Pep Boys Manny Moe & Jack (PBY) 10-Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 31, 2010

OR

o  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from             to           

Commission File No.  1-3381

The Pep Boys - Manny, Moe & Jack

(Exact name of registrant as specified in its charter)

Pennsylvania	23-0962915
(State or other jurisdiction of	(I.R.S. Employer ID number)
incorporation or organization)
3111 W. Allegheny Ave. Philadelphia, PA	19132
(Address of principal executive offices)	(Zip code)

215-430-9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

As of August 27, 2010, there were 52,487,160 shares of the registrant’s Common Stock outstanding.

Index

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets - July 31, 2010 and January 30, 2010	3
	Condensed Consolidated Statements of Operations and Changes in Retained Earnings - Thirteen and Twenty-six Weeks Ended July 31, 2010 and August 1, 2009	4
	Condensed Consolidated Statements of Cash Flows - Twenty-six Weeks Ended July 31, 2010 and August 1, 2009	5
	Notes to the Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
Item 5.	Other Information	27
PART II - OTHER INFORMATION		27
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	(Removed and Reserved)	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
SIGNATURES		30
INDEX TO EXHIBITS		31

2

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except share data)

UNAUDITED

	July 31, 2010			January 30, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	92,363		$	39,326
Accounts receivable, less allowance for uncollectible accounts of $1,703 and $1,488	24,204			22,983
Merchandise inventories	558,932			559,118
Prepaid expenses	20,816			24,784
Other current assets	51,598			65,428
Assets held for disposal	1,778			4,438
Total current assets	749,691			716,077
Property and equipment - net	694,262			706,450
Deferred income taxes	58,968			58,171
Other long-term assets	17,364			18,388
Total assets	$	1,520,285		$	1,499,086
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	196,676		$	202,974
Trade payable program liability	55,280			34,099
Accrued expenses	226,505			242,416
Deferred income taxes	35,750			29,984
Current maturities of long-term debt	1,079			1,079
Total current liabilities	515,290			510,552
Long-term debt less current maturities	305,661			306,201
Other long-term liabilities	76,325			73,933
Deferred gain from asset sales	159,177			165,105
Stockholders’ equity:
Common stock, par value $1 per share: authorized 500,000,000 shares; issued 68,557,041 shares	68,557			68,557
Additional paid-in capital	294,535			293,810
Retained earnings	393,245			374,836
Accumulated other comprehensive loss	(18,758		)	(17,691		)
Less cost of shares in treasury — 16,072,557 shares and 16,164,074 shares	273,747			276,217
Total stockholders’ equity	463,832			443,295
Total liabilities and stockholders’ equity	$	1,520,285		$	1,499,086

See notes to condensed consolidated financial statements.

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THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND CHANGES IN RETAINED EARNINGS

(dollar amounts in thousands, except per share amounts)

UNAUDITED

	Thirteen weeks ended						Twenty-six weeks ended
	July 31, 2010			August 1, 2009			July 31, 2010			August 1, 2009
Merchandise sales	$	406,179		$	392,071		$	815,368		$	790,248
Service revenue	98,676			96,840			199,520			195,151
Total revenues	504,855			488,911			1,014,888			985,399
Costs of merchandise sales	282,362			275,790			566,158			556,825
Costs of service revenue	87,992			84,931			176,634			170,783
Total costs of revenues	370,354			360,721			742,792			727,608
Gross profit from merchandise sales	123,817			116,281			249,210			233,423
Gross profit from service revenue	10,684			11,909			22,886			24,368
Total gross profit	134,501			128,190			272,096			257,791
Selling, general and administrative expenses	113,108			109,482			224,740			217,535
Net gain (loss) from dispositions of assets	2,449			(16		)	2,494			(13		)
Operating profit	23,842			18,692			49,850			40,243
Non-operating income	621			539			1,205			942
Interest expense	6,643			6,466			13,251			8,402
Earnings from continuing operations before income taxes and discontinued operations	17,820			12,765			37,804			32,783
Income tax expense	7,021			4,907			14,845			13,862
Earnings from continuing operations before discontinued operations	10,799			7,858			22,959			18,921
Loss from discontinued operations, net of tax	(201		)	(123		)	(411		)	(277		)
Net earnings	10,598			7,735			22,548			18,644
Retained earnings, beginning of period	384,451			367,882			374,836			358,670
Cash dividends	(1,581		)	(1,577		)	(3,160		)	(3,152		)
Dividend reinvested and other	(223		)	(77		)	(979		)	(199		)
Retained earnings, end of period	$	393,245		$	373,963		$	393,245		$	373,963
Basic earnings per share:
Earnings from continuing operations before discontinued operations	$	0.21		$	0.15		$	0.44		$	0.36
Loss from discontinued operations, net of tax	(0.01		)	—			(0.01		)	—
Basic earnings per share	$	0.20		$	0.15		$	0.43		$	0.36
Diluted earnings per share:
Earnings from continuing operations before discontinued operations	$	0.20		$	0.15		$	0.43		$	0.36
Loss from discontinued operations, net of tax	—			—			—			—
Diluted earnings per share	$	0.20		$	0.15		$	0.43		$	0.36
Cash dividends per share	$	0.03		$	0.03		$	0.06		$	0.06

See notes to condensed consolidated financial statements.

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THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

UNAUDITED

Twenty-six weeks ended	July 31, 2010			August 1, 2009
Cash flows from operating activities:
Net earnings	$	22,548		$	18,644
Adjustments to reconcile net earnings to net cash provided by continuing operations:
Loss from discontinued operations, net of tax	411			277
Depreciation and amortization	36,656			35,338
Amortization of deferred gain from asset sales	(6,299		)	(6,086		)
Stock compensation expense	1,998			1,284
Gain on debt retirement	—			(6,248		)
Deferred income taxes	5,600			4,455
Gain from asset sales	(2,494		)	13
Loss from asset impairment	970			47
Other	179			188
Changes in operating assets and liabilities:
Decrease in accounts receivable, prepaid expenses and other	19,673			24,143
Decrease in merchandise inventories	186			16,168
(Decrease) increase in accounts payable	(6,298		)	10,634
Decrease in accrued expenses	(14,917		)	(18,658		)
Increase in other long-term liabilities	911			1,972
Net cash provided by continuing operations	59,124			82,171
Net cash used in discontinued operations	(1,249		)	(543		)
Net cash provided by operating activities	57,875			81,628
Cash flows from investing activities:
Cash paid for property and equipment	(27,284		)	(17,481		)
Proceeds from dispositions of assets	4,077			1,098
Other	(144		)	(500		)
Net cash used in continuing operations	(23,351		)	(16,883		)
Net cash provided by discontinued operations	569			1,758
Net cash used in investing activities	(22,782		)	(15,125		)
Cash flows from financing activities:
Borrowings under line of credit agreements	16,290			222,017
Payments under line of credit agreements	(16,290		)	(244,284		)
Borrowings on trade payable program liability	169,875			35,300
Payments on trade payable program liability	(148,694		)	(64,616		)
Debt payments	(540		)	(11,451		)
Dividends paid	(3,160		)	(3,152		)
Other	463			237
Net cash provided by (used in) financing activities	17,944			(65,949		)
Net increase in cash and cash equivalents	53,037			554
Cash and cash equivalents at beginning of period	39,326			21,332
Cash and cash equivalents at end of period	$	92,363		$	21,886
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	810		$	2,585
Cash paid for interest	$	11,452		$	12,366
Accrued purchases of property and equipment	$	662		$	1,170

See notes to condensed consolidated financial statements

5

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollar amounts in thousands)

NOTE 1. Basis of Presentation

The Pep Boys — Manny, Moe & Jack and subsidiaries (the “Company”) consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the Company’s financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses, as well as the disclosure of contingent assets and liabilities and other related disclosures. The Company bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of the Company’s assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and the Company includes any revisions to its estimates in the results for the period in which the actual amounts become known.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, as permitted by Rule 10-01 of the Securities and Exchange Commission’s Regulation S-X, “Interim Financial Statements.” It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2010. The results of operations for the twenty-six weeks ended July 31, 2010 are not necessarily indicative of the operating results for the full fiscal year.

The condensed consolidated financial statements presented herein are unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows as of July 31, 2010 and for all periods presented have been made.

The Company’s fiscal year ends on the Saturday nearest January 31. Accordingly, references to fiscal years 2010 and 2009 refer to the years ended January 29, 2011 and January 30, 2010, respectively.

NOTE 2. New Accounting Standards

In October 2009, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) 2009-13 “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force,” (“ASU 2009-13”). This update eliminates the residual method of allocation and requires that consideration be allocated to all deliverables using the relative selling price method. ASU 2009-13 is effective for material revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not believe the adoption of ASU 2009-13 will have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06 “Fair Value Measurements — Improving Disclosures on Fair Value Measurements” (“ASU 2010-06”). This guidance requires new disclosures surrounding transfers in and out of level 1 or 2 in the fair value hierarchy and also requires that in the reconciliation of level 3 inputs, the entity should report separately information on purchases, sales, issuances or settlements. The increased disclosures should be reported for each class of assets or liabilities. ASU 2010-06 also clarifies existing disclosures for the level of disaggregating, disclosures about valuation techniques and inputs used to determine level 2 or 3 fair value measurements and includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances or settlements in the roll forward activity for level 3 fair value measurements which are effective for interim and annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 for requirements effective December 15, 2009 did not have a material impact on the Company’s consolidated financial statements. The Company does not believe the adoption of those requirements of ASU 2010-06 which are effective for periods beginning after December 15, 2010 will have a material impact on its consolidated financial statements.

NOTE 3. Merchandise Inventories

Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected fiscal year-end inventory levels and costs. If the first-in, first-out (“FIFO”) method of costing inventory had been used by the Company, inventory would have

6

been $483.7 million and $482.0 million as of July 31, 2010 and January 30, 2010, respectively.

The Company provides for estimated inventory shrinkage based upon historical levels and the results of its cycle counting program.

The Company also records adjustments for potentially excess and obsolete inventories based on current inventory levels, the historical analysis of product sales and current market conditions. The nature of the Company’s inventory is such that the risk of obsolescence is minimal and excess inventory has historically been returned to the Company’s vendors for credit. The Company records adjustments when less than full credit is expected from a vendor or when market is lower than recorded costs. These adjustments are reviewed on a quarterly basis for adequacy. The Company’s inventory adjustments for these matters were $10.9 million and $13.0 million at July 31, 2010 and January 30, 2010, respectively.

NOTE 4. Property and Equipment

The Company’s property and equipment as of July 31, 2010 and January 30, 2010 was as follows:

(dollar amounts in thousands)	July 31, 2010			January 30, 2010
Property and equipment
Land	$	203,803		$	204,709
Buildings and improvements	830,712			826,804
Furniture, fixtures and equipment	691,983			695,072
Construction in progress	1,660			1,550
Accumulated depreciation and amortization	(1,033,896		)	(1,021,685		)
Property and equipment — net	$	694,262		$	706,450

NOTE 5. Warranty Reserve

The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by the respective vendors, with the Company covering any costs above the vendor’s stipulated allowance. Service labor warranties are covered in full by the Company on a limited lifetime basis. The Company establishes its warranty reserves based on historical data of warranty transactions. These costs are included in either costs of merchandise sales or costs of service revenues in the condensed consolidated statements of operations.

The reserve for warranty cost activity for the twenty-six weeks ended July 31, 2010 and the fifty-two weeks ended January 30, 2010 is as follows:

(dollar amounts in thousands)	July 31,2010			January 30, 2010
Beginning balance	$	694		$	797
Additions related to current period sales	5,682			15,572
Warranty costs incurred in current period	(5,682		)	(15,675		)
Ending balance	$	694		$	694

NOTE 6. Debt and Financing Arrangements

The following are the components of debt and financing arrangements:

(dollar amounts in thousands)	July 31, 2010		January 30, 2010
7.50% Senior Subordinated Notes, due December 2014	$	157,565	$	157,565
Senior Secured Term Loan, due October 2013	149,175		149,715
Revolving Credit Agreement, expiring January 2014	—		—
	306,740		307,280
Less current maturities	1,079		1,079
Long-term debt, less current maturities	$	305,661	$	306,201

7

During the first quarter of fiscal 2009, the Company repurchased $17.0 million of its outstanding 7.50% Senior Subordinated Notes (the “Notes”) for $10.7 million resulting in a gain of $6.2 million which is reflected in interest expense on the accompanying condensed consolidated statements of operations and changes in retained earnings.

As of July 31, 2010, 126 of the Company’s 231 owned stores were used as collateral under the Company’s Senior Secured Term Loan due October 2013.

On January 16, 2009, the Company entered into a new $300.0 million Revolving Credit Agreement. The Company’s ability to borrow under the Revolving Credit Agreement is based on a specific borrowing base consisting of inventory and accounts receivable. The interest rate on this credit line is LIBOR or Prime plus 2.75% to 3.25% based upon the then current availability under the facility. As of July 31, 2010, there were no outstanding borrowings under this agreement and $114.2 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements, as of July 31, 2010, there was $128.3 million of availability remaining.

Several of the Company’s debt agreements require compliance with covenants. The most restrictive of these requirements is contained in the Company’s Revolving Credit Agreement. During any period when the availability under the Revolving Credit Agreement drops below the greater of $50.0 million or 17.5% of the borrowing base, the Company is required to maintain a consolidated fixed charge coverage ratio of at least 1.1:1.0, calculated as the ratio of (a) EBITDA (net income plus interest charges, provision for taxes, depreciation and amortization expense, non-cash stock compensation expenses and other non-recurring, non-cash items) minus capital expenditures and income taxes paid to (b) the sum of debt service charges and restricted payments made. The failure to satisfy this covenant would constitute an event of default under the Revolving Credit Agreement, which would result in a cross-default under the Company’s 7.50% Senior Subordinated Notes and Senior Secured Term Loan. As of July 31, 2010, the Company was in compliance with all such financial covenants.

Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. The estimated fair value of long-term debt including current maturities was $298.7 million and $290.8 million as of July 31, 2010 and January 30, 2010, respectively.

NOTE 7.  Sale-Leaseback Transactions

During the twenty-six weeks ended July 31, 2010, the Company sold one property to an unrelated third party. Net proceeds from this sale were $1.6 million. Concurrent with this sale, the Company entered into an agreement to lease the property back from the purchaser over a minimum lease term of 15 years. The Company classified this lease as an operating lease. The Company actively uses this property and considers the lease as a normal leaseback. A deferred gain of $0.4 million is being recognized over the minimum term of the lease.

Of the 594 store locations operated by the Company at July 31, 2010, 231 are owned and 363 are leased.

NOTE 8. Income Taxes

The Company recognizes taxes payable for the current year, as well as deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. To the extent the Company believes it is more likely than not that the asset will not be recoverable, a valuation allowance must be established. Cumulative losses in recent years constitute “negative evidence” that a recovery is not more likely than not, which must be rebutted by “positive evidence” to avoid establishing a valuation allowance. To establish this positive evidence, the Company considers various tax planning strategies for generating income sufficient to utilize the deferred tax assets, including the potential sale of real estate and the conversion of the Company’s accounting policy for its inventory from LIFO to FIFO.

For income tax benefits related to uncertain tax positions to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. During the twenty-six weeks ended July 31, 2010, the Company did not have a material change to its uncertain tax position liabilities.

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NOTE 9. Accumulated Other Comprehensive Loss

The following are the components of other comprehensive income:

	Thirteen Weeks Ended					Twenty-six Weeks Ended
(dollar amounts in thousands)	July 31, 2010			August 1, 2009		July 31, 2010			August 1, 2009
Net earnings	$	10,598		$	7,735	$	22,548		$	18,644
Other comprehensive income (loss), net of tax:
Defined benefit plan adjustment	265			356		530			560
Derivative financial instrument adjustment	(1,800		)	990		(1,597		)	1,038
Comprehensive income	$	9,063		$	9,081	$	21,481		$	20,242

The components of accumulated other comprehensive loss are:

(dollar amounts in thousands)	July 31, 2010			January 30, 2010
Defined benefit plan adjustment, net of tax	$	(6,628	)	$	(7,158	)
Derivative financial instrument adjustment, net of tax	(12,130		)	(10,533		)
Accumulated other comprehensive loss	$	(18,758	)	$	(17,691	)

NOTE 10: Impairments and Assets Held for Disposal

The Company evaluates the ability to recover long-lived assets whenever events or circumstances indicate that the carrying value of the asset may not be recoverable. In the event assets are impaired, losses are recognized to the extent the carrying value exceeds fair value. In addition, the Company reports assets held for disposal at the lower of the carrying amount or the estimated fair market value, net of disposal costs. A store is classified as “held for disposal” when (i) the Company has committed to a plan to sell, (ii) the building is vacant and the property is available for sale, (iii) the Company is actively marketing the property for sale, (iv) the sale price is reasonable in relation to its current fair value and (v) the Company expects to complete the sale within one year. No depreciation expense is recognized during the period the asset is held for disposal.

During the second quarter of fiscal 2010, the Company recorded an $0.8 million impairment charge related to two stores classified as held and used. The Company used a probability-weighted approach and estimates of expected future cash flows to determine the fair value of these stores. Discount and growth rate assumptions were derived from current economic conditions, management’s expectations and projected trends of current operating results. The fair market value estimate is classified as a Level 3 measure within the fair value hierarchy. Of the $0.8 million impairment charge, $0.6 million was charged to merchandise cost of sales, and $0.2 million was charged to service cost of sales.

During the second quarter of fiscal 2010, the Company also recorded a $0.2 million impairment charge related to a store classified as held for disposal. The Company lowered its selling price reflecting declines in the commercial real estate market. The fair market value of the store is classified as a Level 2 measure within the fair value hierarchy. Substantially all of this impairment was charged to merchandise cost of sales.

During the thirteen week period ended July 31, 2010, the Company sold one store classified as held for disposal for net proceeds of $0.8 million and recognized a net gain of $0.2 million. During the thirteen week period ended August 1, 2009, the Company sold one store classified as held for disposal for net proceeds of $1.0 million and recognized an immaterial net gain. During the twenty-six week period ended July 31, 2010, the Company sold four stores classified as held for disposal for net proceeds of $2.9 million and recognized a net gain of $0.3 million. During the twenty-six week period ended August 1, 2009, the Company sold three stores that were classified as held for disposal for net proceeds of $2.8 million and recognized a net gain of $0.1 million. Assets held for disposal are as follows:

9

(dollar amounts in thousands)	July 31, 2010			January 30, 2010
Land	$	1,310		$	2,980
Buildings and improvements	2,445			5,453
Accumulated depreciation and amortization	(1,977		)	(3,995		)
Property and equipment - net	$	1,778		$	4,438
Number of properties	4			8

In addition to the above stores, the Company reached a settlement agreement during the second quarter on a previously closed store for $2.8 million, resulting in a net gain from the disposition of assets of $2.3 million.

NOTE 11. Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share for earnings from continuing operations and net earnings:

		Thirteen Weeks Ended						Twenty-six Weeks Ended
(in thousands, except per share amounts)		July 31, 2010			August 1, 2009			July 31, 2010			August 1, 2009
(a)	Earnings from continuing operations	$	10,799		$	7,858		$	22,959		$	18,921
	Loss from discontinued operations, net of tax	(201		)	(123		)	(411		)	(277		)
	Net earnings	$	10,598		$	��7,735		$	22,548		$	18,644
(b)	Basic average number of common shares outstanding during period	52,682			52,384			52,609			52,359
	Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price	447			315			426			179
(c)	Diluted average number of common shares assumed outstanding during period	53,129			52,699			53,035			52,538
	Basic earnings per share:
	Earnings from continuing operations (a/b)	$	0.21		$	0.15		$	0.44		$	0.36
	Discontinued operations, net of tax	(0.01		)	—			(0.01		)	—
	Basic earnings per share	$	0.20		$	0.15		$	0.43		$	0.36
	Diluted earnings per share:
	Net earnings from continuing operations (a/c)	$	0.20		$	0.15		$	0.43		$	0.36
	Discontinued operations, net of tax	—			—			—			—
	Diluted earnings per share	$	0.20		$	0.15		$	0.43		$	0.36

At July 31, 2010 and August 1, 2009, respectively, there were 2,402,000 and 2,033,000 outstanding options and restricted stock units. Certain stock options were excluded from the calculation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the periods then ended and therefore would be anti-dilutive. The total numbers of such shares excluded from the diluted earnings per share calculation are 1,071,000 and 973,000 for the thirteen weeks ended July 31, 2010 and August 1, 2009, respectively. The total number of such shares excluded from the diluted earnings per share calculation are 1,088,000 and 1,355,000 for the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively.

10

NOTE 12. Benefit Plans

The Company has a qualified 401(K) savings plan and a separate plan for employees residing in Puerto Rico, which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company’s contribution expense related to the savings plans was approximately $0.7 million for both thirteen week periods ended July 31, 2010 and August 1, 2009, and approximately $1.6 million and $1.8 million for the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively. The Company’s expense for its Account Plan (Defined Contribution SERP) was approximately $0.3 million for both thirteen week periods ended July 31, 2010 and August 1, 2009, and approximately $0.7 million and $0.5 million for the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively. The Company’s contribution to these plans for fiscal year 2010 is contingent upon meeting certain performance metrics. The Company currently estimates that these performance metrics will be achieved and has recorded expense accordingly.

The Company also has a frozen defined benefit pension plan covering the Company’s full-time employees hired on or before February 1, 1992. The Company’s expense for its pension plan follows:

	Thirteen Weeks Ended						Twenty-six Weeks Ended
(dollar amounts in thousands)	July 31, 2010			August 1, 2009			July 31, 2010			August 1, 2009
Interest cost	640			649			1,280			1,270
Expected return on plan assets	(537		)	(365		)	(1,075		)	(902		)
Amortization of prior service cost	—			7			—			7
Amortization of net loss	422			559			843			884
Net periodic benefit cost	$	525		$	850		$	1,048		$	1,259

NOTE 13. Equity Compensation Plans

The Company has stock-based compensation plans, under which it grants stock options and restricted stock units to key employees and members of its Board of Directors. The Company generally recognizes compensation expense on a straight-line basis over the vesting period.

The following table summarizes the options under the Company’s plan:

	Number of Shares
Outstanding — January 30, 2010	1,682,325
Granted	303,056
Exercised	(32,137	)
Forfeited	(6,066	)
Expired	(14,500	)
Outstanding — July 31, 2010	1,932,678

During the twenty-six weeks ended July 31, 2010 and August 1, 2009, the Company granted approximately 303,000 and 948,000 stock options with a weighted average grant date fair value of $4.26 and $2.10, respectively. These options have a seven year term and vest over a three year period with a third vesting on each of the three grant date anniversaries. The compensation expense recorded during the twenty-six weeks ended July 31, 2010 for the options granted was minimal.

Of the options granted in fiscal year 2009, the Company granted 736,000 stock options with a weighted average grant date fair value of $1.69. These options have a seven year term and include both a service and a market appreciation vesting requirement. These options vest over a three year period with a third vesting on each of the three grant date anniversaries, provided the market price of the Company’s stock has appreciated by a certain amount. From the date of grant, the market price of the Company’s stock must have appreciated, for at least 15 consecutive trading days, by $2.00 or more above grant price for 536,000 options and by $6.88 or more above grant price for 200,000 options in order to vest. The Company used a Monte Carlo simulation model to estimate the expected term and is recording the compensation expense over the service period for each separately vesting portion of the options granted. As of July 31, 2010, the market appreciation requirements of both grants have been satisfied.

Expected volatility is based on historical volatilities for a time period similar to that of the expected term. The risk-free rate is based on the U.S. treasury yield curve for issues with a remaining term equal to the expected term. The fair value of each option granted is

11

estimated on the date of grant using the Black-Scholes option-pricing model, and in certain situations where the grant includes both a market and service condition as described more fully above, using a Monte Carlo simulation.

The following are the weighted-average assumptions:

	July 31, 2010		August 1, 2009
Dividend yield	1.4	%	2.3	%
Expected volatility	55.7	%	65.2	%
Risk-free interest rate range:
High	2.0	%	2.3	%
Low	1.7	%	1.6	%
Ranges of expected lives in years	4 - 5		4 - 5

Restricted Stock Units

In the first quarter of fiscal 2010, the Company granted approximately 105,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and the Company achieves certain financial targets for fiscal year 2012. The number of underlying shares that may be issued upon vesting will range from 0% to 150%, depending upon the Company achieving the financial targets for fiscal year 2012. The fair value for these awards was $10.34 at the date of the grant. The compensation expense recorded during the twenty-six weeks ended July 31, 2010 for these restricted stock units was minimal.

In the first quarter of fiscal 2010, the Company also granted approximately 52,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and will become exercisable if the Company satisfies a market condition in fiscal 2012. The number of underlying shares that may become exercisable will range from 0% to 175% depending upon whether the market condition is achieved. The Company used a Monte Carlo simulation to estimate a $12.99 grant date fair value. The compensation expense recorded during the twenty-six weeks ended July 3l, 2010 for these restricted stock units was minimal.

In the second quarter of fiscal 2010, the company granted approximately 52,000 restricted stock units to its non-employee directors of the board that vested immediately. The fair value was $9.55 per unit and the Company recognized compensation expense of approximately $0.5 million for these restricted stock units.

In the first quarter of fiscal 2010, the Company granted approximately 61,000 restricted stock units related to officer’s deferred bonus match under the Company’s non-qualified deferred compensation plan, which vest over a three year period. The following table summarizes the units under the Company’s plan, assuming maximum vesting of underlying shares for performance and market based awards:

	Number of RSUs
Nonvested — January 30, 2010	232,593
Granted	362,283
Forfeited	(3,700	)
Vested	(122,313	)
Nonvested — July 31, 2010	468,863

NOTE 14. Fair Value Measurements

The Company’s fair value measurements consist of (a) non-financial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities.

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

12

The following table provides information by level for assets and liabilities that are measured at fair value, on a recurring basis:

(dollar amounts in thousands)	Fair Value at		Fair Value Measurements Using Inputs Considered as
Description	July 31, 2010		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	92,363	$	92,363
Liabilities:
Current liabilities
Derivative liability (a)	$	38			$	38
Contingent consideration (a)	$	288					$	288
Other liabilities
Derivative liability (b)	$	18,980			$	18,980
Contingent consideration (b)	$	1,312					$	1,312

(a)included in accrued liabilities

(b)included in other long-term liabilities

The Company has one interest rate swap designated as a cash flow hedge on $145.0 million of the Company’s Senior Secured Term Loan that is due in October 2013. The swap is used to minimize interest rate exposure and overall interest costs by converting the variable interest rate to a fixed rate of 5.036%. Since February 1, 2008, this swap was deemed to be fully effective and all adjustments in the interest rate swap’s fair value have been recorded to accumulated other comprehensive loss.

The table below shows the effect of the Company’s interest rate swap on the condensed consolidated financial statements for the periods indicated:

(dollar amounts in thousands)	Amount of Loss in Other Comprehensive Income (Effective Portion)			Earnings Statement Classification	Amount of Loss Recognized in Earnings (Effective Portion) (a)
Thirteen weeks ended July 31, 2010	$	(1,801	)	Interest expense	$	(1,753	)
Twenty-six weeks ended July 31, 2010	$	(1,621	)	Interest expense	$	(3,448	)

(a) represents the effective portion of the loss reclassified from accumulated other comprehensive loss

In the second quarter of fiscal 2010, the Company entered into a price stability agreement (“Agreement”) that is also designated as a cash flow hedge. This Agreement is intended to hedge the price risks associated with the market volatility of retail gasoline. This hedge is deemed to be fully effective and all adjustments in the hedge’s fair value have been recorded to accumulated other comprehensive loss. The effect of this Agreement on the Company’s condensed consolidated financial statements is immaterial.

Non-financial assets measured at fair value on a non-recurring basis:

Certain assets are measured at fair value on a non-recurring basis, that is, the assets are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment. These measures of fair value, and related inputs, are considered level 2 or level 3 measures under the fair value hierarchy.

The fair value of the derivatives was $19.0 million and $16.4 million payable at July 31, 2010 and January 30, 2010, respectively. Of the $2.5 million increase in the fair value during the twenty-six weeks ended July 31, 2010, $1.6 million net of tax was recorded to accumulated other comprehensive loss on the condensed consolidated balance sheet.

13

NOTE 15. Legal Matters

In September 2006, the United States Environmental Protection Agency (“EPA”) requested certain information from the Company as part of an investigation to determine whether the Company had violated, and is in violation of, the Clean Air Act and its non-road engine regulations. The information requested concerned certain generator and personal transportation merchandise offered for sale by the Company. In the fourth quarter of fiscal 2008, the EPA informed the Company that it believed that the Company had violated the Clean Air Act by virtue of the fact that certain of this merchandise did not conform to their corresponding EPA Certificates of Conformity. During the third quarter of fiscal 2009, the Company and the EPA reached a settlement in principle of this matter requiring that the Company (i) pay a monetary penalty of $5.0 million, (ii) take certain corrective action with respect to certain inventory that had been restricted from sale during the course of the investigation, (iii) implement a formal compliance program and (iv) participate in certain non-monetary emission offset activities. The Company had previously accrued an amount equal to the agreed upon civil penalty and a $3.0 million contingency accrual with respect to the restricted inventory. During fiscal 2009, the Company reversed $2.0 million of the inventory accrual as a portion of the subject inventory was released for sale. During the second quarter of fiscal 2010, the Company reversed the remaining $1.0 million of the inventory accrual as the Company reached an agreement with the merchandise vendor to cover the entire cost of retrofitting a portion of the remaining subject merchandise and to accept the balance of the subject inventory for return for full credit. During the second quarter of fiscal 2010, the formal settlement agreement between the Company and the EPA became effective and the Company paid the monetary penalty.

The Company is also party to various other actions and claims arising in the normal course of business.

The Company believes that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While the Company does not believe that the amount of such excess loss could be material to the Company’s financial position, any such loss could have a material adverse effect on the Company’s results of operations in the period(s) during which the underlying matters are resolved.

14

NOTE 16. Supplemental Guarantor Information

The Company’s Notes are fully and unconditionally and joint and severally guaranteed by certain of the Company’s direct and indirectly wholly-owned subsidiaries - namely, The Pep Boys Manny Moe & Jack of California, Pep Boys — Manny Moe & Jack of Delaware, Inc., Pep Boys — Manny Moe & Jack of Puerto Rico, Inc. and PBY Corporation, (collectively, the “Subsidiary Guarantors”). The Notes are not guaranteed by the Company’s wholly owned subsidiary, Colchester Insurance Company.

The following condensed consolidating information presents, in separate columns, the condensed consolidating balance sheets as of July 31, 2010 and January 30, 2010 and the related condensed consolidating statements of operations for the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009 and condensed consolidating statements of cash flows for the twenty-six weeks ended July 31, 2010 and August 1, 2009 for (i) the Company (“Pep Boys”) on a parent only basis, with its investment in subsidiaries recorded under the equity method, (ii) the Subsidiary Guarantors on a combined basis including the consolidation by PBY Corporation of its wholly owned subsidiary, The Pep Boys Manny Moe & Jack of California, (iii) the subsidiary of the Company that does not guarantee the Notes, and (iv) the Company on a consolidated basis.

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

As of July 31, 2010	Pep Boys		Subsidiary Guarantors		Subsidiary Non- Guarantors		Consolidation/ Elimination			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	71,665	$	12,911	$	7,787	$	—		$	92,363
Accounts receivable, net	12,333		11,871		—		—			24,204
Merchandise inventories	192,591		366,341		—		—			558,932
Prepaid expenses	10,694		8,494		7,394		(5,766		)	20,816
Other current assets	765		2,662		56,254		(8,083		)	51,598
Assets held for disposal	903		875		—		—			1,778
Total current assets	288,951		403,154		71,435		(13,849		)	749,691
Property and equipment—net	231,276		450,934		31,203		(19,151		)	694,262
Investment in subsidiaries	1,791,971		—		—		(1,791,971		)	—
Intercompany receivables	—		1,095,616		70,340		(1,165,956		)	—
Deferred income taxes	10,954		48,014		—		—			58,968
Other long-term assets	16,193		1,171		—		—			17,364
Total assets	$	2,339,345	$	1,998,889	$	172,978	$	(2,990,927	)	$	1,520,285
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	196,676	$	—	$	—	$	—		$	196,676
Trade payable program liability	55,280		—		—		—			55,280
Accrued expenses	32,861		55,652		146,420		(8,428		)	226,505
Deferred income taxes	11,901		29,270		—		(5,421		)	35,750
Current maturities of long-term debt	1,079		—		—		—			1,079
Total current liabilities	297,797		84,922		146,420		(13,849		)	515,290
Long-term debt less current maturities	305,661		—		—		—			305,661
Other long-term liabilities	38,474		37,851		—		—			76,325
Deferred gain from asset sales	67,625		110,703		—		(19,151		)	159,177
Intercompany liabilities	1,165,956		—		—		(1,165,956		)	—
Total stockholders’ equity	463,832		1,765,413		26,558		(1,791,971		)	463,832
Total liabilities and stockholders’ equity	$	2,339,345	$	1,998,889	$	172,978	$	(2,990,927	)	$	1,520,285

15

As of January 30, 2010	Pep Boys		Subsidiary Guarantors		Subsidiary Non- Guarantors		Consolidation/ Elimination			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	25,844	$	10,279	$	3,203	$	—		$	39,326
Accounts receivable, net	13,032		9,951		—		—			22,983
Merchandise inventories	195,314		363,804		—		—			559,118
Prepaid expenses	12,607		15,070		14,255		(17,148		)	24,784
Other current assets	1,101		2,667		67,038		(5,378		)	65,428
Assets held for disposal	1,045		3,393		—		—			4,438
Total current assets	248,943		405,164		84,496		(22,526		)	716,077
Property and equipment—net	232,115		462,128		31,544		(19,337		)	706,450
Investment in subsidiaries	1,755,426		—		—		(1,755,426		)	—
Intercompany receivables	—		1,058,132		83,953		(1,142,085		)	—
Deferred income taxes	11,200		46,971		—		—			58,171
Other long-term assets	17,566		822		—		—			18,388
Total assets	$	2,265,250	$	1,973,217	$	199,993	$	(2,939,374	)	$	1,499,086
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	202,974	$	—	$	—	$	—		$	202,974
Trade payable program liability	34,099		—		—		—			34,099
Accrued expenses	24,042		62,106		173,429		(17,161		)	242,416
Deferred income taxes	6,626		28,723		—		(5,365		)	29,984
Current maturities of long-term debt	1,079		—		—		—			1,079
Total current liabilities	268,820		90,829		173,429		(22,526		)	510,552
Long-term debt less current maturities	306,201		—		—		—			306,201
Other long-term liabilities	35,125		38,808		—		—			73,933
Deferred gain from asset sales	69,724		114,718		—		(19,337		)	165,105
Intercompany liabilities	1,142,085		—		—		(1,142,085		)	—
Total stockholders’ equity	443,295		1,728,862		26,564		(1,755,426		)	443,295
Total liabilities and stockholders’ equity	$	2,265,250	$	1,973,217	$	199,993	$	(2,939,374	)	$	1,499,086

16

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(dollars in thousands)

(unaudited)

				Subsidiary			Subsidiary Non-			Consolidation /
Thirteen Weeks Ended July 31, 2010	Pep Boys			Guarantors			Guarantors			Elimination			Consolidated
Merchandise sales	$	141,019		$	265,160		$	—		$	—		$	406,179
Service revenue	35,729			62,947			—			—			98,676
Other revenue	—			—			5,736			(5,736		)	—
Total revenues	176,748			328,107			5,736			(5,736		)	504,855
Costs of merchandise sales	99,511			183,260			—			(409		)	282,362
Costs of service revenue	31,186			56,844			—			(38		)	87,992
Costs of other revenue	—			—			5,091			(5,091		)	—
Total costs of revenues	130,697			240,104			5,091			(5,538		)	370,354
Gross profit from merchandise sales	41,508			81,900			—			409			123,817
Gross profit from service revenue	4,543			6,103			—			38			10,684
Gross profit from other revenue	—			—			645			(645		)	—
Total gross profit	46,051			88,003			645			(198		)	134,501
Selling, general and administrative expenses	41,258			72,576			89			(815		)	113,108
Net gain from dispositions of assets	2,218			231			—			—			2,449
Operating profit	7,011			15,658			556			617			23,842
Non-operating (expense) income	(4,163		)	20,313			617			(16,146		)	621
Interest expense (income)	16,306			6,393			(527		)	(15,529		)	6,643
(Loss) earnings from continuing operations before income taxes	(13,458		)	29,578			1,700			—			17,820
Income tax (benefit) expense	(5,311		)	11,663			669			—			7,021
Equity in earnings of subsidiaries	18,784			—			—			(18,784		)	—
Net earnings from continuing operations	10,637			17,915			1,031			(18,784		)	10,799
Discontinued operations, net of tax	(39		)	(162		)	—			—			(201		)
Net earnings	$	10,598		$	17,753		$	1,031		$	(18,784	)	$	10,598

				Subsidiary			Subsidiary Non-			Consolidation /
Thirteen Weeks Ended August 1, 2009	Pep Boys			Guarantors			Guarantors			Elimination			Consolidated
Merchandise sales	$	133,660		$	258,411		$	—		$	—		$	392,071
Service revenue	34,046			62,794			—			—			96,840
Other revenue	—			—			5,722			(5,722		)	—
Total revenues	167,706			321,205			5,722			(5,722		)	488,911
Costs of merchandise sales	95,456			180,743			—			(409		)	275,790
Costs of service revenue	28,951			56,018			—			(38		)	84,931
Costs of other revenue	—			—			5,337			(5,337		)	—
Total costs of revenues	124,407			236,761			5,337			(5,784		)	360,721
Gross profit from merchandise sales	38,204			77,668			—			409			116,281
Gross profit from service revenue	5,095			6,776			—			38			11,909
Gross profit from other revenue	—			—			385			(385		)	—
Total gross profit	43,299			84,444			385			62			128,190
Selling, general and administrative expenses	39,240			70,720			77			(555		)	109,482
Net gain from dispositions of assets	13			(29		)	—			—			(16		)
Operating profit	4,072			13,695			308			617			18,692
Non-operating (expense) income	(4,039		)	21,508			620			(17,550		)	539
Interest expense (income)	17,016			6,904			(521		)	(16,933		)	6,466
(Loss) earnings from continuing operations before income taxes	(16,983		)	28,299			1,449			—			12,765
Income tax (benefit) expense	(7,940		)	12,232			615			—			4,907
Equity in earnings of subsidiaries	16,781			—			—			(16,781		)	—
Net earnings from continuing operations	7,738			16,067			834			(16,781		)	7,858
Discontinued operations, net of tax	(3		)	(120		)	—			—			(123		)
Net earnings	$	7,735		$	15,947		$	834		$	(16,781	)	$	7,735

17

				Subsidiary			Subsidiary Non-			Consolidation /
Twenty-six Weeks Ended July 31, 2010	Pep Boys			Guarantors			Guarantors			Elimination			Consolidated
Merchandise sales	$	285,444		$	529,924		$	—		$	—		$	815,368
Service revenue	72,370			127,150			—			—			199,520
Other revenue	—			—			11,472			(11,472		)	—
Total revenues	357,814			657,074			11,472			(11,472		)	1,014,888
Costs of merchandise sales	200,507			366,467			—			(816		)	566,158
Costs of service revenue	62,356			114,354			—			(76		)	176,634
Costs of other revenue	—			—			11,561			(11,561		)	—
Total costs of revenues	262,863			480,821			11,561			(12,453		)	742,792
Gross profit from merchandise sales	84,937			163,457			—			816			249,210
Gross profit from service revenue	10,014			12,796			—			76			22,886
Gross profit from other revenue	—			—			(89		)	89			—
Total gross profit	94,951			176,253			(89		)	981			272,096
Selling, general and administrative expenses	81,311			143,511			170			(252		)	224,740
Net gain from dispositions of assets	2,080			414			—			—			2,494
Operating profit	15,720			33,156			(259		)	1,233			49,850
Non-operating (expense) income	(8,413		)	40,521			1,233			(32,136		)	1,205
Interest expense (income)	32,352			12,851			(1,049		)	(30,903		)	13,251
(Loss) earnings from continuing operations before income taxes	(25,045		)	60,826			2,023			—			37,804
Income tax (benefit) expense	(9,856		)	23,905			796			—			14,845
Equity in earnings of subsidiaries	37,778			—			—			(37,778		)	—
Net earnings from continuing operations	22,589			36,921			1,227			(37,778		)	22,959
Discontinued operations, net of tax	(41		)	(370		)	—			—			(411		)
Net earnings	$	22,548		$	36,551		$	1,227		$	(37,778	)	$	22,548

				Subsidiary			Subsidiary Non-			Consolidation /
Twenty-six Weeks Ended August 1, 2009	Pep Boys			Guarantors			Guarantors			Elimination			Consolidated
Merchandise sales	$	269,988		$	520,260		$	—		$	—		$	790,248
Service revenue	68,859			126,292			—			—			195,151
Other revenue	—			—			11,445			(11,445		)	—
Total revenues	338,847			646,552			11,445			(11,445		)	985,399
Costs of merchandise sales	191,474			366,167			—			(816		)	556,825
Costs of service revenue	57,764			113,095			—			(76		)	170,783
Costs of other revenue	—			—			12,142			(12,142		)	—
Total costs of revenues	249,238			479,262			12,142			(13,034		)	727,608
Gross profit from merchandise sales	78,514			154,093			—			816			233,423
Gross profit from service revenue	11,095			13,197			—			76			24,368
Gross profit from other revenue	—			—			(697		)	697			—
Total gross profit	89,609			167,290			(697		)	1,589			257,791
Selling, general and administrative expenses	77,222			139,802			155			356			217,535
Net gain from dispositions of assets	14			(27		)	—			—			(13		)
Operating profit	12,401			27,461			(852		)	1,233			40,243
Non-operating (expense) income	(8,050		)	42,779			1,239			(35,026		)	942
Interest expense (income)	28,400			14,838			(1,043		)	(33,793		)	8,402
(Loss) earnings from continuing operations before income taxes	(24,049		)	55,402			1,430			—			32,783
Income tax (benefit) expense	(11,105		)	24,361			606			—			13,862
Equity in earnings of subsidiaries	31,581			—			—			(31,581		)	—
Net earnings from continuing operations	18,637			31,041			824			(31,581		)	18,921
Discontinued operations, net of tax	7			(284		)	—			—			(277		)
Net earnings	$	18,644		$	30,757		$	824		$	(31,581	)	$	18,644

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

Twenty-six Weeks Ended July 31, 2010	Pep Boys			Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidation / Elimination			Consolidated
Cash flows from operating activities:
Net earnings	$	22,548		$	36,551		$	1,227		$	(37,778	)	$	22,548
Adjustments to reconcile net earnings to net cash (used in) provided by continuing operations	(17,866		)	18,057			285			36,545			37,021
Changes in operating assets and liabilities	12,796			(3,933		)	(9,308		)	—			(445		)
Net cash provided by (used in) continuing operations	17,478			50,675			(7,796		)	(1,233		)	59,124
Net cash used in discontinued operations	(43		)	(1,206		)	—			—			(1,249		)
Net cash provided by (used in) operating activities	17,435			49,469			(7,796		)	(1,233		)	57,875
Net cash used in continuing operations	(13,509		)	(9,842		)	—			—			(23,351		)
Net cash provided by discontinued operations	—			569			—			—			569
Net cash used in investing activities	(13,509		)	(9,273		)	—			—			(22,782		)
Net cash provided by (used in) financing activities	41,895			(37,564		)	12,380			1,233			17,944
Net increase in cash and cash equivalents	45,821			2,632			4,584			—			53,037
Cash and cash equivalents at beginning of period	25,844			10,279			3,203			—			39,326
Cash and cash equivalents at end of period	$	71,665		$	12,911		$	7,787		$	—		$	92,363

Twenty-six Weeks Ended August 1, 2009	Pep Boys			Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidation / Elimination			Consolidated
Cash flows from operating activities:
Net earnings	$	18,644		$	30,757		$	824		$	(31,581	)	$	18,644
Adjustments to reconcile net earnings to net cash (used in) provided by continuing operations	(25,378		)	23,636			662			30,348			29,268
Changes in operating assets and liabilities	34,293			7,631			(7,665		)	—			34,259
Net cash provided by (used in) continuing operations	27,559			62,024			(6,179		)	(1,233		)	82,171
Net cash provided by (used in) discontinued operations	7			(550		)	—			—			(543		)
Net cash provided by (used in) operating activities	27,566			61,474			(6,179		)	(1,233		)	81,628
Net cash used in continuing operations	(9,616		)	(7,267		)	—			—			(16,883		)
Net cash provided by discontinued operations	—			1,758			—			—			1,758
Net cash used in investing activities	(9,616		)	(5,509		)	—			—			(15,125		)
Net cash (used in) provided by financing activities	(17,691		)	(57,494		)	8,003			1,233			(65,949		)
Net increase (decrease) in cash and cash equivalents	259			(1,529		)	1,824			—			554
Cash and cash equivalents at beginning of period	12,753			6,393			2,186			—			21,332
Cash and cash equivalents at end of period	$	13,012		$	4,864		$	4,010		$	—		$	21,886

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

The following discussion and analysis explains the results of operations for the second fiscal quarter and first half of 2010 and 2009 and significant developments affecting our financial condition for the twenty-six weeks ended July 31, 2010. This discussion and analysis should be read in conjunction with the condensed consolidated interim financial statements and the notes to such condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, and the consolidated financial statements and the notes to such financial statements included in Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

Introduction

The Pep Boys-Manny, Moe & Jack is the only national chain offering automotive service, tires, parts and accessories. This positioning allows us to streamline the distribution channel and pass the savings on to our customers facilitating our vision of becoming the automotive solutions provider of choice for the value oriented customer. The majority of our stores are in a Supercenter format, which serves both “do-it-for-me” (“DIFM”, which includes service labor, installed merchandise and tires) and “do-it-yourself” (“DIY”, or retail) customers with the highest quality service offerings and merchandise. Most of our Supercenters also have a commercial sales program that provides delivery of tires, parts and other products to automotive repair shops and dealers. In 2009, as part of our long-term strategy to lead with automotive service, we began complementing our existing Supercenter store base with Service & Tire Centers. These Service & Tire Centers are designed to capture market share and leverage our existing Supercenter and support infrastructure. We opened 24 Service & Tire Centers in fiscal 2009 and year-to-date in fiscal 2010 we have opened an additional seven locations. We also opened two new (14,000 sq. feet) smaller prototype Supercenters in fiscal 2010. We are targeting a total of 30 to 40 new locations in fiscal 2010 and 80 in fiscal 2011. As of July 31, 2010, we operated 555 Supercenters and 30 Service & Tire Centers, as well as nine legacy Pep Boys Express (retail only) stores throughout 35 states and Puerto Rico.

EXECUTIVE SUMMARY

Net earnings for the thirteen weeks ended July 31, 2010 were $10.6 million, a $2.9 million improvement over the $7.7 million reported for the thirteen weeks ended August 1, 2009. The increase in profitability was the result of increased sales across all lines of business, improved total gross profit margins and a $2.4 million pre-tax gain from asset dispositions, partially offset by higher selling, general and administrative expenses. Increased media spend and retail store payroll expenses were responsible for the selling general and administrative expenses increase.

Our diluted earnings per share for the second quarter and first half of 2010 were $0.20 and $0.43, respectively, an improvement of $0.05 and $0.07 over the $0.15 and $0.36 recorded in the second quarter and first half of 2009, respectively.

Total revenue increased for the thirteen and twenty-six week period ending July 31, 2010 by 3.3% and 3.0%, respectively, as compared to the same periods of the prior year. For the thirteen weeks ended July 31, 2010, comparable store sales (sales generated by locations in operation during the same period) increased by 1.8% compared to a decrease of 2.3% for the thirteen weeks ended August 1, 2009. This increase in comparable store sales included a 2.5% increase in comparable store merchandise sales and a 0.7% decrease in comparable store service revenue. For the twenty-six weeks ended July 31, 2010, our comparable store sales increased by 1.6% compared to a decrease of 1.3% for the twenty-six weeks ended August 1, 2009. This increase in comparable store sales included a 2.1% increase in comparable store merchandise sales and a 0.3% decrease in comparable store service revenue.

Various economic factors affect both our consumers and our industry. Sales of non-discretionary product categories are primarily impacted by miles driven, which declined in 2008 but began to stabilize beginning in the second half of fiscal 2009, primarily due to lower gasoline prices. Continued high unemployment and the credit crisis have also modestly benefited our non-discretionary product categories as customers have focused on maintaining their existing vehicles rather than purchasing new vehicles. These trends, however, have negatively impacted sales in our discretionary product categories like accessories and complementary merchandise, although the rate of decline has moderated since the beginning of fiscal 2010.

We continue to focus on refining and expanding our parts assortment to improve our in stock position, improving execution and the customer experience, utilizing television and radio advertising to communicate our value offerings and growing our rewards program to build customer loyalty and drive repeat business. We believe these efforts are responsible for increased customer traffic in our stores for the thirteen and twenty-six week periods ended July 31, 2010.

20

RESULTS OF OPERATIONS

The following discussion explains the material changes in our results of operations.

Analysis of Statement of Operations

Thirteen weeks ended July 31, 2010 vs. Thirteen weeks ended August 1, 2009

The following table presents for the periods indicated certain items in the condensed consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.

	Percentage of Total Revenues				Percentage Change
Thirteen weeks ended	July 31, 2010 (Fiscal 2010)		August 1, 2009 (Fiscal 2009)		Favorable (Unfavorable)
Merchandise sales	80.5	%	80.2	%	3.6	%
Service revenue (1)	19.5		19.8		1.9
Total revenues	100.0		100.0		3.3
Costs of merchandise sales (2)	69.5	(3)	70.3	(3)	(2.4	)
Costs of service revenue (2)	89.2	(3)	87.7	(3)	(3.6	)
Total costs of revenues	73.4		73.8		(2.7	)
Gross profit from merchandise sales	30.5	(3)	29.7	(3)	6.5
Gross profit from service revenue	10.8	(3)	12.3	(3)	(10.3	)
Total gross profit	26.6		26.2		4.9
Selling, general and administrative expenses	22.4		22.4		(3.3	)
Net gain (loss) from dispositions of assets	0.5		—		NM
Operating profit	4.7		3.8		27.6
Non-operating income	0.1		0.1		15.2
Interest expense	1.3		1.3		(2.7	)
Earnings from continuing operations before income taxes	3.5		2.6		39.6
Income tax expense	39.4	(4)	38.4	(4)	(43.1	)
Earnings from continuing operations	2.1		1.6		37.4
Discontinued operations, net of tax	—		—		(63.4	)
Net Earnings	2.1		1.6		37.0

(1)	Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials.
(2)	Costs of merchandise sales include the cost of products sold, purchasing, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.
(3)	As a percentage of related sales or revenue, as applicable.
(4)	As a percentage of earnings from continuing operations before income taxes.

Total revenue and comparable store sales for the thirteen weeks ended July 31, 2010 increased 3.3% and 1.8%, respectively, as compared to the thirteen weeks ended August 1, 2009. Total revenue for the second quarter of 2010 increased by $15.9 million to $504.9 million from $488.9 million in the second quarter of 2009. The 1.8% increase in comparable store sales consisted of a 2.5% comparable store merchandise sales increase and a 0.7% comparable store service revenue decrease. While our total revenue figures were favorably impacted by the opening of the new stores, a new store is not added to our comparable store sales until it reaches its 13th month of operation. Non-comparable stores contributed an additional $7.0 million of total revenue in the second quarter of 2010 as compared to the second quarter of 2009.

Total merchandise sales increased 3.6%, or $14.1 million, to $406.2 million in the second quarter of fiscal 2010, compared to $392.1 million during the prior year period. Comparable store merchandise sales increased 2.5%, or $9.6 million, as compared to the second

21

quarter of 2009, driven primarily by a higher average transaction amount per customer combined with a slight increase in comparable store customer count. The balance of the increase in merchandise sales was due to the contribution from our new stores. Total service revenue increased 1.9% to $98.7 million from $96.8 million in the prior year period primarily due to the contribution from new stores, which was partially offset by a 0.7% decrease in comparable store service revenue.

In the second quarter of 2010, comparable store customer counts marginally increased as compared to negative comparable store customer counts in the prior year period due to our traffic-driving promotional events and rewards program, and customer receptiveness to our improved in stock position and better store execution. We also experienced a 3.5% increase in sales of our core automotive parts categories which make up approximately 80% of our merchandise sales, which was slightly offset by a 1.4% decrease in sales of our discretionary product categories as compared to the prior year period. We continue to believe that providing a differentiated merchandise assortment, better customer experience, value proposition and innovative marketing will increase sales and customer counts consistently over the long term across all lines of business.

Gross profit from merchandise sales increased by $7.5 million, or 6.5%, to $123.8 million for the second quarter of 2010 from $116.3 million in the second quarter of 2009. Gross profit from merchandise sales increased to 30.5% for the second quarter of 2010 from 29.7% for the second quarter of 2009. Gross profit from merchandise sales for the second quarter of 2010 includes the reversal of inventory accruals of $1.0 million mostly offset by an asset impairment charge of $0.8 million. Excluding these adjustments, gross profit from merchandise sales increased to 30.4% from 29.7% in the prior year period. The increase in gross profit margins was primarily due to an improvement in inventory shrinkage, lower in-bound freight costs and lower defective product expense.

Gross profit from service revenue decreased by $1.2 million, or 10.3%, to $10.7 million for the second quarter of 2010 from $11.9 million in the second quarter of 2009. Gross profit from service revenue decreased to 10.8% from 12.3% for the prior year period. Gross profit from service revenue for the second quarter of 2010 includes an asset impairment charge of $0.2 million. Excluding this adjustment, gross profit from service revenue decreased to 11.1% from 12.3% in the prior year period. The decrease in gross profit was primarily due to higher payroll and occupancy costs (includes such items as rent, utilities and building maintenance), which increased by 80 basis points and 116 basis points, respectively, quarter over quarter, primarily due to adding the new Service & Tire Centers. Excluding the impact of the new Service & Tire Centers (which are still in their ramp up stage for sales but incurring the full fixed expense load), the gross profit from service revenue remained relatively flat quarter over quarter.

Selling, general and administrative expenses, as a percentage of total revenues remained flat at 22.4% in the second quarter of 2010 as compared to the prior year period. Selling, general and administrative expenses increased $3.6 million, or 3.3%, to $113.1 million for the second quarter of 2010 from $109.5 million in the prior year period. The increase was primarily due to higher payroll (primarily retail store payroll) and related expenses of $2.1 million and increased media expense of $1.5 million.

Net gains from the disposition of assets of $2.4 million for the second quarter of 2010 includes $2.3 million in net settlement proceeds from the disposition of a previously closed property.

Interest expense of $6.6 million for the second quarter of 2010 was relatively flat compared to the prior year period.

Our income tax expense for the second quarter of 2010 was $7.0 million, or an effective rate of 39.4%, as compared to an expense of $4.9 million, or an effective rate of 38.4%, for the second quarter of 2009. The annual rate depends on a number of factors, including the jurisdiction in which operating profit is earned and the timing and nature of discrete items.

As a result of the foregoing, we reported net earnings of $10.6 million for the second quarter of 2010 as compared to net earnings of $7.7 million in the prior year period. Our basic and diluted earnings per share were $0.20 as compared to $0.15 in the prior year period.

Twenty-six weeks ended July 31, 2010 vs. Twenty-six weeks ended August 1, 2009

The following table presents for the periods indicated certain items in the condensed consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.

22

	Percentage of Total Revenues				Percentage Change
Twenty-six weeks ended	July 31, 2010 (Fiscal 2010)		August 1, 2009  (Fiscal 2009)		Favorable (Unfavorable)
Merchandise sales	80.3	%	80.2	%	3.2	%
Service revenue (1)	19.7		19.8		2.2
Total revenues	100.0		100.0		3.0
Costs of merchandise sales (2)	69.4	(3)	70.5	(3)	(1.7	)
Costs of service revenue (2)	88.5	(3)	87.5	(3)	(3.4	)
Total costs of revenues	73.2		73.8		(2.1	)
Gross profit from merchandise sales	30.6	(3)	29.5	(3)	6.8
Gross profit from service revenue	11.5	(3)	12.5	(3)	(6.1	)
Total gross profit	26.8		26.2		5.5
Selling, general and administrative expenses	22.1		22.1		(3.3	)
Net gain (loss) from dispositions of assets	0.2		—		NM
Operating profit	4.9		4.1		23.9
Non-operating income	0.1		0.1		27.9
Interest expense	1.3		0.9		(57.7	)
Earnings from continuing operations before income taxes	3.7		3.3		15.3
Income tax expense	39.3	(4)	42.3	(4)	(7.1	)
Earnings from continuing operations	2.3		1.9		21.3
Discontinued operations, net of tax	—		—		(48.4	)
Net Earnings	2.2		1.9		20.9

(1)	Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials.
(2)	Costs of merchandise sales include the cost of products sold, purchasing, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.
(3)	As a percentage of related sales or revenue, as applicable.
(4)	As a percentage of earnings from continuing operations before income taxes.

Total revenue and comparable store sales for the twenty-six weeks ended July 31, 2010 increased 3.0% and 1.6%, respectively, as compared to the twenty-six weeks ended August 1, 2009. The 1.6% increase in comparable store sales consisted of a 2.1% comparable store merchandise sales increase, offset by a 0.3% comparable store service revenue decrease. While our total revenue figures were favorably impacted by the opening of the new stores, a new store is not added to our comparable store sales until it reaches its 13th month of operation. Non-comparable stores contributed an additional $13.7 million of total revenue in the first half of 2010 as compared to the prior year period. Total comparable store sales increased due to growth in customer counts in all three lines of business combined with an increase in the average transaction amount per customer.

Gross profit from merchandise sales increased by $15.8 million, or 6.8%, to $249.2 million for the first half of 2010 from $233.4 million in the first half of 2009. Gross profit from merchandise sales increased to 30.6% from 29.5% for the prior year period. The increase in gross profit margins was primarily due to an improvement in inventory shrinkage, lower in-bound freight costs and lower defective product expense.

Gross profit from service revenue decreased by $1.5 million, or 6.1%, to $22.9 million for the first half of 2010 from $24.4 million in the first half of 2009. Gross profit from service revenue decreased to 11.5% from 12.5% for the prior year period. The decrease in gross profit was primarily due to higher fixed expenses such as occupancy costs (includes such items as rent, utilities and building maintenance), which increased by 106 basis points compared to the prior year period, primarily due to adding the new Service & Tire Centers. Excluding the impact of the new Service & Tire Centers (which are still in their ramp up stage for sales but incurring the full fixed expense load), the gross profit from service revenue increased by 43 basis points period over period.

Selling, general and administrative expenses, as a percentage of total revenues remained flat at 22.1% in the first half of 2010 as compared to the prior year period. Selling, general and administrative expenses increased $7.2 million, or 3.3% over the amount recorded in the first half of 2009. The increase was primarily due to increased media expense of $5.3 million and increased payroll (primarily retail store payroll) and related expenses of $3.4 million, partially offset by lower general liability insurance claims expense of $1.9 million.

Net gains from the disposition of assets of $2.5 million for the first half of 2010 includes $2.3 million in net settlement proceeds from the disposition of a previously closed property.

23

Interest expense for the first half of 2010 was $13.3 million, an increase of $4.8 million compared to the prior year period. The first half of 2009 included a $6.2 million gain resulting from the retirement of debt. Excluding this gain, interest expense declined by $1.4 million, period over period, due to reduced debt levels.

Our income tax expense for the first half of 2010 was $14.9 million, or an effective rate of 39.3%, as compared to an expense of $13.9 million, or an effective rate of 42.3%, for the first half of 2009. The change was primarily due to the release of valuation reserves on net operating losses at the state level, which resulted from our improved profitability. The annual rate is dependent on a number of factors, including the jurisdiction in which operating profit is earned and the timing and nature of discrete items.

As a result of the foregoing, we reported net earnings of $22.5 million for the first half of 2010 as compared to net earnings of $18.6 million in the prior year period. Our basic and diluted earnings per share were $0.43 as compared to $0.36 in the prior year period.

INDUSTRY COMPARISON

We operate in the U.S. automotive aftermarket, which has two general lines of business: the Service Business defined as Do-It-For-Me (service labor, installed merchandise and tires) and the Retail Business defined as Do-It-Yourself (retail merchandise) and commercial. Generally, specialized automotive retailers focus on either the Retail or Service area of the business. We believe that operation in both the Retail and Service areas of the business positively differentiates us from most of our competitors. Although we manage our store performance at a store level in aggregation, we believe that the following presentation, which includes the reclassification of revenue from installed products from retail sales to service center revenue, shows an accurate comparison against competitors within the two sales arenas. We compete in the Retail area of the business through our retail sales floor and commercial sales business. Our Service Center business competes in the Service area of the industry.

The following table presents the revenues and gross profit for each area of our business:

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	July 31,		August 1,		July 31,		August 1,
(Dollar amounts in thousands)	2010		2009		2009		2009
Retail Sales (1)	$	268,804	$	259,435	$	538,511	$	523,846
Service Center Revenue (2)	236,051		229,476		476,377		461,553
Total revenues	$	504,855	$	488,911	$	1,014,888	$	985,399
Gross profit from Retail Sales (3)	$	78,830	$	70,746	$	158,584	$	144,301
Gross profit from Service Center Revenue (3)	55,671		57,444		113,512		113,490
Total gross profit	$	134,501	$	128,190	$	272,096	$	257,791

(1)     Excludes revenues from installed products.

(2)     Includes revenues from installed products.

(3)     Gross profit from Retail Sales includes the cost of products sold, purchasing, warehousing and store occupancy costs. Gross profit from Service Center Revenue includes the cost of installed products sold, purchasing, warehousing, service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

CAPITAL AND LIQUIDITY

Our cash requirements arise principally from (1) the purchase of inventory and capital expenditures related to existing and new stores, offices and distribution centers, (2) debt service and (3) contractual obligations. Cash flows realized through the sales of automotive services, tires, parts and accessories are our primary source of liquidity. Net cash provided by operating activities was $57.9 million in the first half of 2010, as compared to $81.6 million in the prior year period. While net earnings increased by $11.7 million (net of non-cash adjustments) in the first half of 2010, cash flow from operating activities decreased from the prior year period primarily due to the $16.2 million inventory reduction we accomplished in the first half of 2009 as we focused on maximizing our inventory investment. Inventory at the end of the current year second quarter remained flat to fiscal 2009 year-end balances despite the need for the inventory investment in our new locations. This is a result of our continued disciplined inventory management including reduced seasonal inventory purchases, inventory lead times and safety stocks. In addition, cash flows from accounts payable declined by $16.9 million primarily due to a shift to our trade payable financing program (shown as cash flows from financing activities on the consolidated statement of cash flows). After taking into consideration changes in the amounts financed under our trade payable

24

program, accounts payable improved by $33.6 million primarily due to increased inventory purchases and the timing of our accounts payable cycle. The ratio of accounts payable to inventory was 45.1% at July 31, 2010, and 41.1% at August 1, 2009.

Cash used in investing activities was $22.8 million for the first half of 2010 as compared to $15.1 million in the prior year period. During the first half of 2010, we sold four properties classified as held for disposal for net proceeds of $2.9 million, of which $0.6 million is included in discontinued operations, and completed one sale leaseback transaction for net proceeds of $1.6 million. During the first half of 2009, we sold three properties classified as assets held for disposal for net proceeds of $2.8 million, of which $1.8 million is reported in discontinued operations. Capital expenditures in the first half of 2010 increased by $9.8 million, to $27.3 million, from $17.5 million for the prior year period. Capital expenditures for the current year were for improvements of our existing stores, offices, distribution centers and for the opening of the new facilities.

Our targeted capital expenditures for fiscal 2010 are $80.0 million. Our fiscal year 2010 capital expenditures include the addition of approximately 30 to 40 new locations and required expenditures for our existing stores, offices and distribution centers. These expenditures are expected to be funded by cash on hand and net cash generated from operating activities. Additional capacity, if needed, exists under our existing line of credit.

In the first half of 2010, cash provided by financing activities was $17.9 million, as compared to cash used in financing of $65.9 million in the prior year period. The $83.9 million improvement was primarily due to increased usage of our trade payable program of $50.5 million. On April 6, 2009, a previously existing program was replaced by a new program funded by various bank participants who have the ability, but not the obligation, to purchase, directly from our vendors, account receivables owed by Pep Boys. This transition temporarily resulted in a net reduction in our trade payable financing program of $29.3 million in the prior year period, as vendors typically participating in the legacy financing program were temporarily paid on a customary trade payable cycle until such time as they were able to transition onto the new financing program. In the current year, we increased the availability under this new financing program to $75.0 million from $50.0 million. As of July 31, 2010, January 30, 2010 and August 1, 2009, we had an outstanding balance of $55.3 million, $34.1 million and $2.6 million, respectively, (classified as trade payable program liability on the condensed consolidated balance sheet) under our vendor financing programs. Additionally, in the first half of 2009, we repurchased $17.0 million of our outstanding 7.5% Senior Subordinated Notes for $10.7 million and repaid $22.3 million of borrowings under our revolving credit agreement.

We anticipate that cash on hand and cash generated by operating activities will exceed our expected cash requirements in fiscal year 2010. In addition, we expect to have excess availability under our existing revolving credit agreement during the entirety of fiscal year 2010. As of July 31, 2010, we had zero drawn on our revolving credit facility and maintained undrawn availability of $128.3 million.

Our working capital was $234.4 million and $205.5 million at July 31, 2010 and January 30, 2010, respectively. Our long-term debt, as a percentage of our total capitalization, was 39.7% and 40.9% at July 31, 2010 and January 30, 2010, respectively.

NEW ACCOUNTING STANDARDS

In October 2009, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) 2009-13 “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force,” (“ASU 2009-13”). This update eliminates the residual method of allocation and requires that consideration be allocated to all deliverables using the relative selling price method. ASU 2009-13 is effective for material revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not believe the adoption of ASU 2009-13 will have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06 “Fair Value Measurements — Improving Disclosures on Fair Value Measurements” (“ASU 2010-06”). This guidance requires new disclosures surrounding transfers in and out of level 1 or 2 in the fair value hierarchy and also requires that in the reconciliation of level 3 inputs, the entity should report separately information on purchases, sales, issuances or settlements. The increased disclosures should be reported for each class of assets or liabilities. ASU 2010-06 also clarifies existing disclosures for the level of disaggregating, disclosures about valuation techniques and inputs used to determine level 2 or 3 fair value measurements and includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances or settlements in the roll forward activity for level 3 fair value measurements which are effective for interim and annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 for requirements effective December 15, 2009 did not have a material impact on the Company’s consolidated financial statements. The Company does not believe the adoption of those requirements of ASU 2010-06 which are effective for periods beginning after December 15, 2010 will have a material impact on its consolidated financial statements.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

On an on-going basis, we evaluate our estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, merchandise inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to “Critical Accounting Policies and Estimates” as reported in our Annual Report on Form 10-K for the fiscal year ended January 30, 2010, which disclosures are hereby incorporated by reference.

FORWARD-LOOKING STATEMENTS

Certain statements contained herein constitute “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. The words “guidance,” “expect,” “anticipate,” “estimates,” “forecasts” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include management’s expectations regarding implementation of its long-term strategic plan, future financial performance, automotive aftermarket trends, levels of competition, business development activities, future capital expenditures, financing sources and availability and the effects of regulation and litigation. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. Our actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond our control, including the strength of the national and regional economies, retail and commercial consumers’ ability to spend, the health of the various sectors of the automotive aftermarket, the weather in geographical regions with a high concentration of our stores, competitive pricing, the location and number of competitors’ stores, product and labor costs and the additional factors described in our filings with the Securities and Exchange Commission (SEC). We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk exposure with regard to financial instruments is due to changes in interest rates. Pursuant to the terms of our Revolving Credit Agreement, changes in LIBOR or the Prime Rate could affect the rates at which we could borrow funds thereunder. At July 31, 2010 we had no borrowings under this facility. Additionally, we have a $149.2 million Senior Secured Term Loan that bears interest at three month LIBOR plus 2.0%.

We have an interest rate swap for a notional amount of $145.0 million, which is designated as a cash flow hedge on our Senior Secured Term Loan. We also have a fuel hedge which is intended to maintain a fixed price for retail gasoline through the January 31, 2011. This is also designated as a cash flow hedge. We record the effective portion of the changes in fair value through accumulated other comprehensive loss.

The fair value of the derivatives was $19.0 million and $16.4 million payable at July 31, 2010 and January 30, 2010, respectively. Of the $2.5 million increase in fair value during the twenty-six weeks ended July 31, 2010, $1.6 million net of tax was recorded to accumulated other comprehensive loss on the condensed consolidated balance sheet.

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Item 4.  Controls and Procedures.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were functioning effectively and provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No change in the Company’s internal control over financial reporting occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 5.  Other Information

None.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

In September 2006, the United States Environmental Protection Agency (“EPA”) requested certain information from the Company as part of an investigation to determine whether the Company had violated, and is in violation of, the Clean Air Act and its non-road engine regulations. The information requested concerned certain generator and personal transportation merchandise offered for sale by the Company. In the fourth quarter of fiscal 2008, the EPA informed the Company that it believed that the Company had violated the Clean Air Act by virtue of the fact that certain of this merchandise did not conform to their corresponding EPA Certificates of Conformity. During the third quarter of fiscal 2009, the Company and the EPA reached a settlement in principle of this matter requiring that the Company (i) pay a monetary penalty of $5.0 million, (ii) take certain corrective action with respect to certain inventory that had been restricted from sale during the course of the investigation, (iii) implement a formal compliance program and (iv) participate in certain non-monetary emission offset activities. The Company had previously accrued an amount equal to the agreed upon civil penalty and a $3.0 million contingency accrual with respect to the restricted inventory. During fiscal 2009, the Company reversed $2.0 million of the inventory accrual as a portion of the subject inventory was released for sale. During the second quarter of fiscal 2010, the Company reversed the remaining $1.0 million of the inventory accrual as the Company reached an agreement with the merchandise vendor to cover the entire cost of retrofitting a portion of the remaining subject merchandise and to accept the balance of the subject inventory for return for full credit. During the second quarter of fiscal 2010, the formal settlement agreement between the Company and the EPA became effective and the Company paid the monetary penalty.

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The Company is also party to various other actions and claims arising in the normal course of business.

The Company believes that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While the Company does not believe that the amount of such excess loss could be material to the Company’s financial position, any such loss could have a material adverse effect on the Company’s results of operations in the period(s) during which the underlying matters are resolved.

Item 1A.  Risk Factors

There have been no changes to the risks described in the Company’s previously filed Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  (Removed and Reserved)

Item 5.  Other Information

None.

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Item 6.  Exhibits

(31.1)	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2)	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(32.1)	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(32.2)	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		THE PEP BOYS - MANNY, MOE & JACK
		(Registrant)
Date:	September 8, 2010	by:	/s/ Raymond L. Arthur
		Raymond L. Arthur
		Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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INDEX TO EXHIBITS

(31.1)	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2)	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(32.1)	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(32.2)	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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