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 October 29, 2011
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 x 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 November 25, 2011, there were 52,720,713 shares of the registrant’s Common Stock outstanding.
|
| Page |
| ||
|
|
|
| ||
|
|
|
| Consolidated Balance Sheets — October 29, 2011 and January 29, 2011 | 3 |
|
|
|
| 4 | |
|
|
|
| 5 | |
|
|
|
| 6 | |
|
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | |
|
|
|
30 | ||
|
|
|
30 | ||
|
|
|
30 | ||
|
|
|
| ||
|
|
|
30 | ||
|
|
|
31 | ||
|
|
|
31 | ||
|
|
|
31 | ||
|
|
|
31 | ||
|
|
|
31 | ||
|
|
|
32 | ||
|
|
|
33 | ||
|
|
|
34 |
PART I - FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
(dollar amounts in thousands, except share data)
(unaudited)
|
| October 29, 2011 |
| January 29, 2011 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 80,716 |
| $ | 90,240 |
|
Accounts receivable, less allowance for uncollectible accounts of $1,257 and $1,551 |
| 23,524 |
| 19,540 |
| ||
Merchandise inventories |
| 606,254 |
| 564,402 |
| ||
Prepaid expenses |
| 15,571 |
| 28,542 |
| ||
Other current assets |
| 47,550 |
| 60,812 |
| ||
Total current assets |
| 773,615 |
| 763,536 |
| ||
|
|
|
|
|
| ||
Property and equipment - net |
| 693,779 |
| 700,981 |
| ||
Goodwill |
| 46,219 |
| 2,549 |
| ||
Deferred income taxes |
| 66,674 |
| 66,019 |
| ||
Other long-term assets |
| 30,821 |
| 23,587 |
| ||
Total assets |
| $ | 1,611,108 |
| $ | 1,556,672 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
| $ | 238,599 |
| $ | 210,440 |
|
Trade payable program liability |
| 68,320 |
| 56,287 |
| ||
Accrued expenses |
| 221,976 |
| 236,028 |
| ||
Deferred income taxes |
| 58,898 |
| 56,335 |
| ||
Current maturities of long-term debt |
| 1,079 |
| 1,079 |
| ||
Total current liabilities |
| 588,872 |
| 560,169 |
| ||
|
|
|
|
|
| ||
Long-term debt less current maturities |
| 294,313 |
| 295,122 |
| ||
Other long-term liabilities |
| 72,257 |
| 70,046 |
| ||
Deferred gain from asset sales |
| 143,424 |
| 152,875 |
| ||
Commitments and contingencies |
|
|
|
|
| ||
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 |
| 295,813 |
| 295,361 |
| ||
Retained earnings |
| 429,935 |
| 402,600 |
| ||
Accumulated other comprehensive loss |
| (14,727 | ) | (17,028 | ) | ||
Treasury stock, at cost — 15,835,096 shares and 15,971,910 shares |
| (267,336 | ) | (271,030 | ) | ||
Total stockholders’ equity |
| 512,242 |
| 478,460 |
| ||
Total liabilities and stockholders’ equity |
| $ | 1,611,108 |
| $ | 1,556,672 |
|
See notes to consolidated financial statements.
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND CHANGES IN RETAINED EARNINGS
(dollar amounts in thousands, except per share amounts)
(unaudited)
|
| Thirteen weeks ended |
| Thirty-nine weeks ended |
| ||||||||
|
| October 29, |
| October 30, |
| October 29, |
| October 30, |
| ||||
Merchandise sales |
| $ | 414,530 |
| $ | 398,368 |
| $ | 1,238,424 |
| $ | 1,213,736 |
|
Service revenue |
| 107,643 |
| 97,996 |
| 319,884 |
| 297,516 |
| ||||
Total revenues |
| 522,173 |
| 496,364 |
| 1,558,308 |
| 1,511,252 |
| ||||
Costs of merchandise sales |
| 292,397 |
| 279,690 |
| 865,446 |
| 845,848 |
| ||||
Costs of service revenue |
| 102,855 |
| 90,818 |
| 295,607 |
| 267,452 |
| ||||
Total costs of revenues |
| 395,252 |
| 370,508 |
| 1,161,053 |
| 1,113,300 |
| ||||
Gross profit from merchandise sales |
| 122,133 |
| 118,678 |
| 372,978 |
| 367,888 |
| ||||
Gross profit from service revenue |
| 4,788 |
| 7,178 |
| 24,277 |
| 30,064 |
| ||||
Total gross profit |
| 126,921 |
| 125,856 |
| 397,255 |
| 397,952 |
| ||||
Selling, general and administrative expenses |
| 109,549 |
| 110,840 |
| 331,717 |
| 335,580 |
| ||||
Net (loss) gain from dispositions of assets |
| (25 | ) | 109 |
| 61 |
| 2,603 |
| ||||
Operating profit |
| 17,347 |
| 15,125 |
| 65,599 |
| 64,975 |
| ||||
Non-operating income |
| 627 |
| 650 |
| 1,783 |
| 1,855 |
| ||||
Interest expense |
| 6,889 |
| 6,630 |
| 19,831 |
| 19,881 |
| ||||
Earnings from continuing operations before income taxes and discontinued operations |
| 11,085 |
| 9,145 |
| 47,551 |
| 46,949 |
| ||||
Income tax expense |
| 4,063 |
| 3,471 |
| 14,232 |
| 18,316 |
| ||||
Earnings from continuing operations before discontinued operations |
| 7,022 |
| 5,674 |
| 33,319 |
| 28,633 |
| ||||
(Loss) income from discontinued operations, net of tax |
| (11 | ) | 44 |
| 3 |
| (367 | ) | ||||
Net earnings |
| 7,011 |
| 5,718 |
| 33,322 |
| 28,266 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Retained earnings, beginning of period |
| 424,923 |
| 393,245 |
| 402,600 |
| 374,836 |
| ||||
Cash dividends |
| (1,586 | ) | (1,581 | ) | (4,757 | ) | (4,741 | ) | ||||
Shares issued and other |
| (413 | ) | (282 | ) | (1,230 | ) | (1,261 | ) | ||||
Retained earnings, end of period |
| $ | 429,935 |
| $ | 397,100 |
| $ | 429,935 |
| $ | 397,100 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Earnings from continuing operations |
| $ | 0.13 |
| $ | 0.11 |
| $ | 0.63 |
| $ | 0.54 |
|
Discontinued operations, net of tax |
| — |
| — |
| — |
| (0.01 | ) | ||||
Basic earnings per share |
| $ | 0.13 |
| $ | 0.11 |
| $ | 0.63 |
| $ | 0.53 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Earnings from continuing operations |
| $ | 0.13 |
| $ | 0.11 |
| $ | 0.62 |
| $ | 0.54 |
|
Discontinued operations, net of tax |
| — |
| — |
| — |
| (0.01 | ) | ||||
Diluted earnings per share |
| $ | 0.13 |
| $ | 0.11 |
| $ | 0.62 |
| $ | 0.53 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash dividends per share |
| $ | 0.03 |
| $ | 0.03 |
| $ | 0.09 |
| $ | 0.09 |
|
See notes to consolidated financial statements.
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
(unaudited)
Thirty-nine weeks ended |
| October 29, 2011 |
| October 30, 2010 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net earnings |
| $ | 33,322 |
| $ | 28,266 |
|
Adjustments to reconcile net earnings to net cash provided by continuing operations: |
|
|
|
|
| ||
(Income) loss from discontinued operations, net of tax |
| (3 | ) | 367 |
| ||
Depreciation and amortization |
| 59,779 |
| 55,260 |
| ||
Amortization of deferred gain from asset sales |
| (9,451 | ) | (9,451 | ) | ||
Stock compensation expense |
| 2,539 |
| 2,748 |
| ||
Deferred income taxes |
| 8,021 |
| 11,795 |
| ||
Net gain from disposition of assets |
| (61 | ) | (2,603 | ) | ||
Loss from asset impairment |
| 389 |
| 970 |
| ||
Other |
| — |
| 52 |
| ||
Changes in assets and liabilities, net of the effects of acquisitions: |
|
|
|
|
| ||
Decrease in accounts receivable, prepaid expenses and other |
| 27,767 |
| 29,382 |
| ||
Increase in merchandise inventories |
| (34,874 | ) | (9,474 | ) | ||
Increase in accounts payable |
| 19,758 |
| 4,864 |
| ||
Decrease in accrued expenses |
| (18,693 | ) | (17,993 | ) | ||
Decrease in other long-term liabilities |
| (3,483 | ) | (2,122 | ) | ||
Net cash provided by continuing operations |
| 85,010 |
| 92,061 |
| ||
Net cash provided by (used in) discontinued operations |
| 40 |
| (1,263 | ) | ||
Net cash provided by operating activities |
| 85,050 |
| 90,798 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Capital expenditures |
| (50,793 | ) | (42,976 | ) | ||
Proceeds from dispositions of assets |
| 89 |
| 6,713 |
| ||
Collateral investment |
| (4,763 | ) | (5,000 | ) | ||
Acquisitions, net of cash acquired |
| (42,901 | ) | (144 | ) | ||
Other |
| (837 | ) | — |
| ||
Net cash used in continuing operations |
| (99,205 | ) | (41,407 | ) | ||
Net cash provided by discontinued operations |
| — |
| 569 |
| ||
Net cash used in investing activities |
| (99,205 | ) | (40,838 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Borrowings under line of credit agreements |
| 5,181 |
| 20,482 |
| ||
Payments under line of credit agreements |
| (5,181 | ) | (20,482 | ) | ||
Borrowings on trade payable program liability |
| 97,400 |
| 89,913 |
| ||
Payments on trade payable program liability |
| (85,367 | ) | (66,995 | ) | ||
Payment for finance issuance cost |
| (2,441 | ) | — |
| ||
Debt payments |
| (809 | ) | (809 | ) | ||
Dividends paid |
| (4,757 | ) | (4,741 | ) | ||
Other |
| 605 |
| 599 |
| ||
Net cash provided by financing activities |
| 4,631 |
| 17,967 |
| ||
Net (decrease) increase in cash and cash equivalents |
| (9,524 | ) | 67,927 |
| ||
Cash and cash equivalents at beginning of period |
| 90,240 |
| 39,326 |
| ||
Cash and cash equivalents at end of period |
| $ | 80,716 |
| $ | 107,253 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
Cash paid for income taxes |
| $ | 1,015 |
| $ | 882 |
|
Cash paid for interest |
| $ | 14,577 |
| $ | 14,412 |
|
Non-cash investing activities: |
|
|
|
|
| ||
Accrued purchases of property and equipment |
| $ | 1,486 |
| $ | 1,280 |
|
See notes to consolidated financial statements
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, 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 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 consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011. The results of operations for the thirty-nine weeks ended October 29, 2011 are not necessarily indicative of the operating results for the full fiscal year.
The 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 October 29, 2011 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 2011 and 2010 refer to the fiscal year ending January 28, 2012 and the fiscal year ended January 29, 2011, respectively.
The Company operated 729 store locations at October 29, 2011, of which 232 were owned and 497 were leased.
The Company maintains a trade payable program that is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by the Company from its vendors. The Company, in turn, makes the regularly scheduled full vendor payments to the bank participants. In the first quarter of fiscal 2011 as a result of the Company’s review, the Company determined that the gross amount of borrowings and payments on the trade payable program shown on the statement of cash flows under “Cash flows from financing activities” included certain vendors that had not participated in the trade payable program. As such, the Company made an equal and offsetting adjustment to reduce the trade payables borrowings and payments line items within financing activities by $157.0 million for the thirty-nine weeks ended October 30, 2010. The full year impact of this adjustment is to reduce the line items by $225.2 million and $90.3 million for the years ended January 29, 2011 and January 30, 2010, respectively. These adjustments have no net impact on net cash used in financing activities or on any other cash flow line items.
NOTE 2—NEW ACCOUNTING STANDARDS
In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29 “Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”). This accounting standard update clarifies that SEC registrants presenting comparative financial statements should disclose in their pro forma information revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material business combinations entered into in fiscal years beginning on or after December 15, 2010 with early adoption permitted. The Company adopted ASU 2010-29 during the first quarter of the current fiscal year.
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The Company is currently evaluating ASU 2011-04 and has not yet determined the impact the adoption will have on the consolidated financial statements.
In June of 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 was issued to improve the comparability of financial reporting between U.S. GAAP and IFRS, and eliminates previous U.S. GAAP guidance that allowed an entity to present components of other comprehensive income (“OCI”) as part of its statement of changes in shareholders’ equity. With the issuance of ASU 2011-05, companies are now required to report all components of OCI either in a single continuous statement of total comprehensive income, which includes components of both OCI and net income, or in a separate statement appearing consecutively with the statement of income. ASU 2011-05 does not affect current guidance for the accounting of the components of OCI, or which items are included within total comprehensive income, and is effective for periods beginning after December 15, 2011, with early adoption permitted. The application of this guidance affects presentation only and therefore is not expected to have an impact on the Company’s consolidated financial condition, results of operations or cash flows.
In September 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350) —Testing Goodwill for Impairment” (“ASU 2011-08”). The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the quantitative two-step goodwill impairment test. Entities also have the option to bypass the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company is evaluating which method it will use for impairment testing at the end of the current fiscal year.
NOTE 3—ACQUISITIONS
During the current fiscal year, the Company made three separate acquisitions. The Company acquired the assets related to seven service and tire centers located in the Seattle-Tacoma area, the assets related to seven service and tire centers located in the Houston, Texas area and all outstanding shares of capital stock of Tire Stores Group Holding Corporation which operated an 85-store chain in Florida, Georgia and Alabama under the name Big 10. Collectively, the acquired stores produced approximately $94.7 million in sales annually based on audited and unaudited pre-acquisition historical information. The total purchase price of these stores was approximately $42.6 million in cash and the assumption of certain liabilities. The acquisitions were financed through cash flows provided by operations. The results of operations of these acquired stores are included in the Company’s results from their respective acquisition dates.
The Company has recorded its initial accounting for these acquisitions in accordance with accounting guidance on business combinations. The acquisitions resulted in goodwill related to, among other things, growth opportunities and assembled workforces. A portion of the goodwill is expected to be deductible for tax purposes. The Company has recorded finite-lived intangible assets at their estimated fair value related to trade name, favorable and unfavorable leases.
The Company expensed all costs related to these acquisitions during fiscal 2011. The total costs related to these acquisitions were $1.5 million and are included in the consolidated statement of operations within selling, general and administrative expenses.
The purchase price of the acquisitions have been preliminarily allocated to the net tangible and intangible assets acquired, with the remainder recorded as goodwill on the basis of estimated fair values. We have revised our estimates in the current quarter, which resulted in a decrease in goodwill of $2.4 million from our initial allocation of purchase price. The change related primarily to the elimination of reserves for uncertain tax positions related to federal and state net operating losses which are included within other non-current assets. The preliminary allocation is a follows:
|
| As of |
| |
|
| Acquisition |
| |
(dollar amounts in thousands) |
| Dates |
| |
Current assets |
| $ | 11,642 |
|
Intangible assets |
| 950 |
| |
Other non-current assets |
| 9,627 |
| |
Current liabilities |
| (13,817 | ) | |
Long-term liabilities |
| (9,458 | ) | |
Total net identifiable assets acquired |
| $ | (1,056 | ) |
|
|
|
| |
Total consideration transferred, net of cash acquired |
| $ | 42,614 |
|
Less: total net identifiable assets acquired |
| (1,056 | ) | |
Goodwill |
| $ | 43,670 |
|
Intangible assets consist of trade names ($0.6 million) and favorable leases ($0.3 million). Long-term liabilities includes unfavorable leases ($9.1 million). The trade names are being amortized over their estimated useful life of 3 years. The favorable and unfavorable lease intangible assets and liabilities are being amortized to rent expense over their respective lease terms, ranging from 2 to 16 years. In connection with the acquisitions, the Company assumed additional lease obligations totaling $122.0 million over an average of 14 years.
Sales for the fiscal 2011 acquired stores totaled $43.6 million. Net earnings for the acquired stores for the period from acquisition date through October 29, 2011 were break-even, excluding transition related expenses.
The purchase price allocation remains preliminary for some of the acquired stores due to the finalization of certain valuation adjustments. The Company believes that this will be finalized by the fourth quarter of fiscal 2011 and that any adjustments to the purchase price allocation will not be material.
As the acquisitions (including Big 10) were immaterial to the operating results both individually and in aggregate for the thirteen and thirty-nine week periods ended October 29, 2011 and October 30, 2010, pro forma results of operations are not presented.
In the third quarter of 2011, the Company recorded a reduction to the contingent consideration of $0.7 million related to one of the Company’s acquisitions. The reversal of contingent consideration was recorded to selling, general and administrative expenses in the consolidated statements of operations.
NOTE 4—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 been $545.7 million and $486.0 million as of October 29, 2011 and January 29, 2011, respectively.
The Company’s inventory, consisting primarily of auto parts and accessories, is used on vehicles typically having long lives. Because of this, and combined with the Company’s historical experience of returning excess inventory to the Company’s vendors for full credit, the risk of obsolescence is minimal. The Company establishes a reserve for excess inventory for instances where less than full credit will be received for such returns or where the Company anticipates items will be sold at retail prices that are less than recorded costs. The reserve is based on management’s judgment, including estimates and assumptions regarding marketability of products, the market value of inventory to be sold in future periods and on historical experiences where the Company received less than full credit from vendors for product returns. The Company also provides for estimated inventory shrinkage based upon historical levels and the results of its cycle counting program. The Company’s inventory adjustments for these matters were approximately $5.6 million at October 29, 2011 and $6.0 million at January 29, 2011.
NOTE 5—PROPERTY AND EQUIPMENT
The Company’s property and equipment as of October 29, 2011 and January 29, 2011 was as follows:
(dollar amounts in thousands) |
| October 29, 2011 |
| January 29, 2011 |
| ||
|
|
|
|
|
| ||
Property and equipment |
|
|
|
|
| ||
Land |
| $ | 204,023 |
| $ | 204,023 |
|
Buildings and improvements |
| 865,251 |
| 848,268 |
| ||
Furniture, fixtures and equipment |
| 710,719 |
| 685,481 |
| ||
Construction in progress |
| 5,180 |
| 8,781 |
| ||
Accumulated depreciation and amortization |
| (1,091,394 | ) | (1,045,572 | ) | ||
Property and equipment — net |
| $ | 693,779 |
| $ | 700,981 |
|
NOTE 6—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 is warranted in full by the Company for a limited specific time period. The Company establishes its warranty reserves based on historical experiences. These costs are included in either costs of merchandise sales or costs of service revenues in the consolidated statements of operations.
The reserve for warranty cost activity for the thirty-nine weeks ended October 29, 2011 and the fifty-two weeks ended January 29, 2011 is as follows:
(dollar amounts in thousands) |
| October 29, 2011 |
| January 29, 2011 |
| ||
Beginning balance |
| $ | 673 |
| $ | 694 |
|
|
|
|
|
|
| ||
Additions related to current period sales |
| 9,790 |
| 12,261 |
| ||
|
|
|
|
|
| ||
Warranty costs incurred in current period |
| (9,790 | ) | (12,282 | ) | ||
|
|
|
|
|
| ||
Ending balance |
| $ | 673 |
| $ | 673 |
|
NOTE 7—DEBT AND FINANCING ARRANGEMENTS
The following are the components of debt and financing arrangements:
(dollar amounts in thousands) |
| October 29, 2011 |
| January 29, 2011 |
| ||
7.50% Senior Subordinated Notes, due December 2014 |
| $ | 147,565 |
| $ | 147,565 |
|
Senior Secured Term Loan, due October 2013 |
| 147,827 |
| 148,636 |
| ||
Revolving Credit Agreement, expiring July 2016 |
| — |
| — |
| ||
Long-term debt |
| 295,392 |
| 296,201 |
| ||
Current maturities |
| (1,079 | ) | (1,079 | ) | ||
Long-term debt less current maturities |
| $ | 294,313 |
| $ | 295,122 |
|
As of October 29, 2011, 126 stores collateralized the Senior Secured Term Loan.
On July 26, 2011, the Company amended and restated its 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 up to a maximum availability of $300.0 million. The amendment reduced the interest rate applicable to borrowings by 75 basis points to a rate between London Interbank Offered Rate (LIBOR) plus 2.00% to 2.50% and extended the maturity date of the Revolving Credit Agreement to July 26, 2016. The related refinancing fees of $2.4 million are being amortized over the new five year life. As of October 29, 2011, there were no outstanding borrowings under the Revolving Credit Agreement and $30.0 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements, as of October 29, 2011, there was $210.1 million of availability remaining.
Several of the Company’s debt agreements require compliance with covenants. The most restrictive of these covenants, an earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirement, is triggered if the Company’s availability under its Revolving Credit Agreement drops below $50.0 million. As of October 29, 2011, the Company was in compliance with all financial covenants contained in its debt agreements.
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 $292.4 million and $298.3 million as of October 29, 2011 and January 29, 2011, respectively.
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. All available evidence, both positive and negative, is considered to determine whether based on the weight of that evidence a valuation allowance is needed. To establish this positive evidence, the Company considers future projections of income and various tax planning strategies for generating
income sufficient to utilize the deferred tax assets. Due to an organizational restructuring of its subsidiaries and the Company’s improved profitability and projected future income, the Company released $3.6 million (net of federal tax) of valuation allowance relating to state net operating loss carryforwards and credits during the thirty-nine weeks ended October 29, 2011.
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 thirteen and thirty-nine weeks ended October 29, 2011, the Company did not have a material change to its uncertain tax position liabilities.
NOTE 9—ACCUMULATED OTHER COMPREHENSIVE LOSS
The following are the components of other comprehensive income:
|
| Thirteen Weeks Ended |
| Thirty-nine Weeks Ended |
| ||||||||
(dollar amounts in thousands) |
| October 29, |
| October 30, |
| October 29, |
| October 30, |
| ||||
Net earnings |
| $ | 7,011 |
| $ | 5,718 |
| $ | 33,322 |
| $ | 28,266 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
| ||||
Defined benefit plan adjustment |
| 236 |
| 264 |
| 709 |
| 794 |
| ||||
Derivative financial instrument adjustment |
| 907 |
| (226 | ) | 1,592 |
| (1,823 | ) | ||||
Comprehensive income |
| $ | 8,154 |
| $ | 5,756 |
| $ | 35,623 |
| $ | 27,237 |
|
The components of accumulated other comprehensive loss are:
(dollar amounts in thousands) |
| October 29, 2011 |
| January 29, 2011 |
| ||
|
|
|
|
|
| ||
Defined benefit plan adjustment, net of tax |
| $ | (5,867 | ) | $ | (6,576 | ) |
Derivative financial instrument adjustment, net of tax |
| (8,860 | ) | (10,452 | ) | ||
Accumulated other comprehensive loss |
| $ | (14,727 | ) | $ | (17,028 | ) |
NOTE 10—IMPAIRMENTS AND ASSETS HELD FOR SALE
During the second quarter of fiscal 2011 and 2010, the Company recorded a $0.4 million and a $0.8 million impairment charge, respectively, related to 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 the 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 $0.4 million impairment charge in fiscal 2011, $0.1 million was charged to costs of merchandise sales, and $0.3 million was charged to costs of service revenues. Of the $0.8 million impairment charge in fiscal 2010, $0.6 million was charged to costs of merchandise sales, and $0.2 million was charged to costs of service revenue.
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 costs of merchandise sales.
During the thirteen week period ended October 30, 2010, the Company sold one store classified as held for disposal for net proceeds of $0.6 million and recognized a net gain of $0.2 million. During the thirty-nine week period ended October 30, 2010, the Company sold five stores classified as held for disposal for net proceeds of $3.5 million and recognized a net gain of $0.5 million.
Assets held for sale were $0.4 million as of October 29, 2011 and $0.5 million as of January 29, 2011 and are recorded within other current assets. Subsequent to the end of the third quarter of fiscal 2011, the Company sold the last remaining store classified as an asset held for sale at the property’s carrying value.
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 |
| Thirty-nine Weeks Ended |
| |||||||||
(in thousands, except per share amounts) |
| October 29, |
| October 30, |
| October 29, |
| October 30, |
| |||||
|
|
|
|
|
|
|
|
|
|
| ||||
(a) | Earnings from continuing operations |
| $ | 7,022 |
| $ | 5,674 |
| $ | 33,319 |
| $ | 28,633 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| (Loss) income from discontinued operations, net of tax |
| (11 | ) | 44 |
| 3 |
| (367 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
| Net earnings |
| $ | 7,011 |
| $ | 5,718 |
| $ | 33,322 |
| $ | 28,266 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
(b) | Basic average number of common shares outstanding during period |
| 52,998 |
| 52,717 |
| 52,933 |
| 52,637 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
| Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price |
| 600 |
| 447 |
| 661 |
| 434 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
(c) | Diluted average number of common shares assumed outstanding during period |
| 53,598 |
| 53,164 |
| 53,594 |
| 53,071 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
| Basic earnings per share: |
|
|
|
|
|
|
|
|
| ||||
| Earnings from continuing operations (a/b) |
| $ | 0.13 |
| $ | 0.11 |
| $ | 0.63 |
| $ | 0.54 |
|
| Discontinued operations, net of tax |
| — |
| — |
| — |
| (0.01 | ) | ||||
| Basic earnings per share |
| $ | 0.13 |
| $ | 0.11 |
| $ | 0.63 |
| $ | 0.53 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Diluted earnings per share: |
|
|
|
|
|
|
|
|
| ||||
| Net earnings from continuing operations (a/c) |
| $ | 0.13 |
| $ | 0.11 |
| $ | 0.62 |
| $ | 0.54 |
|
| Discontinued operations, net of tax |
| — |
| — |
| — |
| (0.01 | ) | ||||
| Diluted earnings per share |
| $ | 0.13 |
| $ | 0.11 |
| $ | 0.62 |
| $ | 0.53 |
|
At October 29, 2011 and October 30, 2010, respectively, there were 2,640,000 and 2,321,000 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 904,000 and 1,078,000 for the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively. The total numbers of such shares excluded from the diluted earnings per share calculation are 1,050,000 and 1,059,000 for the thirteen weeks ended October 29, 2011 and October 30, 2010, respectively.
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 also maintains a non-qualified defined contribution Supplemental Executive Retirement Plan (the “Account Plan”) for key employees designated by the Board of Directors. The Company’s contribution to these plans for fiscal 2011 is contingent upon meeting certain performance metrics. The Company has not recorded any contribution expense for these plans in the first nine months of 2011. The Company’s expense related to the savings plans and the Account Plan for the thirteen weeks ended October 30, 2010 was approximately $0.9 million and $0.3 million, respectively, and for the thirty-nine weeks ended October 30, 2010, approximately $2.5 million and $1.0 million, respectively.
The Company also has a frozen defined benefit pension plan (the “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 |
| Thirty-nine Weeks Ended |
| ||||||||
(dollar amounts in thousands) |
| October 29, 2011 |
| October 30, 2010 |
| October 29, 2011 |
| October 30, 2010 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest cost |
| 640 |
| 640 |
| 1,918 |
| 1,920 |
| ||||
Expected return on plan assets |
| (686 | ) | (538 | ) | (2,058 | ) | (1,613 | ) | ||||
Amortization of net loss |
| 378 |
| 421 |
| 1,134 |
| 1,264 |
| ||||
Net periodic benefit cost |
| $ | 332 |
| $ | 523 |
| $ | 994 |
| $ | 1,571 |
|
The Plan is subject to minimum funding requirements of the Employee Retirement Income Security Act of 1974 as amended. While the Company has no minimum funding requirement during fiscal 2011, it made a $3.0 million discretionary contribution to the defined benefit pension plan on April 28, 2011.
During the third quarter of fiscal 2011, the Company began the process of terminating the Plan. The termination of the Plan is expected to be completed by the end of fiscal 2012. In order to terminate the Plan, in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, the Company is required to fully fund the Plan on a termination basis and will commit to contribute the additional assets necessary to do so. Plan participants will not be adversely affected by the Plan termination, but rather will have their benefits either converted into a lump sum cash payment or an annuity contract placed with an insurance carrier.
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 29, 2011 |
| 1,831,802 |
|
Granted |
| 265,139 |
|
Exercised |
| (44,144 | ) |
Forfeited |
| (10,341 | ) |
Expired |
| (31,683 | ) |
Outstanding — October 29, 2011 |
| 2,010,773 |
|
In the first nine months of fiscal year 2011, the Company granted approximately 265,000 stock options with a weighted average grant date fair value of $5.38. 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 thirteen weeks and thirty-nine weeks ended October 29, 2011, for the options granted was immaterial.
In the first nine months of fiscal year 2010, the Company granted approximately 303,500 stock options with a weighted average grant date fair value of $4.26. 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 thirteen and thirty-nine weeks ended October 30, 2010, for the options granted was immaterial.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on historical volatilities for a time period similar to that of the expected term blended with market based implied
volatility at the time of the grant. 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 following are the weighted-average assumptions:
|
| October 29, 2011 |
| October 30, 2010 |
|
Dividend yield |
| 1.0 | % | 1.4 | % |
Expected volatility |
| 58.2 | % | 55.7 | % |
Risk-free interest rate range: |
|
|
|
|
|
High |
| 1.9 | % | 2.0 | % |
Low |
| 1.6 | % | 1.7 | % |
Ranges of expected lives in years |
| 4 - 5 |
| 4 - 5 |
|
RESTRICTED STOCK UNITS
Performance Based Awards
In the first quarter of fiscal 2011, the Company granted approximately 95,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and the Company achieves a return on invested capital target for fiscal year 2013. 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 in fiscal year 2013. The fair value for these awards was $12.48 per unit at the date of the grant. The compensation expense recorded for these restricted stock units was immaterial during the thirteen weeks and thirty-nine weeks ended October 29, 2011.
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 a return on invested capital target 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 in fiscal year 2012. The fair value for these awards was $10.34 per unit at the date of the grant. The compensation expense recorded for these restricted stock units during the thirteen weeks and thirty-nine weeks ended October 29, 2011 and October 30, 2010, was immaterial.
Market Based Awards
In the first quarter of fiscal 2011, the Company granted approximately 48,000 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 total shareholder return target in fiscal 2013. 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 $14.73 per unit grant date fair value. The compensation expense recorded for these restricted stock units during the thirteen weeks and thirty-nine weeks ended October 29, 2011, was immaterial.
In the first quarter of fiscal 2010, the Company 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 total shareholder return target 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 per unit grant date fair value. The compensation expense recorded for these restricted stock units during the thirteen weeks and thirty-nine weeks ended October 29, 2011 and October 30, 2010, was immaterial.
Other Awards
In the first quarter of fiscal 2011 and 2010, the Company granted approximately 50,000 and 61,000 restricted stock units, respectively, related to officers’ deferred bonus matches under the Company’s non-qualified deferred compensation plan, which vest over a three year period. The fair value of these awards was $13.68 and $12.53, respectively, and the compensation expense recorded for these awards during the thirteen weeks and thirty-nine weeks ended October 29, 2011 and October 30, 2010, was immaterial.
In the second quarter of fiscal 2011, the Company granted approximately 42,000 restricted stock units to its non-employee directors of the board that vested immediately. The fair value was $10.67 per unit and the Company recognized compensation expense of approximately $0.4 million for these restricted stock units.
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.
The following table summarizes the units under the Company’s plan, assuming maximum vesting of underlying shares for the performance and market based awards described above:
|
| Number of RSUs |
|
Nonvested — January 29, 2011 |
| 432,331 |
|
Granted |
| 321,314 |
|
Forfeited |
| (3,051 | ) |
Vested |
| (121,712 | ) |
Nonvested — October 29, 2011 |
| 628,882 |
|
EMPLOYEE STOCK PURCHASE PLAN
During the third quarter of fiscal 2011, the Company began an employee stock purchase plan which provides eligible employees the opportunity to purchase shares of the Company’s stock at a stated discount through regular payroll deductions. The aggregate number of shares of common stock that may be issued or transferred under the plan is 2,000,000 shares. All shares purchased by employees under this plan will be issued through treasury stock. The Company’s expense for the discount during the third quarter of fiscal 2011 was immaterial.
NOTE 14—FAIR VALUE MEASUREMENTS AND DERIVATIVES
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.
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 |
| Fair Value Measurements |
| ||||||||
Description |
| October 29, 2011 |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 80,716 |
| $ | 80,716 |
| $ | — |
| $ | — |
|
Collateral investments (1) |
| 14,400 |
| 14,400 |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Other liabilities |
|
|
|
|
|
|
|
|
| ||||
Derivative liability (3) |
| 13,963 |
| — |
| 13,963 |
| — |
| ||||
(dollar amounts in thousands) |
| Fair Value |
| Fair Value Measurements |
| ||||||||
Description |
| January 29, 2011 |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 90,240 |
| $ | 90,240 |
| $ | — |
| $ | — |
|
Collateral investments (1) |
| 9,638 |
| 9,638 |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Current liabilities |
|
|
|
|
|
|
|
|
| ||||
Contingent consideration (2) |
| 288 |
| — |
| — |
| 288 |
| ||||
Other liabilities |
|
|
|
|
|
|
|
|
| ||||
Derivative liability (3) |
| 16,424 |
| — |
| 16,424 |
| — |
| ||||
Contingent consideration (3) |
| 1,224 |
| — |
| — |
| 1,224 |
| ||||
(1) included in other long-term assets
(2) included in accrued liabilities
(3) included in other long-term liabilities
During fiscal 2010, the Company invested $9.6 million in restricted accounts as collateral for its retained liabilities included within existing insurance programs in lieu of previously outstanding letters of credit. During the thirty-nine weeks of fiscal 2011, the company invested an additional $4.8 million. The collateral investment is included in other long-term assets on the consolidated balance sheet.
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 component of the total 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 consolidated financial statements for the periods indicated:
(dollar amounts in thousands) |
| Amount of Gain in |
| Earnings Statement |
| Amount of Loss |
| ||
Thirteen weeks ended October 29, 2011 |
| $ | 890 |
| Interest expense |
| $ | (1,751 | ) |
Thirteen weeks ended October 30, 2010 |
| $ | (256 | ) | Interest expense |
| $ | (1,721 | ) |
Thirty-nine weeks ended October 29, 2011 |
| $ | 1,538 |
| Interest expense |
| $ | (5,242 | ) |
Thirty-nine weeks ended October 30, 2010 |
| $ | (1,877 | ) | Interest expense |
| $ | (5,169 | ) |
(a) represents the effective portion of the loss reclassified from accumulated other comprehensive loss
The fair value of the derivative was $14.0 million and $16.4 million payable at October 29, 2011 and January 29, 2011, respectively. Of the $2.4 million decrease in the fair value during the thirty-nine weeks ended October 29, 2011, $1.5 million net of tax was recorded to accumulated other comprehensive loss on the consolidated balance sheet.
Non-financial assets measured at fair value on a non-recurring basis:
Certain assets, such as goodwill and long-lived 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.
NOTE 15—LEGAL MATTERS
The Company is party to various 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.
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, The Pep Boys—Manny Moe & Jack of Delaware, Inc. (the “Pep Boys of Delaware”); Pep Boys—Manny Moe & Jack of Puerto Rico, Inc.; Tire Stores Group Holding Corporation (on and after May 5, 2011); Big 10 Tire Stores, LLC (on and after May 5, 2011) and PBY Corporation (at and prior to January 29, 2011), (collectively, the “Subsidiary Guarantors”). The Notes are not guaranteed by the Company’s wholly owned subsidiary, Colchester Insurance Company.
The following consolidating information presents, in separate columns, the condensed consolidating balance sheets as of October 29, 2011 and January 29, 2011 and the related condensed consolidating statements of operations for the thirty-nine weeks ended October 29, 2011 and October 30, 2010 and condensed consolidating statements of cash flows for the thirty-nine weeks ended October 29, 2011 and October 30, 2010 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, (iii) the subsidiary of the Company that does not guarantee the Notes, and (iv) the Company on a consolidated basis. The Company made an immaterial adjustment to the January 29, 2011 amounts reported for cash, intercompany receivables and intercompany liabilities to account for certain intercompany borrowing activity between Pep Boys and a subsidiary guarantor.
On January 29, 2011, The Pep Boys—Manny, Moe & Jack of Pennsylvania made a capital contribution of $264.0 million to Pep Boys of Delaware consisting of intercompany receivables due from the latter. This contribution resulted in an increase in the Pep Boys’ investment in subsidiaries and the Subsidiary Guarantors’ stockholders’ equity. On January 30, 2011, the Company merged PBY Corporation into Pep Boys of Delaware and accordingly, The Pep Boys Manny Moe & Jack of California became the wholly owned subsidiary of Pep Boys of Delaware. This merger did not affect the presentation of the following condensed consolidating information.
On May 5, 2011, The Pep Boys — Manny, Moe & Jack acquired Tire Store Group Holdings Corporation and its subsidiary Big 10 Tire Stores, LLC. As a result of this acquisition, The Pep Boys—Manny, Moe & Jack of Pennsylvania increased its investment in subsidiaries by $9.4 million (see Note 3 — Acquisitions).
CONDENSED CONSOLIDATING BALANCE SHEET
(dollars in thousands)
(unaudited)
As of October 29, 2011 |
| Pep Boys |
| Subsidiary |
| Subsidiary Non- |
| Consolidation/ |
| Consolidated |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 25,536 |
| $ | 43,136 |
| $ | 12,044 |
| $ | — |
| $ | 80,716 |
|
Accounts receivable, net |
| 10,073 |
| 13,451 |
| — |
| — |
| 23,524 |
| |||||
Merchandise inventories |
| 203,450 |
| 402,804 |
| — |
| — |
| 606,254 |
| |||||
Prepaid expenses |
| 5,976 |
| 6,868 |
| 2,752 |
| (25 | ) | 15,571 |
| |||||
Other current assets |
| 915 |
| 428 |
| 51,060 |
| (4,853 | ) | 47,550 |
| |||||
Total current assets |
| 245,950 |
| 466,687 |
| 65,856 |
| (4,878 | ) | 773,615 |
| |||||
Property and equipment—net |
| 240,440 |
| 441,672 |
| 30,351 |
| (18,684 | ) | 693,779 |
| |||||
Investment in subsidiaries |
| 2,167,471 |
| — |
| — |
| (2,167,471 | ) | — |
| |||||
Intercompany receivables |
| — |
| 1,378,385 |
| 59,551 |
| (1,437,936 | ) | — |
| |||||
Goodwill |
| 2,549 |
| 43,670 |
| — |
| — |
| 46,219 |
| |||||
Deferred income taxes |
| 16,395 |
| 50,279 |
| — |
| — |
| 66,674 |
| |||||
Other long-term assets |
| 28,837 |
| 1,984 |
| — |
| — |
| 30,821 |
| |||||
Total assets |
| $ | 2,701,642 |
| $ | 2,382,677 |
| $ | 155,758 |
| $ | (3,628,969 | ) | $ | 1,611,608 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
| |||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Accounts payable |
| $ | 238,599 |
| $ | — |
| $ | — |
| $ | — |
| $ | 238,599 |
|
Trade payable program liability |
| 68,320 |
| — |
| — |
| — |
| 68,320 |
| |||||
Accrued expenses |
| 30,586 |
| 66,693 |
| 124,722 |
| (25 | ) | 221,976 |
| |||||
Deferred income taxes |
| 27,447 |
| 36,304 |
| — |
| (4,853 | ) | 58,898 |
| |||||
Current maturities of long-term debt |
| 1,079 |
| — |
| — |
| — |
| 1,079 |
| |||||
Total current liabilities |
| 366,031 |
| 102,997 |
| 124,722 |
| (4,878 | ) | 588,872 |
| |||||
Long-term debt less current maturities |
| 294,313 |
| — |
| — |
| — |
| 294,313 |
| |||||
Other long-term liabilities |
| 28,749 |
| 43,508 |
| — |
| — |
| 72,257 |
| |||||
Deferred gain from asset sales |
| 62,371 |
| 99,737 |
| — |
| (18,684 | ) | 143,424 |
| |||||
Intercompany liabilities |
| 1,437,936 |
| — |
| — |
| (1,437,936 | ) | — |
| |||||
Total stockholders’ equity |
| 512,242 |
| 2,136,435 |
| 31,036 |
| (2,167,471 | ) | 512,242 |
| |||||
Total liabilities and stockholders’ equity |
| $ | 2,701,642 |
| $ | 2,382,677 |
| $ | 155,758 |
| $ | (3,628,969 | ) | $ | 1,611,108 |
|
As of January 29, 2011 |
| Pep Boys |
| Subsidiary |
| Subsidiary Non- |
| Consolidation/ |
| Consolidated |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 37,912 |
| $ | 42,779 |
| $ | 9,549 |
| $ | — |
| $ | 90,240 |
|
Accounts receivable, net |
| 8,976 |
| 10,564 |
| — |
| — |
| 19,540 |
| |||||
Merchandise inventories |
| 198,062 |
| 366,340 |
| — |
| — |
| 564,402 |
| |||||
Prepaid expenses |
| 11,839 |
| 17,649 |
| 16,202 |
| (17,148 | ) | 28,542 |
| |||||
Other current assets |
| 2,260 |
| 936 |
| 62,655 |
| (5,039 | ) | 60,812 |
| |||||
Total current assets |
| 259,049 |
| 438,268 |
| 88,406 |
| (22,187 | ) | 763,536 |
| |||||
Property and equipment—net |
| 236,853 |
| 452,230 |
| 30,862 |
| (18,964 | ) | 700,981 |
| |||||
Investment in subsidiaries |
| 2,093,479 |
| — |
| — |
| (2,093,479 | ) | — |
| |||||
Intercompany receivables |
| — |
| 1,361,656 |
| 79,270 |
| (1,440,926 | ) | — |
| |||||
Goodwill |
| 2,549 |
| — |
| — |
| — |
| 2,549 |
| |||||
Deferred income taxes |
| 15,749 |
| 50,270 |
| — |
| — |
| 66,019 |
| |||||
Other long-term assets |
| 22,392 |
| 1,195 |
| — |
| — |
| 23,587 |
| |||||
Total assets |
| $ | 2,630,071 |
| $ | 2,303,619 |
| $ | 198,538 |
| $ | (3,575,556 | ) | $ | 1,556,672 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
| |||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Accounts payable |
| $ | 210,440 |
| $ | — |
| $ | — |
| $ | — |
| $ | 210,440 |
|
Trade payable program liability |
| 56,287 |
| — |
| — |
| — |
| 56,287 |
| |||||
Accrued expenses |
| 23,341 |
| 62,168 |
| 167,667 |
| (17,148 | ) | 236,028 |
| |||||
Deferred income taxes |
| 23,024 |
| 38,350 |
| — |
| (5,039 | ) | 56,335 |
| |||||
Current maturities of long-term debt |
| 1,079 |
| — |
| — |
| — |
| 1,079 |
| |||||
Total current liabilities |
| 314,171 |
| 100,518 |
| 167,667 |
| (22,187 | ) | 560,169 |
| |||||
Long-term debt less current maturities |
| 295,122 |
| — |
| — |
| — |
| 295,122 |
| |||||
Other long-term liabilities |
| 35,870 |
| 34,176 |
| — |
| — |
| 70,046 |
| |||||
Deferred gain from asset sales |
| 65,522 |
| 106,317 |
| — |
| (18,964 | ) | 152,875 |
| |||||
Intercompany liabilities |
| 1,440,926 |
| — |
| — |
| (1,440,926 | ) | — |
| |||||
Total stockholders’ equity |
| 478,460 |
| 2,062,608 |
| 30,871 |
| (2,093,479 | ) | 478,460 |
| |||||
Total liabilities and stockholders’ equity |
| $ | 2,630,071 |
| $ | 2,303,619 |
| $ | 198,538 |
| $ | (3,575,556 | ) | $ | 1,556,672 |
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(dollars in thousands)
(unaudited)
|
|
|
| Subsidiary |
| Subsidiary Non- |
| Consolidation / |
|
|
| |||||
Thirteen Weeks Ended October 29, 2011 |
| Pep Boys |
| Guarantors |
| Guarantors |
| Elimination |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Merchandise sales |
| $ | 135,575 |
| $ | 278,955 |
| $ | — |
| $ | — |
| $ | 414,530 |
|
Service revenue |
| 36,499 |
| 71,144 |
| — |
| — |
| 107,643 |
| |||||
Other revenue |
| — |
| — |
| 5,732 |
| (5,732 | ) | — |
| |||||
Total revenues |
| 172,074 |
| 350,099 |
| 5,732 |
| (5,732 | ) | 522,173 |
| |||||
Costs of merchandise sales |
| 98,397 |
| 194,407 |
| — |
| (407 | ) | 292,397 |
| |||||
Costs of service revenue |
| 32,776 |
| 70,117 |
| — |
| (38 | ) | 102,855 |
| |||||
Costs of other revenue |
| — |
| — |
| 5,836 |
| (5,836 | ) | — |
| |||||
Total costs of revenues |
| 131,173 |
| 264,524 |
| 5,836 |
| (6,281 | ) | 395,252 |
| |||||
Gross profit from merchandise sales |
| 37,178 |
| 84,548 |
| — |
| 407 |
| 122,133 |
| |||||
Gross profit from service revenue |
| 3,723 |
| 1,027 |
| — |
| 38 |
| 4,788 |
| |||||
Gross profit from other revenue |
| — |
| — |
| (104 | ) | 104 |
| — |
| |||||
Total gross profit |
| 40,901 |
| 85,575 |
| (104 | ) | 549 |
| 126,921 |
| |||||
Selling, general and administrative expenses |
| 37,084 |
| 72,452 |
| 80 |
| (67 | ) | 109,549 |
| |||||
Net gain from dispositions of assets |
| (2 | ) | (23 | ) | — |
| — |
| (25 | ) | |||||
Operating profit |
| 3,815 |
| 13,100 |
| (184 | ) | 616 |
| 17,347 |
| |||||
Non-operating (expense) income |
| (4,104 | ) | 16,331 |
| 616 |
| (12,216 | ) | 627 |
| |||||
Interest expense (income) |
| 18,032 |
| 979 |
| (522 | ) | (11,600 | ) | 6,889 |
| |||||
(Loss) earnings from continuing operations before income taxes |
| (18,321 | ) | 28,452 |
| 954 |
| — |
| 11,085 |
| |||||
Income tax (benefit) expense |
| (5,829 | ) | 9,567 |
| 325 |
| — |
| 4,063 |
| |||||
Equity in earnings of subsidiaries |
| 19,504 |
| — |
| — |
| (19,504 | ) | — |
| |||||
Net earnings from continuing operations |
| 7,012 |
| 18,885 |
| 629 |
| (19,504 | ) | 7,022 |
| |||||
Discontinued operations, net of tax |
| (1 | ) | (10 | ) | — |
| — |
| (11 | ) | |||||
Net earnings |
| $ | 7,011 |
| $ | 18,875 |
| $ | 629 |
| $ | (19,504 | ) | $ | 7,011 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
| Subsidiary |
| Subsidiary Non- |
| Consolidation / |
|
|
| |||||
Thirteen Weeks Ended October 30, 2010 |
| Pep Boys |
| Guarantors |
| Guarantors |
| Elimination |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Merchandise sales |
| $ | 135,716 |
| $ | 262,652 |
| $ | — |
| $ | — |
| $ | 398,368 |
|
Service revenue |
| 35,246 |
| 62,750 |
| — |
| — |
| 97,996 |
| |||||
Other revenue |
| — |
| — |
| 5,736 |
| (5,736 | ) | — |
| |||||
Total revenues |
| 170,962 |
| 325,402 |
| 5,736 |
| (5,736 | ) | 496,364 |
| |||||
Costs of merchandise sales |
| 96,266 |
| 183,831 |
| — |
| (407 | ) | 279,690 |
| |||||
Costs of service revenue |
| 31,960 |
| 58,896 |
| — |
| (38 | ) | 90,818 |
| |||||
Costs of other revenue |
| — |
| — |
| 5,067 |
| (5,067 | ) | — |
| |||||
Total costs of revenues |
| 128,226 |
| 242,727 |
| 5,067 |
| (5,512 | ) | 370,508 |
| |||||
Gross profit from merchandise sales |
| 39,450 |
| 78,821 |
| — |
| 407 |
| 118,678 |
| |||||
Gross profit from service revenue |
| 3,286 |
| 3,854 |
| — |
| 38 |
| 7,178 |
| |||||
Gross profit from other revenue |
| — |
| — |
| 669 |
| (669 | ) | — |
| |||||
Total gross profit |
| 42,736 |
| 82,675 |
| 669 |
| (224 | ) | 125,856 |
| |||||
Selling, general and administrative expenses |
| 37,672 |
| 73,920 |
| 88 |
| (840 | ) | 110,840 |
| |||||
Net gain from dispositions of assets |
| (105 | ) | 214 |
| — |
| — |
| 109 |
| |||||
Operating profit |
| 4,959 |
| 8,969 |
| 581 |
| 616 |
| 15,125 |
| |||||
Non-operating (expense) income |
| (4,120 | ) | 21,206 |
| 617 |
| (17,053 | ) | 650 |
| |||||
Interest expense (income) |
| 16,824 |
| 6,759 |
| (516 | ) | (16,437 | ) | 6,630 |
| |||||
(Loss) earnings from continuing operations before income taxes |
| (15,985 | ) | 23,416 |
| 1,714 |
| — |
| 9,145 |
| |||||
Income tax (benefit) expense |
| (6,173 | ) | 8,979 |
| 665 |
| — |
| 3,471 |
| |||||
Equity in earnings of subsidiaries |
| 15,517 |
| — |
| — |
| (15,517 | ) | — |
| |||||
Net earnings from continuing operations |
| 5,705 |
| 14,437 |
| 1,049 |
| (15,517 | ) | 5,674 |
| |||||
Discontinued operations, net of tax |
| 13 |
| 31 |
| — |
| — |
| 44 |
| |||||
Net earnings |
| $ | 5,718 |
| $ | 14,468 |
| $ | 1,049 |
| $ | (15,517 | ) | $ | 5,718 |
|
|
|
|
| Subsidiary |
| Subsidiary Non- |
| Consolidation / |
|
|
| |||||
Thirty-nine Weeks Ended October 29, 2011 |
| Pep Boys |
| Guarantors |
| Guarantors |
| Elimination |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Merchandise sales |
| $ | 414,837 |
| $ | 823,587 |
| $ | — |
| $ | — |
| $ | 1,238,424 |
|
Service revenue |
| 112,147 |
| 207,737 |
| — |
| — |
| 319,884 |
| |||||
Other revenue |
| — |
| — |
| 17,198 |
| (17,198 | ) | — |
| |||||
Total revenues |
| 526,984 |
| 1,031,324 |
| 17,198 |
| (17,198 | ) | 1,558,308 |
| |||||
Costs of merchandise sales |
| 295,915 |
| 570,754 |
| — |
| (1,223 | ) | 865,446 |
| |||||
Costs of service revenue |
| 98,750 |
| 196,971 |
| — |
| (114 | ) | 295,607 |
| |||||
Costs of other revenue |
| — |
| — |
| 17,492 |
| (17,492 | ) | — |
| |||||
Total costs of revenues |
| 394,665 |
| 767,725 |
| 17,492 |
| (18,829 | ) | 1,161,053 |
| |||||
Gross profit from merchandise sales |
| 118,922 |
| 252,833 |
| — |
| 1,223 |
| 372,978 |
| |||||
Gross profit from service revenue |
| 13,397 |
| 10,766 |
| — |
| 114 |
| 24,277 |
| |||||
Gross profit from other revenue |
| — |
| — |
| (294 | ) | 294 |
| — |
| |||||
Total gross profit |
| 132,319 |
| 263,599 |
| (294 | ) | 1,631 |
| 397,255 |
| |||||
Selling, general and administrative expenses |
| 113,470 |
| 218,219 |
| 246 |
| (218 | ) | 331,717 |
| |||||
Net gain from dispositions of assets |
| (2 | ) | 63 |
| — |
| — |
| 61 |
| |||||
Operating profit |
| 18,847 |
| 45,443 |
| (540 | ) | 1,849 |
| 65,599 |
| |||||
Non-operating (expense) income |
| (12,595 | ) | 48,252 |
| 1,850 |
| (35,724 | ) | 1,783 |
| |||||
Interest expense (income) |
| 52,891 |
| 2,380 |
| (1,565 | ) | (33,875 | ) | 19,831 |
| |||||
(Loss) earnings from continuing operations before income taxes |
| (46,639 | ) | 91,315 |
| 2,875 |
| — |
| 47,551 |
| |||||
Income tax (benefit) expense |
| (13,543 | ) | 26,914 |
| 861 |
| — |
| 14,232 |
| |||||
Equity in earnings of subsidiaries |
| 66,400 |
| — |
| — |
| (66,400 | ) | — |
| |||||
Net earnings from continuing operations |
| 33,304 |
| 64,401 |
| 2,014 |
| (66,400 | ) | 33,319 |
| |||||
Discontinued operations, net of tax |
| 18 |
| (15 | ) | — |
| — |
| 3 |
| |||||
Net earnings |
| $ | 33,322 |
| $ | 64,386 |
| $ | 2,014 |
| $ | (66,400 | ) | $ | 33,322 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
| Subsidiary |
| Subsidiary Non- |
| Consolidation / |
|
|
| |||||
Thirty-nine Weeks Ended October 30, 2010 |
| Pep Boys |
| Guarantors |
| Guarantors |
| Elimination |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Merchandise sales |
| $ | 421,160 |
| $ | 792,576 |
| $ | — |
| $ | — |
| $ | 1,213,736 |
|
Service revenue |
| 107,616 |
| 189,900 |
| — |
| — |
| 297,516 |
| |||||
Other revenue |
| — |
| — |
| 17,208 |
| (17,208 | ) | — |
| |||||
Total revenues |
| 528,776 |
| 982,476 |
| 17,208 |
| (17,208 | ) | 1,511,252 |
| |||||
Costs of merchandise sales |
| 296,773 |
| 550,298 |
| — |
| (1,223 | ) | 845,848 |
| |||||
Costs of service revenue |
| 94,316 |
| 173,250 |
| — |
| (114 | ) | 267,452 |
| |||||
Costs of other revenue |
| — |
| — |
| 16,628 |
| (16,628 | ) | — |
| |||||
Total costs of revenues |
| 391,089 |
| 723,548 |
| 16,628 |
| (17,965 | ) | 1,113,300 |
| |||||
Gross profit from merchandise sales |
| 124,387 |
| 242,278 |
| — |
| 1,223 |
| 367,888 |
| |||||
Gross profit from service revenue |
| 13,300 |
| 16,650 |
| — |
| 114 |
| 30,064 |
| |||||
Gross profit from other revenue |
| — |
| — |
| 580 |
| (580 | ) | — |
| |||||
Total gross profit |
| 137,687 |
| 258,928 |
| 580 |
| 757 |
| 397,952 |
| |||||
Selling, general and administrative expenses |
| 118,983 |
| 217,431 |
| 258 |
| (1,092 | ) | 335,580 |
| |||||
Net gain from dispositions of assets |
| 1,975 |
| 628 |
| — |
| — |
| 2,603 |
| |||||
Operating profit |
| 20,679 |
| 42,125 |
| 322 |
| 1,849 |
| 64,975 |
| |||||
Non-operating (expense) income |
| (12,533 | ) | 61,727 |
| 1,850 |
| (49,189 | ) | 1,855 |
| |||||
Interest expense (income) |
| 49,176 |
| 19,610 |
| (1,565 | ) | (47,340 | ) | 19,881 |
| |||||
(Loss) earnings from continuing operations before income taxes |
| (41,030 | ) | 84,242 |
| 3,737 |
| — |
| 46,949 |
| |||||
Income tax (benefit) expense |
| (16,029 | ) | 32,884 |
| 1,461 |
| — |
| 18,316 |
| |||||
Equity in earnings of subsidiaries |
| 53,295 |
| — |
| — |
| (53,295 | ) | — |
| |||||
Net earnings from continuing operations |
| 28,294 |
| 51,358 |
| 2,276 |
| (53,295 | ) | 28,633 |
| |||||
Discontinued operations, net of tax |
| (28 | ) | (339 | ) | — |
| — |
| (367 | ) | |||||
Net earnings |
| $ | 28,266 |
| $ | 51,019 |
| $ | 2,276 |
| $ | (53,295 | ) | $ | 28,266 |
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(dollars in thousands)
(unaudited)
Thirty-nine Weeks Ended October 29, 2011 |
| Pep Boys |
| Subsidiary |
| Subsidiary Non- |
| Consolidation / |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net earnings |
| $ | 33,322 |
| $ | 64,386 |
| $ | 2,014 |
| $ | (66,400 | ) | $ | 33,322 |
|
Adjustments to Reconcile Net Earnings to Net Cash (Used In) Provided By Continuing Operations |
| (40,399 | ) | 36,365 |
| 697 |
| 64,550 |
| 61,213 |
| |||||
Changes in operating assets and liabilities |
| 33,992 |
| (25,431 | ) | (18,086 | ) | — |
| (9,525 | ) | |||||
Net cash provided by (used in) continuing operations |
| 26,915 |
| 75,320 |
| (15,375 | ) | (1,850 | ) | 85,010 |
| |||||
Net cash provided by discontinued operations |
| 18 |
| 22 |
| — |
| — |
| 40 |
| |||||
Net Cash Provided by (Used in) Operating Activities |
| 26,933 |
| 75,342 |
| (15,375 | ) | (1,850 | ) | 85,050 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash used in continuing operations |
| (31,509 | ) | (67,696 | ) | — |
| — |
| (99,205 | ) | |||||
Net cash provided by discontinued operations |
| — |
| — |
| — |
| — |
| — |
| |||||
Net Cash Used in Investing Activities |
| (31,509 | ) | (67,696 | ) | — |
| — |
| (99,205 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net Cash (Used in) Provided by Financing Activities |
| (7,800 | ) | (7,288 | ) | 17,869 |
| 1,850 |
| 4,631 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net (Decrease) Increase in Cash |
| (12,376 | ) | 358 |
| 2,494 |
| — |
| (9,524 | ) | |||||
Cash and Cash Equivalents at Beginning of Period |
| 37,912 |
| 42,779 |
| 9,549 |
| — |
| 90,240 |
| |||||
Cash and cash equivalents at end of period |
| $ | 25,536 |
| $ | 43,137 |
| $ | 12,043 |
| $ | — |
| $ | 80,716 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Thirty-nine Weeks Ended October 30, 2010 |
| Pep Boys |
| Subsidiary |
| Subsidiary Non- |
| Consolidation / |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net earnings |
| $ | 28,266 |
| $ | 51,019 |
| $ | 2,276 |
| $ | (53,295 | ) | $ | 28,266 |
|
Adjustments to Reconcile Net Earnings to Net Cash (Used In) Provided By Continuing Operations |
| (24,436 | ) | 31,651 |
| 476 |
| 51,447 |
| 59,138 |
| |||||
Changes in operating assets and liabilities |
| 21,750 |
| (1,148 | ) | (15,945 | ) | — |
| 4,657 |
| |||||
Net cash provided by (used in) continuing operations |
| 25,580 |
| 81,522 |
| (13,193 | ) | (1,848 | ) | 92,061 |
| |||||
Net cash used in discontinued operations |
| (30 | ) | (1,233 | ) | — |
| — |
| (1,263 | ) | |||||
Net Cash Provided by (Used in) Operating Activities |
| 25,550 |
| 80,289 |
| (13,193 | ) | (1,848 | ) | 90,798 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash used in continuing operations |
| (23,593 | ) | (17,814 | ) | — |
| — |
| (41,407 | ) | |||||
Net cash provided by discontinued operations |
| — |
| 569 |
| — |
| — |
| 569 |
| |||||
Net Cash Used in Investing Activities |
| (23,593 | ) | (17,245 | ) | — |
| — |
| (40,838 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net Cash Provided by (Used in) Financing Activities |
| 27,971 |
| (31,882 | ) | 20,030 |
| 1,848 |
| 17,967 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net Increase in Cash |
| 29,928 |
| 31,162 |
| 6,837 |
| — |
| 67,927 |
| |||||
Cash and Cash Equivalents at Beginning of Period |
| 25,844 |
| 10,279 |
| 3,203 |
| — |
| 39,326 |
| |||||
Cash and cash equivalents at end of period |
| $ | 55,772 |
| $ | 41,441 |
| $ | 10,040 |
| $ | — |
| $ | 107,253 |
|
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 third fiscal quarter and first nine months of 2011 and 2010 and significant developments affecting our financial condition for the nine months ended October 29, 2011. This discussion and analysis should be read in conjunction with the consolidated interim financial statements and the notes to such 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 29, 2011.
INTRODUCTION
The Pep Boys—Manny, Moe & Jack is the leading 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 to be 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”) customers with the highest quality service and merchandise offerings. 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 Supercenters and support infrastructure. This growth will occur both organically and through acquisitions. The growth is targeted at existing markets, but may include new markets opportunistically. The objective is to grow our market share and to leverage inventory, marketing, distribution and support costs. Acquisitions will be used to accelerate growth in markets where the Company is under-penetrated.
In the first nine months of fiscal 2011, we added 107 Service & Tire Centers, including 99 Service & Tire Centers acquired in three separate transactions, converted one Service & Tire Center to a Supercenter, and added one Supercenter. As of October 29, 2011, we operated 562 Supercenters and 159 Service & Tire Centers, as well as 8 legacy Pep Boys Express (retail only) stores throughout 35 states and Puerto Rico.
EXECUTIVE SUMMARY
Net earnings for the third quarter of 2011 were $7.0 million, a $1.3 million improvement over the $5.7 million reported for the third quarter of 2010. The increase in profitability was the result of increased total revenues and lower selling, general and administrative expense, partially offset by a decrease in total gross profit margins. Our diluted earnings per share for the third quarter and the first nine months of 2011 were $0.13 and $0.62, respectively, an improvement of $0.02 and $0.09 over the $0.11 and $0.53 recorded for the corresponding periods of 2010.
Total revenue increased for the third quarter of 2011 by 5.2% as compared to the same period of the prior year as a result of our aggressive growth strategy. This increase in total revenues was comprised of a 9.8% increase in service revenue and a 4.1% increase in merchandise sales. For the third quarter of 2011, comparable store sales (sales generated by locations in operation during the same period) decreased by 0.4%. This decrease in comparable store sales was comprised of a 0.4% increase in comparable store service revenue offset by a 0.6% decrease in comparable store merchandise sales.
Sales of our services and non-discretionary products are impacted by miles driven. From March through October 2011, unleaded gasoline prices averaged $3.66 per gallon (national average) as compared to $2.77 in the corresponding period of the prior year. We believe the significant increase in gasoline prices led to the decline in miles driven from March through September 2011, after growing moderately over the previous 12 months. This change in trend combined with the financial burden of higher gasoline prices, continued high unemployment and negative consumer confidence in the overall U.S. economy depressed our third quarter sales. We believe these factors have also led customers to maintain their existing vehicles, rather than purchasing new ones which, in turn has partially offset the negative impact the reduction in miles driven has had on our sales of services and non-discretionary products. These same factors have negatively affected sales in our discretionary product categories like accessories and complementary merchandise. As gasoline prices began to drop in October 2011, albeit not to October 2010 levels, we believe that miles driven once again began to stabilize and assisted our service sales in that month. Given the nature of these macroeconomic factors, we cannot predict whether or for how long these trends will continue, nor can we predict to what degree these trends will affect us in the future.
Our primary response to fluctuations in customer demand is to adjust our service and product pricing and assortment, store staffing and marketing efforts. We believe that we are well positioned to help our customers save money and meet their needs in a challenging
macroeconomic environment. In 2011, we have continued our “surround sound” media campaign that utilizes television, radio and direct mail advertising to communicate our “DOES EVERYTHING. FOR LESS.” brand message and have focused on “execution excellence” in our stores in order to earn the TRUST of our customers every day. The newest feature of our surround sound marketing initiatives was the launch of TreadSmart during the current year third quarter. TreadSmart allows customers to research, purchase and schedule the installation of tires online at pepboys.com.
RESULTS OF OPERATIONS
The following discussion explains the material changes in our results of operations.
Analysis of Statement of Operations
Thirteen weeks ended October 29, 2011 vs. Thirteen weeks ended October 30, 2010
The following table presents for the periods indicated certain items in the 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 |
| October 29, 2011 |
| October 30, 2010 |
| Favorable |
|
|
|
|
|
|
|
|
|
Merchandise sales |
| 79.4 | % | 80.3 | % | 4.1 | % |
Service revenue (1) |
| 20.6 |
| 19.7 |
| 9.8 |
|
Total revenues |
| 100.0 |
| 100.0 |
| 5.2 |
|
Costs of merchandise sales (2) |
| 70.5 | (3) | 70.2 | (3) | (4.5 | ) |
Costs of service revenue (2) |
| 95.6 | (3) | 92.7 | (3) | (13.3 | ) |
Total costs of revenues |
| 75.7 |
| 74.6 |
| (6.7 | ) |
Gross profit from merchandise sales |
| 29.5 | (3) | 29.8 | (3) | 2.9 |
|
Gross profit from service revenue |
| 4.5 | (3) | 7.3 | (3) | (33.3 | ) |
Total gross profit |
| 24.3 |
| 25.4 |
| 0.9 |
|
Selling, general and administrative expenses |
| 21.0 |
| 22.3 |
| 1.2 |
|
Net gain (loss) from dispositions of assets |
| — |
| — |
| — |
|
Operating profit |
| 3.3 |
| 3.0 |
| 14.7 |
|
Non-operating income |
| 0.1 |
| 0.1 |
| (3.5 | ) |
Interest expense |
| 1.3 |
| 1.3 |
| (3.9 | ) |
Earnings from continuing operations before income taxes |
| 2.1 |
| 1.8 |
| 21.2 |
|
Income tax expense |
| 36.7 | (4) | 38.0 | (4) | (17.1 | ) |
Earnings from continuing operations |
| 1.3 |
| 1.1 |
| 23.8 |
|
Discontinued operations, net of tax |
| — |
| — |
| — |
|
Net earnings |
| 1.3 |
| 1.2 |
| 22.6 |
|
(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 for the third quarter of 2011 increased by $25.8 million to $522.2 million from $496.4 million in the third quarter of 2010, while comparable store sales for the third quarter of 2011 decreased 0.4% as compared to the third quarter of 2010. This decrease in comparable store sales consisted of an increase of 0.4% in comparable store service revenue offset by a decrease of 0.6% in comparable store merchandise sales. Total comparable store sales decreased due to lower customer counts in all three lines of business partially offset by an increase in the average transaction amount per customer. While our total revenue figures were favorably
impacted by the opening or acquisition of 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 $27.9 million of total revenue in the third quarter of 2011 as compared to the third quarter of 2010.
Total merchandise sales increased 4.1%, or $16.2 million, to $414.5 million in the third quarter of fiscal 2011, compared to $398.4 million during the prior year quarter. The increase in merchandise sales was due to our non-comparable stores which contributed an additional $18.6 million of sales in the quarter, partially offset by a decline in comparable store merchandise sales of 0.6%, or $2.5 million. The decrease in comparable store merchandise sales was comprised of a 2.0% decline in our retail business which was mostly offset by a 1.8% increase in merchandise sold through our service business as a result of increased tire and other maintenance part sales. Total service revenue increased 9.8%, or $9.6 million, to $107.6 million in the third quarter of 2011 from the $98.0 million recorded in the prior year quarter. The increase in service revenue was comprised of a $0.4 million, or 0.4%, increase in comparable store service revenue and $9.2 million was contributed by our new non-comparable stores
We believe that comparable store customer counts decreased due to macroeconomic conditions, while the average transaction amount per customer increased due to selling price increases implemented to reflect the inflation in material costs. We believe that the significant increase in gasoline prices led to a decline in miles driven, which combined with the financial burden of higher gasoline prices, continued high unemployment and negative consumer confidence in the overall U.S. economy depressed our third quarter sales. These negative economic conditions were somewhat mitigated by the continued aging of the U.S. light vehicle fleet as consumers spent more money on maintaining their vehicles as opposed to buying new vehicles. Over the long-term, we believe that utilizing innovative marketing programs to communicate our value-priced, differentiated service and product assortment will drive increased customer counts and that our continued focus on delivering a better customer experience than our competitors will convert those increased customer counts into sales improvements consistently over all lines of business.
Total gross profit increased by $1.0 million, or 0.9%, to $126.9 million for the third quarter of 2011 from $125.9 million in the third quarter of 2010. Gross profit margin decreased to 24.3% for the third quarter of 2011 from 25.4% for the third quarter of 2010. The decrease in total gross profit margin was primarily due to the opening or acquisition of new Service & Tire Centers. The 85 Big 10 locations acquired in the second quarter of 2011 lowered gross profit margin in the third quarter of 2011 by 70 basis points. The Big 10 locations were dilutive to gross profit margin primarily due to mix of sales being more highly concentrated in tires, which have lower product margins, combined with higher rent and payroll costs as a percent of total store sales. The organic new stores opened by the Company, which are still in their ramp up stage for sales while incurring their full amount of fixed expenses, including payroll and occupancy costs (rent, utilities and building maintenance), negatively affected total gross profit margin by 90 basis points and 50 basis points in the third quarter of 2011 and 2010, respectively. Excluding the impact of both the acquired and the new organic Service & Tire Centers, total gross profit margin remained relatively flat at 25.9 %. While the acquired and new organic Service & Tire Centers have had a negative impact on gross profit from service revenue, these Service & Tire Centers positively contributed to total gross profit for the current year third quarter.
Gross profit from merchandise sales increased by $3.5 million, or 2.9%, to $122.1 million for the third quarter of 2011 from $118.7 million in the third quarter of 2010. Gross profit margin from merchandise sales decreased to 29.5% for the third quarter of 2011 from 29.8% for the third quarter of 2010, primarily due to an increase in store occupancy costs of 20 basis points and a decrease in product gross margins of 10 basis points. The increase in store occupancy costs was due to the deleveraging effect of lower merchandise comparable store sales. The decrease in product gross margins was due to the shift in sales mix to tires which have lower margins.
Gross profit from service revenue decreased by $2.4 million, or 33.3%, to $4.8 million in the third quarter of 2011 from $7.2 million recorded in the third quarter of 2010. Gross profit margin from service revenue decreased to 4.5% for the third quarter of 2011 from 7.3% for the prior year quarter. In accordance with GAAP, service revenue is limited to labor sales (excludes any revenue from installed parts and materials) and costs of service revenues includes the fully loaded service center payroll and related employee benefits and service center occupancy costs. The decrease in gross profit from service revenue was due to the opening or acquisition of new Service & Tire Centers. Excluding the impact of both the acquired and the new organic (which are still in their ramp up stage for sales while incurring the full amount of expenses including payroll and occupancy costs) Service & Tire Centers, gross profit from service revenue improved to 11.2% for the third quarter of 2011 from 9.1% for the third quarter of 2010 due to higher service revenues, which better leveraged the fixed component of service payroll and store occupancy costs.
Selling, general and administrative expenses as a percentage of total revenues decreased to 21.0% for the third quarter of 2011 from 22.3% for the third quarter of 2010. Selling, general and administrative expenses decreased $1.3 million, or 1.2%, to $109.5 million in the third quarter of 2011 from $110.8 million in the prior year quarter. Lower short-term performance based compensation accruals of $3.1 million was partially offset by increased media expense of $0.8 million and increased store and administrative expenses of $1.4 million related to the addition of the 85 Big 10 locations in the second quarter of 2011. The reduction as a percent to sales reflects improved leverage of selling, general and administrative expenses achieved through increased sales volumes in the current year third quarter.
Interest expense increased by $0.3 million to $6.9 million in the third quarter of 2011 compared to $6.6 million in the third quarter of 2010.
Our income tax expense for the third quarter of 2011 was $4.1 million, or an effective rate of 36.7%, as compared to an expense of $3.5 million, or an effective rate of 38.0%, for the third quarter of 2010. 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 $7.0 million in the third quarter of 2011 as compared to net earnings of $5.7 million in the prior year quarter. Our basic and diluted earnings per share were $0.13 as compared to $0.11 in the prior year period.
Thirty-nine weeks ended October 29, 2011 vs. Thirty-nine weeks ended October 30, 2010
The following table presents for the periods indicated certain items in the 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 |
| ||
Thirty-nine weeks ended |
| October 29, 2011 |
| October 30, 2010 |
| Favorable |
|
|
|
|
|
|
|
|
|
Merchandise sales |
| 79.5 | % | 80.3 | % | 2.0 | % |
Service revenue (1) |
| 20.5 |
| 19.7 |
| 7.5 |
|
Total revenues |
| 100.0 |
| 100.0 |
| 3.1 |
|
Costs of merchandise sales (2) |
| 69.9 | (3) | 69.7 | (3) | (2.3 | ) |
Costs of service revenue (2) |
| 92.4 | (3) | 89.9 | (3) | (10.5 | ) |
Total costs of revenues |
| 74.5 |
| 73.7 |
| (4.3 | ) |
Gross profit from merchandise sales |
| 30.1 | (3) | 30.3 | (3) | 1.4 |
|
Gross profit from service revenue |
| 7.6 | (3) | 10.1 | (3) | (19.3 | ) |
Total gross profit |
| 25.5 |
| 26.3 |
| (0.2 | ) |
Selling, general and administrative expenses |
| 21.3 |
| 22.2 |
| 1.2 |
|
Net gain (loss) from dispositions of assets |
| — |
| 0.2 |
| — |
|
Operating profit |
| 4.2 |
| 4.3 |
| 1.0 |
|
Non-operating income |
| 0.1 |
| 0.1 |
| (3.9 | ) |
Interest expense |
| 1.3 |
| 1.3 |
| 0.3 |
|
Earnings from continuing operations before income taxes |
| 3.1 |
| 3.1 |
| 1.3 |
|
Income tax expense |
| 29.9 | (4) | 39.0 | (4) | 22.3 |
|
Earnings from continuing operations |
| 2.1 |
| 1.9 |
| 16.4 |
|
Discontinued operations, net of tax |
| — |
| — |
| — |
|
Net earnings |
| 2.1 |
| 1.9 |
| 17.9 |
|
(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 for the first nine months of 2011 increased by $47.1 million to $1,558.3 million from $1,511.3 million in the first nine months of 2010, while comparable store sales for the first nine months of 2011 decreased by $15.2 million, or 1.0%, as compared to the first nine months of 2010. The decrease in comparable store sales consisted of an increase of 0.8% in comparable store service revenue offset by a decrease of 1.4% in comparable store merchandise sales. Total comparable store sales decreased due to lower customer counts in all three lines of business partially offset by an increase in the average transaction amount per customer. 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 $62.3 million of total revenue in the first nine months of 2011 as compared to the prior year period.
Total gross profit decreased by $0.7 million, or 0.2%, to $397.3 million for the first nine months of 2011 from $398.0 million in the first nine months of 2010. Total gross profit margin decreased to 25.5% for the first nine months of 2011 from 26.3% for the first nine
months of 2010. The decrease in total gross profit margin was primarily due to the opening or acquisition of new Service & Tire Centers. The 85 Big 10 locations acquired in the second quarter of 2011 lowered gross profit margin for the first nine months of 2011 by 40 basis points. The Big 10 locations were dilutive to gross profit margin primarily due to mix of sales being more highly concentrated in tires which have lower product margins combined with higher rent and payroll costs as a percent of total sales. The organic new stores opened by the Company, which are still in their ramp up stage for sales while incurring their full amount of fixed expenses, including payroll and occupancy costs (rent, utilities and building maintenance), negatively affected gross profit margin by 80 basis points and 60 basis points for the first nine months of 2011 and 2010, respectively. Excluding the impact of both the acquired and the new organic Service & Tire Centers, the gross profit margin declined by 30 basis points to 26.6% from 26.9 % in the prior year comprised of a decline in gross profit margins from merchandise sales of 50 basis points partially offset by an increase in gross profit margins from service revenues of 20 basis points. While the acquired and new organic Service & Tire Centers have had a negative impact on gross profit from service revenue, these Service & Tire Centers positively contributed to total gross profit for the first nine months of fiscal 2011.
Gross profit from merchandise sales increased by $5.1 million, or 1.4%, to $373.0 million for the first nine months of 2011 from $367.9 million in the first nine months of 2010. Gross profit margin from merchandise sales decreased slightly to 30.1% from 30.3% for the prior year period. Excluding the effect of the acquired and new Service and Tire Centers, gross profit margin from merchandise sales decreased by 50 basis points to 30.1% from 30.6% in the prior year primarily due to an increase in store occupancy costs of 40 basis points. The increase in store occupancy costs was due to (1) deleveraging effect of lower merchandise comparable store sales and (ii) an increase in the number of Superhub locations leading to higher delivery costs.
Gross profit from service revenue decreased by $5.8 million, or 19.3%, to $24.3 million for the first nine months of 2011 from $30.1 million in the first nine months of 2010. Gross profit margin from service revenue decreased to 7.6% from 10.1% for the prior year period. In accordance with GAAP, service revenue is limited to labor sales (excludes any revenue from installed parts and materials) and costs of service revenue includes the fully loaded service center payroll and related employee benefits and service center occupancy costs. Excluding the impact of both the acquired and the new organic (which are still in their ramp up stage for sales while incurring the full amount of expenses including payroll and occupancy costs) Service & Tire Centers, gross profit from service revenue increased to 12.7% for the first nine months of 2011 from 11.6% for the first nine months of 2010. The increase in gross profit, exclusive of all new locations, was primarily due to higher service revenues, which better leveraged the fixed component of service payroll and store occupancy costs.
Selling, general and administrative expenses, as a percentage of total revenues decreased to 21.3% for the first nine months of 2011 as compared to 22.2% in the prior year period. The reduction as a percent to sales reflects improved leverage of selling, general and administrative expenses achieved through increased sales volumes in the first nine months of 2011. Selling, general and administrative expenses decreased $3.9 million, or 1.2%, compared to the first nine months of 2010 due to lower short-term performance based compensation accruals of $4.6 million and lower media expense of $3.0 million, partially offset by increased store and administrative expenses of $3.3 million related to the addition of the 85 Big 10 locations in the second quarter of 2011 and acquisition and transition related costs of $1.5 million.
Net gains from the disposition of assets were not significant for the first nine months of 2011 and were $2.6 million for the first nine months of 2010. Interest expense for the first nine months of 2011 was $19.8 million, a decrease of $0.1 million compared to the prior year period.
Our income tax expense for the first nine months of 2011 was $14.2 million, or an effective rate of 29.9%, as compared to an expense of $18.3 million, or an effective rate of 39.0%, for the first nine months of 2010. The change was primarily due to the release of $3.6 million (net of federal tax) of valuation allowances on state net operating loss carry forwards and credits. 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 $33.3 million for the first nine months of 2011 as compared to net earnings of $28.3 million in the prior year period. Our basic and diluted earnings per share were $0.62, an increase of $0.09 as compared to $0.53 in the prior year period.
INDUSTRY COMPARISON
We operate in the U.S. automotive aftermarket, which has two general lines of business: (1) the Service business, defined as Do-It-For-Me (service labor, installed merchandise and tires) and (2) 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 |
| Thirty-nine Weeks Ended |
| ||||||||
|
| October 29, |
| October 30, |
| October 29, |
| October 30, |
| ||||
(Dollar amounts in thousands) |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service Center Revenue (1) |
| $ | 269,726 |
| $ | 239,502 |
| $ | 777,891 |
| $ | 715,879 |
|
Retail Sales (2) |
| 252,447 |
| 256,862 |
| 780,417 |
| 795,373 |
| ||||
Total revenues |
| $ | 522,173 |
| $ | 496,364 |
| $ | 1,558,308 |
| $ | 1,511,252 |
|
|
|
|
|
|
|
|
|
|
| ||||
Gross profit from Service Center Revenue (3) |
| $ | 55,400 |
| $ | 51,902 |
| $ | 175,033 |
| $ | 165,414 |
|
Gross profit from Retail Sales (3) |
| 71,521 |
| 73,954 |
| 222,222 |
| 232,538 |
| ||||
Total gross profit |
| $ | 126,921 |
| $ | 125,856 |
| $ | 397,255 |
| $ | 397,952 |
|
(1) | Includes revenues from installed products. |
(2) | Excludes revenues from installed products. |
(3) | 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. Gross profit from Retail Sales includes the cost of products sold, purchasing, warehousing and store occupancy costs. |
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 $85.0 million in the first nine months of 2011, as compared to $90.8 million in the prior year period. The $5.8 million decrease from the prior year period was due to an unfavorable period to period change in operating assets and liabilities of $14.2 million partially offset by increased net earnings (net of non-cash adjustments) of $7.1 million and a decrease in net cash used in discontinued operations of $1.3 million. The change in operating assets and liabilities was primarily due to unfavorable changes in inventory, net of accounts payable of $10.5 million, in accrued expenses and other current assets of $2.3 million, and in all other long-term liabilities of $1.4 million.
In fiscal year 2011, the increased investment in inventory of $34.9 million was principally funded by improvements in our trade vendor payment terms. Taking into consideration changes in our trade payable program liability (shown as cash flows from financing activities on the consolidated statements of cash flows), cash generated from accounts payable was $31.8 million and $27.8 million for the first nine months of 2011 and 2010, respectively. The ratio of accounts payable, including our trade payable program, to inventory was 50.6% at October 29, 2011, 47.3% at January 29, 2011 and 46.6% at October 30, 2010, respectively. The increase in inventory of $41.9 million since the end of fiscal 2010 year end, (including inventory acquired as part of store acquisitions which is shown in acquisition, net of cash acquired on the consolidated statement of cash flows) was due to (i) investment in our new or acquired stores of $9.0 million, (ii) higher inventory balances due to increase in commodity pricing including tires and oil based products of $15.4 million and (iii) increased inventory coverage in certain tire and hard part categories.
Cash used in investing activities was $99.2 million in the first nine months of 2011 as compared to $40.8 million in the prior year period, an increase of $58.4 million. During the first nine months of 2011, we acquired 99 Service & Tire Centers through three separate transactions, including 85 stores in Florida, Georgia and Alabama, seven stores in Houston and seven stores in the Seattle/Tacoma market for $42.6 million, net of cash acquired (see note 3 to the consolidated financial statements). Capital expenditures were $50.8 million and $43.0 million in the first nine months of 2011 and 2010, respectively. Capital expenditures for the first nine months of 2011 included the addition of eight new Service & Tire Centers, the conversion of one Service & Tire Center to a Supercenter, and the addition of one new Supercenter, in addition to our regularly scheduled store and distribution center improvements and information technology enhancements. During the first nine months of 2010, we sold five properties classified as held for sale for net proceeds of $3.5 million, of which $0.6 million is included in discontinued operations, and completed one sale leaseback transaction for net proceeds of $1.6 million. In addition, the prior year included $2.1 million of net settlement proceeds from the disposition of a previously closed property.
Our targeted capital expenditures for fiscal 2011 are $75.0 million. Our fiscal year 2011 capital expenditures include the addition of
approximately 35 new locations (excluding the 85 Big 10 stores), the conversion of 24 Supercenters into Superhubs 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 nine months of 2011, cash provided by financing activities was $4.6 million, as compared to cash provided from financing of $18.0 million in the prior year period. The decrease in cash provided by financing activities is primarily due to the decrease in cash provided from our trade payable program of $10.9 million during the first nine months of 2011 (timing of accounts payable payment cycle) as compared to the first nine months of 2010. The trade payable program is 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. As of October 29, 2011 and January 29, 2011, we had an outstanding balance of $68.3 million and $56.3 million, respectively (classified as trade payable program liability on the consolidated balance sheet). In the current year second quarter, we incurred finance issuance costs of $2.4 million to amend and restate our revolving credit agreement to reduce its interest rate by 75 basis points and to extend its maturity to July 2016.
We anticipate that cash on hand and cash generated by operating activities will exceed our expected cash requirements in fiscal year 2011. In addition, we expect to have excess availability under our existing revolving credit agreement during the entirety of fiscal year 2011. As of October 29, 2011, we had zero drawn on our revolving credit facility and maintained undrawn availability of $210.1 million.
During the third quarter of fiscal 2011, the Company began the process of terminating its defined benefit pension plan (“the Plan”), which covered full-time employees hired on or before February 1, 1992 (see Note 12 to the Consolidated Financial statements). The termination of the Plan, which has been frozen since December 31, 1996, is expected to be completed by the end of fiscal 2012. In order to terminate the Plan, in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, the Company is required to fully fund the Plan on a termination basis and will commit to contribute the additional assets necessary to do so. The amount necessary to do so is not yet known, but is currently estimated to be between $13.0 and $18.0 million. Plan participants will not be adversely affected by the Plan termination, but rather will have their benefits either converted into a lump sum cash payment or an annuity contract placed with an insurance carrier.
Our working capital was $184.7 million and $203.4 million at October 29, 2011 and January 29, 2011, respectively. Our long-term debt, as a percentage of our total capitalization, was 36.5% and 38.2% at October 29, 2011 and January 29, 2011, respectively.
Contractual Obligations
During the current fiscal year, in connection with the acquisitions discussed in note 3, the Company assumed additional lease obligations totaling $122.0 million over an average of 14 years. There have been no other significant developments with respect to our contractual obligations since January 29, 2011. For a discussion of our other contractual obligations, see a discussion of future commitments under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K for the fiscal year ended January 29, 2011.
NEW ACCOUNTING STANDARDS
In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29 “Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”). This accounting standard update clarifies that SEC registrants presenting comparative financial statements should disclose in their pro forma information revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material business combinations entered into in fiscal years beginning on or after December 15, 2010 with early adoption permitted. The Company adopted ASU 2010-29 during the first quarter of the current fiscal year.
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The Company is currently evaluating ASU 2011-04 and has not yet determined the impact the adoption will have on the consolidated financial statements.
In June of 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 was issued to improve the comparability of financial reporting between U.S. GAAP and IFRS, and eliminates previous U.S. GAAP guidance that allowed an entity to present components of other comprehensive income (“OCI”) as part of its statement of changes in shareholders’ equity. With the issuance of ASU 2011-05, companies are now required to report all components of OCI either in a single continuous statement of total comprehensive income, which includes components of both OCI and net income, or in a separate statement appearing consecutively with the statement of income. ASU 2011-05 does not affect current guidance for the accounting of the components of OCI, or which items are included within total comprehensive income, and is effective for periods beginning after December 15, 2011, with early adoption permitted. The application of this guidance affects presentation only and therefore is not expected to have an impact on the Company’s consolidated financial condition, results of operations or cash flows.
In September 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350) —Testing Goodwill for Impairment” (“ASU 2011-08”). The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the quantitative two-step goodwill impairment test. Entities also have the option to bypass the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company is evaluating which method it will use for impairment testing at the end of the current fiscal year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, share-based compensation, risk participation agreements, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed 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 29, 2011.
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 October 29, 2011, we had no borrowings under this facility. Additionally, we have a $147.8 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 record the effective portion of the change in fair value through accumulated other comprehensive loss.
The fair value of the derivative was $14.0 million and $16.4 million payable at October 29, 2011 and January 29, 2011, respectively. Of the $2.4 million decrease in the liabilities during the thirty-nine weeks ended October 29, 2011, $1.5 million net of tax was recorded to accumulated other comprehensive loss on the consolidated balance sheet.
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 provide reasonable assurance that the 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 effective in providing 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 and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
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.
None.
The Company is party to various 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.
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 29, 2011.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
None.
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 |
|
|
|
101.INS (1) |
| XBRL Instance Document |
|
|
|
101.SCH(1) |
| XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL(1) |
| XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB(1) |
| XBRL Taxonomy Extension Labels Linkbase Document |
|
|
|
101.PRE(1) |
| XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
101.DEF(1) |
| XBRL Taxonomy Extension Definition Linkbase Document |
(1) |
| In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except to the extent expressly set forth by specific reference in such filing. |
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: | December 6, 2011 | by: | /s/ Raymond L. Arthur |
|
|
| |
|
| Raymond L. Arthur | |
|
| Executive Vice President and Chief Financial Officer |
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 |
|
|
|
101.INS (1) |
| XBRL Instance Document |
|
|
|
101.SCH(1) |
| XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL(1) |
| XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB(1) |
| XBRL Taxonomy Extension Labels Linkbase Document |
|
|
|
101.PRE(1) |
| XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
101.DEF(1) |
| XBRL Taxonomy Extension Definition Linkbase Document |
(1) |
| In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except to the extent expressly set forth by specific reference in such filing. |