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 August 2, 2014
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 |
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23-0962915 |
(State or other jurisdiction of |
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(I.R.S. Employer ID number) |
incorporation or organization) |
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|
|
|
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3111 W. Allegheny Ave. Philadelphia, PA |
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19132 |
(Address of principal executive offices) |
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(Zip code) |
215-430-9000
(Registrants 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 |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 30, 2014, there were 53,293,776 shares of the registrants Common Stock outstanding.
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)
|
|
August 2, |
|
February 1, |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
38,423 |
|
$ |
33,431 |
|
Accounts receivable, less allowance for uncollectible accounts of $2,102 and $1,320 |
|
27,908 |
|
25,152 |
| ||
Merchandise inventories |
|
659,547 |
|
672,354 |
| ||
Prepaid expenses |
|
21,314 |
|
29,282 |
| ||
Other current assets |
|
56,172 |
|
63,405 |
| ||
Assets held for disposal |
|
2,647 |
|
2,013 |
| ||
Total current assets |
|
806,011 |
|
825,637 |
| ||
|
|
|
|
|
| ||
Property and equipment, net of accumulated depreciation of $1,254,126 and $1,227,121 |
|
623,285 |
|
625,525 |
| ||
Goodwill |
|
56,794 |
|
56,794 |
| ||
Deferred income taxes |
|
56,406 |
|
57,686 |
| ||
Other long-term assets |
|
38,236 |
|
39,839 |
| ||
Total assets |
|
$ |
1,580,732 |
|
$ |
1,605,481 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
|
$ |
219,423 |
|
$ |
256,031 |
|
Trade payable program liability |
|
137,214 |
|
129,801 |
| ||
Accrued expenses |
|
224,399 |
|
237,403 |
| ||
Deferred income taxes |
|
70,785 |
|
69,373 |
| ||
Current maturities of long-term debt |
|
2,000 |
|
2,000 |
| ||
Total current liabilities |
|
653,821 |
|
694,608 |
| ||
|
|
|
|
|
| ||
Long-term debt less current maturities |
|
220,000 |
|
199,500 |
| ||
Other long-term liabilities |
|
46,899 |
|
48,485 |
| ||
Deferred gain from asset sales |
|
108,521 |
|
114,823 |
| ||
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 |
|
297,924 |
|
297,009 |
| ||
Retained earnings |
|
432,476 |
|
432,332 |
| ||
Accumulated other comprehensive income |
|
213 |
|
379 |
| ||
Treasury stock, at cost 15,265,028 shares and 15,358,872 shares |
|
(247,679 |
) |
(250,212 |
) | ||
Total stockholders equity |
|
551,491 |
|
548,065 |
| ||
Total liabilities and stockholders equity |
|
$ |
1,580,732 |
|
$ |
1,605,481 |
|
See notes to consolidated financial statements.
THE PEP BOYS MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(dollar amounts in thousands, except per share data)
(unaudited)
|
|
Thirteen weeks ended |
|
Twenty-six weeks ended |
| ||||||||
|
|
August 2, |
|
August 3, |
|
August 2, |
|
August 3, |
| ||||
Merchandise sales |
|
$ |
400,931 |
|
$ |
412,317 |
|
$ |
812,837 |
|
$ |
829,467 |
|
Service revenue |
|
124,842 |
|
115,302 |
|
251,758 |
|
234,325 |
| ||||
Total revenues |
|
525,773 |
|
527,619 |
|
1,064,595 |
|
1,063,792 |
| ||||
Costs of merchandise sales |
|
280,100 |
|
273,764 |
|
565,147 |
|
570,638 |
| ||||
Costs of service revenue |
|
121,376 |
|
115,147 |
|
242,024 |
|
232,605 |
| ||||
Total costs of revenues |
|
401,476 |
|
388,911 |
|
807,171 |
|
803,243 |
| ||||
Gross profit from merchandise sales |
|
120,831 |
|
138,553 |
|
247,690 |
|
258,829 |
| ||||
Gross profit from service revenue |
|
3,466 |
|
155 |
|
9,734 |
|
1,720 |
| ||||
Total gross profit |
|
124,297 |
|
138,708 |
|
257,424 |
|
260,549 |
| ||||
Selling, general and administrative expenses |
|
120,624 |
|
120,929 |
|
247,694 |
|
239,133 |
| ||||
Net loss from dispositions of assets |
|
(400 |
) |
(31 |
) |
(410 |
) |
(147 |
) | ||||
Operating profit |
|
3,273 |
|
17,748 |
|
9,320 |
|
21,269 |
| ||||
Other income |
|
316 |
|
466 |
|
758 |
|
844 |
| ||||
Interest expense |
|
3,002 |
|
3,562 |
|
6,784 |
|
7,242 |
| ||||
Earnings from continuing operations before income taxes and discontinued operations |
|
587 |
|
14,652 |
|
3,294 |
|
14,871 |
| ||||
Income tax expense |
|
764 |
|
9,273 |
|
1,831 |
|
5,565 |
| ||||
(Loss) earnings from continuing operations before discontinued operations |
|
(177 |
) |
5,379 |
|
1,463 |
|
9,306 |
| ||||
Loss from discontinued operations, net of tax |
|
(96 |
) |
(11 |
) |
(125 |
) |
(75 |
) | ||||
Net (loss) earnings |
|
(273 |
) |
5,368 |
|
1,338 |
|
9,231 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Earnings from continuing operations before discontinued operations |
|
$ |
|
|
$ |
0.10 |
|
$ |
0.03 |
|
$ |
0.17 |
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
|
| ||||
Basic earnings per share |
|
$ |
|
|
$ |
0.10 |
|
$ |
0.03 |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Earnings from continuing operations before discontinued operations |
|
$ |
|
|
$ |
0.10 |
|
$ |
0.03 |
|
$ |
0.17 |
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
|
| ||||
Diluted earnings per share |
|
$ |
|
|
$ |
0.10 |
|
$ |
0.03 |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
| ||||
Derivative financial instruments adjustment, net of tax |
|
(128 |
) |
1,578 |
|
(166 |
) |
1,691 |
| ||||
Comprehensive (loss) income |
|
$ |
(401 |
) |
$ |
6,946 |
|
$ |
1,172 |
|
$ |
10,922 |
|
See notes to consolidated financial statements.
THE PEP BOYS MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
(unaudited)
|
|
Twenty-six weeks ended |
| ||||
|
|
August 2 |
|
August 3, |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net earnings |
|
$ |
1,338 |
|
$ |
9,231 |
|
Adjustments to reconcile net earnings to net cash provided by continuing operations: |
|
|
|
|
| ||
Loss from discontinued operations, net of tax |
|
125 |
|
75 |
| ||
Depreciation |
|
36,346 |
|
40,185 |
| ||
Amortization of deferred gain from asset sales |
|
(6,302 |
) |
(6,302 |
) | ||
Amortization of deferred financing costs |
|
1,311 |
|
1,302 |
| ||
Stock compensation expense |
|
1,799 |
|
1,660 |
| ||
Deferred income taxes |
|
2,727 |
|
1,825 |
| ||
Net loss from disposition of assets |
|
410 |
|
147 |
| ||
Loss from asset impairment |
|
3,839 |
|
2,849 |
| ||
Other |
|
(79 |
) |
(269 |
) | ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Decrease in accounts receivable, prepaid expenses and other |
|
12,572 |
|
9,647 |
| ||
Decrease (increase) in merchandise inventories |
|
12,807 |
|
(8,624 |
) | ||
Decrease in accounts payable |
|
(34,591 |
) |
(18,611 |
) | ||
Decrease in accrued expenses |
|
(15,167 |
) |
(696 |
) | ||
Decrease in other long-term liabilities |
|
(1,277 |
) |
(1,100 |
) | ||
Net cash provided by continuing operations |
|
15,858 |
|
31,319 |
| ||
Net cash used in discontinued operations |
|
(300 |
) |
(121 |
) | ||
Net cash provided by operating activities |
|
15,558 |
|
31,198 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Capital expenditures |
|
(39,010 |
) |
(24,502 |
) | ||
Proceeds from dispositions of assets |
|
35 |
|
18 |
| ||
Release of collateral investment |
|
|
|
1,000 |
| ||
Net cash used in investing activities |
|
(38,975 |
) |
(23,484 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Borrowings under line of credit agreements |
|
339,179 |
|
1,354 |
| ||
Payments under line of credit agreements |
|
(317,679 |
) |
(1,354 |
) | ||
Borrowings on trade payable program liability |
|
94,353 |
|
80,690 |
| ||
Payments on trade payable program liability |
|
(86,940 |
) |
(81,051 |
) | ||
Debt payments |
|
(1,000 |
) |
(1,000 |
) | ||
Proceeds from stock issuance |
|
496 |
|
592 |
| ||
Repurchase of common stock |
|
|
|
(1,246 |
) | ||
Net cash provided by (used in) financing activities |
|
28,409 |
|
(2,015 |
) | ||
Net increase in cash and cash equivalents |
|
4,992 |
|
5,699 |
| ||
Cash and cash equivalents at beginning of period |
|
33,431 |
|
59,186 |
| ||
Cash and cash equivalents at end of period |
|
$ |
38,423 |
|
$ |
64,885 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
Cash paid for income taxes |
|
$ |
660 |
|
$ |
3,288 |
|
Cash received from income tax refunds |
|
$ |
244 |
|
$ |
51 |
|
Cash paid for interest |
|
$ |
5,584 |
|
$ |
6,108 |
|
Non-cash investing activities: |
|
|
|
|
| ||
Accrued purchases of property and equipment |
|
$ |
3,537 |
|
$ |
2,031 |
|
See notes to consolidated financial statements.
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1BASIS 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 Companys 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 Companys 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 Commissions 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 Companys Annual Report on Form 10-K for the fiscal year ended February 1, 2014. The results of operations for the twenty-six weeks ended August 2, 2014 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 August 2, 2014 and for all periods presented have been made. Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on reported totals for assets, liabilities, shareholders equity, cash flows or net income.
The Companys fiscal year ends on the Saturday nearest to January 31. Fiscal 2014, which ends January 31, 2015, and Fiscal 2013, which ended February 1, 2014, are comprised of 52 weeks. The Company operated 799 store locations as of August 2, 2014, of which 227 were owned and 572 were leased.
NOTE 2NEW ACCOUNTING STANDARDS
In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted. The Company is currently evaluating the new standard, but does not expect adoption of ASU 2014-12 to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective retrospectively for annual or interim reporting periods beginning after December 15, 2016, with early adoption not permitted. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2014-09 to have a material impact on the consolidated financial statements.
In April 2014, the FASB issued ASU No. 2014-08, Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 provides a narrower definition of discontinued operations than under existing U.S. GAAP. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entitys operations and financial results should be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations. ASU 2014-08 is effective prospectively for disposals (or classifications as held for disposal) of components of an entity that occur in annual or interim periods beginning after December 15, 2014. The Company does not expect the adoption of ASU 2014-08 to have a material impact on the consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 states that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit
carryforward, if available at the reporting date under the applicable tax law to settle any additional income taxes that would result from the disallowance of a tax position. If the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on the Companys consolidated financial statements.
NOTE 3MERCHANDISE 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 managements 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 $572.1 million and $579.8 million as of August 2, 2014 and February 1, 2014, respectively.
The Companys inventory, consisting primarily of automotive tires, parts, and accessories, is used on vehicles typically having long lives. Because of this, and combined with the Companys historical experience of returning excess inventory to the Companys suppliers 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 managements 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 suppliers for product returns. The Company also provides for estimated inventory shrinkage based upon historical levels and the results of its cycle counting program. The Companys inventory adjustments for these matters were immaterial as of August 2, 2014 and February 1, 2014, respectively.
NOTE 4WARRANTY 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 vendors 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 twenty-six weeks ended August 2, 2014 and the fifty-two weeks ended February 1, 2014 is as follows:
(dollar amounts in thousands) |
|
August 2, 2014 |
|
February 1, 2014 |
| ||
Beginning balance |
|
$ |
682 |
|
$ |
864 |
|
|
|
|
|
|
| ||
Additions related to current period sales |
|
6,588 |
|
13,748 |
| ||
|
|
|
|
|
| ||
Warranty costs incurred in current period |
|
(6,588 |
) |
(13,930 |
) | ||
|
|
|
|
|
| ||
Ending balance |
|
$ |
682 |
|
$ |
682 |
|
NOTE 5DEBT AND FINANCING ARRANGEMENTS
The following are the components of debt and financing arrangements:
(dollar amounts in thousands) |
|
August 2, 2014 |
|
February 1, 2014 |
| ||
Senior Secured Term Loan, due October 2018 |
|
$ |
197,000 |
|
$ |
198,000 |
|
Revolving Credit Agreement, through July 2016 |
|
25,000 |
|
3,500 |
| ||
Long-term debt |
|
222,000 |
|
201,500 |
| ||
Current maturities |
|
(2,000 |
) |
(2,000 |
) | ||
Long-term debt less current maturities |
|
$ |
220,000 |
|
$ |
199,500 |
|
The Company has a Revolving Credit Agreement (the Agreement) with available borrowings up to $300.0 million and a maturity of July 2016. As of August 2, 2014, the Company had $25.0 million in borrowings outstanding under the Agreement and $39.4 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements (including reduction for amounts outstanding under the supplier financing program), as of August 2, 2014 there was $129.4 million of availability remaining under the Agreement.
The Companys 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 Companys availability under its Revolving Credit Agreement plus unrestricted cash drops below $50.0 million. As of August 2, 2014, the Company was in compliance with all financial covenants contained in its debt agreements.
The Company has a supplier financing program with availability up to $200.0 million which is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by the Company directly from suppliers. The Company, in turn, makes the regularly scheduled full supplier payments to the bank participants. There was an outstanding balance of $137.2 million and $129.8 million under the program as of August 2, 2014 and February 1, 2014, respectively (classified as trade payable program liability on the consolidated balance sheet).
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 obligations and are considered a level 2 measure under the fair value hierarchy. The estimated fair value of long-term debt including current maturities was $222.0 million and $203.7 million as of August 2, 2014 and February 1, 2014, respectively.
NOTE 6INCOME 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 Companys financial statements or tax returns. The Companys effective income tax rate differs from the U.S. statutory rate principally due to state taxes, foreign taxes related to the Companys Puerto Rico operations and certain other permanent tax items. 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. For the thirteen weeks ended August 2, 2014 the effective tax rate was 130.1% as compared to 63.3% recorded in the corresponding period of the prior year. The current period income tax expense includes a $0.9 million charge for a valuation allowance recorded against certain separate company state tax loss carryforwards. The increase in the effective tax rate was primarily attributable to the impact of permanent tax differences relative to pre-tax earnings, which was partially offset by the tax charge previously mentioned.
For the twenty-six weeks ended August 2, 2014 and August 3, 2013, the effective tax rate was 55.6% and 37.4%, respectively. The increase in the effective tax rate was primarily attributable to the impact of permanent tax differences relative to pre-tax earnings, which was partially offset by the tax charge previously mentioned.
For income tax benefits related to uncertain tax positions to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. During the twenty-six weeks ended August 2, 2014, there were no material changes to the Companys liability for uncertain tax positions.
NOTE 7EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per share for earnings from continuing operations and net earnings:
|
|
Thirteen Weeks Ended |
|
Twenty-six Weeks Ended |
| |||||||||
(dollar amounts in thousands, except per share amounts) |
|
August 2, |
|
August 3, |
|
August 2, |
|
August 3, |
| |||||
|
|
|
|
|
|
|
|
|
|
| ||||
(a) |
(Loss) earnings from continuing operations |
|
$ |
(177 |
) |
$ |
5,379 |
|
$ |
1,463 |
|
$ |
9,306 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
(Loss) from discontinued operations, net of tax |
|
(96 |
) |
(11 |
) |
(125 |
) |
(75 |
) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Net (loss) earnings |
|
$ |
(273 |
) |
$ |
5,368 |
|
$ |
1,338 |
|
$ |
9,231 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
(b) |
Basic average number of common shares outstanding during period |
|
53,528 |
|
53,392 |
|
53,499 |
|
53,388 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price |
|
|
|
578 |
|
526 |
|
591 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
(c) |
Diluted average number of common shares assumed outstanding during period |
|
53,528 |
|
53,970 |
|
54,025 |
|
53,979 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
| ||||
|
Earnings from continuing operations (a/b) |
|
$ |
|
|
$ |
0.10 |
|
$ |
0.03 |
|
$ |
0.17 |
|
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
|
| ||||
|
Basic earnings per share |
|
$ |
|
|
$ |
0.10 |
|
$ |
0.03 |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
| ||||
|
Earnings from continuing operations (a/c) |
|
$ |
|
|
$ |
0.10 |
|
$ |
0.03 |
|
$ |
0.17 |
|
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
|
| ||||
|
Diluted earnings per share |
|
$ |
|
|
$ |
0.10 |
|
$ |
0.03 |
|
$ |
0.17 |
|
As of August 2, 2014 and August 3, 2013, respectively, there were 3,263,000 and 2,742,000 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 number of such shares excluded from the diluted earnings per share calculation is 3,263,000 and 972,000 for the thirteen weeks ended August 2, 2014 and August 3, 2013, respectively. The total number of such shares excluded from the diluted earnings per share calculation is 1,321,000 and 1,104,000 for the twenty-six weeks ended August 2, 2014 and August 3, 2013.
NOTE 8ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The following table presents changes in accumulated other comprehensive (loss) income for the thirteen and twenty-six weeks ended August 2, 2014 and August 3, 2013, net of tax:
|
|
Gains on Cash Flow Hedges |
| ||||||||||
|
|
Thirteen weeks ended |
|
Twenty-six weeks ended |
| ||||||||
(dollar amounts in thousands) |
|
August 2, 2014 |
|
August 3, 2013 |
|
August 2, 2014 |
|
August 3, 2013 |
| ||||
Beginning balance |
|
$ |
341 |
|
$ |
(867 |
) |
$ |
379 |
|
$ |
(980 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive (loss) income before reclassifications, net of $134 tax benefit, $889 tax, $212 tax benefit and $901 tax |
|
(224 |
) |
1,481 |
|
(356 |
) |
1,503 |
| ||||
Amounts reclassified from accumulated other comprehensive income net of $58, $58, $115 and $113 tax (a) |
|
96 |
|
97 |
|
190 |
|
188 |
| ||||
Net current-period other comprehensive (loss) income |
|
(128 |
) |
1,578 |
|
(166 |
) |
1,691 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Ending balance |
|
$ |
213 |
|
$ |
711 |
|
$ |
213 |
|
$ |
711 |
|
(a) Reclassified amount increased interest expense.
NOTE 9BENEFIT PLANS
The Company continues to maintain the non-qualified defined contribution portion of the Supplemental Executive Retirement Plan (the Account Plan) for key employees designated by the Board of Directors. On January 31, 2014, the Account Plan was amended to eliminate the retirement plan contributions that have historically been made by the Company effective for calendar year 2015. For fiscal 2014 and fiscal 2013, contributions to the Account Plan are contingent upon meeting certain performance metrics. The Company had no contribution expense for the Account Plan in the first half of fiscal 2014 and $0.6 million in the first half of fiscal 2013.
The Company also 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 18 years of age with one or more years of service. The Company contributes the lesser of 50% of the first 6% of a participants contributions or 3% of the participants compensation under both savings plans. The Companys savings plans contribution expense was $1.6 million in the first half of fiscal 2014 and was $1.8 million in the first half of fiscal 2013.
NOTE 10STOCKHOLDERS EQUITY
On December 12, 2012, the Companys Board of Directors authorized a program to repurchase up to $50.0 million of the Companys common stock to be made from time to time in the open market or in privately negotiated transactions, with no expiration date. In the first half of fiscal 2013, the Company repurchased 107,000 shares of common stock for $1.2 million. The repurchased shares are included in the Companys treasury stock.
NOTE 11EQUITY COMPENSATION PLANS
The Company has stock-based compensation plans under which it grants stock options, performance share units 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.
In the first half of fiscal 2014 and fiscal 2013, the Company granted approximately 677,000 and 309,000 stock options, respectively, with a weighted average grant date fair value of $3.95 per unit and $5.11 per unit, respectively. These options have a seven-year term and vest over a three-year period with a third vesting on each of the first three anniversaries of their grant date. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The compensation expense recorded for the options granted during the twenty-six weeks ended August 2, 2014 and August 3, 2013 was immaterial.
In the first half of fiscal 2014 and fiscal 2013, the Company granted approximately 153,000 and 109,000 performance share units, respectively, 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 2016 and fiscal 2015, respectively. 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 2016 and fiscal 2015, respectively. The fair value for these awards was $10.26 per unit and $11.85 per unit, respectively, at the date of the grant. The compensation expense recorded for these performance share units during the twenty-six weeks ended August 2, 2014 and August 3, 2013 was immaterial.
In the first half of fiscal 2014 and fiscal 2013, the Company granted approximately 76,000 and 55,000 performance share units, respectively, 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 for the three-year period ending with fiscal 2016 and fiscal 2015, respectively. 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 $9.13 per unit and $13.41 per unit grant date fair value for fiscal 2014 and fiscal 2013, respectively. The compensation expense recorded for these performance share units during the twenty-six weeks ended August 2, 2014 and August 3, 2013 was immaterial.
In the first half of fiscal 2014, the Company granted approximately 115,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant. The fair value for these awards was $10.26 per unit at the date of the grant. The compensation expense recorded for these restricted stock units during the twenty-six weeks ended August 2, 2014 was immaterial.
NOTE 12FAIR VALUE MEASUREMENTS AND DERIVATIVES
The Companys fair value measurements consist of (a) financial assets and liabilities that are recognized or disclosed at fair value in the Companys financial statements on a recurring basis (at least annually) and (b) all non-financial assets and liabilities that are recognized or disclosed at fair value on a non-recurring basis.
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 Companys 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.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
The Companys long-term investments and interest rate swap agreements are measured at fair value on a recurring basis. The information in the following paragraphs and tables primarily addresses matters relative to these assets and liabilities.
Cash equivalents:
Cash equivalents, other than credit card receivables, include highly liquid investments with an original maturity of three months or less at acquisition. The Company carries these investments at fair value. As a result, the Company has determined that its cash equivalents in their entirety are classified as a Level 1 measure within the fair value hierarchy.
Collateral investments:
Collateral investments include monies on deposit that are restricted. The Company carries these investments at fair value. As a result, the Company has determined that its collateral investments are classified as a Level 1 measure within the fair value hierarchy.
Deferred compensation assets:
Deferred compensation assets include variable life insurance policies held in a Rabbi Trust. The Company values these policies using observable market data. The inputs used to value the variable life insurance policy fall within Level 2 of the fair value hierarchy.
Derivative asset:
The Company has two interest rate swaps designated as cash flow hedges on $100.0 million of the Companys Senior Secured Term Loan facility that expires in October 2018. The Company values these swaps using observable market data to discount projected cash flows and for credit risk adjustments. The inputs used to value derivatives fall within Level 2 of the fair value hierarchy.
The following tables provide information by level for assets and liabilities that are measured at fair value, on a recurring basis:
(dollar amounts in thousands) |
|
Fair Value at |
|
Fair Value Measurements Using Inputs Considered as |
| ||||||||
Description |
|
August 2, 2014 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
38,423 |
|
$ |
38,423 |
|
$ |
|
|
$ |
|
|
Collateral investments (1) |
|
21,611 |
|
21,611 |
|
|
|
|
| ||||
Deferred compensation assets (1) |
|
4,397 |
|
|
|
4,397 |
|
|
| ||||
Derivative asset (1) |
|
342 |
|
|
|
342 |
|
|
| ||||
(dollar amounts in thousands) |
|
Fair Value at |
|
Fair Value Measurements Using Inputs Considered as |
| ||||||||
Description |
|
February 1, 2014 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
33,431 |
|
$ |
33,431 |
|
$ |
|
|
$ |
|
|
Collateral investments (1) |
|
21,611 |
|
21,611 |
|
|
|
|
| ||||
Deferred compensation assets (1) |
|
4,242 |
|
|
|
4,242 |
|
|
| ||||
Derivative asset (1) |
|
606 |
|
|
|
606 |
|
|
| ||||
(1) Included in other long-term assets.
The following represents the impact of fair value accounting for the Companys derivative asset on its consolidated financial statements:
(dollar amounts in thousands) |
|
Amount of (Loss) Gain |
|
Earnings Statement |
|
Amount of Loss |
| ||
Thirteen weeks ended August 2, 2014 |
|
$ |
(128 |
) |
Interest expense |
|
$ |
(153 |
) |
Thirteen weeks ended August 3, 2013 |
|
$ |
1,578 |
|
Interest expense |
|
$ |
(155 |
) |
|
|
|
|
|
|
|
| ||
Twenty-six weeks ended August 2, 2014 |
|
$ |
(166 |
) |
Interest expense |
|
$ |
(304 |
) |
Twenty-six weeks ended August 3, 2013 |
|
$ |
1,691 |
|
Interest expense |
|
$ |
(301 |
) |
(a) Represents the effective portion of the loss reclassified from accumulated other comprehensive loss.
The fair value of the derivative was a $0.3 million asset and a $0.6 million asset as of August 2, 2014 and February 1, 2014, respectively. Of the $0.3 million decrease in the fair value during the twenty-six weeks ended August 2, 2014, a $0.2 million loss, net of tax, was recorded to accumulated other comprehensive income on the consolidated balance sheet.
Non-financial assets measured at fair value on a non-recurring basis:
Certain assets are measured at fair value on a non-recurring basis, that is, the assets are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment. These measures of fair value, and related inputs, are considered level 2 or 3 measures under the fair value hierarchy. Measurements of assets held and used are discussed in Note 13, Impairments.
NOTE 13IMPAIRMENTS
During the second quarter of fiscal 2014, the Company recorded a $2.7 million impairment charge related to five stores classified as held and used and one store classified as held for sale. Of the $2.7 million impairment charge, $1.3 million was charged to costs of merchandise sales, and $1.4 million was charged to costs of service revenue. In the second quarter of fiscal 2013, the Company recorded a $1.7 million impairment charge related to 11 stores classified as held and used. Of the $1.7 million impairment charge, $0.4 million was charged to costs of merchandise sales, and $1.3 million was charged to costs of service revenue. In both periods, the Company used a probability-weighted approach and estimates of expected future cash flows to determine the fair value of these stores. Discount and growth rate assumptions were derived from current economic conditions, managements expectations and projected trends of current operating results. The remaining fair value of the impaired stores is approximately $1.5 million as of August 2, 2014 and is classified as a Level 2 or 3 measure within the fair value hierarchy.
NOTE 14LEGAL MATTERS
The Company is party to a Consent Decree, effective July 15, 2010, with the United States Environmental Protection Agency (EPA) that, among other things, required the Company to implement a formal compliance program with respect to certain small gasoline engine merchandise sold by the Company. In the fourth quarter of fiscal 2013, the EPA alleged, in writing, that the Company had violated certain inspection, testing and reporting requirements of the Consent Decree and made an aggregated stipulated penalty demand of $2.3 million as a result thereof. During fiscal 2014, the Company made a $0.4 million payment on account of a portion of the alleged violations and invoked formal dispute resolution procedures with the EPA under the terms of the Consent Decree with respect to the balance of the violations. The Company has accrued an amount that it believes is sufficient to resolve the remaining violations.
The Company is also 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 Companys financial position. However, there exists a 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 will be material to the Companys financial position, any such loss could have a material adverse effect on the Companys results of operations in the period(s) during which the underlying matters are resolved.
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis explains the results of operations for the second quarter of fiscal 2014 and 2013 and significant developments affecting our financial condition as of August 2, 2014. 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 February 1, 2014.
Introduction
The Pep BoysManny, Moe & Jack and subsidiaries (the Company) has been the best place to shop and care for your car since it began operations in 1921. Approximately 19,000 associates are focused on delivering the best customer service in the automotive aftermarket to our customers across our nearly 800 locations throughout the United States and Puerto Rico and on-line at pepboys.com. Pep Boys satisfies all of a customers automotive needs through our unique offering of service, tires, parts and accessories.
Our stores are organized into a hub and spoke network consisting of Supercenters and Service & Tire Centers. Supercenters average approximately 20,000 square feet and combine do-it-for-me service labor, installed merchandise and tire offerings (DIFM) with do-it-yourself parts and accessories (DIY). Most of our Supercenters also have a commercial sales program that delivers parts, tires and equipment to automotive repair shops and dealers. Service & Tire Centers, which average approximately 5,000 square feet, provide DIFM services in neighborhood locations that are conveniently located where our customers live or work. Service & Tire Centers are designed to capture market share and leverage our existing Supercenters and support infrastructure. We also operate a handful of legacy DIY only Pep Express stores.
In the first half of fiscal 2014, we opened five Service & Tire Centers and converted one Supercenter to a Service & Tire Center. We also closed three Service & Tire Centers and two Supercenters. As of August 2, 2014, we operated 565 Supercenters, 228 Service & Tire Centers and six Pep Express stores located in 35 states and Puerto Rico.
EXECUTIVE SUMMARY
Net loss for the second quarter of 2014 was $0.3 million, or $0.00 per share, as compared to net earnings of $5.4 million, or $0.10 per share, reported for the second quarter of 2013. The decline in earnings was primarily due to reduced revenues and lower total gross margin.
Total revenues decreased for the second quarter of 2014 by 0.3%, or $1.8 million, as compared to the second quarter of 2013 due to a 1.8% decrease in comparable store sales. This decrease in comparable store sales (sales generated by locations in operation during the same period of the prior year) was comprised of a 5.4% increase in comparable store service revenues, offset by a 3.8% decrease in comparable store merchandise sales.
We believe that the industry fundamentals of increasing vehicle complexity and customer preference for DIFM remain solid over the long-term resulting in consistent demand for maintenance and repair services. Consistent with this long-term trend, we have adopted a long-term strategy of growing our automotive service business, while maintaining our DIY customer base.
In the short-term, however, various factors within the economy affect both our customers and our industry, including a weak recovery from the recent recession, continued high underemployment and the tepid growth in real wages. Another macroeconomic factor affecting our customers and our industry is gasoline prices. We believe that the sustained historically high gasoline prices over the past few years challenge our customers spending relative to discretionary and deferrable purchases. In addition, gasoline prices impact miles driven which, in turn, impact sales of our services and non-discretionary products. For the first five months of calendar 2014, miles driven were relatively flat. Given the nature of these macroeconomic factors, we cannot predict whether or for how long these trends may continue, nor can we predict to what degree these trends will affect us in the future.
Over the past few years, we have invested in our business to drive top line sales with investments in marketing & promotions, new stores (Service & Tire Centers), digital operations and, most recently, a new market concept that we call the Road Ahead. Designed around the shopping habits of our target customer segments, this concept enhances the entire store our people, the product assortment, its exterior and interior look and feel and the marketing programs to learn how we can be successful in attracting more of these target customers and earn a greater share of their annual spend in the automotive aftermarket. While each initiative has produced results, they have also brought added expense. Total sales growth has been relatively flat due in large part to the decline in our
DIY business and combined with increased expenses has led to declining profit margins. Accordingly, we are in a position where we must reduce expenses related to our base business so that we can continue to grow with our initiatives. We have been developing plans to reduce expenses to achieve an estimated $25 million in savings on an annual basis.
RESULTS OF OPERATIONS
The following discussion explains the material changes in our results of operations.
Analysis of Statement of Operations
Thirteen weeks ended August 2, 2014 vs. Thirteen weeks ended August 3, 2013
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 |
|
August 2, 2014 |
|
August 3, 2013 |
|
Favorable |
|
|
|
|
|
|
|
|
|
Merchandise sales |
|
76.3 |
% |
78.2 |
% |
(2.8 |
)% |
Service revenue (1) |
|
23.7 |
|
21.8 |
|
8.3 |
|
Total revenues |
|
100.0 |
|
100.0 |
|
(0.3 |
) |
Costs of merchandise sales (2) |
|
69.9 |
(3) |
66.4 |
(3) |
(2.3 |
) |
Costs of service revenue (2) |
|
97.2 |
(3) |
99.9 |
(3) |
(5.4 |
) |
Total costs of revenues |
|
76.4 |
|
73.7 |
|
(3.2 |
) |
Gross profit from merchandise sales |
|
30.1 |
(3) |
33.6 |
(3) |
(12.8 |
) |
Gross profit from service revenue |
|
2.8 |
(3) |
0.1 |
(3) |
NA |
|
Total gross profit |
|
23.6 |
|
26.3 |
|
(10.4 |
) |
Selling, general and administrative expenses |
|
22.9 |
|
22.9 |
|
|
|
Net loss from dispositions of assets |
|
(0.1 |
) |
|
|
NA |
|
Operating profit |
|
0.6 |
|
3.4 |
|
(81.6 |
) |
Other income |
|
0.1 |
|
0.1 |
|
(32.2 |
) |
Interest expense |
|
0.6 |
|
0.7 |
|
15.7 |
|
Earnings from continuing operations before income taxes |
|
0.1 |
|
2.8 |
|
(96.0 |
) |
Income tax expense |
|
130.1 |
(4) |
63.3 |
(4) |
91.8 |
|
Earnings from continuing operations |
|
|
|
1.0 |
|
(100.0 |
) |
Discontinued operations, net of tax |
|
|
|
|
|
|
|
Net (loss) earnings |
|
(0.1 |
) |
1.0 |
|
(105.1 |
) |
(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 second quarter of 2014 decreased by $1.8 million, or 0.3%, to $525.8 million from $527.6 million for the second quarter of 2013. While our total revenues are favorably impacted by the opening of new stores, a new store is not added to our comparable store sales until it reaches its 13th month of operation. Comparable store sales for the second quarter of 2014 decreased by 1.8% as compared to the second quarter of 2013. This decrease in comparable store sales consisted of a 5.4% increase in comparable store service revenue offset by a decrease of 3.8% in comparable store merchandise sales.
Customer online purchases that are picked up at our stores are included in our comparable store sales calculation. Customer online purchases that are delivered to customers homes are not included in our comparable store sales and are immaterial to our total sales and comparable store sales.
Total merchandise sales decreased 2.8%, or $11.4 million, to $400.9 million in the second quarter of fiscal 2014, compared to $412.3 million during the prior year quarter. Comparable store merchandise sales decreased by 3.8%, or $15.6 million, primarily due to lower comparable store transaction counts partially offset by a slightly higher average revenue per transaction. The lower comparable store transactions counts are due, in part, to the repositioning of our retail business as part of our Road Ahead strategy. During the transition, as we target those more profitable customers that are seeking the best place to shop and care for their car, we are gaining these customers at a somewhat slower rate than we have been have losing our less profitable lowest-price only customers. The decrease was comprised of a 4.2% decrease in merchandise sold through our service business (primarily tires, chemicals and filters, batteries and air-conditioning) and a 3.6% decrease in merchandise sold through our retail business (primarily oil, chemicals and filters and tune up and fuel pumps). Non-comparable stores contributed an additional $4.2 million of merchandise sales during the quarter.
Total service revenue increased 8.3%, or $9.5 million, to $124.8 million in the second quarter of 2014 from $115.0 million during the prior year quarter. Comparable store service revenue increased by 5.4%, or $6.2 million, primarily due to a higher average revenue per transaction, partially offset by a decline in transaction counts. Non-comparable stores contributed an additional $3.3 million of service revenue during the quarter.
In our retail business, we believe that the difficult macroeconomic conditions continued to impact our customers and led to the comparable store transaction counts decline of 5.2%. The increase in the average revenue per transaction of 1.6% resulted from higher selling prices.
In our service business, we believe that the decline in comparable store transaction counts of 3.0% was due to a cooler than normal summer which reduced demand for batteries and air-conditioning services and engine performance repair and diagnostic services. Service average revenue per transaction increased by 2.8%, primarily due to higher selling prices.
Total gross profit decreased by $14.4 million, or 10.4%, to $124.3 million in the second quarter of 2014 from $138.7 million in the second quarter of 2013. Total gross profit margin decreased to 23.6% for the second quarter of 2014 from 26.3% for the second quarter of 2013. Excluding the impairment charge of $2.7 million in the second quarter of 2014 and $1.7 million in the second quarter of 2013, total gross profit margin decreased by 240 basis points to 24.2% for fiscal 2014 from 26.6% in fiscal 2013. The decrease in total gross profit margin was primarily due to increased promotional activity and sales mix resulting in lower product gross margins of 80 basis points, combined with higher payroll and related costs of 100 basis points and higher store occupancy costs of 70 basis points.
Gross profit from merchandise sales decreased by $17.7 million, or 12.8%, to $120.8 million for the second quarter of 2014 from $138.6 million in the second quarter of 2013. Gross profit margin from merchandise sales decreased to 30.1% for the second quarter of 2014 from 33.6% for the second quarter of 2013. Excluding the impairment charge of $1.3 million in the second quarter of 2014 and $0.3 million in the second quarter of 2013, gross profit margin from merchandise sales decreased by 320 basis points to 30.5% for fiscal 2014 from 33.7% in fiscal 2013. The decrease in gross profit margin was primarily due to increased promotional activity and sales mix resulting in lower product gross margins of 230 basis points, combined with higher occupancy costs of 60 basis points and higher warehousing costs of 40 basis points.
Gross profit from service revenue increased by $3.3 million, or 2,136.1%, to $3.5 million in the second quarter of 2014 from $0.2 million in the second quarter of 2013. Gross profit margin from service revenue increased to 2.8% for the second quarter of 2014 from 0.1% for the second quarter of 2013. 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 (rent, utilities and building maintenance). Excluding the impairment charge of $1.4 million in the second quarter of 2014 and $1.3 million in the second quarter of 2013, gross profit margin from service revenue increased by 260 basis points to 3.9% for fiscal 2014 from 1.3% in fiscal 2013. The increase in service revenue gross profit margin was primarily due to the leveraging effect of higher sales on the fixed component of payroll and related costs and occupancy costs.
Selling, general and administrative expenses as a percentage of total revenues remained flat at 22.9% for both the second quarter of 2014 and 2013 totaling $120.6 million in the second quarter of 2014 and $120.9 million in the prior year quarter. Higher media spend of $0.9 million, increased travel related to our Road Ahead store conversions of $0.3 million and increased store selling expenses of $0.4 million due to store growth were offset by lower short term compensation accruals.
Interest expense for the second quarter of 2014 was $3.0 million, a decrease of $0.6 million compared to the $3.6 million reported for the second quarter of 2013.
Our income tax expense for the second quarter of 2014 was $0.8 million, or an effective rate of 130.1%, as compared to an expense of $9.3 million, or an effective rate of 63.3% in the second quarter of 2013. The current year includes a $0.9 million charge
related to recording state valuation allowances in certain tax jurisdictions, while the prior year included a $2.5 million charge primarily due to recording a valuation allowance against state hiring credits as a result of tax law changes. 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 a net loss of $0.3 million in the second quarter of 2014 as compared to net earnings of $5.4 million in the prior year quarter. Our basic and diluted earnings per share were $0.00 for the second quarter of 2014 as compared to $0.10 for the second quarter of 2013.
Twenty-six weeks ended August 2, 2014 vs. Twenty-six weeks ended August 3, 2013
The following table presents for the periods indicated certain items in the consolidated statements of operations and comprehensive income 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 |
| ||
Twenty-six weeks ended |
|
August 2, 2014 |
|
August 3, 2013 |
|
Favorable |
|
|
|
|
|
|
|
|
|
Merchandise sales |
|
76.3 |
% |
78.0 |
% |
(2.0 |
)% |
Service revenue (1) |
|
23.7 |
|
22.0 |
|
7.4 |
|
Total revenues |
|
100.0 |
|
100.0 |
|
0.1 |
|
Costs of merchandise sales (2) |
|
69.5 |
(3) |
68.8 |
(3) |
1.0 |
|
Costs of service revenue (2) |
|
96.1 |
(3) |
99.3 |
(3) |
(4.0 |
) |
Total costs of revenues |
|
75.8 |
|
75.5 |
|
(0.5 |
) |
Gross profit from merchandise sales |
|
30.5 |
(3) |
31.2 |
(3) |
(4.3 |
) |
Gross profit from service revenue |
|
3.9 |
(3) |
0.7 |
(3) |
NA |
|
Total gross profit |
|
24.2 |
|
24.5 |
|
(1.2 |
) |
Selling, general and administrative expenses |
|
23.3 |
|
22.5 |
|
(3.6 |
) |
Net loss from dispositions of assets |
|
|
|
|
|
|
|
Operating profit |
|
0.9 |
|
2.0 |
|
(56.2 |
) |
Non-operating income |
|
0.1 |
|
0.1 |
|
(10.2 |
) |
Interest expense |
|
0.6 |
|
0.7 |
|
6.3 |
|
Earnings from continuing operations before income taxes |
|
0.3 |
|
1.4 |
|
(77.9 |
) |
Income tax expense |
|
55.6 |
(4) |
37.4 |
(4) |
67.1 |
|
Earnings from continuing operations |
|
0.1 |
|
0.9 |
|
(84.3 |
) |
Discontinued operations, net of tax |
|
|
|
|
|
|
|
Net earnings |
|
0.1 |
|
0.9 |
|
(85.5 |
) |
(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 half of 2014 increased by $0.8 million to $1,064.6 million from $1,063.8 million for the first half of 2013, while comparable store sales for the first half of 2014 decreased by $17.0 million, or 1.6%, as compared to the first half of 2013. The decrease in comparable store sales consisted of an increase of 4.3% in comparable store service revenues offset by a decrease of 3.3% in comparable store merchandise sales. 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 $17.8 million of total revenue in the first half of 2014 as compared to the prior year period.
Total gross profit for the first half of 2014 decreased by $3.1 million, or 1.2%, to $257.4 million from $260.5 million for the first half of 2012. Total gross profit margin decreased to 24.2% for the first half of 2014 from 24.5% for the first half of 2013. Excluding the impairment charge of $3.8 million and $2.8 million in the first half of 2014 and 2013, respectively, total gross profit margin decreased by 20 basis points period over period. The decrease in total gross profit margin was primarily due to higher payroll
and related expenses of 60 basis points and higher occupancy costs of 40 basis, partially offset by higher product gross margins of 80 basis points.
Gross profit from merchandise sales for the first half of 2014 decreased by $11.1 million, or 4.3%, to $247.7 million from $258.8 million for the first half of 2013. Gross profit margin from merchandise sales decreased to 30.5% for the first half of 2014 from 31.2% for the prior year period. Excluding the impairment charge of $1.5 million in the first half of 2014 and $0.5 million in the prior year first half, gross profit margin from merchandise sales decreased by 60 basis points period over period. The decrease in gross profit margin from merchandise sales was due to higher occupancy costs (rent, utilities) of 30 basis points and higher warehousing costs of 20 basis points.
Gross profit from service revenue for the first half of 2014 increased by $8.0 million to $9.7 million from $1.7 million for the first half of 2013. Gross profit margin from service revenue for the first half of 2014 increased to 3.9% from 0.7% for the first half of 2013. In accordance with GAAP, service revenue is limited to labor sales (excludes any revenue from installed parts and materials). Costs of service revenues include the fully loaded service center payroll and related employee benefits and service center occupancy costs. Excluding the impairment charge of $2.3 million in the first half of both 2014 and 2013, gross profit margin from service revenue increased by 300 basis points period over period. The increase in service revenue gross profit margin was primarily due to the leveraging effect of higher sales on the fixed component of payroll and related costs.
Selling, general and administrative expenses, as a percentage of total revenues for the first half of 2014 increased to 23.3% as compared to 22.5% for the first half of 2013. Selling, general and administrative expenses increased $8.6 million, or 3.6%, compared to the first half of 2013 due to the establishment of a litigation accrual of $4.0 million, higher media expense of $4.3 million, higher travel expense related to our Road Ahead conversions of $0.4 million and higher store selling expense due to store growth of $1.0 million, partially offset by lower payroll and related expense of $1.2 million primarily due to lower short term compensation accruals.
Interest expense for the first half of 2014 was $6.8 million, a decrease of $.5 million compared to the $7.2 million reported for the first half of 2013.
Our income tax expense for the first half of 2014 was $1.8 million, or an effective rate of 55.6%, as compared to an expense of $5.6 million, or an effective rate of 37.4%, for the first half of 2013. The current year includes a $0.9 million charge related to recording state valuation allowances in certain tax jurisdictions 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 $1.3 million for the first half of 2014 as compared to net earnings of $9.2 million in the prior year period. Our diluted earnings per share were $0.03 as compared to $0.17 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 Service or Retail area of the business. We believe that operation in both the Service and Retail areas of the business positively differentiates us from 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. Our Service Center business competes in the Service area of the industry. We compete in the Retail area of the business through our retail sales floor and commercial sales business.
The following table presents the revenues and gross profit for each area of our business:
|
|
Thirteen Weeks Ended |
|
Twenty-six Weeks Ended |
| ||||||||
|
|
August 2, |
|
August 3, |
|
August 2, |
|
August 3, |
| ||||
(Dollar amounts in thousands) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service Center Revenue (1) |
|
$ |
288,302 |
|
$ |
280,905 |
|
$ |
582,215 |
|
$ |
567,882 |
|
Retail Sales (2) |
|
237,471 |
|
246,714 |
|
482,380 |
|
495,910 |
| ||||
Total revenues |
|
$ |
525,773 |
|
$ |
527,619 |
|
$ |
1,064,595 |
|
$ |
1,063,792 |
|
|
|
|
|
|
|
|
|
|
| ||||
Gross profit from Service Center Revenue (3) |
|
$ |
60,684 |
|
$ |
61,593 |
|
$ |
124,463 |
|
$ |
113,733 |
|
Gross profit from Retail Sales (3) |
|
63,613 |
|
77,115 |
|
132,961 |
|
146,816 |
| ||||
Total gross profit |
|
$ |
124,297 |
|
$ |
138,708 |
|
$ |
257,424 |
|
$ |
260,549 |
|
(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 $15.6 million in the first half of 2014, as compared to $31.2 million in the first half of 2013. The $15.6 million decline from the first half of 2013 was due to decreased net earnings, net of non-cash adjustments of $9.2 million and an unfavorable change in operating assets and liabilities of $6.3 million. The change in operating assets and liabilities was primarily due to an unfavorable change in accrued expenses and other current assets of $11.5 million, partially offset by a favorable change in inventory, net of accounts payable, of $5.5 million. We expect favorable changes in inventory to continue for the balance of fiscal 2014 and through fiscal 2015, as we have set a target of reducing our inventory by $50.0 million by the end of fiscal 2015. The change in accrued expenses and other current assets was primarily due to the timing of our Savings Plan (401k) matching contribution and the run-off of our medical claims as we converted from our self insurance program to a fully insured program.
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 used in accounts payable was $27.2 million in the first half of 2014 and $19.0 million in the first half of 2013. The ratio of accounts payable, including our trade payable program, to inventory was 54.1% as of August, 2 2014, 57.4% as of February 1, 2014, and 57.9% as of August, 3 2013. Inventory declined by $12.8 million or 1.9% from year end fiscal 2013 primarily due to lower purchases in the first half of 2014.
Cash used in investing activities was $39.0 million in the first half of 2014 as compared to $23.5 million in the first half of 2013. Capital expenditures were $39.0 million and $24.5 million in the first half of 2014 and 2013, respectively. Capital expenditures for the first half of 2014, in addition to our regularly scheduled store, distribution center improvements and information technology enhancements, included the addition of five new Service and Tire Centers and the conversion of twenty-one stores into our new Road Ahead format. Capital expenditures for the first half of 2013 included the addition of nine new Service & Tire Centers and four new Supercenters. During the first half of 2013, we received $1.0 million of previously posted collateral for retained liabilities related to existing insurance programs.
Our targeted capital expenditures for fiscal 2014 are approximately $80.0 million, which includes the planned addition of 21 Service and Tire Centers, three Supercenters (two of which are relocations), 25 Speed Shops within existing Supercenters and the conversion of 43 stores to the Road Ahead format. As the Road Ahead conversions have progressed, we have refined their scope to include a range of alternatives, from full to moderate investment, to be determined on a store by store basis. We now expect the gross investment in future conversions to average approximately $0.4 million per store, down from the approximately $0.55 million per store investment made to date.
In the first half of 2014, cash provided by financing activities was $28.6 million, as compared to cash used in financing activities of $2.0 million in the first half of 2013. The cash provided by financing activities in the first half of 2014 was primarily related to net borrowings under our revolving credit facility of $21.5 million and $7.4 million under our trade payable program, as compared to net payments of $0.4 million under the trade payable program in the first half of 2013. 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 August 2, 2014 and February 1, 2014, we had an outstanding balance of $137.2 million and $129.8 million, respectively (classified as trade payable program liability on the consolidated balance sheet).
We anticipate that cash on hand, cash generated by operating activities, and availability under our existing revolving credit agreement will exceed our expected cash requirements in fiscal 2014. As of August 2, 2014, we had $38.4 million of cash and cash equivalents on hand, $25.0 million drawn on our revolving credit agreement and maintained undrawn availability on our revolving credit agreement of $129.4 million.
Our working capital was $152.2 million and $131.0 million as of August 2, 2014 and February 1, 2014, respectively. Our total debt, net of cash on hand, as a percentage of our net capitalization, was 25.0% and 23.5% as of August 2, 2014 and February 1, 2014, respectively.
NEW ACCOUNTING STANDARDS
In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted. The Company is currently evaluating the new standard, but does not expect adoption of ASU 2014-12 to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective retrospectively for annual or interim reporting periods beginning after December 15, 2016, with early adoption not permitted. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2014-09 to have a material impact on the consolidated financial statements.
In April 2014, the FASB issued ASU No. 2014-08, Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 provides a narrower definition of discontinued operations than under existing U.S. GAAP. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entitys operations and financial results should be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations. ASU 2014-08 is effective prospectively for disposals (or classifications as held for disposal) of components of an entity that occur in annual or interim periods beginning after December 15, 2014. The Company does not expect the adoption of ASU 2014-08 to have a material impact on the consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 states that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, if available at the reporting date under the applicable tax law to settle any additional income taxes that would result from the disallowance of a tax position. If the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on the Companys consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements 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 February 1, 2014.
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, targets, forecasts and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include managements 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 daily LIBOR could affect the rates at which we could borrow funds thereunder. At August 2, 2014 we had borrowings of $25.0 million under this facility. Additionally, we have a $200.0 million Term Loan that bears interest at LIBOR, with a floor of 1.25%, plus 3.00%.
We have two interest rate swaps for a notional amount of $50.0 million each, which are designated as a cash flow hedge on the first $100.0 million our Term Loan. We record the effective portion of the change in fair value through accumulated other comprehensive income (loss).
The fair value of the derivative was a $0.3 million asset and a $0.6 million asset at August 2, 2014 and February 1, 2014, respectively. Of the $0.3 million decrease in the fair value during the twenty-six weeks ended August 2, 2014, a $0.2 million loss, net of tax, was recorded to accumulated other comprehensive income 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 SECs 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 issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Companys management, with the participation of the Companys chief executive officer and chief financial officer, evaluated the effectiveness of the Companys 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 SECs 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 Companys 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 Companys internal control over financial reporting.
The Company is party to a Consent Decree, effective July 15, 2010, with the United States Environmental Protection Agency (EPA) that, among other things, required the Company to implement a formal compliance program with respect to certain small gasoline engine merchandise sold by the Company. In the fourth quarter of fiscal 2013, the EPA alleged, in writing, that the Company had violated certain inspection, testing and reporting requirements of the Consent Decree and made an aggregated stipulated penalty demand of $2.3 million as a result thereof. During fiscal 2014, the Company made a $0.4 million payment on account of a portion of the alleged violations and invoked formal dispute resolution procedures with the EPA under the terms of the Consent Decree with respect to the balance of the violations. The Company has accrued an amount that it believes is sufficient to resolve the remaining violations.
The Company is also 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 Companys financial position. However, there exists a 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 will be material to the Companys financial position, any such loss could have a material adverse effect on the Companys 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 Companys previously filed Annual Report on Form 10-K for the fiscal year ended February 1, 2014.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On December 12, 2012, the Companys Board of Directors authorized a program to repurchase up to $50.0 million of the Companys common stock to be made from time to time in the open market or in privately negotiated transactions, with no expiration date. There were no common stock repurchases for the second quarter of fiscal 2014. As of August 2, 2014, there were 1,875,753 shares available for issuance under this plan.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 MINE SAFETY DISCLOSURES
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 |
|
XBRL Instance Document |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Labels Linkbase Document |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
THE PEP BOYS - MANNY, MOE & JACK | |
|
|
(Registrant) | |
|
|
|
|
Date: |
September 9, 2014 |
by: |
/s/ David R. Stern |
|
|
|
|
|
|
David R. Stern | |
|
|
Executive Vice President - 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 |
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32.1 |
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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 |
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32.2 |
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Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.INS |
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XBRL Instance Document |
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101.SCH |
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XBRL Taxonomy Extension Schema Document |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB |
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XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael R. Odell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Pep Boys - Manny, Moe & Jack;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periods covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: September 9, 2014 |
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by: |
/s/ Michael R. Odell |
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Michael R. Odell |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David R. Stern, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Pep Boys - Manny, Moe & Jack;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periods covered by this report based on such evaluation; and
(d) Disclosed in this quarterly report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: September 9, 2014 |
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by |
/s/ David R. Stern |
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|
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David R. Stern |
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Executive Vice President - Chief Financial Officer |
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(Principal Financial Officer) |
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Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of The Pep Boys - Manny, Moe & Jack (the Company) for the quarterly period ending August 2, 2014, as filed with the Securities and Exchange Commission on the date hereof (the Report),
I, Michael R. Odell, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Date: September 9, 2014 |
by: |
/s/ Michael R. Odell |
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Michael R. Odell | |
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President and Chief Executive Officer | |
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(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of The Pep Boys - Manny, Moe & Jack (the Company) for the quarterly period ending August 2, 2014, as filed with the Securities and Exchange Commission on the date hereof (the Report),
I, David R. Stern, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Date: September 9, 2014 |
by: |
/s/ David R. Stern |
|
David R. Stern | |
|
Executive Vice President - Chief Financial Officer | |
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(Principal Financial Officer) |
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