Pep Boys 2005 Annual Report Download - page 2

THE PEP BOYS – MANNY, MOE & JACK
3111 West Allegheny Avenue
Philadelphia, PA 19132
Letter To Our Shareholders
To Our Shareholders:
As you know, Pep Boys experienced a disappointing 2005. While our merchandising initiatives and
store refurbishment program brought early success to our renewal program, our efforts to improve the
service center business have required more time to take hold. I want to assure you that this team is
extraordinarily focused on improving our profitability. Every one of our 20,000 associates is working
towards that plan every day in every store with every customer.
Recently, we introduced significant change into the business in an effort to improve our long-term
performance. While disruptive, it was essential for us to strengthen the Company’s merchandising, human
resources and systems support functions, to re-organize our Operations Team into two groups (retail and
service/tires), and to upgrade our service manager team.
After all this change, our focus now is stability and the follow-through of the initiatives we have
launched. Greater stability and experience will allow our store teams to achieve higher levels of customer
satisfaction, which in turn will improve our financial performance. While much of our Operations Team has
been in position for less than a year, these newest leaders are on a very fast learning curve, helped and
mentored by our most seasoned and successful managers. Since we completed this change in line managers,
our turnover of retail and service managers was reduced by half. We now have the right people in place who
are 100% focused on their respective lines of business, and are dedicated to making Pep Boys perform.
On the retail side, we expect sales growth to be modest in 2006, as we focus on driving operating
margin by:
•Being in stock for our customers every day. Our Operations Team recently rolled out a new in-stock
and inventory replenishment program, complete with training for every store.
•Improving margins. We have been improving the realized margin on our promotional products and are
pursuing margin enhancements in some of our core product categories, by adjusting mix, retail prices
or reducing acquisition costs.
•Focusing on our core offering: parts. We believe this is one of the best opportunities to drive the retail
bottom line over the next two years, and the core reason customers choose Pep Boys for all their car
care needs. We have filled out our great parts purchasing team over the past year and they are now
making their way through the very difficult task of reviewing every category and sku to ensure that
our brands, assortments and store-level inventory positions meet our customers’specific repair needs.
•Continuing our store refurbishment program. This is a long overdue store investment that was
needed to build the foundation of our retail renewal and will continue to drive retail performance.
While we will moderate our capital expenditures to mirror our reduced operating cash flow, we plan
to add to the 200 stores grand re-opened to date with another 75-125 stores remodeled in 2006.
•Capitalizing on opportunities in the commercial business. Improvements in our commercial business
came in the form of sales growth in 2004 and margin enhancements in 2005. As we continue to build
our customer franchise with great service and a good value parts offering, we believe that we can get
a combination of the two in 2006.