Pep Boys 2006 Annual Report Download - page 4

Looking at specific results in 2006, our service team stabilized our service center operations in the
first quarter, and we reported a substantial sequential improvement in service center sales that began a
few quarters earlier. Service results in the second quarter were flat – primarily because it was a time
of transition for the company. However, service center operations improved profitability in the third
and fourth quarters. In the fourth quarter in particular, we focused on driving service, achieving a 2%
top line growth. We also continued to add flat rater technicians to drive service revenues, to build
capacity and to grow our business for the future.
On the retail side of the house, we continued to make progress on retail margins, particularly in the
second half of the year, despite negative comps in retail. We primarily achieved this by reducing our
discount offers, better sourcing, and improved operating efficiency.
Turning to the balance sheet, we improved our use of working capital beginning in the first quarter
that resulted in more efficient inventory levels throughout the year. By the second quarter, our cash
flow generation was strong, and it continued to strengthen in the second half of the year. We repaid
over $60 million in indebtedness and generated over $90 million in net cash provided from operating
activities. By the end of the year, we reinforced the balance sheet through reduced capital spending,
careful working capital management and an important refinancing that moved our next significant
funded debt maturity to 2013.
For Pep Boys, the fourth quarter represented a strong finish to the year and our biggest profit since
2004. The quarter speaks well of our operating improvements, as operating profits were up $33.8
million. We improved our operating margins through reduced discounting, improved labor sales and
reduced operating costs. We also instituted operations reviews in the field to maximize efficiencies
and implement best operational practices, which will continue in 2007.
As we move ahead, we will strive to achieve positive comparable store sales in our service center
operations, make continued progress on our retail margins, and continue to reduce our cost structure
to help support overall results.
The year’s tides have resulted in a strong Q4 and a solid platform for positive change and progress. In
the quarters and years ahead, I expect to bring the company to new levels of prosperity, and I am
committed to driving performance for our shareholders by returning to higher levels of profitability
and customer focus. Throughout my career I have used a proven formula for success: Associate
Satisfaction + Customer Satisfaction = Shareholder Satisfaction. I intend to apply this simple formula
to Pep Boys’ operations as people will be the key to our future success.
While my first priority as Pep Boys’ new CEO will be to focus on our core business through
improved tactical execution, over the longer term I look forward to collaborating with the senior
leadership team and Board of Directors on a long term strategic plan to grow the business.
I want you to know that I did not come to Pep Boys to lose, I did not come here to tie, to break even
or to show incremental improvement; I came here to win and to win big. I am confident that together
we can make Pep Boys an industry leader and admired brand once again.
Jeffrey C. Rachor
President and Chief Executive Officer