Pep Boys 2006 Annual Report Download - page 63

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Gross profit from service revenue decreased, as a percentage of service revenue, to 7.9% in fiscal 2005
from 22.6% in fiscal 2004. This was a 67.2% or $62,328,000 decrease from the prior year. This decrease, as
a percentage of service revenue, was due to decreased service revenue against fixed occupancy costs, in
addition to increased payroll and benefits. The decrease in service revenue resulted primarily from
decreased customer traffic and reduced tire sales, which results in fewer tire-related services and a negative
impact on the overall service results. The increase in payroll and benefits was primarily due to a
restructuring of field operations into separate retail and service teams on January 30, 2005. In connection
with this restructuring, certain retail personnel, who were previously utilized in merchandising roles
supporting the service business, were reassigned to purely service-related responsibilities. The labor and
benefit costs related to these associates, approximately $21,132,000, which were previously recognized in
selling, general and administrative expenses, are now recognized in costs of service revenue.
Net gain from sales of assets decreased, as percentage of total revenue to 0.2% from 0.5% in fiscal
2004. The $7,022,000 decrease resulted from the sale of one owned property in 2005 versus the sale of a
distribution center in 2004.
Selling, general and administrative expenses decreased, as a percentage of total revenues, to 23.4% in
fiscal 2005 from 24.1% in fiscal 2004. This was a $24,018,000 or 4.4% decrease from the prior year. This
decrease, as a percentage of total revenues, was due primarily to decreases in store expenses, general office
costs and employee benefits, offset, in part, by an increase in net media expense. The decrease in store
expenses was primarily caused by a decrease of approximately $21,132,000 in payroll and related benefit
costs (see above explanation of field operations restructuring), offset by increased hiring expenses, and
travel expense associated with the store refurbishment program. The decrease in administrative expenses
was primarily due to the recognition of $6,911,000 of executive severance in 2004, offset by a $4,200,000
asset impairment charge reflecting the remaining value of a commercial sales software asset in 2005, higher
travel costs, auditing and tax services and meeting costs. The increase in net media expense was due
primarily to incremental circular advertising and sales promotion expenses of approximately $11,000,000
related to the grand reopenings.
Interest expense increased 36.4% or $13,075,000 due primarily to $9,738,000 in interest and fees
associated with the early satisfaction and discharge of the Company’s $43,000,000 6.88% Medium Term
Notes ($342,000 of interest through original maturity) and the $100,000,000 6.92% TERMS ($1,296,000 of
interest through original maturity, and $8,100,000 to purchase an associated call option).
Earnings from discontinued operations increased from a loss of $2,087,000, net of tax, in fiscal 2004 to
earnings of $292,000, net of tax, in fiscal 2005 due primarily to changes in assumptions for sublet income
and expenses related to closed stores.
Net earnings decreased, as a percentage of total revenues, due primarily to a decrease in total gross
profit, an increase in interest expense and the impact of a net charge for the cumulative effect of a change
in accounting principle for the adoption of FIN 47, “Accounting for Conditional Asset Retirement
Obligations” recorded in fiscal 2005, offset by decreases in income tax expense and loss from discontinued
operations.