Pep Boys 2008 Annual Report Download - page 105

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended January 31, 2009, February 2, 2008 and February 3, 2007
(dollar amounts in thousands, except share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS The Pep Boys—Manny, Moe & Jack and subsidiaries (the ‘‘Company’’) is engaged
principally in automotive repair and maintenance and in the sale of automotive tires, parts and
accessories through a chain of stores. The Company currently operates stores in 35 states and Puerto
Rico.
FISCAL YEAR END The Company’s fiscal year ends on the Saturday nearest to January 31.
Fiscal year 2008, which ended January 31, 2009, and fiscal year 2007, which ended February 2, 2008,
were comprised of 52 weeks, and fiscal year 2006, which ended February 3, 2007, was comprised of
53 weeks.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have
been eliminated.
USE OF ESTIMATES The preparation of the Company’s consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America necessarily
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, 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. Actual
results could differ from those estimates.
MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost or
market. Cost is determined by using the last-in, first-out (LIFO) method. An actual valuation of
inventory under the LIFO method can be made only at the end of each fiscal year based on inventory
and costs at that time. Accordingly, interim LIFO calculations must be based on management’s
estimates of expected fiscal year-end inventory levels and costs. If the first-in, first-out (FIFO) method
of costing inventory had been used by the Company, inventory would have been $493,886 and $475,179
as of January 31, 2009 and February 2, 2008, respectively. During fiscal years 2008, 2007 and 2006, the
effect of LIFO layer liquidations on gross profit was immaterial.
The Company also records valuation adjustments for potentially excess and obsolete inventories
based on current inventory levels, the historical analysis of product sales and current market conditions.
The nature of the Company’s inventory is such that the risk of obsolescence is minimal and excess
inventory has historically been returned to the Company’s vendors for credit. The Company records
those valuation adjustments when less than full credit is expected from a vendor or when market is
lower than recorded costs. These adjustments are reviewed on a quarterly basis for adequacy. The
Company’s inventory is recorded net of valuation adjustments for these matters which were $15,874 and
$11,167 as of January 31, 2009 and February 2, 2008, respectively.
During the third quarter of fiscal year 2007, the Company recorded a $32,803 inventory
impairment for the discontinuance and planned exit of certain non-core merchandise products adopted
as one of the initial steps in the Company’s long-term strategic plan. The impairment charge which is
included in cost of merchandise sales reduced the carrying value of the discontinued merchandise from
$74,080 to $41,277. The carrying value of the remaining discontinued merchandise at January 31, 2009
was immaterial.
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