Pep Boys 2009 Annual Report Download - page 104

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 30, 2010, January 31, 2009 and February 2, 2008
(dollar amounts in thousands, except share and per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In the first quarter of fiscal 2009, the Company launched a Customer Loyalty program. The
program allows members to earn points for each qualifying purchase. Points earned allow members to
receive a certificate that may be redeemed on future purchases. The retail value of points earned by
our loyalty program members is included in accrued liabilities and recorded as a reduction of revenue
at the time the points are earned, based on the historic and projected rate of redemption.
COSTS OF REVENUES Costs of merchandise sales include the cost of products sold, buying,
warehousing and store occupancy costs. Costs of service revenue include service center payroll and
related employee benefits, service center occupancy costs and cost of providing free or discounted
towing services to our customers. Occupancy costs include utilities, rents, real estate and property taxes,
repairs and maintenance and depreciation and amortization expenses.
VENDOR SUPPORT FUNDS The Company receives various incentives in the form of discounts
and allowances from its vendors based on the volume of purchases or for services that the Company
provides to the vendors. These incentives received from vendors include rebates, allowances and
promotional funds. Typically, these funds are dependent on purchase volume. The amounts received are
subject to changes in market conditions, vendor marketing strategies and changes in the profitability or
sell-through of the related merchandise for the Company.
Generally vendor support funds are earned based on purchases or product sales. These incentives
are treated as a reduction of inventories and are recognized as a reduction to cost of sales as the
inventories are sold. Certain vendor allowances are used exclusively for promotions and to offset
certain other direct expenses if the Company determines the allowances are for specific, identifiable
incremental expenses.
WARRANTY 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 vendor’s 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 experience. These costs are included in either our costs of merchandise sales or costs of
service revenue in the consolidated statement of operations.
The reserve for warranty activity for the years ended January 30, 2010 and January 31, 2009,
respectively, are as follows:
Balance, February 2, 2008 ................................... $ 247
Additions related to sales in the current year .................... 13,439
Warranty costs incurred in the current year ..................... (12,889)
Balance, January 31, 2009 ................................... 797
Additions related to sales in the current year .................... 15,572
Warranty costs incurred in the current year ..................... (15,675)
Balance, January 30, 2010 ................................... $ 694
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