Pep Boys 2010 Annual Report Download - page 79

ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis explains the results of our operations for fiscal 2010 and
2009 and developments affecting our financial condition as of January 29, 2011. This discussion and
analysis below should be read in conjunction with Item 6 ‘‘Selected Consolidated Financial Data,’’ and
our consolidated financial statements and the notes included elsewhere in this report. The discussion
and analysis contains ‘‘forward looking statements’’ within the meaning of The Private Securities
Litigation Reform Act of 1995. Forward looking statements include management’s expectations
regarding implementation of its long-term strategic plan, future financial performance, automotive
aftermarket trends, levels of competition, business development activities, future capital expenditures,
financing sources and availability and the effects of regulation and litigation. Actual results may differ
materially from the results discussed in the forward looking statements due to a number of factors
beyond our control, including those set forth under the section entitled ‘‘Item 1A Risk Factors’’
elsewhere in this report.
Introduction
The Pep Boys—Manny, Moe & Jack is the only national chain offering automotive service, tires,
parts and accessories. This positioning allows us to streamline the distribution channel and pass the
savings on to our customers facilitating our vision to be the automotive solutions provider of choice for
the value-oriented customer. The majority of our stores are in a Supercenter format, which serves both
‘‘do-it-for-me’’ (‘‘DIFM’’, which includes service labor, installed merchandise and tires) and
‘‘do-it-yourself’’ (‘‘DIY’’) customers with the highest quality service offerings and merchandise. Most of
our Supercenters also have a commercial sales program that provides delivery of tires, parts and other
products to automotive repair shops and dealers. In 2009, as part of our long-term strategy to lead with
automotive service, we began complementing our existing Supercenter store base with Service & Tire
Centers. These Service & Tire Centers are designed to capture market share and leverage our existing
Supercenter and support infrastructure. During fiscal 2010, we opened 28 new Service & Tire Centers
and seven new Supercenters. We are targeting a total of 50 new Service & Tire Centers and five
Supercenters in fiscal 2011 and 75 Service & Tire Centers and 10 Supercenters in fiscal 2012. As of
January 29, 2011, we operated 560 Supercenters and 53 Service & Tire Centers, as well as 8 legacy Pep
Express (retail only) stores throughout 35 states and Puerto Rico.
EXECUTIVE SUMMARY
Fiscal 2010 was our second consecutive profitable year marked by an increase in net earnings of
$13.6 million, or 59%. Fiscal 2010 net earnings were $36.6 million as compared to $23.0 million in
fiscal 2009. Our diluted earnings per share for fiscal 2010 were $0.69 as compared to $0.44 in fiscal
2009. The increase in profitability was the result of positive comparable store sales across all lines of
business and improved total gross profit margins partially offset by higher selling, general and
administrative expenses and higher interest expense.
Total revenue for fiscal 2010 increased 4.1% compared to the prior year. For fiscal 2010, our
comparable store sales (sales generated by locations in operation during the same period of the prior
year) increased by 2.7% compared to a decrease of 1.2% for the prior year. The increase in
comparable store sales was comprised of a 1.1% increase in comparable store service revenue and a
3.1% increase in comparable store merchandise sales.
Sales of services and non-discretionary products are primarily impacted by miles driven, which had
returned to pre-recession low single-digit growth rates from March 2010 through November 2010, in
part due to lower gasoline prices. As gasoline prices in recent months have been trending higher, we
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