Pep Boys 2010 Annual Report Download - page 84

automotive sales remained relatively flat year over year. Service revenues increased in fiscal 2009 as
compared to fiscal 2008 primarily due to increased customer counts.
During fiscal 2009, customer traffic generated by improved store execution, promotional events and
an improved hard parts inventory position resulted in an increase in service and commercial customer
count. However, total customer count declined as a result of a decrease in DIY customer count. We
believe the decrease in retail customer count is due to reduced spending as a result of the current
economic environment and our competitors continuing to open new stores as well as the result of the
long-term industry decline in the DIY business, as discussed in the ‘‘Business’’ section of our
Form 10-K. In addition, we carry a large assortment of more discretionary retail product that is more
susceptible to consumer spending deferrals. We continue to believe that providing a differentiated
merchandise assortment, better customer experience, low-price value proposition and innovative
marketing will stem the overall decline in customer counts and sales over the long-term. In fact,
customer count in our DIY space declined at a much lower rate in fiscal 2009 as compared to the prior
year and we experienced our first increase in total customer count and sales in our third fiscal quarter
since the first quarter of fiscal 2004, and the fourth quarter of fiscal 2006, respectively.
Gross profit from merchandise sales increased by $8.3 million to $448.8 million for fiscal 2009
from $440.5 million in the prior year. Gross profit from merchandise sales increased to 29.3% for fiscal
2009 from 28.1% for fiscal 2008. Gross profit from merchandise sales in fiscal 2009 includes the
reversal of inventory accruals of approximately $2.0 million established in the prior year related to our
temporarily restricting the sale of certain small engine merchandise that was subject to an ongoing EPA
inquiry and a gain from insurance settlements of $0.6 million, mostly offset by an asset impairment
charge of $2.2 million as a result of continued declines in real estate values of previously closed
locations. In the prior year, gross profit from merchandise sales included an asset impairment charge of
$2.8 million and a $3.0 million inventory accrual due to the EPA inquiry referred to above. Excluding
these adjustments from both years, gross profit from merchandise sales increased to 29.2% for fiscal
2009 from 28.4% in the prior year. Gross profit from merchandise sales increased despite a 2.3%
decrease in merchandise sales as discussed above, primarily as a result of an improvement in inventory
shrinkage, lower in-bound freight costs, lower warehousing costs (which declined by 40 basis points to
3.7% of merchandise sales) and lower store occupancy costs (which declined by 20 basis points to
11.4% of merchandise sales.) Warehousing costs declined primarily due to lower out-bound freight costs
to stores and occupancy costs declined due to lower building maintenance costs and the elimination of
equipment leasing costs.
Gross profit from service revenue increased to 9.9% for fiscal 2009 from 7.0% in fiscal 2008. Gross
profit from service revenue increased by $12.4 million, or 49.6%. Both the current year and the prior
year gross profit from service revenue included an asset impairment charge related to previously closed
stores of $0.7 million and $0.6 million, respectively. Excluding these adjustments from both years, gross
profit from service revenues increased to 10.1% for fiscal 2009 from 7.1% in the prior year. The
increase in gross profit was primarily due to increased service revenue which resulted in higher
absorption of fixed expenses such as occupancy costs and, to a certain extent, labor costs.
Selling, general and administrative expenses, decreased to 22.5% of total revenues in fiscal 2009
from 25.2% in fiscal 2008. Selling, general and administrative expenses decreased $54.8 million or
11.4%. The decrease was primarily due to lower media expense of $21.2 million, lower legal expenses
and professional services fees of $13.3 million, reduced payroll and related expenses of $7.5 million,
lower travel expenses of $2.3 million and improved general liability claims expense of $1.3 million.
Net gains from the disposition of assets for fiscal 2009 and fiscal 2008 reflect gains of $1.2 million
and $9.7 million, respectively, primarily as a result of sale leaseback transactions. The Company
completed sale leaseback transactions on four stores during fiscal 2009, as compared to sale leaseback
transactions on approximately 70 stores in fiscal 2008.
26