Pep Boys 2011 Annual Report Download - page 69

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29.7% from 30.5% for the prior year. Gross profit from merchandise sales for fiscal 2011 included a
$1.1 million reduction in our reserve for excess inventory and an asset impairment charge of $0.6
million. Gross profit from merchandise sales for fiscal 2010 included a net benefit of $6.2 million
comprised of a $5.9 million reduction in our reserve for excess inventory and the reversal of an
inventory related accrual of approximately $1.0 million partially offset by a $0.8 million asset
impairment charge. Excluding these items from both years, gross profit margin from merchandise sales
decreased by 44 basis points to 29.7% in fiscal 2011 from 30.1% in the prior year primarily due to a
decrease in product gross margins of 50 basis points. The decrease in product gross margins was
primarily due to a shift in sales to lower margin tires and increased tire pricing pressure.
Gross profit from service revenue decreased by $13.5 million, or 39.0%, to $21.1 million for fiscal
2011 from $34.6 million in fiscal 2010. Gross profit margin from service revenue decreased to 5.0%
from 8.9% for the prior year. In accordance with GAAP, service revenue is limited to labor sales
(excludes any revenue from installed parts and materials) and costs of service revenue includes the fully
loaded service center payroll, and related employee benefits, and service center occupancy costs. Gross
profit from service revenue for fiscal 2011 and 2010 included a $1.0 million and $0.2 million asset
impairment charge, respectively. Excluding the charge from both years, gross profit margin from service
revenue decreased to 5.25% for fiscal 2011 from 8.9% in the prior year. The decrease in gross profit
from service revenue was due to the opening or acquisition of new Service & Tire Centers. Excluding
the impact of the acquired and new Service & Tire Centers, (which are in their ramp up stage for sales
while incurring their full amount of fixed expenses, including payroll and occupancy costs) and the
impairment charge, gross profit from service revenue increased to 11.3% for fiscal 2011 from 10.6% for
fiscal 2010. The increase in gross profit was primarily due to increased service revenues which better
leveraged fixed store occupancy costs, partially offset by an increase in payroll and occupancy costs.
Selling, general and administrative expenses as a percentage of revenue decreased to 21.5% in
fiscal 2011 from 22.2% in fiscal 2010. Selling, general and administrative expenses increased $1.7
million, or 0.4%, to $444.0 million. The increase was primarily due to higher general liability and
workers compensation claims expense of $4.8 million related to a favorable actuarial based adjustment
in the prior year, higher travel costs from increased gasoline prices related to our commercial fleet of
$2.3 million, and acquisition, transition and merger related costs of $2.0 million. These were mostly
offset by lower payroll and related expenses of $4.9 million, primarily due to lower short-term
compensation accruals, and lower media expense of $2.6 million. The reduction as a percentage of sales
reflects improved leverage of selling, general and administrative expenses achieved through increased
sales in fiscal 2011.
Net gains from the disposition of assets were not significant in fiscal 2011 and were $2.5 million in
fiscal 2010. Fiscal 2010 includes $2.1 million in net settlement proceeds from the disposition of a
previously closed property.
Interest expense decreased by $0.4 million to $26.3 million in fiscal 2011 compared to $26.7 million
in fiscal 2010.
Income tax expense for fiscal 2011 was $12.5 million, or an effective rate of 30.0%, as compared to
$21.3 million, or an effective rate of 36.4%, for fiscal 2010. The fiscal 2011 effective tax rate includes a
$3.6 million benefit related to the release of valuation allowance on certain state net operating losses
and credits. The fiscal 2010 effective tax rate includes a $2.2 million benefit related to the reduction of
a valuation allowance on certain state net operating losses and credits.
As a result of the foregoing, we reported net earnings of $28.9 million for fiscal 2011, a decrease
of $7.7 million, or 21.1%, as compared to net earnings of $36.6 million for fiscal 2010. Our diluted
earnings per share were $0.54 for fiscal 2011 as compared to $0.69 for fiscal 2010.
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