Pep Boys posts 3Q loss; 31 stores close as part of five-year strategic plan

Nov. 28, 2007

Pep Boys-Manny, Moe & Jack posted a net loss of $21.5 million on sales of $535.3 million for the third quarter ended Nov. 3, 2007. That compares to a net loss of $10.9 million on sales of $550.8 million for the same period last year.

Comparable store sales decreased 2.9%, broken down as follows:

* 4.1% decrease in comparable merchandise sales (which includes merchandise sold through the company's retail and service center lines of business), and

* 2.6% increase in service revenue (which is limited to labor sales).

"We were pleased with the continuing improvement of our service center business, which yielded a 4.5% comparable service center revenue

increase (labor plus installed merchandise and tires) and underlying gross profit margin improvement, despite the prevailing difficult macroeconomic environment," said CFO Harry Yanowitz.

"Our cost reduction initiatives also continue to be a highlight, supporting improved overall operating performance.

"As we work through our inventory transition, we expect continued pressure on our retail business, resulting in reduced sales and gross profit margins as we sell down our non-core merchandise through Q4 and into the first half of 2008.

"The costs associated with the initial steps in our long-term strategic plan (see below) will impact both the third and fourth quarters."

For the nine months ended Nov. 3, 2007, Pep Boys recorded a net loss of $14.2 million (a 38.3% increase in net loss compared to the same period in its previous fiscal year) on sales of $1.6 billion (a 2.7% decrease). Comparable sales decreased 2.9%.

"Over the next 12 months, we expect that the inventory rebalancing and the store portfolio reduction will generate working capital proceeds of approximately $65 million," said Yanowitz. "We expect to utilize this working capital together with the proceeds generated from our sale leaseback transactions (the first of which closed Nov. 27, 2007, for $166.2 million) to reduce indebtedness and grow the business."

Pep Boys operates 561 stores following the closing of 31 stores in 16 state on Nov. 27, which is part of its five-year strategic plan. The cornerstones of its plan are as follows:

* to refocus on core automotive merchandise,

* optimize the company's square footage productivity, and

* add incremental service bay density through a "hub and spoke" growth model.

The company said these initiatives will drive robust revenue and profit growth in each of its lines of business -- retail (DIY and commercial) and service centers (labor plus installed merchandise and


In order to support the investment needed for what it calls the "revitalization" of Pep Boys, the company has moved forward with a sale leaseback process for certain existing owned real estate.