Pep Boys Reports Increase in Second Quarter EPS

PHILADELPHIA--The Pep Boys – Manny, Moe & Jack , the nation's leading automotive aftermarket retail and service chain, announced the following results for the thirteen (second quarter) and twenty-six weeks ended August 4, 2007.

Operating Results

Second Quarter

Sales

Sales for the thirteen weeks ended August 4, 2007 were $558,889,000 as compared to the $578,565,000 for the thirteen weeks ended July 29, 2006. Comparable Sales decreased 3.6%, including a 5.1% comparable merchandise sales decrease and a 3.8% comparable service revenue increase. In accordance with GAAP, merchandise sales includes merchandise sold through both our retail and service center lines of business and service revenue is limited to labor sales. Recategorizing Sales into the respective lines of business from which they are generated, comparable Retail Sales (DIY and Commercial) decreased 9.0% and comparable Service Center Revenue (labor plus installed merchandise and tires) increased 4.9%.

Earnings

Net Earnings from Continuing Operations before Cumulative Effect of Change in Accounting Principle increased from $1,470,000 ($0.03 per share - basic and diluted) to $4,196,000 ($0.08 per share - basic and diluted).

Twenty-Six Weeks

Sales

Sales for the twenty-six weeks ended August 4, 2007 were $1,104,902,000, 2.7% less than the $1,135,166,000 recorded last year. Comparable Sales decreased 3.0%, including a 4.1% comparable merchandise sales decrease and a 2.6% comparable service revenue increase. Recategorizing Sales (see above), comparable Retail Sales decreased 6.9% and comparable Service Center Revenue increased 2.9%.

Earnings

Net Earnings from Continuing Operations before Cumulative Effect of Change in Accounting Principle improved from $603,000 ($0.01 per share - basic and diluted) to $7,416,000 ($0.14 per share - basic and diluted).

Commentary

President & CEO Jeffrey Rachor said, “Since I joined Pep Boys, we have accelerated the Company’s execution of previously initiated programs to improve its operational efficiency and move towards monetizing certain real estate assets. In addition, we are already seeing early traction in our service renewal program as Service Operations gained momentum in comparable sales, despite a difficult economic environment.

Our efforts to expand margins and manage down our cost structure have yielded improved operating performance in the first half of the year. Both Retail and Service Center Operations improved gross margin rates. Cost reduction efforts continued to make significant progress again this quarter, showing a year over year reduction of almost 5% in total SG&A expenses.

While we have continued to focus on improving our merchandise margin mix, which contributed to material improvements in profitability in the second quarter, we recognize the importance of permanently reversing retail sales trends with a sustainable core merchandising program. Our merchandising, category management and marketing strategy are being addressed as a top priority in the Strategic Planning Process. As previously communicated, we expect to discuss this plan in November after my second full quarter as CEO.

In support of our asset monetization, a recently completed independent portfolio valuation indicates that our owned real estate portfolio has appreciated in value. In March 2005, we ascribed a value of between $850 and $950 million to our owned stores and distribution centers based upon the results of a market value appraisal. Based upon additional analysis, we now believe that these properties have a market value of approximately $1.0 billion and, based upon fair market rents, could generate sale/leaseback proceeds of approximately $1.3 billion. We plan to begin to monetize a portion of these assets during the second half of the year through sale/leaseback transactions, with the initial use of proceeds being the repayment of debt.”

CFO Harry Yanowitz commented, “Q2 Operating Profit improved by $5.3 million from $12.0 million in 2006 to $17.3 million in 2007. Operating Profit included (i) in Q2 2006, a $6.4 million Net Gain from Dispositions of Assets, a $2.1 million settlement from a credit card issuer class action suit and $2.5 million in charges associated with our strategic review process and executive severance and (ii) in Q2 2007, $0.8 million in outsourcing-related severance charges.

Our trailing four quarter Operating (Loss) Profit has improved from a loss of $5.0 million to a profit of $50.1 million while our trailing four quarter EBITDA, a non-GAAP indicator of levels of our financial performance that includes the gains and charges noted above, increased from $81.3 million to $144.4 million.

As we previously announced, at the end of Q4 2006, we ceased commercial sales in certain of our stores, which while reducing our Q2 comparable sales (2007 vs. 2006) by approximately 1%, is consistent with our prioritization of profits over sales.

Our income tax expense in Q2 2007 was 37.5%, close to our planning rate of 39.0%, but incorporated entries from a favorable resolution of an IRS audit and additional tax expense due to surrender of certain company-owned life insurance assets. We sold these life insurance assets, non-core assets of the company, as part of funding the $58.2 million share repurchase program completed in Q1.”

Pep Boys has 592 stores and more than 6,000 service bays in 36 states and Puerto Rico. Along with its vehicle repair and maintenance capabilities, the Company also serves the commercial auto parts delivery market and is one of the leading sellers of replacement tires in the United States. Customers can find the nearest location by calling 1-800 -PEP-BOYS or by visiting www.pepboys.com.

Pep Boys Financial Highlights
Thirteen weeks ended			August 4, 2007			July 29, 2006
Total Revenues		$	558,889,000		$	578,565,000
Net Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting Principle		$	4,196,000		$	1,470,000
Basic Earnings Per Share:
Average Shares			51,652,000			54,254,000
Net Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting Principle		$	0.08		$	0.03
Diluted Earnings Per Share:
Average Shares			52,264,000			55,190,000
Net Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting Principle		$	0.08		$	0.03
Twenty-six weeks ended			August 4, 2007			July 29, 2006
Total Revenues		$	1,104,902,000		$	1,135,166,000
Net Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting Principle		$	7,416,000		$	603,000
Basic Earnings Per Share:
Average Shares			52,387,000			54,239,000
Net Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting Principle		$	0.14		$	0.01
Diluted Earnings Per Share:
Average Shares			52,949,000			55,206,000
Net Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting Principle		$	0.14		$	0.01

EBITDA Reconciliation
EBITDA is defined as Net Earnings (Loss) plus Interest Expense, minus Income Tax Benefit, plus Income Tax Expense, plus Depreciation and Amortization. EBITDA is not a measurement of financial performance under generally accepted accounting principles and may not be compared to similarly captioned information reported by other companies. In addition, it does not replace net income or cash flow from operations as an indicator of financial performance or liquidity. We believe EBITDA provides a useful indicator of levels of our financial performance and is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. A reconciliation of EBITDA for the thirteen and fifty-three weeks ended August 4, 2007, and the thirteen and fifty-two weeks ended July 29, 2006, respectively, to the most directly comparable GAAP measure (Operating Profit) in accordance with SEC Regulation G follows:
		Thirteen weeks ended				Thirteen weeks ended
		August 4, 2007				July 29, 2006
Operating Profit	$	17,278,000			$	11,989,000
Non-operating Income		1,766,000				2,018,000
Discontinued Operations, pre tax loss		(48,000	)			(94,000	)
Cumulative Effect of Change in Accounting Principle, pre tax		-				-
Depreciation and Amortization		20,578,000				20,696,000
EBITDA	$	39,574,000			$	34,609,000
		Trailing Four Quarters Fifty-three weeks ended				Trailing Four Quarters Fifty-two weeks ended
		August 4, 2007				July 29, 2006
Operating Profit (Loss)	$	50,148,000			$	(5,012,000	)
Non-operating Income		6,417,000				5,953,000
Discontinued Operations, pre tax (loss) income		(958,000	)			594,000
Cumulative Effect of Change in Accounting Principle, pre tax		-				(2,914,000	)
Depreciation and Amortization		88,746,000				82,651,000
EBITDA	$	144,353,000			$	81,272,000