UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended May 2, 1998
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from to
----------- ----------
Commission File No. 1-3381
------
The Pep Boys - Manny, Moe & Jack
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0962915
------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer ID number)
incorporation or organization)
3111 W. Allegheny Ave. Philadelphia, PA 19132
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
215-229-9000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports); and (2) has been subject
to such filing requirements for the past 90 days. Yes ( x ) No ( )
As of May 2, 1998 there were 63,775,313 shares of the registrant's Common
Stock outstanding.
1
<PAGE>
- -------------------------------------------------------------------
Index Page
- -------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated
Financial Statements (Unaudited)
Consolidated Balance Sheets -
May 2, 1998 and January 31, 1998 3
Consolidated Statements of Earnings -
Thirteen weeks ended May 2, 1998
and May 3, 1997 4
Condensed Consolidated Statements of
Cash Flows - Thirteen weeks ended
May 2, 1998 and May 3, 1997 5
Notes to Condensed Consolidated
Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8-11
PART II - OTHER INFORMATION 12
- ---------------------------
SIGNATURE 13
2
<PAGE>
<TABLE>
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except per share amounts)
<CAPTION>
May 2, 1998 Jan. 31, 1998*
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash....................................................... $ 12,238 $ 10,811
Accounts receivable, net................................... 10,908 13,070
Merchandise inventories.................................... 620,539 655,363
Prepaid expenses........................................... 22,985 27,449
Deferred income taxes...................................... 23,215 23,215
Other...................................................... 43,182 40,308
------------- -------------
Total Current Assets.................................... 733,067 770,216
Property and Equipment-at cost:
Land....................................................... 297,357 296,721
Building and improvements.................................. 934,339 920,522
Furniture, fixtures and equipment.......................... 569,056 542,256
Construction in progress................................... 32,103 21,432
------------ -------------
1,832,855 1,780,931
Less accumulated depreciation and amortization............. 426,107 403,182
------------- -------------
Total Property and Equipment............................ 1,406,748 1,377,749
Other........................................................ 14,655 13,395
------------- -------------
Total Assets.................................................. $2,154,470 $2,161,360
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................... $ 202,906 $ 409,053
Accrued expenses........................................... 180,224 162,666
Short-term borrowings...................................... 69,000 47,000
Current maturities of long-term debt....................... 160 157
------------- -------------
Total Current Liabilities............................... 452,290 618,876
Long-Term Debt, less current maturities...................... 551,979 402,021
Deferred Income Taxes........................................ 73,208 73,208
Convertible Subordinated Notes............................... 86,250 86,250
Zero Coupon Convertible Subordinated Notes................... 159,942 158,370
Commitments and Contingencies
Stockholders' Equity:
Common Stock, par value $1 per share:
Authorized 500,000,000 shares - Issued and
outstanding 63,775,313 and 63,657,728..................... 63,775 63,658
Additional paid-in capital................................. 175,097 173,107
Retained earnings.......................................... 653,564 647,505
Accumulated other comprehensive income..................... (1,366) (1,366)
------------- ------------
891,070 882,904
Less:
Cost of shares in benefits trust-2,232,500 shares, at cost. 60,269 60,269
------------- ------------
Total Stockholders' Equity.............................. 830,801 822,635
------------- ------------
Total Liabilities and Stockholders' Equity.................... $2,154,470 $2,161,360
============= ============
See notes to condensed consolidated financial statements.
*Taken from the audited financial statements at Jan. 31, 1998.
</TABLE>
3
<PAGE>
<TABLE>
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollar amounts in thousands, except per share amounts)
UNAUDITED
<CAPTION>
Thirteen weeks ended
-------------------------------
May 2, 1998 May 3, 1997
------------- -------------
<S> <C> <C>
Merchandise Sales.................................... $483,636 $410,321
Service Revenue...................................... 100,588 78,957
------------- -------------
Total Revenues....................................... 584,224 489,278
Costs of Merchandise Sales........................... 349,977 284,723
Costs of Service Revenue............................. 79,865 62,613
------------- -------------
Total Costs of Revenues.............................. 429,842 347,336
Gross Profit from Merchandise Sales.................. 133,659 125,598
Gross Profit from Service Revenue.................... 20,723 16,344
------------- -------------
Total Gross Profit................................... 154,382 141,942
Selling, General and Administrative Expenses......... 126,488 97,837
------------- -------------
Operating Profit..................................... 27,894 44,105
Nonoperating Income.................................. 333 1,253
Interest Expense..................................... 12,512 8,908
------------- -------------
Earnings Before Income Taxes 15,715 36,450
Income Taxes......................................... 5,657 13,304
------------- -------------
Net Earnings......................................... 10,058 23,146
Retained Earnings, beginning of period............... 647,505 612,581
Cash Dividends....................................... 3,999 3,658
------------- -------------
Retained Earnings, end of period..................... $653,564 $632,069
============= =============
Basic Earnings per Share............................. $ .16 $ .38
Diluted Earnings per Share........................... $ .16 $ .37
============= =============
Cash Dividends per Share............................. $ .0650 $ .0600
============= =============
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
UNAUDITED
<CAPTION>
Thirteen weeks ended
----------------------------------
May 2, 1998 May 3, 1997
-------------- --------------
<S> <C> <C>
Net Cash Used in Operating Activities........................... $(115,980) $(76,919)
Cash Flows from Investing Activities:
Capital expenditures............................................ (52,541) (59,302)
Other, net...................................................... 450 713
------------- -------------
Net Cash Used in Investing Activities........................... (52,091) (58,589)
Cash Flows from Financing Activities:
Net borrowings under line of credit agreements.................. 72,000 141,900
Net proceeds from issuance of notes............................. 99,429 -
Reduction of long-term debt..................................... (39) (24)
Dividends paid.................................................. (3,999) (3,658)
Proceeds from exercise of stock options
and dividend reinvestment plan................................ 2,107 1,063
------------- -------------
Net Cash Provided by Financing Activities....................... 169,498 139,281
------------- -------------
Net Increase in Cash................................................. 1,427 3,773
Cash at Beginning of Period.......................................... 10,811 2,589
------------- -------------
Cash at End of Period................................................ $ 12,238 $ 6,362
============= =============
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Condensed Consolidated Financial Statements
The consolidated balance sheet as of May 2, 1998, the consolidated statements
of earnings for the thirteen week periods ended May 2, 1998 and May 3, 1997
and the condensed consolidated statements of cash flows for the thirteen
week periods ended May 2, 1998 and May 3, 1997 have been prepared by the
Company without audit. In the opinion of management, all adjustments
necessary to present fairly the financial position, results of operations and
cash flows at May 2, 1998 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's January 31,
1998 annual report to shareholders. The results of operations for the
thirteen week period ended May 2, 1998 are not necessarily indicative of the
operating results for the full year.
NOTE 2. Merchandise Inventories
Merchandise inventories are valued at the lower of cost (last-in, first-out)
or market. If the first-in, first-out method of valuing inventories had been
used by the Company, inventories would have been approximately $870,000
higher at both May 2, 1998 and January 31, 1998.
NOTE 3. Comprehensive Income
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and disclosure of comprehensive
income and its components in financial statements. Accumulated other
comprehensive income in the consolidated balance sheets as of May 2, 1998 and
January 31, 1998 consists of a minimum pension liability adjustment. There
were no differences between net earnings and comprehensive income for the
thirteen week periods ended May 2, 1998 and May 3, 1997.
Note 4. Medium-Term Note Program
In February 1998, the Company established a Medium-Term Note program which
permits the Company to issue up to $200,000,000 of Medium-Term Notes. Under
this program the Company has sold $100,000,000 principal amount of senior notes,
ranging in annual interest rates from 6.7% to 6.9% and due March 2004 and March
2006. The net proceeds of $99,429,000 were used for working capital, the
repayment of debt and for general corporate purposes.
6
<PAGE>
Note 5. Net Earnings Per Share
<TABLE>
<CAPTION>
Thirteen weeks ended
(in thousands, except per share data) ----------------------------------
May 2, 1998 May 3, 1997
-------------- --------------
<S> <C> <C>
(a) Net earnings..................................... $10,058 $23,146
Adjustment for interest on 4% convertible
subordinated notes, net of income tax effect... - 554
Adjustment for interest on zero coupon convertible
subordinated notes, net of income tax effect... - 959
- -------------------------------------------------------------------------------------------
(b) Adjusted net earnings $10,058 $24,659
- -------------------------------------------------------------------------------------------
(c) Average number of common shares outstanding
during the period.............................. 61,470 60,924
Common shares assumed issued upon conversion of
4% convertible subordinated notes.............. - 2,104
Common shares assumed issued upon conversion of
zero coupon convertible subordinated notes..... - 3,513
Common shares assumed issued upon exercise
of dilutive stock options, net of assumed
repurchase, at the average market price........ 306 671
- -------------------------------------------------------------------------------------------
(d) Average number of common shares assumed
outstanding during the period.................. 61,776 67,212
- -------------------------------------------------------------------------------------------
Basic Earnings per Share (a/c)................... $ .16 $ .38
Diluted Earnings per Share (b/d)................. $ .16 $ .37
- -------------------------------------------------------------------------------------------
</TABLE>
Adjustments for convertible securities were antidilutive during the thirteen
week period ended May 2, 1998 and therefore excluded from the computation of
diluted EPS; however, these securities could potentially be dilutive in the
future. Options to purchase 2,147,042 shares of common stock at various prices
ranging from $23.78 to $37.38 were outstanding at May 2, 1998, but were not
included in the computation of diluted EPS because the options' exercise prices
were greater than the average market price of the common shares.
7
<PAGE>
<TABLE>
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operation -
The following table presents for the periods indicated certain items in the
consolidated statements of earnings as a percentage of total revenues (except
as otherwise provided) and the percentage change in dollar amounts of such items
compared to the indicated prior period.
<CAPTION>
Percentage of Total Revenues Percentage Change
- ------------------------------------------------------ ---------------------------------- -----------------
Thirteen weeks ended May 2, 1998 May 3, 1997 Fiscal 1998 vs.
(Fiscal 1998) (Fiscal 1997) Fiscal 1997
- ------------------------------------------------------ -------------- -------------- -----------------
<S> <C> <C> <C>
Merchandise Sales..................................... 82.8% 83.9% 17.9%
Service Revenue (1)................................... 17.2 16.1 27.4
------ ------ ------
Total Revenues........................................ 100.0 100.0 19.4
Costs of Merchandise Sales (2)........................ 72.4 (3) 69.4 (3) 22.9
Costs of Service Revenue (2).......................... 79.4 (3) 79.3 (3) 27.6
------ ------ ------
Total Costs of Revenues............................... 73.6 71.0 23.8
Gross Profit from Merchandise Sales................... 27.6 (3) 30.6 (3) 6.4
Gross Profit from Service Revenue..................... 20.6 (3) 20.7 (3) 26.8
------ ------ ------
Total Gross Profit.................................... 26.4 29.0 8.8
Selling, General and Administrative Expenses.......... 21.7 20.0 29.3
------ ------ ------
Operating Profit...................................... 4.7 9.0 (36.8)
Nonoperating Income................................... .1 .3 (73.4)
Interest Expense...................................... 2.1 1.8 40.5
------ ------ ------
Earnings Before Income Taxes.......................... 2.7 7.5 (56.9)
Income Taxes.......................................... 36.0 (4) 36.5 (4) (57.5)
------ ------ ------
Net Earnings.......................................... 1.7 4.7 (56.5)
====== ====== ======
<FN>
(1) Service revenue consists of the labor charge for installing merchandise or
maintaining or repairing vehicles, excluding the sale of any installed parts or
materials.
(2) Costs of merchandise sales include the cost of products sold, buying,
warehousing and store occupancy costs. Costs of service revenue include service
center payroll and related employee benefits and service center occupancy costs.
Occupancy costs include utilities, rents, real estate and property taxes, repairs
and maintenance and depreciation and amortization expenses.
(3) As a percentage of related sales or revenue, as applicable.
(4) As a percentage of earnings before income taxes.
</FN>
</TABLE>
8
<PAGE>
Thirteen Weeks Ended May 2, 1998 vs. Thirteen Weeks Ended May 3, 1997
- ------------------------------------------------------------------------
Total revenues for the first quarter increased 19.4% due to a higher store
count (709 at May 2, 1998 compared with 620 at May 3, 1997) coupled with
a 7.0% increase in comparable store revenues (revenues generated by stores in
operation during the same months of each period). Comparable store
merchandise sales increased 5.4% while comparable service revenue increased
15.2%.
Gross profit from merchandise sales decreased, as a percentage of merchandise
sales, due primarily to significantly lower merchandise margins and an
increase in store occupancy costs offset, in part, by a decrease in warehousing
costs.
Selling, general and administrative expenses increased substantially, as a
percentage of total revenues, due primarily to increases in store expenses and
media costs.
<TABLE>
Nonoperating income consisted of the following:
(in thousands)
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Rental revenue $ 286 $ 415
Investment income 54 806
Other income (7) 32
------ ------
Total $ 333 $1,253
====== ======
</TABLE>
Interest expense increased, as a percentage of total revenues, due primarily to
higher debt levels necessary to fund the Company's store expansion program and
related working capital requirements coupled with slightly higher interest
rates.
Net earnings decreased, as a percentage of total revenues, due primarily to a
significant decrease in gross profit from merchandise sales, as a percentage of
merchandise sales, substantially higher selling, general and administrative
expenses, as a percentage of total revenues, and an increase in interest
expense, as a percentage of total revenues.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - May 2, 1998
- ----------------------------------------------
The Company's cash requirements arise principally from the need to finance
the acquisition, construction and equipping of new stores and to purchase
inventory. During the first quarter of 1998, the Company invested $52,541,000
in property and equipment while net inventory (net inventory includes the
decrease in inventory less the change in accounts payable) increased
$171,323,000. Working capital increased from $151,340,000 at January 31, 1998
to $280,777,000 at May 2, 1998. At May 2, 1998, the Company had
stockholders' equity of $830,801,000 and long-term debt of $798,171,000. The
Company's long-term debt was 49% of its total capitalization at May 2, 1998
and 44% at January 31, 1998.
The Company plans to open approximately 34 new stores during the balance of
the current fiscal year. Management estimates that the cost of this
expansion, coupled with expenditures in existing stores, warehouses and
offices will be approximately $132,000,000. Funds required to finance the
store expansion including related inventory requirements are expected to come
primarily from operating activities with the remainder provided by unused
lines of credit which totaled $150,000,000 at May 2, 1998, or from accessing
traditional lending sources such as the public capital markets.
In February 1998, the Company established a Medium-Term Note program which
permits the Company to issue up to $200,000,000 of Medium-Term Notes. Under
this program the Company has sold $100,000,000 principal amount of senior notes,
ranging in annual interest rates from 6.7% to 6.9% and due March 2004 and March
2006. The net proceeds of $99,429,000 were used for working capital, the
repayment of debt and for general corporate purposes.
10
<PAGE>
INFORMATION SYSTEMS AND THE YEAR 2000
- -------------------------------------
The Company recognizes that the arrival of the Year 2000 poses a challenge to
the ability of all systems to recognize the date change from December 31, 1999
to January 1, 2000 and, like other companies, has assessed and is modifying its
computer applications and business processes to provide for their continued
functionality. An assessment of the readiness of external entities which it
interfaces with, such as vendors, suppliers, customers and others, is ongoing.
The Company expects that the principal costs involved will be those associated
with the remediation and testing of its computer applications. This effort is
currently underway across the Company. A large portion of these costs will be
met from existing resources through a reprioritization of technology development
initiatives, with the remainder representing incremental costs. Management
estimates that these costs, which will be expensed as incurred, for the
remediation and testing of computer applications will range from approximately
$12,000,000 to $16,000,000 over the two year period from 1998 through the end
of 1999.
While the Company does not currently foresee any material problems, there can
be no guarantee that the Company and the external entities with which it
interfaces will be Year 2000 compliant by January 1, 2000 and that any such
non-compliance will not have a material adverse effect on the Company.
FORWARD LOOKING STATEMENTS
- --------------------------
Certain statements made herein are forward looking and as a result involve
risk and uncertainties. Actual results could differ materially from expected
results due to factors beyond the control of the Company, including the strength
of the national and regional economies and consumers' ability to spend, the
health of various segments of the market that the Company serves - particularly
the do-it-yourself segment, the weather in geographical regions with a high
concentration of the Company's stores, competitive pricing, location and number
of competitors' stores, product costs, the ability to attract and retain
qualified personnel, the ability to acquire real estate, facilities and
equipment and the ability to complete the rollout of the commercial delivery
program and reduce inventory levels during 1998. Further risk factors are
discussed in the Company's filings with the Securities and Exchange Commission,
including its most recent Form 10-K, a copy of which may be obtained from the
Company without charge.
11
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement Re: Computation of Earnings Per
Share
(27) Financial Data Schedules
(b) Reports on Form 8-K. No reports on Form 8-K have been filed
during the quarter for which this report is filed.
12
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PEP BOYS - MANNY, MOE & JACK
--------------------------------
(Registrant)
Date: June 12, 1998 By: /s/ Michael J. Holden
----------------------- -------------------------
Michael J. Holden
Executive Vice President &
Chief Financial Officer
13
<PAGE>
INDEX TO EXHIBITS
- -----------------
(11) Computations of Earnings Per Share
(27) Financial Data Schedule
<TABLE>
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES Exhibit 11
COMPUTATION OF NET EARNINGS PER SHARE
(in thousands, except per share data)
(UNAUDITED)
<CAPTION>
- ------------------------------------------------------------------------------------------
Thirteen weeks ended
----------------------------------
May 2, 1998 May 3, 1997
-------------- --------------
<S> <C> <C>
(a) Net earnings..................................... $10,058 $23,146
Adjustment for interest on 4% convertible
subordinated notes, net of income tax effect... - 554
Adjustment for interest on zero coupon convertible
subordinated notes, net of income tax effect... - 959
- -------------------------------------------------------------------------------------------
(b) Adjusted net earnings $10,058 $24,659
- -------------------------------------------------------------------------------------------
(c) Average number of common shares outstanding
during the period.............................. 61,470 60,924
Common shares assumed issued upon conversion of
4% convertible subordinated notes.............. - 2,104
Common shares assumed issued upon conversion of
zero coupon convertible subordinated notes..... - 3,513
Common shares assumed issued upon exercise
of dilutive stock options, net of assumed
repurchase, at the average market price........ 306 671
- -------------------------------------------------------------------------------------------
(d) Average number of common shares assumed
outstanding during the period.................. 61,776 67,212
- -------------------------------------------------------------------------------------------
Basic Earnings per Share (a/c)................... $ .16 $ .38
Diluted Earnings per Share (b/d)................. $ .16 $ .37
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE
SHEET AS OF MAY 2, 1998 AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE THIRTEEN WEEK
PERIOD ENDED MAY 2, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> MAY-2-1998
<CASH> 12,238
<SECURITIES> 0
<RECEIVABLES> 11,258
<ALLOWANCES> 350
<INVENTORY> 620,539
<CURRENT-ASSETS> 733,067
<PP&E> 1,406,748
<DEPRECIATION> 426,107
<TOTAL-ASSETS> 2,154,470
<CURRENT-LIABILITIES> 452,290
<BONDS> 798,171
0
0
<COMMON> 63,775
<OTHER-SE> 767,026
<TOTAL-LIABILITY-AND-EQUITY> 2,154,470
<SALES> 483,636
<TOTAL-REVENUES> 584,224
<CGS> 349,977
<TOTAL-COSTS> 429,842
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,512
<INCOME-PRETAX> 15,715
<INCOME-TAX> 5,657
<INCOME-CONTINUING> 10,058
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,058
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
