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Executives

Ray Arthur - Executive Vice President and Chief Financial Officer

Mike Odell - Chief Executive Officer

Scott Webb - SVP Merchandising and Marketing

Sanjay Sood - Vice President and Corporate Controller

Analysts

[Alan Hosmenal] - BB&T Capital Markets

Cid Wilson - Kevin Dann & Partners

Greg Malik – Morgan Stanley

Emily Shank – Barclays Capital

William Keller - FTN Midwest

Jack Baylis – Midland Research

Peter Benedict – Wachovia

The Pep Boys – Manny, Moe & Jack (PBY) F3Q08 Earnings Call December 9, 2008 8:30 AM ET

Operator

(Operator Instructions) Welcome to The Pep Boys Third Quarter 2008 Conference Call. It is now my pleasure to introduce your host Mr. Ray Arthur, Executive Vice President and Chief Financial Officer of Pep Boys.

Ray Arthur

On the call with me today are Mike Odell, Chief Executive Officer of the company, Scott Webb, SVP Merchandising and Marketing, and our Vice President and Corporate Controller, Sanjay Sood.

The format of the call is similar to those done by Pep Boys in the past. First Mike will provide opening comments regarding our results and priorities then I will review the third quarter and first nine months 2008 financial performance, balance sheet and cash flows. We will then turn the call over to the Operator to moderate a question and answer session. The call will end at 9:30 Eastern Time.

Before we begin, I’d like to remind everyone that this conference call is governed by the language at the bottom of our press release concerning forward looking statements as well as SEC Regulation FD. In compliance with these regulations, we are web casting the conference call on investorcalendar.com. For anyone on the webcast who does not have the financial statements, you can access them on our website at PepBoys.com.

I will now turn the call over to Mike Odell, our Chief Executive Officer.

Mike Odell

The third quarter was a challenge for us but we continue to improve our operations and position ourselves for future success. The overall theme that I will discuss with you today is our plan for a profitable 2009 despite what we expect to be a weak economic environment. We will do this through operational execution, a reduced focused marketing spend, tight inventory management, cost reductions and continued tight spending control and pursuing our strategic objectives.

As you know, the economic environment in which we are operating has been difficult. Miles driven is a key indicator for our business because at the end of the day its where and tear from vehicle usage that drives the need for tires, maintenance and repairs. Miles driven have declined every month so far this year.

Also, with consumer confidence down and credit tightening and about 20% of our business attributable to sales of discretionary products conditions such as these do present a challenge. While it is difficult to predict when these key indicators will improve there are some positives. The deferral of required spending which affects 80% of our business should abate, as the weather turns cold in the north, as people continue to hold on to their cars longer, and as dealerships and small shops continue to close and recent lower gas prices are also promising.

Regarding operational execution we firmly believe that customer service is the most critical component enabling success in our business. Our customer service scores have continued to improve in retail up 10% year to date and they have improved significantly in service up 33% year to date. On the store front our focus continues to be on putting our customers first and driving sales through the basics of:

Staffing and scheduling based on customer flow

Developing the expertise of our people

Improving our in stock position

Developing our selling skills.

Our objective for the end of our fiscal year 2008 has been to be what we define as operationally sound. By putting into place the disciplines and processes that we need to support our stores in support of our customers. Our objective for 2009 is to be operationally excellent by driving consistent execution across the chain. We need to be consistently reliable over time in order to grow our business. It’s that simple in an execution based business like ours.

We also believe that accountability is a key driver to success. In October we consolidated our field leadership structure so that area directors, individual vice presidents now own the entire store versus the previous retail service split where no one individual owned the results of a location. This is already helping to build store teams that work as one versus having a division between our retail and service departments within the store.

The division was never intended but it was a natural byproduct of the structure. It was an impediment to achieving synergy with our customers between our service, commercial and retail businesses. This change reduces the number of stores led by an area director from an average of 15 half stores to nine whole stores so we can now assure that the area directors will be in every store once every two weeks and the poorest performing store every Tuesday.

An added benefit is that by taking this action we have also reduced the size of our field leadership structure by 25% since the start of the year top grading the organization in the process.

We have also just converted our service advisors from pure hourly pay to base plus incentive so that they are rewarded based on performance. Performance includes both customer service and sales. So far, we have experienced a small sales lift as we have converted stores and a dramatic lift in customer service scores as service advisors now have a financial incentive to care for their customers. Most importantly, it’s putting more hop in the step of our service advisors to be proactive in caring for customers and building long term customer relationships.

We know it is consistent execution that wins at the end of the day. We have successful stores and struggling stores. Sometimes there are external factors but mostly it just comes down to quality people providing quality service and doing quality work. In that regard, we are now up to 84% complete with our core training curriculum. The next step is to increase the number of certified parts, tire and service pros in our stores. We are also increasing the number of ASE certified technicians and master technicians that we have in our shops as dealerships and smaller shops close their doors.

Within service maintenance services increased nicely in the third quarter but tires and repair services were both down. Frankly, the biggest disappointment has been our tire business which had been a source of strength. We know we are priced very well, we also know that we need to add a little bit more late model coverage than we have already added this year.

While new tires can be deferred a bit they can only be deferred for so long. We still see promise in the tire business. In fact, service business revenue trends have moderated in the current quarter to a low single digit decrease and service margins before occupancy costs have been stable.

Within retail our sales were down 4% in the DIY core which excludes accessories and complimentary products and they were up 2% in the commercial core again excluding accessories and complimentary products then we were down 17% in accessories and complimentary products. Our core parts and fluids market share on a per store basis has been stable due to our improved assortment, competitive pricing and our focus on training our parts people. Product margins have also been stable. Those sales trends continue in the current quarter.

With respect to accessories and complimentary product it continues to be a difficult environment and we’re also comparing now against the big inventory clearance sales of last year especially during this holiday season. One bright spot, GPS was very successful for us on Black Friday and in the current quarter. In fact, we had Yahoo’s number one rated best buy for Black Friday. We also have new automotive related products, some in our store recently and more landing in our stores this spring.

Regarding reduced focused marketing spend; we have tested various mixes of advertising media this year to find the ones that work best in each market. We have run local radio and TV as a branding continuity program in some markets, print only in many markets and have also gone dark in a number of markets. This has helped us to understand which media work in different markets and also which are most cost effective given the varying levels of store density that we have across the different markets that we serve.

We know that direct marketing and grass roots marketing are our most effective media. One example of grass roots marketing is service managers calling customers to survey their past experience and to invite them back in just reminding folks that we are here to serve them. Direct marketing and grass roots marketing will continue to grow in all markets especially to retain and to reactivate customers.

To attract new customers we will use broadcast media to drive awareness of our service business and big tire events. We will also use larger print pieces with less frequency to drive awareness and promotion of our differentiated retail assortment. With our learning’s in 2008, for 2009 we have a specific tailored plan for each market so we can maximize our reach and efficiencies. Our brand message will continue to shout that Pep Boys does everything for less and we will use print pieces to drive tires and services most weeks.

Again, this approach will be more efficient and it will vary based on market effectiveness and store density. Overall we do expect to reduce our marketing budget by roughly $20 million in 2009.

From a promotional standpoint our offers focus on the most frequently needed services; oil changes, tires and brakes. Our pricing is very competitive in each of these categories. We are the home of the buy three tires and get the fourth tire free and we regularly promote our $19.99 we do it for you oil change as well as a weekly do it yourself oil change deal.

We continue to drive our CRM mail and email programs and have recently started direct mail, email and web based prospecting programs. We are expanding our loyalty program from one market to seven markets this quarter and we’ll be national early next year. Loyalty card customers so far spend 20% more per transaction than our average customer.

We also recently launched the ability to find parts availability and pricing on our website and we have a steady calendar of more improvements to come including tire availability and pricing starting this month. While our marketing spend will be down our focus on driving sales is high.

Regarding tight inventory management, in stock position of course is also a key sales driver and while in stock has improved we still have work to do on optimizing inventory levels. On the one hand, we have excess quantities on hand in our stores. On the other hand, we need to continue to improve our parts and tire coverage. The quality of our inventory is very good but we are overstocked in certain items in certain stores. We are refining our presentation quantities and our replenishment quantities and will use a portion of this capital to fund continued improvement in late model vehicle coverage of parts and tires.

Regarding cost reductions and continued tight spending control, to ensure our profitability in 2009 we are of course reviewing all of our spending with a concerted effort towards cost reductions. We are holding off on most major projects and soft initiatives while we focus on executing very well with what we have. In addition to the marketing reduction that I mentioned earlier we also expect at least $10 million in non-merchandise expense reductions in 2009.

Our cash used for maintaining our facilities and equipment will be modest in 2009 as it has been in 2008 and well below our depreciation expenses. Our liquidity position remains strong and as of the end of the third quarter we had $38 million cash on hand and un-drawn revolving credit facility and no significant debt maturity until 2013.

Also a year in advance of the December 9, 2009, maturity of our current revolving credit facility we have secured commitments from the syndicate led by Bank of America for $300 million replacement facility that Ray will talk more about in a second. This facility is expected to close in January.

Regarding strategic objectives, we have considered a number of strategic opportunities over the past year. While business has been tough we believe that the service industry is ripe for consolidation. The closure of dealerships and small shops is evidence of that. Therefore, we are actively pursuing service folks ensuring that we pay the right price and achieve the right market density.

Opportunities include small chains currently operating in the service space and closed or closing individual sights in markets where we have a presence but require greater density. The specific sights need proximity to existing super centers who will supply most of their parts. Our goal is approximately 30 stores per year with a range of 20 to 40.

Service may vary leveraged business up or down which is why the addition of service folks is very attractive leveraging our infrastructure while addressing our key weakness which is lake of market density.

On a separate note, during the third quarter we did end our joint venture with CarOffer.com due to the financial struggles experienced by our partner in their primary business. This business was in a start up stage and was not yet significant to our 2008 results. We still like the idea of helping customers to sell their cars but we don’t have any current plans to reactivate the business.

In closing, before I turn it over to Ray, while our current performance has been challenging we do believe that we have both the strategy and the resources to weather the current economic environment and we are focused on solid execution so that we come out on top. Again, we will do this through operational execution, a reduced focus marketing spend, tight inventory management, cost reductions, and continued tight spending control and pursuing service folks.

Pep Boys is the place to go for great prices on tires, oil changes and automotive maintenance and repairs where the customer is a do it yourselfer or wants our ASE Certified Technicians to do it for them. Now is the time for cost conscious customers to discover the value at Pep Boys.

I’ll now turn it over to Ray for further financial commentary.

Ray Arthur

This morning I will review our results on a GAAP as well as line of business basis. Please see the last page of our press release for line of business format statements. I will also review relevant balance sheet and cash flow data.

On a GAAP basis our net loss for the third quarter 2008 improved to $7.3 million or a loss of $0.14 per share versus a loss of $28 million or $0.54 per share for the same period last year. The prior year included on a pre-tax basis a $32.8 million impairment charge established to exit non-core inventory, an $11 million asset impairment charge related to closed stores, and $6.3 million in legal reserves.

Net earnings for the first nine months of 2008 improved to $2.8 million or $0.05 per share versus a loss of $20.6 million or $0.40 per share for the same period last year. Prior year results were impacted by the same items discussed earlier. In addition, the current year benefited from increased sales or gains from sale lease back transactions significantly reduced interest expense including a gain on debt repurchase of $2.8 million and reduced SG&A spending mostly offset by the impact of reduced gross profit as a result of lower sales.

In addition, the company’s income tax expense was favorably impacted by recognition of a $2.2 million deferred tax asset resulting from a June 2007 state tax law change.

Consolidated revenue for the third quarter was $464.2 million a $64.6 million reduction from revenue from $528.8 million last year. The 12.2% reduction resulted from operating 31 less stores, 20 of which remain in 2007 continuing operations and a 10.4% comparable revenue decline. The comparable revenue decline reflects $10.5 million less and sales of those non-core merchandise categories that we substantially exited as part of our strategic transformation.

Consolidated revenue for the first nine months was $1,462.3 million a $158.1 million reduction from revenue of $1,620.4 million last year. The 9.8% reduction resulted from operating 31 less stores, 20 of which remain in 2007 continuing operations and a 7.8% comparable revenue decline. The comparable revenue decline reflects $36.6 million less and sales of those non-core merchandise categories that we substantially exited.

Gross profit as a percentage of sales came to 24.7% and 25.5% for the third quarter and first nine months of 2008 as compared to 18.5% and 23.9% respectively for the same periods a year ago. The prior year third quarter and for the nine months of 2007 included a $32.8 million inventory impairment charge and a $7.2 million asset impairment charge related to the closure of 20 stores.

Excluding these items gross profit margin as a percentage of sales decreased by 130 basis points and 80 basis points in the third quarter and for the nine months as compared to the corresponding period of the prior year respectively. This decline in gross profit rate was primarily due to reduced service labor sales without a commensurate reduction in overall service payroll and the wind down of our clearance program, increased occupancy costs as a percentage of sales due to reduced sales levels and higher rent due to our sale lease back transactions.

Gross profit margin as a percentage of sales before occupancy costs after adjusting for impairment charges in the prior year remain flat year over year for both the quarter and the nine month periods. The third quarter and first nine months of 2008 include sales of clearance product contributing $415,000 and $326,000 of gross profit respectively, a decline of $2.4 million and $13.4 million from the same periods of the prior year.

Gross profit dollars for the third quarter and first nine months of 2008 increased to $114.8 million and $373.2 million from $97.9 million and $387.3 million last year. Selling, general and administrative expenses declined to $119.8 million for the third quarter and to $361.4 million for the first nine months of 2008 compared with expenses of $133.6 million and $392.5 million respectively for the same periods last year.

As a percentage of sales, expense rate rose to 25.8% and 24.7% from 25.3% and 24.2% respectively for the same period last year primarily due to the de-leveraging impact of the closed stores and the comparable store revenue reduction. Net gain from disposition of assets increased $7.8 million for the first nine months of 2008 from the same period last year due to the closing of the sale lease back transactions and the sale of excess properties. There were no material transactions in either the current year or prior year third quarter.

Operating loss for the third quarter was $5 million and a profit of $21.4 million for the first nine months of 2008 compared to an operating loss of $36.1 million and $3.4 million for the third quarter and nine months of the prior year respectively. The results for the third quarter and first nine months of the current year are primarily the result of comparable store revenue declines, closed stores and continued clearance program offset by reduced spending on SG&A.

In addition, the first nine months of the year was positively impacted by the gains related to the sale lease back transactions and the sale of excess properties.

Interest expense declined for the quarter and first nine months to $7.1 million and $19 million from $11.5 million and $36.5 million last year due to lower debt levels. In addition, interest for the first nine months of 2008 includes a $2.8 million gain on debt repurchase.

Income tax expense as a percentage of pre-tax income for the third quarter and first nine months of 2008 declined to 40.4% and 4.4% from 44.4% and 46.3% respectively last year. The lower rate in the first nine months of the year was primarily the result of the recognition in Q2 2008 of a $2.2 million deferred tax asset resulting from a state tax law change in June 2007.

Discontinued operations generated a loss in the third quarter and first nine months of 2008 of $200,000 and $1.2 million versus a loss of $2.1 million and $1.7 million respectively a year ago. The prior year loss from discontinued operations was primarily due to the pre-tax impairment charge of $3.8 million associated with the closure of 11 stores in the fourth quarter of fiscal 2007.

In summary, net loss as a result of the items I just described improved to $7.3 million or a loss of $0.14 per share for the third quarter 2008 from a loss of $28 million or $0.54 per share for the third quarter of 2007. For the first nine months of 2008 net earnings rose to $2.8 million or $0.05 per share as compared to a loss of $20.6 million or $0.40 per share reported for the first nine months of 2007.

Now I’ll cover service center, retail, and commercial operations on a line of business basis for the third quarter and first nine months of 2008.

Our service center business which includes tires and merchandise sales as well as service labor revenue generated through our service base reported revenue of $211 million and $660 million in the third quarter and first nine months of 2008 versus $235 million and $696 million last year. The 2007 third quarter and first nine months results include sales of $5 million and $16.4 million attributable to closed stores that were not operational for any part of 2008.

Comparable revenues decreased by 8.2% and 3.2% in the third quarter and first nine months of 2008 respectively compared to increases of 4.5% and 3.4% in the same period as last year. The challenging economic climate including a tightening of credit and decline in miles driven has negatively impacted sales performance.

As a result of these factors the demand for replacement tires has also declined resulting in lower sales in this category as compared to the prior year. Tire sales in the prior year third quarter were also favorably impacted by our national TV advertising campaign which we did not repeat in 2008 due to its return on investment. Most lines of business within service were soft with the exception of maintenance services which maintained its positive trends in the quarter.

Service center gross profit declined to $47 million and $153 million for the third quarter and first nine months of 2008 compared with $54 million and $163 million last year. Gross profit as a percentage of revenue for the quarter declined to 22.1% of revenue from 23.1% last year. However, the first nine months results remained relatively flat at 23.2% compared with 23.4% last year.

The current quarter performance is primarily due to reduced labor sales volume without a commensurate reduction in overall service payroll partially offset by increased margins on installed merchandise. In addition, the third quarter 2008 includes a $2 million asset impairment charge related to closed stores.

The retail and commercial business generated sales of $254 million and $803 million for the third quarter and first nine months of 2008 compared to sales of $294 million and $924 million for the same periods last year. The 2007 third quarter and first nine months results include sales of $7 million and $21 million attributable to closed stores that were not operational for any part of 2008. The third quarter and first nine months results also reflect $11 million and $37 million reduction of non-core product sales that we have de-emphasized.

From a gross profit perspective, the retail and commercial business reported gross profit of $68 million and $220 million for the third quarter and first nine months of 2008 respectively versus $44 million and $224 million for the same periods last year. The prior year third quarter included an inventory impairment charge of $33 million, an asset impairment charge of $5 million. Excluding these items gross profit declined by $14 million and $43 million for the third quarter and first nine months respectively.

For the first quarter and first nine months of 2007 gross profit includes $1 million and $4 million generated by closed stores not operational in 2008 and $2 million and $13 million generated from sales of non-core clearance product that we’ve de-emphasized.

Gross profit as a percentage of sales declined after adjusting for these impairment charges discussed above by 90 and 100 basis points for the third quarter and first nine months of 2008 respectively due to sales of clearance products at no margin and a de-leveraging impact of reduced sales. Gross margin, however, before occupancy costs and after adjusting for the impairment charges increased by 150 and 100 basis points in the current year third quarter and for the nine months respectively as compared to the prior year.

I’ll now discuss some key balance sheet data, cash balances increased by $17 million from last year and primarily due to proceeds from three sale lease back transactions and other dispositions of property of $209 million that we closed in the first nine months of the year, offset in part by cash applied to the payment of $117 million to settle a master leased facility and for the seasonal increase in merchandise inventories.

Inventory at the end of the third quarter was $585 million up $24 million from the $561 million at the end of last year. The increase in current quarter represents a normal merchandise increase in preparation for the holiday season.

Property and equipment declined by $33 million from year end primarily due to the sale of stores in the sale lease back transactions offset in part by the purchase of stores and distribution centers that were previously part of our synthetic master lease facility.

Accounts payable including our trade payable program remained relatively flat to year end levels at $260 million. Debt has declined from year end levels by about $70 million as we have applied our sale lease back proceeds to these balances. The deferred gain resulting from sale lease back transactions has increased from $87 million at year end to $173 million at the end of the third quarter.

Focusing on cash flow for a moment, we generated $17 million in cash flow in the first nine months of 2008 and this was primarily due to the sale lease backs offset by the pay down of debt and the retirement of the synthetic master lease obligation.

On another liquidity note, a year in advance of the December 9, 2009, maturity our current revolving credit facility we have secured commitments from a syndicate of banks led by Bank of America, Wells Fargo, and Regents Financial for a $300 million replacement facility. This facility is expected to close subject to the satisfaction of customary closing conditions before our fiscal year ends on January 31, 2009, and we’re very happy about completing this facility in today’s credit markets.

Respectively, we have no significant debt maturities due until 2013. We expect capital expenditures to remain relatively consistent with prior years and do not see any significant needs other than the normal operating cash flow in the near term.

I’ll now turn the call over to the operator to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Alan Hosmenal] - BB&T Capital Markets

[Alan Hosmenal] - BB&T Capital Markets

Could you provide some detail on how sales volumes looked by month through the quarter? Was it a situation where there was a significant variance in results on a monthly basis?

Ray Arthur

The quarter started off a little better and started to really get precipitously worse. The good news is that since the end of the quarter we have seen our service business rebound significantly from where it was and unfortunately I think as we go through the fourth quarter we’re going to be significantly challenged in the retail side of the business because of the significant clearance activity that was completed throughout the fourth quarter of last year.

Mike Odell

In particular it was as we got a month into the quarter is when all the news started to kind of fill the airwaves in terms of negativity is particularly where we saw the tire business tighten up more so than it had previously. As Ray said this past month the service business it’s moderated in terms of the rate of declines in small single digit decline so far this quarter versus the 8% that we had for last quarter. Again, it really was particularly the last two months of the quarter we just finished were rough for us.

[Alan Hosmenal] - BB&T Capital Markets

Where are retail comps running at this point so far in the fourth quarter? Looking at the moderation that you’ve seen in service trends now at a low single digit decline, how much of this do you think reflects just general improvement in operating conditions versus improved selling efforts from the transition you made in the service advisor comp structure?

Mike Odell

We made the change in the service advisor when we did the initial stores in terms of how they’re paid. It was about a 2% to 3% lift in the stores that did the initial conversion so that could be some of what it is. I think also, particularly when you get to tires; there are some things that you can defer some items on your car. People can go the extra 5,000 miles on an oil change; literally they can not do an oil change if they wanted to.

Tires is something where, at some point in time, we definitely see they were coming in and getting replace at 4/32 than at 2/32 we still see a lot of bald tires but its something you can’t defer it forever. Miles driven would affect the wear and tear on the tires but you can’t just defer it forever.

In terms of the retail front, as I said in the comments we were down small single digit in what we call our DIY core and that’s about the same, up a little bit in our commercial core again we’re focused on the parts and fluids and that’s about the same. It’s the accessories and the complimentary that’s where it’s been a struggle. The fourth quarter is where we had all of the big clearance sales last year and that was a big part of our holiday promotion.

While GPS has done well its still tough for us and its down well into the teens in terms of accessories and complimentary product.

Ray Arthur

You’ll see that continue through the quarter pretty much because of the clearance sales that we had last year. This is one area where I’m really looking forward to next year to get all this noise behind us.

[Alan Hosmenal] - BB&T Capital Markets

Looking at some of the operating execution initiatives that you’ve announced for next year how would you rate improved scheduling staffing versus more of a focus on training, improving stock rates in the development of selling skill in relative importance as to what you’ll be putting most of your emphasis on?

Mike Odell

I listed those four because they’re all highly related. You have the right people with the right expertise and the right product doing the right things. All four of those it’s the people, the product, and the expertise and enthusiasm of the associates. I don’t push one over the other I want them all. You’ve got to have the right people, the right place, with the right product doing the right things. If you miss on any of them you short yourself in terms of your results.

[Alan Hosmenal] - BB&T Capital Markets

You mentioned a central build out of the hub and spoke model possibly adding between 30 and 40 stores per year.

Mike Odell

20 to 40 was the target.

[Alan Hosmenal] - BB&T Capital Markets

Is there a particular lean to either your East Coast or West Coast markets and also do you feel like the core operations at Pep Boys are at a point where expansion makes the most sense or simply the opportunity provided through consolidation to build in cities too appealing to pass up in this type of marketplace?

Mike Odell

Its both, our focus for this year was to get what we considered to be an operationally sound state, meaning we’ve got our act together. Once you’ve got your act together then it’s about being operationally excellent across all of our stores. I feel like we will be in this year an operationally sound state so we can focus on the consistent execution across all of our stores.

When you look at the spokes, so much of our business you’ve got the infrastructure, you’ve got the systems, you’ve got the headquarters, you’ve got the inventory and when you look at the investment it takes to buy a spoke and the EBITDA that you generate it really is attractive because all the stores we have they contribute to variable profit. The more units you have contributing to that variable profit to overcome the overhead of the market, etc.

I’ve been through everything here at Pep Boys over and over and over again and the fact of the matter is that we just do not have the market density that we need in most of our markets. In terms of the bias, the bias is definitely in the market obviously where we exist and the things that we’re currently looking at are more toward the Eastern part of the United States versus the Western part of the United States.

Operator

Your next question comes from Cid Wilson - Kevin Dann & Partners

Cid Wilson - Kevin Dann & Partners

Geographically speaking is this still primarily the West Coast and the Southeast where you’ve seeing some of the weakness as well as like Ohio and the Midwest, can you give us some geographical?

Mike Odell

If you go to the US Department of Transportation and you look at the miles driven data that they have by State, basically you see that it’s down in every single state. It’s a little worse when you get to the West Coast or you get to California, Nevada, Arizona and when you get down to Florida. It’s a little worse but miles driven is down in all 50 states and the District of Columbia. It’s a little bit worse in the Florida, California, Nevada but nobody’s really been spared.

Cid Wilson - Kevin Dann & Partners

Can you also give us some idea in terms of comps on your service side based on services whether it’s between brakes, alignments and some of those key categories?

Mike Odell

Maintenance services has been up for us. Repair services has been down. Again, tires was strong earlier in the year and then it was rough during the quarter. Brakes is the one business where I felt like we were not executing as well on brakes during the third quarter as we could have or should have. Brakes is actually improved for us into the fourth quarter. Alignments basically moves with tires, as tires has hurt the alignments has hurt a little bit as well.

Cid Wilson - Kevin Dann & Partners

Can you maybe touch a little bit more about the thinking process related to the change in pay structure and as you mentioned the correlation between the change in pay structure and the possible improvement in those sales?

Mike Odell

I’ll give you one particular example that just is to me the most clear and that is our stores are open almost 80 hours a week with the manager working 50 hours a week it means that they’re there a little more than half the time. You’ve got these times in your store where the person is interacting with the customers is the service advisor. It’s 6:00 at night and you’ve got a guy on the counter who gets paid by the hour and you wonder how bad does he want that business, how bad does he want that customer to come on in which means more work etc.

When they’re on an incentive based program they want every single customer whether they’re coming in the door, they’re out in the parking lot or they’re calling on the phone, they’re hungry to take care of that customer because how well they take care of that customer is part of how they get paid. Now we’re all in the same game whether it’s the technician or the service advisor, the manager, the support team, everybody’s on the same playing field, the same game in terms of wanting to get that customer in and drive that business.

It also allows us to pay our best service advisors more money. Everybody always wants an increase and this way instead of everybody waiting for a merit increase they’re in control in terms of whether or not they make more money or less money. It’s a little painful when you first do it because you end up when you make the change you end up changing some of your people as well because some people aren’t necessarily comfortable with that environment if they were just there to collect the hourly check.

Folks who really care about the customer, care about the business like the plan because it rewards them for their performance.

Operator

Your next question comes from Greg Malik – Morgan Stanley

Greg Malik – Morgan Stanley

When target sales were weak during the quarter was it more units or mix?

Mike Odell

It was worse in the big truck tires but it was across the board. Its relative weakness on trucks but it was everywhere.

Greg Malik – Morgan Stanley

Have you seen private label really expand in this environment or has that stayed an important part and steady?

Mike Odell

We’re mostly private label in terms of what we sell.

Greg Malik – Morgan Stanley

If you looked at even say the Cooper versus some of your house brands is there any noticeable change there or no?

Mike Odell

The difference a lot of it is really fit versus a customer choice. Where we have Cooper Branded Tires it’s because we don’t necessarily have a private label tire. That’s actually why we think tires is a good business for us because of the fact that we have the private label, because we have a very good price competitive we’ve got a lower price than our competitors out there.

I can’t really speak in terms of our business in terms of a trade down within the tires because quite frankly even within our private labels we’ve got the Cornell, the Futura and the Definity. We haven’t necessarily seen customer trade down within ours from Definity down into the Futura and Cornell a little bit but not dramatically.

Greg Malik – Morgan Stanley

Discussing the strategy you guys talked about adding the service spokes and overcoming that key weakness of lack of scale. How do you determine what’s the right price per bay or what’s the right amount of bays per market? Help us think that through strategically.

Mike Odell

The prototype is going to be anywhere from four to eight bays, five to six bays would be a good number in terms of being able to have enough bays to drive the business but not building a shop that has too much infrastructure in itself. In terms of locations for those if you think about service has a three mile trade area typically it could be less than that, it could be up to five miles it could be down to two miles. Basically think about our service centers and think about the three to five mile trade area around each of those super centers.

They’re able to all leverage the same marketing assets and able to get their parts through a commercial delivery truck within a short timeframe.

Ray Arthur

We model the economics in what we’ll pay based on what our mid performance store with that same type of model produces n terms of results.

Greg Malik – Morgan Stanley

The power of the density is going to be more bays on the fixed cost of being in the market?

Mike Odell

The truck is still coming, a lot of the inventories are already in that super center, the truck, in terms of replenishment is coming and they’re not always full. The marketing is already in that marketplace and so its revenue less the cost of the people and the cost of the facility.

Ray Arthur

We have the training systems, we have the IT systems, and we have the governance structure.

Greg Malik – Morgan Stanley

Is there a market where you think you have the scale to use as a benchmark?

Mike Odell

Our most dense markets are Philadelphia and the LA area and I still don’t consider us saturated in either of those markets. In fact, some of the spokes that we’re looking at are right here in Philadelphia our most dense market.

Greg Malik – Morgan Stanley

You mentioned the debt down from a year ago and there have been a lot of changes back and forth with the sale and lease back and some store rationalization. If you were to make a claim where are we now in terms of rent on an ongoing basis to offset the lower debt?

Ray Arthur

I’m not sure I understand.

Greg Malik – Morgan Stanley

What is annualized rent running now given the sale and lease back?

Ray Arthur

About $5 million more than where we were before. It’s offset by lower depreciation and the amortization of the gains so net net there’s really very little impact.

Operator

Your next question comes from Emily Shank – Barclays Capital

Emily Shank – Barclays Capital

Could you please give us just a quick update on where you stand around the sale lease back program are you 100% done now?

Ray Arthur

We’re done to the extent that we aren’t going to go out and do anything large at this point in time. There is a possibility that is we were approached with the appropriate value of the assets at attractive cap rates that we could potentially do something. I wouldn’t say it’s a strategic imperative that we go forward and do that. I think we really are very, very happy to have gotten commitments for our $300 million revolver and are going to close that shortly. That’s certainly a major source of liquidity; it’s a five year deal. I don’t think we necessarily need to do sale lease backs but opportunistically we could.

Emily Shank – Barclays Capital

Can you give us a sense of do you see sale lease backs getting done in your market; do you have the ability to do it if you wanted to do so?

Ray Arthur

We continue to be approached, they’re smaller deals, they’re $10, $20, $30 million they’re not the $100, and $200 million deals that we might have seen before. Yes, that opportunity still exists or least we’re still being approached.

Emily Shank – Barclays Capital

What have the cost structure of those done even a year over year basis?

Ray Arthur

You mean the terms of our previous sale lease backs?

Emily Shank – Barclays Capital

Yes, for instance the deals that you are being approached on…

Ray Arthur

The smaller ones are more attractive than the ones that we’ve done previously. The ones we’ve done previously have cap rates that are in the mid 7’s. A lot of those big deals I’ve seen those properties being re-marketed at different cap rates so what we’re getting approached now with have actually been at least up until last month I would say with more attractive cap rates.

Operator

Your next question comes from William Keller - FTN Midwest

William Keller - FTN Midwest

Just to make sure I heard this correctly, did you say there was an impairment charge this quarter, the third quarter this year or was it third quarter ’07?

Ray Arthur

Third quarter ’07.

William Keller - FTN Midwest

Sorry to hear about the end of the car offer deal can you give an update on some of the other different things you were looking at for the front end of the store, the rental desk and things?

Ray Arthur

We continue to look at those where appropriate. We’re looking at the productivity of our retail space and where appropriate we’re pursuing continued car rental opportunities in addition we’re doing a continual evaluation of that space where we have space that really isn’t productive for us. We will explore subletting excess space. We don’t have excess space in all of our stores but in some of our stores we do. That’s an ongoing initiative that will continue throughout the year.

Mike Odell

In terms of strategic initiatives service spokes is where our opportunity is and so while we’ve considered a lot of opportunities over the past year but it keeps coming back service spokes is the one that’s going to be the game changer for us. I do have Scott Webb our SVP of Merchandising and Marketing here with us maybe if you want to give folks a little highlight of some of the product that we’ve introduced and will be introducing.

Scott Webb

We expanded our assortment on GPS over the last couple of months that was very successful for us. We’ve gotten into a couple new fashion type categories and we actually are breaking into a hobby based category the remote control small vehicles is a great father and son sort of purchase. It’s a category that when you think about it’s not necessarily a category for the toy business or for the department business. It’s a fragmented business; we think there are legs there.

We also are working on a performance shop initiative that won’t necessarily touch all stores but it could touch many stores and be more of a destination shop within the local marketplace.

Mike Odell

The hobby thing is actually pretty cool because like he said its these remote control cars but they have like 80 different replacement parts. It’s like the father and son working on a DIY project instead of working on a big old car they’re working on their little hobby car. What do they retail about $189?

Scott Webb

They start off at $189.

William Keller - FTN Midwest

Switching to tires with the weakness you saw in the third quarter is that still an area where you’re expanding in the front end of the stores?

Mike Odell

Yes, you should see tires every time you walk into a store. Tires, it’s our biggest business and we are going to win in tires.

Ray Arthur

People are going to need tires, it’s just a matter of getting them to wear out.

William Keller - FTN Midwest

I noticed crude expenses was down I believe year over year in the third quarter is that just a timing thing or is there any sort of more material change?

Sanjay Sood

Crude expenses are down primarily because of a decline in our insurance gross payables for workers comp liability. As you know we have various line items that we also have a re-insurance receivable with respect to the gross liabilities so you see a little bit of that offset in pre-paid expenses and other current assets.

Ray Arthur

We have a self insurance subsidiary captive and basically we’ve had better experience so our net liabilities are going down.

Operator

Your next question comes from Jack Baylis – Midland Research

Jack Baylis – Midland Research

Regarding the change in the structure of compensation in the service area what would be the break down between the base pay and the incentive pay as a percentage of the sold compensation?

Mike Odell

60/40. 60 base and 40 incentive, that’s an average.

Jack Baylis – Midland Research

In the retail area is that still hourly pay?

Mike Odell

Yes, the store is such that you’ve got the folks that are either at the parts counter or on the sales floor that are helping customers then you’ve got the registers. You don’t have folks ringing their own sales like you do in service. I’d love to get it there on the retail side as well but it’s not practical given the store layouts and the way they operate.

Jack Baylis – Midland Research

The store manager is responsible for the entire store both areas, how is that?

Mike Odell

We still have within our store; the change that we made was that our divisional vice presidents and area directors are now responsible for everything relative to the store. Within a store you have a service manager and you have a retail store manager. The retail store manager has the parts, the sales floor the checkout and the inventory. The service manager drives the productivity of the service business.

Jack Baylis – Midland Research

Those two people report to an area manager?

Mike Odell

Area director.

Jack Baylis – Midland Research

The area director is responsible for nine stores or so?

Mike Odell

Correct. Previously they were an average of 15 up to as high as 19 which make it really hard to make sure that they were in their stores every two weeks minimum.

Jack Baylis – Midland Research

For the service manager and the retail manager what is their compensation structure?

Mike Odell

Its salary plus quarterly bonus.

Jack Baylis – Midland Research

That is based on?

Mike Odell

Profitability of their store.

Jack Baylis – Midland Research

Of their sector you mean?

Mike Odell

It’s based on the profitability of the total store. The P&L is all one they have to work to get. It encourages them to work as a team.

Operator

Your next question comes from Peter Benedict – Wachovia

Peter Benedict – Wachovia

Could you comment on the pace of closing among the independents and the dealers that you’re seeing? I think you brought it up in your prepared comments. Maybe how it compares to past quarters and is there any region or geographic area where it’s more pronounced today than it has been.

Mike Odell

I don’t have exact data in terms of the geographic. It tends to be the smaller dealers, not necessarily the big new ones but the smaller ones that you see. When you drive down the street you just see a new place closed every day. I think touch and go national. I haven’t seen any data that says how many closures there is by state.

In terms of the trend I honestly don’t remember, there’s always been a few closing here or there but I don’t remember closings anywhere near like we’re seeing right now.

Peter Benedict – Wachovia

When did that really start to pick up is that the last couple of months or since the summer.

Mike Odell

Yes, it’s recent. Where we hear about it, obviously some of it you see driving down the street but a lot of it you hear about from the technicians that we have in our shop because they’re friends are technicians in other shops and we hear about it because those technicians are coming to us looking for jobs.

Peter Benedict – Wachovia

Is it also evident in the parts stores as well? It sounds like you’re talking more about some of the service.

Mike Odell

Yes, it’s really service that we see that. Parts is already less fragmented much more consolidated business obviously.

Operator

At this time we have no time for further questions. I’d now like to turn the conference back to management.

Mike Odell

Thank you for your time today and thank you for your questions. As I said in the comments and in our discussion the third quarter has been a challenge but we’re really excited about our prospects. We do know that this in environment the fact that Pep Boys does everything for less the opportunities we see with our service folks it’s been tough but we’re excited about the future. Thanks and we’ll talk to you guys next quarter.

Operator

This concludes today’s teleconference and you may disconnect your lines at this time. Thank you for your participation.

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