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The Pep Boys – Manny, Moe & Jack (PBY)

F3Q08 Earnings Call

December 9, 2008 8:30 am ET


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


[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



(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 For anyone on the webcast who does not have the financial statements, you can access them on our website at

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.

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