Prospect Capital Corporation
Q3 2008 Earnings Call Transcript

Published: 9 Dec 2008

[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

[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

[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.

[Operator:]

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

[[Alan Hosmenal]:]

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]:]

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]:]

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]:]

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]:]

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:]

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:]

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:]

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

[Operator:]

Your next question comes from Greg Malik – Morgan Stanley

[Greg Malik:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

Those two people report to an area manager?

[Mike Odell:]

Area director.

[Jack Baylis:]

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:]

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

[Mike Odell:]

Its salary plus quarterly bonus.

[Jack Baylis:]

That is based on?

[Mike Odell:]

Profitability of their store.

[Jack Baylis:]

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:]

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:]

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:]

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.