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THE PEP BOYS – MANNY, MOE & JACK 3111 West Allegheny Avenue

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THE PEP BOYS – MANNY, MOE & JACK 3111 West Allegheny Avenue THE PEP BOYS – MANNY, MOE & JACK 3111 West Allegheny Avenue Philadelphia, PA 19132 ______________ Letter To Our Shareholders ______________ To Our Shareholders: The year 2006 was a time of change for Pep Boys. As you know, Pep Boys ended the year with strong results and great momentum but began the year with disappointing comparable sales, particularly on the retail side of the business. Despite an improvement in operating profit in the first quarter and gradually improving service center revenues, the company’s overall lack of significant financial performance since 2004 led to a leadership change and Board reconstitution last summer. Non-executive Chairman of the Board Bill Leonard took the helm as interim CEO in July, and he and his management team have done an outstanding job getting Pep Boys back on track and restoring the company’s profitability by year end. As I recap the highlights of the company’s 2006 performance, I want to take this opportunity to thank Bill for his interim leadership that was the catalyst for this traction and I look forward to partnering with Bill, the Board of Directors, and all of our associates to build on this momentum in the months ahead. It is important for you to know that I am extremely proud and excited to lead Pep Boys. As you may know, I have more than 25 years of experience in the automotive industry, including the operation of multi-unit service centers. I spent the last ten years at Sonic Automotive, Inc., a Fortune 300 company and the third largest auto retailer in the United States. Over 50% of Sonic’s strong profits were derived directly from the service and parts business. I believe I can leverage my experience to bring many proven best practices to the Pep Boys’ retailing and service model. Reviewing our 2006 performance, I can report with confidence that Pep Boys’ operating results are steadily improving, but we still have many challenges ahead. To the company’s credit, we are blessed with a great brand. The Pep Boys – Manny, Moe and Jack have such a proud 86-year heritage; however, I believe that we are not leveraging our brand to its highest return. I believe we can reinvigorate that brand equity and leverage it to a much higher level in the future. I will look to our leadership team and our 19,000 associates, who collectively have hundreds and hundreds of years of legacy experience, to help us lead the renaissance of this great brand. Opportunities in service remain significant and my first priority is to focus on rebuilding the performance of our service center operations. The service and parts business is a great business – a highly profitable business. It is the backbone of Pep Boys’ business model and should be a differentiating competitive advantage for our company. Of course, tires also remain a key entry point for our service business, as our research indicates that 60% of tire customers are also service customers. Another area of growth for our company is maximizing the amount of business we do with each of our customers on both sides of the house. We plan to focus additional attention on customer satisfaction and customer relationship management driven retention processes to maximize the synergy of our complementary businesses. Looking at specific results in 2006, our service team stabilized our service center operations in the first quarter, and we reported a substantial sequential improvement in service center sales that began a few quarters earlier. Service results in the second quarter were flat – primarily because it was a time of transition for the company. However, service center operations improved profitability in the third and fourth quarters. In the fourth quarter in particular, we focused on driving service, achieving a 2% top line growth. We also continued to add flat rater technicians to drive service revenues, to build capacity and to grow our business for the future. On the retail side of the house, we continued to make progress on retail margins, particularly in the second half of the year, despite negative comps in retail. We primarily achieved this by reducing our discount offers, better sourcing, and improved operating efficiency. Turning to the balance sheet, we improved our use of working capital beginning in the first quarter that resulted in more efficient inventory levels throughout the year. By the second quarter, our cash flow generation was strong, and it continued to strengthen in the second half of the year. We repaid over $60 million in indebtedness and generated over $90 million in net cash provided from operating activities. By the end of the year, we reinforced the balance sheet through reduced capital spending, careful working capital management and an important refinancing that moved our next significant funded debt maturity to 2013. For Pep Boys, the fourth quarter represented a strong finish to the year and our biggest profit since 2004. The quarter speaks well of our operating improvements, as operating profits were up $33.8 million. We improved our operating margins through reduced discounting, improved labor sales and reduced operating costs. We also instituted operations reviews in the field to maximize efficiencies and implement best operational practices, which will continue in 2007. As we move ahead, we will strive to achieve positive comparable store sales in our service center operations, make continued progress on our retail margins, and continue to reduce our cost structure to help support overall results. The year’s tides have resulted in a strong Q4 and a solid platform for positive change and progress. In the quarters and years ahead, I expect to bring the company to new levels of prosperity, and I am committed to driving performance for our shareholders by returning to higher levels of profitability and customer focus. Throughout my career I have used a proven formula for success: Associate Satisfaction + Customer Satisfaction = Shareholder Satisfaction. I intend to apply this simple formula to Pep Boys’ operations as people will be the key to our future success. While my first priority as Pep Boys’ new CEO will be to focus on our core business through improved tactical execution, over the longer term I look forward to collaborating with the senior leadership team and Board of Directors on a long term strategic plan to grow the business. I want you to know that I did not come to Pep Boys to lose, I did not come here to tie, to break even or to show incremental improvement; I came here to win and to win big. I am confident that together we can make Pep Boys an industry leader and admired brand once again. Jeffrey C. Rachor President and Chief Executive Officer THE PEP BOYS − MANNY, MOE & JACK 3111 West Allegheny Avenue Philadelphia, Pennsylvania 19132 ________________ NOTICE OF ANNUAL MEETING OF SHAREHOLDERS ________________ To our Shareholders: It is our pleasure to invite you to Pep Boys 2007 Annual Meeting. This year’s meeting will be held on Thursday, June 14, 2007, at the Crowne Plaza Hotel Valley Forge, 260 Mall Boulevard, King of Prussia, Pennsylvania. The meeting will begin promptly at 9:00 a.m. At the meeting, shareholders will act on the following matters: (Item 1) The election of the full Board of Directors for a one-year term. (Item 2) The ratification of the appointment of our independent registered public accounting firm. (Item 3) A shareholder proposal regarding our Shareholder Rights Plan, if presented by its proponent. The shareholders will also consider any other business that may properly come before the meeting. The attached proxy statement provides further information about the matters to be acted on at the meeting. All shareholders of record at the close of business on Friday, April 13, 2007 are entitled to vote at the meeting and any postponements or adjournments. Whether or not you plan to attend the meeting, please make sure that your shares are represented by signing and returning the enclosed proxy card. Brian D. Zuckerman Secretary May 2, 2007 THE PEP BOYS − MANNY, MOE & JACK 3111 West Allegheny Avenue Philadelphia, Pennsylvania 19132 ____________ PROXY STATEMENT ____________ TABLE OF CONTENTS GENERAL INFORMATION ...........................................................................................................................................1 SHARE OWNERSHIP .....................................................................................................................................................3 (ITEM 1) ELECTION OF DIRECTORS .........................................................................................................................6 What is the makeup of the Board of Directors? .............................................................................................................6 Nominees for Election ...................................................................................................................................................6 Corporate Governance ...................................................................................................................................................9 Meetings and Committees of the Board of Directors .....................................................................................................9 Can a shareholder nominate a candidate for director? .................................................................................................10 How are candidates identified and evaluated? .............................................................................................................11
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