TEXT-S&P rates Pep Boys - Manny, Moe & Jack

Overview
-- U.S. automotive parts and service retailer Pep Boys is refinancing its
existing debt to extend debt maturities and to reduce borrowing costs.
-- We are assigning a 'BB-' issue-level rating to the company's proposed
six-year $200 million term loan.
-- We are also affirming our 'B' corporate credit rating on the company.
The outlook is negative.
-- The negative outlook reflects our view that financial ratios may
weaken to levels indicative of a "highly leveraged" financial risk profile,
either through continuing weak financial results over the next two quarters or
through more aggressive financial policies.

Rating Action
On Sept. 19, 2012, Standard & Poor's Ratings Services affirmed its 'B'
corporate credit rating on Philadelphia-based Pep Boys - Manny, Moe & Jack.
The outlook is negative.

In addition, we assigned our 'BB-' issue-level rating to the company's
proposed six-year $200 million term loan. The recovery rating is '1', which
indicates our expectation of very high (90% to 100%) recovery for creditors in
the event of a payment default or bankruptcy.

We will withdraw our existing issue-level ratings upon confirmation of
repayment of existing debt with proposed term loan.

The issue-level rating on Pep Boys' existing senior secured term loan due 2013
is 'BB-' with a '1' recovery rating, indicating our expectation for very high
recovery (90%-100%) for lenders in the event of a payment default. The
issue-level rating on Pep Boys' $200 million senior subordinated notes due
2014 is 'B' with a '3' recovery rating, indicating our expectation for
meaningful recovery (50% to 70%) for noteholders in the event of a payment
default. We will withdraw these ratings on completion of refinancing
transaction.

Rationale
The ratings on Pep Boys reflect Standard & Poor's analysis that the company's
business risk profile remains "vulnerable" and its financial risk profile
remains "aggressive."

Our business risk assessment reflects the company's weak competitive position,
principally because of its competitively disadvantaged store base. The company
may be able to improve its competitive position through its service and tire
center (STC) expansion plan, which would reduce average store size and would
increase service- and maintenance-related revenue. However, weaker industry
conditions over a prolonged period could meaningfully disrupt the STC
expansion plan.

Our financial risk assessment incorporates our expectation for financial
policies to remain aggressive and our forecast for key financial ratios to
remain indicative of an aggressive financial risk profile through fiscal
year-end 2013. Specifically, we forecast operating lease-adjusted debt to
EBITDA of between 4.7x and 4.8x, funds from operations (FFO) to total debt of
between 18% and 19%, and EBITDA coverage of interest of between 2.4x and 3.0x
through fiscal year-end 2013. We note these ratios would worsen to levels
indicative of a "highly leveraged" financial risk profile if results only
slightly miss our current forecast, and this is the principal reason for the
outlook remaining negative.

Standard & Poor's economists believe the risk of another U.S. recession during
the next 12 months remains at 25%. We expect GDP growth of just 2.1% this year
and only 1.8% in 2013, consumer spending growth of between 1.9% and 2.2% per
year through 2013, the unemployment rate remaining at or above 8% through late
2013, and crude oil (WTI) finishing 2012 at $92 per barrel and finishing 2013
at $90 per barrel. (See "U.S. Economic Forecast: Keeping The Ball In Play,"
published Aug. 17, 2012, on RatingsDirect.)

Considering these economic forecast items, our forecast for the company's
operating performance is as follows:
-- In fiscal 2012, we forecast revenue growth of less than 2.5%,
reflecting high-single-digit service center growth and negative retail growth.
In fiscal 2013, we forecast revenue growth of about 1.5%, driven by
mid-single-digit service center growth and continued negative retail growth.
-- In fiscal 2012, we forecast gross margin declines about 50 basis
points (bps) to 24.2%. Gross margin falls as service center revenue mix
increases and as it takes time for new STCs to reach full potential. In fiscal
2013, we forecast gross margin decreases about 10 bps to 24.1%. Gross margin
stabilizes as more STCs reach full potential.
-- In fiscal 2012, we forecast selling, general, and administrative
(SG&A) grows at a faster rate than revenue as the company invests in its STC
expansion plan and additional initiatives. In fiscal 2013, SG&A grows at a
lower rate than revenue as the company begins to benefit from some of the
above-mentioned initiatives.
-- We forecast capital expenditures remain near $65 million per year in
both fiscal 2012 and fiscal 2013 as the company continues its STC expansion
plan. This is below our forecast earlier this year of $80 million, which
reflects the company's recent plan to slow the pace of new store openings. We
estimate maintenance capital expenditures are between $40 million and $50
million per year. Our annual maintenance capital expenditure estimate is based
on results prior to the STC expansion plan, which started during fiscal 2009.
-- We forecast free cash flow of about $70 million in fiscal 2012. We
believe the company will use free cash flow for either incremental store
expansion beyond our forecast assumptions, dividends, or share repurchases.
The STC expansion plan may include acquisitions, similar to the Big 10 Tires
acquisition in May 2011.
-- We forecast further debt reduction is limited to mandatory
amortization, which is 1% per year under the proposed $200 million term loan.
A 50% excess cash flow sweep exists when covenant-calculated lease-adjusted
leverage is equal to or greater than 5.5x.

Second-quarter total revenue of $525 million was nearly $13 million below our
forecast, largely because service center revenue of $274 million, or 5%
growth, was below our estimate of $284 million, or 9% growth. Customer counts
for service centers were up nearly 8%, but average ticket was lower due to
less complex work being performed. We still believe service center revenue
growth can reach the high-single-digit percent area for the rest of 2012, but
this partly depends on the company's ability to generate more complex
service-related revenue, which remains unproven. Retail revenue of $251
million, or down nearly 4%, was in line with our expectations, and we continue
to forecast negative growth from retail for the remainder of 2012.

Pep Boys has a weak competitive position, principally because of its
competitively disadvantaged, though improving, store base. The company has
meaningfully lower sales and profit per square foot relative to automotive
parts retailer peers, given its excessive store sizes. The company's STC
expansion plan discussed above has the potential to address this weakness.
However, we believe it will take considerable time before the full benefits of
the plan are achieved. Today, STCs account for about 23% of total stores,
slightly higher than the prior year. We forecast STCs will reach about 25% of
total stores at fiscal year-end 2012 and about 30% of total stores at fiscal
year-end 2013. The STC expansion plan performance and potential benefits will
be clearer toward the end of fiscal 2012 and into fiscal 2013 because it takes
the average STC about three years to reach maturity. In the meantime, we
believe the company's business risk profile will remain vulnerable.

Liquidity
We view the company's liquidity as "adequate." We expect cash sources should
exceed its cash uses over the next 24 months. Our assessment of the company's
liquidity profile includes the following expectations, assumptions, and
factors:
-- We forecast cash sources will exceed cash uses by more than 1.2x over
the next 12 months, and will remain positive over the next 24 months.
-- We also forecast positive net sources over the next 12 months, even if
EBITDA declines by 15%.
-- The company is not subject to financial maintenance covenants.
According to the proposed term loan credit agreement, a minimum EBITDA
covenant applies if liquidity drops below $50 million.
-- The company has a favorable debt maturity profile, pro forma for the
refinancing transaction.
-- We believe the company has good banking relationships and a
satisfactory standing in the capital markets.

As of July 28, 2012, we calculate total liquidity was $325.9 million, which
included revolver availability of about $175 million and cash of about $150
million. Pro forma for the proposed refinancing transaction, we calculate the
company will have total liquidity of about $160 million. Pep Boys' average
total liquidity over the past eight quarters is about $270 million. Liquidity
falls for two reasons: The company is using a portion of its existing cash as
part of the refinancing transaction and revolver availability is going to be
reduced for cushion against the minimum EBITDA covenant under the new term
loan.

Recovery analysis
For the complete recovery analysis, please see the recovery report on Pep
Boys, to be published on RatingsDirect following this report.

Outlook
The outlook is negative, which reflects our analysis that financial ratios may
weaken to levels indicative of a "highly leveraged" financial risk profile,
either through continued weak financial results over the next two quarters or
through more aggressive financial policies.

We would likely lower the ratings if performance does not improve over the
next two quarters, which would likely result in financial ratios worsening to
levels clearly indicative of a highly leveraged financial risk profile,
including adjusted leverage above 5.5x. Based on second-quarter fiscal 2012
results and pro forma for the proposed refinancing, an EBITDA decline of
nearly 15% would be necessary for adjusted leverage to exceed 5.5x.

We could revise the outlook to stable if it becomes apparent that financial
ratios can remain clearly within levels indicative of an aggressive financial
risk profile, including adjusted leverage below 4.5x. Based on second-quarter
fiscal 2012 results and pro forma for the proposed refinancing, EBITDA growth
of nearly 10% is necessary for adjusted leverage to decline below 4.5x.

Related Criteria and Research
-- Corporate Ratings Criteria 2008, published April 15, 2008
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Methodology and Assumptions: Liquidity Descriptors for Global
Corporate Issuers, published September 28, 2011
-- Use of CreditWatch and Outlooks, published Sept. 14, 2009

Ratings List

Ratings Affirmed

Pep Boys-Manny, Moe & Jack
Corporate Credit Rating B/Negative/--

New Ratings

Pep Boys-Manny, Moe & Jack
Senior Secured
US$200 mil var/fixed-rate term bank BB-
ln due 2018
Recovery Rating 1

Ratings Affirmed; Recovery Ratings Unchanged

Pep Boys-Manny, Moe & Jack
Senior Secured BB-
Recovery Rating 1
Subordinated B
Recovery Rating 3