##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended May 5, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 1-14770
 
 PAYLESS SHOESOURCE, INC.
  Delaware
    
    43-1813160State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization
    
    Identification No.)3231 Southeast Sixth Avenue, Topeka, Kansas
    
    66607-2207(Address of principal executive offices)
    
    (Zip Code)
 (785) 233-5171
 þ o
  þ o o
 o þ




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##### 



PAYLESS SHOESOURCE, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED MAY 5, 2007
INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Statements of Earnings for the 13 Weeks Ended May 5, 2007 and April 29, 2006
    
    
    3Condensed Consolidated Balance Sheets as of May 5, 2007, April 29, 2006 and February 3, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the 13 Weeks Ended May 5, 2007 and April 29, 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 6. Exhibits
    
    
    35Signatures
    
    
    36Employment Agreement  with William E. May302 Certification of Chief Executive Officer302 Certification of Sr. VP, CFO and Treasurer906 Certification of Chief Executive Officer906 Certification of Sr. VP, CFO and Treasurer
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 (UNAUDITED)
  13 Weeks EndedMay 5,
    
    
    April 29,2007
    
    
    2006Net sales
    
    $
    728.6
    
    
    $
    694.5Cost of sales
    
    
    459.7
    
    
    
    438.7Gross margin
    
    
    268.9
    
    
    
    255.8Selling, general and administrative expenses
    
    
    209.9
    
    
    
    199.1Restructuring charges
    
    
    0.2
    
    
    
    Operating profit from continuing operations
    
    
    58.8
    
    
    
    56.7Interest expense
    
    
    4.8
    
    
    
    4.9Interest income
    
    
    (4.7
    )
    
    
    (4.8
    )Earnings from continuing operations before income taxes and minority interest
    
    
    58.7
    
    
    
    56.6Provision for income taxes
    
    
    18.8
    
    
    
    19.5Earnings from continuing operations before minority interest
    
    
    39.9
    
    
    
    37.1Minority interest, net of income taxes
    
    
    (0.9
    )
    
    
    (0.3
    )Net earnings from continuing operations
    
    
    39.0
    
    
    
    36.8Loss from discontinued operations, net of income taxes and minority interest
    
    
    (0.1
    )
    
    
    (0.8
    )Net earnings
    
    $
    38.9
    
    
    $
    36.0Basic earnings per share:Earnings from continuing operations
    
    $
    0.60
    
    
    $
    0.55Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )Basic earnings per share
    
    $
    0.60
    
    
    $
    0.54Diluted earnings per share:Earnings from continuing operations
    
    $
    0.59
    
    
    $
    0.54Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )Diluted earnings per share
    
    $
    0.59
    
    
    $
    0.53Basic Weighted Average Shares Outstanding
    
    
    64.7
    
    
    
    66.6Diluted Weighted Average Shares Outstanding
    
    
    66.0
    
    
    
    67.6
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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
  May 5,
    
    
    April 29,
    
    
    February 3,2007
    
    
    2006
    
    
    2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    321.4
    
    
    $
    333.0
    
    
    $
    371.4Short-term investments
    
    
    6.1
    
    
    
    75.1
    
    
    
    90.0Restricted cash
    
    
    2.0
    
    
    
    2.0
    
    
    
    2.0Inventories
    
    
    381.7
    
    
    
    377.7
    
    
    
    361.9Current deferred income taxes
    
    
    16.2
    
    
    
    19.3
    
    
    
    15.6Prepaid expenses
    
    
    44.2
    
    
    
    41.1
    
    
    
    46.5Other current assets
    
    
    19.2
    
    
    
    18.1
    
    
    
    18.1Current assets of discontinued operations
    
    
    1.1
    
    
    
    4.9
    
    
    
    1.1Total current assets
    
    
    791.9
    
    
    
    871.2
    
    
    
    906.6Property and Equipment:Land
    
    
    6.5
    
    
    
    7.7
    
    
    
    6.6Property, buildings and equipment
    
    
    1,284.8
    
    
    
    1,201.8
    
    
    
    1,245.1Accumulated depreciation and amortization
    
    
    (848.6
    )
    
    
    (821.9
    )
    
    
    (830.5
    )Property and equipment, net
    
    
    442.7
    
    
    
    387.6
    
    
    
    421.2Intangible assets, net
    
    
    95.9
    
    
    
    18.2
    
    
    
    39.6Deferred income taxes
    
    
    43.9
    
    
    
    28.9
    
    
    
    37.7Goodwill
    
    
    40.1
    
    
    
    5.9
    
    
    
    5.9Other assets
    
    
    18.2
    
    
    
    21.3
    
    
    
    16.4Noncurrent assets of discontinued operations
    
    
    
    
    
    
    1.3
    
    
    
    Total Assets
    
    $
    1,432.7
    
    
    $
    1,334.4
    
    
    $
    1,427.4LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    0.3
    
    
    $
    0.4
    
    
    $
    0.4Notes payable
    
    
    2.0
    
    
    
    2.0
    
    
    
    2.0Accounts payable
    
    
    157.5
    
    
    
    175.2
    
    
    
    185.6Accrued expenses
    
    
    156.0
    
    
    
    160.4
    
    
    
    190.2Current liabilities of discontinued operations
    
    
    2.1
    
    
    
    3.4
    
    
    
    2.1Total current liabilities
    
    
    317.9
    
    
    
    341.4
    
    
    
    380.3Long-term debt
    
    
    201.7
    
    
    
    202.9
    
    
    
    201.7Other liabilities
    
    
    175.3
    
    
    
    111.0
    
    
    
    132.6Minority interest
    
    
    12.6
    
    
    
    11.0
    
    
    
    12.7Commitments and contingencies (Note 15)Total shareowners equity
    
    
    725.2
    
    
    
    668.1
    
    
    
    700.1Total Liabilities and Shareowners Equity
    
    $
    1,432.7
    
    
    $
    1,334.4
    
    
    $
    1,427.4
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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
  13 Weeks EndedMay 5,
    
    
    April 29,2007
    
    
    2006Operating Activities:Net earnings
    
    $
    38.9
    
    
    $
    36.0Loss from discontinued operations, net of income taxes and minority interest
    
    
    0.1
    
    
    
    0.8Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    2.6
    
    
    
    1.7Depreciation and amortization
    
    
    24.3
    
    
    
    22.6Amortization of deferred financing costs
    
    
    0.2
    
    
    
    0.3Share-based compensation expense
    
    
    3.1
    
    
    
    2.8Deferred income taxes
    
    
    (1.3
    )
    
    
    0.4Minority interest, net of income taxes
    
    
    0.9
    
    
    
    0.3Income tax benefit from share-based compensation
    
    
    
    
    
    
    0.4Accretion of investments
    
    
    (0.5
    )
    
    
    (0.7
    )Changes in working capital:Inventories
    
    
    (18.6
    )
    
    
    (44.6
    )Prepaid expenses and other current assets
    
    
    7.4
    
    
    
    (0.6
    )Accounts payable
    
    
    (27.4
    )
    
    
    6.7Accrued expenses
    
    
    (14.2
    )
    
    
    (5.6
    )Other assets and liabilities, net
    
    
    5.9
    
    
    
    (0.2
    )Net cash used in discontinued operations
    
    
    (0.1
    )
    
    
    (3.6
    )Cash flow provided by operating activities
    
    
    21.3
    
    
    
    16.7Investing Activities:Capital expenditures
    
    
    (55.7
    )
    
    
    (23.0
    )Proceeds from sale of property and equipment
    
    
    0.1
    
    
    
    1.0Purchases of investments
    
    
    (6.1
    )
    
    
    (74.8
    )Sales and maturities of investments
    
    
    90.5
    
    
    
    59.4Acquisition of business, net of cash acquired
    
    
    (91.5
    )
    
    
    Cash flow used in investing activities
    
    
    (62.7
    )
    
    
    (37.4
    )Financing Activities:Repayment of debt
    
    
    (0.1
    )
    
    
    (1.4
    )Payment of deferred financing costs
    
    
    
    
    
    
    0.2Issuances of common stock
    
    
    3.2
    
    
    
    2.4Purchases of common stock
    
    
    (15.3
    )
    
    
    (26.6
    )Excess tax benefits from share-based compensation
    
    
    1.2
    
    
    
    Distributions to minority owners
    
    
    
    
    
    
    (0.6
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    1.0Cash flow used in financing activities
    
    
    (11.0
    )
    
    
    (25.0
    )Effect of exchange rate changes on cash
    
    
    2.4
    
    
    
    0.5Decrease in cash and cash equivalents
    
    
    (50.0
    )
    
    
    (45.2
    )Cash and cash equivalents, beginning of year
    
    
    371.4
    
    
    
    378.2Cash and cash equivalents, end of quarter
    
    $
    321.4
    
    
    $
    333.0Supplemental cash flow information:Interest paid
    
    $
    0.8
    
    
    $
    9.3Income taxes paid
    
    $
    1.7
    
    
    $
    6.3Non-cash investing and operating activities:Accrued capital additions
    
    $
    13.1
    
    
    $
    11.3
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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Note 1  Interim Results.
  Note 2  Acquisition.
   (dollars in millions)Current assets
    
    $
    5.0Goodwill
    
    
    34.2Trademarks(1)
    
    
    47.7Customer relationships(2)
    
    
    9.2Other assets(3)
    
    
    0.2Current liabilities
    
    
    (4.8
    )Total
    
    $
    91.5
 
 (1)
    
    Comprised of $40.6 million with indefinite lives and $7.1 million with finite
lives amortized over a weighted-average period of ten years.(2)
    
    Amortized over a weighted-average period of seven years.(3)
    
    Comprised of non-compete contracts, amortized over a weighted-average period of
three years. 6




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Note 3  Exit Costs.
   Accrual BalanceTotal Charges
    
    
    Cash
    
    
    as of(dollars in millions)
    
    to Date
    
    
    Payments
    
    
    May 5, 2007Employee severance costs
    
    $
    4.2
    
    
    $
    (0.2
    )
    
    $
    4.0Accelerated depreciation
    
    
    0.6Total charges
    
    $
    4.8
  Note 4  Short-Term Investments.
  May 5,
    
    
    April 29,
    
    
    February 3,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007Held-to-maturity securities:Commercial paper
    
    $
    6.1
    
    
    $
    74.4
    
    
    $
    90.0Certificates of deposit
    
    
    
    
    
    
    0.7
    
    
    
    Total held-to-maturity securities
    
    $
    6.1
    
    
    $
    75.1
    
    
    $
    90.0
  7




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Note 5  Discontinued Operations.
 Payless Domestic
  13 Weeks Ended(dollars in millions)
    
    May 5, 2007
    
    
    April 29, 2006Net sales
    
    $
    
    
    
    $
    Loss from discontinued operations before income taxes
    
    
    (0.2
    )
    
    
    (0.6
    )Benefit for income taxes
    
    
    (0.1
    )
    
    
    (0.2
    )Loss from discontinued operations, net of income taxes
    
    $
    (0.1
    )
    
    $
    (0.4
    )
  May 5,
    
    
    April 29,
    
    
    February 3,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007AssetsCurrent assets:Current deferred income taxes
    
    $
    0.8
    
    
    $
    1.1
    
    
    $
    0.8Other current assets
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Total current assets of discontinued operations
    
    $
    1.0
    
    
    $
    1.3
    
    
    $
    1.0LiabilitiesCurrent liabilities:Accrued expenses
    
    $
    2.1
    
    
    $
    2.8
    
    
    $
    2.1Total current liabilities of discontinued operations
    
    $
    2.1
    
    
    $
    2.8
    
    
    $
    2.1
 Payless International
  13 Weeks Ended(dollars in millions)
    
    May 5, 2007
    
    
    April 29, 2006Net sales
    
    $
    
    
    
    $
    0.3Loss from discontinued operations before income
taxes and minority interest
    
    
    
    
    
    
    (0.7
    )Minority interest
    
    
    
    
    
    
    0.3Loss from discontinued operations, net of income
taxes and minority interest
    
    $
    
    
    
    $
    (0.4
    )
 8




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May 5,
    
    
    April 29,
    
    
    February 3,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    0.1
    
    
    $
    2.9
    
    
    $
    0.1Inventories
    
    
    
    
    
    
    0.3
    
    
    
    Other current assets
    
    
    
    
    
    
    0.4
    
    
    
    Total current assets of discontinued operations
    
    $
    0.1
    
    
    $
    3.6
    
    
    $
    0.1Noncurrent assets:Property and equipment, net
    
    
    
    
    
    
    0.9
    
    
    
    Other assets
    
    
    
    
    
    
    0.4
    
    
    
    Total noncurrent assets of discontinued operations
    
    
    
    
    
    
    1.3
    
    
    
    Total assets of discontinued operations
    
    $
    0.1
    
    
    $
    4.9
    
    
    $
    0.1LiabilitiesCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    0.2
    
    
    $
    Accrued expenses
    
    
    
    
    
    
    0.4
    
    
    
    Total current liabilities of discontinued operations
    
    $
    
    
    
    $
    0.6
    
    
    $
    
 Note 6  Inventories.
  Note 7  Intangible Assets.
  May 5,
    
    
    April 29,
    
    
    February 3,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007Intangible assets subject to amortization:Favorable lease rights:Gross carrying amount
    
    $
    66.1
    
    
    $
    74.5
    
    
    $
    67.2Less: accumulated amortization
    
    
    (54.1
    )
    
    
    (57.5
    )
    
    
    (54.4
    )Carrying amount, end of period
    
    
    12.0
    
    
    
    17.0
    
    
    
    12.8Trademarks:Gross carrying amount
    
    
    7.1
    
    
    
    
    
    
    
    Less: accumulated amortization
    
    
    (0.1
    )
    
    
    
    
    
    
    Carrying amount, end of period
    
    
    7.0
    
    
    
    
    
    
    
    Other Intangible Assets:Gross carrying amount
    
    
    9.5
    
    
    
    
    
    
    
    0.1Less: accumulated amortization
    
    
    (0.1
    )
    
    
    
    
    
    
    Carrying amount, end of period
    
    
    9.4
    
    
    
    
    
    
    
    0.1Total carrying amount of intangible assets
subject to amortization
    
    
    28.4
    
    
    
    17.0
    
    
    
    12.9Indefinite-lived trademarks
    
    
    67.5
    
    
    
    1.2
    
    
    
    26.7Total intangible assets
    
    $
    95.9
    
    
    $
    18.2
    
    
    $
    39.6
 9




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Favorable lease rights
    
    A weighted-average period of 14 years.
Favorable lease rights are amortized over the
term of the underlying lease, including renewal
options in instances where failure to exercise
renewals would result in an economic penalty.Trademarks
    
    5 to 10 yearsOther intangible assets
    
    2 to 8 years
   Year
    
    AmountRemainder of 2007
    
    $
    4.42008
    
    
    4.62009
    
    
    4.22010
    
    
    3.32011
    
    
    3.0
 Note 8  Long-Term Debt.
   Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
 10




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Note 9  Pension Plan.
   13 Weeks EndedMay 5,
    
    
    April 29,(dollars in millions)
    
    2007
    
    
    2006Components of pension expense:Service cost
    
    $
    0.2
    
    
    $
    0.2Interest cost
    
    
    0.5
    
    
    
    0.4Amortization of prior service cost
    
    
    0.1
    
    
    
    0.1Amortization of actuarial loss
    
    
    0.1
    
    
    
    Total
    
    $
    0.9
    
    
    $
    0.7
 Note 10  Share-Based Compensation.
  Stock-settled SARs
   Nonvested Shares
  Cash-settled SARs
  Fair Value
  11




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13 Weeks EndedMay 5, 2007Risk-free interest rate
    
    
    4.5
    %Expected dividend yield
    
    
    
    %Expected appreciation vehicle life (in years)
    
    
    6Weighted-average expected volatility
    
    
    38
    %
 Risk-free interest rate
 Expected dividend yield
 Expected appreciation vehicle life
 Expected Volatility
 Compensation Expense
  13 Weeks Ended(dollars in millions, except per share amounts)
    
    May 5, 2007
    
    
    April 29, 2006Cost of sales
    
    $
    0.9
    
    
    $
    0.7Selling, general and administrative expenses
    
    
    2.2
    
    
    
    2.1Share-based compensation expense before income taxes
    
    
    3.1
    
    
    
    2.8Tax benefit
    
    
    (1.2
    )
    
    
    (1.0
    )Share-based compensation expense after income taxes
    
    $
    1.9
    
    
    $
    1.8Effect on:Basic earnings per share
    
    $
    0.03
    
    
    $
    0.03Diluted earnings per share
    
    $
    0.03
    
    
    $
    0.03
  Note 11  Income Taxes.
    12




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Note 12  Comprehensive Income.
  13 Weeks Ended(dollars in millions)
    
    May 5, 2007
    
    
    April 29, 2006Net earnings
    
    $
    38.9
    
    
    $
    36.0Foreign currency translation adjustments
    
    
    5.2
    
    
    
    1.5Total comprehensive income
    
    $
    44.1
    
    
    $
    37.5
  Note 13  Earnings Per Share.
  13 Weeks Ended(dollars in millions, except per share amounts; shares in thousands)
    
    May 5, 2007
    
    
    April 29, 2006Net earnings from continuing operations
    
    $
    39.0
    
    
    $
    36.8Weighted average shares outstanding  basic
    
    
    64,724
    
    
    
    66,594Net effect of dilutive stock options
    
    
    999
    
    
    
    890Net effect of dilutive SARs
    
    
    110
    
    
    
    Dilutive shares due to nonvested shares
    
    
    168
    
    
    
    97Weighted average shares outstanding  diluted
    
    
    66,001
    
    
    
    67,581Diluted earnings per share from continuing operations
    
    $
    0.59
    
    
    $
    0.54
  13




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Note 14  Segment Reporting.
  Payless
    
    Payless
    
    Payless(dollars in millions)
    
    Domestic
    
    International
    
    Consolidated13 weeks ended May 5, 2007Revenues from external customers
    
    $
    637.3
    
    
    $
    91.3
    
    
    $
    728.6Operating profit from continuing operations
    
    
    53.1
    
    
    
    5.7
    
    
    
    58.8Total assets
    
    
    1,219.5
    
    
    
    213.2
    
    
    
    1,432.713 weeks ended April 29, 2006Revenues from external customers
    
    $
    613.1
    
    
    $
    81.4
    
    
    $
    694.5Operating profit from continuing operations
    
    
    52.1
    
    
    
    4.6
    
    
    
    56.7Total assets
    
    
    1,169.9
    
    
    
    164.5
    
    
    
    1,334.4
  Note 15  Commitments and Contingencies.
  th th
 14




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##### Table of Contents



Note 16  Impact of Recently Issued Accounting Standards.
   Note 17  Related Party Transactions.
   May 5,
    
    April 29,
    
    February 3,(dollars in millions)
    
    2007
    
    2006
    
    2007Deposits
    
    $
    3.7
    
    
    $
    6.8
    
    
    $
    7.9Borrowings
    
    
    4.0
    
    
    
    5.1
    
    
    
    4.0
  13 Weeks EndedMay 5,
    
    April 29,(dollars in millions)
    
    2007
    
    2006Interest expense
    
    $
    0.1
    
    
    $
    0.1
 15




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##### Table of Contents



Note 18  Subsequent Events.
    Note 19  Subsidiary Guarantors of Senior Notes  Condensed Consolidating Financial
Information.
     16




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##### Table of Contents



13 Weeks Ended May 5, 2007Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    667.2
    
    
    $
    233.6
    
    
    $
    (172.2
    )
    
    $
    728.6Cost of sales
    
    
    
    
    
    
    438.9
    
    
    
    190.2
    
    
    
    (169.4
    )
    
    
    459.7Gross margin
    
    
    
    
    
    
    228.3
    
    
    
    43.4
    
    
    
    (2.8
    )
    
    
    268.9Selling, general and administrative expenses
    
    
    1.1
    
    
    
    182.1
    
    
    
    29.5
    
    
    
    (2.8
    )
    
    
    209.9Restructuring charges
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2Operating (loss) profit from continuing operations
    
    
    (1.1
    )
    
    
    46.0
    
    
    
    13.9
    
    
    
    
    
    
    
    58.8Interest expense
    
    
    9.5
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    (5.2
    )
    
    
    4.8Interest income
    
    
    
    
    
    
    (8.8
    )
    
    
    (1.1
    )
    
    
    5.2
    
    
    
    (4.7
    )Equity in earnings of subsidiaries
    
    
    (45.7
    )
    
    
    (11.8
    )
    
    
    
    
    
    
    57.5
    
    
    
    Earnings from continuing operations before income taxes and minority interest
    
    
    35.1
    
    
    
    66.4
    
    
    
    14.7
    
    
    
    (57.5
    )
    
    
    58.7(Benefit) provision for income taxes
    
    
    (3.8
    )
    
    
    20.6
    
    
    
    2.0
    
    
    
    
    
    
    
    18.8Earnings from continuing operations before minority interest
    
    
    38.9
    
    
    
    45.8
    
    
    
    12.7
    
    
    
    (57.5
    )
    
    
    39.9Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (0.9
    )
    
    
    
    
    
    
    (0.9
    )Net earnings from continuing operations
    
    
    38.9
    
    
    
    45.8
    
    
    
    11.8
    
    
    
    (57.5
    )
    
    
    39.0Loss from discontinued operations, net of income taxes and minority interest
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Net earnings
    
    $
    38.9
    
    
    $
    45.7
    
    
    $
    11.8
    
    
    $
    (57.5
    )
    
    $
    38.9
 13 Weeks Ended April 29, 2006Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    642.3
    
    
    $
    203.2
    
    
    $
    (151.0
    )
    
    $
    694.5Cost of sales
    
    
    
    
    
    
    418.0
    
    
    
    168.2
    
    
    
    (147.5
    )
    
    
    438.7Gross margin
    
    
    
    
    
    
    224.3
    
    
    
    35.0
    
    
    
    (3.5
    )
    
    
    255.8Selling, general and administrative expenses
    
    
    1.1
    
    
    
    176.8
    
    
    
    24.7
    
    
    
    (3.5
    )
    
    
    199.1Operating (loss) profit from continuing operations
    
    
    (1.1
    )
    
    
    47.5
    
    
    
    10.3
    
    
    
    
    
    
    
    56.7Interest expense
    
    
    8.9
    
    
    
    0.6
    
    
    
    
    
    
    
    (4.6
    )
    
    
    4.9Interest income
    
    
    
    
    
    
    (8.9
    )
    
    
    (0.5
    )
    
    
    4.6
    
    
    
    (4.8
    )Equity in earnings of subsidiaries
    
    
    (42.4
    )
    
    
    (7.1
    )
    
    
    
    
    
    
    49.5
    
    
    
    Earnings from continuing operations before income taxes and minority
interest
    
    
    32.4
    
    
    
    62.9
    
    
    
    10.8
    
    
    
    (49.5
    )
    
    
    56.6(Benefit) provision for income taxes
    
    
    (3.6
    )
    
    
    20.1
    
    
    
    3.0
    
    
    
    
    
    
    
    19.5Earnings from continuing operations before minority interest
    
    
    36.0
    
    
    
    42.8
    
    
    
    7.8
    
    
    
    (49.5
    )
    
    
    37.1Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.3
    )Net earnings from continuing operations
    
    
    36.0
    
    
    
    42.8
    
    
    
    7.5
    
    
    
    (49.5
    )
    
    
    36.8Loss from discontinued operations, net of income taxes and minority interest
    
    
    
    
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.8
    )Net earnings
    
    $
    36.0
    
    
    $
    42.4
    
    
    $
    7.1
    
    
    $
    (49.5
    )
    
    $
    36.0
 17




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##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    180.6
    
    
    $
    140.8
    
    
    $
    
    
    
    $
    321.4Short-term investments
    
    
    
    
    
    
    6.1
    
    
    
    
    
    
    
    
    
    
    
    6.1Restricted cash
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Inventories
    
    
    
    
    
    
    311.0
    
    
    
    77.9
    
    
    
    (7.2
    )
    
    
    381.7Current deferred income taxes
    
    
    
    
    
    
    13.8
    
    
    
    2.4
    
    
    
    
    
    
    
    16.2Prepaid expenses
    
    
    0.6
    
    
    
    37.1
    
    
    
    6.5
    
    
    
    
    
    
    
    44.2Other current assets
    
    
    46.1
    
    
    
    250.1
    
    
    
    66.9
    
    
    
    (343.9
    )
    
    
    19.2Current assets of discontinued operations
    
    
    
    
    
    
    1.0
    
    
    
    0.1
    
    
    
    
    
    
    
    1.1Total current assets
    
    
    46.7
    
    
    
    799.7
    
    
    
    296.6
    
    
    
    (351.1
    )
    
    
    791.9Property and Equipment:Land
    
    
    
    
    
    
    6.5
    
    
    
    
    
    
    
    
    
    
    
    6.5Property, buildings and equipment
    
    
    
    
    
    
    1,129.5
    
    
    
    155.3
    
    
    
    
    
    
    
    1,284.8Accumulated depreciation and amortization
    
    
    
    
    
    
    (753.2
    )
    
    
    (95.4
    )
    
    
    
    
    
    
    (848.6
    )Property and equipment, net
    
    
    
    
    
    
    382.8
    
    
    
    59.9
    
    
    
    
    
    
    
    442.7Intangible assets, net
    
    
    
    
    
    
    86.9
    
    
    
    9.0
    
    
    
    
    
    
    
    95.9Deferred income taxes
    
    
    
    
    
    
    37.6
    
    
    
    6.3
    
    
    
    
    
    
    
    43.9Goodwill
    
    
    
    
    
    
    34.7
    
    
    
    5.4
    
    
    
    
    
    
    
    40.1Other assets
    
    
    1,355.3
    
    
    
    500.1
    
    
    
    1.4
    
    
    
    (1,838.6
    )
    
    
    18.2Total Assets
    
    $
    1,402.0
    
    
    $
    1,841.8
    
    
    $
    378.6
    
    
    $
    (2,189.7
    )
    
    $
    1,432.7LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.3
    
    
    $
    
    
    
    $
    
    
    
    $
    0.3Notes payable
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Accounts payable
    
    
    
    
    
    
    116.3
    
    
    
    66.7
    
    
    
    (25.5
    )
    
    
    157.5Accrued expenses
    
    
    193.8
    
    
    
    224.1
    
    
    
    63.7
    
    
    
    (325.6
    )
    
    
    156.0Current liabilities of discontinued operations
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    
    
    
    
    2.1Total current liabilities
    
    
    193.8
    
    
    
    342.8
    
    
    
    132.4
    
    
    
    (351.1
    )
    
    
    317.9Long-term debt
    
    
    480.7
    
    
    
    
    
    
    
    14.1
    
    
    
    (293.1
    )
    
    
    201.7Other liabilities
    
    
    2.3
    
    
    
    153.4
    
    
    
    19.6
    
    
    
    
    
    
    
    175.3Minority interest
    
    
    
    
    
    
    
    
    
    
    12.6
    
    
    
    
    
    
    
    12.6Commitments and contingenciesTotal shareowners equity
    
    
    725.2
    
    
    
    1,345.6
    
    
    
    199.9
    
    
    
    (1,545.5
    )
    
    
    725.2Total Liabilities and Shareowners Equity
    
    $
    1,402.0
    
    
    $
    1,841.8
    
    
    $
    378.6
    
    
    $
    (2,189.7
    )
    
    $
    1,432.7
 18




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##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    264.2
    
    
    $
    68.8
    
    
    $
    
    
    
    $
    333.0Short-term investments
    
    
    
    
    
    
    74.4
    
    
    
    0.7
    
    
    
    
    
    
    
    75.1Restricted cash
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Inventories
    
    
    
    
    
    
    314.4
    
    
    
    70.9
    
    
    
    (7.6
    )
    
    
    377.7Current deferred income taxes
    
    
    
    
    
    
    19.1
    
    
    
    0.2
    
    
    
    
    
    
    
    19.3Prepaid expenses
    
    
    0.6
    
    
    
    35.2
    
    
    
    5.3
    
    
    
    
    
    
    
    41.1Other current assets
    
    
    31.7
    
    
    
    47.3
    
    
    
    41.2
    
    
    
    (102.1
    )
    
    
    18.1Current assets of discontinued operations
    
    
    
    
    
    
    1.3
    
    
    
    3.6
    
    
    
    
    
    
    
    4.9Total current assets
    
    
    32.3
    
    
    
    755.9
    
    
    
    192.7
    
    
    
    (109.7
    )
    
    
    871.2Property and Equipment:Land
    
    
    
    
    
    
    7.7
    
    
    
    
    
    
    
    
    
    
    
    7.7Property, buildings and equipment
    
    
    
    
    
    
    1,057.1
    
    
    
    144.7
    
    
    
    
    
    
    
    1,201.8Accumulated depreciation and amortization
    
    
    
    
    
    
    (738.7
    )
    
    
    (83.2
    )
    
    
    
    
    
    
    (821.9
    )Property and equipment, net
    
    
    
    
    
    
    326.1
    
    
    
    61.5
    
    
    
    
    
    
    
    387.6Intangible assets, net
    
    
    
    
    
    
    18.2
    
    
    
    
    
    
    
    
    
    
    
    18.2Deferred income taxes
    
    
    
    
    
    
    19.8
    
    
    
    9.1
    
    
    
    
    
    
    
    28.9Goodwill
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,202.4
    
    
    
    410.8
    
    
    
    1.3
    
    
    
    (1,593.2
    )
    
    
    21.3Noncurrent assets of discontinued operations
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    1.3Total Assets
    
    $
    1,234.7
    
    
    $
    1,536.7
    
    
    $
    265.9
    
    
    $
    (1,702.9
    )
    
    $
    1,334.4LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.4
    
    
    $
    
    
    
    $
    
    
    
    $
    0.4Notes payable
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Accounts payable
    
    
    
    
    
    
    161.1
    
    
    
    78.6
    
    
    
    (64.5
    )
    
    
    175.2Accrued expenses
    
    
    84.2
    
    
    
    106.0
    
    
    
    15.4
    
    
    
    (45.2
    )
    
    
    160.4Current liabilities of discontinued operations
    
    
    
    
    
    
    2.8
    
    
    
    0.6
    
    
    
    
    
    
    
    3.4Total current liabilities
    
    
    84.2
    
    
    
    270.3
    
    
    
    96.6
    
    
    
    (109.7
    )
    
    
    341.4Long-term debt
    
    
    480.5
    
    
    
    0.5
    
    
    
    5.1
    
    
    
    (283.2
    )
    
    
    202.9Other liabilities
    
    
    1.9
    
    
    
    95.7
    
    
    
    13.4
    
    
    
    
    
    
    
    111.0Minority interest
    
    
    
    
    
    
    
    
    
    
    11.0
    
    
    
    
    
    
    
    11.0Commitments and contingenciesTotal shareowners equity
    
    
    668.1
    
    
    
    1,170.2
    
    
    
    139.8
    
    
    
    (1,310.0
    )
    
    
    668.1Total Liabilities and Shareowners Equity
    
    $
    1,234.7
    
    
    $
    1,536.7
    
    
    $
    265.9
    
    
    $
    (1,702.9
    )
    
    $
    1,334.4
 19




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##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    239.4
    
    
    $
    132.0
    
    
    $
    
    
    
    $
    371.4Short-term investments
    
    
    
    
    
    
    90.0
    
    
    
    
    
    
    
    
    
    
    
    90.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Inventories
    
    
    
    
    
    
    282.8
    
    
    
    83.5
    
    
    
    (4.4
    )
    
    
    361.9Current deferred income taxes
    
    
    
    
    
    
    13.2
    
    
    
    2.4
    
    
    
    
    
    
    
    15.6Prepaid expenses
    
    
    0.6
    
    
    
    40.2
    
    
    
    5.7
    
    
    
    
    
    
    
    46.5Other current assets
    
    
    42.3
    
    
    
    15.3
    
    
    
    57.9
    
    
    
    (97.4
    )
    
    
    18.1Current assets of discontinued operations
    
    
    
    
    
    
    1.0
    
    
    
    0.1
    
    
    
    
    
    
    
    1.1Total current assets
    
    
    42.9
    
    
    
    681.9
    
    
    
    283.6
    
    
    
    (101.8
    )
    
    
    906.6Property and Equipment:Land
    
    
    
    
    
    
    6.6
    
    
    
    
    
    
    
    
    
    
    
    6.6Property, buildings and equipment
    
    
    
    
    
    
    1,096.7
    
    
    
    148.4
    
    
    
    
    
    
    
    1,245.1Accumulated depreciation and amortization
    
    
    
    
    
    
    (741.4
    )
    
    
    (89.1
    )
    
    
    
    
    
    
    (830.5
    )Property and equipment, net
    
    
    
    
    
    
    361.9
    
    
    
    59.3
    
    
    
    
    
    
    
    421.2Intangible assets, net
    
    
    
    
    
    
    39.6
    
    
    
    
    
    
    
    
    
    
    
    39.6Deferred income taxes
    
    
    
    
    
    
    31.3
    
    
    
    6.4
    
    
    
    
    
    
    
    37.7Goodwill
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,315.4
    
    
    
    460.2
    
    
    
    1.3
    
    
    
    (1,760.5
    )
    
    
    16.4Total Assets
    
    $
    1,358.3
    
    
    $
    1,580.8
    
    
    $
    350.6
    
    
    $
    (1,862.3
    )
    
    $
    1,427.4LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.4
    
    
    $
    
    
    
    $
    
    
    
    $
    0.4Notes payable
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Accounts payable
    
    
    
    
    
    
    146.6
    
    
    
    59.5
    
    
    
    (20.5
    )
    
    
    185.6Accrued expenses
    
    
    175.4
    
    
    
    32.3
    
    
    
    63.8
    
    
    
    (81.3
    )
    
    
    190.2Current liabilities of discontinued operations
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    
    
    
    
    2.1Total current liabilities
    
    
    175.4
    
    
    
    181.4
    
    
    
    125.3
    
    
    
    (101.8
    )
    
    
    380.3Long-term debt
    
    
    480.7
    
    
    
    0.1
    
    
    
    4.0
    
    
    
    (283.1
    )
    
    
    201.7Other liabilities
    
    
    2.1
    
    
    
    115.2
    
    
    
    15.3
    
    
    
    
    
    
    
    132.6Minority interest
    
    
    
    
    
    
    
    
    
    
    12.7
    
    
    
    
    
    
    
    12.7Commitments and contingenciesTotal shareowners equity
    
    
    700.1
    
    
    
    1,284.1
    
    
    
    193.3
    
    
    
    (1,477.4
    )
    
    
    700.1Total Liabilities and Shareowners Equity
    
    $
    1,358.3
    
    
    $
    1,580.8
    
    
    $
    350.6
    
    
    $
    (1,862.3
    )
    
    $
    1,427.4
 20




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##### Table of Contents



13 Weeks Ended May 5, 2007Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    38.9
    
    
    $
    45.7
    
    
    $
    11.8
    
    
    $
    (57.5
    )
    
    $
    38.9Loss from discontinued operations, net of income taxes
and minority interest
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    2.5
    
    
    
    0.1
    
    
    
    
    
    
    
    2.6Depreciation and amortization
    
    
    
    
    
    
    20.7
    
    
    
    3.6
    
    
    
    
    
    
    
    24.3Amortization of deferred financing costs
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Share-based compensation expense
    
    
    
    
    
    
    3.0
    
    
    
    0.1
    
    
    
    
    
    
    
    3.1Deferred income taxes
    
    
    
    
    
    
    (2.7
    )
    
    
    1.4
    
    
    
    
    
    
    
    (1.3
    )Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    0.9Accretion of investments
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    (0.5
    )Changes in working capital:Inventories
    
    
    
    
    
    
    (28.2
    )
    
    
    6.8
    
    
    
    2.8
    
    
    
    (18.6
    )Prepaid expenses and other current assets
    
    
    (3.8
    )
    
    
    (17.8
    )
    
    
    (8.6
    )
    
    
    37.6
    
    
    
    7.4Accounts payable
    
    
    
    
    
    
    (29.4
    )
    
    
    7.0
    
    
    
    (5.0
    )
    
    
    (27.4
    )Accrued expenses
    
    
    18.4
    
    
    
    2.6
    
    
    
    0.2
    
    
    
    (35.4
    )
    
    
    (14.2
    )Other assets and liabilities, net
    
    
    (41.6
    )
    
    
    4.0
    
    
    
    (14.0
    )
    
    
    57.5
    
    
    
    5.9Net cash used in discontinued operations
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Cash flow provided by (used in) operating activities
    
    
    12.1
    
    
    
    (0.1
    )
    
    
    9.3
    
    
    
    
    
    
    
    21.3Investing Activities:Capital expenditures
    
    
    
    
    
    
    (52.8
    )
    
    
    (2.9
    )
    
    
    
    
    
    
    (55.7
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Acquisition of business, net of cash acquired
    
    
    
    
    
    
    (91.5
    )
    
    
    
    
    
    
    
    
    
    
    (91.5
    )Purchases of investments
    
    
    
    
    
    
    (6.1
    )
    
    
    
    
    
    
    
    
    
    
    (6.1
    )Sales and maturities of investments
    
    
    
    
    
    
    90.5
    
    
    
    
    
    
    
    
    
    
    
    90.5Cash flow used in investing activities
    
    
    
    
    
    
    (59.8
    )
    
    
    (2.9
    )
    
    
    
    
    
    
    (62.7
    )Financing Activities:Issuance of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repayment of debt
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Issuances of common stock
    
    
    3.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.2Purchases of common stock
    
    
    (15.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15.3
    )Excess tax benefits from share-based compensation
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    1.2Cash flow (used in) provided by financing activities
    
    
    (12.1
    )
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    (11.0
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    2.4(Decrease)/increase in cash and cash equivalents
    
    
    
    
    
    
    (58.8
    )
    
    
    8.8
    
    
    
    
    
    
    
    (50.0
    )Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    239.4
    
    
    
    132.0
    
    
    
    
    
    
    
    371.4Cash and
cash equivalents, end of quarter
    
    $
    
    
    
    $
    180.6
    
    
    $
    140.8
    
    
    $
    
    
    
    $
    321.4
 21




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##### Table of Contents



13 Weeks Ended April 29, 2006Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    36.0
    
    
    $
    42.4
    
    
    $
    7.1
    
    
    $
    (49.5
    )
    
    $
    36.0Loss from discontinued operations, net of income taxes
and minority interest
    
    
    
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    
    
    
    
    0.8Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    1.6
    
    
    
    0.1
    
    
    
    
    
    
    
    1.7Depreciation and amortization
    
    
    
    
    
    
    19.6
    
    
    
    3.0
    
    
    
    
    
    
    
    22.6Amortization of deferred financing costs
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Share-based compensation expense
    
    
    0.5
    
    
    
    2.0
    
    
    
    0.3
    
    
    
    
    
    
    
    2.8Deferred income taxes
    
    
    
    
    
    
    (1.1
    )
    
    
    1.5
    
    
    
    
    
    
    
    0.4Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    0.3Income tax benefit from share-based compensation
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4Accretion of investments
    
    
    
    
    
    
    (0.7
    )
    
    
    
    
    
    
    
    
    
    
    (0.7
    )Changes in working capital:Inventories
    
    
    
    
    
    
    (43.1
    )
    
    
    (6.5
    )
    
    
    5.0
    
    
    
    (44.6
    )Prepaid expenses and other current assets
    
    
    (3.6
    )
    
    
    (0.8
    )
    
    
    (15.0
    )
    
    
    18.8
    
    
    
    (0.6
    )Accounts payable
    
    
    
    
    
    
    1.9
    
    
    
    12.5
    
    
    
    (7.7
    )
    
    
    6.7Accrued expenses
    
    
    32.7
    
    
    
    (23.4
    )
    
    
    1.2
    
    
    
    (16.1
    )
    
    
    (5.6
    )Other assets and liabilities, net
    
    
    (42.1
    )
    
    
    (7.9
    )
    
    
    0.3
    
    
    
    49.5
    
    
    
    (0.2
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (0.7
    )
    
    
    (2.9
    )
    
    
    
    
    
    
    (3.6
    )Cash flow provided by (used in) operating activities
    
    
    24.2
    
    
    
    (9.8
    )
    
    
    2.3
    
    
    
    
    
    
    
    16.7Investing Activities:Capital expenditures
    
    
    
    
    
    
    (20.9
    )
    
    
    (2.1
    )
    
    
    
    
    
    
    (23.0
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.0Purchases of investments
    
    
    
    
    
    
    (74.1
    )
    
    
    (0.7
    )
    
    
    
    
    
    
    (74.8
    )Sales and maturities of investments
    
    
    
    
    
    
    58.9
    
    
    
    0.5
    
    
    
    
    
    
    
    59.4Investment in subsidiaries
    
    
    
    
    
    
    (1.5
    )
    
    
    
    
    
    
    1.5
    
    
    
    Cash flow used in investing activities
    
    
    
    
    
    
    (36.6
    )
    
    
    (2.3
    )
    
    
    1.5
    
    
    
    (37.4
    )Financing Activities:Repayment of debt
    
    
    
    
    
    
    (0.1
    )
    
    
    (1.3
    )
    
    
    
    
    
    
    (1.4
    )Payment of deferred financing costs
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2Issuances of common stock
    
    
    2.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.4Purchases of common stock
    
    
    (26.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26.6
    )Distributions to minority owners
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    (0.6
    )Contributions by minority owners
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    1.0Contributions by / distributions to parent
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    (1.5
    )
    
    
    Cash flow (used in) provided by financing activities
    
    
    (24.2
    )
    
    
    0.1
    
    
    
    0.6
    
    
    
    (1.5
    )
    
    
    (25.0
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5(Decrease)/increase in cash and cash equivalents
    
    
    
    
    
    
    (46.3
    )
    
    
    1.1
    
    
    
    
    
    
    
    (45.2
    )Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    310.5
    
    
    
    67.7
    
    
    
    
    
    
    
    378.2Cash and
cash equivalents, end of quarter
    
    $
    
    
    
    $
    264.2
    
    
    $
    68.8
    
    
    $
    
    
    
    $
    333.0
 22




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward Looking Statements
  Overview
 Abaete for Payless ® ® ®
    23




---



##### Table of Contents



®
 TM
   First Quarter Results
   Acquisitions
    24




---



##### Table of Contents




    
    Payless ShoeSource  focusing on democratizing fashion and design in footwear and
accessories through the Payless retail store chain;
    
    Stride Rite  centering on lifestyle-branded footwear and high quality childrens
footwear sold primarily through wholesaling arrangements and more than 300 Stride Rite
store locations; and,
    
    Collective Licensing International  specializing in brand management and global
licensing of its expanding portfolio of youth lifestyle and high quality fashion athletic
brands.
 New Accounting Standards
   Review Of Operations
  Net Earnings
  25




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##### Table of Contents



First Quarter2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    63.1
    
    
    
    63.2Gross margin
    
    
    36.9
    
    
    
    36.8Selling, general and administrative expense
    
    
    28.8
    
    
    
    28.7Operating profit from continuing operations
    
    
    8.1
    
    
    
    8.1Interest (income) expense, net
    
    
    0.1
    
    
    
    Earnings from continuing operations before income taxes and minority interest
    
    
    8.0
    
    
    
    8.1Effective income tax rate*
    
    
    32.0
    
    
    
    34.5Earnings from continuing operations before minority interest
    
    
    5.5
    
    
    
    5.3Minority interest
    
    
    (0.1
    )
    
    
    Earnings from continuing operations
    
    
    5.4
    
    
    
    5.3Loss from discontinued operations, net of income taxes and minority interest
    
    
    (0.1
    )
    
    
    (0.1
    )Net earnings
    
    
    5.3
    %
    
    
    5.2
    %
 
 * Percent of pre-tax earnings Net Sales
   First Quarter2007
    
    2006Net sales
    
    
    4.9
    %
    
    
    (0.1
    )%Same-store sales
    
    
    5.0
    
    
    
    0.4Average selling price per unit
    
    
    2.1
    
    
    
    13.2Unit volume
    
    
    3.0
    
    
    
    (11.8
    )Footwear average selling price per unit
    
    
    2.2
    
    
    
    11.2Footwear unit volume
    
    
    3.3
    
    
    
    (8.6
    )Non-footwear average selling price per unit
    
    
    (0.2
    )
    
    
    7.0Non-footwear unit volume
    
    
    2.2
    
    
    
    (23.0
    )
  Cost of Sales
    26




---



##### Table of Contents



Selling, General and Administrative Expenses
   Interest (Income) Expense
  First Quarter(dollars in millions)
    
    2007
    
    
    2006Interest expense
    
    $
    4.8
    
    
    $
    4.9Interest income
    
    
    (4.7
    )
    
    
    (4.8
    )Interest expense, net
    
    $
    0.1
    
    
    $
    0.1
  Income Taxes
  Minority Interest, Net of Income Taxes
  Discontinued Operations
  International Segment Operating Results
  First Quarter2007
    
    2006Revenues from external customers
    
    $
    91.3
    
    
    $
    81.4Operating profit from continuing operations
    
    
    5.7
    
    
    
    4.6
  27




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##### Table of Contents



Store Activity
  First Quarter2007
    
    2006Beginning of period
    
    
    4,572
    
    
    
    4,605Stores opened
    
    
    15
    
    
    
    52Stores closed
    
    
    (23
    )
    
    
    (55
    )Ending store count
    
    
    4,564
    
    
    
    4,602
  Liquidity and Capital Resources
    Cash Flow Provided by Operating Activities
  Cash Flow Used in Investing Activities
  28




---



##### Table of Contents



Cash Flow Used in Financing Activities
  First Quarter2007
    
    
    2006(dollars in millions, shares in thousands)
    
    Dollars
    
    
    Shares
    
    
    Dollars
    
    
    SharesStock repurchase program
    
    $
    15.2
    
    
    
    454
    
    
    $
    26.4
    
    
    
    1,193Employee stock purchase, deferred compensation
and stock incentive plans
    
    
    0.1
    
    
    
    4
    
    
    
    0.2
    
    
    
    7$
    15.3
    
    
    
    458
    
    
    $
    26.6
    
    
    
    1,200
     Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
   29




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##### Table of Contents



Financial Commitments
  (dollars in millions)Years 1-5
    
    $
    2.5Years 6-10
    
    
    2.8Years 11-15
    
    
    3.0
    Financial Condition Ratios
  May 5,
    
    April 29,
    
    February 3,2007
    
    2006
    
    2007Current Ratio
    
    
    2.5
    
    
    
    2.6
    
    
    
    2.4Debt-capitalization Ratio*
    
    
    22.0
    %
    
    
    23.6
    %
    
    
    22.6
    %
 * Debt-to-capitalization has been computed by dividing total debt by capitalization. Total
debt is defined as long-term debt including current maturities, notes payable and borrowings
under the revolving line of credit. Capitalization is defined as total debt and shareowners
equity. The debt-to-capitalization ratio, including the present value of future minimum rental
payments under operating leases as debt and as capitalization, was 62.7%, 64.2% and 63.5%
respectively, for the periods referred to above. Critical Accounting Policies
    30




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
  Foreign Currency Risk
   
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   31




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   th th
  32




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##### Table of Contents



ITEM 1A. RISK FACTORS
 There are risks associated with our acquisitions.
    There is no assurance that the acquisition of Stride Rite will be completed.
  
    
    the merger must be approved by the shareholders of Stride Rite;
    
    the waiting period applicable to the consummation of the merger under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have been expired or
earlier terminated;
    
    no court order or other legal restraint shall be in effect which restrains or
enjoins the consummation of the merger; and
    
    subject to certain exceptions, no change, event or effect that has a material
adverse effect on the business, operations, assets, liabilities, properties, results
of operations, or financial condition of Stride Rite and its subsidiaries, taken as a
whole, shall have occurred since the execution of the Merger Agreement.
   There are additional risks associated with the pending acquisition of Stride Rite.
  
    
    the current market price of our common stock may reflect a market assumption that
the merger will occur, and failure to complete the merger could result in a decline in
the market price of our common stock;
    
    certain costs relating to the merger, such as legal, accounting and financial
advisory fees, are payable by us whether or not the merger is completed; and
    
    there may be substantial disruption to our business and distraction of our
management and employees from day-to-day operations, because matters relating to the
merger may require substantial commitments of their time and resources.
  33




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Issuer Purchases of Equity Securities
  ApproximateDollar ValueTotal Number of
    
    of Shares thatShares Purchased
    
    May Yet BeTotal Number
    
    Average
    
    as Part of Publicly
    
    Purchased Underof Shares
    
    Price
    
    Announced Plans
    
    the Plans orPurchased(1)
    
    Paid per
    
    or Programs
    
    ProgramsPeriod
    
    (in thousands)
    
    Share
    
    (in thousands)
    
    (in millions)02/04/07  03/03/07
    
    
    1
    
    
    $
    35.05
    
    
    
    
    
    
    $
    289.303/04/07  04/07/07
    
    
    57
    
    
    
    32.49
    
    
    
    56
    
    
    
    287.504/08/07  05/05/07
    
    
    400
    
    
    
    33.55
    
    
    
    398
    
    
    
    274.1Total
    
    
    458
    
    
    $
    34.42
    
    
    
    454
    
    
    $
    274.1
    (2)
 (1)
    
    Includes an aggregate of approximately four thousand shares of our common
stock that was repurchased in connection with our employee stock purchase and
stock incentive plans.(2)
    
    In 2001, our Board of Directors approved the repurchase of our common
stock having a value of up to $250 million in the aggregate pursuant to the
Program. On March 6, 2007, we announced that on March 2, 2007, our Board of
Directors authorized an aggregate of $250
million of share repurchases. The timing and amount of share repurchases, if any,
are limited by the terms of our Credit Agreement and Senior Subordinated Notes. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    The Annual Meeting of Stockholders of the Registrant was held on May 24, 2007.(b)
    
    At the Annual Meeting of Stockholders of the Registrant held on May 24, 2007, action was
taken with respect to the election of three directors of the Registrant: 59,986,621 shares
were voted for Daniel Boggan Jr. while authority was withheld with respect to 494,927 shares,
59,865,644 shares were voted for Michael A. Weiss while authority was withheld with respect to
615,904 shares, and 59,856,216 shares were voted for Robert C. Wheeler while authority was
withheld with respect to 625,332 shares. Other directors whose term of office continued after
the meeting include Howard Fricke, Matthew E. Rubel, Judith K. Hofer, Mylle B. Mangum, John F.
McGovern, Robert F. Moran, and D. Scott Olivet. Mr. Michael E. Murphy retired at the end of
his current term, which expired at the May 24, 2007 Annual Meeting of Stockholders.(c)
    
    Stockholders ratified the appointment of Deloitte & Touche LLP as the Companys independent
registered public accounting firm: 60,098,950 votes in favor, 329,868 votes against and 52,730
votes abstaining; approved the amendments to and restatement of the 2006 Payless ShoeSource,
Inc. Stock Incentive Plan with 44,864,856 votes in favor, 7,620,373 votes against and 119,091
votes abstaining, and approved the amendment to and restatement of the Payless ShoeSource,
Inc. Incentive Compensation Plan with 58,835,228 votes in favor, 1,429,844 votes against and
132,421 votes abstaining.
 34




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##### Table of Contents



ITEM 6. EXHIBITS
 (a) Exhibits:
 Number
    
    Description10.1
    
    Employment Agreement with William E. May entered into as of April 23, 2007.31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer and President*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Senior Vice President, Chief
Financial Officer and Treasurer*32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer and President*32.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Senior Vice President, Chief
Financial Officer and Treasurer*
 
 * Filed herewith 35




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##### Table of Contents



SIGNATURES
   Date: June 13, 2007
    
    By:
    
    /s/ Matthew E. RubelMatthew E. Rubel
Chief Executive Officer
and President
(Principal Executive Officer)Date: June 13, 2007
    
    By:
    
    /s/ Ullrich E. PorzigUllrich E. Porzig
Senior Vice President  Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
 36