##### 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 August 2, 2008
 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
 
 COLLECTIVE BRANDS, 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
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ




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##### 



COLLECTIVE BRANDS, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED AUGUST 2, 2008
INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements. (unaudited)Condensed Consolidated Statements of Earnings for the 13 Weeks and 26 Weeks Ended
August 2, 2008 and August 4, 2007.
    
    
    3Condensed Consolidated Balance Sheets as of August 2, 2008, August 4, 2007
and February 2, 2008.
    
    
    4Condensed Consolidated Statements of Cash Flows for the 26 Weeks Ended
August 2, 2008 and August 4, 2007.
    
    
    5Notes to Condensed Consolidated Financial Statements.
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    27Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    37Item 4. Controls and Procedures.
    
    
    38PART II  OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    38Item 1A. Risk Factors.
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    41Item 6. Exhibits.
    
    
    41Signatures.
    
    
    42Certification pursuant to Section 302 of the CEO, President and Chairman of the BoardCertification pursuant to Section 302 of the SVP, CFO and TreasurerCertification pursuant to Section 906 of the CEO, President and Chairman of the BoardCertification pursuant to Section 906 of the SVP, CFO and TreasurerExhibit 10.1Certification of the CEO, President and Chairman of the BoardCertification of the Senior VP, CFO and TreasurerSection 906 Certification of the CEO, President and Chairman of the BoardSection 906 Certification of the Senior VP, CFO and Treasurer
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 COLLECTIVE BRANDS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
 13 Weeks Ended
    
    
    26 Weeks EndedAugust 2,
    
    
    August 4,
    
    
    August 2,
    
    
    August 4,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    911.7
    
    
    $
    699.3
    
    
    $
    1,844.1
    
    
    $
    1,427.9Cost of sales
    
    
    628.9
    
    
    
    458.7
    
    
    
    1,256.2
    
    
    
    918.4Gross margin
    
    
    282.8
    
    
    
    240.6
    
    
    
    587.9
    
    
    
    509.5Selling, general and administrative expenses
    
    
    259.2
    
    
    
    201.0
    
    
    
    523.0
    
    
    
    410.9Restructuring charges
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.3Operating profit from continuing operations
    
    
    23.6
    
    
    
    39.5
    
    
    
    64.8
    
    
    
    98.3Interest expense
    
    
    20.7
    
    
    
    4.8
    
    
    
    39.2
    
    
    
    9.6Interest income
    
    
    (3.9
    )
    
    
    (4.0
    )
    
    
    (5.2
    )
    
    
    (8.7
    )Earnings from continuing operations before income taxes
and minority interest
    
    
    6.8
    
    
    
    38.7
    
    
    
    30.8
    
    
    
    97.4(Benefit) provision for income taxes
    
    
    (2.8
    )
    
    
    12.7
    
    
    
    (0.5
    )
    
    
    31.5Earnings from continuing operations before minority interest
    
    
    9.6
    
    
    
    26.0
    
    
    
    31.3
    
    
    
    65.9Minority interest, net of income taxes
    
    
    (1.4
    )
    
    
    (1.3
    )
    
    
    (3.0
    )
    
    
    (2.2
    )Net earnings from continuing operations
    
    
    8.2
    
    
    
    24.7
    
    
    
    28.3
    
    
    
    63.7(Loss) earnings from discontinued operations, net of
income taxes and minority interest
    
    
    (0.1
    )
    
    
    0.2
    
    
    
    (0.5
    )
    
    
    0.1Net earnings
    
    $
    8.1
    
    
    $
    24.9
    
    
    $
    27.8
    
    
    $
    63.8Basic earnings per share:Earnings from continuing operations
    
    $
    0.13
    
    
    $
    0.38
    
    
    $
    0.45
    
    
    $
    0.98Earnings (loss) from discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    (0.01
    )
    
    
    0.01Basic earnings per share
    
    $
    0.13
    
    
    $
    0.39
    
    
    $
    0.44
    
    
    $
    0.99Diluted earnings per share:Earnings from continuing operations
    
    $
    0.13
    
    
    $
    0.37
    
    
    $
    0.45
    
    
    $
    0.96Earnings (loss) from discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    (0.01
    )
    
    
    0.01Diluted earnings per share
    
    $
    0.13
    
    
    $
    0.38
    
    
    $
    0.44
    
    
    $
    0.97Basic Weighted Average Shares Outstanding
    
    
    62.9
    
    
    
    64.5
    
    
    
    62.8
    
    
    
    64.6Diluted Weighted Average Shares Outstanding
    
    
    63.1
    
    
    
    65.7
    
    
    
    63.1
    
    
    
    65.9
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COLLECTIVE BRANDS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 August 2,
    
    
    August 4,
    
    
    February 2,2008
    
    
    2007
    
    
    2008ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    451.4
    
    
    $
    327.4
    
    
    $
    232.5Restricted cash
    
    
    
    
    
    
    2.0
    
    
    
    Accounts receivable, net of allowance for doubtful accounts
and returns reserve as of August 2, 2008 and February 2, 2008
of $5.2 and $3.4, respectively
    
    
    119.7
    
    
    
    8.0
    
    
    
    86.1Inventories
    
    
    483.3
    
    
    
    370.0
    
    
    
    470.1Current deferred income taxes
    
    
    40.9
    
    
    
    16.8
    
    
    
    23.8Prepaid expenses
    
    
    63.5
    
    
    
    46.5
    
    
    
    93.4Other current assets
    
    
    21.6
    
    
    
    16.9
    
    
    
    31.5Current assets of discontinued operations
    
    
    0.9
    
    
    
    0.8
    
    
    
    0.8Total current assets
    
    
    1,181.3
    
    
    
    788.4
    
    
    
    938.2Property and Equipment:Land
    
    
    8.6
    
    
    
    5.7
    
    
    
    9.3Property, buildings and equipment
    
    
    1,486.2
    
    
    
    1,323.0
    
    
    
    1,440.1Accumulated depreciation and amortization
    
    
    (938.9
    )
    
    
    (868.6
    )
    
    
    (898.4
    )Property and equipment, net
    
    
    555.9
    
    
    
    460.1
    
    
    
    551.0Intangible assets, net
    
    
    545.4
    
    
    
    94.7
    
    
    
    559.5Goodwill
    
    
    324.1
    
    
    
    40.2
    
    
    
    321.0Deferred income taxes
    
    
    0.7
    
    
    
    47.0
    
    
    
    1.5Other assets
    
    
    43.5
    
    
    
    26.0
    
    
    
    44.0Total Assets
    
    $
    2,650.9
    
    
    $
    1,456.4
    
    
    $
    2,415.2LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    7.4
    
    
    $
    0.3
    
    
    $
    7.4Notes payable
    
    
    
    
    
    
    2.0
    
    
    
    Accounts payable
    
    
    198.3
    
    
    
    164.3
    
    
    
    200.9Accrued expenses
    
    
    206.2
    
    
    
    137.9
    
    
    
    203.5Current liabilities of discontinued operations
    
    
    1.9
    
    
    
    1.5
    
    
    
    1.3Total current liabilities
    
    
    413.8
    
    
    
    306.0
    
    
    
    413.1Long-term debt
    
    
    1,126.3
    
    
    
    200.9
    
    
    
    914.9Deferred income taxes
    
    
    108.2
    
    
    
    0.2
    
    
    
    112.9Other liabilities
    
    
    240.5
    
    
    
    179.1
    
    
    
    254.2Minority interest
    
    
    19.2
    
    
    
    11.5
    
    
    
    17.2Commitments and contingencies (Note 17)Shareowners equity
    
    
    742.9
    
    
    
    758.7
    
    
    
    702.9Total Liabilities and Shareowners Equity
    
    $
    2,650.9
    
    
    $
    1,456.4
    
    
    $
    2,415.2
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COLLECTIVE BRANDS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 26 Weeks EndedAugust 2,
    
    
    August 4,2008
    
    
    2007Operating Activities:Net earnings
    
    $
    27.8
    
    
    $
    63.8Loss (earnings) from discontinued operations, net of income taxes and minority interest
    
    
    0.5
    
    
    
    (0.1
    )Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    4.6
    
    
    
    4.3Depreciation and amortization
    
    
    70.0
    
    
    
    50.3Provision for losses on accounts receivable
    
    
    1.5
    
    
    
    Share-based compensation expense
    
    
    8.5
    
    
    
    6.2Deferred income taxes
    
    
    (26.2
    )
    
    
    (3.9
    )Minority interest, net of income taxes
    
    
    3.0
    
    
    
    2.2Income tax benefit from share-based compensation
    
    
    
    
    
    
    2.5Excess tax benefit from share-based compensation
    
    
    
    
    
    
    (2.4
    )Interest income on held-to-maturity investments
    
    
    
    
    
    
    (0.6
    )Changes in working capital, exclusive of the effects of acquisitions:Accounts receivable
    
    
    (34.7
    )
    
    
    (2.9
    )Inventories
    
    
    (13.9
    )
    
    
    (6.0
    )Prepaid expenses and other current assets
    
    
    39.4
    
    
    
    1.4Accounts payable
    
    
    0.7
    
    
    
    (20.3
    )Accrued expenses
    
    
    7.4
    
    
    
    (38.7
    )Changes in other assets and liabilities, net
    
    
    
    
    
    
    6.8Contributions to pension plans
    
    
    (1.6
    )
    
    
    Net cash used in discontinued operations
    
    
    
    
    
    
    (0.2
    )Cash flow provided by operating activities
    
    
    87.0
    
    
    
    62.4Investing Activities:Capital expenditures
    
    
    (78.2
    )
    
    
    (93.0
    )Proceeds from sale of property and equipment
    
    
    1.1
    
    
    
    1.6Purchases of investments
    
    
    
    
    
    
    (6.1
    )Sales and maturities of investments
    
    
    
    
    
    
    96.7Acquisition of business, net of cash acquired
    
    
    
    
    
    
    (93.2
    )Cash flow used in investing activities
    
    
    (77.1
    )
    
    
    (94.0
    )Financing Activities:Proceeds from revolving loan facility
    
    
    215.0
    
    
    
    Repayment of debt
    
    
    (3.6
    )
    
    
    (5.3
    )Payment of deferred financing costs
    
    
    (0.1
    )
    
    
    Issuances of common stock
    
    
    0.6
    
    
    
    7.8Purchases of common stock
    
    
    (1.3
    )
    
    
    (20.7
    )Excess tax benefit from share-based compensation
    
    
    
    
    
    
    2.4Contributions by minority owners
    
    
    2.6
    
    
    
    Distribution to minority owners
    
    
    (3.6
    )
    
    
    (2.4
    )Cash flow provided by (used in) financing activities
    
    
    209.6
    
    
    
    (18.2
    )Effect of exchange rate changes on cash
    
    
    (0.6
    )
    
    
    5.8Increase (decrease) in cash and cash equivalents
    
    
    218.9
    
    
    
    (44.0
    )Cash and cash equivalents, beginning of year
    
    
    232.5
    
    
    
    371.4Cash and cash equivalents, end of quarter
    
    $
    451.4
    
    
    $
    327.4Supplemental cash flow information:Interest paid
    
    $
    38.7
    
    
    $
    9.0Income taxes paid
    
    $
    8.4
    
    
    $
    19.7Non-cash investing and financing activities:Accrued capital additions
    
    $
    17.9
    
    
    $
    17.5Accrued capital lease addition
    
    $
    
    
    
    $
    1.2Accrued acquistion costs
    
    $
    
    
    
    $
    2.5Accrued financing costs
    
    $
    
    
    
    $
    3.0
  5




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COLLECTIVE BRANDS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Note 1  Interim Results
  Note 2  Acquisitions
 Stride Rite
  6




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(dollars in millions)Receivables
    
    $
    91.3Inventories
    
    
    184.6Other current assets
    
    
    35.7Total current assets
    
    
    311.6Property and equipment
    
    
    68.0Goodwill
    
    
    283.9Indefinite lived trademarks
    
    
    388.1Finite lived intangible assets
    
    
    84.2Other assets
    
    
    10.7Total assets acquired
    
    
    1,146.5Accounts payable
    
    
    (53.4
    )Accrued expenses and other current liabilities
    
    
    (61.8
    )Total current liabilities
    
    
    (115.2
    )Long-term debt
    
    
    (46.0
    )Long-term deferred tax liabilities
    
    
    (178.3
    )Other long-term liabilities
    
    
    (20.4
    )Total liabilities
    
    
    (359.9
    )Net assets acquired
    
    $
    786.6
   Costs Incurred
    
    
    Cash PaymentsTotal Costs Incurred as
    
    
    Accrual Balance as of
    
    
    26 Weeks Ended
    
    
    26 Weeks Ended
    
    
    Accrual Balance as of(dollars in millions)
    
    of August 2, 2008
    
    
    February 2, 2008
    
    
    August 2, 2008
    
    
    August 2, 2008
    
    
    August 2, 2008Employee severance costs
    
    $
    16.4
    
    
    $
    12.8
    
    
    $
    1.9
    
    
    $
    (7.1
    )
    
    $
    7.6Contract termination and other
costs
    
    
    2.5
    
    
    
    1.2
    
    
    
    1.3
    
    
    
    
    
    
    
    2.5Total
    
    $
    18.9
    
    
    $
    14.0
    
    
    $
    3.2
    
    
    $
    (7.1
    )
    
    $
    10.1
 Collective Licensing
   7




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(dollars in millions)Current assets
    
    $
    4.6Goodwill
    
    
    34.3Indefinite lived trademarks
    
    
    40.6Finite lived intangible assets
    
    
    16.5Total assets acquired
    
    
    96.0Current liabilities
    
    
    (4.9
    )Total liabilities acquired
    
    
    (4.9
    )Net assets acquired
    
    $
    91.1
 Pro forma Financial Information
  13 Weeks Ended
    
    
    26 Weeks Ended(dollars in millions, except per share)
    
    August 4, 2007
    
    
    August 4, 2007Net sales
    
    $
    911.3
    
    
    $
    1,837.2Net earnings
    
    
    11.5
    
    
    
    34.0Basic earnings per share
    
    $
    0.18
    
    
    $
    0.53Diluted earnings per share
    
    $
    0.18
    
    
    $
    0.52
 Note 3  Exit Costs
   Costs Incurred
    
    
    Cash PaymentsTotal Costs Incurred as
    
    
    Accrual Balance as of
    
    
    26 Weeks Ended
    
    
    26 Weeks Ended
    
    
    Accrual Balance as of(dollars in millions)
    
    of August 2, 2008
    
    
    February 2, 2008
    
    
    August 2, 2008
    
    
    August 2, 2008
    
    
    August 2, 2008Employee severance costs
    
    $
    6.9
    
    
    $
    5.2
    
    
    $
    1.0
    
    
    $
    (0.1
    )
    
    $
    6.1Contract termination
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal
    
    
    7.7
    
    
    $
    5.2
    
    
    
    1.0
    
    
    $
    (0.1
    )
    
    $
    6.1Accelerated depreciation
    
    
    2.5
    
    
    
    
    
    
    
    0.1Total
    
    $
    10.2
    
    
    
    
    
    
    $
    1.1
  8




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Note 4  Discontinued Operations
   Note 5  Inventories
  Note 6  Intangible Assets
  August 2,
    
    
    August 4,
    
    
    February 2,(dollars in millions)
    
    2008
    
    
    2007
    
    
    2008Intangible assets subject to amortization:Favorable lease rights:Gross carrying amount
    
    $
    67.4
    
    
    $
    65.2
    
    
    $
    69.9Less: accumulated amortization
    
    
    (54.1
    )
    
    
    (54.2
    )
    
    
    (54.7
    )Carrying amount, end of period
    
    
    13.3
    
    
    
    11.0
    
    
    
    15.2Customer relationships:Gross carrying amount
    
    
    76.3
    
    
    
    9.3
    
    
    
    73.7Less: accumulated amortization
    
    
    (14.3
    )
    
    
    (0.6
    )
    
    
    (5.9
    )Carrying amount, end of period
    
    
    62.0
    
    
    
    8.7
    
    
    
    67.8Trademarks and other intangible assets:Gross carrying amount
    
    
    21.4
    
    
    
    7.3
    
    
    
    20.7Less: accumulated amortization
    
    
    (5.0
    )
    
    
    (0.3
    )
    
    
    (3.5
    )Carrying amount, end of period
    
    
    16.4
    
    
    
    7.0
    
    
    
    17.2Total carrying amount of intangible assets
subject to amortization
    
    
    91.7
    
    
    
    26.7
    
    
    
    100.2Indefinite-lived trademarks
    
    
    453.7
    
    
    
    68.0
    
    
    
    459.3Total intangible assets
    
    $
    545.4
    
    
    $
    94.7
    
    
    $
    559.5
  13 Weeks Ended
    
    26 Weeks EndedAugust 2,
    
    August 4,
    
    August 2,
    
    August 4,(dollars in millions)
    
    2008
    
    2007
    
    2008
    
    2007Amortization expense on intangible assets
    
    $
    5.5
    
    
    $
    1.2
    
    
    $
    11.4
    
    
    $
    2.1
 9




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##### Table of Contents



Year
    
    AmountRemainder of 2008
    
    $
    10.42009
    
    
    19.42010
    
    
    15.52011
    
    
    12.52012
    
    
    8.8
 Note 7  Goodwill
   Payless
    
    
    Stride Rite
    
    
    Stride Rite(dollars in millions)
    
    Domestic
    
    
    Retail
    
    
    Wholesale
    
    
    ConsolidatedBalance as of February 2, 2008
    
    $
    40.2
    
    
    $
    42.0
    
    
    $
    238.8
    
    
    $
    321.0Adjustments to Stride Rite purchase price allocation
    
    
    
    
    
    
    
    
    
    
    3.1
    
    
    
    3.1Balance as of August 2, 2008
    
    $
    40.2
    
    
    $
    42.0
    
    
    $
    241.9
    
    
    $
    324.1
  Note 8  Long-Term Debt
  August 2,
    
    
    August 4,
    
    
    February 2,(dollars in millions)
    
    2008
    
    
    2007
    
    
    2008Term loan facility
    
    $
    719.6
    
    
    $
    
    
    
    $
    723.2Senior subordinated notes (1)
    
    
    198.0
    
    
    
    197.7
    
    
    
    197.8Revolving loan facility (2)
    
    
    215.0
    
    
    
    
    
    
    
    Capital-lease obligations
    
    
    1.1
    
    
    
    1.5
    
    
    
    1.3Other
    
    
    
    
    
    
    2.0
    
    
    
    Total debt
    
    
    1,133.7
    
    
    
    201.2
    
    
    
    922.3Less: current maturities of long-term debt
    
    
    7.4
    
    
    
    0.3
    
    
    
    7.4Long-term debt
    
    $
    1,126.3
    
    
    $
    200.9
    
    
    $
    914.9
 
 (1)
    
    As of August 2, 2008, the fair value of the Companys senior subordinated notes
was $183.0 million based on recent trading activity.(2)
    
    As of August 2, 2008, the Companys borrowing base on its revolving loan facility
was $326.7 million less $215.0 million in borrowings and $37.5 million in outstanding letters of
credit or $74.2 million. The variable interest rate including the applicable variable margin at
August 2, 2008, was 3.79%.   Note 9  Derivatives
 10




---



##### Table of Contents



Note 10  Fair Value Measurement
       Note 11  Pension Plans
  Payless Plan
  13 Weeks Ended
    
    
    26 Weeks EndedAugust 2,
    
    
    August 4,
    
    
    August 2,
    
    
    August 4,(dollars in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Components of pension expense:Service cost
    
    $
    0.1
    
    
    $
    0.3
    
    
    $
    0.2
    
    
    $
    0.5Interest cost
    
    
    0.6
    
    
    
    0.4
    
    
    
    1.2
    
    
    
    0.9Amortization of prior service cost
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.8
    
    
    
    0.2Amortization of actuarial loss
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.3Total
    
    $
    1.3
    
    
    $
    1.0
    
    
    $
    2.6
    
    
    $
    1.9
 11




---



##### Table of Contents



Stride Rite Plan
  13 Weeks Ended
    
    
    26 Weeks EndedAugust 2,
    
    
    August 2,(dollars in millions)
    
    2008
    
    
    2008Components of pension expense:Interest cost
    
    $
    1.1
    
    
    $
    2.2Expected return on net assets
    
    
    (1.2
    )
    
    
    (2.4
    )Total
    
    $
    (0.1
    )
    
    $
    (0.2
    )
 Note 12  Share-Based Compensation
   13 Weeks Ended
    
    
    26 Weeks EndedAugust 2,
    
    
    August 4,
    
    
    August 2,
    
    
    August 4,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock-settled SARs(1):Vest in installments over 3 years
    
    
    39,885
    
    
    
    24,590
    
    
    
    548,055
    
    
    
    482,659Cliff vest after 3 years
    
    
    10,080
    
    
    
    23,675
    
    
    
    319,680
    
    
    
    243,400Nonvested Shares:Performance grant  vests in installments over 3 years(2)
    
    
    5,873
    
    
    
    4,980
    
    
    
    10,628
    
    
    
    125,710Vest in installments over 3 years
    
    
    2,000
    
    
    
    2,420
    
    
    
    267,949
    
    
    
    2,420Cliff vest after 3 years
    
    
    2,500
    
    
    
    54,435
    
    
    
    3,925
    
    
    
    54,435Nonvested Share Units:Performance grant  cliff vests after 3 years(3)
    
    
    
    
    
    
    271,113
    
    
    
    
    
    
    
    271,113Cash-settled SARs:Vest in installments over 3 years
    
    
    2,450
    
    
    
    
    
    
    
    5,250
    
    
    
    22,525Cliff vest after 3 years
    
    
    500
    
    
    
    
    
    
    
    8,500
    
    
    
    14,000
 
 (1)
    
    All of the stock-settled SARs issued by the Company to-date
contain an appreciation cap, which limits the appreciation for which
shares of common stock will be granted to 200% of the fair market value of
the underlying common stock on the grant date of the SAR.(2)
    
    Certain nonvested shares are subject to a performance condition for
vesting. The performance grant vests only if the performance condition is
met. As of August 2, 2008, the Company has assessed the likelihood that
the performance conditions will be met and has recorded the related
expense based on the estimated outcome. In the first quarter of 2008,
approximately 131,000 previously issued shares that were subject to a
performance condition did not vest because they failed to meet that
condition.(3)
    
    Certain nonvested share units are subject to a market based
performance condition for vesting. These shares are subject to a market
appreciation condition and a three-year vesting schedule. If neither
condition is met, the shares will not vest. 12




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##### Table of Contents



13 Weeks Ended
    
    
    26 Weeks EndedAugust 2,
    
    
    August 4,
    
    
    August 2,
    
    
    August 4,(dollars in millions, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of sales
    
    $
    1.1
    
    
    $
    0.7
    
    
    $
    2.1
    
    
    $
    1.6Selling, general and administrative expenses
    
    
    3.3
    
    
    
    2.4
    
    
    
    6.4
    
    
    
    4.6Share-based compensation expense before income taxes
    
    
    4.4
    
    
    
    3.1
    
    
    
    8.5
    
    
    
    6.2Tax benefit
    
    
    (1.7
    )
    
    
    (1.2
    )
    
    
    (3.3
    )
    
    
    (2.4
    )Share-based compensation expense after income taxes
    
    $
    2.7
    
    
    $
    1.9
    
    
    $
    5.2
    
    
    $
    3.8Effect on:Basic earnings per share
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.06Diluted earnings per share
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.06
  Note 13  Income Taxes
   Note 14  Comprehensive Income
  13 Weeks Ended
    
    
    26 Weeks EndedAugust 2,
    
    
    August 4,
    
    
    August 2,
    
    
    August 4,(dollars in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net earnings
    
    $
    8.1
    
    
    $
    24.9
    
    
    $
    27.8
    
    
    $
    63.8Foreign currency translation adjustments
    
    
    (1.5
    )
    
    
    4.1
    
    
    
    (2.4
    )
    
    
    9.3Net derivative instrument fair value change, net of taxes
    
    
    2.2
    
    
    
    
    
    
    
    5.9
    
    
    
    Amortization of prior service cost and actuarial loss, net of taxes
    
    
    0.6
    
    
    
    0.5
    
    
    
    1.0
    
    
    
    0.5Total comprehensive income
    
    $
    9.4
    
    
    $
    29.5
    
    
    $
    32.3
    
    
    $
    73.6
  13




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##### Table of Contents



Note 15  Earnings Per Share
  (dollars in millions, except per share amounts;
    
    13 Weeks Ended
    
    
    26 Weeks Endedshares in thousands)
    
    August 2, 2008
    
    
    August 4, 2007
    
    
    August 2, 2008
    
    
    August 4, 2007Net earnings from continuing operations
    
    $
    8.2
    
    
    $
    24.7
    
    
    $
    28.3
    
    
    $
    63.7Weighted average shares outstanding  basic
    
    
    62,851
    
    
    
    64,542
    
    
    
    62,835
    
    
    
    64,633Net effect of dilutive stock options
    
    
    
    
    
    
    895
    
    
    
    
    
    
    
    947Net effect of dilutive SARs
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    101Dilutive shares due to nonvested shares
    
    
    216
    
    
    
    174
    
    
    
    278
    
    
    
    171Weighted average shares outstanding  diluted
    
    
    63,067
    
    
    
    65,702
    
    
    
    63,113
    
    
    
    65,852Basic earnings per share from continuing operations
    
    $
    0.13
    
    
    $
    0.38
    
    
    $
    0.45
    
    
    $
    0.98Diluted earnings per share from continuing operations
    
    $
    0.13
    
    
    $
    0.37
    
    
    $
    0.45
    
    
    $
    0.96
  Note 16  Segment Reporting
  
    
    The Payless Domestic reporting segment is comprised primarily of domestic retail stores
under the Payless ShoeSource name, the Companys sourcing unit and Collective Licensing.
    
    The Payless International reporting segment is comprised of international retail stores
under the Payless ShoeSource name in Canada, the South American Region, the Central
American Region, Puerto Rico, and the U.S. Virgin Islands.
    
    The Stride Rite Retail reporting segment consists of Stride Rites specialty stores and
outlet stores.
    
    The Stride Rite Wholesale reporting segment consists of Stride Rites wholesale
operations.
  14




---



##### Table of Contents



Payless
    
    Payless
    
    Stride Rite
    
    Stride Rite(dollars in millions)
    
    Domestic
    
    International
    
    Retail
    
    Wholesale
    
    Consolidated13 weeks ended August 2, 2008Revenues from external customers
    
    $
    587.4
    
    
    $
    117.0
    
    
    $
    48.7
    
    
    $
    158.6
    
    
    $
    911.7Operating profit (loss) from continuing operations
    
    
    (3.9
    )
    
    
    17.3
    
    
    
    (3.2
    )
    
    
    13.4
    
    
    
    23.626 weeks ended August 2, 2008Revenues from external customers
    
    $
    1,175.9
    
    
    $
    221.3
    
    
    $
    105.8
    
    
    $
    341.1
    
    
    $
    1,844.1Operating profit (loss) from continuing operations
    
    
    1.2
    
    
    
    28.7
    
    
    
    (1.6
    )
    
    
    36.5
    
    
    
    64.8Operating Segment Total Assets
    
    $
    1,306.9
    
    
    $
    215.0
    
    
    $
    95.0
    
    
    $
    1,034.0
    
    
    $
    2,650.9
 Payless
    
    Payless
    
    Stride Rite
    
    Stride Rite(dollars in millions)
    
    Domestic
    
    International
    
    Retail
    
    Wholesale
    
    Consolidated13 weeks ended August 4, 2007Revenues from external customers
    
    $
    591.9
    
    
    $
    107.4
    
    
    $
    
    
    
    $
    
    
    
    $
    699.3Operating profit from continuing operations
    
    
    26.6
    
    
    
    12.9
    
    
    
    
    
    
    
    
    
    
    
    39.526 weeks ended August 4, 2007Revenues from external customers
    
    $
    1,229.2
    
    
    $
    198.7
    
    
    $
    
    
    
    $
    
    
    
    $
    1,427.9Operating profit from continuing operations
    
    
    79.7
    
    
    
    18.6
    
    
    
    
    
    
    
    
    
    
    
    98.3Operating Segment Total Assets
    
    $
    1,242.7
    
    
    $
    213.7
    
    
    $
    
    
    
    $
    
    
    
    $
    1,456.4
  Note 17  Commitments and Contingencies
  th th
 15




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16




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##### Table of Contents



Note 18  Impact of Recently Issued Accounting Standards
     17




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Note 19  Related Party Transactions
  Note 20  Subsidiary Guarantors of Senior Notes  Condensed Consolidating Financial Information
    18




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19




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13 Weeks Ended August 2, 2008Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    807.8
    
    
    $
    320.4
    
    
    $
    (216.5
    )
    
    $
    911.7Cost of sales
    
    
    
    
    
    
    603.0
    
    
    
    221.8
    
    
    
    (195.9
    )
    
    
    628.9Gross margin
    
    
    
    
    
    
    204.8
    
    
    
    98.6
    
    
    
    (20.6
    )
    
    
    282.8Selling, general and administrative expenses
    
    
    0.3
    
    
    
    217.3
    
    
    
    62.2
    
    
    
    (20.6
    )
    
    
    259.2Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating (loss) profit from continuing operations
    
    
    (0.3
    )
    
    
    (12.5
    )
    
    
    36.4
    
    
    
    
    
    
    
    23.6Interest expense
    
    
    4.3
    
    
    
    15.1
    
    
    
    1.3
    
    
    
    
    
    
    
    20.7Interest income
    
    
    
    
    
    
    (2.0
    )
    
    
    (1.9
    )
    
    
    
    
    
    
    (3.9
    )Equity in earnings of subsidiaries
    
    
    (9.8
    )
    
    
    (31.1
    )
    
    
    
    
    
    
    40.9
    
    
    
    Earnings from continuing operations before income taxes
and minority interest
    
    
    5.2
    
    
    
    5.5
    
    
    
    37.0
    
    
    
    (40.9
    )
    
    
    6.8(Benefit) / provision for income taxes
    
    
    (2.9
    )
    
    
    (4.4
    )
    
    
    4.5
    
    
    
    
    
    
    
    (2.8
    )Earnings from continuing operations before minority interest
    
    
    8.1
    
    
    
    9.9
    
    
    
    32.5
    
    
    
    (40.9
    )
    
    
    9.6Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (1.4
    )
    
    
    
    
    
    
    (1.4
    )Net earnings from continuing operations
    
    
    8.1
    
    
    
    9.9
    
    
    
    31.1
    
    
    
    (40.9
    )
    
    
    8.2Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Net earnings
    
    $
    8.1
    
    
    $
    9.8
    
    
    $
    31.1
    
    
    $
    (40.9
    )
    
    $
    8.1
 26 Weeks Ended August 2, 2008Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    1,642.2
    
    
    $
    601.7
    
    
    $
    (399.8
    )
    
    $
    1,844.1Cost of sales
    
    
    
    
    
    
    1,197.2
    
    
    
    419.9
    
    
    
    (360.9
    )
    
    
    1,256.2Gross margin
    
    
    
    
    
    
    445.0
    
    
    
    181.8
    
    
    
    (38.9
    )
    
    
    587.9Selling, general and administrative expenses
    
    
    0.6
    
    
    
    440.2
    
    
    
    121.1
    
    
    
    (38.9
    )
    
    
    523.0Restructuring charges
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Operating (loss) profit from continuing operations
    
    
    (0.6
    )
    
    
    4.7
    
    
    
    60.7
    
    
    
    
    
    
    
    64.8Interest expense
    
    
    8.7
    
    
    
    29.3
    
    
    
    1.3
    
    
    
    (0.1
    )
    
    
    39.2Interest income
    
    
    
    
    
    
    (2.4
    )
    
    
    (2.9
    )
    
    
    0.1
    
    
    
    (5.2
    )Equity in earnings of subsidiaries
    
    
    (31.3
    )
    
    
    (51.6
    )
    
    
    
    
    
    
    82.9
    
    
    
    Earnings from continuing operations before income taxes
and minority interest
    
    
    22.0
    
    
    
    29.4
    
    
    
    62.3
    
    
    
    (82.9
    )
    
    
    30.8(Benefit) / provision for income taxes
    
    
    (5.8
    )
    
    
    (2.4
    )
    
    
    7.7
    
    
    
    
    
    
    
    (0.5
    )Earnings from continuing operations before minority interest
    
    
    27.8
    
    
    
    31.8
    
    
    
    54.6
    
    
    
    (82.9
    )
    
    
    31.3Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (3.0
    )
    
    
    
    
    
    
    (3.0
    )Net earnings from continuing operations
    
    
    27.8
    
    
    
    31.8
    
    
    
    51.6
    
    
    
    (82.9
    )
    
    
    28.3Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    (0.5
    )Net earnings
    
    $
    27.8
    
    
    $
    31.3
    
    
    $
    51.6
    
    
    $
    (82.9
    )
    
    $
    27.8
 20




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##### Table of Contents



13 Weeks Ended August 4, 2007Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    625.3
    
    
    $
    245.9
    
    
    $
    (171.9
    )
    
    $
    699.3Cost of sales
    
    
    
    
    
    
    439.4
    
    
    
    189.2
    
    
    
    (169.9
    )
    
    
    458.7Gross margin
    
    
    
    
    
    
    185.9
    
    
    
    56.7
    
    
    
    (2.0
    )
    
    
    240.6Selling, general and administrative expenses
    
    
    1.2
    
    
    
    170.4
    
    
    
    31.4
    
    
    
    (2.0
    )
    
    
    201.0Restructuring charges
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Operating (loss) profit from continuing operations
    
    
    (1.2
    )
    
    
    15.4
    
    
    
    25.3
    
    
    
    
    
    
    
    39.5Interest expense
    
    
    9.4
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    (5.3
    )
    
    
    4.8Interest income
    
    
    
    
    
    
    (7.7
    )
    
    
    (1.6
    )
    
    
    5.3
    
    
    
    (4.0
    )Equity in earnings of subsidiaries
    
    
    (31.7
    )
    
    
    (21.1
    )
    
    
    
    
    
    
    52.8
    
    
    
    Earnings from continuing operations before income taxes
and minority interest
    
    
    21.1
    
    
    
    43.8
    
    
    
    26.6
    
    
    
    (52.8
    )
    
    
    38.7(Benefit) / provision for income taxes
    
    
    (3.8
    )
    
    
    12.4
    
    
    
    4.1
    
    
    
    
    
    
    
    12.7Earnings from continuing operations before minority interest
    
    
    24.9
    
    
    
    31.4
    
    
    
    22.5
    
    
    
    (52.8
    )
    
    
    26.0Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    (1.3
    )Net earnings from continuing operations
    
    
    24.9
    
    
    
    31.4
    
    
    
    21.2
    
    
    
    (52.8
    )
    
    
    24.7Earnings (loss) from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    0.3
    
    
    
    (0.1
    )
    
    
    
    
    
    
    0.2Net earnings
    
    $
    24.9
    
    
    $
    31.7
    
    
    $
    21.1
    
    
    $
    (52.8
    )
    
    $
    24.9
 26 Weeks Ended August 4, 2007Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    1,292.5
    
    
    $
    479.5
    
    
    $
    (344.1
    )
    
    $
    1,427.9Cost of sales
    
    
    
    
    
    
    878.3
    
    
    
    380.2
    
    
    
    (340.1
    )
    
    
    918.4Gross margin
    
    
    
    
    
    
    414.2
    
    
    
    99.3
    
    
    
    (4.0
    )
    
    
    509.5Selling, general and administrative expenses
    
    
    2.3
    
    
    
    352.4
    
    
    
    60.2
    
    
    
    (4.0
    )
    
    
    410.9Restructuring charges
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.3Operating (loss) profit from continuing operations
    
    
    (2.3
    )
    
    
    61.5
    
    
    
    39.1
    
    
    
    
    
    
    
    98.3Interest expense
    
    
    18.9
    
    
    
    0.7
    
    
    
    0.5
    
    
    
    (10.5
    )
    
    
    9.6Interest income
    
    
    
    
    
    
    (16.4
    )
    
    
    (2.8
    )
    
    
    10.5
    
    
    
    (8.7
    )Equity in earnings of subsidiaries
    
    
    (77.5
    )
    
    
    (33.3
    )
    
    
    
    
    
    
    110.8
    
    
    
    Earnings from continuing operations before income taxes
and minority interest
    
    
    56.3
    
    
    
    110.5
    
    
    
    41.4
    
    
    
    (110.8
    )
    
    
    97.4(Benefit) / provision for income taxes
    
    
    (7.5
    )
    
    
    33.1
    
    
    
    5.9
    
    
    
    
    
    
    
    31.5Earnings from continuing operations before minority interest
    
    
    63.8
    
    
    
    77.4
    
    
    
    35.5
    
    
    
    (110.8
    )
    
    
    65.9Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (2.2
    )
    
    
    
    
    
    
    (2.2
    )Net earnings from continuing operations
    
    
    63.8
    
    
    
    77.4
    
    
    
    33.3
    
    
    
    (110.8
    )
    
    
    63.7Earnings from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Net earnings
    
    $
    63.8
    
    
    $
    77.5
    
    
    $
    33.3
    
    
    $
    (110.8
    )
    
    $
    63.8
 21




---



##### Table of Contents



As of August 2, 2008Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    350.1
    
    
    $
    101.3
    
    
    $
    
    
    
    $
    451.4Accounts receivable, net
    
    
    
    
    
    
    108.1
    
    
    
    20.1
    
    
    
    (8.5
    )
    
    
    119.7Inventories
    
    
    
    
    
    
    407.3
    
    
    
    82.1
    
    
    
    (6.1
    )
    
    
    483.3Current deferred income taxes
    
    
    
    
    
    
    37.5
    
    
    
    3.4
    
    
    
    
    
    
    
    40.9Prepaid expenses
    
    
    
    
    
    
    55.6
    
    
    
    7.9
    
    
    
    
    
    
    
    63.5Other current assets
    
    
    61.8
    
    
    
    267.2
    
    
    
    94.1
    
    
    
    (401.5
    )
    
    
    21.6Current assets of discontinued operations
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    0.9Total current assets
    
    
    61.8
    
    
    
    1,226.7
    
    
    
    308.9
    
    
    
    (416.1
    )
    
    
    1,181.3Property and Equipment:Land
    
    
    
    
    
    
    8.6
    
    
    
    
    
    
    
    
    
    
    
    8.6Property, buildings and equipment
    
    
    
    
    
    
    1,308.1
    
    
    
    178.1
    
    
    
    
    
    
    
    1,486.2Accumulated depreciation and amortization
    
    
    
    
    
    
    (823.8
    )
    
    
    (115.1
    )
    
    
    
    
    
    
    (938.9
    )Property and equipment, net
    
    
    
    
    
    
    492.9
    
    
    
    63.0
    
    
    
    
    
    
    
    555.9Intangible assets, net
    
    
    
    
    
    
    523.8
    
    
    
    21.6
    
    
    
    
    
    
    
    545.4Goodwill
    
    
    
    
    
    
    185.7
    
    
    
    138.4
    
    
    
    
    
    
    
    324.1Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    0.7Other assets
    
    
    1,419.5
    
    
    
    633.9
    
    
    
    2.2
    
    
    
    (2,012.1
    )
    
    
    43.5Total Assets
    
    $
    1,481.3
    
    
    $
    3,063.0
    
    
    $
    534.8
    
    
    $
    (2,428.2
    )
    
    $
    2,650.9LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    7.4
    
    
    $
    
    
    
    $
    
    
    
    $
    7.4Accounts payable
    
    
    
    
    
    
    137.3
    
    
    
    128.7
    
    
    
    (67.7
    )
    
    
    198.3Accrued expenses
    
    
    254.8
    
    
    
    268.8
    
    
    
    31.0
    
    
    
    (348.4
    )
    
    
    206.2Current liabilities of discontinued operations
    
    
    
    
    
    
    1.9
    
    
    
    
    
    
    
    
    
    
    
    1.9Total current liabilities
    
    
    254.8
    
    
    
    415.4
    
    
    
    159.7
    
    
    
    (416.1
    )
    
    
    413.8Long-term debt
    
    
    481.1
    
    
    
    928.4
    
    
    
    9.5
    
    
    
    (292.7
    )
    
    
    1,126.3Deferred income taxes
    
    
    
    
    
    
    107.5
    
    
    
    0.7
    
    
    
    
    
    
    
    108.2Other liabilities
    
    
    2.5
    
    
    
    219.7
    
    
    
    18.3
    
    
    
    
    
    
    
    240.5Minority interest
    
    
    
    
    
    
    
    
    
    
    19.2
    
    
    
    
    
    
    
    19.2Commitments and contingenciesShareowners equity
    
    
    742.9
    
    
    
    1,392.0
    
    
    
    327.4
    
    
    
    (1,719.4
    )
    
    
    742.9Total Liabilities and Shareowners Equity
    
    $
    1,481.3
    
    
    $
    3,063.0
    
    
    $
    534.8
    
    
    $
    (2,428.2
    )
    
    $
    2,650.9
 22




---



##### Table of Contents



As of August 4, 2007Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    166.4
    
    
    $
    161.0
    
    
    $
    
    
    
    $
    327.4Restricted cash
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Accounts receivable, net
    
    
    
    
    
    
    7.7
    
    
    
    0.3
    
    
    
    
    
    
    
    8.0Inventories
    
    
    
    
    
    
    294.3
    
    
    
    81.4
    
    
    
    (5.7
    )
    
    
    370.0Current deferred income taxes
    
    
    
    
    
    
    14.2
    
    
    
    2.6
    
    
    
    
    
    
    
    16.8Prepaid expenses
    
    
    0.6
    
    
    
    39.4
    
    
    
    6.5
    
    
    
    
    
    
    
    46.5Other current assets
    
    
    49.6
    
    
    
    252.0
    
    
    
    71.0
    
    
    
    (355.7
    )
    
    
    16.9Current assets of discontinued operations
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    0.8Total current assets
    
    
    50.2
    
    
    
    774.8
    
    
    
    324.8
    
    
    
    (361.4
    )
    
    
    788.4Property and Equipment:Land
    
    
    
    
    
    
    5.7
    
    
    
    
    
    
    
    
    
    
    
    5.7Property, buildings and equipment
    
    
    
    
    
    
    1,162.1
    
    
    
    160.9
    
    
    
    
    
    
    
    1,323.0Accumulated depreciation and amortization
    
    
    
    
    
    
    (767.9
    )
    
    
    (100.7
    )
    
    
    
    
    
    
    (868.6
    )Property and equipment, net
    
    
    
    
    
    
    399.9
    
    
    
    60.2
    
    
    
    
    
    
    
    460.1Intangible assets, net
    
    
    
    
    
    
    85.1
    
    
    
    9.6
    
    
    
    
    
    
    
    94.7Goodwill
    
    
    
    
    
    
    34.7
    
    
    
    5.5
    
    
    
    
    
    
    
    40.2Deferred income taxes
    
    
    
    
    
    
    41.2
    
    
    
    5.8
    
    
    
    
    
    
    
    47.0Other assets
    
    
    1,393.6
    
    
    
    536.8
    
    
    
    0.8
    
    
    
    (1,905.2
    )
    
    
    26.0Total Assets
    
    $
    1,443.8
    
    
    $
    1,872.5
    
    
    $
    406.7
    
    
    $
    (2,266.6
    )
    
    $
    1,456.4LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.3
    
    
    $
    
    
    
    $
    
    
    
    $
    0.3Notes payable
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Accounts payable
    
    
    
    
    
    
    116.5
    
    
    
    68.8
    
    
    
    (21.0
    )
    
    
    164.3Accrued expenses
    
    
    202.6
    
    
    
    214.1
    
    
    
    61.6
    
    
    
    (340.4
    )
    
    
    137.9Current liabilities of discontinued operations
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    1.5Total current liabilities
    
    
    202.6
    
    
    
    332.4
    
    
    
    132.4
    
    
    
    (361.4
    )
    
    
    306.0Long-term debt
    
    
    480.8
    
    
    
    
    
    
    
    11.1
    
    
    
    (291.0
    )
    
    
    200.9Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2Other liabilities
    
    
    2.2
    
    
    
    157.7
    
    
    
    19.2
    
    
    
    
    
    
    
    179.1Minority interest
    
    
    
    
    
    
    
    
    
    
    11.5
    
    
    
    
    
    
    
    11.5Commitments and contingenciesShareowners equity
    
    
    758.2
    
    
    
    1,382.4
    
    
    
    232.3
    
    
    
    (1,614.2
    )
    
    
    758.7Total Liabilities and Shareowners Equity
    
    $
    1,443.8
    
    
    $
    1,872.5
    
    
    $
    406.7
    
    
    $
    (2,266.6
    )
    
    $
    1,456.4
 23




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##### Table of Contents



As of February 2, 2008Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    69.5
    
    
    $
    163.0
    
    
    $
    
    
    
    $
    232.5Accounts receivable, net
    
    
    
    
    
    
    81.5
    
    
    
    7.9
    
    
    
    (3.3
    )
    
    
    86.1Inventories
    
    
    
    
    
    
    397.5
    
    
    
    76.1
    
    
    
    (3.5
    )
    
    
    470.1Current deferred income taxes
    
    
    
    
    
    
    21.0
    
    
    
    2.8
    
    
    
    
    
    
    
    23.8Prepaid expenses
    
    
    
    
    
    
    85.7
    
    
    
    7.7
    
    
    
    
    
    
    
    93.4Other current assets
    
    
    55.8
    
    
    
    290.5
    
    
    
    151.9
    
    
    
    (466.7
    )
    
    
    31.5Current assets of discontinued operations
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    0.8Total current assets
    
    
    55.8
    
    
    
    946.5
    
    
    
    409.4
    
    
    
    (473.5
    )
    
    
    938.2Property and Equipment:Land
    
    
    
    
    
    
    9.3
    
    
    
    
    
    
    
    
    
    
    
    9.3Property, buildings and equipment
    
    
    
    
    
    
    1,263.4
    
    
    
    176.7
    
    
    
    
    
    
    
    1,440.1Accumulated depreciation and amortization
    
    
    
    
    
    
    (788.3
    )
    
    
    (110.1
    )
    
    
    
    
    
    
    (898.4
    )Property and equipment, net
    
    
    
    
    
    
    484.4
    
    
    
    66.6
    
    
    
    
    
    
    
    551.0Intangible assets, net
    
    
    
    
    
    
    532.4
    
    
    
    27.1
    
    
    
    
    
    
    
    559.5Goodwill
    
    
    
    
    
    
    182.9
    
    
    
    138.1
    
    
    
    
    
    
    
    321.0Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    1.5Other assets
    
    
    1,366.3
    
    
    
    698.7
    
    
    
    1.6
    
    
    
    (2,022.6
    )
    
    
    44.0Total Assets
    
    $
    1,422.1
    
    
    $
    2,844.9
    
    
    $
    644.3
    
    
    $
    (2,496.1
    )
    
    $
    2,415.2LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    7.4
    
    
    $
    
    
    
    $
    
    
    
    $
    7.4Accounts payable
    
    
    
    
    
    
    132.5
    
    
    
    183.2
    
    
    
    (114.8
    )
    
    
    200.9Accrued expenses
    
    
    235.8
    
    
    
    290.1
    
    
    
    36.3
    
    
    
    (358.7
    )
    
    
    203.5Current liabilities of discontinued operations
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    1.3Total current liabilities
    
    
    235.8
    
    
    
    431.3
    
    
    
    219.5
    
    
    
    (473.5
    )
    
    
    413.1Long-term debt
    
    
    481.0
    
    
    
    715.9
    
    
    
    11.1
    
    
    
    (293.1
    )
    
    
    914.9Deferred income taxes
    
    
    
    
    
    
    111.4
    
    
    
    1.5
    
    
    
    
    
    
    
    112.9Other liabilities
    
    
    2.4
    
    
    
    233.5
    
    
    
    18.8
    
    
    
    (0.5
    )
    
    
    254.2Minority interest
    
    
    
    
    
    
    
    
    
    
    17.2
    
    
    
    
    
    
    
    17.2Commitments and contingenciesShareowners equity
    
    
    702.9
    
    
    
    1,352.8
    
    
    
    376.2
    
    
    
    (1,729.0
    )
    
    
    702.9Total Liabilities and Shareowners Equity
    
    $
    1,422.1
    
    
    $
    2,844.9
    
    
    $
    644.3
    
    
    $
    (2,496.1
    )
    
    $
    2,415.2
 24




---



##### Table of Contents



26 Weeks Ended August 2, 2008Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    27.8
    
    
    $
    31.3
    
    
    $
    51.6
    
    
    $
    (82.9
    )
    
    $
    27.8Loss from discontinued operations, net of income taxes
and minority interest
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    4.5
    
    
    
    0.1
    
    
    
    
    
    
    
    4.6Depreciation and amortization
    
    
    1.4
    
    
    
    57.6
    
    
    
    11.0
    
    
    
    
    
    
    
    70.0Provision for losses on accounts receivable
    
    
    
    
    
    
    1.4
    
    
    
    0.1
    
    
    
    
    
    
    
    1.5Share-based compensation expense
    
    
    
    
    
    
    8.9
    
    
    
    (0.4
    )
    
    
    
    
    
    
    8.5Deferred income taxes
    
    
    
    
    
    
    (23.3
    )
    
    
    (2.9
    )
    
    
    
    
    
    
    (26.2
    )Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    3.0
    
    
    
    
    
    
    
    3.0Changes in working capital:Accounts receivable
    
    
    
    
    
    
    (27.2
    )
    
    
    (12.6
    )
    
    
    5.1
    
    
    
    (34.7
    )Inventories
    
    
    
    
    
    
    (10.3
    )
    
    
    (6.2
    )
    
    
    2.6
    
    
    
    (13.9
    )Prepaid expenses and other current assets
    
    
    (6.0
    )
    
    
    32.5
    
    
    
    (10.9
    )
    
    
    23.8
    
    
    
    39.4Accounts payable
    
    
    
    
    
    
    29.3
    
    
    
    13.2
    
    
    
    (41.8
    )
    
    
    0.7Accrued expenses
    
    
    19.0
    
    
    
    (18.9
    )
    
    
    (3.0
    )
    
    
    10.3
    
    
    
    7.4Changes in other assets and liabilities, net
    
    
    (41.5
    )
    
    
    (58.6
    )
    
    
    17.2
    
    
    
    82.9
    
    
    
    Contributions to pension plans
    
    
    
    
    
    
    (1.6
    )
    
    
    
    
    
    
    
    
    
    
    (1.6
    )Cash flow provided by (used in) operating activities
    
    
    0.7
    
    
    
    26.1
    
    
    
    60.2
    
    
    
    
    
    
    
    87.0Investing Activities:Capital expenditures
    
    
    
    
    
    
    (72.0
    )
    
    
    (6.2
    )
    
    
    
    
    
    
    (78.2
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    1.1Cash flow used in investing activities
    
    
    
    
    
    
    (70.9
    )
    
    
    (6.2
    )
    
    
    
    
    
    
    (77.1
    )Financing Activities:Repayment of notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from revolving loan facility
    
    
    
    
    
    
    215.0
    
    
    
    
    
    
    
    
    
    
    
    215.0Issuance of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repayment of debt
    
    
    
    
    
    
    (3.6
    )
    
    
    
    
    
    
    
    
    
    
    (3.6
    )Payment of deferred financing costs
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Issuances of common stock
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6Purchases of common stock
    
    
    (1.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )Dividends received (paid) to related parties
    
    
    
    
    
    
    116.5
    
    
    
    (116.5
    )
    
    
    
    
    
    
    Distributions to
minority owners
    
    
    
    
    
    
    
    
    
    
    (3.6
    )
    
    
    
    
    
    
    (3.6
    )Contributions from minority owners
    
    
    
    
    
    
    
    
    
    
    2.6
    
    
    
    
    
    
    
    2.6Cash flow provided by (used in) provided by financing activities
    
    
    (0.7
    )
    
    
    327.8
    
    
    
    (117.5
    )
    
    
    
    
    
    
    209.6Effect of exchange rate changes on cash
    
    
    
    
    
    
    (2.4
    )
    
    
    1.8
    
    
    
    
    
    
    
    (0.6
    )Increase/(decrease) in cash and cash equivalents
    
    
    
    
    
    
    280.6
    
    
    
    (61.7
    )
    
    
    
    
    
    
    218.9Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    69.5
    
    
    
    163.0
    
    
    
    
    
    
    
    232.5Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    350.1
    
    
    $
    101.3
    
    
    $
    
    
    
    $
    451.4
 25




---



##### Table of Contents



26 Weeks Ended August 4, 2007Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    63.8
    
    
    $
    77.5
    
    
    $
    33.3
    
    
    $
    (110.8
    )
    
    $
    63.8Earnings from discontinued operations, net of income taxes
and minority interest
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    4.1
    
    
    
    0.2
    
    
    
    
    
    
    
    4.3Depreciation and amortization
    
    
    0.6
    
    
    
    42.2
    
    
    
    7.5
    
    
    
    
    
    
    
    50.3Share-based compensation expense
    
    
    
    
    
    
    6.4
    
    
    
    (0.2
    )
    
    
    
    
    
    
    6.2Deferred income taxes
    
    
    
    
    
    
    (6.7
    )
    
    
    2.8
    
    
    
    
    
    
    
    (3.9
    )Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    2.2Income tax benefit from share-based compensation
    
    
    
    
    
    
    2.5
    
    
    
    
    
    
    
    
    
    
    
    2.5Excess tax benefit from share-based compensation
    
    
    
    
    
    
    (2.4
    )
    
    
    
    
    
    
    
    
    
    
    (2.4
    )Interest income on held-to-maturity investments
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )Changes in working capital, exclusive of the effects of acquisitions:Accounts receivable, net
    
    
    
    
    
    
    (2.9
    )
    
    
    
    
    
    
    
    
    
    
    (2.9
    )Inventories
    
    
    
    
    
    
    (11.5
    )
    
    
    4.2
    
    
    
    1.3
    
    
    
    (6.0
    )Prepaid expenses and other current assets
    
    
    (7.3
    )
    
    
    (27.2
    )
    
    
    (13.5
    )
    
    
    49.4
    
    
    
    1.4Accounts payable
    
    
    
    
    
    
    (28.9
    )
    
    
    9.1
    
    
    
    (0.5
    )
    
    
    (20.3
    )Accrued expenses
    
    
    27.2
    
    
    
    (12.8
    )
    
    
    (2.9
    )
    
    
    (50.2
    )
    
    
    (38.7
    )Changes in other assets and liabilities, net
    
    
    (71.4
    )
    
    
    (27.8
    )
    
    
    (7.2
    )
    
    
    113.2
    
    
    
    6.8Net cash (used in) provided by discontinued operations
    
    
    
    
    
    
    (0.3
    )
    
    
    0.1
    
    
    
    
    
    
    
    (0.2
    )Cash flow provided by operating activities
    
    
    12.9
    
    
    
    11.5
    
    
    
    35.6
    
    
    
    2.4
    
    
    
    62.4Investing Activities:Capital expenditures
    
    
    
    
    
    
    (86.3
    )
    
    
    (6.7
    )
    
    
    
    
    
    
    (93.0
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    1.6Purchases of investments
    
    
    
    
    
    
    (6.1
    )
    
    
    
    
    
    
    
    
    
    
    (6.1
    )Sales and maturities of investments
    
    
    
    
    
    
    96.7
    
    
    
    
    
    
    
    
    
    
    
    96.7Acquisition of business, net of cash acquired
    
    
    
    
    
    
    (93.2
    )
    
    
    
    
    
    
    
    
    
    
    (93.2
    )Cash flow used in investing activities
    
    
    
    
    
    
    (87.3
    )
    
    
    (6.7
    )
    
    
    
    
    
    
    (94.0
    )Financing Activities:Repayment of debt
    
    
    
    
    
    
    (3.2
    )
    
    
    (2.1
    )
    
    
    
    
    
    
    (5.3
    )Issuances of common stock
    
    
    7.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.8Purchases of common stock
    
    
    (20.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20.7
    )Excess tax benefits from share-based compensation
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    
    
    
    
    2.4Contributions by / distributions to parent
    
    
    
    
    
    
    
    
    
    
    2.4
    
    
    
    (2.4
    )
    
    
    Dividends to parent
    
    
    
    
    
    
    3.6
    
    
    
    (3.6
    )
    
    
    
    
    
    
    Distributions to minority owners
    
    
    
    
    
    
    
    
    
    
    (2.4
    )
    
    
    
    
    
    
    (2.4
    )Cash flow (used in) provided by financing activities
    
    
    (12.9
    )
    
    
    2.8
    
    
    
    (5.7
    )
    
    
    (2.4
    )
    
    
    (18.2
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    5.8
    
    
    
    
    
    
    
    5.8(Decrease)/increase in cash and cash equivalents
    
    
    
    
    
    
    (73.0
    )
    
    
    29.0
    
    
    
    
    
    
    
    (44.0
    )Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    239.4
    
    
    
    132.0
    
    
    
    
    
    
    
    371.4Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    166.4
    
    
    $
    161.0
    
    
    $
    
    
    
    $
    327.4
 26




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward Looking Statements
 forward-looking
 Overview
  
    
    Our Business  a general description of our business, our strategy and key 2008 events.
    
    Consolidated Review of Operations  an analysis of our consolidated results of
operations for the 13 and 26 weeks ended August 2, 2008 and August 4, 2007 as presented in
our condensed consolidated financial statements.
    
    Reporting Segment Review of Operations  an analysis of our results of operations for
the 13 and 26 weeks ended August 2, 2008 and August 4, 2007 as presented in our condensed
consolidated financial statements for our four reporting segments: Payless Domestic,
Payless International, Stride Rite Retail and Stride Rite Wholesale.
    
    Liquidity and Capital Resources  an analysis of cash flows, aggregate financial
commitments and certain financial condition ratios.
    
    Critical Accounting Policies  an update since February 2, 2008 of our discussion of our
critical accounting policies that involve a higher degree of judgment or complexity.
 27




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##### Table of Contents



Our Business
 ® ® ®
  Payless
 ® ® ®
  Stride Rite
 ®
 ® ®
 Key 2008 Events
   28




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##### Table of Contents



29




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##### Table of Contents



Consolidated Review of Operations
  Second Quarter
    
    First Six Months2008
    
    2007
    
    2008
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    69.0
    
    
    
    65.6
    
    
    
    68.1
    
    
    
    64.3Gross margin
    
    
    31.0
    
    
    
    34.4
    
    
    
    31.9
    
    
    
    35.7Selling, general and administrative expense
    
    
    28.4
    
    
    
    28.7
    
    
    
    28.4
    
    
    
    28.8Operating profit from continuing operations
    
    
    2.6
    
    
    
    5.7
    
    
    
    3.5
    
    
    
    6.9Interest expense, net
    
    
    1.9
    
    
    
    0.1
    
    
    
    1.8
    
    
    
    0.1Earnings from continuing operations before
income taxes and minority interest
    
    
    0.7
    
    
    
    5.6
    
    
    
    1.7
    
    
    
    6.8Effective income tax rate*
    
    
    (41.2
    )
    
    
    32.8
    
    
    
    (1.6
    )
    
    
    32.3Earnings from continuing operations before
minority interest
    
    
    0.9
    
    
    
    3.7
    
    
    
    1.6
    
    
    
    4.6Minority interest, net of income taxes
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (0.1
    )Net earnings from continuing operations
    
    
    0.8
    
    
    
    3.5
    
    
    
    1.5
    
    
    
    4.5Loss from discontinued operations,
net of income taxes and minority interest
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    Net earnings
    
    
    0.8
    %
    
    
    3.6
    %
    
    
    1.5
    %
    
    
    4.5
    %
 
 *
    
    Percent of pre-tax earnings Net Earnings
  Net Sales
   Second Quarter
    
    First Six Months2008
    
    2007
    
    2008
    
    2007Net sales
    
    
    30.4
    %
    
    
    (1.0
    )%
    
    
    29.1
    %
    
    
    1.9
    %Same-store sales
    
    
    0.2
    
    
    
    (0.7
    )
    
    
    (2.7
    )
    
    
    2.4Average selling price per unit
    
    
    4.9
    
    
    
    1.2
    
    
    
    3.7
    
    
    
    1.7Unit volume
    
    
    (4.0
    )
    
    
    (2.4
    )
    
    
    (5.8
    )
    
    
    0.3Footwear average selling price per unit
    
    
    5.9
    
    
    
    1.8
    
    
    
    4.8
    
    
    
    2.0Footwear unit volume
    
    
    (5.4
    )
    
    
    (2.8
    )
    
    
    (7.1
    )
    
    
    0.1Non-footwear average selling price per unit
    
    
    3.9
    
    
    
    (3.5
    )
    
    
    1.6
    
    
    
    (1.8
    )Non-footwear unit volume
    
    
    3.3
    
    
    
    (0.1
    )
    
    
    0.4
    
    
    
    1.2
  30




---



##### Table of Contents



Cost of Sales
   Gross Margin
   Selling, General and Administrative Expenses
    Interest Expense (Income)
  31




---



##### Table of Contents



Second Quarter
    
    
    First Six Months(dollars in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Interest expense
    
    $
    20.7
    
    
    $
    4.8
    
    
    $
    39.2
    
    
    $
    9.6Interest income
    
    
    (3.9
    )
    
    
    (4.0
    )
    
    
    (5.2
    )
    
    
    (8.7
    )Interest expense, net
    
    $
    16.8
    
    
    $
    0.8
    
    
    $
    34.0
    
    
    $
    0.9
  Income Taxes
  Minority Interest, Net of Taxes
  Discontinued Operations
  Reporting Segment Review of Operations
  32




---



##### Table of Contents



Second Quarter
    
    
    First Six Months(in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues from external customers:Payless Domestic
    
    $
    587.4
    
    
    $
    591.9
    
    
    $
    1,175.9
    
    
    $
    1,229.2Payless International
    
    
    117.0
    
    
    
    107.4
    
    
    
    221.3
    
    
    
    198.7Stride Rite Wholesale
    
    
    158.6
    
    
    
    
    
    
    
    341.1
    
    
    
    Stride Rite Retail
    
    
    48.7
    
    
    
    
    
    
    
    105.8
    
    
    
    Consolidated Net Sales
    
    $
    911.7
    
    
    $
    699.3
    
    
    $
    1,844.1
    
    
    $
    1,427.9Operating profit from continuing operations:Payless Domestic
    
    $
    (3.9
    )
    
    $
    26.6
    
    
    $
    1.2
    
    
    $
    79.7Payless International
    
    
    17.3
    
    
    
    12.9
    
    
    
    28.7
    
    
    
    18.6Stride Rite Wholesale
    
    
    13.4
    
    
    
    
    
    
    
    36.5
    
    
    
    Stride Rite Retail
    
    
    (3.2
    )
    
    
    
    
    
    
    (1.6
    )
    
    
    Operating profit from continuing operations
    
    $
    23.6
    
    
    $
    39.5
    
    
    $
    64.8
    
    
    $
    98.3
  Payless
    
    Stride RitePayless Domestic
    
    International
    
    Retail
    
    TotalSecond Quarter 2008Beginning store count
    
    
    3,956
    
    
    
    606
    
    
    
    348
    
    
    
    4,910Stores opened
    
    
    20
    
    
    
    3
    
    
    
    6
    
    
    
    29Stores closed
    
    
    (35
    )
    
    
    (3
    )
    
    
    (3
    )
    
    
    (41
    )Ending store count
    
    
    3,941
    
    
    
    606
    
    
    
    351
    
    
    
    4,898First Six Months 2008Beginning store count
    
    
    3,954
    
    
    
    598
    
    
    
    340
    
    
    
    4,892Stores opened
    
    
    71
    
    
    
    13
    
    
    
    18
    
    
    
    102Stores closed
    
    
    (84
    )
    
    
    (5
    )
    
    
    (7
    )
    
    
    (96
    )Ending store count
    
    
    3,941
    
    
    
    606
    
    
    
    351
    
    
    
    4,898Second Quarter 2007Beginning store count
    
    
    3,974
    
    
    
    590
    
    
    
    
    
    
    
    4,564Stores opened
    
    
    32
    
    
    
    3
    
    
    
    
    
    
    
    35Stores closed
    
    
    (34
    )
    
    
    (5
    )
    
    
    
    
    
    
    (39
    )Ending store count
    
    
    3,972
    
    
    
    588
    
    
    
    
    
    
    
    4,560First Six Months 2007Beginning store count
    
    
    3,986
    
    
    
    586
    
    
    
    
    
    
    
    4,572Stores opened
    
    
    65
    
    
    
    8
    
    
    
    
    
    
    
    73Stores closed
    
    
    (79
    )
    
    
    (6
    )
    
    
    
    
    
    
    (85
    )Ending store count
    
    
    3,972
    
    
    
    588
    
    
    
    
    
    
    
    4,560
 Payless Domestic Segment Operating Results
  33




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##### Table of Contents



Second Quarter
    
    First Six MonthsPercent
    
    
    
    
    
    
    
    
    
    Percent(dollars in millions)
    
    2008
    
    2007
    
    2007 to 2008
    
    2008
    
    2007
    
    2007 to 2008Revenues from external customers
    
    $
    587.4
    
    
    $
    591.9
    
    
    
    (0.8)
    %
    
    $
    1,175.9
    
    
    $
    1,229.2
    
    
    
    (4.3)
    %Operating (loss) profit from continuing operations
    
    $
    (3.9
    )
    
    $
    26.6
    
    
    
    (114.7)
    %
    
    $
    1.2
    
    
    $
    79.7
    
    
    
    (98.5)
    %Operating (loss) profit from continuing operations
as % of revenues from external customers
    
    
    (0.7)
    %
    
    
    4.5
    %
    
    
    
    
    
    
    0.1
    %
    
    
    6.5
    %
     Payless International Segment Operating Results
  Second Quarter
    
    First Six MonthsPercent
    
    
    
    
    
    
    
    
    
    Percent(dollars in millions)
    
    2008
    
    2007
    
    2007 to 2008
    
    2008
    
    2007
    
    2007 to 2008Revenues from external customers
    
    $
    117.0
    
    
    $
    107.4
    
    
    
    8.9
    %
    
    $
    221.3
    
    
    $
    198.7
    
    
    
    11.4
    %Operating profit from continuing operations
    
    $
    17.3
    
    
    $
    12.9
    
    
    
    34.1
    %
    
    $
    28.7
    
    
    $
    18.6
    
    
    
    54.3
    %Operating profit from continuing operations as %
of revenues from external customers
    
    
    14.8
    %
    
    
    12.0
    %
    
    
    
    
    
    
    13.0
    %
    
    
    9.4
    %
      34




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##### Table of Contents



Stride Rite Wholesale Segment Operating Results
    Stride Rite Retail Segment Operating Results
   Liquidity and Capital Resources
      Cash Flow Provided by Operating Activities
  35




---



##### Table of Contents



Cash Flow Used in Investing Activities
  Cash Flow Used in Financing Activities
  First Six Months2008
    
    
    2007(dollars in millions, shares in thousands)
    
    Dollars
    
    
    Shares
    
    
    Dollars
    
    
    SharesStock repurchase program
    
    $
    
    
    
    
    
    
    
    $
    19.7
    
    
    
    595Employee stock purchase, deferred compensation
and stock incentive plans
    
    
    1.3
    
    
    
    111
    
    
    
    1.0
    
    
    
    27$
    1.3
    
    
    
    111
    
    
    $
    20.7
    
    
    
    622
   Contractual Obligations
  Financial Condition Ratios
  August 2,
    
    August 4,
    
    February 2,2008
    
    2007
    
    2008Current Ratio
    
    
    2.9
    
    
    
    2.6
    
    
    
    2.3Debt-capitalization Ratio*
    
    
    60.4
    %
    
    
    21.1
    %
    
    
    56.7
    %
 
 *
    
    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 loan
facility. 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 76.1%, 62.8% and 73.5%, respectively, for the periods
referred to above.  36




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##### Table of Contents



Critical Accounting Policies
 Accounting for Contingencies
   New Accounting Standards
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   Foreign Currency Risk
   37




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  th th
 38




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##### Table of Contents



39




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##### Table of Contents



ITEM 1A. RISK FACTORS
  Our exposure to legal claims has increased substantially as a result of the $304.6 million jury
verdict in our litigation with adidas. That jury verdict has negatively impacted our business and
we expect those negative impacts to continue. If that verdict is incorporated into a final judgment
without substantial reduction in the amount or if we are required to post a bond at or in excess of
the verdict amount in order to appeal, our financial position, results of operations, cash flows,
liquidity and access to capital would be negatively impacted.
       40




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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)05/04/08  05/31/08
    
    
    7
    
    
    
    12.37
    
    
    
    
    
    
    
    204.806/01/08  07/05/08
    
    
    14
    
    
    
    11.77
    
    
    
    
    
    
    
    204.807/06/08  08/02/08
    
    
    68
    
    
    
    10.45
    
    
    
    
    
    
    
    204.8Total
    
    
    89
    
    
    
    10.81
    
    
    
    
    
    
    
    204.8
    (2)
 
 (1)
    
    Includes an aggregate of approximately 90 thousand shares of our common stock that was
repurchased in connection with our employee stock purchase and stock incentive plans.(2)
    
    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 6. EXHIBITS
 (a) Exhibits:
 Number
    
    Description10.1
    
    
    Settlement Agreement entered into by and between K-Swiss, Inc. and Payless ShoeSource, Inc., effective June 24, 2008.*31.1
    
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer, President and
Chairman of the Board*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, President and
Chairman of the Board*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 41




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##### Table of Contents



SIGNATURES
  COLLECTIVE BRANDS, INC.Date: September 3, 2008
    By:
    /s/ Matthew E. RubelMatthew E. RubelChief Executive Officer, President
and Chairman of the Board
(Principal Executive Officer) Date: September 3, 2008
    By:
    /s/ Ullrich E. PorzigUllrich E. PorzigSenior Vice President - Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 42