##### 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 November 1, 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
State or other jurisdiction of 
incorporation or organization
    
    43-1813160
(I.R.S. Employer
Identification No.)3231 Southeast Sixth Avenue, Topeka, Kansas
(Address of principal executive offices)
    
    66607-2207
(Zip Code)Registrants telephone number, including area code
 (785) 233-5171
 þ o
  Large accelerated filer
þ
    
    Accelerated filer
o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



COLLECTIVE BRANDS, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED NOVEMBER 1, 2008
INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements. (unaudited)Condensed Consolidated Statements of Earnings for the 13 Weeks and 39 Weeks Ended
November 1, 2008 and November 3, 2007.
    
    
    3Condensed Consolidated Balance Sheets as of November 1, 2008, November 3, 2007
and February 2, 2008.
    
    
    4Condensed Consolidated Statements of Cash Flows for the 39 Weeks Ended
November 1, 2008 and November 3, 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.
    
    
    38Item 4. Controls and Procedures.
    
    
    39PART II  OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    39Item 1A. Risk Factors.
    
    
    41Item 6. Exhibits.
    
    
    43Signatures:Certification pursuant to Section 302 of the CEO, President and Chairman of the BoardCertification pursuant to Section 302 of the Division SVP, Chief Financial Officer and TreasurerCertification pursuant to Section 906 of the CEO, President and Chairman of the BoardCertification pursuant to Section 906 of the Division SVP, Chief Financial Officer and TreasurerEX-31.1EX-31.2EX-32.1EX-32.2
  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
    
    
    39 Weeks EndedNovember 1,
    
    
    November 3,
    
    
    November 1,
    
    
    November 3,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    862.7
    
    
    $
    830.7
    
    
    $
    2,706.8
    
    
    $
    2,258.6Cost of sales
    
    
    564.0
    
    
    
    563.5
    
    
    
    1,820.2
    
    
    
    1,481.9Gross margin
    
    
    298.7
    
    
    
    267.2
    
    
    
    886.6
    
    
    
    776.7Selling, general and administrative expenses
    
    
    245.1
    
    
    
    239.6
    
    
    
    768.1
    
    
    
    650.5Restructuring charges
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    0.2
    
    
    
    0.2Operating profit from continuing operations
    
    
    53.5
    
    
    
    27.7
    
    
    
    118.3
    
    
    
    126.0Interest expense
    
    
    19.9
    
    
    
    18.1
    
    
    
    57.7
    
    
    
    27.7Interest income
    
    
    (2.7
    )
    
    
    (2.9
    )
    
    
    (6.5
    )
    
    
    (11.6
    )Earnings from continuing operations before income taxes
and minority interest
    
    
    36.3
    
    
    
    12.5
    
    
    
    67.1
    
    
    
    109.9(Benefit) provision for income taxes
    
    
    (12.9
    )
    
    
    (15.1
    )
    
    
    (13.4
    )
    
    
    16.4Earnings from continuing operations before minority interest
    
    
    49.2
    
    
    
    27.6
    
    
    
    80.5
    
    
    
    93.5Minority interest, net of income taxes
    
    
    (1.8
    )
    
    
    (2.0
    )
    
    
    (4.8
    )
    
    
    (4.2
    )Net earnings from continuing operations
    
    
    47.4
    
    
    
    25.6
    
    
    
    75.7
    
    
    
    89.3Earnings (loss) from discontinued operations, net of
income taxes and minority interest
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    (0.4
    )
    
    
    Net earnings
    
    $
    47.5
    
    
    $
    25.5
    
    
    $
    75.3
    
    
    $
    89.3Basic earnings per share:Earnings from continuing operations
    
    $
    0.75
    
    
    $
    0.40
    
    
    $
    1.20
    
    
    $
    1.38Earnings (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Basic earnings per share
    
    $
    0.75
    
    
    $
    0.40
    
    
    $
    1.20
    
    
    $
    1.38Diluted earnings per share:Earnings from continuing operations
    
    $
    0.75
    
    
    $
    0.39
    
    
    $
    1.19
    
    
    $
    1.36Earnings (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted earnings per share
    
    $
    0.75
    
    
    $
    0.39
    
    
    $
    1.19
    
    
    $
    1.36Basic Weighted Average Shares Outstanding
    
    
    63.0
    
    
    
    64.6
    
    
    
    62.9
    
    
    
    64.6Diluted Weighted Average Shares Outstanding
    
    
    63.2
    
    
    
    65.3
    
    
    
    63.1
    
    
    
    65.7
  3




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##### Table of Contents



COLLECTIVE BRANDS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
  November 1,
    
    
    November 3,
    
    
    February 2,2008
    
    
    2007
    
    
    2008ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    523.6
    
    
    $
    301.3
    
    
    $
    232.5Accounts receivable, net of allowance for doubtful accounts
and returns reserve as of November 1, 2008, November 3, 2007,
and February 2, 2008 of $5.3, $0.7 and $3.4, respectively
    
    
    89.1
    
    
    
    93.6
    
    
    
    86.1Inventories
    
    
    467.6
    
    
    
    476.1
    
    
    
    470.1Current deferred income taxes
    
    
    45.6
    
    
    
    15.1
    
    
    
    23.8Prepaid expenses
    
    
    74.8
    
    
    
    94.9
    
    
    
    93.4Other current assets
    
    
    37.1
    
    
    
    14.9
    
    
    
    31.5Current assets of discontinued operations
    
    
    0.9
    
    
    
    0.8
    
    
    
    0.8Total current assets
    
    
    1,238.7
    
    
    
    996.7
    
    
    
    938.2Property and Equipment:Land
    
    
    8.6
    
    
    
    10.8
    
    
    
    9.3Property, buildings and equipment
    
    
    1,486.8
    
    
    
    1,422.6
    
    
    
    1,440.1Accumulated depreciation and amortization
    
    
    (952.1
    )
    
    
    (892.4
    )
    
    
    (898.4
    )Property and equipment, net
    
    
    543.3
    
    
    
    541.0
    
    
    
    551.0Intangible assets, net
    
    
    539.4
    
    
    
    564.8
    
    
    
    559.5Goodwill
    
    
    324.0
    
    
    
    314.6
    
    
    
    321.0Deferred income taxes
    
    
    0.2
    
    
    
    1.4
    
    
    
    1.5Other assets
    
    
    40.1
    
    
    
    43.3
    
    
    
    44.0Total Assets
    
    $
    2,685.7
    
    
    $
    2,461.8
    
    
    $
    2,415.2LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    222.3
    
    
    $
    7.5
    
    
    $
    7.4Accounts payable
    
    
    186.5
    
    
    
    159.3
    
    
    
    200.9Accrued expenses
    
    
    208.2
    
    
    
    214.4
    
    
    
    203.5Current liabilities of discontinued operations
    
    
    1.8
    
    
    
    1.5
    
    
    
    1.3Total current liabilities
    
    
    618.8
    
    
    
    382.7
    
    
    
    413.1Long-term debt
    
    
    909.7
    
    
    
    918.6
    
    
    
    914.9Deferred income taxes
    
    
    116.0
    
    
    
    132.0
    
    
    
    112.9Other liabilities
    
    
    243.8
    
    
    
    221.3
    
    
    
    254.2Minority interest
    
    
    21.3
    
    
    
    13.5
    
    
    
    17.2Commitments and contingencies (Note 17)Shareowners equity
    
    
    776.1
    
    
    
    793.7
    
    
    
    702.9Total Liabilities and Shareowners Equity
    
    $
    2,685.7
    
    
    $
    2,461.8
    
    
    $
    2,415.2
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##### Table of Contents



COLLECTIVE BRANDS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
  39 Weeks EndedNovember 1,
    
    
    November 3,2008
    
    
    2007Operating Activities:Net earnings
    
    $
    75.3
    
    
    $
    89.3Loss from discontinued operations, net of income taxes and minority interest
    
    
    0.4
    
    
    
    Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    5.6
    
    
    
    6.1Depreciation and amortization
    
    
    105.9
    
    
    
    81.4Provision for losses on accounts receivable
    
    
    2.2
    
    
    
    0.7Share-based compensation expense
    
    
    12.4
    
    
    
    10.7Deferred income taxes
    
    
    (21.3
    )
    
    
    (4.7
    )Minority interest, net of income taxes
    
    
    4.8
    
    
    
    4.2Income tax benefit from share-based compensation
    
    
    
    
    
    
    2.6Excess 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, net
    
    
    (4.8
    )
    
    
    22.5Inventories
    
    
    (2.6
    )
    
    
    76.0Prepaid expenses and other current assets
    
    
    9.0
    
    
    
    (33.1
    )Accounts payable
    
    
    (8.6
    )
    
    
    (76.7
    )Accrued expenses
    
    
    17.5
    
    
    
    (16.5
    )Changes in other assets and liabilities, net
    
    
    6.7
    
    
    
    22.0Contributions to pension plans
    
    
    (4.7
    )
    
    
    Net cash used in discontinued operations
    
    
    
    
    
    
    (0.3
    )Cash flow provided by operating activities
    
    
    197.8
    
    
    
    181.2Investing Activities:Capital expenditures
    
    
    (107.5
    )
    
    
    (128.0
    )Restricted cash
    
    
    
    
    
    
    2.0Proceeds from sale of property and equipment
    
    
    2.1
    
    
    
    2.9Purchases of investments
    
    
    
    
    
    
    (6.1
    )Sales and maturities of investments
    
    
    
    
    
    
    96.7Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (876.9
    )Cash flow used in investing activities
    
    
    (105.4
    )
    
    
    (909.4
    )Financing Activities:Repayment of notes payable
    
    
    
    
    
    
    (2.0
    )Issuance of debt
    
    
    
    
    
    
    725.0Proceeds from revolving loan facility
    
    
    215.0
    
    
    
    Repayment of debt
    
    
    (5.5
    )
    
    
    (51.5
    )Payment of deferred financing costs
    
    
    (0.1
    )
    
    
    (8.1
    )Issuances of common stock
    
    
    0.8
    
    
    
    8.3Purchases of common stock
    
    
    (1.7
    )
    
    
    (21.2
    )Excess tax benefit from share-based compensation
    
    
    
    
    
    
    2.4Contributions by minority owners
    
    
    3.4
    
    
    
    Distribution to minority owners
    
    
    (3.6
    )
    
    
    (2.4
    )Cash flow provided by financing activities
    
    
    208.3
    
    
    
    650.5Effect of exchange rate changes on cash
    
    
    (9.6
    )
    
    
    7.6Increase (decrease) in cash and cash equivalents
    
    
    291.1
    
    
    
    (70.1
    )Cash and cash equivalents, beginning of year
    
    
    232.5
    
    
    
    371.4Cash and cash equivalents, end of period
    
    $
    523.6
    
    
    $
    301.3Supplemental cash flow information:Interest paid
    
    $
    54.0
    
    
    $
    11.2Income taxes paid
    
    $
    13.1
    
    
    $
    19.6Non-cash investing and financing activities:Accrued capital additions
    
    $
    12.7
    
    
    $
    23.7Accrued capital lease addition
    
    $
    
    
    
    $
    1.2Accrued financing costs
    
    $
    
    
    
    $
    0.7
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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
    
    
    283.8Indefinite lived trademarks
    
    
    388.1Finite lived intangible assets
    
    
    84.2Other assets
    
    
    10.7Total assets acquired
    
    
    1,146.4Accounts payable
    
    
    (53.4
    )Accrued expenses and other current liabilities
    
    
    (61.7
    )Total current liabilities
    
    
    (115.1
    )Long-term debt
    
    
    (46.0
    )Long-term deferred tax liabilities
    
    
    (178.3
    )Other long-term liabilities
    
    
    (20.4
    )Total liabilities
    
    
    (359.8
    )Net assets acquired
    
    $
    786.6
   Total Costs Incurredas of November 1,
    
    
    Accrual Balance as of
    
    
    39 Weeks Ended November 1, 2008
    
    
    Accrual Balance as of(dollars in millions)
    
    2008
    
    
    February 2, 2008
    
    
    Costs Incurred
    
    
    Cash Payments
    
    
    November 1, 2008Employee severance costs
    
    $
    16.4
    
    
    $
    12.8
    
    
    $
    1.9
    
    
    $
    (7.5
    )
    
    $
    7.2Contract termination
and other costs
    
    
    2.5
    
    
    
    1.2
    
    
    
    1.3
    
    
    
    (0.4
    )
    
    
    2.1Total
    
    $
    18.9
    
    
    $
    14.0
    
    
    $
    3.2
    
    
    $
    (7.9
    )
    
    $
    9.3
 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
    
    
    39 Weeks Ended(dollars in millions, except per share)
    
    November 3, 2007
    
    
    November 3, 2007Net sales
    
    $
    854.8
    
    
    $
    2,688.1Net earnings
    
    
    34.7
    
    
    
    89.3Basic earnings per share
    
    $
    0.54
    
    
    $
    1.38Diluted earnings per share
    
    $
    0.53
    
    
    $
    1.36
 Note 3  Exit Costs
   Total Costs Incurredas of November 1,
    
    
    Accrual Balance as of
    
    
    39 Weeks Ended November 1, 2008
    
    
    Accrual Balance as of(dollars in millions)
    
    2008
    
    
    February 2, 2008
    
    
    Costs Incurred
    
    
    Cash Payments
    
    
    November 1, 2008Employee severance costs
    
    $
    6.7
    
    
    $
    5.2
    
    
    $
    0.8
    
    
    $
    (0.2
    )
    
    $
    5.8Contract termination
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal
    
    
    7.5
    
    
    $
    5.2
    
    
    
    0.8
    
    
    $
    (0.2
    )
    
    $
    5.8Accelerated depreciation
    
    
    2.5
    
    
    
    
    
    
    
    0.1Total
    
    $
    10.0
    
    
    
    
    
    
    $
    0.9
  8




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Note 4  Discontinued Operations
  Note 5  Inventories
  Note 6  Intangible Assets
  November 1,
    
    
    November 3,
    
    
    February 2,(dollars in millions)
    
    2008
    
    
    2007
    
    
    2008Intangible assets subject to amortization:Favorable lease rights:Gross carrying amount
    
    $
    64.5
    
    
    $
    69.9
    
    
    $
    69.9Less: accumulated amortization
    
    
    (52.7
    )
    
    
    (53.7
    )
    
    
    (54.7
    )Carrying amount, end of period
    
    
    11.8
    
    
    
    16.2
    
    
    
    15.2Customer relationships:Gross carrying amount
    
    
    76.3
    
    
    
    75.8
    
    
    
    73.7Less: accumulated amortization
    
    
    (18.1
    )
    
    
    (2.9
    )
    
    
    (5.9
    )Carrying amount, end of period
    
    
    58.2
    
    
    
    72.9
    
    
    
    67.8Trademarks and other intangible assets:Gross carrying amount
    
    
    21.4
    
    
    
    18.4
    
    
    
    20.7Less: accumulated amortization
    
    
    (5.7
    )
    
    
    (2.0
    )
    
    
    (3.5
    )Carrying amount, end of period
    
    
    15.7
    
    
    
    16.4
    
    
    
    17.2Total carrying amount of intangible assets
subject to amortization
    
    
    85.7
    
    
    
    105.5
    
    
    
    100.2Indefinite-lived trademarks
    
    
    453.7
    
    
    
    459.3
    
    
    
    459.3Total intangible assets
    
    $
    539.4
    
    
    $
    564.8
    
    
    $
    559.5
  13 Weeks Ended
    
    39 Weeks EndedNovember 1,
    
    November 3,
    
    November 1,
    
    November 3,(dollars in millions)
    
    2008
    
    2007
    
    2008
    
    2007Amortization expense on intangible assets
    
    $
    4.8
    
    
    $
    4.6
    
    
    $
    16.2
    
    
    $
    6.7
  Year
    
    AmountRemainder of 2008
    
    $
    5.12009
    
    
    19.42010
    
    
    15.52011
    
    
    12.52012
    
    
    10.2
 9




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##### Table of Contents



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
    
    
    
    
    
    
    
    
    
    
    3.0
    
    
    
    3.0Balance as of November 1, 2008
    
    $
    40.2
    
    
    $
    42.0
    
    
    $
    241.8
    
    
    $
    324.0
  Note 8  Long-Term Debt
  November 1,
    
    
    November 3,
    
    
    February 2,(dollars in millions)
    
    2008
    
    
    2007
    
    
    2008Term loan facility
    
    $
    717.8
    
    
    $
    725.0
    
    
    $
    723.2Senior subordinated notes (1)
    
    
    198.1
    
    
    
    197.7
    
    
    
    197.8Revolving loan facility(2)
    
    
    215.0
    
    
    
    
    
    
    
    Capital-lease obligations
    
    
    1.1
    
    
    
    1.4
    
    
    
    1.3Other
    
    
    
    
    
    
    2.0
    
    
    
    Total debt
    
    
    1,132.0
    
    
    
    926.1
    
    
    
    922.3Less: current maturities of long-term debt
    
    
    222.3
    
    
    
    7.5
    
    
    
    7.4Long-term debt
    
    $
    909.7
    
    
    $
    918.6
    
    
    $
    914.9
 
 (1)
    
    As of November 1, 2008, the fair value of the Companys senior
subordinated notes was $150.0 million based on recent trading activity. The
decline in the fair value of the Senior Subordinated Notes is primarily due to
the current state of the credit market for similar debt instruments.(2)
    
    As of November 1, 2008, the Companys borrowing base on its
revolving loan facility was $313.8 million less $215.0 million in borrowings
and $30.8 million in outstanding letters of credit, or $68.0 million. The
variable interest rate including the applicable variable margin at November 1,
2008, was 4.28%.    10




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##### Table of Contents



Note 9  Derivatives
   Note 10  Fair Value Measurement
       Note 11  Pension Plans
  Payless Plan
  13 Weeks Ended
    
    
    39 Weeks EndedNovember 1,
    
    
    November 3,
    
    
    November 1,
    
    
    November 3,(dollars in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Components of pension expense:Service cost
    
    $
    0.1
    
    
    $
    0.2
    
    
    $
    0.3
    
    
    $
    0.7Interest cost
    
    
    0.6
    
    
    
    0.4
    
    
    
    1.8
    
    
    
    1.3Amortization of prior service cost
    
    
    0.4
    
    
    
    0.1
    
    
    
    1.2
    
    
    
    0.3Amortization of actuarial loss
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.5Total
    
    $
    1.3
    
    
    $
    0.9
    
    
    $
    3.9
    
    
    $
    2.8
 11




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##### Table of Contents



Stride Rite Plan
  13 Weeks Ended
    
    
    39 Weeks EndedNovember 1,
    
    
    November 3,
    
    
    November 1,
    
    
    November 3,(dollars in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Components of pension expense:Interest cost
    
    $
    1.1
    
    
    $
    0.9
    
    
    $
    3.3
    
    
    $
    0.9Expected return on net assets
    
    
    (1.3
    )
    
    
    (1.0
    )
    
    
    (3.7
    )
    
    
    (1.0
    )Total
    
    $
    (0.2
    )
    
    $
    (0.1
    )
    
    $
    (0.4
    )
    
    $
    (0.1
    )
 Note 12  Share-Based Compensation
   13 Weeks Ended
    
    39 Weeks EndedNovember 1,
    
    November 3,
    
    November 1,
    
    November 3,2008
    
    2007
    
    2008
    
    2007Stock-settled SARs(1):Vest in installments over 3 years
    
    
    104,139
    
    
    
    867,719
    
    
    
    652,194
    
    
    
    1,350,378Cliff vest after 3 years
    
    
    144,048
    
    
    
    47,000
    
    
    
    463,728
    
    
    
    290,400Nonvested Shares:Performance grant  vests in installments over 3 years(2)
    
    
    13,849
    
    
    
    18,298
    
    
    
    24,477
    
    
    
    144,008Vest in installments over 3 years
    
    
    8,974
    
    
    
    350,701
    
    
    
    276,923
    
    
    
    353,121Cliff vest after 3 years
    
    
    8,300
    
    
    
    86,755
    
    
    
    12,225
    
    
    
    141,190Nonvested Share Units:Performance grant  cliff vests after 3 years(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    271,113Cash-settled SARs:Vest in installments over 3 years
    
    
    
    
    
    
    48,086
    
    
    
    5,250
    
    
    
    70,611Cliff vest after 3 years
    
    
    4,000
    
    
    
    
    
    
    
    12,500
    
    
    
    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 November 1, 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. For the 13 and 39 weeks ended November 1, 2008,
approximately 57,000 and 188,000 nonvested performance shares, respectively, did
not vest because they failed to meet the performance 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
    
    
    39 Weeks EndedNovember 1,
    
    
    November 3,
    
    
    November 1,
    
    
    November 3,(dollars in millions, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of sales
    
    $
    1.0
    
    
    $
    1.3
    
    
    $
    3.1
    
    
    $
    2.9Selling, general and administrative expenses
    
    
    2.9
    
    
    
    3.2
    
    
    
    9.3
    
    
    
    7.8Share-based compensation expense before income taxes
    
    
    3.9
    
    
    
    4.5
    
    
    
    12.4
    
    
    
    10.7Tax benefit
    
    
    (1.4
    )
    
    
    (1.7
    )
    
    
    (4.7
    )
    
    
    (4.1
    )Share-based compensation expense after income taxes
    
    $
    2.5
    
    
    $
    2.8
    
    
    $
    7.7
    
    
    $
    6.6Effect on:Basic earnings per share
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.10Diluted earnings per share
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.10
  Note 13  Income Taxes
     13




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Note 14  Comprehensive Income
  13 Weeks Ended
    
    
    39 Weeks EndedNovember 1,
    
    
    November 3,
    
    
    November 1,
    
    
    November 3,(dollars in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net earnings
    
    $
    47.5
    
    
    $
    25.5
    
    
    $
    75.3
    
    
    $
    89.3Foreign currency translation adjustments
    
    
    (16.5
    )
    
    
    9.5
    
    
    
    (18.9
    )
    
    
    18.8Net derivative instrument fair value change, net of taxes
    
    
    (2.6
    )
    
    
    (4.7
    )
    
    
    3.3
    
    
    
    (4.7
    )Amortization of prior service cost and actuarial loss, net of taxes
    
    
    0.4
    
    
    
    0.2
    
    
    
    1.4
    
    
    
    0.5Total comprehensive income
    
    $
    28.8
    
    
    $
    30.5
    
    
    $
    61.1
    
    
    $
    103.9
  Note 15  Earnings Per Share
  13 Weeks Ended
    
    
    39 Weeks EndedNovember 1,
    
    
    November 3,
    
    
    November 1,
    
    
    November 3,(dollars in millions, except per share amounts; shares in  thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net earnings from continuing operations
    
    $
    47.4
    
    
    $
    25.6
    
    
    $
    75.7
    
    
    $
    89.3Weighted average shares outstanding  basic
    
    
    63,017
    
    
    
    64,577
    
    
    
    62,896
    
    
    
    64,614Net effect of dilutive stock options
    
    
    3
    
    
    
    510
    
    
    
    1
    
    
    
    802Net effect of dilutive SARs
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    67Dilutive shares due to nonvested shares
    
    
    142
    
    
    
    193
    
    
    
    233
    
    
    
    178Weighted average shares outstanding  diluted
    
    
    63,162
    
    
    
    65,281
    
    
    
    63,129
    
    
    
    65,661Basic earnings per share from continuing operations
    
    $
    0.75
    
    
    $
    0.40
    
    
    $
    1.20
    
    
    $
    1.38Diluted earnings per share from continuing operations
    
    $
    0.75
    
    
    $
    0.39
    
    
    $
    1.19
    
    
    $
    1.36
  Note 16  Segment Reporting
  (i)
    
    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.(ii)
    
    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.(iii)
    
    The Stride Rite Retail reporting segment consists of Stride Rites specialty stores
and outlet stores.(iv)
    
    The Stride Rite Wholesale reporting segment consists of Stride Rites wholesale
operations.
  14




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Payless

    
    Payless
    

    Stride Rite

    
    Stride Rite(dollars in millions)
    
    Domestic
    
    International
    
    Retail
    
    Wholesale
    
    Consolidated13 weeks ended November 1, 2008:Revenues from external customers
    
    $
    553.7
    
    
    $
    111.4
    
    
    $
    65.5
    
    
    $
    132.1
    
    
    $
    862.7Operating profit from continuing operations
    
    
    29.2
    
    
    
    12.3
    
    
    
    7.6
    
    
    
    4.4
    
    
    
    53.539 weeks ended November 1, 2008:Revenues from external customers
    
    $
    1,729.6
    
    
    $
    332.7
    
    
    $
    171.3
    
    
    $
    473.2
    
    
    $
    2,706.8Operating profit from continuing operations
    
    
    30.4
    
    
    
    41.0
    
    
    
    6.0
    
    
    
    40.9
    
    
    
    118.3As of November 1, 2008:Operating Segment Total Assets
    
    $
    1,396.3
    
    
    $
    199.5
    
    
    $
    114.7
    
    
    $
    975.2
    
    
    $
    2,685.7Payless

    
    Payless
    

    Stride Rite

    
    Stride Rite(dollars in millions)
    
    Domestic
    
    International
    
    Retail
    
    Wholesale
    
    Consolidated13 weeks ended November 3, 2007:Revenues from external customers
    
    $
    574.9
    
    
    $
    111.0
    
    
    $
    49.8
    
    
    $
    95.0
    
    
    $
    830.7Operating profit (loss) from continuing operations
    
    
    28.4
    
    
    
    15.8
    
    
    
    (0.4
    )
    
    
    (16.1
    )
    
    
    27.739 weeks ended November 3, 2007:Revenues from external customers
    
    $
    1,804.0
    
    
    $
    309.8
    
    
    $
    49.8
    
    
    $
    95.0
    
    
    $
    2,258.6Operating profit (loss) from continuing operations
    
    
    108.1
    
    
    
    34.4
    
    
    
    (0.4
    )
    
    
    (16.1
    )
    
    
    126.0As of November 3, 2007:Operating Segment Total Assets
    
    $
    1,201.7
    
    
    $
    146.1
    
    
    $
    108.8
    
    
    $
    1,005.2
    
    
    $
    2,461.8
  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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18




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##### Table of Contents



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




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13 Weeks Ended November 1, 2008Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    762.2
    
    
    $
    295.3
    
    
    $
    (194.8
    )
    
    $
    862.7Cost of sales
    
    
    
    
    
    
    533.7
    
    
    
    203.2
    
    
    
    (172.9
    )
    
    
    564.0Gross margin
    
    
    
    
    
    
    228.5
    
    
    
    92.1
    
    
    
    (21.9
    )
    
    
    298.7Selling, general and administrative expenses
    
    
    (0.1
    )
    
    
    204.5
    
    
    
    62.6
    
    
    
    (21.9
    )
    
    
    245.1Restructuring charges
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Operating profit from continuing operations
    
    
    0.1
    
    
    
    23.9
    
    
    
    29.5
    
    
    
    
    
    
    
    53.5Interest expense
    
    
    4.4
    
    
    
    15.5
    
    
    
    
    
    
    
    
    
    
    
    19.9Interest income
    
    
    
    
    
    
    (2.4
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    (2.7
    )Equity in earnings of subsidiaries
    
    
    (49.2
    )
    
    
    (26.5
    )
    
    
    
    
    
    
    75.7
    
    
    
    Earnings from continuing operations before income taxes
and minority interest
    
    
    44.9
    
    
    
    37.3
    
    
    
    29.8
    
    
    
    (75.7
    )
    
    
    36.3(Benefit) / provision for income taxes
    
    
    (2.6
    )
    
    
    (11.8
    )
    
    
    1.5
    
    
    
    
    
    
    
    (12.9
    )Earnings from continuing operations before minority interest
    
    
    47.5
    
    
    
    49.1
    
    
    
    28.3
    
    
    
    (75.7
    )
    
    
    49.2Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (1.8
    )
    
    
    
    
    
    
    (1.8
    )Net earnings from continuing operations
    
    
    47.5
    
    
    
    49.1
    
    
    
    26.5
    
    
    
    (75.7
    )
    
    
    47.4Income from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Net earnings
    
    $
    47.5
    
    
    $
    49.2
    
    
    $
    26.5
    
    
    $
    (75.7
    )
    
    $
    47.5
 39 Weeks Ended November 1, 2008Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    2,404.4
    
    
    $
    897.0
    
    
    $
    (594.6
    )
    
    $
    2,706.8Cost of sales
    
    
    
    
    
    
    1,730.9
    
    
    
    623.1
    
    
    
    (533.8
    )
    
    
    1,820.2Gross margin
    
    
    
    
    
    
    673.5
    
    
    
    273.9
    
    
    
    (60.8
    )
    
    
    886.6Selling, general and administrative expenses
    
    
    0.5
    
    
    
    644.7
    
    
    
    183.7
    
    
    
    (60.8
    )
    
    
    768.1Restructuring charges
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2Operating (loss) profit from continuing operations
    
    
    (0.5
    )
    
    
    28.6
    
    
    
    90.2
    
    
    
    
    
    
    
    118.3Interest expense
    
    
    13.1
    
    
    
    44.7
    
    
    
    
    
    
    
    (0.1
    )
    
    
    57.7Interest income
    
    
    
    
    
    
    (4.7
    )
    
    
    (1.9
    )
    
    
    0.1
    
    
    
    (6.5
    )Equity in earnings of subsidiaries
    
    
    (80.5
    )
    
    
    (78.1
    )
    
    
    
    
    
    
    158.6
    
    
    
    Earnings from continuing operations before income taxes
and minority interest
    
    
    66.9
    
    
    
    66.7
    
    
    
    92.1
    
    
    
    (158.6
    )
    
    
    67.1(Benefit) / provision for income taxes
    
    
    (8.4
    )
    
    
    (14.2
    )
    
    
    9.2
    
    
    
    
    
    
    
    (13.4
    )Earnings from continuing operations before minority interest
    
    
    75.3
    
    
    
    80.9
    
    
    
    82.9
    
    
    
    (158.6
    )
    
    
    80.5Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (4.8
    )
    
    
    
    
    
    
    (4.8
    )Net earnings from continuing operations
    
    
    75.3
    
    
    
    80.9
    
    
    
    78.1
    
    
    
    (158.6
    )
    
    
    75.7Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Net earnings
    
    $
    75.3
    
    
    $
    80.5
    
    
    $
    78.1
    
    
    $
    (158.6
    )
    
    $
    75.3
 20




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##### Table of Contents



13 Weeks Ended November 3, 2007Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    738.5
    
    
    $
    260.7
    
    
    $
    (168.5
    )
    
    $
    830.7Cost of sales
    
    
    
    
    
    
    532.0
    
    
    
    196.9
    
    
    
    (165.4
    )
    
    
    563.5Gross margin
    
    
    
    
    
    
    206.5
    
    
    
    63.8
    
    
    
    (3.1
    )
    
    
    267.2Selling, general and administrative expenses
    
    
    (1.3
    )
    
    
    205.8
    
    
    
    38.2
    
    
    
    (3.1
    )
    
    
    239.6Restructuring charges
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Operating profit from continuing operations
    
    
    1.3
    
    
    
    0.8
    
    
    
    25.6
    
    
    
    
    
    
    
    27.7Interest expense
    
    
    9.4
    
    
    
    13.7
    
    
    
    0.3
    
    
    
    (5.3
    )
    
    
    18.1Interest income
    
    
    
    
    
    
    (6.6
    )
    
    
    (1.6
    )
    
    
    5.3
    
    
    
    (2.9
    )Equity in earnings of subsidiaries
    
    
    (30.7
    )
    
    
    (20.1
    )
    
    
    
    
    
    
    50.8
    
    
    
    Earnings from continuing operations before income taxes
and minority interest
    
    
    22.6
    
    
    
    13.8
    
    
    
    26.9
    
    
    
    (50.8
    )
    
    
    12.5(Benefit) / provision for income taxes
    
    
    (2.9
    )
    
    
    (17.0
    )
    
    
    4.8
    
    
    
    
    
    
    
    (15.1
    )Earnings from continuing operations before minority interest
    
    
    25.5
    
    
    
    30.8
    
    
    
    22.1
    
    
    
    (50.8
    )
    
    
    27.6Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (2.0
    )
    
    
    
    
    
    
    (2.0
    )Net earnings from continuing operations
    
    
    25.5
    
    
    
    30.8
    
    
    
    20.1
    
    
    
    (50.8
    )
    
    
    25.6Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Net earnings
    
    $
    25.5
    
    
    $
    30.7
    
    
    $
    20.1
    
    
    $
    (50.8
    )
    
    $
    25.5
 39 Weeks Ended November 3, 2007Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    2,031.0
    
    
    $
    740.2
    
    
    $
    (512.6
    )
    
    $
    2,258.6Cost of sales
    
    
    
    
    
    
    1,410.1
    
    
    
    577.4
    
    
    
    (505.6
    )
    
    
    1,481.9Gross margin
    
    
    
    
    
    
    620.9
    
    
    
    162.8
    
    
    
    (7.0
    )
    
    
    776.7Selling, general and administrative expenses
    
    
    1.0
    
    
    
    558.5
    
    
    
    98.0
    
    
    
    (7.0
    )
    
    
    650.5Restructuring charges
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2Operating (loss) profit from continuing operations
    
    
    (1.0
    )
    
    
    62.2
    
    
    
    64.8
    
    
    
    
    
    
    
    126.0Interest expense
    
    
    28.3
    
    
    
    14.4
    
    
    
    0.8
    
    
    
    (15.8
    )
    
    
    27.7Interest income
    
    
    
    
    
    
    (23.1
    )
    
    
    (4.3
    )
    
    
    15.8
    
    
    
    (11.6
    )Equity in earnings of subsidiaries
    
    
    (108.2
    )
    
    
    (53.4
    )
    
    
    
    
    
    
    161.6
    
    
    
    Earnings from continuing operations before income taxes
and minority interest
    
    
    78.9
    
    
    
    124.3
    
    
    
    68.3
    
    
    
    (161.6
    )
    
    
    109.9(Benefit) / provision for income taxes
    
    
    (10.4
    )
    
    
    16.1
    
    
    
    10.7
    
    
    
    
    
    
    
    16.4Earnings from continuing operations before minority interest
    
    
    89.3
    
    
    
    108.2
    
    
    
    57.6
    
    
    
    (161.6
    )
    
    
    93.5Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (4.2
    )
    
    
    
    
    
    
    (4.2
    )Net earnings from continuing operations
    
    
    89.3
    
    
    
    108.2
    
    
    
    53.4
    
    
    
    (161.6
    )
    
    
    89.3Earnings from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings
    
    $
    89.3
    
    
    $
    108.2
    
    
    $
    53.4
    
    
    $
    (161.6
    )
    
    $
    89.3
 21




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##### Table of Contents



As of November 1, 2008Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    404.1
    
    
    $
    119.5
    
    
    $
    
    
    
    $
    523.6Accounts receivable, net
    
    
    
    
    
    
    87.4
    
    
    
    10.8
    
    
    
    (9.1
    )
    
    
    89.1Inventories
    
    
    
    
    
    
    393.9
    
    
    
    78.5
    
    
    
    (4.8
    )
    
    
    467.6Current deferred income taxes
    
    
    
    
    
    
    42.6
    
    
    
    3.0
    
    
    
    
    
    
    
    45.6Prepaid expenses
    
    
    
    
    
    
    67.1
    
    
    
    7.7
    
    
    
    
    
    
    
    74.8Other current assets
    
    
    64.5
    
    
    
    269.1
    
    
    
    92.0
    
    
    
    (388.5
    )
    
    
    37.1Current assets of discontinued operations
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    0.9Total current assets
    
    
    64.5
    
    
    
    1,265.1
    
    
    
    311.5
    
    
    
    (402.4
    )
    
    
    1,238.7Property and Equipment:Land
    
    
    
    
    
    
    8.6
    
    
    
    
    
    
    
    
    
    
    
    8.6Property, buildings and equipment
    
    
    
    
    
    
    1,319.4
    
    
    
    167.4
    
    
    
    
    
    
    
    1,486.8Accumulated depreciation and amortization
    
    
    
    
    
    
    (843.4
    )
    
    
    (108.7
    )
    
    
    
    
    
    
    (952.1
    )Property and equipment, net
    
    
    
    
    
    
    484.6
    
    
    
    58.7
    
    
    
    
    
    
    
    543.3Intangible assets, net
    
    
    
    
    
    
    519.1
    
    
    
    20.3
    
    
    
    
    
    
    
    539.4Goodwill
    
    
    
    
    
    
    185.9
    
    
    
    138.1
    
    
    
    
    
    
    
    324.0Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2Other assets
    
    
    1,458.7
    
    
    
    635.3
    
    
    
    1.9
    
    
    
    (2,055.8
    )
    
    
    40.1Total Assets
    
    $
    1,523.2
    
    
    $
    3,090.0
    
    
    $
    530.7
    
    
    $
    (2,458.2
    )
    
    $
    2,685.7LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    222.3
    
    
    $
    
    
    
    $
    
    
    
    $
    222.3Accounts payable
    
    
    
    
    
    
    123.1
    
    
    
    116.8
    
    
    
    (53.4
    )
    
    
    186.5Accrued expenses
    
    
    263.3
    
    
    
    251.2
    
    
    
    26.2
    
    
    
    (332.5
    )
    
    
    208.2Current liabilities of discontinued operations
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    
    
    
    
    1.8Total current liabilities
    
    
    263.3
    
    
    
    598.4
    
    
    
    143.0
    
    
    
    (385.9
    )
    
    
    618.8Long-term debt
    
    
    481.2
    
    
    
    710.5
    
    
    
    9.6
    
    
    
    (291.6
    )
    
    
    909.7Deferred income taxes
    
    
    
    
    
    
    115.8
    
    
    
    0.2
    
    
    
    
    
    
    
    116.0Other liabilities
    
    
    2.6
    
    
    
    223.8
    
    
    
    17.4
    
    
    
    
    
    
    
    243.8Minority interest
    
    
    
    
    
    
    
    
    
    
    21.3
    
    
    
    
    
    
    
    21.3Commitments and contingenciesShareowners equity
    
    
    776.1
    
    
    
    1,441.5
    
    
    
    339.2
    
    
    
    (1,780.7
    )
    
    
    776.1Total Liabilities and Shareowners Equity
    
    $
    1,523.2
    
    
    $
    3,090.0
    
    
    $
    530.7
    
    
    $
    (2,458.2
    )
    
    $
    2,685.7
 22




---



##### Table of Contents



As of November 3, 2007Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    119.0
    
    
    $
    182.3
    
    
    $
    
    
    
    $
    301.3Accounts receivable, net
    
    
    
    
    
    
    77.3
    
    
    
    92.4
    
    
    
    (76.1
    )
    
    
    93.6Inventories
    
    
    
    
    
    
    412.4
    
    
    
    67.9
    
    
    
    (4.2
    )
    
    
    476.1Current deferred income taxes
    
    
    
    
    
    
    11.7
    
    
    
    3.4
    
    
    
    
    
    
    
    15.1Prepaid expenses
    
    
    0.6
    
    
    
    86.8
    
    
    
    7.5
    
    
    
    
    
    
    
    94.9Other current assets
    
    
    48.3
    
    
    
    311.4
    
    
    
    0.1
    
    
    
    (344.9
    )
    
    
    14.9Current assets of discontinued operations
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    0.8Total current assets
    
    
    48.9
    
    
    
    1,019.4
    
    
    
    353.6
    
    
    
    (425.2
    )
    
    
    996.7Property and Equipment:Land
    
    
    
    
    
    
    10.8
    
    
    
    
    
    
    
    
    
    
    
    10.8Property, buildings and equipment
    
    
    
    
    
    
    1,246.5
    
    
    
    176.1
    
    
    
    
    
    
    
    1,422.6Accumulated depreciation and amortization
    
    
    
    
    
    
    (780.9
    )
    
    
    (111.5
    )
    
    
    
    
    
    
    (892.4
    )Property and equipment, net
    
    
    
    
    
    
    476.4
    
    
    
    64.6
    
    
    
    
    
    
    
    541.0Intangible assets, net
    
    
    
    
    
    
    537.1
    
    
    
    27.7
    
    
    
    
    
    
    
    564.8Goodwill
    
    
    
    
    
    
    176.5
    
    
    
    138.1
    
    
    
    
    
    
    
    314.6Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    1.4Other assets
    
    
    1,424.2
    
    
    
    740.8
    
    
    
    1.9
    
    
    
    (2,123.6
    )
    
    
    43.3Total Assets
    
    $
    1,473.1
    
    
    $
    2,950.2
    
    
    $
    587.3
    
    
    $
    (2,548.8
    )
    
    $
    2,461.8LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    7.5
    
    
    $
    
    
    
    $
    
    
    
    $
    7.5Accounts payable
    
    
    
    
    
    
    110.7
    
    
    
    87.6
    
    
    
    (39.0
    )
    
    
    159.3Accrued expenses
    
    
    196.2
    
    
    
    361.9
    
    
    
    42.5
    
    
    
    (386.2
    )
    
    
    214.4Current liabilities of discontinued operations
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    1.5Total current liabilities
    
    
    196.2
    
    
    
    481.6
    
    
    
    130.1
    
    
    
    (425.2
    )
    
    
    382.7Long-term debt
    
    
    480.9
    
    
    
    717.8
    
    
    
    31.1
    
    
    
    (311.2
    )
    
    
    918.6Deferred income taxes
    
    
    
    
    
    
    129.6
    
    
    
    2.4
    
    
    
    
    
    
    
    132.0Other liabilities
    
    
    2.3
    
    
    
    198.9
    
    
    
    20.1
    
    
    
    
    
    
    
    221.3Minority interest
    
    
    
    
    
    
    
    
    
    
    13.5
    
    
    
    
    
    
    
    13.5Commitments and contingenciesShareowners equity
    
    
    793.7
    
    
    
    1,422.3
    
    
    
    390.1
    
    
    
    (1,812.4
    )
    
    
    793.7Total Liabilities and Shareowners Equity
    
    $
    1,473.1
    
    
    $
    2,950.2
    
    
    $
    587.3
    
    
    $
    (2,548.8
    )
    
    $
    2,461.8
 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




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##### Table of Contents



39 Weeks Ended November 1, 2008Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    75.3
    
    
    $
    80.5
    
    
    $
    78.1
    
    
    $
    (158.6
    )
    
    $
    75.3Loss from discontinued operations, net of income taxes
and minority interest
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    0.4Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    5.4
    
    
    
    0.2
    
    
    
    
    
    
    
    5.6Depreciation and amortization
    
    
    2.2
    
    
    
    87.2
    
    
    
    16.5
    
    
    
    
    
    
    
    105.9Provision for losses on accounts receivable
    
    
    
    
    
    
    2.0
    
    
    
    0.2
    
    
    
    
    
    
    
    2.2Share-based compensation expense
    
    
    
    
    
    
    12.7
    
    
    
    (0.3
    )
    
    
    
    
    
    
    12.4Deferred income taxes
    
    
    
    
    
    
    (18.6
    )
    
    
    (2.7
    )
    
    
    
    
    
    
    (21.3
    )Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    4.8
    
    
    
    
    
    
    
    4.8Changes in working capital:Accounts receivable, net
    
    
    
    
    
    
    (5.0
    )
    
    
    (5.7
    )
    
    
    5.9
    
    
    
    (4.8
    )Inventories
    
    
    
    
    
    
    1.8
    
    
    
    (5.7
    )
    
    
    1.3
    
    
    
    (2.6
    )Prepaid expenses and other current assets
    
    
    (8.7
    )
    
    
    54.8
    
    
    
    (47.9
    )
    
    
    10.8
    
    
    
    9.0Accounts payable
    
    
    
    
    
    
    (20.7
    )
    
    
    39.7
    
    
    
    (27.6
    )
    
    
    (8.6
    )Accrued expenses
    
    
    27.5
    
    
    
    (38.5
    )
    
    
    2.3
    
    
    
    26.2
    
    
    
    17.5Changes in other assets and liabilities, net
    
    
    (95.4
    )
    
    
    (40.8
    )
    
    
    0.9
    
    
    
    142.0
    
    
    
    6.7Contributions to pension plans
    
    
    
    
    
    
    (4.7
    )
    
    
    
    
    
    
    
    
    
    
    (4.7
    )Cash flow provided by operating activities
    
    
    0.9
    
    
    
    116.5
    
    
    
    80.4
    
    
    
    
    
    
    
    197.8Investing Activities:Capital expenditures
    
    
    
    
    
    
    (96.1
    )
    
    
    (11.4
    )
    
    
    
    
    
    
    (107.5
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    
    
    
    
    2.1Cash flow used in investing activities
    
    
    
    
    
    
    (94.0
    )
    
    
    (11.4
    )
    
    
    
    
    
    
    (105.4
    )Financing Activities:Proceeds from revolving loan facility
    
    
    
    
    
    
    215.0
    
    
    
    
    
    
    
    
    
    
    
    215.0Repayment of debt
    
    
    
    
    
    
    (5.5
    )
    
    
    
    
    
    
    
    
    
    
    (5.5
    )Payment of deferred financing costs
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Issuances of common stock
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8Purchases of common stock
    
    
    (1.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.7
    )Contributions by parent
    
    
    
    
    
    
    (5.2
    )
    
    
    5.2
    
    
    
    
    
    
    
    Dividends received from (paid to) related parties
    
    
    
    
    
    
    107.9
    
    
    
    (107.9
    )
    
    
    
    
    
    
    Contributions by minority owners
    
    
    
    
    
    
    
    
    
    
    3.4
    
    
    
    
    
    
    
    3.4Distributions to minority owners
    
    
    
    
    
    
    
    
    
    
    (3.6
    )
    
    
    
    
    
    
    (3.6
    )Cash flow (used in) provided by provided by financing activities
    
    
    (0.9
    )
    
    
    312.1
    
    
    
    (102.9
    )
    
    
    
    
    
    
    208.3Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (9.6
    )
    
    
    
    
    
    
    (9.6
    )Increase/(decrease) in cash and cash equivalents
    
    
    
    
    
    
    334.6
    
    
    
    (43.5
    )
    
    
    
    
    
    
    291.1Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    69.5
    
    
    
    163.0
    
    
    
    
    
    
    
    232.5Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    404.1
    
    
    $
    119.5
    
    
    $
    
    
    
    $
    523.6
 25




---



##### Table of Contents



39 Weeks Ended November 3, 2007Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    89.3
    
    
    $
    108.2
    
    
    $
    53.4
    
    
    $
    (161.6
    )
    
    $
    89.3Earnings from discontinued operations, net of income taxes
and minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    5.6
    
    
    
    0.5
    
    
    
    
    
    
    
    6.1Depreciation and amortization
    
    
    0.7
    
    
    
    67.6
    
    
    
    13.1
    
    
    
    
    
    
    
    81.4Provision for losses on receivables
    
    
    
    
    
    
    0.1
    
    
    
    0.6
    
    
    
    
    
    
    
    0.7Share-based compensation expense
    
    
    
    
    
    
    11.2
    
    
    
    (0.5
    )
    
    
    
    
    
    
    10.7Deferred income taxes
    
    
    
    
    
    
    (8.2
    )
    
    
    3.5
    
    
    
    
    
    
    
    (4.7
    )Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    4.2
    
    
    
    
    
    
    
    4.2Income tax benefit from share-based compensation
    
    
    
    
    
    
    2.6
    
    
    
    
    
    
    
    
    
    
    
    2.6Excess 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
    
    
    
    
    
    
    22.8
    
    
    
    (21.3
    )
    
    
    21.0
    
    
    
    22.5Inventories
    
    
    
    
    
    
    43.6
    
    
    
    32.6
    
    
    
    (0.2
    )
    
    
    76.0Prepaid expenses and other current assets
    
    
    (6.0
    )
    
    
    (66.1
    )
    
    
    0.4
    
    
    
    38.6
    
    
    
    (33.1
    )Accounts payable
    
    
    
    
    
    
    (88.1
    )
    
    
    29.9
    
    
    
    (18.5
    )
    
    
    (76.7
    )Accrued expenses
    
    
    20.8
    
    
    
    32.9
    
    
    
    (29.3
    )
    
    
    (40.9
    )
    
    
    (16.5
    )Changes in other assets and liabilities, net
    
    
    (91.9
    )
    
    
    (56.7
    )
    
    
    6.6
    
    
    
    164.0
    
    
    
    22.0Net cash (used in) provided by discontinued operations
    
    
    
    
    
    
    (0.4
    )
    
    
    0.1
    
    
    
    
    
    
    
    (0.3
    )Cash flow provided by operating activities
    
    
    12.9
    
    
    
    72.1
    
    
    
    93.8
    
    
    
    2.4
    
    
    
    181.2Investing Activities:Capital expenditures
    
    
    
    
    
    
    (118.7
    )
    
    
    (9.3
    )
    
    
    
    
    
    
    (128.0
    )Restricted cash
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Proceeds from sale of property and equipment
    
    
    
    
    
    
    2.9
    
    
    
    
    
    
    
    
    
    
    
    2.9Purchases of investments
    
    
    
    
    
    
    (6.1
    )
    
    
    
    
    
    
    
    
    
    
    (6.1
    )Sales and maturities of investments
    
    
    
    
    
    
    96.7
    
    
    
    
    
    
    
    
    
    
    
    96.7Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (876.9
    )
    
    
    
    
    
    
    
    
    
    
    (876.9
    )Cash flow used in investing activities
    
    
    
    
    
    
    (902.1
    )
    
    
    (7.3
    )
    
    
    
    
    
    
    (909.4
    )Financing Activities:Repayment of notes payable
    
    
    
    
    
    
    
    
    
    
    (2.0
    )
    
    
    
    
    
    
    (2.0
    )Issuance of debt
    
    
    
    
    
    
    725.0
    
    
    
    
    
    
    
    
    
    
    
    725.0Repayment of debt
    
    
    
    
    
    
    (51.5
    )
    
    
    
    
    
    
    
    
    
    
    (51.5
    )Payment of deferred financing costs
    
    
    
    
    
    
    (8.1
    )
    
    
    
    
    
    
    
    
    
    
    (8.1
    )Issuances of common stock
    
    
    8.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.3Purchases of common stock
    
    
    (21.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21.2
    )Excess tax benefits from share-based compensation
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    
    
    
    
    2.4Contributions by minority owners
    
    
    
    
    
    
    
    
    
    
    2.4
    
    
    
    (2.4
    )
    
    
    Distributions to minority owners
    
    
    
    
    
    
    
    
    
    
    (2.4
    )
    
    
    
    
    
    
    (2.4
    )Dividends to parent
    
    
    
    
    
    
    41.8
    
    
    
    (41.8
    )
    
    
    
    
    
    
    Cash flow (used in) provided by financing activities
    
    
    (12.9
    )
    
    
    709.6
    
    
    
    (43.8
    )
    
    
    (2.4
    )
    
    
    650.5Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    7.6
    
    
    
    
    
    
    
    7.6(Decrease)/increase in cash and cash equivalents
    
    
    
    
    
    
    (120.4
    )
    
    
    50.3
    
    
    
    
    
    
    
    (70.1
    )Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    239.4
    
    
    
    132.0
    
    
    
    
    
    
    
    371.4Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    119.0
    
    
    $
    182.3
    
    
    $
    
    
    
    $
    301.3
 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
  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 39 weeks ended November 1, 2008 and November 3, 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 39 weeks ended November 1, 2008 and November 3, 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




---



##### Table of Contents



Consolidated Review of Operations
  Third Quarter
    
    First Nine Months2008
    
    2007
    
    2008
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    65.4
    
    
    
    67.8
    
    
    
    67.2
    
    
    
    65.6Gross margin
    
    
    34.6
    
    
    
    32.2
    
    
    
    32.8
    
    
    
    34.4Selling, general and administrative expense
    
    
    28.4
    
    
    
    28.8
    
    
    
    28.4
    
    
    
    28.8Operating profit from continuing operations
    
    
    6.2
    
    
    
    3.4
    
    
    
    4.4
    
    
    
    5.6Interest expense, net
    
    
    2.0
    
    
    
    1.9
    
    
    
    1.9
    
    
    
    0.7Earnings from continuing operations before
income taxes and minority interest
    
    
    4.2
    
    
    
    1.5
    
    
    
    2.5
    
    
    
    4.9Effective income tax rate*
    
    
    (35.5
    )
    
    
    (120.8
    )
    
    
    (20.0
    )
    
    
    14.9Earnings from continuing operations before
minority interest
    
    
    5.7
    
    
    
    3.3
    
    
    
    3.0
    
    
    
    4.1Minority interest, net of income taxes
    
    
    (0.2
    )
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    (0.2
    )Net earnings from continuing operations
    
    
    5.5
    
    
    
    3.0
    
    
    
    2.8
    
    
    
    3.9Loss from discontinued operations,
net of income taxes and minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings
    
    
    5.5
    %
    
    
    3.0
    %
    
    
    2.8
    %
    
    
    3.9
    %
 
 *
    
    Percent of pre-tax earnings Net Earnings
  Net Sales
   Third Quarter
    
    First Nine Months2008
    
    2007
    
    2008
    
    2007Net sales
    
    
    3.9
    %
    
    
    18.1
    %
    
    
    19.8
    %
    
    
    7.3
    %Same-store sales
    
    
    (3.2
    )
    
    
    (2.4
    )
    
    
    (2.8
    )
    
    
    0.8Average selling price per unit
    
    
    4.7
    
    
    
    2.8
    
    
    
    4.0
    
    
    
    2.0Unit volume
    
    
    (7.4
    )
    
    
    (5.3
    )
    
    
    (6.3
    )
    
    
    (1.5
    )Footwear average selling price per unit
    
    
    6.3
    
    
    
    3.8
    
    
    
    5.2
    
    
    
    2.5Footwear unit volume
    
    
    (9.4
    )
    
    
    (5.8
    )
    
    
    (7.8
    )
    
    
    (1.7
    )Non-footwear average selling price per unit
    
    
    4.8
    
    
    
    (3.3
    )
    
    
    2.7
    
    
    
    (2.2
    )Non-footwear unit volume
    
    
    (0.3
    )
    
    
    (3.6
    )
    
    
    0.2
    
    
    
    (0.6
    )
 30




---



##### Table of Contents



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




---



##### Table of Contents



Third Quarter
    
    
    First Nine Months(dollars in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Interest expense
    
    $
    19.9
    
    
    $
    18.1
    
    
    $
    57.7
    
    
    $
    27.7Interest income
    
    
    (2.7
    )
    
    
    (2.9
    )
    
    
    (6.5
    )
    
    
    (11.6
    )Interest expense, net
    
    $
    17.2
    
    
    $
    15.2
    
    
    $
    51.2
    
    
    $
    16.1
  Income Taxes
    Minority Interest, Net of Taxes
  Discontinued Operations
  Reporting Segment Review of Operations
  32




---



##### Table of Contents



Third Quarter
    
    
    First Nine Months(in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues from external customers:Payless Domestic
    
    $
    553.7
    
    
    $
    574.9
    
    
    $
    1,729.6
    
    
    $
    1,804.0Payless International
    
    
    111.4
    
    
    
    111.0
    
    
    
    332.7
    
    
    
    309.8Stride Rite Wholesale
    
    
    132.1
    
    
    
    95.0
    
    
    
    473.2
    
    
    
    95.0Stride Rite Retail
    
    
    65.5
    
    
    
    49.8
    
    
    
    171.3
    
    
    
    49.8Consolidated Net Sales
    
    $
    862.7
    
    
    $
    830.7
    
    
    $
    2,706.8
    
    
    $
    2,258.6Operating profit from continuing operations:Payless Domestic
    
    $
    29.2
    
    
    $
    28.4
    
    
    $
    30.4
    
    
    $
    108.1Payless International
    
    
    12.3
    
    
    
    15.8
    
    
    
    41.0
    
    
    
    34.4Stride Rite Wholesale
    
    
    4.4
    
    
    
    (16.1
    )
    
    
    40.9
    
    
    
    (16.1
    )Stride Rite Retail
    
    
    7.6
    
    
    
    (0.4
    )
    
    
    6.0
    
    
    
    (0.4
    )Operating profit from continuing operations
    
    $
    53.5
    
    
    $
    27.7
    
    
    $
    118.3
    
    
    $
    126.0
  Payless
    
    Stride RitePayless Domestic
    
    International
    
    Retail
    
    TotalThird Quarter 2008Beginning store
count
    
    
    3,941
    
    
    
    606
    
    
    
    351
    
    
    
    4,898Stores opened
    
    
    13
    
    
    
    9
    
    
    
    3
    
    
    
    25Stores closed
    
    
    (29
    )
    
    
    (3
    )
    
    
    (1
    )
    
    
    (33
    )Ending store count
    
    
    3,925
    
    
    
    612
    
    
    
    353
    
    
    
    4,890First Nine Months 2008Beginning store
count
    
    
    3,954
    
    
    
    598
    
    
    
    340
    
    
    
    4,892Stores opened
    
    
    84
    
    
    
    22
    
    
    
    21
    
    
    
    127Stores closed
    
    
    (113
    )
    
    
    (8
    )
    
    
    (8
    )
    
    
    (129
    )Ending store count
    
    
    3,925
    
    
    
    612
    
    
    
    353
    
    
    
    4,890Third Quarter 2007Beginning store
count
    
    
    3,972
    
    
    
    588
    
    
    
    
    
    
    
    4,560Stores acquired
    
    
    
    
    
    
    
    
    
    
    330
    
    
    
    330Stores opened
    
    
    24
    
    
    
    9
    
    
    
    9
    
    
    
    42Stores closed
    
    
    (36
    )
    
    
    (3
    )
    
    
    (2
    )
    
    
    (41
    )Ending store count
    
    
    3,960
    
    
    
    594
    
    
    
    337
    
    
    
    4,891First Nine Months 2007Beginning store
count
    
    
    3,986
    
    
    
    586
    
    
    
    
    
    
    
    4,572Stores acquired
    
    
    
    
    
    
    
    
    
    
    330
    
    
    
    330Stores opened
    
    
    87
    
    
    
    17
    
    
    
    9
    
    
    
    113Stores closed
    
    
    (113
    )
    
    
    (9
    )
    
    
    (2
    )
    
    
    (124
    )Ending store count
    
    
    3,960
    
    
    
    594
    
    
    
    337
    
    
    
    4,891
 Payless Domestic Segment Operating Results
  33




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##### Table of Contents



Third Quarter
    
    First Nine MonthsPercent increase
    
    
    
    
    
    
    
    
    
    Percent increase(decrease)
    
    
    
    
    
    
    
    
    
    (decrease)(dollars in millions)
    
    2008
    
    2007
    
    2007 to 2008
    
    2008
    
    2007
    
    2007 to 2008Revenues from external customers
    
    $
    553.7
    
    
    $
    574.9
    
    
    
    (3.7)
    %
    
    $
    1,729.6
    
    
    $
    1,804.0
    
    
    
    (4.1)
    %Operating profit from continuing operations
    
    $
    29.2
    
    
    $
    28.4
    
    
    
    2.8
    %
    
    $
    30.4
    
    
    $
    108.1
    
    
    
    (71.9)
    %Operating profit from continuing operations as %
of revenues from external customers
    
    
    5.3
    %
    
    
    4.9
    %
    
    
    
    
    
    
    1.8
    %
    
    
    6.0
    %
     Payless International Segment Operating Results
  Third Quarter
    
    First Nine MonthsPercent increase
    
    
    
    
    
    
    
    
    
    Percent increase(decrease)
    
    
    
    
    
    
    
    
    
    (decrease)(dollars in millions)
    
    2008
    
    2007
    
    2007 to 2008
    
    2008
    
    2007
    
    2007 to 2008Revenues from external customers
    
    $
    111.4
    
    
    $
    111.0
    
    
    
    0.4
    %
    
    $
    332.7
    
    
    $
    309.8
    
    
    
    7.4
    %Operating profit from continuing operations
    
    $
    12.3
    
    
    $
    15.8
    
    
    
    (22.2)
    %
    
    $
    41.0
    
    
    $
    34.4
    
    
    
    19.2
    %Operating profit from continuing operations as %
of revenues from external customers
    
    
    11.0
    %
    
    
    14.2
    %
    
    
    
    
    
    
    12.3
    %
    
    
    11.1
    %
     34




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##### Table of Contents



Stride Rite Wholesale Segment Operating Results
  Third Quarter
    
    First Nine Months(dollars in millions)
    
    2008
    
    2007
    
    2008
    
    2007Revenues from external customers
    
    $
    132.1
    
    
    $
    95.0
    
    
    $
    473.2
    
    
    $
    95.0Operating profit (loss) from continuing operations
    
    $
    4.4
    
    
    $
    (16.1
    )
    
    $
    40.9
    
    
    $
    (16.1
    )Operating profit (loss) from continuing operations
as % of revenues from external customers
    
    
    3.3
    %
    
    
    (16.9)
    %
    
    
    8.6
    %
    
    
    (16.9)
    %
      Stride Rite Retail Segment Operating Results
  Third Quarter
    
    First Nine Months(dollars in millions)
    
    2008
    
    2007
    
    2008
    
    2007Revenues from external customers
    
    $
    65.5
    
    
    $
    49.8
    
    
    $
    171.3
    
    
    $
    49.8Operating profit (loss) from continuing operations
    
    $
    7.6
    
    
    $
    (0.4
    )
    
    $
    6.0
    
    
    $
    (0.4
    )Operating profit (loss) from continuing operations
as % of revenues from external customers
    
    
    11.6
    %
    
    
    (0.8)
    %
    
    
    3.5
    %
    
    
    (0.8)
    %
 35




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##### Table of Contents



Liquidity and Capital Resources
      Cash Flow Provided by Operating Activities
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Cash Flow Used in Investing Activities
  Cash Flow Used in Financing Activities
  First Nine Months2008
    
    
    2007(dollars in millions, shares in thousands)
    
    Dollars
    
    
    Shares
    
    
    Dollars
    
    
    SharesStock repurchase program
    
    $
    
    
    
    
    
    
    
    $
    20.1
    
    
    
    610Employee stock purchase, deferred compensation
and stock incentive plans
    
    
    1.7
    
    
    
    135
    
    
    
    1.1
    
    
    
    35$
    1.7
    
    
    
    135
    
    
    $
    21.2
    
    
    
    645
   Contractual Obligations
  Financial Condition Ratios
  November 1,
    
    November 3,
    
    February 2,2008
    
    2007
    
    2008Current Ratio
    
    
    2.0
    
    
    
    2.6
    
    
    
    2.3Debt-capitalization Ratio*
    
    
    59.3
    %
    
    
    53.9
    %
    
    
    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 74.3%, 72.4% and 73.5%, respectively, for the periods
referred to above.  37




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Critical Accounting Policies
 Accounting for Contingencies
   New Accounting Standards
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   Foreign Currency Risk
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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
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ITEM 1A. RISK FACTORS
  Our exposure to legal claims has increased substantially as a result of the $304.6 million jury
verdict and subsequent judgment of $65.3 million in our litigation with adidas. That jury verdict
and subsequent judgment has negatively impacted our business and we expect those negative impacts
to continue.
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Adverse changes in our market capitalization or anticipated future operating performance may be an
indication of goodwill impairment, which could have a material impact on our financial position and
results of operations.
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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)08/3/08  08/30/08
    
    
    7
    
    
    
    12.72
    
    
    
    
    
    
    
    204.808/31/08  10/04/08
    
    
    12
    
    
    
    18.02
    
    
    
    
    
    
    
    204.810/05/08  11/01/08
    
    
    5
    
    
    
    15.19
    
    
    
    
    
    
    
    204.8Total
    
    
    24
    
    
    
    15.98
    
    
    
    
    
    
    
    204.8
 
 (1)
    
    Includes an aggregate of approximately 24 thousand shares of our common stock that was repurchased in connection with
our employee stock purchase and stock incentive plan.(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
    
    Description31.1
    
    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 Division 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 Division Senior Vice President, Chief Financial Officer
and Treasurer*
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SIGNATURES
  COLLECTIVE BRANDS, INC.Date: December 4, 2008
    
    By: /s/ Matthew E. Rubel

Matthew E. RubelChief Executive Officer, President and 
Chairman of
the Board 
(Principal Executive Officer)Date: December 4, 2008
    
    By: /s/ Douglas G. BoessenDouglas G. BoessenDivision Senior Vice President,

Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)
 44