##### 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
 
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  
  PAYLESS SHOESOURCE, INC
  DELAWARE
    
    43-1813160(State 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)
 
 x  ̈
  x  ̈  ̈
  ̈ x




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##### 



PAYLESS SHOESOURCE, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED OCTOBER 28, 2006
INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1.Financial Statements.Condensed Consolidated Balance Sheets as of October 28, 2006, October 29, 2005 and January 28, 2006
    
    
    
    
    
    
    3Condensed Consolidated Statements of Earnings for the 13 Weeks and 39 Weeks Ended October 28, 2006 and October 29, 2005
    
    
    
    
    
    
    4Condensed Consolidated Statements of Cash Flows for the 39 Weeks Ended October 28, 2006 and October 29, 2005
    
    
    
    
    
    
    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.
    
    
    
    
    
    
    35Item 4.Controls and Procedures.
    
    
    
    
    
    
    35PART II  OTHER INFORMATIONItem 1.Legal Proceedings.
    
    
    
    
    
    
    36Item 1A.Risk Factors.
    
    
    
    
    
    
    37Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    
    
    
    
    37Item 6.Exhibits.
    
    
    
    
    
    
    37Signatures
    
    
    
    
    
    
    38302 Certification of CEO and President302 Certification of Sr. VP, CFO and Treasurer906 Certification of CEO and President906 Certification of Sr. VP, CFO and Treasurer
  2




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PART I  FINANCIAL INFORMATION
 
 ITEM 1  FINANCIAL STATEMENTS
 PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 October 28,
    
    
    October 29,
    
    
    January 28,2006
    
    
    2005
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    389.0
    
    
    $
    302.9
    
    
    $
    378.2Short-term investments
    
    
    83.4
    
    
    
    101.2
    
    
    
    59.0Restricted cash
    
    
    2.0
    
    
    
    2.0
    
    
    
    2.0Inventories
    
    
    349.2
    
    
    
    342.4
    
    
    
    332.6Current deferred income taxes
    
    
    18.0
    
    
    
    18.2
    
    
    
    20.2Other current assets
    
    
    60.3
    
    
    
    62.9
    
    
    
    59.6Current assets of discontinued operations
    
    
    1.4
    
    
    
    4.6
    
    
    
    2.9Total current assets
    
    
    903.3
    
    
    
    834.2
    
    
    
    854.5Property and Equipment:Land
    
    
    7.4
    
    
    
    7.7
    
    
    
    7.7Property, buildings and equipment
    
    
    1,241.1
    
    
    
    1,191.7
    
    
    
    1,185.2Accumulated depreciation and amortization
    
    
    (843.7
    )
    
    
    (811.3
    )
    
    
    (807.8
    )Property and equipment, net
    
    
    404.8
    
    
    
    388.1
    
    
    
    385.1Favorable leases, net
    
    
    13.6
    
    
    
    19.0
    
    
    
    18.2Deferred income taxes
    
    
    31.1
    
    
    
    24.0
    
    
    
    27.5Goodwill
    
    
    5.9
    
    
    
    5.9
    
    
    
    5.9Other assets
    
    
    46.2
    
    
    
    20.6
    
    
    
    21.9Noncurrent assets of discontinued operations
    
    
    
    
    
    
    1.4
    
    
    
    1.4Total Assets
    
    $
    1,404.9
    
    
    $
    1,293.2
    
    
    $
    1,314.5LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    0.9
    
    
    $
    1.6
    
    
    $
    0.4Notes payable
    
    
    2.0
    
    
    
    2.0
    
    
    
    2.0Accounts payable
    
    
    166.2
    
    
    
    139.9
    
    
    
    168.6Accrued expenses
    
    
    204.1
    
    
    
    160.5
    
    
    
    163.5Current liabilities of discontinued operations
    
    
    2.1
    
    
    
    5.6
    
    
    
    4.0Total current liabilities
    
    
    375.3
    
    
    
    309.6
    
    
    
    338.5Long-term debt
    
    
    201.7
    
    
    
    204.2
    
    
    
    204.2Other liabilities
    
    
    118.2
    
    
    
    99.5
    
    
    
    109.3Minority interest
    
    
    10.5
    
    
    
    9.5
    
    
    
    10.5Commitments and contingencies (Note 14)Total shareowners equity
    
    
    699.2
    
    
    
    670.4
    
    
    
    652.0Total Liabilities and Shareowners Equity
    
    $
    1,404.9
    
    
    $
    1,293.2
    
    
    $
    1,314.5
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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 (UNAUDITED)
 13 Weeks Ended
    
    
    39 Weeks EndedOctober 28, 2006
    
    
    October 29, 2005
    
    
    October 28, 2006
    
    
    October 29, 2005Net sales
    
    $
    703.4
    
    
    $
    666.5
    
    
    $
    2,104.0
    
    
    $
    2,054.7Cost of sales
    
    
    462.1
    
    
    
    447.9
    
    
    
    1,362.9
    
    
    
    1,356.6Gross margin
    
    
    241.3
    
    
    
    218.6
    
    
    
    741.1
    
    
    
    698.1Selling, general and administrative expenses
    
    
    196.8
    
    
    
    183.0
    
    
    
    589.4
    
    
    
    578.6Restructuring charges
    
    
    0.4
    
    
    
    1.2
    
    
    
    0.7
    
    
    
    1.9Operating profit from continuing operations
    
    
    44.1
    
    
    
    34.4
    
    
    
    151.0
    
    
    
    117.6Interest expense
    
    
    4.8
    
    
    
    4.7
    
    
    
    14.2
    
    
    
    14.6Interest income
    
    
    (5.6
    )
    
    
    (3.2
    )
    
    
    (15.6
    )
    
    
    (7.5
    )Earnings from continuing operations before income taxes and minority
interest
    
    
    44.9
    
    
    
    32.9
    
    
    
    152.4
    
    
    
    110.5Provision for income taxes
    
    
    13.3
    
    
    
    9.3
    
    
    
    50.1
    
    
    
    31.9Earnings from continuing operations before minority interest
    
    
    31.6
    
    
    
    23.6
    
    
    
    102.3
    
    
    
    78.6Minority interest, net of income taxes
    
    
    (1.0
    )
    
    
    (1.2
    )
    
    
    (1.9
    )
    
    
    (1.5
    )Net earnings from continuing operations
    
    
    30.6
    
    
    
    22.4
    
    
    
    100.4
    
    
    
    77.1Loss from discontinued operations, net of income taxes and minority interest
    
    
    (1.7
    )
    
    
    (0.5
    )
    
    
    (3.0
    )
    
    
    (5.1
    )Net earnings
    
    $
    28.9
    
    
    $
    21.9
    
    
    $
    97.4
    
    
    $
    72.0Basic earnings per share:Earnings from continuing operations
    
    $
    0.47
    
    
    $
    0.33
    
    
    $
    1.52
    
    
    $
    1.15Loss from discontinued operations
    
    
    (0.03
    )
    
    
    (0.01
    )
    
    
    (0.05
    )
    
    
    (0.08
    )Basic earnings per share
    
    $
    0.44
    
    
    $
    0.32
    
    
    $
    1.47
    
    
    $
    1.07Diluted earnings per share:Earnings from continuing operations
    
    $
    0.46
    
    
    $
    0.33
    
    
    $
    1.49
    
    
    $
    1.14Loss from discontinued operations
    
    
    (0.03
    )
    
    
    (0.01
    )
    
    
    (0.04
    )
    
    
    (0.08
    )Diluted earnings per share
    
    $
    0.43
    
    
    $
    0.32
    
    
    $
    1.45
    
    
    $
    1.06Basic Weighted Average Shares Outstanding
    
    
    65.4
    
    
    
    67.7
    
    
    
    66.2
    
    
    
    67.4Diluted Weighted Average Shares Outstanding
    
    
    66.4
    
    
    
    68.1
    
    
    
    67.2
    
    
    
    67.6
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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 39 Weeks EndedOctober 28,
    
    
    October 29,2006
    
    
    2005Operating Activities:Net earnings
    
    $
    97.4
    
    
    $
    72.0Loss from discontinued operations, net of income taxes and minority interest
    
    
    3.0
    
    
    
    5.1Net earnings from continuing operations
    
    
    100.4
    
    
    
    77.1Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    7.2
    
    
    
    6.8Depreciation and amortization
    
    
    66.7
    
    
    
    68.2Amortization of deferred financing costs
    
    
    0.8
    
    
    
    0.9Share-based compensation expense
    
    
    8.3
    
    
    
    0.8Deferred income taxes
    
    
    4.5
    
    
    
    16.4Minority interest, net of income taxes
    
    
    1.9
    
    
    
    1.5Income tax benefit from share-based compensation
    
    
    0.5
    
    
    
    1.2Accretion of investments
    
    
    (2.2
    )
    
    
    (0.7
    )Changes in working capital:Inventories
    
    
    (16.2
    )
    
    
    3.3Other current assets
    
    
    (4.1
    )
    
    
    (5.9
    )Accounts payable
    
    
    (4.9
    )
    
    
    (16.4
    )Accrued expenses
    
    
    38.6
    
    
    
    8.2Other assets and liabilities, net
    
    
    (1.5
    )
    
    
    7.3Net cash used in discontinued operations
    
    
    (3.9
    )
    
    
    (9.5
    )Cash flow provided by operating activities
    
    
    196.1
    
    
    
    159.2Investing Activities:Capital expenditures
    
    
    (89.6
    )
    
    
    (49.5
    )Proceeds from sale of property and equipment
    
    
    3.2
    
    
    
    0.8Restricted cash
    
    
    
    
    
    
    1.0Intangible asset additions
    
    
    (15.1
    )
    
    
    Purchases of investments
    
    
    (160.7
    )
    
    
    (146.4
    )Sales and maturities of investments
    
    
    138.5
    
    
    
    67.2Net cash used in discontinued operations
    
    
    
    
    
    
    (0.1
    )Cash flow used in investing activities
    
    
    (123.7
    )
    
    
    (127.0
    )Financing Activities:Repayment of notes payable
    
    
    
    
    
    
    (1.0
    )Issuance of debt
    
    
    
    
    
    
    1.2Excess tax benefits from share-based compensation
    
    
    4.2
    
    
    
    Payment of deferred financing costs
    
    
    (0.2
    )
    
    
    Repayment of debt
    
    
    (2.2
    )
    
    
    (0.2
    )Issuances of common stock
    
    
    27.7
    
    
    
    14.6Purchases of common stock
    
    
    (91.6
    )
    
    
    (16.8
    )Distributions to minority owners
    
    
    (1.0
    )
    
    
    Net cash provided by discontinued operations
    
    
    1.2
    
    
    
    0.9Cash flow used in financing activities
    
    
    (61.9
    )
    
    
    (1.3
    )Effect of exchange rate changes on cash
    
    
    0.3
    
    
    
    1.0Increase in cash and cash equivalents
    
    
    10.8
    
    
    
    31.9Cash and cash equivalents, beginning of year
    
    
    378.2
    
    
    
    271.0Cash and cash equivalents, end of period
    
    $
    389.0
    
    
    $
    302.9Supplemental cash flow information:Interest paid
    
    $
    19.3
    
    
    $
    19.7Income taxes paid
    
    $
    22.6
    
    
    $
    18.7Non-cash investing and operating activities:Accrued capital additions
    
    $
    8.6
    
    
    $
    5.1Accrued intangible asset additions
    
    $
    10.0
    
    
    $
    
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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 NOTE 1. INTERIM RESULTS.
  NOTE 2. SHARE-BASED COMPENSATION.
    6




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13 Weeks Ended
    
    
    39 Weeks Ended(dollars in millions, except per share amounts)
    
    October 29, 2005
    
    
    October 29, 2005Net earnings:As reported
    
    $
    21.9
    
    
    $
    72.0Add: Total stock-based employee compensation
expense included in net earnings as reported,
net of related income taxes
    
    
    0.1
    
    
    
    3.2Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related income
taxes
    
    
    1.2
    
    
    
    5.9Pro forma
    
    $
    20.8
    
    
    $
    69.3Basic earnings per share:As reported
    
    $
    0.32
    
    
    $
    1.07Pro forma
    
    $
    0.30
    
    
    $
    1.03Diluted earnings per share:As reported
    
    $
    0.32
    
    
    $
    1.06Pro forma
    
    $
    0.30
    
    
    $
    1.02
 Equity Incentive Plans
      7




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8




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Stock Options and Stock-Settled SARs
    
    39 Weeks Ended October 28, 2006Weighted Average
    
    
    
    Stock-Settled
    
    
    Weighted Average(units in thousands)
    
    Options
    
    
    Exercise Price
    
    
    SARs
    
    
    
    Exercise PriceOutstanding at beginning of period
    
    
    5,738
    
    
    $
    18
    
    
    
    
    
    
    $
    Granted
    
    
    470
    
    
    
    22
    
    
    
    906
    
    
    
    23Exercised
    
    
    (1,591
    )
    
    
    17
    
    
    
    
    
    
    
    Forfeited or expired
    
    
    (159
    )
    
    
    17
    
    
    
    (59
    )
    
    
    22Outstanding at end of period
    
    
    4,458
    
    
    
    19
    
    
    
    847
    
    
    
    23Exercisable or convertible at end of period
    
    
    2,554
    
    
    
    18
    
    
    
    
    
    
    
    Weighted
average fair value of units granted (per unit)

    $
    10
    
    
    
    
    
    
    $
    9
 Nonvested Shares
    
    39 Weeks Ended October 28, 2006Weighted AverageGrant Date(shares in thousands)
    
    Nonvested Shares
    
    
    Fair ValueNonvested at beginning of period
    
    
    301
    
    
    $
    19Granted
    
    
    72
    
    
    
    23Vested
    
    
    (46
    )
    
    
    16Forfeited or expired
    
    
    (8
    )
    
    
    19Nonvested at end of period
    
    
    319
    
    
    
    21
 Cash-Settled SAR's
    
    39 Weeks Ended October 28, 2006Cash-Settled
    
    
    Weighted Average(shares in thousands)
    
    SAR's
    
    
    Exercise PriceOutstanding at beginning of period
    
    
    108
    
    
    $
    17Granted
    
    
    98
    
    
    
    22Exercised
    
    
    (31
    )
    
    
    17Forfeited or expired
    
    
    (23
    )
    
    
    17Outstanding at end of period
    
    
    152
    
    
    
    20Exercisable or convertible at end of period
    
    
    59
    
    
    
    17Weighted average fair value of units granted (per unit)
    
    $
    9
 9




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(units in thousands)Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Aggregate
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    AverageRemaining
    
    
    Intrinsic
    
    
    Weighted
    
    
    
    
    
    
    Remaining
    
    
    Intrinsic
    
    
    WeightedRange of
    
    Number of
    
    
    Contractual Life
    
    
    Value
    
    
    Average
    
    
    Number
    
    
    Contractual Life
    
    
    Value
    
    
    AverageExercise Prices
    
    Outstanding
    
    
    (in years)
    
    
    (in thousands)
    
    
    Exercise Price
    
    
    Exercisable
    
    
    (in years)
    
    
    (in thousands)
    
    
    Exercise Price$13-15
    
    
    369
    
    
    
    3
    
    
    $
    4,176
    
    
    $
    15
    
    
    
    369
    
    
    
    3
    
    
    $
    4,176
    
    
    $
    1516-18
    
    
    2,181
    
    
    
    5
    
    
    
    20,892
    
    
    
    17
    
    
    
    1,404
    
    
    
    4
    
    
    
    13,575
    
    
    
    1719-25
    
    
    1,908
    
    
    
    5
    
    
    
    8,218
    
    
    
    22
    
    
    
    781
    
    
    
    4
    
    
    
    2,869
    
    
    
    23
 Stock-settled SARs Outstanding
    
    
    Stock-settled SARs ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Aggregate
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    AverageRemaining
    
    
    Intrinsic
    
    
    Weighted
    
    
    
    
    
    
    Remaining
    
    
    Intrinsic
    
    
    WeightedRange of
    
    Number of
    
    
    Contractual Life
    
    
    Value
    
    
    Average
    
    
    Number
    
    
    Contractual Life
    
    
    Value
    
    
    AverageExercise Prices
    
    Outstanding
    
    
    (in years)
    
    
    (in thousands)
    
    
    Exercise Price
    
    
    Exercisable
    
    
    (in years)
    
    
    (in thousands)
    
    
    Exercise Price$21-23
    
    
    785
    
    
    
    6
    
    
    $
    2,893
    
    
    $
    23
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    24-27
    
    
    62
    
    
    
    7
    
    
    
    19
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
      Grant Date Fair Value
   10




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13 Weeks Ended
    
    
    39 Weeks EndedOctober 28,
    
    
    October 29,
    
    
    October 28,
    
    
    October 29,2006
    
    
    2005
    
    
    2006
    
    
    2005Risk-free interest rate
    
    
    4.7
    %
    
    
    3.9
    %
    
    
    4.9
    %
    
    
    3.9
    %Expected dividend yield
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %Expected appreciation vehicle life (in years)
    
    
    5
    
    
    
    5
    
    
    
    6
    
    
    
    5Weighted-average expected volatility
    
    
    35
    %
    
    
    33
    %
    
    
    35
    %
    
    
    33
    %
 Risk-free interest rate
 Expected dividend yield
 Expected appreciation vehicle life
 Expected Volatility
 Compensation Expense
     13 Weeks Ended
    
    
    39 Weeks EndedOctober 28,
    
    
    October 29,
    
    
    October 28,
    
    
    October 29,(dollars in millions, except per share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Cost of sales
    
    $
    0.9
    
    
    $
    0.1
    
    
    $
    2.4
    
    
    $
    0.4Selling, general and administrative expenses
    
    
    1.9
    
    
    
    
    
    
    
    5.9
    
    
    
    4.6Share-based compensation expense before income taxes
    
    
    2.8
    
    
    
    0.1
    
    
    
    8.3
    
    
    
    5.0Tax benefit
    
    
    (1.0
    )
    
    
    
    
    
    
    (3.0
    )
    
    
    (1.8
    )Share-based compensation expense after income taxes
    
    $
    1.8
    
    
    $
    0.1
    
    
    $
    5.3
    
    
    $
    3.2Effect on:Basic earnings per share
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.08
    
    
    $
    0.05Diluted earnings per share
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.08
    
    
    $
    0.05
 11




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NOTE 3. SHORT-TERM INVESTMENTS.
  October 28,
    
    
    October 29,
    
    
    January 28,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2006Held-to-maturity securities:Commercial paper
    
    $
    83.4
    
    
    $
    86.5
    
    
    $
    58.5Agency securities
    
    
    
    
    
    
    14.2
    
    
    
    Certificates of deposit
    
    
    
    
    
    
    0.5
    
    
    
    0.5Total short-term investments
    
    $
    83.4
    
    
    $
    101.2
    
    
    $
    59.0
  NOTE 4. RESTRUCTURING CHARGES.
     2006 ChargesTotal Charges
    
    
    Accrual Balance as of
    
    
    
    
    
    
    Accrual
    
    
    Cash
    
    
    Accrual Balance as of(dollars in millions)
    
    to Date
    
    
    January 28, 2006
    
    
    Costs Incurred
    
    
    Adjustments
    
    
    Payments
    
    
    October 28, 2006Employee severance costs
    
    $
    9.0
    
    
    $
    1.0
    
    
    $
    
    
    
    $
    
    
    
    $
    (0.6
    )
    
    $
    0.4Contract termination costs
    
    
    29.5
    
    
    
    5.5
    
    
    
    
    
    
    
    1.0
    
    
    
    (3.9
    )
    
    
    2.6Other exit costs
    
    
    5.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43.6
    
    
    $
    6.5
    
    
    $
    
    
    
    $
    1.0
    
    
    $
    (4.5
    )
    
    $
    3.0Asset impairments and net disposal losses
    
    
    35.0Total Charges
    
    $
    78.6
    12




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NOTE 5. DISCONTINUED OPERATIONS.
 Payless Domestic
  13 Weeks Ended
    
    
    39 Weeks EndedOctober 28,
    
    
    October 29,
    
    
    October 28,
    
    
    October 29,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Loss from discontinued operations before income taxes
    
    $
    
    
    
    $
    
    
    
    $
    (0.3
    )
    
    $
    (5.5
    )Benefit for income taxes
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    (2.1
    )Loss from discontinued operations, net of income taxes
    
    $
    
    
    
    $
    
    
    
    $
    (0.2
    )
    
    $
    (3.4
    )Basic and diluted loss per share from discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (0.05
    )
  October 28,
    
    
    October 29,
    
    
    January 28,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2006AssetsCurrent assets:Current deferred income taxes
    
    $
    0.7
    
    
    $
    1.9
    
    
    $
    1.3Other current assets
    
    
    0.2
    
    
    
    0.5
    
    
    
    0.3Total current assets of discontinued operations
    
    $
    0.9
    
    
    $
    2.4
    
    
    $
    1.6LiabilitiesCurrent liabilities:Accrued expenses
    
    $
    2.0
    
    
    $
    5.0
    
    
    $
    3.4Total current liabilities of discontinued operations
    
    $
    2.0
    
    
    $
    5.0
    
    
    $
    3.4
 Payless International
  13 Weeks Ended
    
    
    39 Weeks EndedOctober 28,
    
    
    October 29,
    
    
    October 28,
    
    
    October 29,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    0.2
    
    
    $
    0.4
    
    
    $
    0.8
    
    
    $
    1.3Cost of sales
    
    
    0.5
    
    
    
    0.5
    
    
    
    1.3
    
    
    
    1.4Gross margin
    
    
    (0.3
    )
    
    
    (0.1
    )
    
    
    (0.5
    )
    
    
    (0.1
    )Selling, general and administrative expenses
    
    
    0.8
    
    
    
    0.8
    
    
    
    2.3
    
    
    
    2.8Loss from discontinued operations before minority interest
    
    
    (1.1
    )
    
    
    (0.9
    )
    
    
    (2.8
    )
    
    
    (2.9
    )Minority Interest
    
    
    0.5
    
    
    
    0.4
    
    
    
    1.1
    
    
    
    1.2Loss before disposal
    
    
    (0.6
    )
    
    
    (0.5
    )
    
    
    (1.7
    )
    
    
    (1.7
    )Loss on disposal of discontinued operations, net of minority interest
of $0.7 for the 13 and 39 weeks ended October 28, 2006
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.1
    )
    
    
    Loss from discontinued operations, net of minority interest
    
    $
    (1.7
    )
    
    $
    (0.5
    )
    
    $
    (2.8
    )
    
    $
    (1.7
    )Basic and diluted loss per share from discontinued operations
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.04
    )
    
    $
    (0.03
    )
 13




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##### Table of Contents



October 28,
    
    
    October 29,
    
    
    January 28,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2006AssetsCurrent Assets:Cash and cash equivalents
    
    $
    0.4
    
    
    $
    1.3
    
    
    $
    0.7Inventories
    
    
    
    
    
    
    0.3
    
    
    
    0.4Other current assets
    
    
    0.1
    
    
    
    0.6
    
    
    
    0.2Total current assets of discontinued operations
    
    
    0.5
    
    
    
    2.2
    
    
    
    1.3Noncurrent Assets:Property and equipment, net
    
    
    
    
    
    
    1.0
    
    
    
    1.0Other assets
    
    
    
    
    
    
    0.4
    
    
    
    0.4Total noncurrent assets of discontinued operations
    
    
    
    
    
    
    1.4
    
    
    
    1.4Total assets of discontinued operations
    
    $
    0.5
    
    
    $
    3.6
    
    
    $
    2.7LiabilitiesCurrent Liabilities:Accounts payable
    
    $
    0.1
    
    
    $
    0.3
    
    
    $
    0.3Accrued expenses
    
    
    
    
    
    
    0.3
    
    
    
    0.3Total current liabilities of discontinued operations
    
    $
    0.1
    
    
    $
    0.6
    
    
    $
    0.6
 NOTE 6. INVENTORIES.
  NOTE 7. FAVORABLE LEASES.
  October 28,
    
    
    October 29,
    
    
    January 28,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2006Gross carrying amount
    
    $
    67.6
    
    
    $
    76.0
    
    
    $
    75.6Less: accumulated amortization
    
    
    (54.0
    )
    
    
    (57.0
    )
    
    
    (57.4
    )Carrying amount, end of period
    
    $
    13.6
    
    
    $
    19.0
    
    
    $
    18.2
  13 Weeks Ended
    
    
    39 Weeks EndedOctober 28,
    
    
    October 29,
    
    
    October 28,
    
    
    October 29,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Amortization expense on favorable leases
    
    $
    0.9
    
    
    $
    0.8
    
    
    $
    2.4
    
    
    $
    2.6
  Year
    
    AmountRemainder of 2006
    
    $
    0.82007
    
    
    2.52008
    
    
    2.12009
    
    
    1.82010
    
    
    1.6
 14




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NOTE 8. LONG-TERM DEBT AND LINE OF CREDIT.
   Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
 NOTE 9. PENSION PLAN.
   13 Weeks Ended
    
    
    39 Weeks EndedOctober 28,
    
    
    October 29,
    
    
    October 28,
    
    
    October 29,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Components of pension expense:Service cost
    
    $
    0.2
    
    
    $
    0.2
    
    
    $
    0.6
    
    
    $
    0.6Interest cost
    
    
    0.3
    
    
    
    0.2
    
    
    
    1.0
    
    
    
    0.8Amortization of prior service cost
    
    
    0.1
    
    
    
    
    
    
    
    0.3
    
    
    
    0.1Amortization of actuarial loss
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2Total
    
    $
    0.7
    
    
    $
    0.5
    
    
    $
    2.1
    
    
    $
    1.7
 NOTE 10. INCOME TAXES.
  15




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NOTE 11. COMPREHENSIVE INCOME.
  13 Weeks Ended
    
    
    39 Weeks EndedOctober 28,
    
    
    October 29,
    
    
    October 28,
    
    
    October 29,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net earnings
    
    $
    28.9
    
    
    $
    21.9
    
    
    $
    97.4
    
    
    $
    72.0Foreign currency translation adjustments
    
    
    0.4
    
    
    
    2.5
    
    
    
    1.3
    
    
    
    3.6Total comprehensive income
    
    $
    29.3
    
    
    $
    24.4
    
    
    $
    98.7
    
    
    $
    75.6
  NOTE 12. EARNINGS PER SHARE.
  13 Weeks Ended
    
    
    39 Weeks Ended(dollars in millions, except per
    
    October 28,
    
    
    October 29,
    
    
    October 28,
    
    
    October 29,share; shares in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net earnings from continuing operations
    
    $
    30.6
    
    
    $
    22.4
    
    
    $
    100.4
    
    
    $
    77.1Weighted average common shares outstanding  basic
    
    
    65,382
    
    
    
    67,705
    
    
    
    66,153
    
    
    
    67,421Net effect of dilutive stock options based on the
treasury stock method
    
    
    880
    
    
    
    362
    
    
    
    909
    
    
    
    156Dilutive shares due to nonvested shares
    
    
    122
    
    
    
    35
    
    
    
    112
    
    
    
    42Outstanding shares for diluted earnings per share
    
    
    66,384
    
    
    
    68,102
    
    
    
    67,174
    
    
    
    67,619Diluted earnings per share from continuing operations
    
    $
    0.46
    
    
    $
    0.33
    
    
    $
    1.49
    
    
    $
    1.14
  NOTE 13. SEGMENT REPORTING.
  16




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Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    Consolidated13 weeks ended October 28, 2006:Revenues from external customers
    
    $
    598.7
    
    
    $
    104.7
    
    
    $
    703.4Operating profit from continuing operations
    
    
    28.4
    
    
    
    15.7
    
    
    
    44.139 weeks ended October 28, 2006:Revenues from external customers
    
    $
    1,816.4
    
    
    $
    287.6
    
    
    $
    2,104.0Operating profit from continuing operations
    
    
    117.9
    
    
    
    33.1
    
    
    
    151.0Total assets
    
    
    1,218.0
    
    
    
    186.9
    
    
    
    1,404.913 weeks ended October 29, 2005:Revenues from external customers
    
    $
    576.3
    
    
    $
    90.2
    
    
    $
    666.5Operating profit from continuing operations
    
    
    23.5
    
    
    
    10.9
    
    
    
    34.439 weeks ended October 29, 2005:Revenues from external customers
    
    $
    1,793.5
    
    
    $
    261.2
    
    
    $
    2,054.7Operating profit from continuing operations
    
    
    92.5
    
    
    
    25.1
    
    
    
    117.6Total assets
    
    
    1,128.7
    
    
    
    164.5
    
    
    
    1,293.2
  NOTE 14. COMMITMENTS AND CONTINGENCIES.
  th th ®
 17




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##### Table of Contents



NOTE 15. HURRICANES KATRINA, RITA, and WILMA.
  NOTE 16. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS.
      18




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##### Table of Contents



NOTE 17. RELATED PARTY TRANSACTIONS.
  NOTE 18. SUBSIDIARY GUARANTORS OF SENIOR NOTES  CONDENSED CONSOLIDATING FINANCIAL INFORMATION.
     19




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##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    286.1
    
    
    $
    102.9
    
    
    $
    
    
    
    $
    389.0Short-term investments
    
    
    
    
    
    
    83.4
    
    
    
    
    
    
    
    
    
    
    
    83.4Restricted cash
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Inventories
    
    
    
    
    
    
    281.9
    
    
    
    71.6
    
    
    
    (4.3
    )
    
    
    349.2Current deferred income taxes
    
    
    
    
    
    
    15.1
    
    
    
    2.9
    
    
    
    
    
    
    
    18.0Other current assets
    
    
    40.2
    
    
    
    49.6
    
    
    
    65.6
    
    
    
    (95.1
    )
    
    
    60.3Current assets of discontinued operations
    
    
    
    
    
    
    0.9
    
    
    
    0.5
    
    
    
    
    
    
    
    1.4Total current assets
    
    
    40.2
    
    
    
    717.0
    
    
    
    245.5
    
    
    
    (99.4
    )
    
    
    903.3Property and Equipment:Land
    
    
    
    
    
    
    7.4
    
    
    
    
    
    
    
    
    
    
    
    7.4Property, buildings and equipment
    
    
    
    
    
    
    1,091.5
    
    
    
    149.6
    
    
    
    
    
    
    
    1,241.1Accumulated depreciation and amortization
    
    
    
    
    
    
    (754.1
    )
    
    
    (89.6
    )
    
    
    
    
    
    
    (843.7
    )Property and equipment, net
    
    
    
    
    
    
    344.8
    
    
    
    60.0
    
    
    
    
    
    
    
    404.8Favorable leases, net
    
    
    
    
    
    
    13.6
    
    
    
    
    
    
    
    
    
    
    
    13.6Deferred income taxes
    
    
    
    
    
    
    26.3
    
    
    
    4.8
    
    
    
    
    
    
    
    31.1Goodwill
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,288.3
    
    
    
    474.8
    
    
    
    1.3
    
    
    
    (1,718.2
    )
    
    
    46.2Total Assets
    
    $
    1,328.5
    
    
    $
    1,582.4
    
    
    $
    311.6
    
    
    $
    (1,817.6
    )
    
    $
    1,404.9LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.4
    
    
    $
    0.5
    
    
    $
    
    
    
    $
    0.9Notes payable
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Accounts payable
    
    
    
    
    
    
    139.0
    
    
    
    46.0
    
    
    
    (18.8
    )
    
    
    166.2Accrued expenses
    
    
    146.7
    
    
    
    81.5
    
    
    
    56.5
    
    
    
    (80.6
    )
    
    
    204.1Current liabilities of discontinued operations
    
    
    
    
    
    
    2.0
    
    
    
    0.1
    
    
    
    
    
    
    
    2.1Total current liabilities
    
    
    146.7
    
    
    
    222.9
    
    
    
    105.1
    
    
    
    (99.4
    )
    
    
    375.3Long-term debt
    
    
    480.6
    
    
    
    0.2
    
    
    
    4.0
    
    
    
    (283.1
    )
    
    
    201.7Other liabilities
    
    
    2.0
    
    
    
    100.8
    
    
    
    15.4
    
    
    
    
    
    
    
    118.2Minority interest
    
    
    
    
    
    
    
    
    
    
    10.5
    
    
    
    
    
    
    
    10.5Commitments and contingencies (Note 14)Total shareowners equity
    
    
    699.2
    
    
    
    1,258.5
    
    
    
    176.6
    
    
    
    (1,435.1
    )
    
    
    699.2Total Liabilities and Shareowners Equity
    
    $
    1,328.5
    
    
    $
    1,582.4
    
    
    $
    311.6
    
    
    $
    (1,817.6
    )
    
    $
    1,404.9
 20




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Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    184.9
    
    
    $
    118.0
    
    
    $
    
    
    
    $
    302.9Short-term investments
    
    
    
    
    
    
    100.7
    
    
    
    0.5
    
    
    
    
    
    
    
    101.2Restricted cash
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Inventories
    
    
    
    
    
    
    283.3
    
    
    
    61.4
    
    
    
    (2.3
    )
    
    
    342.4Current deferred income taxes
    
    
    
    
    
    
    18.2
    
    
    
    
    
    
    
    
    
    
    
    18.2Other current assets
    
    
    26.3
    
    
    
    93.1
    
    
    
    19.5
    
    
    
    (76.0
    )
    
    
    62.9Current assets of discontinued operations
    
    
    
    
    
    
    2.4
    
    
    
    2.2
    
    
    
    
    
    
    
    4.6Total current assets
    
    
    26.3
    
    
    
    682.6
    
    
    
    203.6
    
    
    
    (78.3
    )
    
    
    834.2Property and Equipment:Land
    
    
    
    
    
    
    7.7
    
    
    
    
    
    
    
    
    
    
    
    7.7Property, buildings and equipment
    
    
    
    
    
    
    1,053.8
    
    
    
    137.9
    
    
    
    
    
    
    
    1,191.7Accumulated depreciation and amortization
    
    
    
    
    
    
    (736.3
    )
    
    
    (75.0
    )
    
    
    
    
    
    
    (811.3
    )Property and equipment, net
    
    
    
    
    
    
    325.2
    
    
    
    62.9
    
    
    
    
    
    
    
    388.1Favorable leases, net
    
    
    
    
    
    
    19.0
    
    
    
    
    
    
    
    
    
    
    
    19.0Deferred income taxes
    
    
    
    
    
    
    13.6
    
    
    
    10.4
    
    
    
    
    
    
    
    24.0Goodwill
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,148.8
    
    
    
    445.4
    
    
    
    1.3
    
    
    
    (1,574.9
    )
    
    
    20.6Noncurrent assets of discontinued operations
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    1.4Total Assets
    
    $
    1,175.1
    
    
    $
    1,491.7
    
    
    $
    279.6
    
    
    $
    (1,653.2
    )
    
    $
    1,293.2LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.4
    
    
    $
    1.2
    
    
    $
    
    
    
    $
    1.6Notes payable
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Accounts payable
    
    
    
    
    
    
    131.4
    
    
    
    72.9
    
    
    
    (64.4
    )
    
    
    139.9Accrued expenses
    
    
    22.5
    
    
    
    138.3
    
    
    
    13.6
    
    
    
    (13.9
    )
    
    
    160.5Current liabilities of discontinued operations
    
    
    
    
    
    
    5.0
    
    
    
    0.6
    
    
    
    
    
    
    
    5.6Total current liabilities
    
    
    22.5
    
    
    
    275.1
    
    
    
    90.3
    
    
    
    (78.3
    )
    
    
    309.6Long-term debt
    
    
    480.3
    
    
    
    0.7
    
    
    
    6.4
    
    
    
    (283.2
    )
    
    
    204.2Other liabilities
    
    
    1.9
    
    
    
    85.3
    
    
    
    12.3
    
    
    
    
    
    
    
    99.5Minority interest
    
    
    
    
    
    
    
    
    
    
    9.5
    
    
    
    
    
    
    
    9.5Commitments and contingencies (Note 14)Total shareowners equity
    
    
    670.4
    
    
    
    1,130.6
    
    
    
    161.1
    
    
    
    (1,291.7
    )
    
    
    670.4Total Liabilities and Shareowners Equity
    
    $
    1,175.1
    
    
    $
    1,491.7
    
    
    $
    279.6
    
    
    $
    (1,653.2
    )
    
    $
    1,293.2
 21




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##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    310.5
    
    
    $
    67.7
    
    
    $
    
    
    
    $
    378.2Short-term investments
    
    
    
    
    
    
    58.5
    
    
    
    0.5
    
    
    
    
    
    
    
    59.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Inventories
    
    
    
    
    
    
    271.3
    
    
    
    63.9
    
    
    
    (2.6
    )
    
    
    332.6Current deferred income taxes
    
    
    
    
    
    
    19.3
    
    
    
    0.9
    
    
    
    
    
    
    
    20.2Other current assets
    
    
    28.7
    
    
    
    82.7
    
    
    
    31.5
    
    
    
    (83.3
    )
    
    
    59.6Current assets of discontinued operations
    
    
    
    
    
    
    1.6
    
    
    
    1.3
    
    
    
    
    
    
    
    2.9Total current assets
    
    
    28.7
    
    
    
    743.9
    
    
    
    167.8
    
    
    
    (85.9
    )
    
    
    854.5Property and Equipment:Land
    
    
    
    
    
    
    7.7
    
    
    
    
    
    
    
    
    
    
    
    7.7Property, buildings and equipment
    
    
    
    
    
    
    1,044.3
    
    
    
    140.9
    
    
    
    
    
    
    
    1,185.2Accumulated depreciation and amortization
    
    
    
    
    
    
    (728.8
    )
    
    
    (79.0
    )
    
    
    
    
    
    
    (807.8
    )Property and equipment, net
    
    
    
    
    
    
    323.2
    
    
    
    61.9
    
    
    
    
    
    
    
    385.1Favorable leases, net
    
    
    
    
    
    
    18.2
    
    
    
    
    
    
    
    
    
    
    
    18.2Deferred income taxes
    
    
    
    
    
    
    18.5
    
    
    
    9.0
    
    
    
    
    
    
    
    27.5Goodwill
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,157.1
    
    
    
    405.5
    
    
    
    1.3
    
    
    
    (1,542.0
    )
    
    
    21.9Noncurrent assets of discontinued operations
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    1.4Total Assets
    
    $
    1,185.8
    
    
    $
    1,515.2
    
    
    $
    241.4
    
    
    $
    (1,627.9
    )
    
    $
    1,314.5LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.4
    
    
    $
    
    
    
    $
    
    
    
    $
    0.4Notes payable
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Accounts payable
    
    
    
    
    
    
    159.4
    
    
    
    66.0
    
    
    
    (56.8
    )
    
    
    168.6Accrued expenses
    
    
    51.5
    
    
    
    127.4
    
    
    
    13.7
    
    
    
    (29.1
    )
    
    
    163.5Current liabilities of discontinued operations
    
    
    
    
    
    
    3.4
    
    
    
    0.6
    
    
    
    
    
    
    
    4.0Total current liabilities
    
    
    51.5
    
    
    
    290.6
    
    
    
    82.3
    
    
    
    (85.9
    )
    
    
    338.5Long-term debt
    
    
    480.4
    
    
    
    0.6
    
    
    
    6.4
    
    
    
    (283.2
    )
    
    
    204.2Other liabilities
    
    
    1.9
    
    
    
    94.9
    
    
    
    12.5
    
    
    
    
    
    
    
    109.3Minority interest
    
    
    
    
    
    
    
    
    
    
    10.5
    
    
    
    
    
    
    
    10.5Commitments and contingencies (Note 14)Total shareowners equity
    
    
    652.0
    
    
    
    1,129.1
    
    
    
    129.7
    
    
    
    (1,258.8
    )
    
    
    652.0Total Liabilities and Shareowners Equity
    
    $
    1,185.8
    
    
    $
    1,515.2
    
    
    $
    241.4
    
    
    $
    (1,627.9
    )
    
    $
    1,314.5
 22




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##### Table of Contents



13 Weeks Ended October 28, 2006Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    632.4
    
    
    $
    227.4
    
    
    $
    (156.4
    )
    
    $
    703.4Cost of sales
    
    
    
    
    
    
    440.1
    
    
    
    175.3
    
    
    
    (153.3
    )
    
    
    462.1Gross margin
    
    
    
    
    
    
    192.3
    
    
    
    52.1
    
    
    
    (3.1
    )
    
    
    241.3Selling, general and administrative expense
    
    
    1.1
    
    
    
    169.7
    
    
    
    29.1
    
    
    
    (3.1
    )
    
    
    196.8Restructuring charges
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    0.4Operating (loss) profit from continuing operations
    
    
    (1.1
    )
    
    
    22.2
    
    
    
    23.0
    
    
    
    
    
    
    
    44.1Interest expense
    
    
    11.2
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    (7.0
    )
    
    
    4.8Interest income
    
    
    
    
    
    
    (12.1
    )
    
    
    (0.5
    )
    
    
    7.0
    
    
    
    (5.6
    )Equity in earnings of subsidiaries
    
    
    (36.9
    )
    
    
    (16.3
    )
    
    
    
    
    
    
    53.2
    
    
    
    Earnings from continuing operations before income
taxes and minority interest
    
    
    24.6
    
    
    
    50.3
    
    
    
    23.2
    
    
    
    (53.2
    )
    
    
    44.9(Benefit) provision for income taxes
    
    
    (4.3
    )
    
    
    13.4
    
    
    
    4.2
    
    
    
    
    
    
    
    13.3Earnings from continuing operations before
minority interest
    
    
    28.9
    
    
    
    36.9
    
    
    
    19.0
    
    
    
    (53.2
    )
    
    
    31.6Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    (1.0
    )Net earnings from continuing operations
    
    
    28.9
    
    
    
    36.9
    
    
    
    18.0
    
    
    
    (53.2
    )
    
    
    30.6Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    
    
    
    
    (1.7
    )
    
    
    
    
    
    
    (1.7
    )Net earnings
    
    $
    28.9
    
    
    $
    36.9
    
    
    $
    16.3
    
    
    $
    (53.2
    )
    
    $
    28.9
 13 Weeks Ended October 29, 2005Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    608.2
    
    
    $
    188.3
    
    
    $
    (130.0
    )
    
    $
    666.5Cost of sales
    
    
    
    
    
    
    430.6
    
    
    
    145.1
    
    
    
    (127.8
    )
    
    
    447.9Gross margin
    
    
    
    
    
    
    177.6
    
    
    
    43.2
    
    
    
    (2.2
    )
    
    
    218.6Selling, general and administrative expense
    
    
    1.1
    
    
    
    159.9
    
    
    
    24.2
    
    
    
    (2.2
    )
    
    
    183.0Restructuring charges
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    1.2Operating (loss) profit from continuing operations
    
    
    (1.1
    )
    
    
    16.5
    
    
    
    19.0
    
    
    
    
    
    
    
    34.4Interest expense
    
    
    8.1
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    (3.9
    )
    
    
    4.7Interest income
    
    
    
    
    
    
    (6.8
    )
    
    
    (0.3
    )
    
    
    3.9
    
    
    
    (3.2
    )Equity in earnings of subsidiaries
    
    
    (27.8
    )
    
    
    (7.3
    )
    
    
    
    
    
    
    35.1
    
    
    
    Earnings from continuing operations before income
taxes and minority interest
    
    
    18.6
    
    
    
    30.4
    
    
    
    19.0
    
    
    
    (35.1
    )
    
    
    32.9(Benefit) provision for income taxes
    
    
    (3.3
    )
    
    
    2.6
    
    
    
    10.0
    
    
    
    
    
    
    
    9.3Earnings from continuing operations before
minority interest
    
    
    21.9
    
    
    
    27.8
    
    
    
    9.0
    
    
    
    (35.1
    )
    
    
    23.6Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    (1.2
    )Net earnings from continuing operations
    
    
    21.9
    
    
    
    27.8
    
    
    
    7.8
    
    
    
    (35.1
    )
    
    
    22.4Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.5
    )Net earnings
    
    $
    21.9
    
    
    $
    27.8
    
    
    $
    7.3
    
    
    $
    (35.1
    )
    
    $
    21.9
 23




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##### Table of Contents



39 Weeks Ended October 28, 2006Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    1,910.5
    
    
    $
    643.3
    
    
    $
    (449.8
    )
    
    $
    2,104.0Cost of sales
    
    
    
    
    
    
    1,299.5
    
    
    
    503.6
    
    
    
    (440.2
    )
    
    
    1,362.9Gross margin
    
    
    
    
    
    
    611.0
    
    
    
    139.7
    
    
    
    (9.6
    )
    
    
    741.1Selling, general and administrative expense
    
    
    3.4
    
    
    
    514.0
    
    
    
    81.6
    
    
    
    (9.6
    )
    
    
    589.4Restructuring charges
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    0.7Operating (loss) profit from continuing operations
    
    
    (3.4
    )
    
    
    96.3
    
    
    
    58.1
    
    
    
    
    
    
    
    151.0Interest expense
    
    
    29.4
    
    
    
    0.9
    
    
    
    0.8
    
    
    
    (16.9
    )
    
    
    14.2Interest income
    
    
    
    
    
    
    (30.9
    )
    
    
    (1.6
    )
    
    
    16.9
    
    
    
    (15.6
    )Equity in earnings of subsidiaries
    
    
    (118.6
    )
    
    
    (44.1
    )
    
    
    
    
    
    
    162.7
    
    
    
    Earnings from continuing operations before income
taxes and minority interest
    
    
    85.8
    
    
    
    170.4
    
    
    
    58.9
    
    
    
    (162.7
    )
    
    
    152.4(Benefit) provision for income taxes
    
    
    (11.6
    )
    
    
    51.6
    
    
    
    10.1
    
    
    
    
    
    
    
    50.1Earnings from continuing operations before
minority interest
    
    
    97.4
    
    
    
    118.8
    
    
    
    48.8
    
    
    
    (162.7
    )
    
    
    102.3Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (1.9
    )
    
    
    
    
    
    
    (1.9
    )Net earnings from continuing operations
    
    
    97.4
    
    
    
    118.8
    
    
    
    46.9
    
    
    
    (162.7
    )
    
    
    100.4Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (0.2
    )
    
    
    (2.8
    )
    
    
    
    
    
    
    (3.0
    )Net earnings
    
    $
    97.4
    
    
    $
    118.6
    
    
    $
    44.1
    
    
    $
    (162.7
    )
    
    $
    97.4
 39 Weeks Ended October 29, 2005Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    1,882.9
    
    
    $
    545.3
    
    
    $
    (373.5
    )
    
    $
    2,054.7Cost of sales
    
    
    
    
    
    
    1,293.3
    
    
    
    429.1
    
    
    
    (365.8
    )
    
    
    1,356.6Gross margin
    
    
    
    
    
    
    589.6
    
    
    
    116.2
    
    
    
    (7.7
    )
    
    
    698.1Selling, general and administrative expense
    
    
    3.4
    
    
    
    507.5
    
    
    
    75.4
    
    
    
    (7.7
    )
    
    
    578.6Restructuring charges
    
    
    
    
    
    
    1.9
    
    
    
    
    
    
    
    
    
    
    
    1.9Operating (loss) profit from continuing operations
    
    
    (3.4
    )
    
    
    80.2
    
    
    
    40.8
    
    
    
    
    
    
    
    117.6Interest expense
    
    
    23.3
    
    
    
    0.9
    
    
    
    1.0
    
    
    
    (10.6
    )
    
    
    14.6Interest income
    
    
    
    
    
    
    (17.0
    )
    
    
    (1.1
    )
    
    
    10.6
    
    
    
    (7.5
    )Equity in earnings of subsidiaries
    
    
    (89.2
    )
    
    
    (25.9
    )
    
    
    
    
    
    
    115.1
    
    
    
    Earnings from continuing operations before income
taxes and minority interest
    
    
    62.5
    
    
    
    122.2
    
    
    
    40.9
    
    
    
    (115.1
    )
    
    
    110.5(Benefit) provision for income taxes
    
    
    (9.5
    )
    
    
    29.6
    
    
    
    11.8
    
    
    
    
    
    
    
    31.9Earnings from continuing operations before
minority interest
    
    
    72.0
    
    
    
    92.6
    
    
    
    29.1
    
    
    
    (115.1
    )
    
    
    78.6Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (1.5
    )
    
    
    
    
    
    
    (1.5
    )Net earnings from continuing operations
    
    
    72.0
    
    
    
    92.6
    
    
    
    27.6
    
    
    
    (115.1
    )
    
    
    77.1Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (3.4
    )
    
    
    (1.7
    )
    
    
    
    
    
    
    (5.1
    )Net earnings
    
    $
    72.0
    
    
    $
    89.2
    
    
    $
    25.9
    
    
    $
    (115.1
    )
    
    $
    72.0
 24




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##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    97.4
    
    
    $
    118.6
    
    
    $
    44.1
    
    
    $
    (162.7
    )
    
    $
    97.4Loss from discontinued operations, net of income taxes
and minority interest
    
    
    
    
    
    
    0.2
    
    
    
    2.8
    
    
    
    
    
    
    
    3.0Net earnings from continuing operations
    
    
    97.4
    
    
    
    118.8
    
    
    
    46.9
    
    
    
    (162.7
    )
    
    
    100.4Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    6.5
    
    
    
    0.7
    
    
    
    
    
    
    
    7.2Depreciation and amortization
    
    
    
    
    
    
    56.1
    
    
    
    10.6
    
    
    
    
    
    
    
    66.7Amortization of deferred financing costs
    
    
    0.6
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.8Share-based compensation expense
    
    
    
    
    
    
    7.7
    
    
    
    0.6
    
    
    
    
    
    
    
    8.3Deferred income taxes
    
    
    
    
    
    
    (3.6
    )
    
    
    8.1
    
    
    
    
    
    
    
    4.5Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    1.9
    
    
    
    
    
    
    
    1.9Income tax benefit of share-based compensation
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5Accretion of investments
    
    
    
    
    
    
    (2.2
    )
    
    
    
    
    
    
    
    
    
    
    (2.2
    )Changes in working capital:Inventories
    
    
    
    
    
    
    (10.6
    )
    
    
    (7.3
    )
    
    
    1.7
    
    
    
    (16.2
    )Other current assets
    
    
    (11.5
    )
    
    
    29.9
    
    
    
    (34.3
    )
    
    
    11.8
    
    
    
    (4.1
    )Accounts payable
    
    
    
    
    
    
    (23.0
    )
    
    
    (19.9
    )
    
    
    38.0
    
    
    
    (4.9
    )Accrued expenses
    
    
    95.2
    
    
    
    (42.7
    )
    
    
    37.6
    
    
    
    (51.5
    )
    
    
    38.6Other assets and liabilities, net
    
    
    (117.8
    )
    
    
    (48.3
    )
    
    
    1.9
    
    
    
    162.7
    
    
    
    (1.5
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (0.9
    )
    
    
    (3.0
    )
    
    
    
    
    
    
    (3.9
    )Cash flow provided by operating activities
    
    
    63.9
    
    
    
    88.4
    
    
    
    43.8
    
    
    
    
    
    
    
    196.1Investing Activities:Capital expenditures
    
    
    
    
    
    
    (80.4
    )
    
    
    (9.2
    )
    
    
    
    
    
    
    (89.6
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    3.2
    
    
    
    
    
    
    
    
    
    
    
    3.2Intangible asset additions
    
    
    
    
    
    
    (15.1
    )
    
    
    
    
    
    
    
    
    
    
    (15.1
    )Purchases of investments
    
    
    
    
    
    
    (160.0
    )
    
    
    (0.7
    )
    
    
    
    
    
    
    (160.7
    )Sales and maturities of investments
    
    
    
    
    
    
    137.3
    
    
    
    1.2
    
    
    
    
    
    
    
    138.5Investment in subsidiaries
    
    
    
    
    
    
    (1.5
    )
    
    
    
    
    
    
    1.5
    
    
    
    Cash flow used in investing activities
    
    
    
    
    
    
    (116.5
    )
    
    
    (8.7
    )
    
    
    1.5
    
    
    
    (123.7
    )Financing Activities:Excess tax benefits from share-based compensation
    
    
    
    
    
    
    4.2
    
    
    
    
    
    
    
    
    
    
    
    4.2Payment of deferred financing costs
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Repayment of debt
    
    
    
    
    
    
    (0.3
    )
    
    
    (1.9
    )
    
    
    
    
    
    
    (2.2
    )Issuances of common stock
    
    
    27.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27.7Purchases of common stock
    
    
    (91.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (91.6
    )Contribution by / distributions to parent
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    (1.5
    )
    
    
    Distributions to minority owners
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    (1.0
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    1.2Cash flow (used in) provided by financing activities
    
    
    (63.9
    )
    
    
    3.7
    
    
    
    (0.2
    )
    
    
    (1.5
    )
    
    
    (61.9
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    0.3(Decrease) increase in cash and cash equivalents
    
    
    
    
    
    
    (24.4
    )
    
    
    35.2
    
    
    
    
    
    
    
    10.8Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    310.5
    
    
    
    67.7
    
    
    
    
    
    
    
    378.2Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    286.1
    
    
    $
    102.9
    
    
    $
    
    
    
    $
    389.0
 25




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##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    72.0
    
    
    $
    89.2
    
    
    $
    25.9
    
    
    $
    (115.1
    )
    
    $
    72.0Loss from discontinued operations, net of income taxes
and minority interest
    
    
    
    
    
    
    3.4
    
    
    
    1.7
    
    
    
    
    
    
    
    5.1Net earnings from continuing operations
    
    
    72.0
    
    
    
    92.6
    
    
    
    27.6
    
    
    
    (115.1
    )
    
    
    77.1Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    6.5
    
    
    
    0.3
    
    
    
    
    
    
    
    6.8Depreciation and amortization
    
    
    
    
    
    
    60.9
    
    
    
    7.3
    
    
    
    
    
    
    
    68.2Amortization of deferred financing costs
    
    
    0.1
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    0.9Share-based compensation expense
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8Deferred income taxes
    
    
    
    
    
    
    15.2
    
    
    
    1.2
    
    
    
    
    
    
    
    16.4Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    1.5Income tax benefit of share-based compensation
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2Accretion of investments
    
    
    
    
    
    
    (0.7
    )
    
    
    
    
    
    
    
    
    
    
    (0.7
    )Changes in working capital:Inventories
    
    
    
    
    
    
    (6.2
    )
    
    
    10.0
    
    
    
    (0.5
    )
    
    
    3.3Other current assets
    
    
    (9.5
    )
    
    
    (42.5
    )
    
    
    31.0
    
    
    
    15.1
    
    
    
    (5.9
    )Accounts payable
    
    
    
    
    
    
    13.2
    
    
    
    (4.3
    )
    
    
    (25.3
    )
    
    
    (16.4
    )Accrued expenses
    
    
    15.3
    
    
    
    (11.2
    )
    
    
    (6.6
    )
    
    
    10.7
    
    
    
    8.2Other assets and liabilities, net
    
    
    (77.7
    )
    
    
    (29.5
    )
    
    
    (0.6
    )
    
    
    115.1
    
    
    
    7.3Net cash used in discontinued operations
    
    
    
    
    
    
    (7.2
    )
    
    
    (2.3
    )
    
    
    
    
    
    
    (9.5
    )Cash flow provided by operating activities
    
    
    2.2
    
    
    
    91.9
    
    
    
    65.1
    
    
    
    
    
    
    
    159.2Investing Activities:Capital expenditures
    
    
    
    
    
    
    (47.0
    )
    
    
    (2.5
    )
    
    
    
    
    
    
    (49.5
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    0.8Restricted cash
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    1.0Purchases of investments
    
    
    
    
    
    
    (145.9
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    (146.4
    )Sales and maturities of investments
    
    
    
    
    
    
    67.2
    
    
    
    
    
    
    
    
    
    
    
    67.2Investment in subsidiaries
    
    
    
    
    
    
    23.6
    
    
    
    
    
    
    
    (23.6
    )
    
    
    Net cash used in discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )Cash flow used in investing activities
    
    
    
    
    
    
    (101.3
    )
    
    
    (2.1
    )
    
    
    (23.6
    )
    
    
    (127.0
    )Financing Activities:Repayment of notes payable
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    (1.0
    )Issuance of debt
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    1.2Repayment of debt
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Issuances of common stock
    
    
    14.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.6Purchases of common stock
    
    
    (16.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16.8
    )Distributions to parent
    
    
    
    
    
    
    
    
    
    
    (23.6
    )
    
    
    23.6
    
    
    
    Net cash provided by discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    0.9Cash flow used in financing activities
    
    
    (2.2
    )
    
    
    (0.2
    )
    
    
    (22.5
    )
    
    
    23.6
    
    
    
    (1.3
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    1.0(Decrease) increase in cash and cash equivalents
    
    
    
    
    
    
    (9.6
    )
    
    
    41.5
    
    
    
    
    
    
    
    31.9Cash and cash equivalents, beginning of year
    
    
    
    
    
    
    194.5
    
    
    
    76.5
    
    
    
    
    
    
    
    271.0Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    184.9
    
    
    $
    118.0
    
    
    $
    
    
    
    $
    302.9
 26




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##### Table of Contents



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
         27




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TM ®
       28




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##### Table of Contents



29




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##### Table of Contents



Third Quarter
    
    
    First Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    65.7
    
    
    
    67.2
    
    
    
    64.8
    
    
    
    66.0Gross margin
    
    
    34.3
    
    
    
    32.8
    
    
    
    35.2
    
    
    
    34.0Selling, general and administrative expense
    
    
    28.0
    
    
    
    27.5
    
    
    
    28.0
    
    
    
    28.2Restructuring charges
    
    
    0.1
    
    
    
    0.2
    
    
    
    
    
    
    
    0.1Operating profit from continuing operations
    
    
    6.2
    
    
    
    5.1
    
    
    
    7.2
    
    
    
    5.7Interest (income) expense, net
    
    
    (0.1
    )
    
    
    0.2
    
    
    
    (0.1
    )
    
    
    0.3Earnings from continuing operations before income
taxes and minority interest
    
    
    6.3
    
    
    
    4.9
    
    
    
    7.3
    
    
    
    5.4Effective income tax rate*
    
    
    29.6
    
    
    
    28.3
    
    
    
    32.9
    
    
    
    28.9Earnings
from continuing operations before minority interest
    
    
    4.5
    
    
    
    3.5
    
    
    
    4.9
    
    
    
    3.8Minority interest
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (0.1
    )Earnings from continuing operations
    
    
    4.4
    
    
    
    3.3
    
    
    
    4.8
    
    
    
    3.7Loss from discontinued operations, net of income taxes and
minority interest
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.2
    )
    
    
    (0.2
    )Net Earnings
    
    
    4.1
    %
    
    
    3.3
    %
    
    
    4.6
    %
    
    
    3.5
    %
    30




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##### Table of Contents



Third Quarter
    
    
    First Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005Net Sales
    
    
    5.5
    %
    
    
    0.8
    %
    
    
    2.4
    %
    
    
    0.3
    %Same-store Sales
    
    
    5.2
    
    
    
    3.0
    
    
    
    2.6
    
    
    
    2.4Average selling price per unit
    
    
    6.2
    
    
    
    8.6
    
    
    
    10.9
    
    
    
    6.7Unit volume
    
    
    (0.5
    )
    
    
    (6.9
    )
    
    
    (7.7
    )
    
    
    (5.9
    )Footwear average selling price per unit
    
    
    5.9
    
    
    
    3.8
    
    
    
    10.0
    
    
    
    4.1Footwear unit volume
    
    
    1.1
    
    
    
    (1.4
    )
    
    
    (5.6
    )
    
    
    (2.7
    )Non-footwear average selling price per unit
    
    
    (1.4
    )
    
    
    15.6
    
    
    
    4.2
    
    
    
    10.7Non-footwear unit volume
    
    
    (5.8
    )
    
    
    (21.7
    )
    
    
    (15.5
    )
    
    
    (16.6
    )
          31




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##### Table of Contents



Third Quarter
    
    

First
Nine Months(dollars in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues from external customers
    
    $
    104.7
    
    
    $
    90.2
    
    
    $
    287.6
    
    
    $
    261.2Operating profit from continuing operations
    
    
    15.7
    
    
    
    10.9
    
    
    
    33.1
    
    
    
    25.1
     32




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##### Table of Contents



Cash Flow Provided by Operating Activities
  Cash Flow Used in Investing Activities
  Cash Flow Used in Financing Activities
    Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
  33




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##### Table of Contents



Financial Commitments
     October 28,
    
    
    October 29,
    
    
    January 28,2006
    
    
    2005
    
    
    2006Current Ratio
    
    
    2.4
    
    
    
    2.7
    
    
    
    2.5Debt-Capitalization Ratio*
    
    
    22.5
    %
    
    
    23.6
    %
    
    
    24.0
    %
 
   Third Quarter
    
    
    First Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005Beginning of period
    
    
    4,584
    
    
    
    4,625
    
    
    
    4,605
    
    
    
    4,640Stores opened
    
    
    30
    
    
    
    38
    
    
    
    120
    
    
    
    110Stores closed
    
    
    (40
    )
    
    
    (37
    )
    
    
    (151
    )
    
    
    (124
    )Ending store count
    
    
    4,574
    
    
    
    4,626
    
    
    
    4,574
    
    
    
    4,626
      34




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##### Table of Contents



Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  35




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##### Table of Contents



th th
 ®
 36




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##### Table of Contents



Total Number of
    
    
    Approximate DollarShares Purchased as
    
    
    Value of SharesAverage
    
    
    Part of Publicly
    
    
    that May Yet BeTotal Number of
    
    
    Price
    
    
    Announced Plans or
    
    
    Purchased Under theShares Purchased(1)
    
    
    Paid per
    
    
    Programs(2)
    
    
    Plans or Programs(3)Period
    
    (in Thousands)
    
    
    Share
    
    
    (in Thousands)
    
    
    (in Millions)07/30/06  08/26/06
    
    
    2
    
    
    $
    26.26
    
    
    
    
    
    
    $
    111.808/27/06  09/30/06
    
    
    1,243
    
    
    
    23.57
    
    
    
    1,242
    
    
    
    82.510/01/06  10/28/06
    
    
    228
    
    
    
    24.87
    
    
    
    225
    
    
    
    76.9Total
    
    
    1,473
    
    
    $
    23.77
    
    
    
    1,467
    
    
    $
    76.9
 (1)
    
    We repurchased an aggregate of 6 thousand shares of our common stock in connection
with our employee stock purchase and stock incentive plans.(2)
    
    In 2001, our Board of Directors approved the repurchase of our common stock having
a value of up to $250 million in the aggregate pursuant to the Program.(3)
    
    The timing and amount of share repurchases, if any, are limited by the terms of
our Credit Agreement and Senior Subordinated Notes.
   Number
    
    Description31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer and President*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Senior Vice President, Chief Financial Officer and Treasurer*32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer and President*32.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Senior Vice President, Chief Financial Officer and Treasurer*
 *
 37




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##### Table of Contents



PAYLESS SHOESOURCE, INC.Date: December 6, 2006
    By:
    /s/ Matthew E. RubelMatthew E. RubelChief Executive Officer
and President
(Principal Executive Officer)Date: December 6, 2006
    By:
    /s/ Ullrich E. PorzigUllrich E. PorzigSenior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 38