##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended November 3, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from to
 Commission File Number: 1-14770
 
 COLLECTIVE BRANDS, INC.
  Delaware
    
    43-1813160State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization
    
    Identification No.)3231 Southeast Sixth Avenue, Topeka, Kansas
    
    66607-2207(Address of principal executive offices)
    
    (Zip Code)
 (785) 233-5171
 þ o
  þ o o
 o þ




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##### 



COLLECTIVE BRANDS, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED NOVEMBER 3, 2007
INDEX
 PagePART I - FINANCIAL INFORMATIONItem 1. Financial Statements. (unaudited)Condensed Consolidated Statements of Earnings for the 13 Weeks and 39 Weeks Ended
November 3, 2007 and October 28, 2006.
    
    
    3Condensed Consolidated Balance Sheets as of November 3, 2007, October 28, 2006 and February 3, 2007.
    
    
    4Condensed Consolidated Statements of Cash Flows for the 39 Weeks Ended November 3, 2007
and October 28, 2006.
    
    
    5Notes to Condensed Consolidated Financial Statements.
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    28Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    38Item 4. Controls and Procedures.
    
    
    39PART II - OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    39Item 1A. Risk Factors.
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    41Item 6. Exhibits.
    
    
    42Signatures.
    
    
    43Certification Pursuant to Section 302 of the CEO and PresidentCertification Pursuant to Section 302 of the Senior VP, CFO and TreasurerCertification Pursuant to Section 906 of the CEO and PresidentCertification Pursuant to Section 906 of the Senior VP, CFO and Treasurer
  2




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##### Table of Contents



PART I
- FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 COLLECTIVE BRANDS, INC. AND SUBSIDIARIES
(Formerly Payless ShoeSource, Inc.)
 
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 (UNAUDITED)
  13 Weeks Ended
    
    
    39 Weeks EndedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    830.7
    
    
    $
    703.4
    
    
    $
    2,258.6
    
    
    $
    2,104.0Cost of sales
    
    
    563.5
    
    
    
    462.1
    
    
    
    1,481.9
    
    
    
    1,362.9Gross margin
    
    
    267.2
    
    
    
    241.3
    
    
    
    776.7
    
    
    
    741.1Selling, general and administrative expenses
    
    
    239.6
    
    
    
    196.8
    
    
    
    650.5
    
    
    
    589.4Restructuring charges
    
    
    (0.1
    )
    
    
    0.4
    
    
    
    0.2
    
    
    
    0.7Operating profit from continuing operations
    
    
    27.7
    
    
    
    44.1
    
    
    
    126.0
    
    
    
    151.0Interest expense
    
    
    18.1
    
    
    
    4.8
    
    
    
    27.7
    
    
    
    14.2Interest income
    
    
    (2.9
    )
    
    
    (5.6
    )
    
    
    (11.6
    )
    
    
    (15.6
    )Earnings from continuing operations before income taxes
and minority interest
    
    
    12.5
    
    
    
    44.9
    
    
    
    109.9
    
    
    
    152.4(Benefit) / provision for income taxes
    
    
    (15.1
    )
    
    
    13.3
    
    
    
    16.4
    
    
    
    50.1Earnings from continuing operations before minority interest
    
    
    27.6
    
    
    
    31.6
    
    
    
    93.5
    
    
    
    102.3Minority interest, net of income taxes
    
    
    (2.0
    )
    
    
    (1.0
    )
    
    
    (4.2
    )
    
    
    (1.9
    )Net earnings from continuing operations
    
    
    25.6
    
    
    
    30.6
    
    
    
    89.3
    
    
    
    100.4Loss from discontinued operations, net of income
taxes and minority interest
    
    
    (0.1
    )
    
    
    (1.7
    )
    
    
    
    
    
    
    (3.0
    )Net earnings
    
    $
    25.5
    
    
    $
    28.9
    
    
    $
    89.3
    
    
    $
    97.4Basic earnings per share:Earnings from continuing operations
    
    $
    0.40
    
    
    $
    0.47
    
    
    $
    1.38
    
    
    $
    1.52Loss from discontinued operations
    
    
    
    
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.05
    )Basic earnings per share
    
    $
    0.40
    
    
    $
    0.44
    
    
    $
    1.38
    
    
    $
    1.47Diluted earnings per share:Earnings from continuing operations
    
    $
    0.39
    
    
    $
    0.46
    
    
    $
    1.36
    
    
    $
    1.49Loss from discontinued operations
    
    
    
    
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.04
    )Diluted earnings per share
    
    $
    0.39
    
    
    $
    0.43
    
    
    $
    1.36
    
    
    $
    1.45Basic Weighted Average Shares Outstanding
    
    
    64.6
    
    
    
    65.4
    
    
    
    64.6
    
    
    
    66.2Diluted Weighted Average Shares Outstanding
    
    
    65.3
    
    
    
    66.4
    
    
    
    65.7
    
    
    
    67.2
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COLLECTIVE BRANDS, INC. AND SUBSIDIARIES
(Formerly Payless ShoeSource, Inc.)
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
  November 3,
    
    
    October 28,
    
    
    February 3,2007
    
    
    2006
    
    
    2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    301.3
    
    
    $
    389.0
    
    
    $
    371.4Short-term investments
    
    
    
    
    
    
    83.4
    
    
    
    90.0Restricted cash
    
    
    
    
    
    
    2.0
    
    
    
    2.0Receivables, net of allowance
for doubtful accounts as of November 3, 2007 of $0.7
    
    
    93.6
    
    
    
    15.8
    
    
    
    14.8Inventories
    
    
    476.1
    
    
    
    349.2
    
    
    
    361.9Current deferred income taxes
    
    
    15.1
    
    
    
    18.0
    
    
    
    15.6Prepaid expenses
    
    
    94.9
    
    
    
    41.3
    
    
    
    46.5Other current assets
    
    
    14.9
    
    
    
    3.2
    
    
    
    3.3Current assets of discontinued operations
    
    
    0.8
    
    
    
    1.4
    
    
    
    1.1Total current assets
    
    
    996.7
    
    
    
    903.3
    
    
    
    906.6Property and Equipment:Land
    
    
    10.8
    
    
    
    7.4
    
    
    
    6.6Property, buildings and equipment
    
    
    1,422.6
    
    
    
    1,241.1
    
    
    
    1,245.1Accumulated depreciation and amortization
    
    
    (892.4
    )
    
    
    (843.7
    )
    
    
    (830.5
    )Property and equipment, net
    
    
    541.0
    
    
    
    404.8
    
    
    
    421.2Intangible assets, net
    
    
    564.8
    
    
    
    40.1
    
    
    
    39.6Goodwill
    
    
    314.6
    
    
    
    5.9
    
    
    
    5.9Deferred income taxes
    
    
    1.4
    
    
    
    31.1
    
    
    
    37.7Other assets
    
    
    43.3
    
    
    
    19.7
    
    
    
    16.4Total Assets
    
    $
    2,461.8
    
    
    $
    1,404.9
    
    
    $
    1,427.4LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    7.5
    
    
    $
    0.9
    
    
    $
    0.4Notes payable
    
    
    
    
    
    
    2.0
    
    
    
    2.0Accounts payable
    
    
    159.3
    
    
    
    166.2
    
    
    
    185.6Accrued expenses
    
    
    214.4
    
    
    
    204.1
    
    
    
    190.2Current liabilities of discontinued operations
    
    
    1.5
    
    
    
    2.1
    
    
    
    2.1Total current liabilities
    
    
    382.7
    
    
    
    375.3
    
    
    
    380.3Long-term debt
    
    
    918.6
    
    
    
    201.7
    
    
    
    201.7Deferred income taxes
    
    
    132.0
    
    
    
    
    
    
    
    Other liabilities
    
    
    221.3
    
    
    
    118.2
    
    
    
    132.6Minority interest
    
    
    13.5
    
    
    
    10.5
    
    
    
    12.7Commitments and contingencies (Note 16)Shareowners equity
    
    
    793.7
    
    
    
    699.2
    
    
    
    700.1Total Liabilities and Shareowners Equity
    
    $
    2,461.8
    
    
    $
    1,404.9
    
    
    $
    1,427.4
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COLLECTIVE BRANDS, INC. AND SUBSIDIARIES
(Formerly Payless ShoeSource, Inc.)
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
  39 Weeks EndedNovember 3,
    
    
    October 28,2007
    
    
    2006Operating Activities:Net earnings
    
    $
    89.3
    
    
    $
    97.4Loss from discontinued operations, net of income taxes and minority interest
    
    
    
    
    
    
    3.0Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    6.1
    
    
    
    7.2Depreciation and amortization
    
    
    81.4
    
    
    
    67.5Provision for losses on accounts receivable
    
    
    0.7
    
    
    
    Share-based compensation expense
    
    
    10.7
    
    
    
    8.3Deferred income taxes
    
    
    (4.7
    )
    
    
    4.5Minority interest, net of income taxes
    
    
    4.2
    
    
    
    1.9Income tax benefit from share-based compensation
    
    
    2.6
    
    
    
    4.7Excess tax benefit from share-based compensation
    
    
    (2.4
    )
    
    
    (4.2
    )Interest income on held-to-maturity investments
    
    
    (0.6
    )
    
    
    (2.2
    )Changes in working capital, exclusive of the effects of acquisitions:Receivables, net
    
    
    22.5
    
    
    
    1.8Inventories
    
    
    76.0
    
    
    
    (16.2
    )Prepaid expenses and other current assets
    
    
    (33.1
    )
    
    
    (5.9
    )Accounts payable
    
    
    (76.7
    )
    
    
    (4.9
    )Accrued expenses
    
    
    (16.5
    )
    
    
    38.6Other assets and liabilities, net
    
    
    22.0
    
    
    
    (1.5
    )Net cash used in discontinued operations
    
    
    (0.3
    )
    
    
    (3.9
    )Cash flow provided by operating activities
    
    
    181.2
    
    
    
    196.1Investing Activities:Capital expenditures
    
    
    (128.0
    )
    
    
    (89.6
    )Restricted cash
    
    
    2.0
    
    
    
    Proceeds from sale of property and equipment
    
    
    2.9
    
    
    
    3.2Intangible asset additions
    
    
    
    
    
    
    (15.1
    )Purchases of investments
    
    
    (6.1
    )
    
    
    (160.7
    )Sales and maturities of investments
    
    
    96.7
    
    
    
    138.5Acquisition of businesses, net of cash acquired
    
    
    (876.9
    )
    
    
    Cash flow used in investing activities
    
    
    (909.4
    )
    
    
    (123.7
    )Financing Activities:Repayment of notes payable
    
    
    (2.0
    )
    
    
    Issuance of debt
    
    
    725.0
    
    
    
    Repayment of debt
    
    
    (51.5
    )
    
    
    (2.2
    )Payment of deferred financing costs
    
    
    (8.1
    )
    
    
    (0.2
    )Issuances of common stock
    
    
    8.3
    
    
    
    27.7Purchases of common stock
    
    
    (21.2
    )
    
    
    (91.6
    )Excess tax benefit from share-based compensation
    
    
    2.4
    
    
    
    4.2Distributions to minority owners
    
    
    (2.4
    )
    
    
    (1.0
    )Contributions from minority owners
    
    
    
    
    
    
    1.2Cash flow provided by (used in) financing activities
    
    
    650.5
    
    
    
    (61.9
    )Effect of exchange rate changes on cash
    
    
    7.6
    
    
    
    0.3(Decrease) increase in cash and cash equivalents
    
    
    (70.1
    )
    
    
    10.8Cash and cash equivalents, beginning of year
    
    
    371.4
    
    
    
    378.2Cash and cash equivalents, end of quarter
    
    $
    301.3
    
    
    $
    389.0Supplemental cash flow information:Interest paid
    
    $
    11.2
    
    
    $
    19.3Income taxes paid
    
    $
    19.6
    
    
    $
    22.6Non-cash investing and financing activities:Accrued capital additions
    
    $
    23.7
    
    
    $
    8.6Accrued capital lease addition
    
    $
    1.2
    
    
    $
    Accrued financing costs
    
    $
    0.7
    
    
    $
    Accrued intangible asset additions
    
    $
    
    
    
    $
    10.0
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COLLECTIVE BRANDS, INC. AND SUBSIDIARIES
(Formerly Payless ShoeSource, Inc.)
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Note 1  Interim Results.
  Note 2  Acquisitions.
 Stride Rite
  6




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(In millions)Receivables
    
    $
    96.5Inventories
    
    
    184.8Other current assets
    
    
    25.0Total current assets
    
    
    306.3Property and equipment
    
    
    68.1Goodwill
    
    
    274.4Indefinite lived Trademarks
    
    
    391.1Finite lived intangible assets*
    
    
    83.7Other assets
    
    
    10.7Total assets acquired
    
    
    1,134.3Accounts payable
    
    
    (53.4
    )Accrued expenses and other current liabilities
    
    
    (50.0
    )Total current liabilities
    
    
    (103.4
    )Long-term debt
    
    
    (46.0
    )Long-term deferred tax liabilities
    
    
    (179.2
    )Other long-term liabilities
    
    
    (19.9
    )Total liabilities
    
    
    (348.5
    )Net assets acquired
    
    $
    785.8
 
 *
    
    Finite lived intangible assets will be amortized as follows: Fair Value
    
    
    Weighted AverageType
    
    (in millions)
    
    
    Remaining Useful LifeTrademarks
    
    $
    7.2
    
    
    8 YearsCustomer Relationships
    
    
    66.6
    
    
    8 YearsCustomer Backlog
    
    
    2.2
    
    
    0.75 YearsOther Intangibles
    
    
    7.7
    
    
    5 Years$
    83.7
   Collective Licensing
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##### Table of Contents



(dollars in millions)Current assets
    
    $
    4.6Goodwill
    
    
    34.3Trademarks(1)
    
    
    47.7Customer relationships(2)
    
    
    9.2Other intangible assets(3)
    
    
    0.2Current liabilities
    
    
    (4.9
    )Net assets acquired
    
    $
    91.1
 
 (1)
    
    Comprised of $40.6 million with indefinite lives and $7.1 million with finite
lives amortized over a weighted-average period of ten years.(2)
    
    Amortized over a weighted-average period of seven years.(3)
    
    Comprised of non-compete contracts, amortized over a weighted-average period of
three years.  Pro forma Financial Information
  13 Weeks Ended
    
    
    39 Weeks EndedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,(dollars in millions, except per share)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    854.8
    
    
    $
    881.9
    
    
    $
    2,688.1
    
    
    $
    2,662.0Net earnings
    
    
    34.7
    
    
    
    22.1
    
    
    
    89.3
    
    
    
    61.7Basic earnings per share
    
    $
    0.54
    
    
    $
    0.34
    
    
    $
    1.38
    
    
    $
    0.93Diluted earnings per share
    
    $
    0.53
    
    
    $
    0.33
    
    
    $
    1.36
    
    
    $
    0.92
 Note 3  Exit Costs.
  8




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Costs Incurred
    
    
    Cash Payments13 Weeks Ended
    
    
    39 Weeks Ended
    
    
    39 Weeks Ended
    
    
    Accrual Balance as of(dollars in millions)
    
    November 3, 2007
    
    
    November 3, 2007
    
    
    November 3, 2007
    
    
    November 3, 2007Employee severance costs
    
    $
    0.4
    
    
    $
    5.2
    
    
    $
    (0.6
    )
    
    $
    4.6Contract termination
    
    
    
    
    
    
    0.8
    
    
    
    (0.8
    )
    
    
    Accelerated depreciation
    
    
    0.6
    
    
    
    1.8Total
    
    $
    1.0
    
    
    $
    7.8
    
    
    $
    (1.4
    )
    
    $
    4.6
  Note 4  Short-Term Investments.
  October 28,
    
    
    February 3,(dollars in millions)
    
    2006
    
    
    2007Held-to-maturity securities:Commercial paper
    
    $
    83.4
    
    
    $
    90.0Total held-to-maturity securities
    
    $
    83.4
    
    
    $
    90.0
  Note 5  Discontinued Operations.
 Payless Domestic Segment
  13 Weeks Ended
    
    
    39 Weeks EndedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Loss from discontinued operations before income taxes
    
    $
    (0.2
    )
    
    $
    
    
    
    $
    
    
    
    $
    (0.3
    )Benefit for income taxes
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Loss from discontinued operations, net of income taxes
    
    $
    (0.1
    )
    
    $
    
    
    
    $
    
    
    
    $
    (0.2
    )
 9




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##### Table of Contents



November 3,
    
    
    October 28,
    
    
    February 3,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007AssetsCurrent assets:Receivables, net
    
    $
    0.1
    
    
    $
    
    
    
    $
    Current deferred income taxes
    
    
    0.6
    
    
    
    0.7
    
    
    
    0.8Other current assets
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2Total current assets of discontinued operations
    
    $
    0.8
    
    
    $
    0.9
    
    
    $
    1.0LiabilitiesCurrent liabilities:Accrued expenses
    
    $
    1.5
    
    
    $
    2.0
    
    
    $
    2.1Total current liabilities of discontinued operations
    
    $
    1.5
    
    
    $
    2.0
    
    
    $
    2.1
 Payless International Segment
  13 Weeks Ended
    
    
    39 Weeks EndedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    
    
    
    $
    0.2
    
    
    $
    
    
    
    $
    0.8Cost of sales
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    1.3Gross margin
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.5
    )Selling, general and administrative expenses
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    2.3Loss from discontinued operations before minority interest
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    (2.8
    )Minority interest
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    1.1Loss from discontinued operations, net of income taxes minority interest
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    (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
    )
    
    $
    
    
    
    $
    (2.8
    )
 November 3,
    
    
    October 28,
    
    
    February 3,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    0.4
    
    
    $
    0.1Inventories
    
    
    
    
    
    
    
    
    
    
    Other current assets
    
    
    
    
    
    
    0.1
    
    
    
    Total current assets of discontinued operations
    
    $
    
    
    
    $
    0.5
    
    
    $
    0.1LiabilitiesCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    0.1
    
    
    $
    Accrued expenses
    
    
    
    
    
    
    
    
    
    
    Total current liabilities of discontinued operations
    
    $
    
    
    
    $
    0.1
    
    
    $
    
 10




---



##### Table of Contents



Note 6  Inventories.
  Note 7  Intangible Assets.
  November 3,
    
    
    October 28,
    
    
    February 3,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007Intangible assets subject to amortization:Favorable lease rights:Gross carrying amount
    
    $
    69.8
    
    
    $
    67.6
    
    
    $
    67.2Less: accumulated amortization
    
    
    (53.6
    )
    
    
    (54.0
    )
    
    
    (54.4
    )Carrying amount, end of period
    
    
    16.2
    
    
    
    13.6
    
    
    
    12.8Trademarks:Gross carrying amount
    
    
    14.3
    
    
    
    
    
    
    
    Less: accumulated amortization
    
    
    (0.6
    )
    
    
    
    
    
    
    Carrying amount, end of period
    
    
    13.7
    
    
    
    
    
    
    
    Customer relationships and other intangible assets:Gross carrying amount
    
    
    79.9
    
    
    
    
    
    
    
    0.1Less: accumulated amortization
    
    
    (4.2
    )
    
    
    
    
    
    
    Carrying amount, end of period
    
    
    75.7
    
    
    
    
    
    
    
    0.1Total carrying amount of intangible assets
subject to amortization
    
    
    105.6
    
    
    
    13.6
    
    
    
    12.9Indefinite-lived trademarks
    
    
    459.2
    
    
    
    26.5
    
    
    
    26.7Total intangible assets
    
    $
    564.8
    
    
    $
    40.1
    
    
    $
    39.6
  Favorable lease rights
    
    A weighted-average period of 11 years.
Favorable lease rights are amortized over the term of
the underlying lease, including renewal options in instances where failure to exercise renewals
would result in an economic penalty.Trademarks
    
    5 to 10 yearsCustomer relationships and
other intangible assets
    
    0.75 to 8 years
  13 Weeks Ended
    

39 Weeks EndedNovember 3,
    
    October 28,
    
    November 3,
    
    October 28,(dollars in millions)
    
    2007
    
    2006
    
    2007
    
    2006Amortization expense on intangible assets
    
    $
    4.6
    
    
    $
    0.9
    
    
    $
    6.7
    
    
    $
    2.4
 11




---



##### Table of Contents



Year
    
    AmountRemainder of 2007
    
    $
    5.32008
    
    
    20.72009
    
    
    18.22010
    
    
    14.42011
    
    
    11.6
  Note 8  Long-Term Debt.
 pari
passu
    12




---



##### Table of Contents



Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
 Note 9  Derivatives.
   Note 10  Pension Plan.
 
 13 Weeks Ended
    
    
    39 Weeks EndedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Components of pension expense:Service cost
    
    $
    0.2
    
    
    $
    0.2
    
    
    $
    0.7
    
    
    $
    0.6Interest cost
    
    
    0.4
    
    
    
    0.3
    
    
    
    1.3
    
    
    
    1.0Amortization of prior service cost
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.3Amortization of actuarial loss
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.2Total
    
    $
    0.9
    
    
    $
    0.7
    
    
    $
    2.8
    
    
    $
    2.1
  13




---



##### Table of Contents



13 Weeks Ended
    
    
    39 Weeks EndedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Components of pension expense:Service cost
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest cost
    
    
    0.9
    
    
    
    
    
    
    
    0.9
    
    
    
    Expected return on net assets
    
    
    (1.0
    )
    
    
    
    
    
    
    (1.0
    )
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of actuarial loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    (0.1
    )
    
    $
    
    
    
    $
    (0.1
    )
    
    $
    
 Note 11  Share-Based Compensation.
   13 Weeks Ended
    
    39 Weeks EndedNovember 3, 2007Stock-settled SARs(1):Vest in installments over 3 years
    
    
    867,719
    
    
    
    1,350,378Cliff vest after 3 years
    
    
    47,000
    
    
    
    290,400Nonvested Shares:Performance
grant - vests in installments over 3 years(2)
    
    
    18,298
    
    
    
    144,008Vest in installments over 3 years
    
    
    350,701
    
    
    
    353,121Cliff vest after 3 years
    
    
    86,755
    
    
    
    141,190Nonvested Share Units:Performance
grant - cliff vests after 3 years(2)
    
    
    
    
    
    
    271,113Cash-settled SARs(1):Vest in installments over 3 years
    
    
    48,086
    
    
    
    70,611Cliff vest after 3 years
    
    
    
    
    
    
    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 and nonvested share units are subject to a
performance condition for vesting. The performance grant vests only if
the performance condition is met. As of November 3, 2007, the Company has
assessed the likelihood that the performance conditions will be met and
has recorded the related expense based on the estimated outcome.  13 Weeks Ended
    
    
    39 Weeks EndedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,(dollars in millions, except per share amounts)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of sales
    
    $
    1.3
    
    
    $
    0.9
    
    
    $
    2.9
    
    
    $
    2.4Selling, general and administrative expenses
    
    
    3.2
    
    
    
    1.9
    
    
    
    7.8
    
    
    
    5.9Share-based compensation expense before income taxes
    
    
    4.5
    
    
    
    2.8
    
    
    
    10.7
    
    
    
    8.3Tax benefit
    
    
    (1.7
    )
    
    
    (1.0
    )
    
    
    (4.1
    )
    
    
    (3.0
    )Share-based compensation expense after income taxes
    
    $
    2.8
    
    
    $
    1.8
    
    
    $
    6.6
    
    
    $
    5.3Effect on:Basic earnings per share
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.08Diluted earnings per share
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.08
 14




---



##### Table of Contents



Note 12  Income Taxes.
        15




---



##### Table of Contents



Note 13  Comprehensive Income.
  (dollars in millions)13 weeks ended November 3, 2007Net earnings
    
    $
    25.5Foreign currency translation adjustments
    
    
    9.5Net derivative instrument fair value change, net of
taxes of $2.6 (Note 9)
    
    
    (4.7
    )Amortization of prior service cost and actuarial loss,
net of taxes of $0.1
    
    
    0.2Total comprehensive income
    
    $
    30.539 weeks ended November 3, 2007Net earnings
    
    $
    89.3Foreign currency translation adjustments
    
    
    18.8Net derivative instrument fair value change, net of
taxes of $2.6 (Note 9)
    
    
    (4.7
    )Amortization of prior service cost and actuarial loss,
net of taxes of $0.3
    
    
    0.5Total comprehensive income
    
    $
    103.913 weeks ended October 28, 2006Net earnings
    
    $
    28.9Foreign currency translation adjustments
    
    
    0.4Total comprehensive income
    
    $
    29.339 weeks ended October 28, 2006Net earnings
    
    $
    97.4Foreign currency translation adjustments
    
    
    1.3Total comprehensive income
    
    $
    98.7
   16




---



##### Table of Contents



Note 14  Earnings Per Share.
  13 Weeks Ended
    
    
    39 Weeks EndedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,(dollars in millions, except per share amounts; shares in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net earnings from continuing operations
    
    $
    25.6
    
    
    $
    30.6
    
    
    $
    89.3
    
    
    $
    100.4Weighted
average shares outstanding - basic
    
    
    64,577
    
    
    
    65,382
    
    
    
    64,614
    
    
    
    66,153Net effect of dilutive stock options
    
    
    510
    
    
    
    880
    
    
    
    802
    
    
    
    909Net effect of dilutive SARs
    
    
    1
    
    
    
    
    
    
    
    67
    
    
    
    Dilutive shares due to nonvested shares
    
    
    193
    
    
    
    122
    
    
    
    178
    
    
    
    112Weighted
average shares outstanding - diluted
    
    
    65,281
    
    
    
    66,384
    
    
    
    65,661
    
    
    
    67,174Diluted earnings per share from continuing operations
    
    $
    0.39
    
    
    $
    0.46
    
    
    $
    1.36
    
    
    $
    1.49
  Note 15  Segment Reporting.
  
    
    The Payless Domestic reporting segment is comprised of domestic retail stores under the
Payless ShoeSource name, operations in Guam and Saipan, the Payless wholesale business, the
Companys sourcing unit and Collective Licensing.
    
    The Payless International reporting segment is comprised of international retail stores
under the Payless ShoeSource name in Canada, the South American Region, the Central
American Region, Puerto Rico, and the U.S. Virgin Islands.
    
    The Stride Rite Retail reporting segment consists of Stride Rites retail stores and
outlet stores and the Saucony factory outlets.
    
    The Stride Rite Wholesale reporting segment consists of Stride Rites wholesale
operations.
  17




---



##### Table of Contents



Payless
    
    Payless
    
    Stride Rite
    
    Stride Rite(dollars in millions)
    
    Domestic
    
    International
    
    Retail
    
    Wholesale
    
    Consolidated13 weeks ended November 3, 2007Revenues from external customers
    
    $
    574.9
    
    
    $
    111.0
    
    
    $
    49.8
    
    
    $
    95.0
    
    
    $
    830.7Operating profit from continuing operations
    
    
    28.4
    
    
    
    15.8
    
    
    
    (0.4
    )
    
    
    (16.1
    )
    
    
    27.739 weeks ended November 3, 2007Revenues from external customers
    
    $
    1,804.0
    
    
    $
    309.8
    
    
    $
    49.8
    
    
    $
    95.0
    
    
    $
    2,258.6Operating profit from continuing operations
    
    
    108.1
    
    
    
    34.4
    
    
    
    (0.4
    )
    
    
    (16.1
    )
    
    
    126.0Operating Segment Total Assets
    
    $
    1,201.7
    
    
    $
    146.1
    
    
    $
    108.8
    
    
    $
    1,005.2
    
    
    $
    2,461.8
 Payless
    
    Payless
    
    Stride Rite
    
    Stride Rite(dollars in millions)
    
    Domestic
    
    International
    
    Retail
    
    Wholesale
    
    Consolidated13 weeks ended October 28, 2006Revenues from external customers
    
    $
    598.7
    
    
    $
    104.7
    
    
    $
    
    
    
    $
    
    
    
    $
    703.4Operating profit from continuing operations
    
    
    28.4
    
    
    
    15.7
    
    
    
    
    
    
    
    
    
    
    
    44.139 weeks ended October 28, 2006Revenues from external customers
    
    $
    1,816.4
    
    
    $
    287.6
    
    
    $
    
    
    
    $
    
    
    
    $
    2,104.0Operating profit from continuing operations
    
    
    117.9
    
    
    
    33.1
    
    
    
    
    
    
    
    
    
    
    
    151.0Operating Segment Total Assets
    
    $
    1,218.0
    
    
    $
    186.9
    
    
    $
    
    
    
    $
    
    
    
    $
    1,404.9
 Note 16  Commitments and Contingencies.
  th th
 18




---



##### Table of Contents



Note 17  Impact of Recently Issued Accounting Standards.
   Note 18  Related Party Transactions.
   19




---



##### Table of Contents



November 3,
    
    October 28,
    
    February 3,(dollars in millions)
    
    2007
    
    2006
    
    2007Deposits
    
    $
    3.2
    
    
    $
    3.1
    
    
    $
    7.9Borrowings
    
    
    2.0
    
    
    
    4.5
    
    
    
    4.0
  13 Weeks Ended
    
    39 Weeks EndedNovember 3,
    
    October 28,
    
    November 3,
    
    October 28,(dollars in millions)
    
    2007
    
    2006
    
    2007
    
    2006Interest expense
    
    $
    
    
    
    $
    
    
    
    $
    0.1
    
    
    $
    0.1
 Note 19  Subsidiary Guarantors of Senior Notes  Condensed Consolidating Financial Information.
     20




---



##### 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
 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 expenses
    
    
    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
 21




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##### Table of Contents



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
    )
    
    
    89.3Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings
    
    $
    89.3
    
    
    $
    108.2
    
    
    $
    53.4
    
    
    $
    (161.6
    )
    
    $
    89.3
 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 expenses
    
    
    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
 22




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    119.0
    
    
    $
    182.3
    
    
    $
    
    
    
    $
    301.3Receivables, 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 contingenciesTotal shareowners 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




---



##### 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
    
    
    
    
    
    
    
    2.0Receivables, net
    
    
    
    
    
    
    12.1
    
    
    
    59.2
    
    
    
    (55.5
    )
    
    
    15.8Inventories
    
    
    
    
    
    
    281.9
    
    
    
    71.6
    
    
    
    (4.3
    )
    
    
    349.2Current deferred income taxes
    
    
    
    
    
    
    15.1
    
    
    
    2.9
    
    
    
    
    
    
    
    18.0Prepaid expenses
    
    
    0.6
    
    
    
    34.7
    
    
    
    6.0
    
    
    
    
    
    
    
    41.3Other current assets
    
    
    39.6
    
    
    
    58.3
    
    
    
    0.4
    
    
    
    (95.1
    )
    
    
    3.2Current assets of discontinued operations
    
    
    
    
    
    
    0.9
    
    
    
    0.5
    
    
    
    
    
    
    
    1.4Total current assets
    
    
    40.2
    
    
    
    772.5
    
    
    
    245.5
    
    
    
    (154.9
    )
    
    
    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
    
    
    
    
    
    
    
    404.8Intangible assets, net
    
    
    
    
    
    
    40.1
    
    
    
    
    
    
    
    
    
    
    
    40.1Goodwill
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Deferred income taxes
    
    
    
    
    
    
    26.3
    
    
    
    4.8
    
    
    
    
    
    
    
    31.1Other assets
    
    
    1,288.3
    
    
    
    448.3
    
    
    
    1.3
    
    
    
    (1,718.2
    )
    
    
    19.7Total Assets
    
    $
    1,328.5
    
    
    $
    1,637.9
    
    
    $
    311.6
    
    
    $
    (1,873.1
    )
    
    $
    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
    
    
    
    137.0
    
    
    
    56.5
    
    
    
    (136.1
    )
    
    
    204.1Current liabilities of discontinued operations
    
    
    
    
    
    
    2.0
    
    
    
    0.1
    
    
    
    
    
    
    
    2.1Total current liabilities
    
    
    146.7
    
    
    
    278.4
    
    
    
    105.1
    
    
    
    (154.9
    )
    
    
    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 contingenciesTotal Shareowners equity
    
    
    699.2
    
    
    
    1,258.5
    
    
    
    176.6
    
    
    
    (1,435.1
    )
    
    
    699.2Total Liabilities and Shareowners Equity
    
    $
    1,328.5
    
    
    $
    1,637.9
    
    
    $
    311.6
    
    
    $
    (1,873.1
    )
    
    $
    1,404.9
 24




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    239.4
    
    
    $
    132.0
    
    
    $
    
    
    
    $
    371.4Short-term investments
    
    
    
    
    
    
    90.0
    
    
    
    
    
    
    
    
    
    
    
    90.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Receivables, net
    
    
    
    
    
    
    12.1
    
    
    
    57.8
    
    
    
    (55.1
    )
    
    
    14.8Inventories
    
    
    
    
    
    
    282.8
    
    
    
    83.5
    
    
    
    (4.4
    )
    
    
    361.9Current deferred income taxes
    
    
    
    
    
    
    13.2
    
    
    
    2.4
    
    
    
    
    
    
    
    15.6Prepaid expenses
    
    
    0.6
    
    
    
    40.2
    
    
    
    5.7
    
    
    
    
    
    
    
    46.5Other current assets
    
    
    42.3
    
    
    
    58.3
    
    
    
    0.1
    
    
    
    (97.4
    )
    
    
    3.3Current assets of discontinued operations
    
    
    
    
    
    
    1.0
    
    
    
    0.1
    
    
    
    
    
    
    
    1.1Total current assets
    
    
    42.9
    
    
    
    737.0
    
    
    
    283.6
    
    
    
    (156.9
    )
    
    
    906.6Property and Equipment:Land
    
    
    
    
    
    
    6.6
    
    
    
    
    
    
    
    
    
    
    
    6.6Property, buildings and equipment
    
    
    
    
    
    
    1,096.7
    
    
    
    148.4
    
    
    
    
    
    
    
    1,245.1Accumulated depreciation and amortization
    
    
    
    
    
    
    (741.4
    )
    
    
    (89.1
    )
    
    
    
    
    
    
    (830.5
    )Property and equipment, net
    
    
    
    
    
    
    361.9
    
    
    
    59.3
    
    
    
    
    
    
    
    421.2Intangible assets, net
    
    
    
    
    
    
    39.6
    
    
    
    
    
    
    
    
    
    
    
    39.6Goodwill
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Deferred income taxes
    
    
    
    
    
    
    31.3
    
    
    
    6.4
    
    
    
    
    
    
    
    37.7Other assets
    
    
    1,315.4
    
    
    
    460.2
    
    
    
    1.3
    
    
    
    (1,760.5
    )
    
    
    16.4Total Assets
    
    $
    1,358.3
    
    
    $
    1,635.9
    
    
    $
    350.6
    
    
    $
    (1,917.4
    )
    
    $
    1,427.4LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.4
    
    
    $
    
    
    
    $
    
    
    
    $
    0.4Notes payable
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Accounts payable
    
    
    
    
    
    
    146.6
    
    
    
    59.5
    
    
    
    (20.5
    )
    
    
    185.6Accrued expenses
    
    
    175.4
    
    
    
    87.4
    
    
    
    63.8
    
    
    
    (136.4
    )
    
    
    190.2Current liabilities of discontinued operations
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    
    
    
    
    2.1Total current liabilities
    
    
    175.4
    
    
    
    236.5
    
    
    
    125.3
    
    
    
    (156.9
    )
    
    
    380.3Long-term debt
    
    
    480.7
    
    
    
    0.1
    
    
    
    4.0
    
    
    
    (283.1
    )
    
    
    201.7Other liabilities
    
    
    2.1
    
    
    
    115.2
    
    
    
    15.3
    
    
    
    
    
    
    
    132.6Minority interest
    
    
    
    
    
    
    
    
    
    
    12.7
    
    
    
    
    
    
    
    12.7Commitments and contingenciesTotal shareowners equity
    
    
    700.1
    
    
    
    1,284.1
    
    
    
    193.3
    
    
    
    (1,477.4
    )
    
    
    700.1Total Liabilities and Shareowners Equity
    
    $
    1,358.3
    
    
    $
    1,635.9
    
    
    $
    350.6
    
    
    $
    (1,917.4
    )
    
    $
    1,427.4
 25




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##### 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
    )
    
    $
    89.3Adjustments 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:Receivables, 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
    )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
    
    
    
    
    
    
    
    
    
    
    
    2.9Intangible asset additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchases of investments
    
    
    
    
    
    
    (6.1
    )
    
    
    
    
    
    
    
    
    
    
    (6.1
    )Sales and maturities of investments
    
    
    
    
    
    
    96.7
    
    
    
    
    
    
    
    
    
    
    
    96.7Acquisition of business, 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 benefit 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 quarter
    
    $
    
    
    
    $
    119.0
    
    
    $
    182.3
    
    
    $
    
    
    
    $
    301.3
 26




---



##### Table of Contents



39 Weeks Ended October 28, 2006Parent
    
    
    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
    
    
    
    
    
    
    
    3.0Adjustments for non-cash items included in net earnings:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    6.5
    
    
    
    0.7
    
    
    
    
    
    
    
    7.2Depreciation and amortization
    
    
    0.6
    
    
    
    56.3
    
    
    
    10.6
    
    
    
    
    
    
    
    67.5Share-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 from share-based compensation
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    
    
    
    
    4.7Excess tax benefit from share-based compensation
    
    
    
    
    
    
    (4.2
    )
    
    
    
    
    
    
    
    
    
    
    (4.2
    )Interest income on held-to-maturity investments
    
    
    
    
    
    
    (2.2
    )
    
    
    
    
    
    
    
    
    
    
    (2.2
    )Changes in working capital:Receivables, net
    
    
    
    
    
    
    1.6
    
    
    
    (32.0
    )
    
    
    32.2
    
    
    
    1.8Inventories
    
    
    
    
    
    
    (10.6
    )
    
    
    (7.3
    )
    
    
    1.7
    
    
    
    (16.2
    )Prepaid expenses and other current assets
    
    
    (11.5
    )
    
    
    (3.9
    )
    
    
    (2.3
    )
    
    
    11.8
    
    
    
    (5.9
    )Accounts payable
    
    
    
    
    
    
    (23.0
    )
    
    
    (19.9
    )
    
    
    38.0
    
    
    
    (4.9
    )Accrued expenses
    
    
    95.2
    
    
    
    (10.5
    )
    
    
    37.6
    
    
    
    (83.7
    )
    
    
    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:Repayment of debt
    
    
    
    
    
    
    (0.3
    )
    
    
    (1.9
    )
    
    
    
    
    
    
    (2.2
    )Payment of deferred financing costs
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Issuances of common stock
    
    
    27.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27.7Purchases of common stock
    
    
    (91.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (91.6
    )Excess tax benefits from share-based compensation
    
    
    
    
    
    
    4.2
    
    
    
    
    
    
    
    
    
    
    
    4.2Distributions to minority owners
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    (1.0
    )Contributions by / distributions to parent
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    (1.5
    )
    
    
    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
    
    
    
    
    
    
    
    0.3Increase
(decrease) 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 quarter
    
    $
    
    
    
    $
    286.1
    
    
    $
    102.9
    
    
    $
    
    
    
    $
    389.0
 27




---



##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward Looking Statements
  Overview
 ® ® ®
 ® ®
 ®
 28




---



##### Table of Contents



Payless ShoeSource
   ®
 TM
  Stride Rite
 ® ®
  29




---



##### Table of Contents



®
 ®
 ®
 Third Quarter Results
    Acquisitions
   30




---



##### Table of Contents



New Accounting Standards
   Review of Operations
  Net Earnings
   Third Quarter
    
    First Nine Months2007
    
    2006
    
    2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    67.8
    
    
    
    65.7
    
    
    
    65.6
    
    
    
    64.8Gross margin
    
    
    32.2
    
    
    
    34.3
    
    
    
    34.4
    
    
    
    35.2Selling, general and administrative expense
    
    
    28.8
    
    
    
    28.0
    
    
    
    28.8
    
    
    
    28.0Restructuring charges
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    Operating profit from continuing operations
    
    
    3.4
    
    
    
    6.2
    
    
    
    5.6
    
    
    
    7.2Interest expense (income), net
    
    
    1.9
    
    
    
    (0.1
    )
    
    
    0.7
    
    
    
    (0.1
    )Earnings from continuing operations before
income taxes and minority interest
    
    
    1.5
    
    
    
    6.3
    
    
    
    4.9
    
    
    
    7.3Effective income tax rate*
    
    
    (120.8
    )
    
    
    29.6
    
    
    
    14.9
    
    
    
    32.9Earnings from continuing operations before
minority interest
    
    
    3.3
    
    
    
    4.5
    
    
    
    4.1
    
    
    
    4.9Minority interest, net of income taxes
    
    
    (0.3
    )
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (0.1
    )Net earnings from continuing operations
    
    
    3.0
    
    
    
    4.4
    
    
    
    3.9
    
    
    
    4.8Loss from discontinued operations,
net of income taxes and minority interest
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.2
    )Net earnings
    
    
    3.0
    %
    
    
    4.1
    %
    
    
    3.9
    %
    
    
    4.6
    %
 
 *
    
    Percent of pre-tax earnings 31




---



##### Table of Contents



Net Sales
  Third Quarter
    
    
    First Nine Months(in millions)
    
    2007
    
    2006
    
    2007
    
    2006Payless Domestic
    
    $
    574.9
    
    
    $
    598.7
    
    
    $
    1,804.0
    
    
    $
    1,816.4Payless International
    
    
    111.0
    
    
    
    104.7
    
    
    
    309.8
    
    
    
    287.6Stride Rite Wholesale
    
    
    95.0
    
    
    
    
    
    
    
    95.0
    
    
    
    Stride Rite Retail
    
    
    49.8
    
    
    
    
    
    
    
    49.8
    
    
    
    $
    830.7
    
    
    $
    703.4
    
    
    $
    2,258.6
    
    
    $
    2,104.0
  Third Quarter
    
    First Nine Months2007
    
    2006
    
    2007
    
    2006Same-store sales*
    
    
    (3.5
    )
    
    
    5.2
    
    
    
    0.0
    
    
    
    2.6Average selling price per unit
    
    
    2.8
    
    
    
    6.2
    
    
    
    2.0
    
    
    
    10.9Unit volume
    
    
    (5.3
    )
    
    
    (0.5
    )
    
    
    (1.5
    )
    
    
    (7.7
    )Footwear average selling price per unit
    
    
    3.8
    
    
    
    5.9
    
    
    
    2.5
    
    
    
    10.0Footwear unit volume
    
    
    (5.8
    )
    
    
    1.1
    
    
    
    (1.7
    )
    
    
    (5.6
    )Non-footwear average selling price per unit
    
    
    (3.3
    )
    
    
    (1.4
    )
    
    
    (2.2
    )
    
    
    4.2Non-footwear unit volume
    
    
    (3.6
    )
    
    
    (5.8
    )
    
    
    (0.6
    )
    
    
    (15.5
    )
 
 *
    
    The same-store sales calculation excludes Latin America. Cost of Sales
  Gross Margin
  Selling, General and Administrative Expenses
    32




---



##### Table of Contents



Interest Expense (Income)
  Third Quarter
    
    
    First Nine Months(dollars in millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Interest expense
    
    $
    18.1
    
    
    $
    4.8
    
    
    $
    27.7
    
    
    $
    14.2Interest income
    
    
    (2.9
    )
    
    
    (5.6
    )
    
    
    (11.6
    )
    
    
    (15.6
    )Interest expense (income), net
    
    $
    15.2
    
    
    $
    (0.8
    )
    
    $
    16.1
    
    
    $
    (1.4
    )
  Income Taxes
  Minority Interest, Net of Taxes
  Discontinued Operations
  Payless Domestic Segment Operating Results
   Third Quarter
    
    First Nine Months2007
    
    2006
    
    2007
    
    2006Net Sales
    
    $
    574.9
    
    
    $
    598.7
    
    
    $
    1,804.0
    
    
    $
    1,816.4Operating profit from continuing operations
    
    
    28.4
    
    
    
    28.4
    
    
    
    108.1
    
    
    
    117.9
   33




---



##### Table of Contents



Payless International Segment Operating Results
  Third Quarter
    
    First Nine Months2007
    
    2006
    
    2007
    
    2006Net Sales
    
    $
    111.0
    
    
    $
    104.7
    
    
    $
    309.8
    
    
    $
    287.6Operating profit from continuing operations
    
    
    15.8
    
    
    
    15.7
    
    
    
    34.4
    
    
    
    33.1
   Stride Rite Retail Segment Operating Results
  Third Quarter
    
    First Nine Months2007
    
    2006
    
    2007
    
    2006Net Sales
    
    $
    49.8
    
    
    $
    
    
    
    $
    49.8
    
    
    $
    Operating profit from continuing operations
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.4
    )
    
    
    
   Stride Rite Wholesale Segment Operating Results
  Third Quarter
    
    First Nine Months2007
    
    2006
    
    2007
    
    2006Net Sales
    
    $
    95.0
    
    
    $
    
    
    
    $
    95.0
    
    
    $
    Operating profit from continuing operations
    
    
    (16.1
    )
    
    
    
    
    
    
    (16.1
    )
    
    
    
  34




---



##### Table of Contents



Store ActivityPayless Domestic and Payless International Segments
  Third Quarter
    
    First Nine Months2007
    
    2006
    
    2007
    
    2006Beginning of period
    
    
    4,560
    
    
    
    4,584
    
    
    
    4,572
    
    
    
    4,605Stores opened
    
    
    35
    
    
    
    30
    
    
    
    108
    
    
    
    120Stores closed
    
    
    (41
    )
    
    
    (40
    )
    
    
    (126
    )
    
    
    (151
    )Ending store count
    
    
    4,554
    
    
    
    4,574
    
    
    
    4,554
    
    
    
    4,574
  Store ActivityStride Rite Retail Segment
  Environmental Liability
  Liquidity and Capital Resources
   Cash Flow Provided by Operating Activities
  35




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##### Table of Contents



Cash Flow Used in Investing Activities
  Cash Flow Provided by Financing Activities
  First Nine Months2007
    
    
    2006(dollars in millions, shares in thousands)
    
    Dollars
    
    
    Shares
    
    
    Dollars
    
    
    SharesStock repurchase program
    
    $
    20.1
    
    
    
    610
    
    
    $
    90.8
    
    
    
    3,818Employee stock purchase, deferred compensation
and stock incentive plans
    
    
    1.1
    
    
    
    35
    
    
    
    0.8
    
    
    
    30$
    21.2
    
    
    
    645
    
    
    $
    91.6
    
    
    
    3,848
  pari
passu
    36




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##### Table of Contents



Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
  Contractual Obligations
  Cash Payments Due by Fiscal YearLess than
    
    
    
    
    
    
    
    
    
    
    More than(in millions)
    
    Total
    
    
    One Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Five YearsOhio distribution center operating lease
    
    $
    41.5
    
    
    $
    
    
    
    $
    5.0
    
    
    $
    5.0
    
    
    $
    31.5Term Loan
    
    
    725.0
    
    
    
    7.3
    
    
    
    14.5
    
    
    
    14.5
    
    
    
    688.7Stride Rite operating leases
    
    
    133.0
    
    
    
    23.2
    
    
    
    40.7
    
    
    
    30.5
    
    
    
    38.6Stride Rite open account purchase orders for inventory
    
    
    59.6
    
    
    
    59.6
    
    
    
    
    
    
    
    
    
    
    
    Stride Rite employee severance
    
    
    10.9
    
    
    
    
    
    
    
    10.9
    
    
    
    
    
    
    
    $
    970.0
    
    
    $
    90.1
    
    
    $
    71.1
    
    
    $
    50.0
    
    
    $
    758.8
   Financial Condition Ratios
  November 3,
    
    October 28,
    
    February 3,2007
    
    2006
    
    2007Current Ratio
    
    
    2.6
    
    
    
    2.4
    
    
    
    2.4Debt-capitalization Ratio*
    
    
    53.9
    %
    
    
    22.5
    %
    
    
    22.6
    %
 
 *
    
    Debt-to-capitalization has been computed by dividing total debt by
capitalization. Total debt is defined as long-term debt including current
maturities, notes payable and borrowings under the revolving line of
credit. Capitalization is defined as total debt and shareowners equity.
The debt-to-capitalization ratio, including the present value of future
minimum rental payments under operating leases as debt and as
capitalization, was 72.4%, 62.5% and 63.5%, respectively, for the periods
referred to above.  37




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Critical Accounting Policies
       
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
  Foreign Currency Risk
   38




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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
   39




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th th
  
 ITEM 1A. RISK FACTORS
  Consumer Trends and Our Wholesale Business
  40




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Retention of Major License
  Intellectual Property Risk
  There are risks associated with our acquisitions.
    
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Issuer Purchases of Equity Securities
  ApproximateDollar ValueTotal Number of
    
    of Shares thatShares Purchased
    
    May Yet BeTotal Number
    
    Average
    
    as Part of Publicly
    
    Purchased Underof Shares
    
    Price
    
    Announced Plans
    
    the Plans orPurchased(1)
    
    Paid per
    
    or Programs
    
    ProgramsPeriod
    
    (in thousands)
    
    Share
    
    (in thousands)
    
    (in millions)08/05/07  09/01/07
    
    
    2
    
    
    $
    24.05
    
    
    
    
    
    
    $
    232.009/02/07  10/06/07
    
    
    18
    
    
    
    21.95
    
    
    
    15
    
    
    
    231.710/07/07  11/03/07
    
    
    3
    
    
    
    22.25
    
    
    
    
    
    
    
    231.7Total
    
    
    23
    
    
    $
    22.20
    
    
    
    15
    
    
    $
    231.7
    (2)
 
 (1)
    
    Includes an aggregate of approximately eight thousand shares of our common
stock that was repurchased in connection with our employee stock purchase and
stock incentive plans.(2)
    
    On March 2, 2007, our Board of Directors authorized an aggregate of $250
million of share repurchases. The timing and amount of share repurchases, if
any, are limited by the terms of our Credit Agreement and Senior Subordinated
Notes. 41




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##### Table of Contents



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 and President*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Senior Vice President,
Chief Financial Officer and Treasurer*32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive
Officer and President*32.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Senior Vice President,
Chief Financial Officer and Treasurer*
 
 *
    
    Filed herewith 42




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SIGNATURES
  COLLECTIVE BRANDS, INC.Date: December 12, 2007
    
    
    
    By: /s/ Matthew E. RubelMatthew E. RubelChief Executive Officer
and President(Principal Executive Officer)Date: December 12, 2007
    
    
    
    By: /s/ Ullrich E. PorzigUllrich E. PorzigSenior Vice President - ChiefFinancial Officer and Treasurer(Principal Financial and Accounting Officer)
 43