Fresh off its announced plan to acquire Stride Rite, Inc., Payless ShoeSource, Inc. reported first quarter results that included single-digit gains on the top and bottom lines and were among the best to come out of family footwear retail. In addition, PSS announced plans to open its second distribution center in the U.S., this time further eastward in Ohio. However, the strong results, new DC and excitement in the industry over the pending deal were not enough for PSS to keep its recently hired COO.

On the financial side of things, Payless recorded a 5% increase in comparable store sales for the first quarter, just slightly outpacing the 4.9% gain in net sales to $728.6 million from $694.5 million during the year-ago period. On a conference call with analysts, management attributed the sales gains to a strong performance in women’s product; average unit retails growing 2% to $12.59; total footwear units improving 3%; and the company converting a higher percentage of customers in its stores and selling more units per transaction. In addition, the western U.S. and international markets were said to have performed “particularly well.” CEO Matt Rubel said that casuals really drove the first quarter results, but that sandals were weak and “will remain challenging into Q2.”

Branded sales accounted for 38% of the footwear portfolio, up from 25% last year, with Airwalk and American Eagle described as having strong performances. Rubel sees Payless as capable of eventually carrying 70% to 80% branded product. The international business was said to be seeing positive comps in the “high-single and double-digit range” with possible growth opportunities into central and northern South America.

Moving down the income statement, Payless saw gross margins improve 10 basis points in the quarter to 36.9% from 36.8% in the first quarter last year, primarily resulting from the higher average mark-up of branded product, but offset a bit by costs involved with the new DC. On the bottom line, net income increased 8.1% to $38.9 million, or 59 cents per diluted share, from $36.0 million, or 53 cents per diluted share in the same quarter last year. The quarterly results include costs of $6.1 million pre-tax or 6 cents per diluted share relating to the DC initiatives. The new distribution center, which will work in conjunction with PSS’s current DC in Redlands, CA, is expected to be operational in summer 2008 in Brookville, OH, near Dayton.

Finally, PSS announced in a filing with the SEC that EVP and COO William E. May resigned from the company for personal reasons. May started working with Payless on April 23, just over one month ago, after serving in the same role for Tween Brands.