Brown Shoe Company, Inc. consolidated net sales were $576.6 million, a decrease of 0.5% compared to $579.3 million in the second quarter of fiscal 2006. Net earnings were $9.8 million, or 22 cents per diluted share, versus net earnings of $15.2 million, or 35 cents per diluted share in the prior-year period.

Second quarter fiscal 2007 earnings include charges related to the Company's Earnings Enhancement Plan of $0.08 per diluted share. Second quarter fiscal 2006 earnings included a net gain of $0.08 per diluted share from net insurance recoveries related to environmental remediation costs at its Denver, CO facility offset by costs related to the Company's Earnings Enhancement Plan. On an adjusted basis, net earnings were $13.4 million, or $0.30 per diluted share, compared to net earnings of $12.0 million or $0.27 per diluted share for the thirteen weeks ended July 29, 2006, an 11.1% increase. See Schedule 4 attached for a reconciliation to GAAP net earnings and the discussion of “Non-GAAP Financial Measures.”

Ron Fromm, Brown Shoe's Chairman and CEO, stated, “Our strong execution and integrated business model enabled us to achieve the low-end of our guidance range in a difficult retail environment. This performance demonstrates Brown Shoe's many strengths, including strong execution in design, sourcing and distribution, our fiscal discipline, and the advantages of operating a diversified portfolio of footwear brands. Our consumer-driven model continues to mitigate risk while our diversification by brand, price point, channel and now geography provides us with multiple opportunities from which to grow.”

Fromm continued, “Once again, Famous Footwear led our performance generating a same-store sales increase of 3.6 percent and a 59.3 percent increase in operating earnings. Although our wholesale revenues declined 12.6 percent, our gross margins improved by 160 basis points, as we continue to rebalance our efforts toward our higher-margin branded business. The remainder of the year may be challenging, but we continue to focus on our key strategies and initiatives, and we expect them to lead to increased revenue growth at higher rates of profitability in the future.”

Segment Highlights

Retail Division

Total sales at Famous Footwear rose 8.0% to $316.1 million compared to $292.7 million for the same 13-week period last year. Same-store sales for the quarter ended August 4, 2007 increased 3.6% over the quarter ended July 29, 2006. Operating earnings increased 59.3 percent to $19.0 million, or 6.0 percent of sales, compared to $11.9 million, or 4.1 percent of sales, in the year-ago period. Famous Footwear opened 22 new stores and closed seven during the quarter, resulting in 1,024 stores open at the end of the quarter compared to 963 during the year-ago period.

The Specialty Retail segment, which primarily consists of Naturalizer stores and the Shoes.com e-commerce business, reported sales in the quarter of $62.0 million, a 4.3 percent increase over last year's $59.5 million. Same-store sales declined 1.3 percent while sales at Shoes.com grew by 45.2 percent. The segment's operating loss was $1.7 million compared to a loss of $1.5 million in the year earlier period. The segment's operating profit decline versus the year ago period was related to lower gross margins at the Shoes.com division. During the quarter, four new stores were opened and five were closed, resulting in 279 stores open at the end of the quarter, compared to 305 at the end of the year-ago period.

Wholesale Division

Wholesale sales declined 12.6 percent in the quarter to $198.4 million compared to $227.2 million in the previous year. Improved performances from Naturalizer, Children's, and Dr. Scholl's during a tough retail environment were more than offset by the exiting of the Bass license at the end of 2006 and the reduced emphasis on private label business, leading to lower-than-expected sales. Gross margins increased by 160 basis points in the quarter, as the Company continues to shift resources to higher-margin branded and private brand businesses. As expected, operating earnings declined in the quarter to $12.9 million versus $19.1 million in the year-ago period. The decline was driven by de-leveraging due to lower sales, a shift in the timing of the World Shoe Association trade show in July, start-up costs related to the China joint venture, and higher costs related to the Earnings Enhancement Plan.

Balance Sheet

Inventory at August 4, 2007 was $474.5 million, as compared to $480.4 million last year. Inventory at the Company's Famous Footwear division was down $2.1 million in the quarter versus the same period last year, while operating 61 more stores. The Company's debt-to-capital ratio at the end of the quarter was 21.1 percent, compared to 29.9 percent at the same time last year.

Strategic Initiatives Update

Costs during the quarter related to the Company's Earnings Enhancement Plan were in line with expectations, as the Company incurred after-tax costs of $3.6 million or $0.08 per diluted share in the quarter. Additionally, the Company made the determination in the second quarter to consolidate its direct-to-consumer operations. As such, the Company will close its Los Angeles office and move its Shoes.com business to its St. Louis, MO headquarters. The Company believes these changes will improve the efficiency of Shoes.com's operations by further integrating it into the Company's direct-to-consumer platform. Costs related to this move are expected to be incurred primarily in the third quarter. The Company continues to work on other initiatives related to this plan. In doing so, it has determined that certain costs will be incurred later than expected:

  -- In 2007, after-tax implementation costs are now estimated to be
     approximately $11 million, decreasing from previous estimates of $14
     million, while the Company continues to expect to realize after-tax
     benefits of $10 to $12 million;
  -- In 2008, after-tax implementation costs are estimated to be
     approximately $8 million, increasing from previous estimates of $5
     million, and annual after-tax benefits upon completion in late 2008
     continue to be estimated to be $17 to $20 million.

Full-Year and Third Quarter 2007 Guidance

For fiscal 2007, the Company now estimates that sales will range from $2.44 billion to $2.46 billion and expects net earnings per diluted share of $1.58 to $1.63. This guidance includes estimated costs related to the Company's Earnings Enhancement Plan of $0.25 per diluted share. On an adjusted basis, net earnings per diluted share are now estimated to be $1.83 to $1.88. This estimate is predicated on a same-store-sales increase at Famous Footwear of 2.0 to 3.0 percent for the full year. Wholesale division sales are expected to decline 11 to 12 percent in 2007, with growth at its branded businesses offset by the exit of the Bass license and decline in its private label business. However, the Company expects sales will grow in its Wholesale division in 2008 by mid-single digits, as it continues to execute its growth initiatives. Additionally, the Company expects its effective tax rate to increase by approximately 400 basis points in fiscal 2007 compared to the previous year, primarily because of a reduced mix of lower tax rate foreign earnings.

For the third quarter of 2007, the Company expects sales of $674 million to $684 million compared to $676.8 million in the year-ago period. Net earnings per diluted share in the quarter are estimated to be $0.62 to $0.67 as compared to $0.62 per diluted share in the previous year. This guidance range includes estimated charges and implementation costs of the Company's Earnings Enhancement Plan of $0.08 in the third quarter of 2007. In the third quarter of 2006, the Company incurred charges of $0.03 per diluted share related to its exiting of the Bass license. On an adjusted basis, the Company expects third quarter 2007 net earnings per diluted share of $0.70 to $0.75 an increase of 7.7 to 15.4 percent compared to $0.65 per diluted share in the same period a year ago. Third quarter guidance is predicated on a same-store sales range at Famous Footwear of negative 1.0 to positive 1.0 percent, which follows a same-store sales increase in the third quarter of 2006 of 8.2 percent and reflects the change in the retail reporting calendar in 2007 following a 53-week year in 2006. In 2007, this shift causes the third quarter to begin on August 5, 2007 and end on November 3, 2007 and thereby shifts one week of the Back-to-School selling season into the second quarter. Third quarter Wholesale sales are expected to decline nine to ten percent, with growth in the Company's branded businesses offset by the exit of the Bass license and a reduced emphasis on private label business. See Schedule 5 attached for a reconciliation to GAAP net earnings.