Collective Brands, Inc.'s third quarter, the first financial reporting period since the acquisition of Stride Rite, net earnings were $25.5 million, or 39 cents per diluted share, down 11.8% versus third quarter 2006 net earnings of $28.9 million, or 43 cents per diluted share.

The results for the third quarter of 2007 included purchase accounting expense resulting from the flow through of inventory recorded at fair value and depreciation and amortization of certain other assets purchased in the Stride Rite acquisition totaling $28.6 million pre-tax or 12 cents per diluted share. Excluding the impact of purchase accounting, net income for the third quarter of 2007 would have been $33.3 million, or $0.51 per diluted share, an increase of 15.2% versus the third quarter 2006. Third quarter 2007 net earnings were favorably impacted by a lower annual effective income tax rate. All 2006 financial information provided excludes Stride Rite.

Collective Brands' third quarter 2007 total sales were $830.7 million, up 18.1% compared to the third quarter of 2006, driven by the addition of Stride Rite. Total sales for Payless and Stride Rite were $685.9 million and $144.8 million, respectively, for the third quarter of 2007. Comparable store sales (which include only Payless results) declined 3.5%. Comparable store sales were affected by lower traffic and unit sales, primarily lower sales of boots, as a result of unseasonably warm weather as well as consumer behavior linked to the economic environment.

“Results in the third quarter show that our hybrid business model gives us strength through diversification even in a challenging business environment,” said Matthew E. Rubel, Chief Executive Officer and President. “The acquisition of Stride Rite during the quarter advances our strategy to bring compelling lifestyle, performance, and fashion brands to footwear consumers worldwide. The Stride Rite integration is progressing well, and we continue to undertake initiatives which will drive long term earnings in our business higher. Our actions in the third quarter to strengthen gross margin and manage inventory and expenses mitigated the impact of negative comparable store sales.”

Gross margin rate for the third quarter of 2007 was 32.2%. Gross margin rate excluding the impact of purchase accounting* was 35.6% in the third quarter of 2007. This compares to a gross margin rate of 34.3% in the third quarter of 2006, an increase of 130 basis points. Approximately 80 basis points of this increase was driven by the mix impact of the higher gross margin rate of Stride Rite. Approximately 50 basis points of this increase was driven by higher average unit retail prices and more direct sourcing in Payless, partially offset by higher product markdowns and higher occupancy expenses.

Selling, general and administrative (SG&A) expenses were 28.8% of sales in the third quarter of 2007 versus 28.0% in the prior year period, an increase of 80 basis points. Approximately 40 basis points of the increase was driven by $3.1 million of acquisition-related expenses. The remainder of the rate increase was driven primarily by lower comparable store sales and higher advertising expenses. This was offset in part by lower incentive compensation. SG&A expenses were $239.6 million in the third quarter of 2007, up $42.8 million versus the prior year due primarily to the addition of Stride Rite.

Third quarter 2007 operating profit from continuing operations as a percent of sales (operating margin) was 3.3%. Operating margin excluding the impact of purchase accounting* was 6.8%, or $56.3 million, compared to third quarter 2006 operating margin of 6.3%, or $44.1 million. This represents an increase of 50 basis points, or $12.2 million, over the prior year period.

Net interest expense in the third quarter of 2007 was $15.2 million compared to net interest income of $0.8 million in the same period last year. The change was due to the use of cash and short term investments and increase in borrowings to fund the acquisitions of Stride Rite and Collective Licensing.

The third quarter 2007 income tax benefit was $15.1 million compared to income tax expense of $13.3 million in the third quarter of 2006. The estimated annual effective tax rate for full year 2007 is 16.7%. As of the end of the second quarter of 2007, the company recorded income tax expense at an estimated annual effective tax rate of 32.8%. The lower annual effective tax rate as projected at the end of the third quarter of 2007 compared to that at the second quarter of 2007 was driven principally by the reduction in anticipated annual pre-tax earnings in high-tax jurisdictions offset by higher pre-tax earnings estimates in relatively low-tax jurisdictions.

Excluding the impact of purchase accounting, the full year 2007 effective income tax rate* is expected to be 27.6%. The decrease in the annual effective tax rate from 32.8% at the second quarter 2007 to 27.6% at the third quarter 2007 resulted in a decrease in income tax expense of approximately $8 million, or $0.12 per diluted share, which was recognized during the third quarter of 2007. Of this decrease in tax expense, approximately $5 million, or $0.08 per diluted share, relates to the first and second quarter catch-up impact of the effective income tax rate and approximately $3 million, or $0.04 per diluted share, is due to the change in the income tax rate applied to third quarter pre-tax earnings.

Collective Brands ended the third quarter of 2007 with $301.3 million in cash and short-term investments compared to $472.4 million at the end of the third quarter of 2006. Total debt increased to $926.1 million in the third quarter of 2007 from $202.6 million in the prior year period. Both the reduction in cash and short-term investments and the increase in debt were due primarily to the acquisitions of Stride Rite and Collective Licensing. Net debt at the end of the third quarter of 2007 was $624.8 million.

Total inventory was $476.1 million at the end of the third quarter of 2007, up $126.9 million compared to the same period last year due primarily to the added inventory associated with the acquisition of Stride Rite. At the end of the third quarter of 2007, aged inventory at Payless was approximately flat on a unit basis compared to last year.

Capital expenditures for the first nine months of 2007 totaled $128.0 million versus $89.6 million in the prior-year period. The increase was due primarily to greater investments in the Company's supply chain and store base. During third quarter 2007, Collective Brands added 27 new stores (18 Payless and 9 Stride Rite), closed 26 stores (24 Payless and 2 Stride Rite), and relocated 15 Payless stores. Collective Brands ended the period with 4,891 stores (4,554 Payless and 337 Stride Rite).

    Retail Store Counts   3rd Quarter 2007  2nd Quarter 2007  3rd Quarter 2006
    Payless ShoeSource               4,554             4,560             4,574
    Stride Rite                        337               330               318
    Total Stores                     4,891             4,890             4,892

Outlook for Collective Brands



     --   Collective Brands announces the following guidance for its fourth


          quarter of 2007:



            o Comparable store sales are expected to decrease in the


              mid-single digits.  Approximately two percentage points of this


              decline is related to the shift of one week due to the 53rd week


              last year.


            o Total sales for Payless will include one less week for the


              quarter than in 2006. The sales from the 53rd week last year


              were approximately $36 million.


            o Gross margin is anticipated to be approximately 500 to 600 basis


              points lower than last year, approximately one-third of which is


              due primarily to lower comparable store sales and having one


              less week of sales in the fourth quarter. The balance of the


              lower gross margin rate is due to purchase accounting expense


              related to the flow through of inventory


              recorded at fair value.


            o The impact of purchase accounting is anticipated to be dilutive


              to pre-tax earnings by approximately $28 million, or


              approximately $0.41 per diluted share.



     --   During 2008, the pre-tax purchase accounting expense is anticipated


          to be approximately $20 million.  The company anticipates


          approximately $8 million in the first quarter 2008, approximately


          half of which is due to the flow through of inventory recorded at


          fair value.  By the end of the first quarter, the flow through of


          inventory recorded at fair value is expected to be fully recognized


          in the income statement.  Second, third and fourth quarter purchase


          accounting is expected to be approximately $4 million pre-tax in


          each period due to the depreciation and amortization of certain


          other assets.



     --   Excluding the impact of purchase accounting, the Stride Rite


          acquisition is expected to be accretive to earnings per share in


          2008 as Stride Rite's operating earnings contribution including


          synergies is expected to exceed the incremental interest expense.


          Due to the impact of purchase accounting, the Stride Rite


          acquisition is not expected to be earnings per share accretive in


          2008 on a GAAP basis.



     --   Excluding the impact of purchase accounting, the 2006 - 2009


          compound annual growth rate in operating profit is expected to be in


          the mid-to-upper teens, assuming a revenue growth rate in the


          low-to-mid single-digits in 2008 and 2009.  Similarly, including the


          impact of purchase accounting, the 2006 - 2009 compound annual


          growth rate in operating profit is expected to be in the low-teens


          on a GAAP basis.



     --   Capital expenditures are expected to total approximately $175




          million and $150 million for 2007 and 2008, respectively.




                           COLLECTIVE BRANDS, INC.


                CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS


                                 (UNAUDITED)



    (Dollars and shares in


     millions, except


     per share data)           13 Weeks Ended         39 Weeks Ended



                           November 3, October 28,  November 3,  October 28,


                              2007        2006        2007          2006



    Net sales                $830.7      $703.4     $2,258.6     $2,104.0



    Cost of sales             563.5       462.1      1,481.9      1,362.9



    Gross margin              267.2       241.3        776.7        741.1



    Selling, general and


     administrative expenses  239.6       196.8        650.5        589.4



    Restructuring charges      (0.1)        0.4          0.2          0.7



    Operating profit from


     continuing operations     27.7        44.1        126.0        151.0



    Interest expense           18.1         4.8         27.7         14.2



    Interest 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         50.1



    Earnings from continuing


     operations before


     minority interest         27.6        31.6         93.5        102.3



    Minority interest, net


     of income taxes           (2.0)       (1.0)        (4.2)        (1.9)



    Net earnings from


     continuing operations     25.6        30.6         89.3        100.4



    Loss from discontinued


     operations, net of


     income taxes and


     minority interest         (0.1)       (1.7)           -         (3.0)



    Net earnings              $25.5       $28.9        $89.3        $97.4



    Basic earnings per share:


      Earnings from


       continuing operations  $0.40       $0.47        $1.38        $1.52


      Loss from discontinued


       operations                 -       (0.03)           -        (0.05)


    Basic earnings per share: $0.40       $0.44        $1.38        $1.47



    Diluted earnings per share


      Earnings from


       continuing operations  $0.39       $0.46        $1.36        $1.49


      Loss from discontinued


       operations                 -       (0.03)           -        (0.04)


    Diluted earnings per


     share                    $0.39       $0.43        $1.36        $1.45



    Basic weighted average


     shares outstanding        64.6        65.4         64.6         66.2



    Diluted weighted average


     shares outstanding        65.3        66.4         65.7         67.2