Collective Brands to Close 475 Stores

Collective Brands also announced second-quarter results and indicated that its board of directors will, together with management, conduct a review of strategic and financial alternatives to further enhance shareholder value.

Net sales for the second quarter increased 4.9 percent to $882.4 million. The second quarter 2011 net loss attributable to Collective Brands, Inc. was $35.0 million or $0.58 per diluted share. Excluding certain impairment and severance charges, adjusted net earnings attributable to Collective Brands were $9.9 million, or 16 cents per diluted share.

In the quarter, the company recorded impairment and severance charges that reduced pre-tax income by $83.6 million, of which $76.8 million was non-cash. The impairment charges, all of which are non-cash, consist of $33 million in asset impairments primarily related to the net book value of stores at both Payless and Stride Rite; $31 million in trade name impairments mostly related to Stride Rite; and $10 million in goodwill impairment in Payless Domestic. In addition, the company recorded a $10 million severance charge of which $3 million is non-cash.

“While the second quarter was challenging for the company, we are taking aggressive actions to improve the business,” said Michael J. Massey, Chief Executive Officer of Collective Brands, Inc. “In Payless Domestic, we are gaining a much greater understanding of our customers and their needs and expectations. With this clarity, we are taking short term actions to improve our performance, accelerating key initiatives, and adjusting our longer term strategies. At the same time, we will continue to invest for growth and profitability in our Performance + Lifestyle Group and international businesses.”

Strategic Review

The company also announced that its Board of Directors will, together with management, conduct a review of strategic and financial alternatives to further enhance shareholder value. Working with its advisors, Perella Weinberg Partners and Kurt Salmon, the Board and management will explore a full range of alternatives for Collective Brands.

The Board stressed that there can be no assurance that this review will result in any additional action, and the company will not make any comments until the Board completes its review and has decided upon a specific course of action. The Board also announced that it adopted a short duration Rights Plan to protect shareholder rights while the review is being conducted.

Under the Rights Plan, the Rights will become exercisable if a person or group acquires 15 percent or more of Collective Brands outstanding common stock. The Record Date for the issuance of the Rights will be September 6, 2011 and the Rights will expire on August 15, 2012 unless earlier redeemed or terminated.

A Form 8-K will be filed with the United States Securities and Exchange Commission containing additional information regarding the terms and conditions of the Rights Plan.

D. Scott Olivet, Non-Executive Chairman of Collective Brands, said, “The Board is working with management on aggressive actions to drive shareholder value by positioning our brands, driving growth, improving profitability and return on invested capital as well as building the team and infrastructure for long-term success. The Board will also work with management and our advisors on a comprehensive review of strategic and financial alternatives to best unlock the value of the company for our shareholders.”

Second Quarter Financial Results

Net sales for Collective Brands increased 4.9 percent due to growth in three of our four segments — PLG Wholesale, Payless International and PLG Retail. Same store sales(2) declined 0.7 percent due to the sales results in Payless Domestic.

PLG Wholesale continued its strong sales performance, increasing 25 percent. The increase was led by Sperry with growth across virtually all product categories, distribution channels, and customer segments. Saucony also delivered gains globally driven by innovative styles in the minimalist and lightweight categories.

PLG Retail net sales increased 9 percent on growth from new Sperry Top-Sider stores combined with a 4 percent same store sales increase.

Payless International sales increased 7 percent on the strength of a 3 percent same store sales increase driven primarily by Latin America stores.

Payless Domestic net sales declined 3 percent, with same store sales down 2 percent in the quarter. This sequential improvement from the 8 percent same store sales decline in the first quarter was partly the result of aggressive actions the company took during the latter half of the quarter. These actions resulted in sharper pricing and greater value for consumers, and served to reduce sandal inventory.

The gross margin rate in the quarter was 23.6 percent. On an adjusted basis(1), the gross margin rate was 30.8 percent, a decrease of 360 basis points compared to last year as a result of higher product costs and pricing actions.

SG&A expense in the quarter increased due to the severance charge, but decreased on an adjusted basis(1) by $2 million and 160 basis points as a percent of sales. The SG&A rate decrease was driven by lower compensation-related expense in the Payless Domestic segment and expense leverage from sales growth in every other reporting segment.

Inventory at the end of the quarter was $585.0 million, up 17.6 percent. The higher inventory level was driven principally by higher product costs, more PLG footwear units, and additional Payless accessories.

Subsequent to the end of the quarter, the company amended and extended its revolving credit facility. The company will no longer have a limit on pre-payments of the 8.25 percent senior subordinated notes, subject to excess line availability. As a result, the company intends to repay at least $50 million of the notes in the third quarter of 2011.

Collective Brands repurchased 900,000 shares of its stock, or 1.5 percent of its shares outstanding, on the open market for $13.0 million during the second quarter — the maximum amount permitted under its credit agreements.

During the second quarter, the company added 18 new stores (16 Payless and 2 PLG), closed 20 stores (19 Payless and 1 PLG), and relocated 14 stores (12 Payless and 2 PLG).

Wholly-Owned and Joint Venture Store     Jul. 30, Apr. 30, Jan. 29, Jul. 31,
 Counts                                    2011     2011     2011     2010
                                         ——– ——– ——– ——–

Payless ShoeSource                          4,455    4,458    4,461    4,472
Performance + Lifestyle Group                 384      383      383      385
                                         ——– ——– ——– ——–
Total Stores                                4,839    4,841    4,844    4,857
                                         ======== ======== ======== ========

The company also franchised stores in 14 countries and territories at the end of second quarter 2011.

                                         Jul. 30, Apr. 30, Jan. 29, Jul. 31,
Franchise Store Counts                     2011     2011     2011     2010
                                         ——– ——– ——– ——–
Payless ShoeSource                            103       79       62       23
Stride Rite                                    11       10        8        0
                                         ——– ——– ——– ——–
Total Stores                                  114       89       70       23
                                         ======== ======== ======== ========

Quarterly Segment Results (dollars in millions)

                                      2011      2010    $ Change   percent Change
                                   ——— ——— ———  ——–
NET SALES
  Payless Domestic                 $   494.5 $   508.0 $   (13.5)     (2.7 percent)
  Payless International                117.2     109.8       7.4       6.7 percent
  PLG Wholesale                        217.7     174.7      43.0      24.6 percent
  PLG Retail                            53.0      48.8       4.2       8.6 percent
                                   ——— ——— ———  ——–
TOTAL                              $   882.4 $   841.3 $    41.1       4.9 percent
                                   ========= ========= =========  ========

                                                          Adjusted
                                        Adjusted          2011 vs.      percent
                     2011   Adjustments (1) 2011   2010     2010    Change
                   ——-  ———– ——–  ——  ——–  ——
OPERATING PROFIT /
 (LOSS)
  Payless Domestic $ (63.8) $      53.8 $  (10.0) $  6.8  $  (16.8)   (NMF)
  Payless
   International       8.6          2.5     11.1    11.6      (0.5)   (4.3 percent)
  PLG Wholesale       (0.3)        24.2     23.9    22.9       1.0     4.4 percent
  PLG Retail          (6.9)         3.1     (3.8)   (4.6)      0.8    17.4 percent
                   ——-  ———– ——–  ——  ——–  ——
TOTAL              $ (62.4) $      83.6 $   21.2  $ 36.7  $  (15.5)  (42.2 percent)
                   =======  =========== ========  ======  ========  ======

                                                                  Adjusted
                                    Adjusted(1)                   2011 vs.
                          2011          2011          2010          2010
                      ———–   ———–   ———–   ———–
OPERATING MARGIN
  Payless Domestic          (12.9 percent)        (2.0 percent)         1.3 percent     (330 bps)
  Payless
   International              7.3 percent          9.5 percent         10.6 percent     (110 bps)
  PLG Wholesale              (0.1 percent)        11.0 percent         13.1 percent     (210 bps)
  PLG Retail                (13.0 percent)        (7.2 percent)        (9.4 percent)     220 bps
                      ———–   ———–   ———–   ———–
TOTAL                        (7.1 percent)         2.4 percent          4.4 percent     (200 bps)
                      ===========   ===========   ===========   ===========

Store Closings

Today, Collective Brands determined it will close approximately 475 underperforming and low volume, non-strategic stores within the next three years. Over the three years, approximately 400 of the stores slated to close are Payless stores in the U.S., Canada, and Puerto Rico and about 75 are Stride Rite Children's locations. This year, the company expects to close more than 300 of those stores. Approximately 270 of the stores slated to close this year are Payless and about 45 are Stride Rite Children's locations. These actions will be taken to optimize the profitability of markets by removing many low sales volume stores which are cash flow negative or slightly positive but cannot support the assortments and staffing that the company believes its stores should offer. In fiscal 2010, stores to be closed this year had sales of approximately $110 million. The company will immediately begin to work with landlords to effect the store closings. Non-cash asset impairment charges of $19 million in the second quarter were related to these stores to be closed. Future lease termination, severance, and other cash exit costs associated with the store closings could be in the range of $25 million to $35 million. Lease termination costs will be recorded when the stores are closed or lease terminations are negotiated with the landlords. Once these stores are closed, the company anticipates an annual improvement in operating profit of $18 million to $22 million including the benefit of estimated sales transfer to remaining locations from closed stores.

Outlook for Collective Brands

As a result of its backlog of $153 million for delivery in third quarter 2011, which increased 36 percent year-over-year, PLG Wholesale sales in the third quarter of 2011 are expected to increase in excess of 20 percent over third quarter 2010.

The 2011 effective tax rate is expected to be approximately 10 percent, excluding the impact of adjustments and discrete events(1).

Capital expenditures are expected to total approximately $105 million in 2011.

Depreciation and amortization for 2011 is expected to total approximately $135 million.

Year-end 2011 retail net store count is expected to decrease by nearly 300 stores over the prior year. Sperry retail stores will continue to grow.

                            YE10      Open     Close      Change   YE11 est.
                         ——— ——— ———  ———  ———
Payless
  Payless Domestic           3,794        49      (301)      (252)     3,542
  Payless International        667        35       (38)        (3)       664
                         ——— ——— ———  ———  ———
Payless Total                4,461        84      (339)      (255)     4,206
PLG (Stride Rite,
 Sperry)                       383        13       (50)       (37)       346
                         ——— ——— ———  ———  ———
Collective Brands Total      4,844        97      (389)      (292)     4,552
                         ========= ========= =========  =========  =========

In addition, Payless and Stride Rite franchise locations are expected to total over 140 in 17 countries and territories by year-end.