Collective Brands Inc. said it will file several motions in court seeking to set aside or reduce an unfavorable verdict in a lawsuit with adidas. Last week, a federal jury in Oregon ordered Collective Brands to pay $305 million in damages to adidas AG. The verdict stems from a lawsuit that Adidas filed in 2001 against Payless ShoeSource  – which changed its name to Collective Brands last year – for selling shoes that Adidas said violated its trademarked three-stripe logo. The amount includes $30.6 million in actual damages and $274 million divided between Payless profits and punitive damages, Collective Brands said.

Collective Brands also on Monday Shoe maker offered first-quarter guidance above expectations. The company expects first-quarter earnings between 61 cents to 67 cents per share, while analysts polled by Thomson Financial predict a profit of 51 cents per share, on average. Collective Brands' estimate excludes litigation costs but includes a benefit of 8 cents per share stemming from a greater-than-expected mix of earnings in lower-tax international markets. Sales are expected to rise to $932 million, boosted by its acquisition of Stride Rite footwear chain in June. Analysts predict sales of $926 million. Same-store sales fell 6.5%.

The full shareholder's letter from Matthew E. Rubel, CEO and president of Collective Brands, Inc., follows:

May 12, 2008

Dear Fellow Shareholder:

Collective Brands, Inc. is committed to competing fairly in the marketplace. We have built a company of great brands with over 31,000 people and tens of millions of customers. At our Payless ShoeSource unit, we are focused on democratizing fashion in footwear — delivering to customers the latest fashion, styles and ideas in footwear for the entire family, at great value. This is a cornerstone of our business model. And, it has been a core part of our Company's DNA for years. This notion was the basis of our thinking when, nearly seven years ago in 2001, Payless ShoeSource chose to defend against what we considered to be the unwarranted trademark infringement case brought against us by adidas AG in federal court in Portland, Oregon.

As you know from our previous communications of this case, adidas has claimed that our two- and four-stripe shoe styles infringed on its three-stripe logo and Superstar trade dress. Throughout the case, we continued to have confidence that our defenses were meritorious, that our designs do not infringe the adidas designs, and that we should prevail.

Unfortunately, last week, the jury saw things differently and awarded adidas $305 million in damages, consisting of $30.6 million in actual damages and $274 million divided between Payless profits and punitive damages. We believe that the jury's verdict was unjustified and excessive, and that we have strong grounds to have the jury's verdict overturned or reduced. The jury's total award, which is more than 10 times the actual damages found, exceeds by 15 times our profits on the sale of these shoes and, if not overturned, would permit adidas to claim exclusive control over all shoes with two, three or four parallel stripes.

We are expeditiously taking steps to protect the Company's legal rights and later today we will be filing several motions with the court that, among other things, ask the court to set aside the verdict and either enter judgment in our favor or order a new trial, and, if that is not the case, to reduce the jury's award substantially. To the extent that we are not fully successful, we intend to appeal to the United States Court of Appeals. If the trial court does not grant our motions, it may take several years for the matter to be resolved on appeal.

Among the issues we will be raising in our motions are that:

—  the damages verdict should be thrown out because adidas offered no

    evidence that it suffered even one penny of actual damages and the $30.6

    million royalty awarded is irrational;

—  the law requires that the entire damages award of $305 million be

    thrown out or drastically reduced because it is confiscatory and

    inequitable, and would give adidas a windfall unrelated to any actual

    injury and would exceed by 15 times Payless' profits on the shoes at issue;

—  judgment should be entered in Payless' favor because the law does not

    permit adidas to leverage its three-stripe trademark into a monopoly on the

    use of two and four stripe designs on footwear, which the verdict might

    otherwise enable adidas to claim;

—  the law does not authorize any of the $137 million in punitive damages

    awarded; and

—  the judgment cannot stand because adidas offered no credible evidence

    that anyone ever bought a Payless shoe believing it to be an adidas shoe or

    actually confused a Payless shoe with an adidas shoe at any time, and

    introduced no evidence that there is any likelihood of confusion between

    Payless' two and four-stripe shoes and adidas' trademark other than

    incomplete surveys that did not even cover more than half of the shoe

    styles at issue.

You should also know that despite this development, we have been successful in maintaining our focus on our businesses. Even with the very challenging economic environment, our Company has been able to demonstrate the ability to remain as a staple in the lives of our consumers who appreciate the value they get from our brands.

To that end, I am pleased to report that we anticipate sales for the first quarter, which ended May 3, 2008, to be $932 million, reflecting the Stride Rite acquisition, and earnings to be in the range of $0.61 to $0.67 per share, which is above the Thomson First Call consensus estimate, despite comparable store sales being down 6.5%. In addition, we expect EBITDA to exceed $100 million. Earnings exclude any charges that we may record associated with litigation, but do reflect a lower effective income tax rate than previously anticipated, resulting in a favorable impact of approximately $0.08 related primarily to the greater-than-expected mix of earnings in lower-tax, international jurisdictions. We expect to report our earnings on June 4 and, of course, I will keep you apprised of any new developments regarding the litigation.

Sincerely,

Matthew E. Rubel

Collective Brands Inc. said it will file several motions in court seeking to set aside or reduce an unfavorable verdict in a lawsuit with adidas. Matt Rubel, Collective Brands's CEO, said in a letter to shareholders, ” If the trial court does not grant our motions, it may take several years for the matter to be resolved on appeal.”

Collective Brands also on Monday raised its first-quarter guidance above expectations. The company expects first-quarter earnings between 61 cents to 67 cents per share, while analysts polled by Thomson Financial predict a profit of 51 cents per share, on average. Collective Brands' estimate excludes litigation costs but includes a benefit of 8 cents per share stemming from a greater-than-expected mix of earnings in lower-tax international markets. Sales are expected to rise to $932 million, boosted by its acquisition of Stride Rite footwear chain in June. Analysts predict sales of $926 million. Same-store sales fell 6.5%.

The full shareholder's letter from Matthew E. Rubel, CEO and president of Collective Brands, Inc., follows:

May 12, 2008

Dear Fellow Shareholder:

Collective Brands, Inc. is committed to competing fairly in the marketplace. We have built a company of great brands with over 31,000 people and tens of millions of customers. At our Payless ShoeSource unit, we are focused on democratizing fashion in footwear — delivering to customers the latest fashion, styles and ideas in footwear for the entire family, at great value. This is a cornerstone of our business model. And, it has been a core part of our Company's DNA for years. This notion was the basis of our thinking when, nearly seven years ago in 2001, Payless ShoeSource chose to defend against what we considered to be the unwarranted trademark infringement case brought against us by adidas AG in federal court in Portland, Oregon.

As you know from our previous communications of this case, adidas has claimed that our two- and four-stripe shoe styles infringed on its three-stripe logo and Superstar trade dress. Throughout the case, we continued to have confidence that our defenses were meritorious, that our designs do not infringe the adidas designs, and that we should prevail.

Unfortunately, last week, the jury saw things differently and awarded adidas $305 million in damages, consisting of $30.6 million in actual damages and $274 million divided between Payless profits and punitive damages. We believe that the jury's verdict was unjustified and excessive, and that we have strong grounds to have the jury's verdict overturned or reduced. The jury's total award, which is more than 10 times the actual damages found, exceeds by 15 times our profits on the sale of these shoes and, if not overturned, would permit adidas to claim exclusive control over all shoes with two, three or four parallel stripes.

We are expeditiously taking steps to protect the Company's legal rights and later today we will be filing several motions with the court that, among other things, ask the court to set aside the verdict and either enter judgment in our favor or order a new trial, and, if that is not the case, to reduce the jury's award substantially. To the extent that we are not fully successful, we intend to appeal to the United States Court of Appeals. If the trial court does not grant our motions, it may take several years for the matter to be resolved on appeal.

Among the issues we will be raising in our motions are that:

—  the damages verdict should be thrown out because adidas offered no

    evidence that it suffered even one penny of actual damages and the $30.6

    million royalty awarded is irrational;

—  the law requires that the entire damages award of $305 million be

    thrown out or drastically reduced because it is confiscatory and

    inequitable, and would give adidas a windfall unrelated to any actual

    injury and would exceed by 15 times Payless' profits on the shoes at issue;

—  judgment should be entered in Payless' favor because the law does not

    permit adidas to leverage its three-stripe trademark into a monopoly on the

    use of two and four stripe designs on footwear, which the verdict might

    otherwise enable adidas to claim;

—  the law does not authorize any of the $137 million in punitive damages

    awarded; and

—  the judgment cannot stand because adidas offered no credible evidence

    that anyone ever bought a Payless shoe believing it to be an adidas shoe or

    actually confused a Payless shoe with an adidas shoe at any time, and

    introduced no evidence that there is any likelihood of confusion between

    Payless' two and four-stripe shoes and adidas' trademark other than

    incomplete surveys that did not even cover more than half of the shoe

    styles at issue.

You should also know that despite this development, we have been successful in maintaining our focus on our businesses. Even with the very challenging economic environment, our Company has been able to demonstrate the ability to remain as a staple in the lives of our consumers who appreciate the value they get from our brands.

To that end, I am pleased to report that we anticipate sales for the first quarter, which ended May 3, 2008, to be $932 million, reflecting the Stride Rite acquisition, and earnings to be in the range of $0.61 to $0.67 per share, which is above the Thomson First Call consensus estimate, despite comparable store sales being down 6.5%. In addition, we expect EBITDA to exceed $100 million. Earnings exclude any charges that we may record associated with litigation, but do reflect a lower effective income tax rate than previously anticipated, resulting in a favorable impact of approximately $0.08 related primarily to the greater-than-expected mix of earnings in lower-tax, international jurisdictions. We expect to report our earnings on June 4 and, of course, I will keep you apprised of any new developments regarding the litigation.

Sincerely,

Matthew E. Rubel