Collective Brands, formerly Payless and the new owners of Stride Rite,
Keds, Sperry Top-Sider, Saucony and Hind, saw second quarter Payless
sales decrease 1% to roughly $699 million with comp store sales
slipping 1.4%. These results do not include Stride Rite, Hind and
Saucony since the acquisition closed after the end of Q2. Second
quarter sales were unfavorably affected by weak results in sandals,
which caused total unit sales to decline 2%, and by the later
back-to-school season. These factors were mostly offset by Payless
converting a higher percentage of customers and growing units sold per
transaction. In addition, athletic and casual footwear performed well
with average unit retails up 1% for the quarter.

Of particular note is Payless’ pursuit of their “house of brands”
strategy, which began last year. Brands accounted for 44% of PSS’
footwear sales in the second quarter of 2007, up from 30% in the
year-ago period. The growth in brands was led by strong performances in
Airwalk and American Eagle. Brands have higher AURs and higher gross
margin return on inventory investment versus non-brands, plus their
higher productivity per five foot section helps sales per square foot.
PSS expects brands to account for 70% of sales in the long term.

Gross margin was 34.4% of sales in Q2, down 20 basis points. SG&A
expenses as a percent of sales were 28.7% in the second quarter versus
24.7% last year, an increase of 130 basis points. Inventory at the end
of the quarter was $370 million compared to $351 million last year.
Inventory quality at quarter-end improved as aged units made up a lower
percentage of total inventory. These factors brought net earnings down
23% to $25 million, or 38 cents per diluted share.

Looking ahead at the integration and strategy for growth behind the
newly acquired Stride Rite stable of brands, PSS expects to roll out a
similar strategy in Stride Rite retail stores as the Payless chain is
using. PSS CEO Matt Rubel said he wants Stride Rite to be a “House of
Kids Brands.” The company will launch Airwalk skate shoes in Stride
Rite to expand the chain’s age range up to 10 years old.

Management believes that Sperry Top-Sider has “the potential for
explosive women's growth,” since historical growth has been primarily
in the men’s category. In Keds, PSS intends to target marketing efforts
at the 18-year-old woman and continue to follow the current momentum
for the brand.  PSS will also broaden the appeal of the Keds brand
beyond just canvas and vulcanized styles. PSS is also looking to extend
the license of Tommy Hilfiger footwear.

With Saucony, the domestic and international growth opportunity is
focused on creating and delivering authentic technical running products
through the specialty running channel. PSS management said that they
will remain consistent in the current approach to Saucony. The Hind
brand, which was “one of the originators of compression technology”
will move from the Saucony group into the Collective Licensing unit and
become a licensing platform for the company.  

Excluding the purchase accounting relating to the Stride Rite
acquisition, 2006 through 2009 compounded annual growth rate and
operating profit is expected to be in the mid- to upper-teens. 
Including the purchase accounting, 2006 through 2009 compounded annual
growth rate and operating profit is expected to be in the low-teens on
a GAAP basis. This estimate is down from previous guidance in the 20%
range given when the SRR deal was first announced due to the current
retail environment and more conservative estimates.