Payless ShoeSource, Inc. reported earnings of $24.6 million, or 37 cents a share, rebounding from a net loss $5.6 million a year ago.

Fourth quarter 2006 net earnings were favorably impacted by the release of $14.3 million of income tax reserves, equivalent to $0.22 per diluted share, related primarily to the closing of income tax audits in various jurisdictions.

Fourth quarter 2006 comparable store sales were up 6.8%, the eighth consecutive quarter of positive comparable store sales. Total sales were $693 million, up 13% compared to the fourth quarter of 2005. Several related factors drove fourth quarter 2006 sales higher versus the prior year period. First, average unit retails increased 4% due primarily to having on-trend products. Second, the company sold 4% more units excluding the 14th week of the quarter. Third, sales from the 14th week of the quarter added $36 million. And fourth, the stores' customer service efforts resulted in increased customer conversion.

“Payless delivered an outstanding quarter of sales and earnings due primarily to strong results in our women's and children's categories,” said Matthew E. Rubel, Chief Executive Officer and President. “In 2006, we started to successfully execute the key components of our strategy, and in doing so, have strengthened our position in the marketplace with our customers.”

Gross margin was 33.9% in the fourth quarter of 2006 versus 31.2% in the fourth quarter of 2005. The 270 basis point increase was due mainly to higher initial mark-on. The company's gross margin benefited by having more on-trend and differentiated products which resonated with customers.

Selling, general and administrative (SG&A) expenses were 31.6% of sales in the fourth quarter of 2006 versus 30.9% in the prior year period, an increase of 70 basis points. The increase was driven primarily by higher incentive compensation and the expensing of stock options which did not occur in 2005.

During the fourth quarter of 2006, Payless repurchased 1.1 million shares for $37.6 million under its stock repurchase program. On March 2, 2007, the Payless board of directors authorized an aggregate of $250 million of share repurchases. In accordance with its indenture governing its senior subordinated notes, the company may repurchase approximately $12 million more of its stock at this time. This limit will continue to adjust quarterly based on the company's net earnings.

For the full year of 2006, Payless generated total sales of $2.80 billion, up 4.9% compared to 2005 total sales of $2.67 billion. Comparable store sales were up 3.5% in 2006. Net earnings in 2006 were $122 million, or $1.82 per diluted share, versus net earnings of $66 million, or $0.98 per diluted share, in 2005. Net earnings grew 84% and 86% in dollars and on a per share basis, respectively. Gross margin was 34.9% for 2006, up 160 basis points over the prior year. SG&A as a percent of sales was 28.9% for 2006, up 10 basis points over the prior year.

Payless ended 2006 with $461 million in cash and short-term investments compared to $437 million at the end of 2005. The increase was due to greater cash from operations. Total inventory at year end 2006 was $362 million compared to $333 million at the end of 2005. The increase was driven by timing and an increase in raw materials due to a higher percentage of product sourced directly by the company. Average inventory in stores was flat at year end.

Capital expenditures for 2006 totaled $119 million versus $64 million in the prior year. The increase was due primarily to investments in stores. During 2006, the company added 63 new stores and relocated another 106. Net of closings, Payless ended the year with 33 fewer stores versus 2005. Capital expenditures for fiscal 2007 are expected to total approximately $160 million. The increase over 2006 will be driven by spending on the company's supply chain. In 2006 and 2007 the company has invested, and will continue to invest, in brands, stores, technology and distribution which support Payless' strategic imperatives of effective brand marketing, on-trend targeted product, great shopping experience, and efficient operations.

In 2006, Payless also deployed cash towards the repurchase of 5.0 million shares for $128.4 million under its stock repurchase program.

Payless ShoeSource remains committed to its long-standing goal to achieve low single-digit positive same-store sales on a consistent basis through successful execution of its merchandising strategies.

The company's long-term goal is to achieve earnings per share percentage growth in the mid-teens. The Financial Accounting Standards Board issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48) in June 2006. FIN 48 provides required accounting treatment for tax positions taken, or expected to be taken, in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The company is currently reviewing FIN 48 and has not yet determined the potential impact on its financial statements. As such, the company's long-term earning per share percentage growth goal does not consider the impact from the adoption of FIN 48.