Phoenix Footwear Group, Inc. reported net sales from continuing operations decreased 10% to $17.9 million for the second quarter from $19.8 million last year. The company’s footwear brands were down 4% for the quarter while the company’s accessories business declined 14%, reflecting the challenging retail environment, particularly within the mass channel. Net loss from continuing operations was $2.2 million, or 27 cents per share, on 8.2 million weighted-average shares outstanding, compared to net loss of $1.0 million, or 13 cents per share, from continuing operations a year ago. The 2008 net loss included the non-cash write-off of $622,000 in debt issuance costs previously capitalized under the company’s previous credit facility, which was replaced during the second quarter of fiscal 2008.


Jim Riedman, Phoenix Footwear’s Chairman, commented, “In spite of the very challenging economic headwinds our company faced, we were able to expand gross margins and achieved flat operating loss compared to a year ago. The substantial progress we have made is underscored by our new revolving credit facility with Wells Fargo Bank. We ended the quarter with an improved balance sheet, as reflected by much lower debt and inventory levels. We have significantly strengthened our portfolio of brands, attracted an experienced management team, renewed our focus on managing costs and solidified our capital structure. These steps position us well for further financial and operational improvement. While we are very encouraged by our accomplishments over the past twelve months, our board and management team are intensely committed to translating these into improved equity value for our shareholders.”

Gross margin expanded 40 basis points to 34.1%, compared to 33.7% for the second quarter of 2007. The increase was due to improved margins on sales to mass merchant customers by the company’s accessories segment, which was offset by sales incentives and allowances in the footwear and premium footwear segments, as well as additional royalty fees associated with the Tommy Bahama Footwear brand.


Operating expenses decreased 8% to $7.5 million, or 42% of net sales, compared to $8.1 million, or 41% of net sales, for the second quarter of fiscal 2007. The decrease in operating expenses is primarily attributable to expense reimbursements received under the Transition Services Agreement entered into concurrently with the company’s divestiture of Altama Delta Corporation.


Operating loss was flat at $1.4 million.


“Our second quarter results were negatively impacted by the challenging economic environment and extraordinary softness at retail. In spite of this hurdle Tommy Bahama maintained strong double digit growth and we were pleased with the sell through rates of products within our other brands. As our retail partners focused on inventory reduction however, reorders came in well below our expectations, resulting in lower sales overall,” commented Cathy Taylor, Phoenix Footwear’s Chief Executive Officer. “To best manage our business through this more uncertain environment, we continued to carefully review each of our brands with a particular focus on product quality, customer deliveries and achieving our primary goal of profitable growth. The positive response to our new product initiatives we received at the recent WSA show from our customers validates our ongoing investments in our brands and our ability to quickly react to changing demands in the market place. We believe we have the right foundation in place and are very excited to see momentum building across all of our divisions, and believe we will return to profitability and positive organic growth during the second half of 2008.”


At Tommy Bahama, further door and product expansion is anticipated within Nordstrom, Macy’s and Lord & Taylor. Additionally, the line has been further expanded to capture key product and price categories.  In the wake of WSA and our current open orders, we expect Tommy Bahama to return to a more robust growth rate during the fourth quarter.


Financial Guidance


Ms. Taylor concluded, “In light of the unusual softness at retail this summer we are behind our original projections and do not anticipate that we will be able to close the gap sufficiently to meet our previously issued guidance of sales and operating income. Nonetheless, we expect to achieve sales growth of approximately 5-10% for fiscal 2008, to return to profitability during the fourth quarter and to be approximately break-even for the whole year on an operating basis.”


 Phoenix Footwear Group, Inc.

                Consolidated Condensed Statement of Operations

                                (In thousands)


                                             For the Three Months Ended

                                                    (Unaudited)


                                          June 28          June 30

                                           2008             2007


    Net sales                             $17,924  100.0%  $19,815  100.0%

    Cost of goods sold                     11,811   65.9%   13,146   66.3%


    Gross profit                            6,113   34.1%    6,669   33.7%


    Operating expenses:

      Selling and administrative expenses   8,027   44.8%    7,723   39.0%

      Non cash 401k stock grant

       compensation                            43    0.2%      133    0.7%

      Amortization                            153    0.9%      225    1.1%

      Other (income) expense, net            (750)     -%        –      -%

        Total operating expenses            7,473   41.7%    8,081   40.8%


    Operating Loss                         (1,360)  -7.6%   (1,412)  -7.1%


    Interest expense, net                     859              319


    Loss before income taxes and

     discontinued operations               (2,219) -12.4%   (1,731)  -8.7%


    Income tax provision (benefit)             21             (685)


    Loss before discontinued operations    (2,240) -12.5%   (1,046)  -5.3%


    Earnings from discontinued

     operations, net of tax                    81    0.5%      117    0.6%


    Net Loss                              $(2,159) -12.0%    $(929)  -4.7%


    Loss per common share:


    Basic

    Continuing operations                  $(0.27)          $(0.13)

    Discontinued operations                  0.01             0.01

    Net loss                               $(0.26)          $(0.12)


    Diluted

    Continuing operations                  $(0.27)          $(0.13)

    Discontinued operations                  0.01             0.01

    Net loss                               $(0.26)          $(0.12)


    Weighted-average shares

     outstanding:

    Basic                                8,166,191       8,044,871

    Diluted                              8,166,191       8,044,871