Shoe Pavilion, Inc. saw second quarter net sales increase 19.5% to $37.5 million from $31.4 million for the same period last year. Comparable store net sales for the second quarter decreased 1.0%. Sales from new stores and relocated stores contributed $9.1 million in the second quarter ended June 30, 2007.

Gross profit was 29.3% in the second quarter compared to 34.9% in the same period last year. The decrease primarily reflects higher occupancy costs due to the rapid rollout of new stores during the past year and a reduction in selling margins. Selling, general and administrative expenses increased to 32.5% of net sales compared to 29.2% in the year-ago period primarily reflecting de-leveraging from the lower than expected net sales.

A net loss of $1.1 million was incurred in the second quarter, or 11 cents per diluted share, compared to net income of $1.0 million, or 10 cents per diluted share, for the second quarter of 2006.

Dmitry Beinus, CEO, stated, “Our results for the second quarter are lower than we initially anticipated as a result of outside factors which continue to affect the 24 stores opened in the last year. Most of the stores we rolled out in 2006 were in new shopping centers where we have experienced slower than expected traffic due to ongoing construction as well as it taking longer than planned for other retailers to open stores at those centers. In addition, several of the stores were in new regions where we lacked critical mass. Our near-term goal is to open new stores only in existing markets to boost the economies of scale and the leveraging effects of our cluster strategy.

“Despite the recent performance of our stores opened in the last year, it is important to note that our core business continues to perform well. While we experienced lower than planned sales at our newer stores, we were able to achieve a 1.5% increase in comparable store sales, excluding six stores opened in 2006, and a 19.5% increase in net sales versus the second quarter of 2006. As a group, stores that were opened before January 1, 2006 met our expectations and generated strong increases in both sales and operating income for the quarter. Based on the results achieved across our store base, we continue to be confident in our merchandise strategy and assortment. In addition, we continue to believe our newer stores will ramp up to generate sales growth and operating margin in line with our more mature stores, just over a longer period of time than we had originally expected.”

                        Shoe Pavilion, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)

Thirteen weeks ended
June 30, July 1,
2007 2006
———– ——–

Net sales $ 37,537 $31,422
Cost of sales and related occupancy expenses 26,555 20,471
———– ——–
Gross profit 10,982 10,951
Selling, general and administrative expenses 12,201 9,161
———– ——–
(Loss) income from operations (1,219) 1,790
Interest expense, net (525) (102)
———– ——–
(Loss) income before income taxes (1,744) 1,688
Income tax benefit (expense) 649 (681)
———– ——–
Net (loss) income $ (1,095) $ 1,007
=========== ========

(Loss) earnings per share:
Basic (0.11) 0.11
Diluted (0.11) 0.10

Weighted average shares outstanding:
Basic 9,542 9,509
Diluted 9,542 9,706