This summary is based on the fourth quarter fiscal 2006 earnings call conducted by Payless ShoeSource Inc. (PSS: chart) on March 6, 2007.

Key Investors Issues

- The earnings were 37 cents a share compared to loss of 8 cents per share in prior year.
- Sales grew to $692.7 million from $611 million in the prior year.
- For fiscal 2006, profit rose to $122 million, on sales of $2.8 billion.

Fourth Quarter Fiscal 2006 Financial Highlights

Fourth quarter sales totaled $693 million, an increase of 13% over the fourth quarter of 2005.

The 2006 fourth quarter sales include sales of $36 million in the 14th week of the fiscal quarter. Same-store sales increased 6.8% during the fourth quarter of 2006. The same-store sales figure was calculated, excluding the 14th week.

Fourth quarter 2006 sales results, which trended more favorably each month, were driven primarily by four related factors:
- The Women’s and Children’s Footwear categories each experienced strong sales increases. Importantly, the Women’s category performed very well despite modest sales gains in boots, which helps illustrate the broad appeal of the firm’s Women’s product. Dress and Casual Footwear were also very strong.
- The firm sold 4% more footwear units versus the prior year, again excluding the 14th week of the quarter.
- The customer conversion was up due to increased customer engagement and strong store operations execution.
- The International segment sales increased 16% due to more effective merchandising and strengthening of the firm’s brand in international markets.

Gross margin was 33.9% of sales in the fourth quarter of 2006 versus 31.2% in the same quarter last year, an increase of 270 basis points.

The increase was driven primarily by higher initial mark-on. Gross margin benefited by having more on-trend and differentiated product, which resonated with the firm’s customers. In addition, company sourced more product directly. Directly sourced product tend to have a lower cost relative to indirectly sourced produced. Also higher sales allowed the firm to leverage the fixed components of its cost of goods.

Selling general administrative expenses were $219 million in the fourth quarter of 2006, up 16% versus the same period last year.

The increase was driven by higher incentive compensation, the 14th week of the quarter and the expensing of stock options, which did not occur last year. SG&A as a percent of sales was 31.6% in the fourth quarter of 2006 versus 30.9% last year, and increase of 70 bases points.

The firm’s net interest income was $2 million in the fourth quarter of 2006 versus net interest expense of $300,000 in the prior year.

Interest income was driven by higher cash balances and higher interest rates on its investments.

The income tax benefit was $10 million in the fourth quarter of 2006 versus a $1 million benefit in the prior year.

Fourth quarter 2006 income tax was favorably impacted by the release of $14.3 million of income tax reserves related primarily to the closing of income tax audits in various jurisdictions. The $14.3 million equates to 22 cents per diluted share.

Minority interest represents the 40% share of earnings that is due to the firm’s joint venture partners in Latin America.

Fourth quarter 2006 minority interest was $2.7 million compared to $1.5 million in the same period last year. The increase was due to strong business trends in Latin American businesses.

Net earnings from continuing operations were $25 million, or 38 cents per diluted share, in the fourth quarter of 2006.

This compares to a net loss from continuing operations of $600,000 or 1 cent per diluted share, for the fourth of 2005.

The cash and short term investments at year end were $461 million, up $24 million or 5% over the previous year.