This summary is based on the second quarter fiscal 2007 earnings call conducted by Payless ShoeSource (PSS: chart) on August 31, 2007.

Management:
Chief Executive Officer and President: Matt Rubel
Senior Vice President and Chief Financial Officer: Ric Porzig
Director, Investor Relations: James Grant

Key Investors Issues

- The earnings per share dropped to 38 cents from 48 cents in the prior year.
- The Western distribution center is up and shipping efficiently.
- The acquisition of Stride Rite was closed on August 17, with cost synergies over the three year expected to exceed $40 million.

Second Quarter Fiscal 2007 Financial Highlights

Net earnings were $25 million or 38 cents per share, down 23% from 2006.

The decline in earnings was due to expenses related to the distribution centre initiative including the exit from one facility and temporary redundancies between facilities, which totaled $3.6 million pre-tax or 4 cents per share. In addition, expenses of $1.8 million were also related to the integration and planning of Stride Rite.

Earnings from continuing operations were $24.7 million, down from $33 million in 2006.

Sales were down 1% from the prior year figures to $699 million, with same store sales falling 1.4%, despite industry reports of a rise in market share during the quarter.

Unfavorable sales were driven by weak results in the sandal business causing total unit sales to decline by 2%, and the later timing of the back-to-school season. Certain key markets shifted their school start dates to a couple of weeks later. These factors were mostly offset by the conversion of a higher percentage of customers and more sales units per transaction.

Athletic and casual footwear performed well with average unit retail up 1%.

Gross margin was 34.4% of sales, down 20 basis points in 2006.

This was driven by more direct sourcing, markdowns on most types of sandals, investments in the distribution centre infrastructure and last year’s hurricane insurance recoveries.

SG&A expenses, as a percent of sales, were 28.7%, up from 24.7% in last year.

This was a result of lower sales of sandals, rather than a growth in expenses. SG&A expenses were $201 million, up 3.9% from 2006, due to a higher payroll, and professional services.

Net interest expense was $800,000 against net interest income of $700,000 in the same period last year, following lower cash balances.

The company financed a portion of its acquisition of Stride Rite with a $725 million Term Loan B at a variable rate of 8.3% over 7 years. On August 24 2007, the company entered into an interest rate swap arrangement for $540 million, which provides for a fixed interest rate of approximately 7.75%, portions of which mature on a series of dates over the next 5 years.

Minority interest, which represent 40% share of earnings due to the joint venture partners in Latin America, was $1.3 million compared to $600,000 in the prior year due to stronger results in the Latin American business.

Cash and short term investments were $327 million, down $114 million or 26% over the previous year, as a result of the acquisition of Collective Licensing International.

Inventory increased from $351 million in 2006 to $370 million, following greater investments and strong performing product categories for fall, merchandise mix shift, stored more footwear at higher average costs linked to higher average retail and an increase in longer lead time raw material commitments associated with a higher product sourced directly.