This summary is based on the third quarter fiscal 2006 earnings call conducted by Payless ShoeSource Inc. (PSS: chart) on November 21, 2006.

Key Investors Issues

- Earnings per share were 43 cents compared to 32 cents in the year ago quarter.
- Quarterly sales increased to $703 million, on 5.2% growth in same store sales.
- The company repurchased $35 million or about 1.5 million shares of its common stock during Q3.

Third Quarter Fiscal 2006 Financial Highlights

Net earnings were $28.9 million or 43 cents per share for the third quarter of 2006, compared to $21.9 million or 32 cents per share during the third quarter of 2005.

Third quarter 2006 results include a loss of 3 cents per share relating to discontinued retail operations in Japan. The company’s substantially complete with the exit process. In addition, results for the third quarter include a favorable income tax impact of 3 cents per share for changes in the effective income tax rate. The incremental impact of FAS 123(R) on net earnings for the third quarter of 2006 was approximately $2 million pre-tax or 2 cents per share.

Third quarter sales totaled $703 million, an increase of 5.5% over last year.

Same-store sales increased 5.2% during the quarter. Footwear sales were strong across all segments of the firm’s women''s and children''s categories. Average unit retail increased 5.9% for the quarter compared with the same period last year and unit sales of footwear increased by 1.1%.

Gross margin was 34.3% of sales in the third quarter 2006 versus 32.8% in the same quarter last year.

The increase was driven primarily by higher initial mark-on.

Selling, general and administrative expenses were 28% of sales in the third quarter of 2006 versus 27.5% in the third quarter last year.

The increase was driven primarily by increased costs for the company’s employee incentive programs.

Net earnings from continuing operations were $30.6 million in the third quarter of 2006, compared with $22.4 million in the third quarter of 2005.

Diluted earnings per share from continuing operations increased during the third quarter to 46 cents from 33 cents in the third quarter of last year.

Discontinued operations include the performance of Japan retail operations as well as disposal costs relating to the exit of the retail operations in the country.

The company incurred a loss from discontinued operations of $1.7 million net of income taxes and minority interest or 3 cents per share in the third quarter of fiscal 2006 compared with a loss of $500,000 or 1 cent per share in the third quarter of last year.

Total inventories at the end of the third quarter 2006 were $349 million compared to $342 million at the end of the third quarter of 2005.

Inventory per store at the end of the third quarter increased by 3% compared to the same period last year. The increase was primarily driven by an increase in raw materials due to a higher percentage of product sourced directly by the company. The company’s inventory is well positioned with a low level of aged merchandise.

- The company''s effective income tax rate was 29.6% during the third quarter 2006, which included an adjustment to reflect the reduced projected effective tax rate for the year.
- The company ended the third quarter 2006 with cash, cash equivalents and short-term investments of $472 million, an increase of $35 million over the cash, cash equivalents and short-term investment balance as of the end of fiscal 2005.
- Cash used for capital expenditures was $36.8 million during the third quarter 2006.

During the third quarter of 2006, the company repurchased $35 million or approximately 1.5 million shares of common stock under its stock repurchase program.

Under the indenture governing the company''s 8.25 notes, the company may repurchase approximately an additional $19 million of common stock. This limit will continue to adjust quarterly based on the company''s net earnings.