Fiscal Year to Date Financial Highlights

- Sales during the first nine months of 2006 totaled $2.1 billion, a 2.4% increase over the same period last year.
- During the first nine months of 2006, same-store sales increased 2.6%.
- During the first nine months of 2006, gross margin was 35.2% versus 34% last year.
- During the first nine months of 2006, selling, general and administrative expenses were 28% of sales, versus 28.2% in the first nine months of 2005.

- During the first nine months of 2006, net earnings were $97.4 million and diluted earnings per share were $1.45. This compares with net earnings of $72 million and diluted earnings per share of $1.06 in the first nine months of 2005, 37% increase in diluted earnings per share year-to-date.
- For the first nine months of fiscal 2006, the incremental impact of FAS 123(R) was approximately $6 million pre-tax, or 6 cents per diluted share.

- During the first nine months of 2006, net earnings from continuing operations were $100.4 million compared with net earnings from continuing operations of $77.1 million in the first nine months of fiscal 2005. Earnings per share from continuing operations increased to $1.49 in the first nine months of fiscal 2006 compared with $1.14 per diluted share in the nine months of last year.
- Losses from discontinued operations were $3 million net of income taxes and minority interest, or 4 cents per share in the first nine months of fiscal 2006 compared with a loss of $5.1 million or 8 cents per share in the first nine months of last year.

Fiscal 2006 Outlook

Payless ShoeSource remains committed to its long-standing goal to achieve low single-digit positive same-store sales on a consistent basis, through successful execution of its merchandising strategies. The company does not provide guidance for sales, earnings or margins. However, the company''s business model and strategy are designed to leverage sales performance, and the goal is to achieve earnings per share growth in the mid-teens over time.

- The company currently estimates that the incremental impact of FAS 123(R) full year results will be approximately $8 million pre-tax or 8 cents per diluted share.
- Depreciation and amortization are expected to be approximately $90 million to $95 million.
- Cash for capital expenditures are expected to be approximately $127 million and working capital should be approximately neutral subject to normal seasonal fluctuations.

- For the full fiscal year 2006, the effective income tax rate is expected to be around 33%, excluding discrete events.
- During fiscal year 2006, the Company intends to open approximately 65 new stores and close approximately 75, for a net decrease of 10 stores. The company also intends to relocate approximately 110 stores.

Key questions and answers from the third quarter fiscal 2006 earnings call conducted by Payless ShoeSource Inc. on November 21, 2006.

What issues you''re going to need to address to manage the roll-out of the licenses for the next year? Whether that will affect the other brands that you carry in the store or other house brands you carry in the store, and is there any near-term costs in Q4 in advance of that roll-out?

There are no costs to rolling them out, and the planning in terms of the brands is done both on a customer segment basis as well as how it fits into the firm’s promotional calendar. Each brand will have a unique place in the promotional calendar, or the ability to participate in the promotional calendar. Hence it''s something that is very much sequenced in, and the firm will take items that perhaps were not profitable zones for the firm, that may have received certain types of distribution or promotional planning, and the firm will move that out for these new initiatives. The management is finding that the company’s brands are more productive, and that it has that in a measured manner and continue to monitor how much more productive they are.

How quickly you would be able to roll out the Hot Zone format? What is the expected number of stores and how much it cost you?

The company will announce how many it''ll be doing next year at the end of the next quarter and provide specific number as to how many it is planning. But the firm has a cross-functional team in the organization working on optimizing how to manage those Hot Zones, and so that is the format that ultimately will be the one that gets the most roll-out, and the firm believes that it continues to quantifiably perform well as well as give better customer service. The management believes that there’s a very large opportunity.

Could you comment on the approximate dollar volume that you maybe able to anticipate from the Exeter Brand product lines and Disney merchandise? What approximate percentage can these combined brands represent in terms of the total company’s estimated sales revenue when they’re fully ramped up?

The management is not going to give the exact dollar amount, but Disney is the firm’s number one character business, and so it is in the tens of millions of dollars. It’s something that will give the firm significant gross margin opportunity as well as growth opportunity and brings closer to working with Disney on many things. That will have an impact on bottom-line as well as top-line performance. The Tailwind brand where the firm is partnering with Exeter Group can be one of the firm’s top two brands in the athletic area.

In terms of the Disney product, does this mean that you’re going to be moving the product that you’re currently sourcing from people like Brown Shoe out of their business, or is this going to be in addition to what you’re already sourcing in terms of Disney character shoes?

The firm was specific about these licenses that it has DTR, direct-to-retail, to start. There are some things where there may be some characters that some agents have longer-term commitments on, and the firm may still work with them on those for the time being. But as new ideas come into the marketplace, the firm will be able to capture those new ideas for launch as well, as a part of this agreement.

Can you give an idea on where you stand now at the end of the third quarter in terms of the number of stores that you''ve modernized and how many you think you may modernize over the course of the next 12 months?

The firm has 138 stores in the new format. Of those, there are approximately 20 stores that have been remodeled. The rest of them are new stores. The firm will remodel approximately another 30 stores to 35 stores in the fourth quarter. The outlook for the next 12 months will be provided when the firm announced the results for the fourth quarter.

Can you talk a little bit about the men''s side of the business and what you have planned there?