Collective Brands Reports First Quarter 2008 Financial Results

Collective Brands, Inc. (NYSE: PSS) today reported financial results for the first quarter ended May 3, 2008. First quarter 2008 net earnings were $19.7 million, or $0.31 per diluted share including a $30 million pre-tax charge, or $0.36 per share, related to loss contingencies associated with litigation. Excluding the litigation charge, Collective Brands' first quarter 2008 net earnings(1) were $42.2 million, or $0.67 per diluted share. Excluding the litigation charge and $3.5 million pre-tax, or $0.04 per diluted share, for the flow through of inventory recorded at fair value (i.e. purchase accounting inventory step-up), net earnings(1) for the first quarter of 2008 were $44.7 million, or $0.71 per diluted share. In the first quarter of 2007, the Company reported net earnings of $38.9 million or $0.59 per diluted share.

Collective Brands' first quarter 2008 net sales were $932.4 million, up 28.0%, and include the addition of Stride Rite. Net sales for Payless and Stride Rite were $692.8 million and $239.6 million, respectively, for the first quarter of 2008. Comparable store sales(2) declined 6.5% due primarily to lower traffic as a result of a slowdown in consumer spending linked to the economic environment combined with an earlier Easter.

"Our operating results in the first quarter of 2008 demonstrate the strength of the Collective Brands new business model, which offers diversity in price points, brands, selling channels and geographies," said Matthew E. Rubel, Chairman, Chief Executive Officer and President. "Several areas of the Company reported strong growth. International and wholesale sales increased with particular strength in Payless Latin America, Sperry Top-Sider, and Saucony. In addition, we effectively managed our retail inventories to keep them fresh and controlled our costs to produce good first quarter results and position us well for the future. In addition to our earnings performance, we also generated strong cash flow and we intend to continue to use cash flows from mature businesses to accelerate growth opportunities that our retail, wholesale and licensing platforms provide."

The gross margin rate for the first quarter of 2008 was 32.7%. Included in gross margin were $30 million of litigation and $3.5 million of purchase accounting inventory step-up charges; excluding the charges, the gross margin rate was 36.3%(1). The Payless merchandise margin rate increased again in the first quarter of 2008 compared to the same period last year reflecting the successful execution of the Company's strategies to achieve higher average unit retail prices and increase direct sourcing of Payless products. In addition to the effects of litigation and inventory step-up charges, Collective Brands' first quarter 2008 gross margin rate declined from 36.9% last year due to the de-leveraging of fixed costs such as rent and other occupancy costs as a result of lower Payless sales.

Selling, general and administrative (SG&A) expenses were 28.3% of sales in the first quarter of 2008 versus 28.8% in the prior year period, a decrease of 50 basis points. The improvement was primarily due to the impact of Stride Rite's lower SG&A rate and Payless expense reductions, partially offset by the impact of lower comparable sales at Payless. SG&A expenses were $263.8 million in the first quarter of 2008, up $53.9 million versus the prior year period due to the addition of Stride Rite.

Net interest expense in the first quarter of 2008 was $17.2 million compared to net interest expense of $0.1 million last year. The change was due to the use of cash and short-term investments and an increase in borrowings to fund the acquisition of Stride Rite.

The income tax rate for first quarter 2008 was 9.6%, including discrete items of $1.3 million, compared to an income tax rate of 32.0% for the first quarter of 2007. The effective income tax rate for the full year is expected to be approximately 16% compared to previous guidance of 30%, excluding discrete items. The lower income tax rate for first quarter 2008 versus first quarter 2007, and the full year 2008 effective tax rate versus prior guidance are primarily due to a lower percentage of earnings in high-tax jurisdictions and a higher percentage of earnings in lower-tax jurisdictions, together with inherent tax efficiencies gained through the Stride Rite acquisition. These tax efficiencies are expected to have a long-term favorable impact to cash flow.

Collective Brands ended first quarter 2008 with $231.4 million in cash and short-term investments compared to $327.5 million at the end of first quarter 2007. Total debt in first quarter 2008 was $920.5 million primarily related to the acquisition of Stride Rite.

Collective Brands inventory was $481.5 million at the end of first quarter 2008, up $99.8 million compared to the same period last year due primarily to the addition of $130.7 million of Stride Rite inventory. Payless in-store inventory was down 10.2% versus first quarter 2007. Payless aged inventory was slightly lower than last year and lower than the trailing 3-year first quarter average of aged inventory reflecting a clean inventory position.