Collective Brands (PSS) 10-Q 2011 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 30, 2011

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number: 1-14770

COLLECTIVE BRANDS, INC.

(Exact name of registrant as specified in its charter)

Delaware State or other jurisdiction of incorporation of organization	43-1813160 (I.R.S. Employer Identification No.)
3231 Southeast Sixth Avenue, Topeka, Kansas (Address of principal executive offices)	66607-2207 (Zip Code)

Registrant’s telephone number, including area code(785) 233-5171

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESþ NOo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YESþ NOo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerþ Accelerated filero Non-accelerated filero Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NOþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value
60,568,803 shares as of August 25, 2011

COLLECTIVE BRANDS, INC.

FORM 10-Q

FOR THE FISCAL QUARTER ENDED JULY 30, 2011
INDEX

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements. (unaudited)
Condensed Consolidated Statements of (Loss) Earnings for the 13 Weeks and 26 Weeks Ended July 30, 2011 and July 31, 2010		3
Condensed Consolidated Balance Sheets as of July 30, 2011, July 31, 2010 and January 29, 2011		4
Condensed Consolidated Statements of Equity and Comprehensive Income for the 26 Weeks Ended July 30, 2011 and July 31, 2010		5
Condensed Consolidated Statements of Cash Flows for the 26 Weeks Ended July 30, 2011 and July 31, 2010		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3. Quantitative and Qualitative Disclosures About Market Risk		38
Item 4. Controls and Procedures		38
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		39
Item 1A. Risk Factors		39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 4. Reserved		40
Item 6. Exhibits		40
Signatures
Certification pursuant to Section 302 of the CEO
Certification pursuant to Section 302 of the Division SVP, CFO and Treasurer
Certification pursuant to Section 906 of the CEO
Certification pursuant to Section 906 of the Division SVP, CFO and Treasurer
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COLLECTIVE BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS

(UNAUDITED)

(dollars and shares in millions, except per share)

	13 Weeks Ended						26 Weeks Ended
	July 30,			July 31,			July 30,			July 31,
	2011			2010			2011			2010
Net sales	$	882.4		$	841.3		$	1,751.4		$	1,720.1
Cost of sales		673.9			552.2			1,233.0			1,094.3
Gross margin		208.5			289.1			518.4			625.8
Selling, general and administrative expenses		260.9			252.4			528.4			507.5
Impairment of goodwill		10.0			—			10.0			—
Operating (loss) profit		(62.4	)		36.7			(20.0	)		118.3
Interest expense		10.0			12.2			20.9			25.6
Interest income		(0.1	)		(0.1	)		(0.2	)		(0.3	)
Loss on early extinguishment of debt		—			—			—			0.8
Net (loss) earnings before income taxes		(72.3	)		24.6			(40.7	)		92.2
(Benefit) Provision for income taxes		(39.0	)		2.6			(35.6	)		14.2
Net (loss) earnings		(33.3	)		22.0			(5.1	)		78.0
Net earnings attributable to noncontrolling interests		(1.7	)		(0.9	)		(3.5	)		(2.7	)
Net (loss) earnings attributable to Collective Brands, Inc.	$	(35.0	)	$	21.1		$	(8.6	)	$	75.3
(Loss) earnings per share attributable to Collective Brands, Inc. common shareholders:
Basic	$	(0.58	)	$	0.33		$	(0.14	)	$	1.17
Diluted	$	(0.58	)	$	0.32		$	(0.14	)	$	1.15
Weighted average shares outstanding:
Basic		60.3			63.5			60.5			63.5
Diluted		60.3			64.2			60.5			64.4

See Notes to Condensed Consolidated Financial Statements.

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COLLECTIVE BRANDS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
(dollars in millions)

	July 30,			July 31,			January 29,
	2011			2010			2011
ASSETS
Current Assets:
Cash and cash equivalents	$	234.8		$	333.9		$	324.1
Accounts receivable, net of allowance for doubtful accounts and returns reserve as of July 30, 2011, July 31, 2010 and January 29, 2011 of $7.1, $5.3 and $6.0, respectively		171.8			133.1			114.4
Inventories		585.0			497.5			531.7
Deferred income taxes		36.5			37.6			30.7
Prepaid expenses		59.8			59.3			55.1
Other current assets		20.3			20.0			22.2
Total current assets		1,108.2			1,081.4			1,078.2
Property and Equipment:
Land		6.0			6.9			6.7
Property, buildings and equipment		1,437.3			1,438.6			1,444.6
Accumulated depreciation and amortization		(1,059.9	)		(997.8	)		(1,019.0	)
Property and equipment, net		383.4			447.7			432.3
Intangible assets, net		390.7			437.0			428.4
Goodwill		269.8			279.8			279.8
Deferred income taxes		6.8			7.1			10.1
Other assets		39.4			42.8			39.7
Total Assets	$	2,198.3		$	2,295.8		$	2,268.5
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of long-term debt	$	5.1		$	7.3		$	5.1
Accounts payable		310.0			225.6			287.4
Accrued expenses		154.4			168.7			184.4
Total current liabilities		469.5			401.6			476.9
Long-term debt		657.0			761.0			659.4
Deferred income taxes		40.6			65.8			65.4
Other liabilities		186.1			222.4			212.4
Commitments and contingencies (Note 12)
Equity:
Collective Brands, Inc. shareowners’ equity		816.5			817.4			822.9
Noncontrolling interests		28.6			27.6			31.5
Total equity		845.1			845.0			854.4
Total Liabilities and Equity	$	2,198.3		$	2,295.8		$	2,268.5

See Notes to Condensed Consolidated Financial Statements.

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COLLECTIVE BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
AND COMPREHENSIVE INCOME

(UNAUDITED)
(dollars in millions)

	Collective Brands, Inc. Shareowners’
	Outstanding		Additional						Accumulated Other			Non-
	Common		Paid-in			Retained			Comprehensive			controlling			Total			Comprehensive
	Stock		Capital			Earnings			Income (Loss)			Interests			equity			Income
Balance at January 30, 2010	$	0.7	$	34.7		$	722.1		$	(22.3	)	$	28.7		$	763.9
Net earnings		—		—			75.3			—			2.7			78.0		$	78.0
Translation adjustments		—		—			—			1.0			0.7			1.7			1.7
Net change in fair value of derivatives, net of taxes of $1.7		—		—			—			2.3			—			2.3			2.3
Changes in unrecognized amounts of pension benefits, net of taxes of $0.6		—		—			—			0.9			—			0.9			0.9
Issuances of common stock under stock plans		—		8.1			—			—			—			8.1
Purchases of common stock		—		(14.1	)		—			—			—			(14.1	)
Amortization of unearned nonvested shares		—		3.6			—			—			—			3.6
Share-based compensation expense		—		5.1			—			—			—			5.1
Contributions from noncontrolling interests		—		—			—			—			1.5			1.5
Distributions to noncontrolling interests		—		—			—			—			(6.0	)		(6.0	)
Comprehensive income																			82.9
Comprehensive income attributable to noncontrolling interests																			(3.4	)
Comprehensive income attributable to Collective Brands, Inc.																		$	79.5
Balance at July 31, 2010	$	0.7	$	37.4		$	797.4		$	(18.1	)	$	27.6		$	845.0
Balance at January 29, 2011	$	0.6	$	(2.5	)	$	834.9		$	(10.1	)	$	31.5		$	854.4
Net (loss) earnings		—		—			(8.6	)		—			3.5			(5.1	)	$	(5.1	)
Translation adjustments		—		—			—			6.0			0.6			6.6			6.6
Net change in fair value of derivatives, net of taxes of $1.7		—		—			—			2.7			—			2.7			2.7
Changes in unrecognized amounts of pension benefits, net of taxes of $0.9		—		—			—			1.9			—			1.9			1.9
Issuances of common stock under stock plans		—		1.8			—			—			—			1.8
Purchases of common stock		—		(7.3	)		(10.9	)		—			—			(18.2	)
Amortization of unearned nonvested shares		—		4.2			—			—			—			4.2
Share-based compensation expense		—		3.8			—			—			—			3.8
Distributions to noncontrolling interests		—		—			—			—			(7.0	)		(7.0	)
Comprehensive income																			6.1
Comprehensive income attributable to noncontrolling interests																			(4.1	)
Comprehensive income attributable to Collective Brands, Inc.																		$	2.0
Balance at July 30, 2011	$	0.6	$	—		$	815.4		$	0.5		$	28.6		$	845.1

See Notes to Condensed Consolidated Financial Statements.

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COLLECTIVE BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(dollars in millions)

	26 Weeks Ended
	July 30,			July 31,
	2011			2010
Operating Activities:
Net (loss) earnings	$	(5.1	)	$	78.0
Adjustments for non-cash items included in net (loss) earnings:
Loss on impairment and disposal of assets		36.3			3.1
Impairment of goodwill and indefinite-lived tradenames		41.1			—
Depreciation and amortization		66.4			69.2
Provision for losses on accounts receivable		0.4			0.5
Share-based compensation expense		8.6			8.9
Deferred income taxes		(29.3	)		2.4
Loss on extinguishment of debt		—			0.8
Changes in working capital
Accounts receivable		(56.6	)		(38.6	)
Inventories		(50.8	)		(54.0	)
Prepaid expenses and other current assets		(3.4	)		(6.2	)
Accounts payable		21.9			32.2
Accrued expenses		(29.4	)		(16.0	)
Changes in other assets and liabilities, net		(22.9	)		(2.8	)
Cash flow (used in) provided by operating activities		(22.8	)		77.5
Investing Activities:
Capital expenditures		(42.3	)		(46.8	)
Cash flow used in investing activities		(42.3	)		(46.8	)
Financing Activities:
Repayment of debt		(2.6	)		(81.3	)
Issuances of common stock		1.8			8.1
Purchases of common stock		(18.2	)		(14.1	)
Contributions by noncontrolling interests		—			1.5
Distribution to noncontrolling interests		(7.0	)		(6.0	)
Cash flow used in financing activities		(26.0	)		(91.8	)
Effect of exchange rate changes on cash		1.8			1.5
Decrease in cash and cash equivalents		(89.3	)		(59.6	)
Cash and cash equivalents, beginning of year		324.1			393.5
Cash and cash equivalents, end of quarter	$	234.8		$	333.9
Supplemental cash flow information:
Interest paid	$	20.9		$	25.2
Income taxes paid	$	15.9		$	10.7
Non-cash investing activities:
Accrued capital expenditures	$	13.2		$	11.2

See Notes to Condensed Consolidated Financial Statements.

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COLLECTIVE BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 — Interim Results

These unaudited Condensed Consolidated Financial Statements of Collective Brands, Inc., a Delaware corporation, and subsidiaries (the “Company”) have been prepared in accordance with the instructions to Form 10-Q of the United States Securities and Exchange Commission (“SEC”) and should be read in conjunction with the Notes to the Consolidated Financial Statements (pages 61-103) in the Company’s 2010 Annual Report on Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, these unaudited Condensed Consolidated Financial Statements are fairly presented and all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods have been included; however, certain items included in these statements are based upon estimates for the entire year. The Condensed Consolidated Balance Sheet as of January 29, 2011 has been derived from the audited financial statements at that date.

The Company’s operations in the Central and South American Regions operate as consolidated joint ventures in which the Company maintains a 60% ownership interest. The reporting period for operations in the Central and South American Regions is a December 31 year-end. The Central American Region is comprised of operations in Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Jamaica, Nicaragua, Panama and Trinidad & Tobago. The South American Region is comprised of operations in Colombia and Ecuador. The effects of the one-month lag for the operations in the Central and South American Regions are not significant to the Company’s financial position and results of operations. All intercompany amounts have been eliminated. The results for the twenty-six week period ended July 30, 2011 are not necessarily indicative of the results that may be expected for the entire fifty-two week fiscal year ending January 28, 2012.

Note 2 — Asset Impairment

If an indicator of impairment exists, the Company reviews property and equipment on a store-by-store basis to determine whether the carrying amount of the asset exceeds its fair value. The Company models estimated future cash flows on a store-by-store basis and compares the present value, using an appropriate discount rate, of these cash flows to the carrying amount of the assets to determine if impairment exists. The underlying estimates of cash flows include estimates of future revenues, gross margin rates and store expenses as well as any potential for changes related to occupancy costs, store closures and transfer sales. These assumptions are based upon the stores’ past and expected future performance. To the extent the estimates for revenue growth, gross margin rates, and store expense projections are not realized, the Company could record an impairment charge.

In the second quarter of 2011, due to underperformance in certain retail businesses, the Company revised its projections used in determining whether its store assets were impaired. This impairment test indicated that $44.7 million of the Company’s assets had a fair value of $10.6 million and, as such, the Company recorded a $34.1 million impairment charge. The following table summarizes the asset impairment charges by reporting segment:

	13 Weeks Ended						26 Weeks Ended
	July 30,		July 31,		Increase		July 30,		July 31,		Increase
(dollars in millions)	2011		2010		(Decrease)		2011		2010		(Decrease)
Payless Domestic	$	27.3	$	1.1	$	26.2	$	28.6	$	1.1	$	27.5
Payless International		2.8		0.3		2.5		2.8		0.3		2.5
PLG Wholesale		0.7		—		0.7		0.7		—		0.7
PLG Retail		3.3		0.2		3.1		3.3		0.2		3.1
Total	$	34.1	$	1.6	$	32.5	$	35.4	$	1.6	$	33.8

Note 3 — Intangible Assets and Goodwill

Intangible Assets other than Goodwill

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The impairment test for indefinite-lived tradenames compares each tradename’s fair value to its book value. If the book value of a tradename exceeds its fair value, the tradename is considered impaired and the Company recognizes an impairment charge for the difference. The fair values of the Company’s tradenames are determined using either the relief from royalty method or the excess earnings method, which are forms of the income approach. The relief from royalty method is based on the theory that the owner of the tradename is relieved of paying a royalty or license fee for the use of the tradename. The excess earnings method calculates the value of the tradename by discounting its future cash flows.

Management judgment is a significant factor in determining whether an indicator of impairment for tradenames has occurred. The Company relies on estimates in determining the fair value of each tradename, which include the following critical quantitative factors:

• Anticipated future revenues and long-term growth rates for each tradename.The relief from royalty and excess earnings methods rely on the timing and estimates of future revenues, including an estimate of long-term growth rates. The Company’s projections of future revenues are subject to change as actual results are achieved that differ from those anticipated. Actual results could vary significantly from estimates.

• Reasonable market royalty rate for each tradename.The relief from royalty approach used to determine fair value requires selection of appropriate royalty rates for each tradename. The rates selected depend upon, among other things, licensing agreements involving similar tradenames, historical and forecasted operating profit for each tradename and qualitative factors such as market awareness, history, longevity, and market size.

• Selection of an appropriate discount rate.The relief from royalty and excess earnings methods require the selection of an appropriate discount rate, which is based on a weighted average cost of capital analysis. The discount rate is subject to changes in short-term interest rates and long-term yield as well as variances in the typical capital structure of marketplace participants in the Company’s industry. The discount rate is determined based on assumptions that would be used by marketplace participants, and for that reason, the capital structure of selected marketplace participants is used in the weighted average cost of capital analysis.Because the selection of the discount rate is dependent on several variables, the discount rate may change from year to year.

In the second quarter of 2011, due to underperformance in certain retail businesses, the Company revised certain financial projections. These revisions indicated a potential impairment of certain indefinite lived tradenames and, as such, required an assessment of the fair value of these indefinite-lived tradenames to determine if their book value exceeded their fair value. This assessment indicated that the book value of certain indefinite-lived tradenames exceeded their fair value and the Company recognized $31.1 million of pre-tax impairment charges in cost of sales. Of the $31.1 million pre-tax impairment charge, $23.5 million is in the PLG Wholesale reporting segment and $7.6 million is in the Payless Domestic reporting segment.

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The following is a summary of the Company’s intangible assets:

	July 30,			July 31,			January 29,
(dollars in millions)	2011			2010			2011
Intangible assets subject to amortization:
Favorable lease rights:
Gross carrying amount	$	23.3		$	30.4		$	24.8
Less: accumulated amortization		(19.4	)		(23.8	)		(19.8	)
Carrying amount, end of period		3.9			6.6			5.0
Customer relationships:
Gross carrying amount		74.2			74.2			74.2
Less: accumulated amortization		(49.5	)		(39.9	)		(45.2	)
Carrying amount, end of period		24.7			34.3			29.0
Trademarks and other intangible assets:
Gross carrying amount		39.0			38.6			38.5
Less: accumulated amortization		(11.3	)		(8.0	)		(9.6	)
Carrying amount, end of period		27.7			30.6			28.9
Carrying amount of intangible assets subject to amortization		56.3			71.5			62.9
Indefinite-lived trademarks		334.4			365.5			365.5
Total intangible assets	$	390.7		$	437.0		$	428.4

Amortization expense on intangible assets is as follows:

	13 Weeks Ended				26 Weeks Ended
	July 30,		July 31,		July 30,		July 31,
(dollars in millions)	2011		2010		2011		2010
Amortization expense on intangible assets	$	3.1	$	4.1	$	6.5	$	8.4

The Company expects amortization expense for the remainder of 2011 and the following four years to be as follows (in millions):

Year	Amount
Remainder of 2011	$	6.8
2012		11.3
2013		9.7
2014		8.3
2015		5.9

Goodwill

     The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its book value. If the book value of a reporting unit exceeds its fair value, goodwill is considered potentially impaired and the Company must complete the second step of the goodwill impairment test. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the book value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, the Company would allocate the fair value to all of the assets and liabilities of the reporting unit in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge for the difference would be recognized.

     The fair value of a reporting unit is determined using a combined income and market approach. The income approach uses a reporting unit’s projection of estimated cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions. The market approach may involve use of the guideline transaction method, the guideline company method, or both. The guideline transaction method makes use of available transaction price data of companies engaged in the same or a similar line of

9

business as the respective reporting unit. The guideline company method uses market multiples of publicly traded companies with operating characteristics similar to the respective reporting unit. The Company considers value indications from both the income approach and market approach in estimating the fair value of each reporting unit in our analysis. The Company also compares the aggregate fair value of our reporting units to our market capitalization plus a control premium at each reporting period.

Management judgment is a significant factor in determining whether an indicator of impairment has occurred. The Company relies on estimates in determining the fair value of each reporting unit, which include the following critical quantitative factors:

• Anticipated future cash flows and long-term growth rates for each reporting unit.The income approach relies on the timing and estimates of future cash flows, including an estimate of long-term growth rates. The projections use our estimates of economic and market conditions over the projected period including growth rates in sales and estimates of expected changes in operating margins. The Company’s projections of future cash flows are subject to change as actual results are achieved that differ from those anticipated. Actual results could vary significantly from estimates.

• Selection of an appropriate discount rate.The income approach requires the selection of an appropriate discount rate, which is based on a weighted average cost of capital analysis. The discount rate is subject to changes in short-term interest rates and long-term yield, as well as variances in the typical capital structure of marketplace participants in our industry. The discount rate is determined based on assumptions that would be used by marketplace participants, and for that reason, the capital structure of selected marketplace participants is used in the weighted average cost of capital analysis. Because the selection of the discount rate is dependent on several variables, it is possible that the discount rate could change from year to year.

As a result of underperformance of certain retail businesses, the Company revised its financial projections related to its reporting units. These revisions indicated a potential impairment of goodwill and, as such, the fair value of the Company’s reporting units were assessed to determine if their book value exceeded their fair value. As a result of this assessment, the Company determined that the book value of goodwill exceeded its fair value and recognized $10.0 million of pre-tax goodwill impairment charges.

The following presents the carrying amount of goodwill, by reporting segment and reporting unit (dollars in millions):

		July 30,		July 31,		January 29,
Reporting Segment	Reporting Unit	2011		2010		2011
PLG Wholesale	PLG Wholesale	$	239.6	$	239.6	$	239.6
Payless Domestic1	Payless Domestic		—		5.9		5.9
Payless Domestic1	Collective Licensing		30.2		34.3		34.3
Total		$	269.8	$	279.8	$	279.8

¹ The Payless Domestic reporting segment includes a goodwill impairment charge of $10.0 million taken in the second quarter of 2011. Cumulative impairment charges for all reporting segments total $52.0 million, $42.0 million of which relate to the PLG Retail reporting segment and $10.0 million of which relate to the Payless Domestic reporting segment.

Note 4 — Long-Term Debt

The following is a summary of the Company’s long-term debt and capital lease obligations:

	July 30,		July 31,		January 29,
(dollars in millions)	2011		2010		2011
Term Loan Facility(1)	$	486.8	$	592.1	$	489.4
Senior Subordinated Notes(2)		174.3		174.0		174.1
Revolving Loan Facility(3)		—		—		—
Capital-lease obligations		1.0		1.0		1.0
Other long-term debt		—		1.2		—
Total debt		662.1		768.3		664.5
Less: current maturities of long-term debt		5.1		7.3		5.1
Long-term debt	$	657.0	$	761.0	$	659.4

10

(1)	As of July 30, 2011, July 31, 2010 and January 29, 2011, the fair value of the Company’s Term Loan was $478.4 million, $574.4 million and $489.4 million, respectively, based on market conditions and perceived risks as of those dates.
(2)	As of July 30, 2011, July 31, 2010 and January 29, 2011, the fair value of the Company’s senior subordinated notes was $175.6 million, $176.9 million and $177.8 million, respectively, based on trading activity as of those dates.
(3)	As of July 30, 2011, the Company’s borrowing base on its revolving loan facility was $350.0 million less $28.6 million in outstanding letters of credit, or $321.4 million. The variable interest rate, including the applicable variable margin at July 30, 2011, was 1.13%.

As of July 30, 2011, the Company was in compliance with all of its debt covenants related to its outstanding debt.

On August 16, 2011, the Company amended its $350 million Amended and Restated Loan and Guaranty Agreement (“Revolving Loan Facility”) with a $300 million Second Amended and Restated Loan and Guaranty Agreement (“Amended Revolving Loan Facility”). The Amended Revolving Loan Facility is a senior secured loan guaranteed by substantially all the assets of the borrower and the guarantors, having first priority in accounts, inventory and certain related assets. The Amended Revolving Loan Facility matures on August 16, 2016 and bears interest at the London Inter-Bank Offer Rate (“LIBOR”), plus a variable margin of 1.75% to 2.25% or the base rate, as defined in the agreement. The Amended Revolving Loan Facility provides increased flexibility for investments, incurrence of indebtedness and restricted payments including prepayments on its Senior Subordinated Notes, subject to excess line availability tests. The facility will be available as needed for general corporate purposes.

Note 5 — Derivatives

The Company has entered into an interest rate contract for an initial amount of $540 million to hedge a portion of its variable rate $725 million term loan facility (“interest rate contract”). The interest rate contract provides for a fixed interest rate of approximately 7.75%, portions of which mature on a series of dates through 2012. As of July 30, 2011, the Company has hedges remaining on $130 million of its $486.8 million outstanding Term Loan Facility balance.

The Company has also entered into a series of forward contracts to hedge a portion of certain foreign currency purchases (“foreign currency contracts”). The foreign currency contracts provide for a fixed exchange rate and mature over a series of dates through May 2012. As of July 30, 2011, the Company has hedged $10.5 million of its forecasted foreign currency purchases.

The interest rate and foreign currency contracts are designated as cash flow hedging instruments. The change in the fair value of the interest rate and foreign currency contracts are recorded as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the periods in which earnings are impacted by the hedged item. The following table presents the fair value of the Company’s hedging portfolio related to its interest rate contract and foreign currency contracts:

		Fair Value
	Location on Condensed	July 30,		July 31,		January 29,
(dollars in millions)	Consolidated Balance Sheet	2011		2010		2011
Interest rate contract	Other liabilities	$	—	$	3.4	$	1.3
Interest rate contract	Accrued expenses	$	3.3	$	7.5	$	6.1
Foreign currency contracts	Accrued expenses	$	0.3	$	0.5	$	0.4
Foreign currency contracts	Other current assets	$	—	$	—	$	0.1

11

It is the Company’s policy to enter into derivative instruments with terms that match the underlying exposure being hedged. As such, the Company’s derivative instruments are considered highly effective, and the net gain or loss from hedge ineffectiveness is not significant. Realized gains or losses on the hedging instruments occur when a portion of the hedge settles or if it is probable that the forecasted transaction will not occur. The impact of the derivative instruments on the Condensed Consolidated Financial Statements is as follows:

	Gain (Loss) Recognized in						Loss Reclassified from AOCI into
	OCI on Derivatives						(Loss) Earnings
	13 Weeks Ended					Location on Condensed	13 Weeks Ended
	July 30,		July 31,			Consolidated Statement of	July 30,			July 31,
(dollars in millions)	2011		2010			(Loss) Earnings	2011			2010
Interest rate contract	$	0.2	$	(1.1	)	Interest expense	$	(1.1	)	$	(1.8	)
Foreign currency contracts	$	0.1	$	(0.2	)	Cost of sales	$	(0.1	)	$	(0.1	)

	Loss Recognized in OCI on							Loss Reclassified from AOCI
	Derivatives							into (Loss) Earnings
	26 Weeks Ended						Location on Condensed	26 Weeks Ended
	July 30,			July 31,			Consolidated Statement	July 30,			July 31,
(dollars in millions)	2011			2010			of (Loss) Earnings	2011			2010
Interest rate contract	$	—		$	(1.3	)	Interest expense	$	(2.7	)	$	(4.0	)
Foreign currency contracts	$	(0.2	)	$	(0.5	)	Cost of sales	$	(0.3	)	$	(0.1	)

The Company expects $3.3 million of the fair value of the interest rate contract and $0.3 million of the fair value of the foreign currency contracts recorded in AOCI to be recognized in earnings during the next 12 months. These amounts may vary based on actual changes to LIBOR and foreign currency exchange rates.

Note 6 — Fair Value Measurements

The Company’s estimates of the fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets, and requires that observable inputs be used in the valuations when available. The three levels of the hierarchy are as follows:

Level 1: observable inputs such as quoted prices in active markets

Level 2: inputs other than the quoted prices in active markets that are observable either directly or indirectly

Level 3: unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions

12

The following table presents financial assets and financial liabilities that the Company measures at fair value on a recurring basis. The Company has classified these financial assets and liabilities in accordance with the fair value hierarchy:

	Estimated Fair Value Measurements
			Significant		Significant
	Quoted Prices in		Observable		Unobservable
	Active Markets		Other Inputs		Inputs
(dollars in millions)	(Level 1)		(Level 2)		(Level 3)		Total Fair Value
As of July 30, 2011:
Financial Assets:
Money market funds	$	137.5	$	—	$	—	$	137.5
Financial Liabilities:
Interest rate contract(1)	$	—	$	3.3	$	—	$	3.3
Foreign currency contracts(2)	$	—	$	0.3	$	—	$	0.3
As of July 31, 2010:
Financial Assets:
Money market funds	$	233.0	$	—	$	—	$	233.0
Financial Liabilities:
Interest rate contract(1)	$	—	$	10.9	$	—	$	10.9
Foreign currency contracts(2)	$	—	$	0.5	$	—	$	0.5
As of January 29, 2011:
Financial Assets:
Money market funds	$	174.8	$	—	$	—	$	174.8
Foreign currency contracts(2)	$	—	$	0.1	$	—	$	0.1
Financial Liabilities:
Interest rate contract(1)	$	—	$	7.4	$	—	$	7.4
Foreign currency contracts(2)	$	—	$	0.4	$	—	$	0.4

(1)	The fair value of the interest rate contract is determined using a mark-to-market valuation technique based on an observable interest rate yield curve and adjusting for credit risk.
(2)	The fair value of the foreign currency contracts are determined using a mark-to-market technique based on observable foreign currency exchange rates and adjusting for credit risk.

Note 7 — Pension Plans

The Company has a pension plan that covers a select group of management employees (“Payless Plan”), a pension plan that covers certain PLG employees (“PLG Plan”) and a pension plan that covers certain employees in Asia (“Asia Plan”). To calculate pension expense, the Company uses assumptions to estimate the total benefits ultimately payable to each management employee and allocates this cost to service periods.

Payless Plan

The Payless Plan is a nonqualified, supplementary account balance defined benefit plan for a select group of management employees. The plan is an unfunded, noncontributory plan. The components of pension expense for the plan were:

	13 Weeks Ended				26 Weeks Ended
	July 30,		July 31,		July 30,		July 31,
(dollars in millions)	2011		2010		2011		2010
Components of pension expense:
Service cost	$	0.2	$	0.1	$	0.4	$	0.3
Interest cost		0.4		0.5		0.9		1.0
Amortization of prior service cost		0.4		0.4		0.8		0.8
Amortization of actuarial loss		0.4		0.4		0.8		0.7
Total	$	1.4	$	1.4	$	2.9	$	2.8

13

PLG Plan

The PLG Plan is a noncontributory defined benefit pension plan, which no longer accrues future benefits, covering certain eligible PLG associates. The components of pension expense for the plan were:

	13 Weeks Ended						26 Weeks Ended
	July 30,			July 31,			July 30,			July 31,
(dollars in millions)	2011			2010			2011			2010
Components of pension expense:
Interest cost	$	1.2		$	1.2		$	2.4		$	2.3
Expected return on net assets		(1.4	)		(1.3	)		(2.7	)		(2.5	)
Amortization of actuarial loss		0.3			0.4			0.6			0.7
Total	$	0.1		$	0.3		$	0.3		$	0.5

Asia Plan

The Asia Plan is a nonqualified, supplementary account balance defined benefit plan for a select group of employees in Asia. The plan is an unfunded, noncontributory plan. The components of pension expense for the plan were not significant for the thirteen and twenty-six weeks ended July 30, 2011 and July 31, 2010.

Note 8 — Share-Based Compensation

Under its equity incentive plans, the Company currently grants share appreciation vehicles consisting of stock-settled stock appreciation rights (“stock-settled SARs”), cash-settled stock appreciation rights (“cash-settled SARs”), as well as full value vehicles in the form of nonvested shares and nonvested share units ( “nonvested shares and nonvested share units”) and phantom stock units (“phantom nonvested share units”).

14

The number of shares for grants made in the thirteen and twenty-six weeks ended July 30, 2011 and July 31, 2010 are as follows:

13 Weeks Ended

26 Weeks Ended

July 30, 2011

July 31, 2010

July 30, 2011

July 31, 2010

Maximum

Maximum

Maximum

Maximum

Share

share

Share

Share

Share

share

Share

Share

units

equivalents

units

equivalents

units

equivalents

units

equivalents

Stock-settled SARs(1):

Vest in installments over 3 years

—

—

3,969

2,205

213,141

118,412

724,094

402,274

Cliff vest after 3 years

—

—

—

—

—

—

12,200

6,778

⁽¹⁾ All of the stock-settled SARs issued by the Company in the periods presented contain an appreciation cap, which limits the appreciation for which shares of common stock will be granted. The appreciation cap is limited to 125% of the fair market value of the underlying common stock on the grant date of the SAR, meaning that the maximum shares issuable under a SAR is 0.56 shares per SAR.

	13 Weeks Ended				26 Weeks Ended
	July 30,		July 31,		July 30,		July 31,
	2011		2010		2011		2010
Nonvested shares and nonvested share units:
Vest in installments over 3 years		—		3,673		—		317,036
Vest in installments over 2 years		—		—		—		77,231
Cliff vest after 3 years		4,031		—		160,718		—
Performance grant — vest in installments over 3 years(2)		677		—		131,755		77,227
Performance grant — cliff vest after 3 years(2)		4,880		—		97,463		—
Phantom nonvested share units:
Vest in installments over 3 years		—		—		—		18,033
Cliff vest after 3 years		—		—		1,350		—
Performance grant — vest in installments over 3 years(2)		—		—		450		—
Performance grant — cliff vest after 3 years(2)		—		—		6,584		—
Cash-settled SARs:
Vest in installments over 3 years		—		—		—		19,497

⁽²⁾ Certain nonvested shares are subject to a performance condition for vesting. The performance grant vests only if the performance condition is met. As of July 30, 2011, the Company has assessed the likelihood that the performance condition will be met and has recorded the related expense based on the estimated outcome.

In the second quarter of 2011, 731 thousand stock-settled SARs and 161 thousand nonvested share and share units vested as a result of the departure of the Company’s Chief Executive Officer. These vested shares resulted in $3.2 million of incremental pre-tax share-based compensation expense during the 13 weeks ended July 30, 2011.

The total fair value of share grants for the 26 weeks ended July 30, 2011 and July 31, 2010 is $9.6 million and $17.1 million, respectively. The total fair value of share grants for the 13 weeks ended July 30, 2011 and July 31, 2010 is $0.1 million and $0.1 million, respectively.

Total share-based compensation expense is summarized as follows:

	13 Weeks Ended				26 Weeks Ended
	July 30,		July 31,		July 30,		July 31,
(dollars in millions)	2011		2010		2011		2010
Cost of sales	$	1.3	$	1.0	$	2.2	$	2.2
Selling, general and administrative expenses		3.8		3.1		6.4		6.7
Share-based compensation expense before income taxes	$	5.1	$	4.1	$	8.6	$	8.9

15

Included in this amount is $1.3 million of expense that was recognized as a result of the grants made in 2011. No amount of share-based compensation was capitalized. As of July 30, 2011, the Company had unrecognized compensation expense related to nonvested awards of $15.2 million, which is expected to be recognized over a weighted average period of 0.9 years.

Note 9 — Income Taxes

The Company’s effective income tax benefit rate was 87.5% during the twenty-six weeks ended July 30, 2011, compared to a 15.4% provision rate during the twenty-six weeks ended July 31, 2010. The Company’s effective income tax benefit rate was 53.9% during the thirteen weeks ended July 30, 2011, compared to a 10.6% provision rate during the thirteen weeks ended July 31, 2010. The Company recorded $1.4 million of net favorable discrete events in the twenty-six weeks ended July 30, 2011 and $2.7 million of net favorable discrete events in the twenty-six weeks ended July 31, 2010. The Company’s effective tax rate differs from the U.S. statutory rate principally due to the impact of its operations conducted in jurisdictions with rates lower than the U.S. statutory rate and the on-going implementation of tax efficient business initiatives. In 2011, the Company expects to incur losses in comparatively high-tax jurisdictions and generate income in comparatively low-tax jurisdictions, resulting in a tax benefit rate in excess of the U.S. statutory rate.

The Company has unrecognized tax benefits, inclusive of related interest and penalties, of $38.3 million and $65.9 million as of July 30, 2011 and July 31, 2010, respectively. The portion of the unrecognized tax benefits that would impact the effective income tax rate if recognized are $24.7 million and $40.0 million, respectively.

The Company anticipates that it is reasonably possible that the total amount of unrecognized tax benefits at July 30, 2011 will decrease by up to $4.1 million within the next twelve months. To the extent these tax benefits are recognized, the effective rate would be favorably impacted in the period of recognition by up to $3.4 million. The potential reduction primarily relates to potential settlements of on-going examinations with tax authorities and the potential lapse of the statutes of limitations in relevant tax jurisdictions.

The Company’s U.S. federal income tax returns have been examined by the Internal Revenue Service through 2007. The Company’s income tax returns in Hong Kong are open for examination from 2002 through present. The Company has certain state and foreign income tax returns in the process of examination or administrative appeal.

Note 10 — Earnings Per Share

Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share include the effect of conversions of stock options and stock-settled SARs. For all years presented, the Company used the two-class method to calculate earnings per share. Earnings per share has been computed as follows:

	13 Weeks Ended					26 Weeks Ended
	July 30,			July 31,		July 30,			July 31,
(dollars in millions, except per share amounts; shares in thousands)	2011			2010		2011			2010
Net (loss) earnings attributable to Collective Brands, Inc.	$	(35.0	)	$	21.1	$	(8.6	)	$	75.3
Less: net earnings allocated to participating securities(1)		—			0.4		—			1.2
Net (loss) earnings available to common shareholders	$	(35.0	)	$	20.7	$	(8.6	)	$	74.1
Weighted average shares outstanding — basic		60,275			63,498		60,465			63,459
Net effect of dilutive stock options		—			118		—			257
Net effect of dilutive stock-settled SARs		—			567		—			686
Weighted average shares outstanding — diluted		60,275			64,183		60,465			64,402
Basic (loss) earnings per share attributable to common shareholders	$	(0.58	)	$	0.33	$	(0.14	)	$	1.17
Diluted (loss) earnings per share attributable to common shareholders	$	(0.58	)	$	0.32	$	(0.14	)	$	1.15

⁽¹⁾ Net earnings allocated to participating securities is calculated based upon a weighted average percentage of participating securities in relation to total shares outstanding.Net losses are not allocated to participating securities.

All of the Company’s stock options and stock-settled SARs outstanding were excluded from the calculation of diluted earnings per share for the thirteen and twenty-six weeks ended July 30, 2011 as their effects were antidilutive. The Company excluded approximately 4.4 million and 3.2 million stock options and stock-settled SARs from the calculation of diluted earnings per share for the thirteen and twenty-six weeks ended July 31, 2010 because to include them would have been antidilutive. Certain grants that are subject to performance conditions for vesting are considered antidilutive if the performance conditions are not met as of the end of the reporting period.

16

Note 11 — Segment Reporting

The Company has four reporting segments: (i) Payless Domestic, (ii) Payless International, (iii) PLG Wholesale and (iv) PLG Retail. The Company has defined its reporting segments as follows:

(i)	The Payless Domestic reporting segment is comprised primarily of domestic retail stores under the Payless ShoeSource name, the Company’s sourcing unit and Collective Licensing.
(ii)	The Payless International reporting segment is comprised of international retail stores under the Payless ShoeSource name in Canada, the South American Region, the Central American Region, Puerto Rico, and the U.S. Virgin Islands, as well as franchising arrangements under the Payless ShoeSource name.
(iii)	The PLG Wholesale reporting segment consists of PLG’s global wholesale operations.
(iv)	The PLG Retail reporting segment consists of PLG’s owned Stride Rite children’s stores, PLG’s outlet stores, store-in-stores at select Macy’s Department Stores and Sperry Top-Sider retail stores.

Payless International’s operations in the Central American and South American Regions are operated as joint ventures in which the Company maintains a 60% ownership interest. Noncontrolling interest represents the Company’s joint venture partners’ share of net earnings or losses on applicable international operations. Certain management costs for services performed by Payless Domestic and certain royalty fees and sourcing fees charged by Payless Domestic are allocated to the Payless International segment. These total costs and fees amounted to $10.1 million and $9.1 million during the thirteen weeks ended July 30, 2011 and July 31, 2010, respectively, and $18.9 million and $17.9 million during the twenty-six weeks ended July 30, 2011 and July 31, 2010, respectively. The reporting period for operations in the Central and South American Regions use a December 31 year-end. The effect of this one-month lag on the Company’s financial position and results of operations is not significant. All intercompany amounts have been eliminated. Information on the Company’s reporting segments is as follows:

	13 Weeks Ended						26 Weeks Ended
	July 30,			July 31,			July 30,			July 31,
(dollars in millions)	2011			2010			2011			2010
Reporting segment net sales:
Payless Domestic	$	494.5		$	508.0		$	992.9		$	1,054.6
Payless International		117.2			109.8			214.7			209.8
PLG Wholesale		217.7			174.7			430.2			348.1
PLG Retail		53.0			48.8			113.6			107.6
Total net sales	$	882.4		$	841.3		$	1,751.4		$	1,720.1
Reporting segment operating (loss) profit:
Payless Domestic	$	(63.8	)	$	6.8		$	(50.8	)	$	56.1
Payless International		8.6			11.6			11.6			18.7
PLG Wholesale		(0.3	)		22.9			25.0			46.2
PLG Retail		(6.9	)		(4.6	)		(5.8	)		(2.7	)
Total operating profit	$	(62.4	)	$	36.7		$	(20.0	)	$	118.3

	July 30,		July 31,		January 29,
(dollars in millions)	2011		2010		2011
Reporting segment total assets:
Payless Domestic	$	973.2	$	1,120.2	$	1,039.3
Payless International		218.7		215.5		258.4
PLG Wholesale		931.4		883.9		905.3
PLG Retail		75.0		76.2		65.5
Total assets	$	2,198.3	$	2,295.8	$	2,268.5

Note 12 — Commitments and Contingencies

There are no pending legal proceedings other than ordinary and routine litigation incidental to the business to which the Company is a party or of which its property is subject, none of which, individually or in aggregate, the Company expects to have a material impact on its financial position, results of operations and cash flows.

17

Note 13 — Impact of Recently Issued Accounting Standards

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The Company is currently evaluating ASU 2011-04 and has not yet determined the impact the adoption will have on the Company’s Condensed Consolidated Financial Statements.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”), which is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2011. The provisions of ASU 2011-05 require companies to display adjustments for items that are reclassified from other comprehensive income (“OCI”) to net income in both net income and OCI in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company does not believe ASU 2011-05 will have a significant impact on the Company’s Condensed Consolidated Financial Statements.

Note 14 — Related Party Transactions

The Company maintains banking relationships with certain financial institutions that are affiliated with some of the Company’s Latin America joint venture partners. Total deposits in these financial institutions as of July 30, 2011, July 31, 2010 and January 29, 2011 were $2.7 million, $5.1 million and $12.7 million, respectively. Total borrowings with these financial institutions as of July 31, 2010 were $1.2 million. There were no borrowings with these financial institutions as of July 30, 2011 and January 29, 2011.

Note 15 — Subsequent Events

During the third quarter of 2011, the Company announced that, as part of its efforts to optimize the performance of its Payless and Stride Rite store fleet, it would close approximately 475 under-performing and low-volume, non-strategic stores in the next three years with more than 300 of those closings coming by the end of this fiscal year. Approximately 270 of the stores slated to close this year are Payless and about 45 are Stride Rite Children’s locations. These actions will be taken to optimize the profitability of markets by removing many low sales volume stores which are cash flow negative or slightly positive but cannot support the assortments and staffing that the Company believes its stores should offer.

In accordance with Accounting Standards Codification (“ASC”) 420, “Exit or Disposal Cost Obligations,” costs associated with this plan, which consist of contract termination costs, employee termination costs, and other exit costs, will be recorded at fair value when they are incurred. The Company estimates that these costs could be in the range of $25 million to $35 million over the next three years, however, the ultimate financial impact of this plan is dependent upon the actual exit transactions. The lease termination costs will be recorded when the stores are closed or lease buyouts are negotiated with the landlords.

The Company also announced that it will adopt a short duration Rights Plan to protect shareholder rights. Under the Rights Plan, the Rights will become exercisable if a person or group acquires 15% or more of Collective Brands, Inc. outstanding common stock. The Record Date for the issuance of the Rights will be September 6, 2011 and the Rights will expire on August 15, 2012 unless earlier redeemed or terminated.

Note 16 — Subsidiary Guarantors of Senior Notes — Condensed Consolidating Financial Information

The Company has issued Notes guaranteed by all of its domestic subsidiaries (the “Guarantor Subsidiaries”). The Guarantor Subsidiaries are direct or indirect wholly owned domestic subsidiaries of the Company. The guarantees are full and unconditional and joint and several.

The following supplemental financial information sets forth, on a consolidating basis, the Condensed Consolidating Statements of (Loss) Earnings for the Company (the “Parent Company”), for the Guarantor Subsidiaries and for the Company’s Non-Guarantor Subsidiaries (the “Non-guarantor Subsidiaries”) and total Condensed Consolidated Collective Brands, Inc. and Subsidiaries for the thirteen week and twenty-six week periods ended July 30, 2011, and July 31, 2010, Condensed Consolidating Balance Sheets as of July 30, 2011, July 31, 2010, and January 29, 2011, and the Condensed Consolidating Statements of Cash Flows for the twenty-six week periods ended July 30, 2011, and July 31, 2010. With the exception of operations in the Central and South American Regions in which the Company has a 60% ownership interest, the Non-guarantor Subsidiaries are direct or indirect wholly-owned subsidiaries of the Guarantor Subsidiaries. The equity investment for each subsidiary is recorded by its parent within other assets.

The Non-guarantor Subsidiaries are made up of the Company’s operations in the Central and South American Regions, Canada, Mexico, Germany, the Netherlands, the United Kingdom, Ireland, Australia, Bermuda, Saipan and Puerto Rico and the Company’s sourcing organization in Hong Kong, Taiwan, China, Vietnam, Indonesia and Brazil. The operations in the Central and South American Regions use a December 31 year-end. Operations in the Central and South American Regions are included in the Company’s results on a one-month lag relative to results from other regions. The effect of this one-month lag on the Company’s financial position and results of operations is not significant.

18

Under the indenture governing the Notes, the Company’s subsidiaries in Singapore are designated as unrestricted subsidiaries. The effect of these subsidiaries on the Company’s financial position and results of operations and cash flows is not significant. The Company’s subsidiaries in Singapore are included in the Non-guarantor Subsidiaries.

19

CONDENSED CONSOLIDATING STATEMENTS OF (LOSS) EARNINGS
(dollars in millions)

	13 Weeks Ended July 30, 2011
	Parent			Guarantor			Non-guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	720.6		$	375.3		$	(213.5	)	$	882.4
Cost of sales		—			565.3			324.4			(215.8	)		673.9
Gross margin		—			155.3			50.9			2.3			208.5
Selling, general and administrative expenses		1.0			235.5			22.1			2.3			260.9
Impairment of goodwill		—			10.0			—			—			10.0
Operating (loss) profit		(1.0	)		(90.2	)		28.8			0.0			(62.4	)
Interest expense		12.8			6.1			0.2			(9.1	)		10.0
Interest income		—			(9.1	)		(0.1	)		9.1			(0.1	)
Equity in earnings of subsidiaries		23.6			(17.7	)		—			(5.9	)		—
(Loss) earnings before income taxes		(37.4	)		(69.5	)		28.7			5.9			(72.3	)
(Benefit) provision for income taxes		(2.4	)		(45.9	)		9.3			—			(39.0	)
Net (loss) earnings		(35.0	)		(23.6	)		19.4			5.9			(33.3	)
Net earnings attributable to noncontrolling interests		—			—			(1.7	)		—			(1.7	)
Net (loss) earnings attributable to Collective Brands, Inc.	$	(35.0	)	$	(23.6	)	$	17.7		$	5.9		$	(35.0	)

	26 Weeks Ended July 30, 2011
	Parent			Guarantor			Non-guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	1,493.2		$	763.9		$	(505.7	)	$	1,751.4
Cost of sales		—			1,088.0			627.2			(482.2	)		1,233.0
Gross margin		—			405.2			136.7			(23.5	)		518.4
Selling, general and administrative expenses		2.0			462.8			87.1			(23.5	)		528.4
Impairment of goodwill		—			10.0			—			—			10.0
Operating (loss) profit		(2.0	)		(67.6	)		49.6			—			(20.0	)
Interest expense		25.6			13.2			0.2			(18.1	)		20.9
Interest income		—			(18.2	)		(0.1	)		18.1			(0.2	)
Equity in earnings of subsidiaries		(11.7	)		(33.8	)		—			45.5			—
(Loss) earnings before income taxes		(15.9	)		(28.8	)		49.5			(45.5	)		(40.7	)
(Benefit) provision for income taxes		(7.3	)		(40.5	)		12.2			—			(35.6	)
Net (loss) earnings		(8.6	)		11.7			37.3			(45.5	)		(5.1	)
Net earnings attributable to noncontrolling interests		—			—			(3.5	)		—			(3.5	)
Net (loss) earnings attributable to Collective Brands, Inc.	$	(8.6	)	$	11.7		$	33.8		$	(45.5	)	$	(8.6	)

20

	13 Weeks Ended July 31, 2010
	Parent			Guarantor			Non-guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	730.1		$	367.2		$	(256.0	)	$	841.3
Cost of sales		—			508.9			276.4			(233.1	)		552.2
Gross margin		—			221.2			90.8			(22.9	)		289.1
Selling, general and administrative expenses		0.9			214.0			60.4			(22.9	)		252.4
Operating (loss) profit		(0.9	)		7.2			30.4			—			36.7
Interest expense		12.8			8.3			0.1			(9.0	)		12.2
Interest income		—			(9.0	)		(0.1	)		9.0			(0.1	)
Equity in earnings of subsidiaries		(30.0	)		(25.0	)		—			55.0			—
Earnings before income taxes		16.3			32.9			30.4			(55.0	)		24.6
(Benefit) provision for income taxes		(4.8	)		2.9			4.5			—			2.6
Net earnings		21.1			30.0			25.9			(55.0	)		22.0
Net earnings attributable to noncontrolling interests		—			—			(0.9	)		—			(0.9	)
Net earnings attributable to Collective Brands, Inc.	$	21.1		$	30.0		$	25.0		$	(55.0	)	$	21.1

	26 Weeks Ended July 31, 2010
	Parent			Guarantor			Non-guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	1,508.0		$	730.3		$	(518.2	)	$	1,720.1
Cost of sales		—			1,010.7			557.6			(474.0	)		1,094.3
Gross margin		—			497.3			172.7			(44.2	)		625.8
Selling, general and administrative expenses		1.8			431.9			118.0			(44.2	)		507.5
Operating (loss) profit		(1.8	)		65.4			54.7			—			118.3
Interest expense		19.8			17.9			0.1			(12.2	)		25.6
Interest income		—			(12.4	)		(0.1	)		12.2			(0.3	)
Loss on early extinguishment of debt		—			0.8			—			—			0.8
Equity in earnings of subsidiaries		(89.3	)		(47.7	)		—			137.0			—
Earnings before income taxes		67.7			106.8			54.7			(137.0	)		92.2
(Benefit) provision for income taxes		(7.6	)		17.5			4.3			—			14.2
Net earnings		75.3			89.3			50.4			(137.0	)		78.0
Net earnings attributable to noncontrolling interests		—			—			(2.7	)		—			(2.7	)
Net earnings attributable to Collective Brands, Inc.	$	75.3		$	89.3		$	47.7		$	(137.0	)	$	75.3

21

CONDENSED CONSOLIDATING BALANCE SHEET
(dollars in millions)

	As of July 30, 2011
	Parent		Guarantor			Non-guarantor
	Company		Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	—	$	70.3		$	164.5		$	—		$	234.8
Accounts receivable, net		—		159.3			31.6			(19.1	)		171.8
Inventories		—		457.7			132.1			(4.8	)		585.0
Current deferred income taxes		—		22.1			14.4			—			36.5
Prepaid expenses		35.6		14.4			9.8			—			59.8
Other current assets		—		355.2			147.7			(482.6	)		20.3
Total current assets		35.6		1,079.0			500.1			(506.5	)		1,108.2
Property and Equipment:
Land		—		6.0			—			—			6.0
Property, buildings and equipment		—		1,219.1			218.2			—			1,437.3
Accumulated depreciation and amortization		—		(912.2	)		(147.7	)		—			(1,059.9	)
Property and equipment, net		—		312.9			70.5			—			383.4
Intangible assets, net		—		363.4			27.3			—			390.7
Goodwill		—		133.5			136.3			—			269.8
Deferred income taxes		—		—			6.8			—			6.8
Other assets		1,558.7		971.1			21.2			(2,511.6	)		39.4
Total Assets	$	1,594.3	$	2,859.9		$	762.2		$	(3,018.1	)	$	2,198.3
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of long-term debt	$	—	$	5.1		$	—		$	—		$	5.1
Other current liabilities		137.5		591.5			241.9			(506.5	)		464.4
Total current liabilities		137.5		596.6			241.9			(506.5	)		469.5
Long-term debt		637.1		501.7			36.4			(518.2	)		657.0
Deferred income taxes		—		37.0			3.6			—			40.6
Other liabilities		3.2		166.9			16.0			—			186.1
Commitments and contingencies
Equity:
Collective Brands, Inc. shareowners’ equity		816.5		1,557.7			435.7			(1,993.4	)		816.5
Noncontrolling interests		—		—			28.6			—			28.6
Total equity		816.5		1,557.7			464.3			(1,993.4	)		845.1
Total Liabilities and Equity	$	1,594.3	$	2,859.9		$	762.2		$	(3,018.1	)	$	2,198.3

22

CONDENSED CONSOLIDATING BALANCE SHEET
(dollars in millions)

	As of July 31, 2010
	Parent		Guarantor			Non-guarantor
	Company		Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	—	$	161.7		$	172.2		$	—		$	333.9
Accounts receivable, net		—		122.9			21.0			(10.8	)		133.1
Inventories		—		404.0			102.9			(9.4	)		497.5
Current deferred income taxes		—		30.0			7.6			—			37.6
Prepaid expenses		18.5		28.9			11.9			—			59.3
Other current assets		—		281.4			190.3			(451.7	)		20.0
Total current assets		18.5		1,028.9			505.9			(471.9	)		1,081.4
Property and Equipment:
Land		—		6.9			—			—			6.9
Property, buildings and equipment		—		1,234.2			204.4			—			1,438.6
Accumulated depreciation and amortization		—		(864.6	)		(133.2	)		—			(997.8	)
Property and equipment, net		—		376.5			71.2			—			447.7
Intangible assets, net		—		406.0			31.0			—			437.0
Goodwill		—		142.9			136.9			—			279.8
Deferred income taxes		—		—			7.1			—			7.1
Other assets		1,468.7		958.5			2.8			(2,387.2	)		42.8
Total Assets	$	1,487.2	$	2,912.8		$	754.9		$	(2,859.1	)	$	2,295.8
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of long-term debt	$	—	$	6.1		$	1.2		$	—		$	7.3
Other current liabilities		29.9		589.2			242.2			(467.0	)		394.3
Total current liabilities		29.9		595.3			243.4			(467.0	)		401.6
Long-term debt		636.8		586.0			87.0			(548.8	)		761.0
Deferred income taxes		—		64.1			1.7			—			65.8
Other liabilities		3.1		203.7			16.1			(0.5	)		222.4
Commitments and contingencies
Equity:
Collective Brands, Inc. shareowners’ equity		817.4		1,463.7			379.1			(1,842.8	)		817.4
Noncontrolling interests		—		—			27.6			—			27.6
Total equity		817.4		1,463.7			406.7			(1,842.8	)		845.0
Total Liabilities and Equity	$	1,487.2	$	2,912.8		$	754.9		$	(2,859.1	)	$	2,295.8

23

CONDENSED CONSOLIDATING BALANCE SHEET
(dollars in millions)

	As of January 29, 2011
	Parent		Guarantor			Non-guarantor
	Company		Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	—	$	122.4		$	201.7		$	—		$	324.1
Accounts receivable, net		—		103.4			21.2			(10.2	)		114.4
Inventories		—		418.5			122.5			(9.3	)		531.7
Current deferred income taxes		—		23.1			7.6			—			30.7
Prepaid expenses		28.4		15.8			10.9			—			55.1
Other current assets		—		276.9			150.9			(405.6	)		22.2
Total current assets		28.4		960.1			514.8			(425.1	)		1,078.2
Property and Equipment:
Land		—		6.7			—			—			6.7
Property, buildings and equipment		—		1,233.1			211.5			—			1,444.6
Accumulated depreciation and amortization		—		(878.5	)		(140.5	)		—			(1,019.0	)
Property and equipment, net		—		361.3			71.0			—			432.3
Intangible assets, net		—		399.4			29.0			—			428.4
Goodwill		—		142.9			136.9			—			279.8
Deferred income taxes		—		—			10.1			—			10.1
Other assets		1,538.6		916.4			22.1			(2,437.4	)		39.7
Total Assets	$	1,567.0	$	2,780.1		$	783.9		$	(2,862.5	)	$	2,268.5
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of long-term debt	$	—	$	5.1		$	—		$	—		$	5.1
Other current liabilities		103.8		516.4			270.0			(418.4	)		471.8
Total current liabilities		103.8		521.5			270.0			(418.4	)		476.9
Long-term debt		637.0		484.3			67.1			(529.0	)		659.4
Deferred income taxes		—		64.0			1.4			—			65.4
Other liabilities		3.3		191.9			17.2			—			212.4
Commitments and contingencies
Equity:
Collective Brands, Inc. shareowners’ equity		822.9		1,518.4			396.7			(1,915.1	)		822.9
Noncontrolling interests		—		—			31.5			—			31.5
Total equity		822.9		1,518.4			428.2			(1,915.1	)		854.4
Total Liabilities and Equity	$	1,567.0	$	2,780.1		$	783.9		$	(2,862.5	)	$	2,268.5

24

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(dollars in millions)

	26 Weeks Ended July 30, 2011
	Parent			Guarantor			Non-guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Operating Activities:
Net (loss) earnings	$	(8.6	)	$	11.7		$	37.3		$	(45.5	)	$	(5.1	)
Adjustments for non-cash items included in net earnings		0.2			110.1			13.2			—			123.5
Changes in working capital		26.5			(97.1	)		(41.0	)		(6.7	)		(118.3	)
Other, net		(1.7	)		(41.3	)		(32.1	)		52.2			(22.9	)
Cash flow provided by (used in) operating activities		16.4			(16.6	)		(22.6	)		—			(22.8	)
Investing Activities:
Capital expenditures		—			(32.9	)		(9.4	)		—			(42.3	)
Cash flow used in investing activities		—			(32.9	)		(9.4	)		—			(42.3	)
Financing Activities:
Net proceeds (repayments) of debt		—			(2.6	)		—			—			(2.6	)
Net purchases of common stock		(16.4	)		—			—			—			(16.4	)
Net distributions to noncontrolling interests		—			—			(7.0	)		—			(7.0	)
Cash flow used in financing activities		(16.4	)		(2.6	)		(7.0	)		—			(26.0	)
Effect of exchange rate changes on cash		—			—			1.8			—			1.8
(Decrease) increase in cash and cash equivalents		—			(52.1	)		(37.2	)		—			(89.3	)
Cash and cash equivalents, beginning of year		—			122.4			201.7			—			324.1
Cash and cash equivalents, end of quarter	$	—		$	70.3		$	164.5		$	—		$	234.8

	26 Weeks Ended July 31, 2010
	Parent			Guarantor			Non-guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Operating Activities:
Net earnings	$	75.3		$	89.3		$	50.4		$	(137.0	)	$	78.0
Adjustments for non-cash items included in net earnings		0.2			75.1			9.6			—			84.9
Changes in working capital		8.5			(109.4	)		18.2			0.1			(82.6	)
Other, net		(78.0	)		(53.5	)		(8.2	)		136.9			(2.8	)
Cash flow provided by operating activities		6.0			1.5			70.0			—			77.5
Investing Activities:
Capital expenditures		—			(38.3	)		(8.5	)		—			(46.8	)
Cash flow used in investing activities		—			(38.3	)		(8.5	)		—			(46.8	)
Financing Activities:
Net repayment of debt or notes payable		—			(81.3	)		—			—			(81.3	)
Net purchases of common stock		(6.0	)		—			—			—			(6.0	)
Net distributions to noncontrolling interests		—			—			(4.5	)		—			(4.5	)
Cash flow used in financing activities		(6.0	)		(81.3	)		(4.5	)		—			(91.8	)
Effect of exchange rate changes on cash		—			—			1.5			—			1.5
(Decrease) increase in cash and cash equivalents		—			(118.1	)		58.5			—			(59.6	)
Cash and cash equivalents, beginning of year		—			279.8			113.7			—			393.5
Cash and cash equivalents, end of quarter	$	—		$	161.7		$	172.2		$	—		$	333.9

25

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This report contains forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, products, future store openings and closings, international expansion opportunities, possible strategic initiatives, new business concepts, capital expenditure plans, fashion trends, consumer spending patterns and similar matters. Statements including the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” or variations of such words and similar expressions are forward-looking statements. We note that a variety of factors could cause actual results and experience to differ materially from the anticipated results or expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of our business include, but are not limited to, the following: litigation including intellectual property and employment matters; the inability to renew material leases, licenses or contracts upon their expiration on acceptable terms; changes in consumer spending patterns; changes in consumer preferences and overall economic conditions; the impact of increasing competitive pressure from mass market discount and off-price retailers; changes in weather patterns; the financial condition of the suppliers and manufacturers; changes in existing or potential duties, tariffs or quotas and the application thereof; changes in relationships between the United States and foreign countries, changes in relationships between Canada and foreign countries; economic and political instability in foreign countries, or restrictive actions by the governments of foreign countries in which suppliers and manufacturers from whom we source are located or in which we operate stores or otherwise do business; changes in trade, intellectual property, customs and/or tax laws; fluctuations in currency exchange rates; availability of suitable store locations on acceptable terms; the ability to terminate leases on acceptable terms; customers will not be retained or that disruptions from acquisitions will harm relationships with customers, employees and suppliers; costs and other expenditures in excess of those projected for environmental investigation and remediation or other legal proceedings; the ability to hire and retain associates; performance of other parties in strategic alliances; general economic, business and social conditions in the countries from which we source products, supplies or have or intend to open stores; performance of partners in joint ventures or franchised operations; the ability to comply with local laws in foreign countries; threats or acts of terrorism or war; strikes, work stoppages and/or slowdowns by unions that play a significant role in the manufacture, distribution or sale of product; congestion at major ocean ports; changes in commodity prices such as oil; and changes in the value of the dollar relative to the Chinese Yuan and other currencies. For more complete discussion of these and other risks that could impact our forward-looking statements, please refer to our 2010 Annual Report on Form 10-K for the fiscal year ended January 29, 2011, including the discussion contained under “Risk Factors.” We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Collective Brands, Inc., our operations and our present business environment. MD&A is provided as a supplement to, and should be read in connection with, our Condensed Consolidated Financial Statements and the accompanying notes thereto included under Part I Item 1 of this report. MD&A should also be read in conjunction with our Consolidated Financial Statements as of January 29, 2011, and for the year then ended, and the related MD&A, both of which are contained on our Form 10-K for the year ended January 29, 2011. MD&A includes the following sections:

• Our Business — a brief description of our business and key 2011 events.

• Consolidated Review of Operations — an analysis of our consolidated results of operations for the 13 and 26 weeks ended July 30, 2011 and July 31, 2010 as presented in our Condensed Consolidated Financial Statements.

• Reporting Segment Review of Operations — an analysis of our results of operations for the 13 and 26 weeks ended July 30, 2011 and July 31, 2010 as presented in our Condensed Consolidated Financial Statements for our four reporting segments: Payless Domestic, Payless International, PLG Wholesale and PLG Retail.

• Liquidity and Capital Resources — an analysis of cash flows, aggregate financial commitments and certain financial condition ratios.

• Critical Accounting Policies — an update, since January 29, 2011, of our discussion of our critical accounting policies that involve a higher degree of judgment or complexity. This section also includes the impact of new accounting standards.

26

Our Business

Collective Brands, Inc. consists of three lines of business: Payless ShoeSource (“Payless”), Collective Brands Performance + Lifestyle Group (“PLG”), and Collective Licensing. We operate a hybrid business model that includes retail, wholesale, licensing and franchising businesses. Payless is one of the largest footwear retailers in the Western Hemisphere and is dedicated to democratizing fashion and design in footwear and accessories and inspiring fun, fashion possibilities for the family at a great value. PLG markets products at wholesale and retail for children and adults under brand names that include Saucony^®, Sperry Top-Sider^®, Stride Rite^® and Keds^®. Collective Licensing is a youth lifestyle marketing and global licensing business within the Payless Domestic segment.

We measure the performance of our business using several metrics, but rely primarily on net sales, same-stores sales, operating profit (loss) from continuing operations, adjusted earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”), net debt and free cash flow (see “Non-GAAP Financial Measures” section). We also measure the performance of our business using our reporting segments’ net sales and operating (loss) profit (see “Reporting Segment Review of Operations” section).

Key 2011 Events

During the first six months of 2011, weak retail sales in North America drove down our overall results. Sales in our Payless Domestic segment decreased $61.7 million from the first six months of 2010. At the same time, we had continued strong sales in our PLG Wholesale segment and in Payless Latin America.

Our profitability in the first six months of 2011 was also unfavorably impacted by $83.6 million of pre-tax tangible asset impairment charges, intangible asset impairments, CEO severance and goodwill impairments (“adjustments”).

In the second quarter of 2011, due to a decline in our retail businesses, we recorded non-cash tangible asset impairment charges of $34.1 million, an increase of $32.5 million over the same period last year.

Also in the second quarter of 2011, as a result of the decline in performance of our domestic retail businesses and in connection with the preparation of the financial statements, we revised our financial projections related to certain tradenames and reporting units. These revisions indicated a potential impairment of our goodwill and intangible assets and, as such, we assessed the fair value of these items to determine if their book value exceeded their fair value. As a result of this assessment, we determined that the book value of certain indefinite-lived tradenames and goodwill exceeded their fair value and we recognized $31.1 million of pre-tax impairment charges for our indefinite-lived tradenames and $10.0 million of pre-tax impairment charges for goodwill.

In the second quarter of 2011, we recorded severance charges of $10.0 million related to the departure of our Chief Executive Officer. These charges related to a one-time cash payment of $6.8 million and the acceleration of share-based compensation expense related to outstanding awards of $3.2 million.

Total pre-tax charges related to the items described above are summarized by reporting segment in the following table:

	Payless		Payless		PLG		PLG
(in millions)	Domestic		International		Retail		Wholesale		Total
Impairment of tangible assets – increase from Q2 2010	$	26.2	$	2.5	$	3.1	$	0.7	$	32.5
Impairment of tradenames		7.6		—		—		23.5		31.1
CEO severance		10.0		—		—		—		10.0
Impairment of goodwill		10.0		—		—		—		10.0
Total	$	53.8	$	2.5	$	3.1	$	24.2	$	83.6

The CEO severance is recorded within selling, general and administrative expenses on the consolidated statement of (loss) earnings. Tangible asset impairment charges and the impairment of tradenames are recorded within cost of sales on the consolidated statement of (loss) earnings. Impairment of goodwill is recorded as a separate line item on the consolidated statement of (loss) earnings.

Footwear product costs were higher in the first half of 2011 on like—products, which also negatively impacted our financial performance. For the second quarter of 2011, we had a 13% increase in like-product costs primarily due to higher commodity, labor, and transportation costs that impacted all of our reporting segments. Going forward, we expect like-product cost increases in the third quarter will be similar to the second quarter increase and moderate in the fourth quarter.

27

In response to the decline in performance of certain retail businesses, we announced that, as part of our efforts to optimize the performance of our Payless and Stride Rite store fleet, we would close approximately 475 under-performing and low-volume, non-strategic stores in the next three years with more than 300 of those closings coming by the end of this fiscal year. Approximately 270 of the stores slated to close this year are Payless and about 45 are Stride Rite Children’s locations. These actions will be taken to optimize the profitability of markets by removing many low sales volume stores which are cash flow negative or slightly positive but cannot support the assortments and staffing that we believe our stores should offer.

Costs associated with this plan, which consist of contract termination costs, employee termination costs, and other exit costs, will be recorded at fair value when they are incurred. As of July 30, 2011, we had not yet incurred any of these costs and, as such, there were no exit costs recorded in the second quarter of 2011. We estimate that these costs could be in the range of $25 million to $35 million over the next three years, however, the ultimate financial impact of this plan is dependent upon the actual exit transactions incurred.

In fiscal 2010, stores to be closed this year had sales of approximately $110 million. Non-cash asset impairment charges of $19 million in the second quarter were related to these stores to be closed. Once these stores are closed, we anticipate an annual improvement in operating profit of between $18 million and $22 million including the benefit of estimated sales transfer to remaining locations from closed stores.

In the third quarter of 2011, we announced that our Board of Directors, together with management, will conduct a review of strategic and financial alternatives to further enhance shareholder value. Working with its advisors, the Board and management will explore a full range of alternatives for Collective Brands. The Board stressed that there can be no assurance that this review will result in any additional action, and we will not make any comments until the Board completes its review and has decided upon a specific course of action.

We also announced that we will adopt a short duration Rights Plan to protect shareholder rights. Under the Rights Plan, the Rights will become exercisable if a person or group acquires 15% or more of Collective Brands, Inc. outstanding common stock. The Record Date for the issuance of the Rights will be September 6, 2011 and the Rights will expire on August 15, 2012 unless earlier redeemed or terminated.

Consolidated Review of Operations

The following table presents the components of costs and expenses, as a percent of net sales, for the second quarter and first six months ended July 30, 2011 (“2011”) and July 31, 2010 (“2010”):

	Second Quarter						First Six Months
	2011			2010			2011			2010
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		76.4			65.6			70.4			63.6
Gross margin		23.6			34.4			29.6			36.4
Selling, general and administrative expense		29.6			30.0			30.2			29.5
Impairment of goodwill		1.1			—			0.6			—
Operating (loss) profit		(7.1	)		4.4			(1.2	)		6.9
Interest expense, net		1.1			1.5			1.2			1.4
Loss on early extinguishment of debt		—			—			—			0.1
Net (loss) earnings before income taxes		(8.2	)		2.9			(2.4	)		5.4
Effective income tax rate*		53.9			10.6			87.5			15.4
Net (loss) earnings		(3.8	)		2.6			(0.3	)		4.5
Net earnings attributable to noncontrolling interests		(0.2	)		(0.1	)		(0.2	)		(0.2	)
Net (loss) earnings attributable to Collective Brands, Inc.		(4.0)	%		2.5	%		(0.5)	%		4.3	%

* Percent of pre-tax earnings

Net (Loss) Earnings Attributable to Collective Brands, Inc.

Second quarter 2011 net loss attributable to Collective Brands, Inc. was $(35.0) million, or $(0.58) per diluted share, versus second quarter 2010 net earnings attributable to Collective Brands, Inc. totaling $21.1 million, or $0.32 per diluted share. The decrease in net earnings attributable to Collective Brands, Inc. was driven by decreased gross margins due to intangible and tangible asset impairment charges, higher product costs and increased promotional activity, as well as increased selling, general and administrative expenses due to CEO severance offset by lower compensation-related expenses.

The net loss attributable to Collective Brands, Inc. for the first six months of 2011 was $(8.6) million, or $(0.14) per diluted share versus earnings attributable to Collective Brands, Inc. for the first six months of 2010 of $75.3 million, or $1.15 per diluted share. The decrease in net earnings attributable to Collective Brands, Inc. was driven by decreased gross margins primarily due to intangible and tangible asset impairment charges, higher product costs and increased promotional activity, as well as increased selling, general and administrative expenses due to CEO severance, offset by lower compensation related charges.

Net Sales

Other than total net sales, the table below summarizes net sales information for our retail stores. Stores operated under franchise agreements are excluded from these calculations. Same-store sales are calculated on a weekly basis and exclude liquidation sales. If a store is open the entire week in each of the two years being compared, its sales are included in the same-store sales calculation for the week. Our Payless and Stride Rite children’s e-commerce businesses are considered stores in this calculation.

Percent increases (decreases) are as follows:

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	Second Quarter						First Six Months
	2011			2010			2011			2010
Total net sales		4.9	%		0.6	%		1.8	%		1.2	%
Same-store sales		(0.7	)		(5.0	)		(4.1	)		(3.1	)
Average selling price per unit		(1.8	)		(2.4	)		0.8			(1.9	)
Unit volume		0.3			(2.7	)		(5.1	)		(1.6	)
Footwear average selling price per unit		3.2			(2.5	)		5.5			(1.2	)
Footwear unit volume		(5.7	)		(3.6	)		(10.0	)		(3.7	)
Non-footwear average selling price per unit		(11.8	)		6.3			(8.2	)		5.8
Non-footwear unit volume		27.0			1.2			12.2			6.5

Please refer to “Reporting Segment Review of Operations” below for the further details on the changes in net sales for each of our reporting units.

Cost of Sales

Cost of sales was $673.9 million in the second quarter of 2011, up 22.0% from $552.2 million in the second quarter of 2010. The increase in cost of sales from the second quarter 2010 to 2011 is due to the impact of incremental tangible asset impairment charges of $32.5 million and the impairment of tradenames totaling $31.1 million. The increase was also driven by higher product costs in the second quarter of 2011 compared to the second quarter of 2010 and the impact of higher net sales.

Cost of sales was $1,233.0 million in the first six months of 2011, up 12.7% from $1,094.3 million in the first six months of 2010. The increase in cost of sales from 2010 to 2011 is primarily due to the impact of tangible and intangible asset impairment charges, higher product costs and a greater mix of wholesale products, which have a higher cost of sales than our retail products.

Gross Margin

Gross margin rate for the second quarter of 2011 was 23.6%, compared to a gross margin rate of 34.4% in the second quarter of 2010. The decrease in gross margin rate from the second quarter 2010 to 2011 is due to the impact of tangible asset impairment charge increases from the second quarter of 2010 (3.9%) and the impairment of tradenames (3.7%). Higher product costs and more Payless promotional activity in the second quarter of 2011 compared to the second quarter of 2010 also drove the gross margin decline.

Gross margin rate for the first six months of 2011 was 29.6%, compared to a gross margin rate of 36.4% in the first six months of 2010. The gross margin rate decreased principally due to the impact of intangible and tangible asset impairment charges, higher product costs and increased promotional activity.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were $260.9 million in the second quarter of 2011, an increase of 3.4% from $252.4 million in the second quarter of 2010. As a percentage of net sales, SG&A expenses were 29.6% of net sales in the second quarter of 2011 versus 30.0% in the second quarter of 2010. The increase in SG&A expenses for the second quarter of 2011 compared to 2010 is primarily due to the impact of the 2011 CEO severance totaling $10.0 million and continued marketing and sales investments in the PLG Wholesale reporting segment, offset by the impact of lower compensation-related expenses.

SG&A expenses were $528.4 million in the first six months of 2011, an increase of 4.1% from $507.5 million in the first six months of 2010. As a percentage of net sales, SG&A expenses were 30.2% of net sales in the first six months of 2011 versus 29.5% in the first six months of 2010. The increase in SG&A expenses for the first six months of 2011 compared to the first six months 2010 is primarily due to the impact of the 2011 CEO severance totaling $10.0 million and continued marketing and sales investments in the PLG Wholesale reporting segment, offset by the impact of lower compensation-related expenses.

Impairment of Goodwill

We assess goodwill for impairment annually and at any other date when events or changes in circumstances indicate that the book value of these assets may exceed their fair value. This assessment is performed at a reporting unit level. A reporting unit is a component of a segment that constitutes a business, for which discrete financial information is available, and for which the operating results are regularly reviewed by management. We develop an estimate of the fair value of each reporting unit using both a market approach and an income approach. If potential for impairment exists, the fair value of the reporting unit is subsequently measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting unit’s goodwill.

A change in events or circumstances, including a decision to hold an asset or group of assets for sale, a change in strategic direction, or a change in the competitive environment could adversely affect the fair value of one or more reporting units. In the second quarter

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of 2011, due to underperformance in our domestic retail businesses, we revised our financial projections related to certain reporting units. These circumstances indicated a potential impairment of our goodwill and, as such, we assessed the fair value of our goodwill to determine if its book value exceeded its fair value. We determined that the book value of our goodwill did exceed its fair value and we recorded an impairment charge of $10.0 million within the Payless Domestic reporting segment.

Interest Expense (Income)

Interest income and expense components were:

	Second Quarter						First Six Months
(dollars in millions)	2011			2010			2011			2010
Interest expense	$	10.0		$	12.2		$	20.9		$	25.6
Interest income		(0.1	)		(0.1	)		(0.2	)		(0.3	)
Interest expense, net	$	9.9		$	12.1		$	20.7		$	25.3

The decline in interest expense in the second quarter and first six months of 2011 from the second quarter and first six months of 2010 is primarily a result of less outstanding debt. The decline in interest income in the first six months of 2011 from the first six months of 2010 is primarily a result of a lower invested cash balance.

Loss on Early Extinguishment of Debt

The loss on early extinguishment of debt relates to the acceleration of deferred debt costs on our Term Loan Facility in proportion to the $78.0 million extinguished in the first six months of 2010.

Income Taxes

Our effective income tax rate benefit was 87.5% during the first six months of 2011 as compared to a 15.4% provision rate in the first six months of 2010. We recorded $1.4 million of net favorable discrete events in the first six months of 2011 and $2.7 million of net favorable discrete events in the first six months of 2010. Our effective tax rate differs from the U.S. statutory rate principally due to the impact of our operations conducted in jurisdictions with rates lower than the U.S. statutory rate and the on-going implementation of tax efficient business initiatives. In 2011, we expect to incur losses in comparatively high-tax jurisdictions and generate income in comparatively low-tax jurisdictions, resulting in a tax benefit rate in excess of the U.S. statutory rate.

We have unrecognized tax benefits, inclusive of related interest and penalties, of $38.3 million and $65.9 million as of July 30, 2011 and July 31, 2010, respectively. The portion of the unrecognized tax benefits that would impact the effective income tax rate if recognized are $24.7 million and $40.0 million, respectively.

We anticipate that it is reasonably possible that the total amount of unrecognized tax benefits at July 30, 2011 will decrease by up to $4.1 million within the next twelve months. To the extent these tax benefits are recognized, the effective rate would be favorably impacted in the period of recognition by up to $3.4 million. The potential reduction primarily relates to potential settlements of on-going examinations with tax authorities and the potential lapse of the statutes of limitations in relevant tax jurisdictions.

Our Condensed Consolidated Balance Sheet as of July 30, 2011 includes deferred tax assets, net of related valuation allowances, of approximately $172.5 million. In assessing the future realization of these assets, we concluded it is more likely than not the assets will be realized. This conclusion was based in large part upon management’s belief that we will generate sufficient quantities of taxable income from operations in future years in the appropriate tax jurisdictions. If our near-term forecasts are not achieved, we may be required to record additional valuation allowances against our deferred tax assets. This could have a material impact on our financial position and results of operations in a particular period.

Net Earnings Attributable to Noncontrolling Interests

Net earnings attributable to noncontrolling interests represent our joint venture partners’ share of net earnings or losses on applicable international operations.

Non-GAAP Financial Measures

The Company uses certain non-GAAP financial measures to assess performance. These measures are included as a complement to results provided in accordance with GAAP because we believe these non-GAAP financial measures help us explain underlying performance trends in our business and provide useful information to both management and investors. These measures should be

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considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results.

We use adjusted earnings before interest, income taxes, depreciation and amortization (“adjusted EBITDA”) as a non-GAAP performance measure because we believe it reflects the Company’s core operating performance by excluding certain charges and the impact of the effect of financing and investing activities by eliminating the effects of interest, depreciation and amortization costs. The following table presents the reconciliation of net earnings to non-GAAP adjusted EBITDA:

	Second Quarter					First Six Months
(dollars in millions)	2011			2010		2011			2010
Net (loss) earnings	$	(33.3	)	$	22.0	$	(5.1	)	$	78.0
(Benefit) provision for income taxes		(39.0	)		2.6		(35.6	)		14.2
Net interest expense (including loss on early extinguishment of debt)		9.9			12.1		20.7			26.1
Depreciation and amortization		32.5			34.2		65.1			67.8
Tangible asset impairment charge increase from 2010		32.5			—		33.8			—
Impairment of tradenames		31.1			—		31.1			—
CEO severance		10.0			—		10.0			—
Impairment of goodwill		10.0			—		10.0			—
Adjusted EBITDA	$	53.7		$	70.9	$	130.0		$	186.1

The decrease in adjusted EBITDA in the second quarter and first six months of 2011 compared to the second quarter of 2010 is primarily driven by lower gross margins and an increase in selling, general and administrative expenses.

We also use free cash flow, defined as cash flow provided by operating activities less capital expenditures, as a non-GAAP performance measure because we believe it provides useful information about our liquidity, our ability to make investments and to service debt. The following table presents our calculation of free cash flow:

	Second Quarter						First Six Months
(dollars in millions)	2011			2010			2011			2010
Cash flow provided by (used in) operating activities	$	18.5		$	24.3		$	(22.8	)	$	77.5
Less: Capital expenditures		31.5			27.0			42.3			46.8
Free cash flow	$	(13.0	)	$	(2.7	)	$	(65.1	)	$	30.7

The decrease in free cash flow for the second quarter is primarily related to a decrease in cash flow provided by operating activities in the second quarter of 2011. The decrease in free cash flow for the first six months of 2011 is primarily related to a decrease in cash flow provided by operating activities as a result of decreases in net earnings.

Finally, we use net debt, defined as total debt less cash and cash equivalents, as a non-GAAP performance measure as we believe it provides useful information about the relationship between our long-term debt obligations and our cash and cash equivalents balance at a point in time. The following table presents our calculation of net debt:

	Second Quarter
(dollars in millions)	2011		2010
Total debt	$	662.1	$	768.3
Less: cash and cash equivalents		234.8		333.9
Net debt	$	427.3	$	434.4

Net debt decreased in the second quarter of 2011 compared to the second quarter of 2010 primarily due to the decrease in total debt as a result of debt repayments in 2010, offset by decreases in cash and cash equivalents.

Reporting Segment Review of Operations

We operate our business using four reporting segments: Payless Domestic, Payless International, PLG Wholesale and PLG Retail. We evaluate the performance of our reporting segments based on segment net sales and segment operating profit. The following table reconciles reporting segment net sales to consolidated net sales and reporting segment operating profit to our consolidated operating profit for the second quarter and first six months ended July 30, 2011 and July 31, 2010:

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	Second Quarter						First Six Months
	July 30,			July 31,			July 30,			July 31,
(dollars in millions)	2011			2010			2011			2010
Reporting segment net sales:
Payless Domestic	$	494.5		$	508.0		$	992.9		$	1,054.6
Payless International		117.2			109.8			214.7			209.8
PLG Wholesale		217.7			174.7			430.2			348.1
PLG Retail		53.0			48.8			113.6			107.6
Total net sales	$	882.4		$	841.3		$	1,751.4		$	1,720.1
Reporting segment operating profit (loss):
Payless Domestic	$	(63.8	)	$	6.8		$	(50.8	)	$	56.1
Payless International		8.6			11.6			11.6			18.7
PLG Wholesale		(0.3	)		22.9			25.0			46.2
PLG Retail		(6.9	)		(4.6	)		(5.8	)		(2.7	)
Total operating profit	$	(62.4	)	$	36.7		$	(20.0	)	$	118.3

The following table presents the change in store count during the second quarter and first six months of 2011 and 2010 by reporting segment. We consider a store relocation to be both a store opening and a store closing.

	Payless			Payless
	Domestic			International			PLG Retail			Total
Second Quarter 2011:
Beginning store count		3,788			670			383			4,841
Stores opened		17			11			4			32
Stores closed		(22	)		(9	)		(3	)		(34	)
Ending store count		3,783			672			384			4,839
First Six Months 2011:
Beginning store count		3,794			667			383			4,844
Stores opened		30			15			8			53
Stores closed		(41	)		(10	)		(7	)		(58	)
Ending store count		3,783			672			384			4,839
Second Quarter 2010:
Beginning store count		3,831			645			376			4,852
Stores opened		8			12			11			31
Stores closed		(18	)		(6	)		(2	)		(26	)
Ending store count		3,821			651			385			4,857
First Six Months 2010:
Beginning store count		3,827			643			363			4,833
Stores opened		21			17			24			62
Stores closed		(27	)		(9	)		(2	)		(38	)
Ending store count		3,821			651			385			4,857

As of July 30, 2011, we franchised 103 Payless and 11 PLG Retail stores compared to 23 Payless retail stores as of July 31, 2010. We had no franchised PLG Retail stores as of July 31, 2010. Franchised stores are not reflected in the table above.

The total square footage for our retail stores as of July 30, 2011 and July 31, 2010 was approximately 14.6 million and 14.7 million, respectively. These square footage numbers do not include our franchised stores.

Payless Domestic Segment Operating Results

The Payless Domestic reporting segment is comprised primarily of operations from the domestic retail stores under the Payless ShoeSource name, the Company’s sourcing operations and Collective Licensing.

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	Second Quarter									First Six Months
							Percent change									Percent change
(dollars in millions)	2011			2010			2011 vs. 2010			2011			2010			2011 vs. 2010
Net sales	$	494.5		$	508.0			(2.7	)%	$	992.9		$	1,054.6			(5.9)	%
Operating (loss) profit	$	(63.8	)	$	6.8		NM		*%	$	(50.8	)	$	56.1		NM		*%
Operating (loss) profit as % of net sales		(12.9	)%		1.3	%					(5.1	)%		5.3	%

* Percent change is not meaningful.

For the second quarter of 2011, net sales for the Payless Domestic reporting segment decreased 2.7% or $13.5 million, to $494.5 million, from the second quarter of 2010. For the first six months of 2011, net sales for the Payless Domestic reporting segment decreased 5.9% or $61.7 million, to $992.9 million, from the first six months of 2010. The sales decline for the second quarter was primarily due to a comparable store sales decline, driven by lower traffic and declines in sales of sandals, and by operating fewer stores. The sales decline for the first six month of 2011 was primarily due to a comparable store sales decline and operating fewer stores.

As a percentage of net sales, operating loss was (12.9)% for the second quarter of 2011 compared to operating profit of 1.3% in the second quarter of 2010. The percentage decrease was primarily driven by an increase in tangible asset impairment charges over the second quarter of 2010 totaling $26.2 million (5.2%), CEO severance totaling $10.0 million (2.0%), impairment of goodwill totaling $10.0 million (2.0%) and impairment of tradenames totaling $7.6 million (1.5%). Higher product costs and increased promotional activity also contributed to the decrease. As a percentage of net sales, operating loss was (5.1)% for the first six months of 2011 compared to operating profit of 5.3% in the first six months of 2010. The decrease was primarily driven by tangible asset impairments, CEO severance, impairment of goodwill, impairment of tradenames and higher product costs this year compared to last year.

Payless International Segment Operating Results

Our Payless International reporting segment includes retail operations under the Payless ShoeSource name in Canada, the Central and South American Regions, Puerto Rico and the U.S. Virgin Islands, as well as franchising arrangements under the Payless ShoeSource name. For all periods presented, our franchising operations were not significant.

	Second Quarter									First Six Months
							Percent change									Percent change
(dollars in millions)	2011			2010			2011 vs. 2010			2011			2010			2011 vs. 2010
Net sales	$	117.2		$	109.8			6.7	%	$	214.7		$	209.8			2.3	%
Operating profit	$	8.6		$	11.6			(25.9	)%	$	11.6		$	18.7			(38.0)	%
Operating profit as % of net sales		7.3	%		10.6	%					5.4	%		8.9	%

For the second quarter of 2011, net sales for the Payless International reporting segment increased 6.7% or $7.4 million, to $117.2 million, from the second quarter of 2010. For the first six months of 2011, net sales for the Payless International reporting segment increased 2.3% or $4.9 million, to $214.7 million, from the first six months of 2010. For the second quarter of 2011, sales increases in Latin America drove the increase over last year and were partially offset by sales declines in Puerto Rico and Canada. For the first six months of 2011, sales increases in Latin America were offset by sales declines in Puerto Rico.

As a percentage of net sales, operating profit decreased to 7.3% for the second quarter of 2011 compared to 10.6% in the second quarter of 2010. The decline was driven by an increase in tangible asset impairment charges over the second quarter of 2010 totaling $2.5 million (2.3%), higher product costs this year compared to last year and operating profit declines in Puerto Rico and Canada. As a percentage of net sales, operating profit decreased to 5.4% for the first six months of 2011 compared to 8.9% in the first six months of 2010. The percentage decrease is primarily due to tangible asset impairment charges, higher product costs this year compared to last year and operating profit declines Canada and Puerto Rico.

PLG Wholesale Segment Operating Results

The PLG Wholesale reporting segment is comprised of PLG’s wholesale operations, which primarily includes sales from the Stride Rite, Sperry Top-Sider, Saucony and Keds brands.

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	Second Quarter									First Six Months
							Percent change									Percent change
(dollars in millions)	2011			2010			2011 vs. 2010			2011			2010			2011 vs. 2010
Net sales	$	217.7		$	174.7			24.6	%	$	430.2		$	348.1			23.6	%
Operating (loss) profit	$	(0.3	)	$	22.9		NM		*%	$	25.0		$	46.2			(45.9	)%
Operating (loss) profit as % of net sales		(0.1	)%		13.1	%					5.8	%		13.3	%

* Percent change is not meaningful.

For the second quarter of 2011, net sales for the PLG Wholesale reporting segment increased 24.6% or $43.0 million, to $217.7 million, from the second quarter of 2010. For the first six months of 2011, net sales for the PLG Wholesale reporting segment increased 23.6% or $82.1 million, to $430.2 million, from the first six months of 2010. The increase in net sales for both the second quarter and first six months of 2011 is due to global gains in the Sperry Top-Sider, Saucony and Stride Rite Brands.

As a percentage of net sales, operating loss was (0.1)% for the second quarter of 2011 compared to operating profit of 13.1% in the second quarter of 2010. The decrease is primarily due to impairment of tradenames totaling $23.5 million (13.5%). The decline was also driven by higher product costs, offset by the leveraging of fixed costs due to higher net sales. As a percentage of net sales, operating profit decreased to 5.8% for the first six months of 2011 compared to 13.3% in the first six months of 2010. The decrease was primarily due to the impairment of tradenames and higher product costs, offset by the impact of the leveraging of fixed costs due to higher net sales.

PLG Retail Segment Operating Results

The PLG Retail reporting segment consists of PLG’s owned Stride Rite children’s stores, PLG’s outlet stores, store-in-stores at select Macy’s Department Stores and Sperry Top-Sider retail stores.

	Second Quarter									First Six Months
							Percent change									Percent change
(dollars in millions)	2011			2010			2011 vs. 2010			2011			2010			2011 vs. 2010
Net sales	$	53.0		$	48.8			8.6	%	$	113.6		$	107.6			5.6	%
Operating loss	$	(6.9	)	$	(4.6	)		50.0	%	$	(5.8	)	$	(2.7	)		114.8	%
Operating loss as a % of net sales		(13.0	)%		(9.4	)%					(5.1	)%		(2.5	)%

For the second quarter of 2011, net sales for the PLG Retail reporting segment increased 8.6% or $4.2 million, to $53.0 million, from the second quarter of 2010. For the first six months of 2011, net sales for the PLG Retail reporting segment increased 5.6% or $6.0 million, to $113.6 million, from the first six months of 2010. The increase in revenues from external customers in the second quarter and first six months was primarily due to higher comparable store sales and the contribution of new Sperry stores.

As a percentage of net sales, operating loss was (13.0)% for the second quarter of 2011 compared to (9.4)% in the second quarter of 2010. The decline was driven by an increase in tangible asset impairment charges over the second quarter of 2010 of $3.1 million (6.4%) and higher product costs, offset by the impact of higher comparable store sales and the leveraging of fixed costs due to higher net sales. As a percentage of net sales, operating loss was (5.1)% for the first six months of 2011 compared to (2.5)% in the first six months of 2010. The percentage decrease was primarily due the impact of asset impairment charge increases from the second quarter of 2010 and higher product costs in 2011 compared to 2010.

Liquidity and Capital Resources

We ended the second quarter of 2011 with a cash and cash equivalents balance of $234.8 million, a decrease of $99.1 million from the 2010 second quarter. The decrease was due primarily to debt repayments, capital expenditures and share repurchases.

As of July 30, 2011, our foreign subsidiaries and joint ventures had $164.5 million in cash located in financial institutions outside of the United States. A majority of this cash represents undistributed earnings of our foreign subsidiaries, a significant portion of which are indefinitely reinvested. In the event of a distribution to the U.S., those earnings could be subject to U.S. federal and state income taxes, net of foreign tax credits.

As of July 30, 2011, the borrowing base on our Amended and Restated Loan and Guaranty Agreement (“Revolving Loan Facility”) was $350.0 million less $28.6 million in outstanding letters of credit, or $321.4 million. The variable interest rate including the applicable variable margin at July 30, 2011, was 1.13%. We had no borrowings on our Revolving Loan Facility at any time during the first six months of 2011.

On August 16, 2011, we amended our $350 million Revolving Loan Facility with a $300 million Second Amended and Restated Loan and Guaranty Agreement (“Amended Revolving Loan Facility”). The Amended Revolving Loan Facility is a senior secured loan

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guaranteed by substantially all the assets of the borrower and the guarantors, having first priority in accounts receivable, inventory and certain related assets. The Amended Revolving Loan Facility matures on August 16, 2016 and bears interest at the London Inter-Bank Offer Rate (“LIBOR”), plus a variable margin of 1.75% to 2.25% or the base rate as defined in the agreement. The Amended Revolving Loan Facility provides increased flexibility for investments, incurrence of indebtedness and restricted payments including prepayments on its Senior Subordinated Notes, subject to excess line availability tests. The facility will be available as needed for general corporate purposes.

We are subject to financial covenants under our Loan Facilities. We have a financial covenant under our Term Loan Facility agreement that requires us to maintain, on the last day of each fiscal quarter, a total leverage ratio of not more than 4.0 to 1. As of July 30, 2011, our leverage ratio, as defined in our Term Loan Facility agreement, was 2.5 to 1 and we were in compliance with all of our covenants. We expect, based on our current financial projections, to be in compliance with our covenants on our Loan Facilities for the next twelve months. Further, we believe that our liquid assets, cash generated from operations and amounts available under our Amended Revolving Loan Facility will provide us with sufficient funds for capital expenditures and other operating activities for at least the next twelve months.

Cash Flow (Used in) Provided by Operating Activities

Cash flow used in operations was $22.8 million in the first six months of 2011, compared with cash flow provided by operations of $77.5 million in the same period in 2010. The decrease in cash flow from operations in the first six months of 2011 as compared to the first six months of 2010 is primarily due to lower cash earnings and increases in inventories and accounts receivable. The increase in inventories is primarily driven by higher product costs and more units in our PLG Wholesale reporting segment to support higher net sales. The increase in accounts receivable is primarily due to higher sales in our PLG Wholesale reporting segment.

Cash Flow Used in Investing Activities

Our capital expenditures totaled $42.3 million during the first six months of 2011, compared with $46.8 million for the same period in 2010. The decrease in capital expenditures was primarily due to the timing of payments for certain technology and store investments in 2011 compared to 2010. Total capital expenditures in 2011 are expected to be approximately $105 million compared to $98 million in 2010. We intend to use internal cash and cash flow from operations to finance all of these expenditures.

Cash Flow Used in Financing Activities

We have made the following common stock repurchases:

	First Six Months
	2011				2010
(dollars in millions, shares in thousands)	Dollars		Shares		Dollars		Shares
Stock repurchase program	$	14.9		993	$	11.8		628
Employee stock purchase, deferred compensation and stock incentive plans		3.3		173		2.3		105
	$	18.2		1,166	$	14.1		733

Under the terms of our Credit Facilities, we are restricted on the amount of common stock we may repurchase. This limit may increase or decrease on a quarterly basis based upon our net earnings.

Contractual Obligations

For a discussion of our other contractual obligations, see a discussion of future commitments under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K for the fiscal year ended January 29, 2011. There have been no significant developments with respect to our contractual obligations since January 29, 2011.

Financial Condition Ratios

A summary of key financial information for the periods indicated is as follows:

	July 30,			July 31,			January 29,
	2011			2010			2011
Debt-capitalization Ratio*		44.8	%		47.6	%		44.7	%

* Debt-to-capitalization has been computed by dividing total debt by capitalization. Total debt is defined as long-term debt including current maturities, notes payable and borrowings under the revolving loan facility. Capitalization is defined as total debt and equity. The debt-to-capitalization ratio, including the present value of future minimum rental payments under operating leases as debt and as capitalization, was 66.8%, 68.0% and 66.7%, respectively, for the periods referred to above.

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Critical Accounting Policies

Property and Equipment

We evaluate our stores on a quarterly basis to determine if their assets are recoverable. Our primary indicator that store assets may not be recoverable is if a store’s projected future undiscounted cash flows are less than the carrying amount of the store’s assets. The underlying estimates of cash flows include estimates of future net sales, gross margin rates and store expenses as well as any potential for changes related to occupancy costs, store closures and transfer sales. These assumptions are based upon the stores’ past and expected future performance. If an indicator of impairment exists, we model estimated future cash flows on a store-by-store basis and compare the present value, using an appropriate discount rate, of these cash flows to the carrying amount of the assets. An impairment loss is recognized when the carrying amount of the store’s assets exceeds their fair value.

Our impairment calculations require us to apply judgment in estimating future net sales, gross margin rates and store expenses as well as any potential for changes related to occupancy costs, store closures and transfer sales. We also apply judgment in estimating asset fair values, including the selection of an appropriate discount rate.

In the second quarter of 2011, due to underperformance in certain retail businesses, we revised the projections used in determining whether our store assets were impaired. Our impairment test indicated that $44.7 million of our assets had a fair value of $10.6 million and, as such, we recorded a $34.1 million impairment charge.

Accounting for Goodwill

We assess goodwill for impairment annually and at any other date when events or changes in circumstances indicate that the book value of our reporting units may exceed their fair value. A reporting unit is a component of a segment that constitutes a business, for which discrete financial information is available, and for which the operating results are regularly reviewed by management. We have five reporting units for the purposes of assessing goodwill: Payless Domestic, Payless International, PLG Wholesale, PLG Retail, and Collective Licensing.

The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its book value. If the book value of a reporting unit exceeds its fair value, goodwill is considered potentially impaired and the Company must complete the second step of the goodwill impairment test. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the book value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, we would allocate the fair value to all of the assets and liabilities of the reporting unit in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, we would recognize an impairment charge for the difference.

The fair value of the reporting units is determined using a combined income and market approach. The income approach uses a reporting unit’s projection of estimated cash flows and is discounted using a weighted-average cost of capital that reflects current market conditions. The market approach may involve use of the guideline transaction method, the guideline company method, or both. The guideline transaction method makes use of available transaction price data of companies engaged in the same or a similar line of business as the respective reporting unit. The guideline company method uses market multiples of publicly traded companies with operating characteristics similar to the respective reporting unit. We consider value indications from both the income approach and market approach in estimating the fair value of each reporting unit in our analysis. We also compare the aggregate fair value of our reporting units to our market capitalization plus a control premium at each reporting period.

Management judgment is a significant factor in determining whether an indicator of impairment has occurred. We rely on estimates in determining the fair value of each reporting unit, which include the following critical quantitative factors:

• Anticipated future cash flows and long-term growth rates for each reporting unit.The income approach to determining fair value relies on the timing and estimates of future cash flows, including an estimate of long-term growth rates. The projections use our estimates of economic and market conditions over the projected period including growth rates in sales and estimates of expected changes in operating margins. Our projections of future cash flows are subject to change as actual results are achieved that differ from those anticipated. Actual results could vary significantly from estimates.

• Selection of an appropriate discount rate.The income approach requires the selection of an appropriate discount rate, which is based on a weighted average cost of capital analysis. The discount rate is subject to changes in short-term interest rates and long-term yield, as well as variances in the typical capital structure of marketplace participants in our industry. The discount rate is determined based on assumptions that would be used by marketplace participants, and for that reason, the capital structure of selected marketplace participants is used in the weighted average cost of capital analysis. Because the selection of the discount rate is dependent on several variables, it is possible that the discount rate could change from year to year.

In the second quarter of 2011, due to underperformance in our retail businesses, we revised our financial projections related to our reporting units. These revisions indicated a potential impairment of our goodwill and, as such, we assessed the fair value of our reporting units to determine if their book value exceeded their fair value. As a result of this assessment, we determined that the book value of goodwill exceeded its fair value and we recognized $10.0 million of pre-tax impairment charges for goodwill.

Our goodwill balance was $269.8 million as of July 30, 2011. The goodwill balance by reporting segment and reporting unit as of July 30, 2011 is as follows:

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		Goodwill Balance
Reporting Segment	Reporting Unit	(in millions)
PLG Wholesale	PLG Wholesale	$	239.6
Payless Domestic	Collective Licensing		30.2
Total		$	269.8

The fair value of the PLG Wholesale reporting unit substantially exceeds its carrying value. For the Collective Licensing reporting unit, a 100 basis point increase in the discount rate used in determining the fair value of the reporting unit, holding all other variables constant, and a 100 basis point decrease in the projected long-term EBITDA margin, holding all other variables constant, would not result in a deficit between the fair value and the carrying value of the reporting unit.

In future periods, if our goodwill were to become impaired, the resulting impairment charge could have a material impact on our financial position and results of operations.

Accounting for Intangible Assets

Indefinite-lived intangible assets are not amortized, but are tested for impairment annually and more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. Favorable leases, certain tradenames and other intangible assets with finite lives are amortized over their useful lives using the straight-line method. Customer relationships are amortized based on the time period over which the benefits of the asset are expected to occur.

Each period we evaluate whether events and circumstances warrant a revision to the remaining estimated useful life of each intangible asset. If we were to determine that events and circumstances warrant a change to the estimate of an intangible asset’s remaining useful life, then the remaining carrying amount of the intangible asset would be amortized prospectively over that revised remaining useful life.

The impairment test for indefinite-lived tradenames compares each tradename’s fair value to its book value. If the book value of a tradename exceeds its fair value, the tradename is considered impaired and the Company recognizes an impairment charge for the difference. The fair values of our tradenames are determined using either the relief from royalty method or the excess earnings method, which are forms of the income approach. The relief from royalty method is based on the theory that the owner of the tradename is relieved of paying a royalty or license fee for the use of the tradename. The excess earnings method calculates the value of the tradename by discounting its future cash flows.

Management judgment is a significant factor in determining whether an indicator of impairment for tradenames has occurred. We rely on estimates in determining the fair value of each tradename, which include the following critical quantitative factors:

• Anticipated future revenues and long-term growth rates for each tradename.The relief from royalty approach to determining fair value relies on the timing and estimates of future revenues, including an estimate of long-term growth rates. Our projections of future revenues are subject to change as actual results are achieved that differ from those anticipated. Actual results could vary significantly from estimates.

• Reasonable market royalty rate for each tradename.The relief from royalty approach to determining fair value requires selection of appropriate royalty rates for each tradename. The rates selected depend upon, among other things, licensing agreements involving similar tradenames, historical and forecasted operating profit for each tradename and qualitative factors such as market awareness, history, longevity, and market size.

• Selection of an appropriate discount rate.The relief from royalty approach requires the selection of an appropriate discount rate, which is based on a weighted average cost of capital analysis. The discount rate is subject to changes in short-term interest rates and long-term yield as well as variances in the typical capital structure of marketplace participants in the Company’s industry. The discount rate is determined based on assumptions that would be used by marketplace participants, and for that reason, the capital structure of selected marketplace participants is used in the weighted average cost of capital analysis.Because the selection of the discount rate is dependent on several variables, it is possible that the discount rate could change from year to year.

In the second quarter of 2011, due to underperformance in our retail businesses, we revised our financial projections related to certain indefinite-lived tradenames. These revisions indicated a potential impairment of certain indefinite lived tradenames and, as such, we assessed the fair value of these indefinite-lived tradenames to determine if their book value exceeded their fair value. This assessment indicated that the book value of certain indefinite-lived tradenames exceeded their fair value and we recognized $31.1 million of pre-tax impairment charges. Our indefinite-lived tradename balance as of July 30, 2011 is $334.4 million.

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A 100 basis point decrease in the royalty rate used in determining the fair value of our indefinite-lived tradenames, holding all other variables constant, could result in an impairment of approximately $26 million. Increasing the discount rate 100 basis points, holding all other variables constant, could result in an impairment of approximately $13 million. Decreasing the projected revenue growth rates 100 basis points, holding all other variables constant, could result in an impairment of approximately $13 million.

In future periods, if our indefinite-lived tradenames were to become impaired, the resulting impairment charge could have a material impact on our financial position and results of operations.

For more information regarding our critical accounting policies, estimates and judgments, see the discussion under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended January 29, 2011.

New Accounting Standards

See Note 13 of the Condensed Consolidated Financial Statements for new accounting standards, including the expected dates of adoption and estimated effects on our Condensed Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Interest on our senior secured Revolving Loan Facility, which is entirely comprised of a revolving line of credit, is based on the London Inter-Bank Offered Rate (“LIBOR”) plus a variable margin of 0.875% to 1.5%, or the base rate, as defined in the credit agreement. Interest on our Amended Revolving Loan Facility is based on LIBOR plus a variable margin of 1.75% to 2.25%, or the base rate, as defined in the credit agreement. There are no outstanding borrowings on the revolving line of credit at any time during the six months ended July 30, 2011; however, if we were to borrow against our revolving line of credit, borrowing costs may fluctuate depending upon the volatility of LIBOR. On August 24, 2007, we entered into an interest rate contract for $540 million to hedge a portion of our variable rate Term Loan Facility. The interest rate contract provides for a fixed interest rate of approximately 7.75%, portions of which mature on a series of dates over the next five years. The unhedged portion of the Term Loan Facility is subject to interest rate risk depending on the volatility of LIBOR. As of July 30, 2011, a 100 basis point increase in LIBOR on the unhedged portion of the Company’s Term Loan Facility, which totals $356.8 million, would impact pretax interest expense by approximately $3.5 million annually or approximately $0.9 million per quarter.

Foreign Currency Risk

We have operations in foreign countries; therefore, our cash flows in U.S. dollars are impacted by fluctuations in foreign currency exchange rates. We adjust our retail prices, when possible, to reflect changes in exchange rates to mitigate this risk. To further mitigate this risk, we may, from time to time, enter into forward contracts to purchase or sell foreign currencies.

A significant percentage of our footwear is sourced from the People’s Republic of China (the “PRC”). The national currency of the PRC, the Yuan, is currently not a freely convertible currency. The value of the Yuan depends to a large extent on the PRC government’s policies and upon the PRC’s domestic and international economic and political developments. During 2005, the PRC government adopted an exchange rate system based on a trade-weighted basket of foreign currencies of the PRC’s main trading partners. Under this “managed float” policy, the exchange rate of the Yuan may shift each day up to 0.5% in either direction from the previous day’s close, and as a result, the valuation of the Yuan may increase incrementally over time should the PRC central bank allow it to do so, which could significantly increase the cost of the products we source from the PRC. As of July 29, 2011, the last day of trading in our quarter, the exchange rate was 6.42 Yuan per U.S. dollar compared to 6.77 Yuan per U.S. dollar at the end of our second quarter 2010 and 6.57 Yuan per U.S. dollar at the end of our 2010 fiscal year.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management is responsible for establishing disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s (“SEC”) rules and forms and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

As of the end of the period covered by this Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective and designed to ensure that information required to be disclosed in periodic reports filed with the SEC is recorded, processed,

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summarized and reported within the time period specified. Our principal executive officer and principal financial officer also concluded that our controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to management including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the second quarter of fiscal year 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no pending legal proceedings other than ordinary, routine litigation incidental to the business to which the Company is a party or of which its property is subject, none of which the Company expects to have a material impact on its financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS

For more information regarding our risk factors, see Item 1A in our Form 10-K for the year ended January 29, 2011. There have been no changes to the risk factors disclosed in our 2010 Annual Report on Form 10-K, other than the addition of the following risk factor:

Our Payless Domestic Reporting Segment is Heavily Influenced by the Economic Condition of our Core Customer Base

Our Payless Domestic reporting segment is highly dependent on the disposable income of our core customer base. High unemployment and rising prices for staple products like gasoline and food are factors that have a particularly negative impact on the disposable income of our core customer base. If the economic condition of certain segments of our core customer base does not improve, our financial results may be negatively impacted. Also, any deterioration in the general economic conditions for our core customer base could adversely affect our business.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table provides information about purchases by us (and our affiliated purchasers) during the quarter ended July 30, 2011, of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:

					Total Number of
					Shares Purchased		Approximate Dollar Value of
	Total Number		Average		as Part of Publicly		Shares that May Yet Be
	of Shares		Price		Announced Plans		Purchased Under the Plans or
	Purchased(1)		Paid per		or Programs		Programs
Period	(in thousands)		Share		(in thousands)		(in millions)
05/01/11 — 05/28/11		103	$	15.57		100	$	137.0
05/29/11 — 07/02/11		848		14.26		800		135.5
07/03/11 — 07/30/11		4		15.22		—		124.0
Total		955	$	14.40		900	$	124.0	(2)

(1)	Includes an aggregate of approximately 55 thousand shares of our common stock that was repurchased in connection with our employee stock purchase and stock incentive plans.
(2)	On March 2, 2007 our Board of Directors authorized an aggregate of $250 million of share repurchases. The timing and amount of share repurchases, if any, are limited by the terms of our Credit Agreement and Senior Subordinated Notes.

ITEM 4. RESERVED

ITEM 6. EXHIBITS

     (a) Exhibits:

Number	Description
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer*
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Division Senior Vice President - Chief Financial Officer and Treasurer*
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer*
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Division Senior Vice President - Chief Financial Officer and Treasurer*
101	The following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 2011, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Statements of Earnings (Unaudited) for the 13 Weeks and 26 Weeks Ended July 30, 2011 and July 31, 2010; (ii) the Condensed Consolidated Balance Sheets (Unaudited) as of July 30, 2011, July 31, 2010 and January 29, 2011; (iii) the Condensed Consolidated Statements of Equity and Comprehensive Income (Unaudited) for the 26 Weeks Ended July 30, 2011 and July 31, 2010; (iv) the Condensed Consolidated Statements of Cash Flows (Unaudited) for the 26 Weeks Ended July 30, 2011 and July 31, 2010; and (v) the Notes to the Condensed Consolidated Financial Statements (Unaudited).**

*	Filed herewith
**	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COLLECTIVE BRANDS, INC.
Date: August 31, 2011	By:	/s/ Michael J. Massey
		Michael J. Massey
		Chief Executive Officer (Principal Executive Officer)
Date: August 31, 2011	By:	/s/ Douglas G. Boessen
		Douglas G. Boessen
		Division Senior Vice President- Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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