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Payless Second Quarter 2002

From: ASAP

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Payless ShoeSource, Inc. (NYSE: PSS) reported that for the second quarter of fiscal 2002, which ended August 3, 2002, the company posted diluted earnings per share of $2.07, an increase of 29.4 percent from diluted earnings per share of $1.60 during the second quarter of fiscal 2001. The earnings increase was primarily the result of cost control, inventory management that reduced the need to take heavy markdowns, and benefits of the previously announced restructuring.

In addition, earnings per share during the second quarter were benefited by a reduced income tax rate, reduced self-insurance costs resulting from a change in actuarial estimates due to favorable claims experience, and lower net store closing costs associated with the company's previously announced restructuring. These three items increased diluted earnings per share by 17 cents in the quarter.

During the first six months of fiscal 2002, diluted earnings per share increased 7.6 percent to $3.12 from $2.90 a year earlier.

The company recorded net earnings of $47.2 million during the second quarter 2002, a 29.6 percent increase from $36.4 million during the second quarter 2001. In the first half of fiscal 2002, net earnings were $71.1 million, a 7.7 percent increase from $66.1 million during the first half of 2001.

Company sales for the second quarter 2002 totaled $776.2 million, a 3.7 percent decrease from $806.0 million during the second quarter 2001. In the second quarter 2002, same-store sales decreased 5.8 percent from the second quarter 2001. In the first half of fiscal 2002, company sales totaled $1.51 billion, 3.8 percent decrease from $1.57 billion a year earlier. In the first half of fiscal 2002, same-store sales decreased 6.1 percent.

Gross margin was 32.6 percent of sales in the second quarter 2002 versus 32.0 percent in the second quarter 2001. The improvement reflects lower markdowns than last year in the second quarter, and benefits from the company's restructuring. In the first half of fiscal 2002, gross margin was 31.2 percent of sales, compared with 31.8 percent last year reflecting the increase in markdowns taken in the first quarter, and the impact of lower sales on occupancy and buying costs as a percent of sales.

Selling, general and administrative expenses decreased during the second quarter 2002 by $14.6 million from second quarter 2001, and improved as a percent to sales in the second quarter 2002 to 22.8 percent from 23.8 percent in the second quarter 2001. This was the result of reducing expenses consistent with lower sales performance, planned benefits from the company's restructuring, and lower self-insurance costs due to favorable claims experience. In the first half of fiscal 2002, SG&A expenses declined by $25.3 million versus the same time last year.

The nonrecurring benefit of $0.9 million reflects the reversal of $3.8 million of the restructuring charge taken during the fourth quarter of 2001 as a result of lower than anticipated store closing costs partially offset by a $2.0 million charge for additional professional fees and $0.9 million of employee relocation costs associated with the restructuring. The company anticipates any future charges to earnings associated with the 2001 restructuring to be less than $1.0 million.

As of the end of the second quarter, the company has closed 71 under-performing stores of the original 104 stores identified as part of the restructuring. Five of the original 104 stores will not be closed based on further management analysis. The remaining 28 under-performing stores are expected to close by the end of the year. The company has spent $27.8 million, through the end of the second quarter of 2002, of the total $40.5 million cash charge associated with the restructuring.

The company's effective income tax rate for fiscal year 2002 has been reduced from 38.4 percent to 36.5 percent. The reduction reflects the tax impact of actions taken to restructure operations to support the increasing globalization of its business. The company expects these benefits to continue into the future. Costs associated with these actions were provided for in the restructuring charge taken in the fourth quarter 2001 and the second quarter 2002. The reduced tax rate contributed 9 cents per share, diluted, in the second quarter and is expected to add 5 cents per share, diluted, in the second half of the year.

Total company inventories at the end of the second quarter 2002 were $337.3 million compared to $382.2 million at the end of the second quarter 2001. Average inventory per store decreased 12.5 percent compared with the end of the second quarter last year. Current inventories are in very good condition as the company transitions to more updated, fashionable fall merchandise.

"Payless ShoeSource achieved earnings growth, reduced debt and increased its cash position despite a disappointing sales performance in a tough consumer environment," said Steven J. Douglass, Chairman and Chief Executive Officer of Payless. "Our challenge for the second half of fiscal 2002 is to build sales momentum by repositioning our core business, the Payless ShoeSource chain. We will do this by focusing on strategies designed to re-emphasize our position in the market as the merchandise authority in value priced footwear. We will deliver a constant flow of fresh fashion ideas, to show customers something new each time they visit."

International Operations

The company continues to expand its core business internationally. During the second quarter, the company opened an additional 13 new stores in Central America. Payless is currently operating 99 stores in this region, and intends to be operating approximately 130 stores by the end of fiscal year 2002. The company believes the Central American and Caribbean region represents a 150 to 200 store opportunity.

In addition, during second quarter Payless opened 15 new stores in the South American market. The company is now operating stores in Ecuador, Peru and Chile. By year-end the company expects to be operating 60 stores in these three countries, and believes the Andean region of South America to be approximately a 300-store opportunity.

The company is currently operating 267 stores in Canada. The company expects to operate 272 stores in Canada by year-end.

Capital Allocation

During the second quarter of fiscal 2002, the company reduced its debt by $67.8 million. This included a scheduled payment of $17.8 million and a voluntary pre-payment of $50 million, which will reduce future interest expense. The company's cash balance is $169.6 million as of the end of the second quarter 2001, versus $51.3 million at the end of second quarter last year. The increased cash balance reflects the improved operating performance and effective working capital management. The company has sufficient cash to fund current working capital requirements and support future growth.

Second quarter 2002 capital expenditures totaled $24.0 million - including a $2.9 million contribution from the company's joint venture partners in Latin America. Payless expects total capital expenditures for fiscal 2002 to be approximately $120 million, including a $15 million contribution from the company's joint venture partners, for a net of $105 million.

During the second quarter, the company repurchased less than 5 thousand shares of its common stock - related to employee benefit plans - for a non-material amount of money. Subject to the maintenance of certain financial covenants, the company's financing agreements allow up to $50 million a year for share repurchases.

Also during the second quarter, the company's store count declined by 25 stores - which included 59 new stores and 84 closings. This brings the total store count to 4,960. For fiscal 2002, the increase is expected to be in the range of 45 - 50 net new stores.

Outlook for Third Quarter and Full-Year Fiscal 2002

Payless ShoeSource anticipates low single-digit negative same-store sales for the third quarter of fiscal 2002 and diluted earnings per share to be in the range of $1.20-$1.30. This would represent an increase of 103 to 120 percent from earnings of $0.59 per share in the third quarter 2001. For the full year 2002, the company continues to expect low single-digit negative same-store sales and diluted earnings per share in the range of $4.70 - $4.90. This reflects actual first half performance, an outlook for the second half that is consistent with previous guidance, plus the benefits of the reduced tax rate going forward.

Payless ShoeSource, Inc. is North America's largest family footwear retailer. The company operates a total of 4,960 stores offering quality family footwear and accessories at affordable prices. In addition, customers can buy shoes over the Internet through Payless.com(SM), at http://www.payless.com/ .

This release contains forward-looking statements relating to such matters as anticipated financial performance, international expansion opportunities, consumer spending patterns, share repurchases, capital expenditure plans, business prospects, products, future store openings, possible strategic alternatives and similar matters. Forward looking statements are identified by words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," or variations of such words. A variety of known and unknown risks and uncertainties and other factors could cause actual results and expectations to differ materially from the anticipated results or expectations which include, but are not limited to: changes in consumer spending patterns; changes in consumer preferences and overall economic conditions; the impact of competition and pricing; changes in weather patterns; the financial condition of the company's suppliers and manufacturers; changes in existing or potential duties, tariffs or quotas; 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 the company sources are located or in which the company otherwise does business; changes in trade and/or tax laws; fluctuations in currency exchange rates; availability of suitable store locations on acceptable terms; the ability to hire and retain associates; performance of other parties in strategic alliances; and general economic, business and social conditions, performance of our partners in joint ventures, the ability to comply with local laws in foreign countries and threats or acts of terrorism. Please refer to the company's 2001 Annual Report and its Form 10-K for the fiscal year ended February 2, 2002, for more information on these and other risk factors that could cause actual results to differ. The company does 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.

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