UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended November 3, 2007
[  ]	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 1-2191

BROWN SHOE COMPANY, INC. (Exact name of registrant as specified in its charter)
New York (State or other jurisdiction of incorporation or organization)	43-0197190 (IRS Employer Identification Number)
8300 Maryland Avenue St. Louis, Missouri (Address of principal executive offices)	63105 (Zip Code)
(314) 854-4000 (Registrant's telephone number, including area code)

Indicate by checkmark 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.     Yes  R    No £

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer R    Accelerated filer £    Non-accelerated filer £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £    No R

As of December 1, 2007, 44,244,266 common shares were outstanding.

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PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
($ thousands)	November 3, 2007			October 28, 2006			February 3, 2007
Assets
Current Assets
Cash and cash equivalents	$	79,932		$	47,512		$	53,661
Receivables		96,800			127,010			132,224
Inventories		440,892			433,927			420,520
Prepaid expenses and other current assets		29,407			17,863			31,955
Total current assets		647,031			626,312			638,360
Other assets		104,846			86,050			106,113
Investment in nonconsolidated affiliate		7,066			–			–
Goodwill and intangible assets, net		215,628			216,748			216,420
Property and equipment		399,110			373,262			373,843
Allowance for depreciation and amortization		(253,310	)		(246,847	)		(235,679	)
Net property and equipment		145,800			126,415			138,164
Total assets	$	1,120,371		$	1,055,525		$	1,099,057
Liabilities and Shareholders' Equity
Current Liabilities
Borrowings under revolving credit agreement	$	–		$	20,500		$	1,000
Trade accounts payable		165,231			153,307			185,767
Accrued expenses		115,063			139,263			146,320
Income taxes		5,134			5,222			1,429
Total current liabilities		285,428			318,292			334,516
Other Liabilities
Long-term debt		150,000			150,000			150,000
Deferred rent		39,640			36,150			38,025
Other liabilities		52,358			51,298			52,891
Total other liabilities		241,998			237,448			240,916
Minority Interests		734			(8	)		(20	)
Shareholders' Equity
Common stock		442			430			433
Additional paid-in capital		183,340			151,766			161,825
Accumulated other comprehensive income		22,295			4,762			11,881
Retained earnings		386,134			342,835			349,506
Total shareholders’ equity		592,211			499,793			523,645
Total liabilities and shareholders’ equity	$	1,120,371		$	1,055,525		$	1,099,057

See notes to condensed consolidated financial statements.

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BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

	(Unaudited)						(Unaudited)
	Thirteen Weeks Ended						Thirty-nine Weeks Ended
($ thousands, except per share amounts)	November 3, 2007			October 28, 2006			November 3, 2007			October 28, 2006
Net sales	$	645,546		$	676,812		$	1,788,465		$	1,831,669
Cost of goods sold		385,705			406,828			1,067,827			1,114,668
Gross profit		259,841			269,984			720,638			717,001
Selling and administrative expenses		217,021			227,941			642,484			630,194
Equity in net loss of nonconsolidated affiliate		14			–			14			–
Operating earnings		42,806			42,043			78,140			86,807
Interest expense		(3,762	)		(4,367	)		(11,588	)		(13,291	)
Interest income		965			707			2,598			1,486
Earnings before income taxes and minority interests		40,009			38,383			69,150			75,002
Income tax provision		(13,046	)		(11,449	)		(22,901	)		(22,942	)
Minority interests in net loss (earnings) of consolidated subsidiaries		46			(27	)		226			69
Net earnings	$	27,009		$	26,907		$	46,475		$	52,129
Basic earnings per common share	$	0.62		$	0.64		$	1.07		$	1.24
Diluted earnings per common share	$	0.61		$	0.62		$	1.04		$	1.20
Dividends per common share	$	0.07		$	0.05		$	0.21		$	0.16

See notes to condensed consolidated financial statements.

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BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited)
	Thirty-nine Weeks Ended
($ thousands)	November 3, 2007			October 28, 2006
Operating Activities:
Net earnings	$	46,475		$	52,129
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		31,794			30,954
Share-based compensation expense		7,517			7,270
Loss on disposal of facilities and equipment		1,031			985
Impairment charges for facilities and equipment		1,252			1,068
Provision for doubtful accounts		19			709
Foreign currency transaction (gains) losses		(119	)		142
Undistributed loss of nonconsolidated affiliate		14			–
Changes in operating assets and liabilities:
Receivables		35,405			30,746
Inventories		(20,372	)		(19,632	)
Prepaid expenses and other current assets		3,170			719
Trade accounts payable		(20,536	)		(19,776	)
Accrued expenses		(31,257	)		7,854
Income taxes		3,705			1,394
Deferred rent		1,615			(69	)
Deferred income taxes		(913	)		732
Other, net		3,927			(47	)
Net cash provided by operating activities		62,727			95,178
Investing Activities:
Capital expenditures		(34,356	)		(37,507	)
Cash recognized on initial consolidation of joint venture		980			–
Investment in nonconsolidated affiliate		(7,080	)		–
Acquisition cost		(2,750	)		(22,700	)
Net cash used for investing activities		(43,206	)		(60,207	)
Financing Activities:
Decrease in borrowings under revolving credit agreement		(1,000	)		(29,500	)
Proceeds from stock options exercised		8,962			7,874
Tax benefit related to share-based plans		5,802			6,568
Dividends paid		(9,341	)		(6,842	)
Net cash provided by (used for) financing activities		4,423			(21,900	)
Effect of exchange rate changes on cash		2,327			153
Increase in cash and cash equivalents		26,271			13,224
Cash and cash equivalents at beginning of period		53,661			34,288
Cash and cash equivalents at end of period	$	79,932		$	47,512

See notes to condensed consolidated financial statements.

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BROWN SHOE COMPANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments which management believes are necessary (which include only normal recurring accruals) to present fairly the financial position, results of operations, and cash flows of Brown Shoe Company, Inc. (the “Company”). These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

The Company's business is subject to seasonal influences, particularly the back-to-school selling season at Famous Footwear, which primarily falls in the Company’s third quarter. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole.

Certain prior period amounts on the condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings.

Stock Split

On March 7, 2007, the Company’s Board of Directors authorized a three-for-two split of its common stock, to be effected in the form of a dividend of one share of stock for every two shares outstanding. The dividend was paid on April 2, 2007 to shareholders of record on March 19, 2007. All share and per share data provided herein give effect to this stock split, applied retroactively.

Change in Par Value

Effective May 31, 2007, the par value of the Company’s common stock was reduced from $3.75 per share to $0.01 per share. All relevant share data provided herein give effect to this change, applied retroactively.

For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended February 3, 2007.

Note 2 Business Combinations and Investments

B&H Footwear Limited

In June 2007, the Company entered into a joint venture agreement with a subsidiary of Hongguo International Holdings Limited (Hongguo), a Singapore listed company, to market Naturalizer footwear in China in Fall 2007 and Via Spiga footwear in 2008. The Company is a 51% owner of the joint venture, B&H Footwear Limited (B&H Footwear), with Hongguo owning the other 49%. B&H Footwear will distribute the Naturalizer brand in department store shops and free-standing stores in several of China’s largest cities: Shanghai, Beijing, Guangzhou, and Shenzhen. B&H Footwear will also sell Naturalizer footwear to Hongguo on a wholesale basis, which Hongguo will sell in retail stores it plans to open throughout the rest of China. In addition to the equity interest, the Company will receive a royalty from B&H Footwear for its use of the Naturalizer brand name, which will be based on the sales of B&H Footwear through its retail operations and to Hongguo.

B&H Footwear began operations in the third quarter of 2007.  As of November 3, 2007, B&H Footwear operated three stores and shops, selling Naturalizer footwear in China, and Hongguo operated 15 stores and shops. The Company’s consolidated financial statements include the accounts of B&H Footwear.

Investment in Edelman Shoe, Inc.

In August, 2007, the Company invested $7.1 million in Edelman Shoe, Inc., acquiring 42.5% of the outstanding stock. Edelman Shoe, Inc. is a privately held company operated by Sam and Libby Edelman. The Edelmans maintain a majority equity interest in Edelman Shoe, Inc. and the Company has an option to buy the remaining interest in the future. This investment is

5

expected to allow Edelman Shoe, Inc. to accelerate the development and expansion of the Sam Edelman brand, which was launched in 2004 and is sold in better department stores and independent and specialty stores across the country. The Company’s investment in Edelman Shoe, Inc. is accounted for in accordance with the equity method.

Note 3 Recent Accounting Pronouncements

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes

In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company adopted the provisions of FIN 48 on February 4, 2007. At February 4, 2007, the Company had $1.2 million of unrecognized tax benefits, relating to various state tax issues, which includes $0.2 million of estimated interest and penalties. A charge of $0.8 million, net of federal income tax benefits, was recorded against retained earnings as a cumulative effect adjustment at February 4, 2007. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate in a future period. There have been no significant changes to these amounts during the quarter ended November 3, 2007.

Estimated interest and penalties related to the underpayment of income taxes are classified as a component of the income tax provision in the Condensed Consolidated Statements of Earnings and were insignificant for the quarter ended November 3, 2007. Accrued interest and penalties were $0.2 million as of February 4, 2007 and November 3, 2007.

The Company has settled examinations by the Internal Revenue Service of tax years through January 29, 2005 (fiscal year 2004). The Company’s fiscal year 2005 tax return is currently under examination by the Internal Revenue Service. The Company has also settled examinations by the Canada Revenue Agency of tax years through January 28, 2006 (fiscal year 2005). The Company also files tax returns in various foreign jurisdictions and numerous states, for which various tax years are subject to examination.

Note 4 Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per common share for the periods ended November 3, 2007, and October 28, 2006:

	Thirteen Weeks Ended				Thirty-nine Weeks Ended
(in thousands, except per share data)	November 3, 2007		October 28, 2006		November 3, 2007		October 28, 2006
NUMERATOR
Net earnings	$	27,009	$	26,907	$	46,475	$	52,129
DENOMINATOR
Denominator for basic earnings per common share		43,688		42,344		43,494		42,081
Dilutive effect of unvested restricted stock and stock options		781		1,236		1,082		1,463
Denominator for diluted earnings per common share		44,469		43,580		44,576		43,544
Basic earnings per common share	$	0.62	$	0.64	$	1.07	$	1.24
Diluted earnings per common share	$	0.61	$	0.62	$	1.04	$	1.20

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Options to purchase 447,367 and 59,000 shares of common stock for the thirteen-week periods and 183,743 and 29,667 for the thirty-nine week periods ended November 3, 2007, and October 28, 2006, respectively, were not included in the denominator for diluted earnings per common share because their effect would be antidilutive.

Note 5 Comprehensive Income

Comprehensive income includes changes in shareholders’ equity related to foreign currency translation adjustments and unrealized gains or losses from derivatives used for hedging activities.

The following table sets forth the reconciliation from net earnings to comprehensive income for the periods ended November 3, 2007, and October 28, 2006:

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
($ thousands)	November 3, 2007			October 28, 2006			November 3, 2007			October 28, 2006
Net earnings	$	27,009		$	26,907		$	46,475		$	52,129
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		6,645			551			12,235			1,253
Unrealized (losses) gains on derivative instruments		(465	)		(326	)		(1,441	)		499
Net (gain) loss from derivatives reclassified into earnings		(19	)		279			(380	)		188
		6,161			504			10,414			1,940
Comprehensive income	$	33,170		$	27,411		$	56,889		$	54,069

Note 6 Restructuring Charges

Earnings Enhancement Plan

During 2006, the Company initiated an Earnings Enhancement Plan designed to increase earnings through cost reductions, efficiency initiatives and the reallocation of resources. Key elements of the plan include: (i) restructuring administrative and support areas; (ii) redesigning logistics and distribution platforms; (iii) reorganizing to eliminate operational redundancies; (iv) realigning strategic priorities; and (v) refining the supply chain process and enhancing inventory utilization. The total costs to implement these plans are estimated to be approximately $36 million ($22 million on an after-tax basis). These estimates are preliminary and differences may arise between these estimates and actual costs to the Company. The Company incurred charges of $6.3 million ($3.9 million on an after-tax basis) in 2006. The Company incurred charges totaling $15.3 million ($9.8 million on an after-tax basis) during the thirty-nine weeks ended November 3, 2007.

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The following is a summary of the activity in the reserve, by category of costs:

	Employee Severance			Facility & Lease Exits			Fixed Asset Write Off			Consulting Services			Other		Total
Reserve balance at February 3, 2007	$	2.4		$	(0.3	)	$	–		$	0.2		$	–	$	2.3
Additional charges in first quarter 2007		3.1			1.7			–			0.1			0.2		5.1
Amounts settled in first quarter 2007		(4.5	)		(1.2	)		–			(0.2	)		(0.2	)	(6.1	)
Reserve balance at May 5, 2007	$	1.0		$	0.2		$	–		$	0.1		$	–	$	1.3
Additional charges in second quarter 2007		0.6			0.1			–			4.7			0.3		5.7
Amounts settled in second quarter 2007		(0.6	)		–			–			(3.1	)		(0.3	)	(4.0	)
Reserve balance at August 4, 2007	$	1.0		$	0.3		$	–		$	1.7		$	–	$	3.0
Additional charges in third quarter 2007		3.2			0.4			0.3			0.6			–		4.5
Amounts settled in third quarter 2007		(0.4	)		(0.3	)		(0.3	)		(2.2	)		–		(3.2	)
Reserve balance at November 3, 2007	$	3.8		$	0.4		$	–		$	0.1		$	–	$	4.3

Of the $4.5 million in costs recorded during the thirteen weeks ended November 3, 2007, $2.8 million was recorded in the Specialty Retail segment, $1.3 million was recorded in the Other segment, and $0.4 million was recorded in the Wholesale Operations segment. The entire $4.5 million charge was reflected as a component of selling and administrative expenses. A tax benefit of $1.6 million was associated with this charge.

Note 7 Business Segment Information

Applicable business segment information is as follows for the periods ended November 3, 2007, and October 28, 2006:

($ thousands)	Famous Footwear		Wholesale Operations		Specialty Retail			Other			Totals
Thirteen Weeks Ended November 3, 2007
External sales	$	361,027	$	213,714	$	70,805		$	–		$	645,546
Intersegment sales		446		44,728		–			–			45,174
Operating earnings (loss)		30,766		23,109		(1,944	)		(9,125	)		42,806
Operating segment assets		443,097		418,725		99,679			158,870			1,120,371
Thirteen Weeks Ended October 28, 2006
External sales	$	366,289	$	242,334	$	68,189		$	–		$	676,812
Intersegment sales		1,177		47,571		–			–			48,748
Operating earnings (loss)		39,553		19,993		1,005			(18,508	)		42,043
Operating segment assets		409,621		464,048		88,045			93,811			1,055,525

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($ thousands)	Famous Footwear		Wholesale Operations		Specialty Retail			Other			Totals
Thirty-nine Weeks Ended November 3, 2007
External sales	$	1,002,464	$	592,890	$	193,111		$	–		$	1,788,465
Intersegment sales		1,502		119,156		–			–			120,658
Operating earnings (loss)		70,736		49,029		(6,658	)		(34,967	)		78,140
Thirty-nine Weeks Ended October 28, 2006
External sales	$	961,288	$	686,329	$	184,052		$	–		$	1,831,669
Intersegment sales		2,498		133,738		–			–			136,236
Operating earnings (loss)		67,383		53,194		(3,445	)		(30,325	)		86,807

The Other segment includes unallocated corporate administrative and other costs and, in the thirteen and thirty-nine weeks ended October 28, 2006, includes net expenses of $3.7 million associated with an executive early retirement agreement. The Other segment also includes, during the thirty-nine weeks ended October 28, 2006, net recoveries of $7.3 million from insurance companies for remediation costs associated with our Redfield site in Denver, Colorado.

During the thirteen weeks and thirty-nine weeks ended November 3, 2007, operating earnings includes expenses of $1.3 million and $9.1 million, $0.4 million and $3.1 million, and $2.8 million and $3.1 million for the Other segment, the Wholesale Operations segment and the Specialty Retail segment, respectively, related to the Company’s Earnings Enhancement Plan.

During the thirteen weeks ended October 28, 2006, no charges were incurred related to the Company’s Earnings Enhancement Plan. During the thirty-nine weeks ended October 28, 2006, operating earnings includes expenses of $1.4 million, $0.4 million and $0.2 million, respectively, for the Other segment, the Wholesale Operations segment and the Specialty Retail segment, related to the Company’s Earnings Enhancement Plan.

During the thirteen and thirty-nine weeks ended October 28, 2006, the Wholesale Operations segment includes $2.3 million of costs associated with the exit of the Bass footwear license.

Note 8 Goodwill and Other Intangible Assets

Goodwill and intangible assets were attributable to the Company's operating segments as follows:

($ thousands)	November 3, 2007		October 28, 2006		February 3, 2007
Famous Footwear	$	6,279	$	3,529	$	3,529
Wholesale Operations		198,252		205,097		203,385
Specialty Retail		11,097		7,609		9,506
Other		–		513		–
	$	215,628	$	216,748	$	216,420

The change in goodwill and other intangible assets in the Famous Footwear segment is due to the acquisition of a trademark during the second quarter of 2007 for $2.8 million, which facilitates the Company's use of the Famous Footwear mark on its stores located in the metropolitan St. Louis area. These stores (approximately 25) were formerly named Supermarket of Shoes. This acquisition further solidifies our Famous Footwear name as a national brand.

The change in goodwill and other intangible assets between periods for the Wholesale Operations segment is primarily due to the amortization of our licensed and owned trademarks. The 2007 change for the Specialty Retail segment reflects changes in the Canadian dollar exchange rate.

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Note 9 Share-Based Compensation

During the third quarter of 2007, the Company granted 18,000 stock options to certain employees with a weighted-average exercise price and grant date fair value of $20.45 and $8.32, respectively.  These options vest in four equal increments, with 25% vesting over each of the next four years. These options have a term of ten years.  Compensation expense is recognized on a straight-line basis separately for each vesting portion of the stock option award. 

The Company granted no performance share awards during the third quarter of 2007. Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals over the next three years. The performance share awards may pay out at a maximum of 200% of the target number of shares.  Compensation expense is being recognized based on the fair value of the award on the date of grant and the anticipated number of shares to be awarded on a straight-line basis over the three-year service period.

The Company also granted 9,500 restricted shares with a weighted average grant date fair value of $20.45 during the third quarter of 2007. The restricted shares vest in four years and compensation expense will be recognized on a straight-line basis over the four-year period.

The Company recognized share-based compensation expense of $1.8 million and $2.3 million during the thirteen-week and $7.5 million and $7.3 million during the thirty-nine week periods ended November 3, 2007, and October 28, 2006, respectively.

The Company issued 12,893 and 968,542 shares of common stock during the thirteen and thirty-nine week periods ended November 3, 2007, respectively, for stock options exercised and restricted stock grants.

Note 10 Retirement and Other Benefit Plans

The following table sets forth the components of net periodic benefit plan cost or income for the Company, including all domestic and Canadian plans:

	Pension Benefits						Other Postretirement Benefits
	Thirteen Weeks Ended						Thirteen Weeks Ended
($ thousands)	November 3,  2007			October 28, 2006			November 3, 2007			October 28, 2006
Service cost	$	2,038		$	1,976		$	–		$	–
Interest cost		2,667			2,547			64			63
Expected return on assets		(4,484	)		(4,301	)		–			–
Special termination benefits		–			1,400			–			–
Amortization of:
Actuarial loss (gain)		111			139			(3	)		(2	)
Prior service costs		91			87			–			–
Net transition assets		(50	)		(47	)		–			–
Total net periodic benefit cost	$	373		$	1,801		$	61		$	61

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	Pension Benefits						Other Postretirement Benefits
	Thirty-nine Weeks Ended						Thirty-nine Weeks Ended
($ thousands)	November 3, 2007			October 28, 2006			November 3, 2007			October 28, 2006
Service cost	$	6,107		$	5,927		$	–		$	–
Interest cost		7,985			7,640			193			188
Expected return on assets		(13,428	)­		(12,901	)		–			–
Special termination benefits		–			1,400			–			–
Settlement cost		1,200			–			–			–
Amortization of:
Actuarial loss (gain)		328			417			(8	)		(7	)
Prior service costs		274			261			–			–
Net transition assets		(140	)		(140	)		–			–
Total net periodic benefit cost	$	2,326		$	2,604		$	185		$	181

Note 11 Long-Term and Short-Term Financing Arrangements

The Company has a Revolving Credit Agreement (the “Agreement”) that provides for a maximum line of credit of $350 million, subject to a calculated borrowing base, and is guaranteed by certain of its subsidiaries. Borrowing availability under the Agreement is based upon the sum of eligible accounts receivable and inventory, less outstanding borrowings, letters of credit and applicable reserves. The Agreement matures in 2009; and the Company’s obligations are secured by its accounts receivable and inventory. Borrowings under the Agreement bear interest at a variable rate determined based upon the level of availability under the Agreement. If availability falls below specified levels, the Company would then be subject to certain financial covenants. In addition, if availability falls below $25 million and the fixed charge coverage ratio is less than 1.0 to 1, the Company would be in default. The Agreement also contains certain other covenants and restrictions. At November 3, 2007, the Company had no borrowings outstanding and $10.5 million in letters of credit outstanding under the Agreement. Total additional borrowing availability was $339 million at November 3, 2007.

On July 23, 2007, the Company and certain of its subsidiaries entered into the third amendment to the Agreement. This amendment amends the Agreement by, among other things:

·   reducing the commitment fees paid on the unused portion of the facility;

·   enhancing credit given for the inventory component in the calculation of the loan parties’ borrowing base;

·   increasing flexibility concerning Indebtedness and Guarantees of Indebtedness;

·   providing additional flexibility regarding Investments and Restricted Payments.

The Company issued $150 million of 8.75% senior notes due 2012 (“Senior Notes”) in April 2005. The Senior Notes are guaranteed on a senior unsecured basis by each of the subsidiaries of Brown Shoe Company, Inc. that is an obligor under its secured Revolving Credit Agreement. Interest on the Senior Notes is payable on May 1 and November 1 of each year. The Senior Notes mature on May 1, 2012, but are callable any time on or after May 1, 2009, at specified redemption prices plus accrued and unpaid interest. The Senior Notes also contain certain restrictive covenants.

Note 12 Related Party Transactions

OgilvyOne LLC

In 2007, the Company continued to use OgilvyOne LLC (“Ogilvy”) to provide certain marketing and consulting services. A member of the Company’s Board of Directors, Carla C. Hendra, is an officer of Ogilvy North America and OgilvyOne N.A., both of which are affiliates of Ogilvy. The Company incurred charges of $0.1 million and $1.0 million with Ogilvy during the thirteen–week and thirty-nine week period ended November 3, 2007, respectively.

11

Hongguo International Holdings

The Company entered into a joint venture agreement with a subsidiary of Hongguo International Holdings Limited (Hongguo) to begin marketing Naturalizer footwear in China in Fall 2007 and Via Spiga footwear in 2008. The Company is a 51% owner of the joint venture, “B&H Footwear”, with Hongguo owning the other 49%. B&H Footwear began operations in the third quarter of 2007. B&H Footwear will distribute the Naturalizer brand in department store shops and free-standing stores in several of China’s largest cities. In addition, B&H Footwear sells Naturalizer footwear to Hongguo on a wholesale basis. Hongguo will then sell Naturalizer product through retail stores it is opening in China. During the third quarter of 2007, the Company, through its consolidated subsidiary, B&H Footwear, sold $1.8 million of Naturalizer footwear on a wholesale basis to Hongguo.

Note 13 Commitments and Contingencies

Environmental Remediation

While the Company currently does not operate manufacturing facilities, prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future. The Company is involved in environmental remediation and ongoing compliance activities at several sites.

Redfield

The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (“the Redfield site” or, when referring to remediation activities at or under the facility, the “on-site remediation”) and residential neighborhoods adjacent to and near the property (the “off-site remediation”) that have been affected by solvents previously used at the facility. Based on the results of ongoing testing and the study of remediation alternatives by our environmental consultants, the Company, in 2006, submitted to the Colorado authorities a supplement to its former remediation plan, setting forth a long-term remediation plan and extending the time period the Company expects to perform certain remediation activities. Accordingly, a charge of $5.6 million was recorded in 2006, the majority of which represented the estimated discounted costs to complete the on-site remediation. The liability for the on-site remediation, $5.3 million, has been discounted at 4.8%. On an undiscounted basis, the on-site remediation liability would be $21.5 million. The Company expects to spend approximately $0.2 million in each of the next five succeeding years and $20.5 million thereafter related to the on-site remediation. During the thirteen and thirty-nine weeks ended November 3, 2007, the Company recorded no expense related to this remediation, other than the accretion of interest expense.

The cumulative expenditures for both on-site and off-site remediation through November 3, 2007 are $19.0 million. As discussed further below, the Company has recovered a portion of these expenditures from insurers and other third parties and continues to pursue recovery of additional remediation, defense costs and other damages from other insurers. The reserve for the anticipated future remediation activities at November 3, 2007, is $9.1 million, of which $1.0 million is accrued within accrued expenses and $8.1 million is accrued within other noncurrent liabilities. Of the total $9.1 million reserve, $5.3 million is for on-site remediation and $3.8 million is for off-site remediation.

Other

The Company has completed its remediation efforts at its closed New York tannery and two associated landfills. In 1995, state environmental authorities reclassified the status of these sites as being properly closed and requiring only continued maintenance and monitoring over the next 17 years. The Company has an accrued liability of $2.0 million at November 3, 2007, related to these sites, which has been discounted at 6.4%. On an undiscounted basis, this liability would be $3.1 million. The Company expects to spend approximately $0.2 million in each of the next five succeeding years and $2.1 million thereafter related to these sites. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other landfills. However, the Company does not currently believe that its liability for such sites, if any, would be material.

12

Based on information currently available, the Company had an accrued liability of $11.2 million as of November 3, 2007, to complete the cleanup, maintenance and monitoring at all sites. Of the $11.2 million liability, $1.0 million is included in accrued expenses, and $10.2 million is included in other noncurrent liabilities in the condensed consolidated balance sheet. The Company continues to evaluate its estimated costs in conjunction with its environmental consultants and records its best estimate of such liabilities. However, future actions and the associated costs are subject to oversight and approval of various governmental authorities. Accordingly, the ultimate costs may vary, and it is possible costs may exceed the recorded amounts.

Litigation

In March 2000, a class action lawsuit was filed in Colorado State Court (District Court for the City and County of Denver) related to the Redfield site described above. Plaintiffs alleged claims for trespass, nuisance, strict liability, unjust enrichment, negligence and exemplary damages arising from the alleged release of solvents contaminating the groundwater and indoor air in the areas adjacent to and near the site. In December 2003, the jury hearing the claims returned a verdict finding the Company’s subsidiary negligent and awarded the class plaintiffs $1.0 million in damages. The Company recorded this award along with estimated pretrial interest on the award and estimated costs related to sanctions imposed by the court related to a pretrial discovery dispute between the parties. The total pretax charge recorded for these matters in 2003 was $3.1 million. The Company recorded an additional $0.6 million in expense in 2004, related to pretrial interest, to reflect the trial court’s ruling extending the time period for which prejudgment interest applied. The plaintiffs filed an appeal of the December 2003 jury verdict and in August 2007, the Colorado Court of Appeals issued its decision of the appeal.  The Court rejected plaintiffs’ attempt to obtain a new trial by affirming the trial court judgment.  The Court also denied a cross-appeal by the Company seeking a reversal of a portion of the pretrial interest awarded to plaintiffs.  The Court also reversed the trial court’s award of costs to the Company, and remanded the case to the trial court for a determination of whether plaintiffs are entitled to recover their costs related to the trial. The plaintiffs have filed a petition with the Supreme Court of Colorado seeking review of the Court of Appeal’s decision denying them a new trial. The ultimate outcome and cost of further proceedings in this matter may vary.

In connection with the Redfield environmental remediation and class action litigation discussed above, the Company sued a number of its insurers seeking recovery of defense costs, indemnity and other damages related to the former operations and the remediation at the site. During 2006, the Company reached agreements with certain of those insurers to resolve the coverage claims arising out of the Redfield site and recorded income related to these recoveries of $7.3 million, net of related legal fees, as a reduction of selling and administrative expenses. The Company continues to pursue recovery of additional remediation, defense costs and other damages from other insurers, but is unable to estimate the ultimate recovery from those insurers. In addition, the Company has filed a contribution action in Colorado State Court against the Colorado Department of Transportation, which owns and operates a facility adjacent to the Redfield site.

The Company also is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on the Company’s results of operations or financial position. All legal costs associated with litigation are expensed as incurred.

Other

During 2004, the Company recorded charges of $2.4 million relating to the insolvency of an insurance company that insured the Company for workers’ compensation and casualty losses from 1973 to 1989. That company is now in liquidation. Certain claims from that time period are still outstanding. While management has recorded its best estimate of loss, the ultimate outcome and cost to the Company may vary.

The Company is contingently liable for lease commitments of approximately $2.4 million in the aggregate, which relate to the Cloth World and Meis specialty retailing chains and a manufacturing facility, which were sold in prior years. In order for the Company to incur any liability related to these lease commitments, the current owners would have to default. As of November 3, 2007, the Company does not believe this is reasonably likely to occur.

13

Note 14 Financial Information for the Company and its Subsidiaries

In 2005, Brown Shoe Company, Inc. issued senior notes which are fully and unconditionally and jointly and severally guaranteed by all of its existing and future subsidiaries that are guarantors under its existing Revolving Credit Agreement. The following table presents the condensed consolidating financial information for each of Brown Shoe Company, Inc. (Parent), the Guarantors and subsidiaries of the Parent that are not Guarantors (the Non-Guarantors), together with consolidating eliminations, as of and for the periods indicated.

The condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Management believes that the information, presented in lieu of complete financial statements for each of the Guarantors, provides meaningful information to allow investors to determine the nature of the assets held by, and operation and cash flow of, each of the consolidating groups.

14

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF NOVEMBER 3, 2007

($ thousands)	Parent		Guarantors			Non-Guarantors		Eliminations			Total
ASSETS
Current Assets
Cash and cash equivalents	$	21,000	$	20,473		$	38,459	$	–		$	79,932
Receivables		68,926		3,873			24,001		–			96,800
Inventories		57,161		383,020			711		–			440,892
Prepaid expenses and other current assets		5,999		21,622			1,786		–			29,407
Total current assets		153,086		428,988			64,957		–			647,031
Other assets		282,534		37,357			583		–			320,474
Property and equipment, net		30,092		112,424			3,284		–			145,800
Investment in nonconsolidated affiliate		–		–			7,066		–			7,066
Investment in subsidiaries		630,700		40,107			–		(670,807	)		–
Total assets	$	1,096,412	$	618,876		$	75,890	$	(670,807	)	$	1,120,371
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Borrowings under revolving credit agreement	$	–	$	–		$	–	$	–		$	–
Trade accounts payable		21,207		117,840			26,184		–			165,231
Accrued expenses		48,735		62,068			4,260		–			115,063
Income taxes		2,061		291			2,782		–			5,134
Total current liabilities		72,003		180,199			33,226		–			285,428
Other Liabilities
Long-term debt		150,000		–			–		–			150,000
Other liabilities		63,146		28,617			235		–			91,998
Intercompany payable (receivable)		219,052		(220,302	)		1,250		–			–
Total other liabilities		432,198		(191,685	)		1,485		–			241,998
Minority interests		–		(338	)		1,072		–			734
Shareholders’ equity		592,211		630,700			40,107		(670,807	)		592,211
Total liabilities and shareholders’ equity	$	1,096,412	$	618,876		$	75,890	$	(670,807	)	$	1,120,371

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CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2007

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net sales	$	470,586		$	1,160,154		$	281,409		$	(123,684	)	$	1,788,465
Cost of goods sold		343,709			619,161			228,641			(123,684	)		1,067,827
Gross profit		126,877			540,993			52,768			–			720,638
Selling and administrative expenses		136,274			467,246			38,964			–			642,484
Equity in net loss of nonconsolidated affiliate		–			–			14			–			14
Equity in (earnings) loss of subsidiaries		(58,203	)		(20,222	)		–			78,425			–
Operating earnings		48,806			93,969			13,790			(78,425	)		78,140
Interest expense		(11,562	)		(9	)		(17	)		–			(11,588	)
Interest income		675			654			1,269			–			2,598
Intercompany interest income (expense)		3,892			(5,214	)		1,322			–			–
Earnings before income taxes and minority interests		41,811			89,400			16,364			(78,425	)		69,150
Income tax benefit (provision)		4,664			(27,097	)		(468	)		–			(22,901	)
Minority interests in net loss (earnings) of consolidated subsidiaries		–			–			226			–			226
Net earnings (loss)	$	46,475		$	62,303		$	16,122		$	(78,425	)	$	46,475

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2007

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net cash (used) provided by operating activities	$	(14,253	)	$	57,869		$	20,647		$	(1,536	)	$	62,727
Investing activities
Capital expenditures		(1,933	)		(31,742	)		(681	)		–			(34,356	)
Cash recognized on initial consolidation of joint venture		–			–			980			–			980
Investment in nonconsolidated affiliate		–			–			(7,080	)		–			(7,080	)
Acquisition cost		–			(2,750	)		–			–			(2,750	)
Net cash used for investing activities		(1,933	)		(34,492	)		(6,781	)		–			(43,206	)
Financing activities
Decrease in borrowings under revolving credit agreement		(1,000	)		–			–			–			(1,000	)
Proceeds from stock options exercised		8,962			–			–			–			8,962
Tax benefit related to share-based plans		5,802			–			–			–			5,802
Dividends (paid) received		(9,341	)		30,007			(30,007	)		–			(9,341	)
Intercompany financing		32,763			(50,778	)		16,479			1,536
Net cash provided (used) by financing activities		37,186			(20,771	)		(13,528	)		1,536			4,423
Effect of exchange rate changes on cash		–			2,327			–			–			2,327
Increase (decrease) in cash and cash equivalents		21,000			4,933			338			–			26,271
Cash and cash equivalents at beginning of period		–			15,540			38,121			–			53,661
Cash and cash equivalents at end of period	$	21,000		$	20,473		$	38,459		$	–		$	79,932

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CONDENSED CONSOLIDATING BALANCE SHEET

AS OF OCTOBER 28, 2006

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
ASSETS
Current Assets
Cash and cash equivalents	$	(1,174	)	$	18,110		$	30,576		$	–		$	47,512
Receivables		79,884			9,269			37,857			–			127,010
Inventories		74,763			340,657			21,699			(3,192	)		433,927
Prepaid expenses and other current assets		7,754			8,231			1,578			300			17,863
Total current assets		161,227			376,267			91,710			(2,892	)		626,312
Other assets		268,704			32,028			2,066			–			302,798
Property and equipment, net		15,216			107,996			3,203			–			126,415
Investment in subsidiaries		544,527			38,842			–			(583,369	)		–
Total assets	$	989,674		$	555,133		$	96,979		$	(586,261	)	$	1,055,525
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Borrowings under revolving credit agreement	$	20,500		$	–		$	–		$	–		$	20,500
Trade accounts payable		20,280			89,710			43,317			–			153,307
Accrued expenses		71,164			59,002			9,064			33			139,263
Income taxes		4,111			731			2,004			(1,624	)		5,222
Total current liabilities		116,055			149,443			54,385			(1,591	)		318,292
Other Liabilities
Long-term debt		150,000			­–			–			–			150,000
Other liabilities		58,101			29,346			1			–			87,448
Intercompany payable (receivable)		165,725			(167,613	)		3,189			(1,301	)		–
Total other liabilities		373,826			(138,267	)		3,190			(1,301	)		237,448
Minority Interests		–			–			(8	)		–			(8	)
Shareholders’ equity		499,793			543,957			39,412			(583,369	)		499,793
Total liabilities and shareholders’ equity	$	989,674		$	555,133		$	96,979		$	(586,261	)	$	1,055,525

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 28, 2006

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net sales	$	510,729		$	1,139,758			322,446		$	(141,264	)	$	1,831,669
Cost of goods sold		378,903			611,685			265,344			(141,264	)		1,114,668
Gross profit		131,826			528,073			57,102			–			717,001
Selling and administrative expenses		141,134			456,491			32,569			–			630,194
Equity in (earnings) loss of subsidiaries		(64,071	)		(23,736	)		–			87,807			–
Operating earnings		54,763			95,318			24,533			(87,807	)		86,807
Interest expense		(13,247	)		(9	)		(35	)		–			(13,291	)
Interest income		539			345			602			–			1,486
Intercompany interest income (expense)		3,711			(4,928	)		1,217			–			–
Earnings before income taxes and minority interests		45,766			90,726			26,317			(87,807	)		75,002
Income tax benefit (provision)		6,363			(26,659	)		(2,646	)		–			(22,942	)
Minority interests in net loss (earnings) of consolidated subsidiaries		–			–			69			–			69
Net earnings (loss)	$	52,129		$	64,067		$	23,740		$	(87,807	)	$	52,129

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE THRITY-NINE WEEKS ENDED OCTOBER 28, 2006

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net cash provided by operating activities	$	19,953		$	50,459		$	24,592		$	174		$	95,178
Investing activities
Acquisition cost		(22,700	)		–			–			–			(22,700	)
Capital expenditures		(1,431	)		(35,816	)		(260	)		–			(37,507	)
Net cash used for investing activities		(24,131	)		(35,816	)		(260	)		–			(60,207	)
Financing activities
Decrease in borrowings under revolving credit agreement		(29,500	)		–			–			–			(29,500	)
Proceeds from stock options exercised		7,874			–			–			–			7,874
Tax benefit related to share-based plans		6,568			–			–			–			6,568
Dividends paid		(6,842	)		–			–			–			(6,842	)
Intercompany financing		11,567			(11,394	)		1			(174	)		-
Net cash (used) provided by financing activities		(10,333	)		(11,394	)		1			(174	)		(21,900	)
Effect of exchange rate changes on cash		–			295			(142	)		–			153
(Decrease) increase in cash and cash equivalents		(14,511	)		3,544			24,191			–			13,224
Cash and cash equivalents at beginning of period		13,337			14,566			6,385			–			34,288
Cash and cash equivalents at end of period	$	(1,174	)	$	18,110		$	30,576		$	–		$	47,512

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

OVERVIEW

Overall, the business environment continued to be difficult in both our retail and wholesale businesses during the third quarter, resulting in lower net sales compared to the third quarter of last year. However, our net earnings were slightly greater than the third quarter of last year, while our diluted earnings per share were lower reflecting additional shares outstanding.

We also continued to make progress during the third quarter on a number of key initiatives, including our Earnings Enhancement Plan, international expansion and other business investments. These initiatives are described further in the Recent Developments section below.

The following is a summary of the financial highlights for the third quarter:

·   Consolidated net sales declined $31.3 million, or 4.6%, to $645.5 million for the third quarter of fiscal 2007, as compared to $676.8 million for the third quarter of last year. The largest sales decline came from our Wholesale Operations segment, which declined $28.6 million, driven by our reduced emphasis on sales of private label product, the discontinuance of the Bass license at the end of 2006 and the overall weak retail environment, which negatively impacted in-season reorders from our wholesale customers.

·   Operating earnings improved 1.8% to $42.8 million in the third quarter of 2007, compared to $42.0 million in the third quarter of 2006, which represented an increase of 40 basis points as a percent of sales.

·   Net earnings were $27.0 million, or $0.61 per diluted share, for the third quarter of 2007, compared to $26.9 million, or $0.62 per diluted share, for the third quarter of last year.

There were several items that impacted our third quarter results in 2007 and 2006. These items include:

·   Earnings Enhancement Plan costs – We incurred costs related to our initiatives under our Earnings Enhancement Plan of $4.5 million ($2.9 million on an after-tax basis, or $0.06 per diluted share) during the third quarter of 2007, with no corresponding charge in the third quarter of 2006. See further discussions of our Earnings Enhancement Plan in the Recent Developments section below.

·   Employee incentive plan costs – Due to reductions in our expectations for our cash-based employee incentive plan payouts, we recognized a cumulative incentive compensation expense reduction of $2.0 million in the third quarter of 2007, compared to expense of $9.6 million in the third quarter of 2006.

·   Bass Exit – During the third quarter of 2006, we incurred incremental operating losses of $2.3 million ($1.4 million on an after-tax basis), or $0.03 per diluted share, related to the exit of the Bass business.

·   Executive Retirement Agreement – During the third quarter of 2006, we incurred a charge of $3.7 million ($2.3 million on an after-tax basis), or $0.05 per diluted share, related to an executive early retirement agreement.

Following is a summary of our operating results in the third quarter of 2007 and the status of our balance sheet:

·   Famous Footwear’s net sales decreased 1.4% to $361.0 million in the third quarter compared to $366.3 million in the third quarter of last year. Same-store sales decreased 6.2% for the quarter (or 2.6% on a comparable calendar basis which eliminates the effect of the shift of the fiscal calendar following the 53-week year in fiscal 2006) reflecting the overall weak retail environment, unseasonably warm weather and the strong sales performance last year when an 8.2% same-store sales gain was achieved. Operating earnings decreased 22.2% to $30.8 million in the third quarter compared to $39.6 million in the third quarter of the prior year, driven by both the lower sales and a lower gross profit rate.  As a percent of sales, operating earnings decreased to 8.5% in the third quarter of 2007, compared to 10.8% in the same period last year.

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·   Our Wholesale Operations segment’s net sales decreased 11.8% to $213.7 million in the third quarter, compared to $242.3 million in the third quarter of last year, due to reduced sales of lower margin private label product, the discontinuance of the Bass business at the end of 2006 and the weak retail environment. Higher sales were achieved in our Dr. Scholl’s, Nickels Soft, Etienne Aigner, Franco Sarto and International divisions. The segment experienced a higher gross profit rate due to a greater mix of branded product, lower inventory markdowns and exiting the lower margin Bass business. Reductions in expected incentive plan payouts lessened the impact of the reduction in net sales, and operating earnings improved to $23.1 million compared to $20.0 million in the third quarter last year. The segment incurred charges of $0.4 million in the third quarter of 2007 and no charges in the third quarter of 2006 related to our Earnings Enhancement Plan; and during the third quarter of 2006, incremental costs of $2.3 million were incurred related to the exit of the Bass business. As a percent of sales, operating earnings increased to 10.8% in the third quarter of 2007, compared to 8.3% in the same period last year.

·   Our Specialty Retail segment’s sales increased 3.8% to $70.8 million in the third quarter, compared to $68.2 million in the third quarter of last year, due to both growth in our Shoes.com business and the strengthening of the Canadian dollar exchange rate, partially offset by a same-store sales decrease of 1.9%. We incurred an operating loss of $1.9 million in the third quarter of 2007, compared to operating earnings of $1.0 million in the third quarter of the prior year. This segment incurred charges of $2.8 million in the third quarter of 2007 related to our Earnings Enhancement Plan, principally for the relocation of the Shoes.com administrative office from Los Angeles to St. Louis, which we believe will lead to better integration of this business into the Brown Shoe platform and contribute to continued sales growth in our e-commerce business.

·   Inventories at quarter-end were $440.9 million, up from $433.9 million last year. Our current ratio, the relationship of current assets to current liabilities, increased to 2.27 to 1 compared to 1.91 to 1 at February 3, 2007, and 1.97 to 1 at October 28, 2006. Our debt-to-capital ratio, the ratio of our debt obligations to the sum of our debt obligations and shareholders’ equity, decreased to 20.2% at the end of the quarter from 25.4% at the end of the year-ago quarter, reflecting the decrease in borrowings under our revolving credit agreement and increased shareholders’ equity.

Recent Developments

Earnings Enhancement Program

We continue to make progress on our Earnings Enhancement Plan introduced in 2006, which was designed to increase earnings through cost reductions, efficiency initiatives and the reallocation of resources. Key elements of the plan include: (i) restructuring administrative and support areas; (ii) redesigning logistics and distribution platforms; (iii) reorganizing to eliminate operational redundancies; (iv) realigning strategic priorities; and (v) refining the supply chain process and enhancing inventory utilization. Annual after-tax savings expected to be achieved upon the anticipated completion of the initiatives in late 2008 continue to be estimated at $17–$20 million.

We have made substantial progress in implementing a number of initiatives under this plan, including:

·   Closing our Los Angeles, CA, office, which housed the Shoes.com e-commerce business, and consolidating that business into our St. Louis, MO, headquarters facility.

·   Closing our Needham, MA, office and Dover, NH, distribution center, which housed the Bennett business.

·   Consolidating our New York City operations to accommodate the offices of our Brown New York personnel, as well as our product development teams and showrooms.

·   Closing our Italian sales office.

·   Outsourcing our Canadian wholesale business to a third-party distributor.

·   Closing all of our Via Spiga stores.

·   Making various process improvements and related personnel reductions throughout the Company to streamline our operations.

These actions resulted in charges of $6.3 million in 2006 ($3.9 million on an after-tax basis, or $0.06 per diluted share). We incurred charges of $4.5 million ($2.9 million on an after-tax basis, or $0.06 per diluted share) during the third quarter of 2007, with no corresponding charge in the third quarter of 2006. We have incurred charges of $15.3 million ($9.8 million on an after-tax basis, or $0.22 per diluted share) in the first thirty-nine weeks of 2007, compared to $2.0 million ($1.2 million on an after-tax basis, or $0.03 per diluted share) in the first thirty-nine weeks of 2006. See Note 6 to the condensed consolidated financial statements for additional information related to these charges.

20

While much has been accomplished, we are still developing certain of the initiatives, and we expect to update our costs and savings estimates as they are further refined. However, our current estimates are as follows:

·   In 2007, after-tax implementation costs are estimated to be approximately $11 million. We expect to realize after-tax benefits of $10–$12 million.

·   In 2008, after-tax implementation costs are estimated to be approximately $8 million, and annual after-tax benefits are estimated to be $17–$20 million upon completion of the projects in late 2008.

B&H Footwear Limited

In June 2007, we entered into a joint venture agreement with a subsidiary of Hongguo International Holdings Limited (Hongguo) to market Naturalizer footwear in China in Fall 2007 and Via Spiga footwear in 2008. We own 51% of the equity of the joint venture, B&H Footwear Limited (B&H Footwear), with Hongguo owning the other 49%. In addition to the equity interest, we will receive a royalty from B&H Footwear for its use of the Naturalizer brand name. B&H Footwear operates from our Dongguan, China offices, where we currently maintain our sourcing operation of nearly 600 employees. B&H Footwear combines our strength in brand-building and marketing with Hongguo’s established network of approximately 700 retail locations and operational expertise in the retail industry in China.

B&H Footwear will distribute the Naturalizer brand in department store shops and free-standing stores in several of China’s largest cities: Shanghai, Beijing, Guangzhou, and Shenzhen. B&H Footwear will also sell Naturalizer footwear to Hongguo on a wholesale basis, which Hongguo will sell in retail stores it plans to open throughout the rest of China. Over the next five years, B&H Footwear plans to open approximately 75 stores and shops carrying the Naturalizer brand, and Hongguo plans to open approximately 350 locations. During this same time period, 100 Via Spiga points of distribution are expected to be opened, approximately 30 by B&H Footwear and approximately 70 by Hongguo.

B&H Footwear began operations in the third quarter of 2007. As of November 3, 2007, B&H Footwear operated three Naturalizer stores and shops and Hongguo operated 15 stores and shops. In 2007, we expect that the sales of B&H Footwear will be immaterial and the start-up costs and operating losses will total approximately $1.5 million to $2.0 million (or $0.03 to $0.04 per diluted share).

Investment in Edelman Shoe, Inc.

In August 2007, we invested $7.1 million in Edelman Shoe, Inc., acquiring 42.5% of the outstanding stock. Edelman Shoe, Inc. is a privately held company operated by Sam and Libby Edelman. The Edelmans maintain a majority equity interest in Edelman Shoe, Inc. and we have an option to buy the remaining interest in the future. This investment is expected to allow Edelman Shoe, Inc. to accelerate the development and expansion of the Sam Edelman brand, which was launched in 2004 and is sold in better department stores and independent and specialty stores across the country.

21

CONSOLIDATED RESULTS

	Thirteen Weeks Ended								Thirty-nine Weeks Ended
	November 3, 2007				October 28, 2006				November 3, 2007				October 28, 2006
($ millions)				% of Net Sales				% of Net Sales				% of Net Sales				% of Net  Sales
Net sales	$	645.5		100.0%	$	676.8		100.0%	$	1,788.5		100.0%	$	1,831.7		100.0%
Cost of goods sold		385.7		59.7%		406.8		60.1%		1,067.9		59.7%		1,114.7		60.9%
Gross profit		259.8		40.3%		270.0		39.9%		720.6		40.3%		717.0		39.1%
Selling and administrative expenses		217.0		33.7%		228.0		33.7%		642.5		35.9%		630.2		34.4%
Equity in net loss of nonconsolidated affiliate		–		–		–		–		–		–		–		–
Operating earnings		42.8		6.6%		42.0		6.2%		78.1		4.4%		86.8		4.7%
Interest expense		(3.8	)	(0.6)%		(4.3	)	(0.6)%		(11.5	)	(0.6)%		(13.3	)	(0.7)%
Interest income		1.0		0.2%		0.7		0.1%		2.6		0.1%		1.5		0.1%
Earnings before income taxes and minority interests		40.0		6.2%		38.4		5.7%		69.2		3.9%		75.0		4.1%
Income tax provision		(13.0	)	(2.0)%		(11.5	)	(1.7)%		(22.9	)	(1.3)%		(22.9	)	(1.3)%
Minority interests in net loss (earnings) of consolidated subsidiaries		–		–		–		–		0.2		–		–		–
Net earnings	$	27.0		4.2%	$	26.9		4.0%	$	46.5		2.6%	$	52.1		2.8%

Net Sales

Net sales decreased $31.3 million, or 4.6%, to $645.5 million in the third quarter of 2007 as compared to $676.8 million in the third quarter of the prior year. The largest decline came from our Wholesale Operations segment, which reported a $28.6 million decline, driven by our reduced emphasis on sales of private label product, the discontinuance of the Bass license at the end of 2006 and the overall weak retail environment. Famous Footwear’s sales decreased by $5.3 million over the year-ago quarter, reflecting a 6.2% same-store sales decrease (a 2.6% decrease on a comparable calendar basis), partially offset by a higher store count in the current period. The same-store sales decline in 2007 reflects unseasonably warm weather; and in the third quarter of 2006, Famous Footwear had a particularly strong back-to-school selling season, generating a same-store sales increase of 8.2%. Our Specialty Retail segment’s sales improved by $2.6 million, due to both growth in our Shoes.com business and the strengthening of the Canadian dollar exchange rate, partially offset by a same-store sales decrease of 1.9% and a lower store count compared to last year.

Net sales decreased $43.2 million, or 2.4%, to $1,788.5 million in the first nine months of 2007, as compared to $1,831.7 million in the first nine months of the prior year. The decrease in the year to date net sales is due to the same factors listed above for the quarterly period. Famous Footwear same-store sales decreased 0.2% and our Specialty Retail stores same-store sales decreased 0.1%. Total sales at our retail divisions are higher than last year for the year to date period, due to a higher store count at Famous Footwear, growth in our Shoes.com business and the strengthening of the Canadian dollar exchange rate.

Gross Profit

Gross profit decreased $10.2 million, or 3.8%, to $259.8 million for the third quarter of 2007, as compared to $270.0 million in the third quarter of the prior year. As a percent of net sales, our gross profit rate increased to 40.3% in the third quarter from 39.9% in the third quarter of the prior year, driven by higher margin rates in our Wholesale Operations segment and a greater mix of retail sales, which carry a higher gross profit rate. Our Wholesale Operations segment experienced a higher gross profit rate as a result of a greater mix of branded product, due to reduced sales of lower margin private label product, as well as lower inventory markdowns, and discontinuing the lower margin Bass business in 2006.

Gross profit increased $3.6 million, or 0.5%, to $720.6 million for the first nine months of 2007, as compared to $717.0 million in the first nine months of the prior year. As a percent of net sales, our gross profit rate increased to 40.3% in the first nine months from 39.1% in the first nine months of the prior year. The improvement in the year to date gross profit and gross profit rate is due to the same factors listed above for the quarterly period.

22

Selling and Administrative Expenses

Selling and administrative expenses decreased $11.0 million, or 4.8%, to $217.0 million for the third quarter of 2007 as compared to $228.0 million in the third quarter of the prior year. As a percentage of sales, selling and administrative expenses of 33.7% were equal to last year’s third quarter. In addition to normal cost increases throughout the Company, as well as increased costs from a larger store base at Famous Footwear and growth at Shoes.com, there were several factors impacting the comparison of the third quarters of 2007 and 2006, as follows:

·   We recognized a cumulative incentive compensation expense reduction of $2.0 million in the third quarter of 2007 related to cash-based employee incentive plans, compared to expense of $9.6 million in the third quarter of 2006, for a net decrease of $11.6 million in the third quarter of 2007 compared to the third quarter of last year.

·   In 2007, costs related to our Earnings Enhancement Plan were higher by $4.5 million, with no corresponding charge in the third quarter of 2006.

·   In 2007, we realized lower costs resulting from the benefits of our Earnings Enhancement Plan of approximately $4 million.

·   In 2006, we incurred a charge of $3.7 million related to an executive early retirement agreement.

·   In 2006, we incurred incremental charges of $2.3 million related to the exit of the Bass business.

Selling and administrative expenses increased $12.3 million, or 2.0%, to $642.5 million for the first nine months as compared to $630.2 million in the first nine months of the prior year. As a percentage of sales, selling and administrative expenses of 35.9% are higher than last year’s first nine months of 34.4%. In addition to increased costs at Famous Footwear resulting from a larger store base and growth at Shoes.com, there were several factors impacting the comparison of selling and administrative expenses for the first nine months of 2007 and 2006, as follows:

·   In 2007, we realized lower costs resulting from the benefits of our Earnings Enhancement Plan of approximately $15 million.

·   In 2007, costs related to our Earnings Enhancement Plan were higher by $13.3 million. We incurred $15.3 million during the first nine months of 2007, compared to $2.0 million during the first nine months of 2006.

·   We recognized year to date expense of $5.2 million in 2007 related to cash-based employee incentive plans, compared to expense of $16.4 million in the year to date 2006 period, for a decrease of $11.2 million in the first nine months of 2007 compared to the first nine months of 2006.

·   2006 includes an insurance recovery of $7.3 million for our Redfield site that was recognized as a reduction of selling and administrative expenses in the second quarter of 2006.

·   In 2006, we incurred a charge of $3.7 million related to an executive early retirement agreement.

·   In 2006, we incurred incremental charges of $2.3 million related to the exit of the Bass business.

·   During 2007, we incurred start-up costs of $0.8 million related to our joint venture, B&H Footwear.

Interest Expense

Interest expense decreased $0.5 million to $3.8 million in the third quarter, as compared to $4.3 million in the third quarter of the prior year. The decrease in interest expense is a result of the lower average borrowings under our revolving credit facility.

Interest expense decreased $1.8 million to $11.5 million in the first nine months, as compared to $13.3 million in the first nine months of the prior year. The decrease in interest expense is a result of the lower average borrowings under our revolving credit facility.

Income Tax Provision

Our consolidated effective tax rate was 32.6% in the third quarter of 2007, as compared to 29.8% in the third quarter of the prior year, and was 33.1% in the first nine months of 2007, as compared to 30.6% in the first nine months of the prior year. Both increases are attributable primarily to a greater mix of domestic earnings, which are taxed at higher rates than earnings from our international operations.

Net Earnings

Net earnings increased $0.1 million, or 0.4%, to $27.0 million in the third quarter as compared to $26.9 million in the third quarter of the prior year.

23

Net earnings decreased $5.6 million, or 10.8%, to $46.5 million in the first nine months of 2007 as compared to $52.1 million in the first nine months of the prior year.

FAMOUS FOOTWEAR

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	November 3, 2007			October 28, 2006			November 3, 2007			October 28, 2006
($ millions, except sales  per square foot)			% of Net Sales			% of Net Sales			% of Net Sales			% of Net  Sales
Operating Results
Net sales	$	361.0	100.0%	$	366.3	100.0%	$	1,002.5	100.0%	$	961.3	100.0%
Cost of goods sold		199.1	55.2%		199.1	54.4%		552.2	55.1%		530.7	55.2%
Gross profit		161.9	44.8%		167.2	45.6%		450.3	44.9%		430.6	44.8%
Selling and administrative expenses		131.1	36.3%		127.6	34.8%		379.6	37.8%		363.2	37.8%
Operating earnings	$	30.8	8.5%	$	39.6	10.8%	$	70.7	7.1%	$	67.4	7.0%
Key Metrics
Same-store sales % change		(6.2%)			8.2%			(0.2%)			3.5%
Same-store sales $ change	$	(21.9)		$	25.7		$	(1.7)		$	30.8
Sales change from new and closed stores, net	$	16.6		$	12.5		$	42.9		$	27.5
Sales per square foot	$	49		$	54		$	139		$	142
Square footage (thousand sq. ft.)		7,367			6,819			7,367			6,819
Stores opened		51			26			91			64
Stores closed		15			10			30			38
Ending stores		1,060			979			1,060			979

Net Sales

Net sales decreased $5.3 million, or 1.4%, to $361.0 million in the third quarter of 2007, as compared to $366.3 million in the third quarter of the prior year. Same-store sales decreased 6.2% for the quarter (or 2.6% on a comparable calendar basis, which eliminates the effect of the shift of the fiscal calendar following the 53-week year in fiscal 2006) reflecting the overall weak retail environment, unseasonably warm weather and the strong sales performance last year when an 8.2% same-store sales gain was achieved. A higher store count partially offset the same-store sales decline. During the third quarter of 2007, we opened 51 new stores and closed 15, resulting in 1,060 stores at the end of the third quarter as compared to 979 at the end of the third quarter of the prior year. Sales per square foot were $49, compared to $54 last year.

Net sales increased $41.2 million, or 4.3%, to $1,002.5 million in the first nine months of 2007 as compared to $961.3 million in the first nine months of the prior year, due to a higher store count, partially offset by a same-store sales decrease of 0.2%. Sales per square foot decreased slightly to $139, down from $142 a year ago.

Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months. This method avoids the distorting effect that grand opening sales have in the first month of operation. Relocated stores are treated as new stores. Closed stores are excluded from the calculation. Sales change from new and closed stores, net, reflects the change in net sales due to stores that have been opened or closed during the period and are thereby excluded from the same-store sales calculation.

Gross Profit

Gross profit decreased $5.3 million, or 3.2%, to $161.9 million in the third quarter of 2007, as compared to $167.2 million in the third quarter of the prior year. The decrease reflects both a volume decrease (described above in the net sales section) and a rate decrease. As a percent of sales, our gross profit rate was 44.8% in the third quarter of 2007, down from 45.6% in the third quarter of the prior year. The decrease in the rate primarily reflects higher net markdowns to sell through inventory. In addition, in the third quarter of 2006, after realigning our corporate structure, we recognized $1.0 million of income related to gift card breakage (i.e., gift cards sold where the likelihood of redemption by the customer is remote).

24

Gross profit increased $19.7 million, or 4.6%, to $450.3 million in the first nine months of 2007, as compared to $430.6 million in the first nine months of the prior year. The increase primarily reflects the higher store count and higher sales compared to the prior year, as previously described. As a percent of sales, our gross profit rate was 44.9% in the first nine months of 2007, up from 44.8% in the first nine months of the prior year. The slight improvement in the rate was primarily due to higher initial markups.

Selling and Administrative Expenses

Selling and administrative expenses increased $3.5 million, or 2.8%, to $131.1 million for the third quarter of 2007, as compared to $127.6 million in the third quarter of the prior year. This increase is primarily attributable to the higher store count resulting in higher retail facilities and selling costs. Partially offsetting these increases, the division recognized lower incentive plan compensation expense during the period, as compared to last year. As a percentage of net sales, selling and administrative costs have increased to 36.3% from 34.8% last year. This increase reflects higher marketing and retail facilities expense, as well as the impact of lower sales.

Selling and administrative expenses increased $16.4 million, or 4.5%, to $379.6 million for the first nine months of 2007, as compared to $363.2 million in the first nine months of the prior year. This increase is primarily attributable to the higher sales volume and a higher store count resulting in higher retail facilities and selling costs. Partially offsetting these increases, the division recognized lower incentive plan compensation expense during the period, as compared to last year. As a percentage of net sales, selling and administrative costs were 37.8%, equal to last year.

Operating Earnings

Operating earnings decreased $8.8 million, or 22.2%, to $30.8 million for the third quarter of 2007, as compared to $39.6 million in the third quarter of the prior year. The decrease in operating earnings was due to the lower sales volume, a lower gross profit rate, higher retail facilities expense and the inclusion of gift card breakage income in last year’s results, partially offset by lower cash-based incentive compensation expense. As a percent of sales, operating earnings declined to 8.5% in the third quarter of 2007, compared to 10.8% in the same period last year, reflecting the above factors and expense de-leveraging as a result of the lower sales.

Operating earnings increased $3.3 million, or 5.0%, to $70.7 million for the first nine months of 2007, as compared to $67.4 million in the first nine months of the prior year. The increase in operating earnings was due to the higher sales volume and higher gross profit rates in the first half of fiscal 2007. As a percent of sales, operating earnings of 7.1% in the first nine months of 2007 were slightly higher than the 7.0% for the same period last year.

WHOLESALE OPERATIONS

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	November 3, 2007			October 28, 2006			November 3, 2007			October 28, 2006
($ millions)			% of Net Sales			% of Net Sales			% of Net Sales			% of Net  Sales
Operating Results
Net sales	$	213.7	100.0%	$	242.3	100.0%	$	592.9	100.0%	$	686.3	100.0%
Cost of goods sold		148.6	69.5%		171.2	70.6%		410.6	69.3%		486.3	70.9%
Gross profit		65.1	30.5%		71.1	29.4%		182.3	30.7%		200.0	29.1%
Selling and administrative expenses		42.0	19.7%		51.1	21.1%		133.3	22.4%		146.8	21.3%
Operating earnings	$	23.1	10.8%	$	20.0	8.3%	$	49.0	8.3%	$	53.2	7.8%
Key Metrics
Unfilled order position at end of period	$	280.3		$	290.8

25

Net Sales

Net sales decreased $28.6 million, or 11.8%, to $213.7 million in the third quarter of 2007, as compared to $242.3 million in the third quarter of the prior year due reduced sales of lower margin private label product, the discontinuance of the Bass business at the end of 2006 and the overall weak retail environment. Sales in our Dr. Scholl’s, Nickels Soft, Etienne Aigner, Franco Sarto and International divisions were higher than last year.

Net sales decreased $93.4 million, or 13.6%, to $592.9 million in the first nine months of 2007, as compared to $686.3 million in the first nine months of the prior year. Sales gains from our Dr. Scholl’s, International, Etienne Aigner, Nickels Soft, and Naturalizer divisions were more than offset by lower private label sales and our exit from the Bass business at the end of 2006.

Gross Profit

Gross profit decreased $6.0 million, or 8.4%, to $65.1 million in the third quarter of 2007, as compared to $71.1 million in the third quarter of the prior year. As a percentage of net sales, however, our gross profit rate increased to 30.5% in the third quarter from 29.4% in the third quarter of the prior year. The improvement in the rate is due to a greater mix of branded product, lower inventory markdowns and exiting the lower margin Bass business in 2006.

Gross profit decreased $17.7 million, or 8.9%, to $182.3 million in the first nine months of 2007, as compared to $200.0 million in the first nine months of the prior year. As a percentage of net sales, our gross profit rate increased to 30.7% in the first nine months from 29.1% in the first nine months of the prior year. This improvement is due to the same factors that impacted gross profit for the third quarter.

Selling and Administrative Expenses

Selling and administrative expenses decreased $9.1 million, or 17.8%, to $42.0 million for the third quarter of 2007 as compared to $51.1 million in the third quarter of the prior year. In addition to reduced costs from the Earnings Enhancement Plan initiatives, this decrease is attributable to the following factors:

·   Decrease of $5.1 million related to cash-based incentive plan payouts.

·   Decrease of $2.3 million related to Bass exit costs – During the third quarter of 2006, we recognized $2.3 million related to exiting the Bass business.

·   Decrease of approximately $1.6 million related to the WSA trade show – As a result of fiscal 2006 including 53 weeks and the resulting shift of one week for the fiscal 2007 period, the WSA trade show in Las Vegas occurred during the second quarter of 2007 rather than the third quarter, resulting in approximately $1.6 million decrease in expenses for the third quarter of 2007.

·   Increase of $0.4 million related to our Earnings Enhancement Plan – We incurred $0.4 million in charges for the third quarter of 2007 related to our Earnings Enhancement Plan, with no charges in the corresponding year-ago period.

As a percent of sales, selling and administrative expenses decreased from 21.1% last year to 19.7% this year, as a result of the above listed factors.

Selling and administrative expenses decreased $13.5 million, or 9.3%, to $133.3 million for the first nine months of 2007 as compared to $146.8 million in the first nine months of the prior year. As a result of the reduction in net sales, we experienced lower expense in certain variable cost categories. In addition to reduced costs from the Earnings Enhancement Plan, this decrease is attributable to the following factors:

·   Decrease of $5.3 million related to cash-based incentive plan payouts.

·   Decrease of $3.5 million related to reductions in marketing and other selling costs

·   Increase of $2.7 million related to our Earnings Enhancement Plan – We incurred $3.1 million in charges during the first nine months of 2007 related to our Earnings Enhancement Plan, compared to $0.4 million of charges in the corresponding year-ago period.

·   Decrease of $2.3 million related to Bass exit costs.

As a percent of sales, selling and administrative expenses increased from 21.3% last year to 22.4% this year, reflecting the above named factors and the de-leveraging of the expense base due to lower sales.

26

Operating Earnings

Operating earnings increased $3.1 million, or 15.6%, to $23.1 million for the third quarter of 2007, as compared to $20.0 million in the third quarter of the prior year, reflecting the higher gross profit rate and lower expenses.

Operating earnings decreased $4.2 million, or 7.8%, to $49.0 million for the first nine months of 2007, as compared to $53.2 million in the first nine months of the prior year as the impact of the lower sales could not offset the higher gross profit rate and lower sales.

SPECIALTY RETAIL

	Thirteen Weeks Ended							Thirty-nine Weeks Ended
	November 3, 2007				October 28, 2006			November 3, 2007			October 28, 2006
($ millions, except for sales per square foot)				% of Net Sales			% of Net Sales			% of Net Sales				% of Net  Sales
Operating Results
Net sales	$	70.8		100.0%	$	68.2	100.0%	$	193.1	100.0%	$	184.1		100.0%
Cost of goods sold		38.0		53.7%		36.5	53.5%		105.0	54.4%		97.8		53.1%
Gross profit		32.8		46.3%		31.7	46.5%		88.1	45.6%		86.3		46.9%
Selling and administrative expenses		34.7		49.0%		30.7	45.0%		94.8	49.0%		89.7		48.8%
Operating earnings (loss)	$	(1.9	)	(2.7)%	$	1.0	1.5%	$	(6.7)	(3.4)%	$	(3.4	)	(1.9)%
Key Metrics
Same-store sales % change		(1.9%)				6.0%			(0.1%)			1.4%
Same-store sales $ change	$	(0.9)			$	2.6		$	(0.2)		$	1.9
Sales change from new and closed stores, net	$	(3.4)			$	(5.7)		$	(9.5)		$	(13.7)
Impact of changes in Canadian exchange rate on sales	$	2.2			$	1.1		$	3.1		$	3.9
Increase in sales of      e-commerce subsidiary	$	4.7			$	7.1		$	15.6		$	17.7
Sales per square foot, excluding e-commerce subsidiary	$	101			$	102		$	275		$	275
Square footage (thousand sq. ft.)		466				507			466			507
Stores opened		2				1			6			3
Stores closed		3				8			18			19
Ending stores		278				298			278			298

Net Sales

Net sales increased $2.6 million, or 3.8%, to $70.8 million in the third quarter of 2007 as compared to $68.2 million in the third quarter of the prior year. The improvement in net sales was due to growth in sales at Shoes.com, Inc., our e-commerce subsidiary, as well as the strengthening of the Canadian dollar exchange rate, partially offset by a same-store sales decline of 1.9% and a lower store count compared to last year. Sales at Shoes.com increased $4.7 million, or 29.5%, to $20.4 million in the third quarter, as compared to $15.8 million in last year’s third quarter. We opened 2 stores and closed 3 during the quarter resulting in 278 stores at the end of the quarter compared to 298 last year.

Net sales increased $9.0 million, or 4.9%, to $193.1 million in the first nine months of 2007, as compared to $184.1 million in the first nine months of the prior year. Our improvement in net sales was primarily due to growth in sales at Shoes.com and the strengthening Canadian dollar exchange rate, partially offset by a same-store sales decline of 0.1% and the lower store count. Sales at Shoes.com increased $15.6 million, or 39.4%, to $55.3 million in the first nine months compared to $39.7 million in last year’s first nine months.

27

Gross Profit

Gross profit increased $1.1 million, or 3.5%, to $32.8 million in the third quarter of 2007, as compared to $31.7 million in the third quarter of the prior year. The increase in gross profit is due higher sales volume. As a percentage of net sales, our gross profit rate decreased to 46.3% in the third quarter from 46.5% in the year ago quarter, as a result of lower margins on our e-commerce business.

Gross profit increased $1.8 million, or 2.1%, to $88.1 million in the first nine months of 2007, as compared to $86.3 million in the first nine months of the prior year. The increase in gross profit is due to the higher sales base. As a percentage of net sales, our gross profit rate decreased to 45.6% in the first nine months from 46.9% in the first nine months of last year, as a result of higher markdowns taken at Shoes.com to clear inventory, partially offset by a higher gross profit rate in our stores.

Selling and Administrative Expenses

Selling and administrative expenses increased $4.0 million, or 13.2% to $34.7 million for the third quarter of 2007, as compared to $30.7 million in the third quarter of the prior year. The increase is primarily attributable to the recognition of $2.8 million of costs in the third quarter of 2007 related to our Earnings Enhancement Plan, principally for the relocation of the Shoes.com administrative office from Los Angeles to St. Louis, with no corresponding costs in the third quarter of 2006. We also experienced higher expenses at Shoes.com to support its sales growth. However, our retail facility costs and store payroll were lower due to the lower store count.

Selling and administrative expenses increased $5.1 million, or 5.6%, to $94.8 million for the first nine months of 2007, as compared to $89.7 million in the first nine months of the prior year. The increase is primarily attributable to the recognition of $3.1 million in charges associated with our Earnings Enhancement Plan during the first nine months of 2007, compared to $0.2 million during the first nine months of 2006. In addition, we experienced higher expenses at Shoes.com to support its sales growth. Retail facility costs and store payroll were lower due to the lower store count.

Operating Earnings

Specialty Retail had an operating loss of $1.9 million in the third quarter of 2007, as compared to operating earnings of $1.0 million in the third quarter of the prior year.  The decrease in earnings is primarily attributable to the recognition of $2.8 million of costs in the third quarter of 2007 related to our Earnings Enhancement Plan.

Specialty Retail had an operating loss of $6.7 million in the first nine months of 2007, compared to $3.4 million in the first nine months of the prior year.  The decrease in earnings is primarily attributable to higher charges of $2.9 million related to our Earnings Enhancement Plan and higher selling and administrative expenses, as described above.

OTHER SEGMENT

The Other segment includes unallocated corporate administrative and other costs. Unallocated corporate administrative and other costs decreased $9.4 million to $9.1 million in the third quarter of 2007 from $18.5 million in the third quarter of the prior year. There were several factors impacting the comparison of selling and administrative expenses for the third quarter of 2007 and 2006, as follows:

·   Executive Retirement Agreement – During the third quarter of 2006, we incurred a charge of $3.7 million related to an executive early retirement agreement, with no corresponding charges in 2007.

·   Cash-based incentive plan costs were $3.4 million lower in 2007.

·   Lower expenses related to workers’ compensation losses, legal fees, recruiting costs, and directors compensation

·   Earnings Enhancement Plan – Partially offsetting the decreases noted above, we incurred costs related to our Earnings Enhancement Plan of $1.3 million with no corresponding charges during the third quarter of 2006.

Unallocated corporate administrative and other costs increased $4.7 million to $35.0 million in the first nine months of 2007 from $30.3 million in the first nine months of the prior year. There were several factors impacting the comparison of selling and administrative expenses for the first nine months of 2007 and 2006, as follows:

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·   Earnings Enhancement Plan – We incurred higher costs related to our Earnings Enhancement Plan of $7.7 million ($9.1 million recorded for the first nine months of 2007, and $1.4 million for the first nine months of 2006).

·   Insurance recoveries – In the second quarter of 2006, we recognized income of $7.3 million, net of related legal fees, for insurance recoveries associated with our Redfield site, with no comparable recoveries in the first nine months of 2007.

·   Executive Retirement Agreement – During the third quarter of 2006, we incurred a charge of $3.7 million related to an executive early retirement agreement, with no corresponding charges in 2007.

·   Cash-based incentive plan costs were $2.4 million lower than last year.

·   Nation-wide credit card settlement – In 2007, we recognized $1.0 million of income related to a settlement with credit card companies as a reduction of selling and administrative expenses.

·   Lower expenses related to workers’ compensation losses, legal fees, recruiting costs, and directors compensation (related to a lower stock price).

LIQUIDITY AND CAPITAL RESOURCES

Borrowings

($ millions)	November 3, 2007		October 28, 2006		Increase/ (Decrease)
Borrowings under revolving credit agreement	$	–	$	20.5	$	(20.5	)
Senior notes		150.0		150.0		–
Total debt	$	150.0	$	170.5	$	(20.5	)

Total debt obligations have decreased by $20.5 million, or 12.0%, to $150.0 million at November 3, 2007, as compared to $170.5 million at October 28, 2006. This decrease is due entirely to the decline in borrowings under our revolving credit agreement. Our only debt outstanding at November 3, 2007 was our Senior Notes. As a result of the lower average borrowings, interest expense decreased $0.5 million, or 13.9%, to $3.8 million in the third quarter of 2007 from $4.3 million in the third quarter of the prior year.

We have $150 million of 8.75% Senior Notes outstanding, which are due in 2012. The Senior Notes are guaranteed on a senior unsecured basis by each of our subsidiaries that is an obligor under our senior secured credit facility. Interest is payable on May 1 and November 1 of each year. The Senior Notes mature on May 1, 2012, but are callable any time on or after May 1, 2009, at specified redemption prices plus accrued and unpaid interest. The Senior Notes also contain certain restrictive covenants, including, among other things, restrictions on the payment of dividends, the incurrence of additional indebtedness, the guarantee or pledge of our assets, certain investments, and our ability to merge or consolidate with another entity or sell substantially all of our assets. We were in compliance with all required covenants at November 3, 2007.

We have a Revolving Credit Agreement that provides for a maximum line of credit of $350 million, subject to a calculated borrowing base. Borrowing availability under the Credit Agreement is based upon the sum of eligible accounts receivable and inventory, less outstanding borrowings, letters of credit and applicable reserves. The Credit Agreement expires in 2009, and our obligations are secured by our accounts receivable and inventory. Borrowings under the Credit Agreement bear interest at a variable rate determined based upon the level of availability under the Credit Agreement. If availability falls below specified levels, we would then be subject to certain financial covenants. In addition, if availability falls below $25 million and the fixed charge coverage ratio is less than 1.0 to 1, we would be in default. The Credit Agreement also contains certain other covenants and restrictions, with which we were in compliance at November 3, 2007.

On July 23, 2007, we and certain of our subsidiaries entered into the third amendment to the Revolving Credit Agreement. This amendment amends the Revolving Credit Agreement by, among other things:

·   reducing the commitment fees paid on the unused portion of the facility;

·   enhancing credit given for the inventory component in the calculation of the loan parties’ borrowing base;

·   increasing flexibility concerning Indebtedness and Guarantees of Indebtedness;

·   providing additional flexibility regarding Investments and Restricted Payments.

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At November 3, 2007, we had no borrowings outstanding and $10.5 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $339 million at November 3, 2007. We believe that our access to capital, including borrowing capacity under the Credit Agreement, will be adequate to fund our operational needs, capital expenditure plans and potential acquisitions.

Working Capital and Cash Flow

	Thirty-nine Weeks Ended
($ millions)	November 3, 2007			October 28, 2006			Increase/ (Decrease)
Net cash provided (used) by operating activities	$	62.8		$	95.2		$	(32.4	)
Net cash provided (used) by investing activities		(43.2	)		(60.2	)		17.0
Net cash provided (used) by financing activities		4.4			(21.9	)		26.3
Effect of exchange rate changes on cash		2.3			0.1			2.2
Increase (decrease) in cash and cash equivalents	$	26.3		$	13.2		$	13.1

Reasons for the major variances in cash provided (used) in the table above are as follows:

Cash provided by operating activities was lower by $32.4 million due, in part, to lower net earnings of $5.6 million, which was more than offset by lower accrued expenses, reflecting the timing of payments and lower costs of incentive plans which are paid after the end of the year.

Cash used by investing activities was lower as a result of a payment during the first quarter of 2006 of $22.7 million to the prior owners of Bennett related to the first of three earnout periods. No such payment has been or will be made in 2007. This was partially offset by our $7.1 million investment in Edelman Shoe, Inc., as more fully described in Note 2 to the condensed consolidated financial statements.

Cash provided by financing activities was attributable to proceeds from stock option exercises and related tax benefits and is higher than last year as a result of a reduced level of paydowns of short-term borrowings under the revolver.

A summary of key financial data and ratios at the dates indicated is as follows:

	November 3, 2007	October 28, 2006	February 3, 2007
Working capital ($ millions)	$ 361.6	$ 308.0	$ 303.8
Current ratio	2.27:1	1.97:1	1.91:1
Total debt as a percentage of total capitalization	20.2%	25.4%	22.4%

Working capital at November 3, 2007, was $361.6 million, which was $57.8 million higher than at February 3, 2007, and $53.6 million higher than at October 28, 2006. Our current ratio, the relationship of current assets to current liabilities, increased to 2.27 to 1 compared to 1.91 to 1 at February 3, 2007, and 1.97 to 1 at October 28, 2006. These improvements compared to prior year are primarily attributable to a higher cash balance and the reduction in our borrowings under our revolving credit agreement. Our debt-to-capital ratio, the ratio of our debt obligations to the sum of our debt obligations and shareholders’ equity, decreased to 20.2% at the end of the quarter from 25.4% at the end of the year-ago quarter, reflecting the decrease in borrowings under our revolving credit agreement and a higher shareholders’ equity balance. At November 3, 2007, we had $79.9 million of cash and cash equivalents, of which the majority represents cash and cash equivalents of our Canadian and other foreign subsidiaries.

As described in Note 6 to the condensed consolidated financial statements, we initiated an Earnings Enhancement Plan designed in 2006 to increase earnings through cost reductions, efficiency initiatives and the reallocation of resources. We have completed a number of the initiatives identified under this plan and have several yet to complete. We believe we have adequate liquidity and cash flow to complete these remaining projects.

We paid dividends of $0.07 and $0.05 per share in the third quarter of 2007 and the third quarter of 2006, respectively.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year, except for the adoption of FASB Interpretation No. 48 (“FIN 48”) on February 4, 2007, as more fully described in Note 3 to the condensed consolidated financial statements.  For further information, see Item 7 of our Annual Report on Form 10-K for the year ended February 3, 2007.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities using different measurement techniques. SFAS 159 requires additional disclosures related to the fair value measurements included in the entity’s financial statements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Accordingly, we will adopt SFAS 159 in fiscal year 2008. We are currently evaluating the impact of SFAS 159 on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Accordingly, we will adopt SFAS 157 in fiscal year 2008. We are currently evaluating the impact of adopting SFAS 157 on the consolidated financial statements.

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements and expectations regarding the Company’s future performance and the future performance of its brands. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These include (i) the preliminary nature of estimates of the costs and benefits of the Earnings Enhancement Plan, which are subject to change as the Company refines these estimates over time; (ii) intense competition within the footwear industry; (iii) rapidly changing consumer demands and fashion trends and purchasing patterns, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions; (iv) customer concentration and increased consolidation in the retail industry; (v) the Company's ability to successfully implement its Earnings Enhancement Plan; (vi) political and economic conditions or other threats to continued and uninterrupted flow of inventory from China and Brazil, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory; (vii) the Company's ability to attract and retain licensors and protect its intellectual property; (viii) the Company's ability to secure leases on favorable terms; (ix) the Company's ability to maintain relationships with current suppliers; (x) the uncertainties of pending litigation and (xi) the Company’s ability to successfully execute its international growth strategy. The Company’s reports to the Securities and Exchange Commission contain detailed information relating to such factors, including, without limitation, the information under the caption “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended February 3, 2007, which information is incorporated by reference herein. The Company does not undertake any obligation or plan to update these forward-looking statements, even though its situation may change.

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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Part II, Item 7A of the Company's Annual Report on Form 10-K for the year ended February 3, 2007.

ITEM 4 CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

It is the Chief Executive Officer's and Chief Financial Officer's ultimate responsibility to ensure we maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include mandatory communication of material events, automated accounting processing and reporting, management review of monthly, quarterly and annual results, an established system of internal controls and internal control reviews by our internal auditors.

A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met. Further, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected.  Our disclosure controls and procedures are designed to provide a reasonable level of assurance that their objectives are achieved.  As of November 3, 2007, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective at the reasonable assurance level.

There have been no changes in our internal control over financial reporting during the quarter ended November 3, 2007, 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

We are involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial position. All legal costs associated with litigation are expensed as incurred.

Information regarding Legal Proceedings is set forth within Note 13 to the condensed consolidated financial statements and incorporated by reference herein.

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ITEM 1A RISK FACTORS

No material changes have occurred related to our risk factors since the end of the most recent fiscal year. For further information, see Part I, Item 1A of our Annual Report on Form 10-K for the year ended February 3, 2007.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information relating to our repurchases of common stock during the third quarter of 2007:

Fiscal Period	Total Number of Shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number of Shares that May Yet Be Purchased Under the Program  (1)
August 5, 2007 – September 1, 2007	–			–		­–		2,409,975
September 2, 2007 – October 6, 2007	–			–		–		2,409,975
October 7, 2007 – November 3, 2007	969	(2)		20.62	(2)	–		2,409,975
Total	969	(2)		20.62	(2)	–		2,409,975

(1)   In May 2000, the Board of Directors authorized a stock repurchase program authorizing the repurchase of up to 4.5 million shares of our outstanding common stock. We can utilize the repurchase program to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase program does not have an expiration date. Under this plan, 2,090,025 shares have been repurchased and the remaining availability is 2,409,975 shares as of the end of the period. Our repurchases of common stock are limited under our debt agreements.

(2)   Represents shares that were tendered by employees related to certain share-based awards. These shares were tendered in satisfaction of the exercise price of stock options and/or to satisfy minimum tax withholding amounts for the exercise of non-qualified stock options or the vesting of restricted stock or stock performance awards. Accordingly, these share purchases are not considered a part of our publicly announced stock repurchase program.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5 OTHER INFORMATION

None.

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ITEM 6 EXHIBITS

Exhibit No.
3.1	Restated Certificate of Incorporation of the Company incorporated herein by reference from Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 5, 2007, and filed June 5, 2007.
3.2	Bylaws of the Company as amended through April 11, 2007, incorporated herein by reference from Exhibit 3.1 to the Company’s Form 8-K filed April 12, 2007.
10.1	Third Amendment to Amended and Restated Credit Agreement dated as of July 23, 2007, among the Company, as lead borrower for itself and on behalf of certain of its subsidiaries and the financial institutions party thereto, as lenders, with respect to the Amended and Restated Credit Agreement dated as of July 21, 2004, as amended, incorporated herein by reference from Exhibit 10.1d to the Company’s Form 8-K filed July 23, 2007.
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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

	BROWN SHOE COMPANY, INC.
Date: December 11, 2007	/s/ Mark E. Hood
	Mark E. Hood Senior Vice President and Chief Financial Officer on behalf of the Registrant and as the Principal Financial Officer

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