CALERES INC - Quarter Report: 2010 July (Form 10-Q)

bws10q2q.htm

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 July 31, 2010

[ ]	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 check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £

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

Yes £ No £

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

	Large accelerated filer £	Accelerated filer R

	Non-accelerated filer £	Smaller reporting company £
	(Do not check if a smaller reporting company)

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 August 28, 2010, 43,857,140 common shares were outstanding.

PART I

FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
($ thousands)	July 31, 2010			August 1, 2009			January 30, 2010
Assets
Current assets
Cash and cash equivalents	$	30,724		$	37,274		$	125,833
Receivables		106,149			72,156			84,297
Inventories		578,085			526,808			456,682
Prepaid expenses and other current assets		33,206			41,877			41,437
Total current assets		748,164			678,115			708,249

Other assets		118,884			110,540			113,114
Intangible assets, net		73,876			80,613			77,226
Property and equipment		418,190			423,704			418,765
Allowance for depreciation		(281,983	)		(268,154	)		(277,204	)
Net property and equipment		136,207			155,550			141,561
Total assets	$	1,077,131		$	1,024,818		$	1,040,150

Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	35,500		$	47,500		$	94,500
Trade accounts payable		294,845			233,791			177,700
Other accrued expenses		139,675			133,652			141,863
Total current liabilities		470,020			414,943			414,063

Other liabilities
Long-term debt		150,000			150,000			150,000
Deferred rent		38,011			42,049			38,869
Other liabilities		27,555			29,570			25,991
Total other liabilities		215,566			221,619			214,860

Equity
Common stock		439			428			429
Additional paid-in capital		130,621			149,530			152,314
Accumulated other comprehensive income (loss)		1,567			(4,279	)		177
Retained earnings		258,444			233,904			249,251
Total Brown Shoe Company, Inc. shareholders’ equity		391,071			379,583			402,171
Noncontrolling interests		474			8,673			9,056
Total equity		391,545			388,256			411,227
Total liabilities and equity	$	1,077,131		$	1,024,818		$	1,040,150

See notes to condensed consolidated financial statements.

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

	(Unaudited)						(Unaudited)
	Thirteen Weeks Ended						Twenty-six Weeks Ended
($ thousands, except per share amounts)	July 31, 2010			August 1, 2009			July 31, 2010			August 1, 2009
Net sales	$	585,756		$	511,621		$	1,183,474		$	1,050,361
Cost of goods sold		347,286			307,981			697,444			638,557
Gross profit		238,470			203,640			486,030			411,804
Selling and administrative expenses		224,448			206,620			448,963			419,337
Restructuring and other special charges, net		1,891			1,998			3,608			4,612
Operating earnings (loss)		12,131			(4,978	)		33,459			(12,145	)
Interest expense		(4,810	)		(4,914	)		(9,322	)		(10,163	)
Interest income		49			145			67			288
Earnings (loss) before income taxes		7,370			(9,747	)		24,204			(22,020	)
Income tax (provision) benefit		(2,582	)		5,531			(8,881	)		10,733
Net earnings (loss)	$	4,788		$	(4,216	)	$	15,323		$	(11,287	)
Less: Net (loss) earnings attributable to noncontrolling interests		(473	)		29			16			561
Net earnings (loss) attributable to Brown Shoe Company, Inc.	$	5,261		$	(4,245	)	$	15,307		$	(11,848	)

Basic earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders	$	0.12		$	(0.10	)	$	0.35		$	(0.28	)

Diluted earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders	$	0.12		$	(0.10	)	$	0.35		$	(0.28	)

Dividends per common share	$	0.07		$	0.07		$	0.14		$	0.14

See notes to condensed consolidated financial statements.

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited)
	Twenty-six Weeks Ended
($ thousands)	July 31, 2010			August 1, 2009
Operating Activities
Net earnings (loss)	$	15,323		$	(11,287	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation		16,028			18,204
Amortization of capitalized software		5,010			3,993
Amortization of intangibles		3,350			3,387
Amortization of debt issuance costs		1,098			1,098
Share-based compensation expense		2,781			1,944
Tax deficiency related to share-based plans		142			89
Loss on disposal of facilities and equipment		617			293
Impairment charges for facilities and equipment		1,684			2,094
Deferred rent		(858	)		335
Provision for doubtful accounts		80			477
Foreign currency transaction gains		(11	)		(61	)
Changes in operating assets and liabilities:
Receivables		(21,923	)		11,643
Inventories		(121,298	)		(59,120	)
Prepaid expenses and other current and noncurrent assets		8,923			2,507
Trade accounts payable		117,041			81,073
Accrued expenses and other liabilities		(714	)		(4,391	)
Other, net		(284	)		(2,567	)
Net cash provided by operating activities		26,989			49,711

Investing Activities
Purchases of property and equipment		(12,844	)		(17,911	)
Capitalized software		(11,871	)		(10,916	)
Net cash used for investing activities		(24,715	)		(28,827	)

Financing Activities
Borrowings under revolving credit agreement		435,500			394,900
Repayments under revolving credit agreement		(494,500	)		(459,900	)
Acquisition of noncontrolling interests (Edelman Shoe, Inc.)		(32,692	)		–
Dividends paid		(6,114	)		(6,006	)
Proceeds from stock options exercised		561			–
Tax deficiency related to share-based plans		(142	)		(89	)
Net cash used for financing activities		(97,387	)		(71,095	)
Effect of exchange rate changes on cash		4			585
Decrease in cash and cash equivalents		(95,109	)		(49,626	)
Cash and cash equivalents at beginning of period		125,833			86,900
Cash and cash equivalents at end of period	$	30,724		$	37,274

See notes to condensed consolidated financial statements.

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 of the United States Securities and Exchange Commission (“SEC”) and reflect all adjustments and accruals of a normal recurring nature, which management believes are necessary 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 wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions.

The Company’s business is seasonal in nature due to consumer spending patterns, with higher back-to-school and Christmas and Easter holiday season sales. Traditionally, the third fiscal quarter accounts for a substantial portion of earnings for the year. 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 in the condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings (loss) attributable to Brown Shoe Company, Inc.

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 January 30, 2010.

Note 2

Impact of New and Prospective Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued a standard that changes the consolidation guidance applicable to a variable interest entity (“VIE”). The pronouncement also amends previous rules governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis should include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This guidance also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE and enhanced disclosures about an enterprise’s involvement with a VIE. The standard is effective as of the beginning of interim and annual reporting periods that begin after November 15, 2009. The Company adopted the guidance at the beginning of 2010. See Note 3 to the condensed consolidated financial statements for additional information.

In January 2010, the FASB issued guidance that provides amendments to Accounting Standards Codification 820, Fair Value Measurements and Disclosures, and requires more extensive disclosures about (a) transfers in and out of Levels 1 and 2; (b) activity in Level 3 fair value measurements; (c) different classes of assets and liabilities measured at fair value; and (d) the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The guidance is effective for interim or annual reporting periods beginning after December 15, 2009, except for certain disclosures applicable to Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Accordingly, the Company adopted the guidance, except for certain disclosures applicable to Level 3 fair value measurements, at the beginning of 2010. See Note 13 to the condensed consolidated financial statements for additional information related to fair value measurements.

Note 3

Edelman Shoe, Inc.

Edelman Shoe, Inc. (“Edelman Shoe”) is a leading designer and marketer of fashion footwear. The Sam Edelman brand was launched in 2004 and is primarily sold through department stores and independent retailers.

In 2007, the Company invested cash of $7.1 million in Edelman Shoe, acquiring 42.5% of the outstanding stock. On November 3, 2008, the Company invested an additional $4.1 million of cash in Edelman Shoe, acquiring 7.5% of the outstanding stock, bringing the Company’s total equity interest to 50%.

Beginning November 3, 2008, the Company’s consolidated financial statements included the accounts of Edelman Shoe as a result of the Company’s determination that Edelman Shoe was a VIE, for which the Company was the primary beneficiary. At the beginning of fiscal 2010, the Company adopted amended consolidation guidance applicable to VIEs, evaluated the impact on the existing variable interests in Edelman Shoe and determined that Edelman Shoe continued to be a VIE that was appropriately consolidated by the Company.

On June 4, 2010, the Company acquired the remaining 50% of the outstanding stock of Edelman Shoe for $40.0 million, consisting of a combination of $32.7 million of cash, including transaction fees, and $7.3 million in shares of the Company’s common stock. The stock consideration consisted of 473,081 shares of the Company’s common stock. The acquisition of the remaining interest in Edelman Shoe was accounted for in accordance with the consolidation guidance applicable to noncontrolling interests, which requires changes in a parent’s ownership interest in a subsidiary, without loss of control, to be reflected as an adjustment to the carrying amount of the noncontrolling interest with excess consideration recognized directly to equity attributable to the controlling interest. As a result, the Company’s acquisition of the remaining interest in Edelman Shoe resulted in a reduction to total equity of $32.7 million, consisting of a net reduction of $24.1 million to total Brown Shoe Company, Inc. shareholders’ equity and the elimination of $8.6 million of the noncontrolling interest in Edelman Shoe. As of June 4, 2010, Edelman Shoe is a wholly-owned subsidiary of the Company. See Note 5 to the condensed consolidated financial statements for additional information related to the impact of the acquisition on total equity.

Note 4

Earnings Per Share

The Company uses the two-class method to compute basic and diluted earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders. In periods of net loss, no effect is given to the Company’s participating securities since they do not contractually participate in the losses of the Company. The following table sets forth the computation of basic and diluted earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders for the periods ended July 31, 2010 and August 1, 2009:


	Thirteen Weeks Ended						Twenty-six Weeks Ended
(in thousands, except per share amounts)	July 31, 2010		August 1, 2009			July 31, 2010			August 1, 2009

NUMERATOR
Net earnings (loss) attributable to Brown Shoe Company, Inc. before allocation of earnings to participating securities	$	5,261	$	(4,245	)		$	15,307		$	(11,848	)
Less: Earnings allocated to participating securities		188		–				535			–
Net earnings (loss) attributable to Brown Shoe Company, Inc. after allocation of earnings to participating securities	$	5,073	$	(4,245	)		$	14,772		$	(11,848	)

DENOMINATOR
Denominator for basic earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders		42,147		41,583				41,951			41,574
Dilutive effect of share-based awards		316		–				316			–
Denominator for diluted earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders		42,463		41,583				42,267			41,574

Basic earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders	$	0.12	$	(0.10	)		$	0.35		$	(0.28	)

Diluted earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders	$	0.12	$	(0.10	)		$	0.35		$	(0.28	)

Options to purchase 795,654 and 797,154 shares of common stock for the thirteen weeks and twenty-six weeks ended July 31, 2010 were not included in the denominator for diluted earnings per common share attributable to Brown Shoe Company, Inc. shareholders because the effect would be antidilutive. Due to the Company’s net loss attributable to Brown Shoe Company, Inc. for the thirteen weeks and twenty-six weeks ended August 1, 2009, the denominator for diluted loss per common share attributable to Brown Shoe Company, Inc. shareholders is the same as the denominator for basic loss per common share attributable to Brown Shoe Company, Inc. shareholders.

Note 5

Comprehensive Income (Loss) and Changes in Equity

Comprehensive income (loss) includes changes in 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 (loss) to comprehensive income (loss) for the periods ended July 31, 2010 and August 1, 2009:


	Thirteen Weeks Ended						Twenty-six Weeks Ended
($ thousands)	July 31, 2010			August 1, 2009			July 31, 2010		August 1, 2009
Net earnings (loss)	$	4,788		$	(4,216	)	$	15,323		$		(11,287	)

Other comprehensive income (loss) (“OCI”), net of tax:
Foreign currency translation adjustment		(80	)		2,767			1,040				2,661
Unrealized gains (losses) on derivative instruments, net of tax of $185 and $484 in the thirteen weeks and $44 and $515 in the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively		482			(1,112	)		187				(1,277	)
Net loss from derivatives reclassified into earnings, net of tax of $35 and $71 in the thirteen weeks and $89 and $68 in the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively		64			142			169				120
		466			1,797			1,396				1,504
Comprehensive income (loss)	$	5,254		$	(2,419	)	$	16,719		$		(9,783	)
Less: Comprehensive (loss) income attributable to noncontrolling interests		(467	)		31			22				563
Comprehensive income (loss) attributable to Brown Shoe Company, Inc.	$	5,721		$	(2,450	)	$	16,697			$	(10,346	)

The following table sets forth the balance in accumulated other comprehensive income (loss) for the Company at July 31, 2010, August 1, 2009 and January 30, 2010:


($ thousands)	July 31, 2010			August 1, 2009			January 30, 2010
Foreign currency translation gains	$	5,188		$	3,379		$	4,154
Unrealized losses on derivative instruments, net of tax		(361	)		(889	)		(717	)
Pension and other postretirement benefits, net of tax		(3,260	)		(6,769	)		(3,260	)
Accumulated other comprehensive income (loss)	$	1,567		$	(4,279	)	$	177

See additional information related to derivative instruments in Note 12 and Note 13 and additional information related to pension and other postretirement benefits in Note 10 to the condensed consolidated financial statements.

The following tables set forth the changes in Brown Shoe Company, Inc. shareholders’ equity and noncontrolling interests for the twenty-six weeks ended July 31, 2010 and August 1, 2009:


($ thousands)	Brown Shoe Company, Inc. Shareholders’ Equity			Noncontrolling Interests			Total Equity
Equity at January 30, 2010	$	402,171		$	9,056		$	411,227
Comprehensive income		16,697			22			16,719
Dividends paid		(6,114	)		–			(6,114	)
Acquisition of noncontrolling interest (Edelman Shoe, Inc.)
Stock issued in connection with the acquisition of the noncontrolling interest		7,309			–			7,309
Distribution to noncontrolling interest		(31,397	)		(8,604	)		(40,001	)
Stock issued under share-based plans		(234	)		–			(234	)
Tax deficiency related to share-based plans		(142	)		–			(142	)
Share-based compensation expense		2,781			–			2,781
Equity at July 31, 2010	$	391,071		$	474		$	391,545


($ thousands)	Brown Shoe Company, Inc. Shareholders’ Equity			Noncontrolling Interests		Total Equity
Equity at January 31, 2009	$	394,104		$	8,110	$	402,214
Comprehensive (loss) income		(10,346	)		563		(9,783	)
Dividends paid		(6,006	)		–		(6,006	)
Stock issued under share-based plans		(24	)		–		(24	)
Tax deficiency related to share-based plans		(89	)		–		(89	)
Share-based compensation expense		1,944			–		1,944
Equity at August 1, 2009	$	379,583		$	8,673	$	388,256

Note 6

Restructuring and Other Special Charges, Net

Information Technology Initiatives

During 2008, the Company began implementation of an integrated enterprise resource planning (“ERP”) information technology system provided by third-party vendors. The ERP information technology system is replacing select existing internally developed and certain other third-party applications, and is expected to better support the Company’s business model. The Company expects the implementation will enhance its profitability through improved management and execution of its business operations, financial systems, supply chain efficiency and planning and employee productivity. The phased implementation began during 2008 and is expected to be substantially complete in the fourth quarter of 2010. The Company incurred expenses of $1.9 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) and $3.6 million ($2.4 million on an after-tax basis, or $0.06 per diluted share) during the thirteen weeks and twenty-six weeks ended July 31, 2010, respectively, as a component of restructuring and other special charges, net, related to these initiatives. Of the $1.9 million in expenses recorded during the thirteen weeks ended July 31, 2010, $1.7 million was recorded in the Other segment and $0.2 million was recorded in the Wholesale Operations segment. The Company incurred expenses of $2.0 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) and $4.6 million ($3.0 million on an after-tax basis, or $0.07 per diluted share) during the thirteen weeks and twenty-six weeks ended August 1, 2009, respectively, as a component of restructuring and other special charges, net, related to these initiatives. Of the $2.0 million in expenses recorded during the thirteen weeks ended August 1, 2009, $1.9 million was recorded in the Other segment and $0.1 million was recorded in the Wholesale Operations segment. During the full year of 2008, the Company incurred expenses of $3.7 million ($2.4 million on an after-tax basis, or $0.06 per diluted share), and these expenses were reflected within the Other segment. During the full year of 2009, the Company incurred expenses of $9.2 million ($5.8 million on an after-tax basis, or $0.14 per diluted share) of which $0.3 million was recorded in the Wholesale Operations segment, and the remaining expense was recorded in the Other segment.

Organizational Changes

During November 2009, the Company made a series of changes within its leadership team as two executives announced plans to retire in early to mid-2010. During the fourth quarter of 2009, the Company incurred charges of $4.6 million ($2.8 million on an after-tax basis, or $0.07 per diluted share), related to their retirement. All of the costs recorded during 2009 were reflected within the Other segment as a component of restructuring and other special charges, net. During the first half of 2010, no additional charges were incurred. During the second quarter of 2010, the Company recorded settlements of $2.0 million in connection with the retirements, resulting in total settlements of $4.2 million during the first half of 2010, and a $0.4 million remaining liability as of July 31, 2010.

Expense and Capital Containment Initiatives

During 2008, the Company announced expense and capital containment initiatives in an effort to proactively position itself for continued challenges in the retail environment. These initiatives included a voluntary separation program, changes in compensation structure, further rationalization of operating expenses and the closing of certain functions at its Fredericktown, Missouri, distribution center. The Company incurred charges of $30.9 million ($19.1 million on an after-tax basis, or $0.46 per diluted share) during 2008. These costs included employee-related costs for severance, including healthcare benefits and enhanced pension benefits, as well as facility and other costs. The Company incurred no related charges during 2009 and the first half of 2010.

The following is a summary of the charges and settlements by category of costs:


($ millions)	Employee Severance			Facility			Other			Total
Original charges and reserve balance	$	24.7		$	6.0		$	0.2		$	30.9
Amounts settled in 2008		(5.3	)		(2.7	)		–			(8.0	)
Reserve balance at January 31, 2009	$	19.4		$	3.3		$	0.2		$	22.9
Amounts settled in 2009		(15.3	)		(2.1	)		(0.2	)		(17.6	)
Reserve balance at January 30, 2010	$	4.1		$	1.2		$	–		$	5.3
Amounts settled in first quarter 2010		(2.3	)		(0.2	)		–			(2.5	)
Reserve balance at May 1, 2010	$	1.8		$	1.0		$	–		$	2.8
Amounts settled in second quarter 2010		(0.1	)		(1.0	)		–			(1.1	)
Reserve balance at July 31, 2010	$	1.7		$	–		$	–		$	1.7

Of the $30.9 million in costs recorded during 2008, $14.4 million was recorded in the Wholesale Operations segment, $12.1 million was recorded in the Other segment, $3.8 million was recorded in the Famous Footwear segment and $0.6 million was recorded in the Specialty Retail segment. All of the costs recorded during 2008 were reflected as a component of restructuring and other special charges, net. A tax benefit of $11.8 million associated with the costs was recorded during 2008. The write-off of assets during 2008 of $0.5 million, included in facility costs, was a noncash item.

Headquarters Consolidation

During 2008, the Company relocated its Famous Footwear division headquarters from Madison, Wisconsin, to St. Louis, Missouri, to foster collaboration, increase the Company’s speed to market and strengthen its connection with consumers. The Company incurred charges of $29.8 million ($18.2 million on an after-tax basis, or $0.44 per diluted share) during 2008. These costs included employee-related costs for relocation, severance, recruiting and retention, as well as facility and other costs. All of the costs recorded during 2008 were reflected within the Other segment as a component of restructuring and other special charges, net. During 2008, a tax benefit of $11.6 million associated with the costs was recorded. The write-off of assets during 2008 of $3.4 million, included in facility costs, was a noncash item. During 2009, the Company recorded income of $1.9 million ($1.1 million on an after-tax basis, or $0.03 per diluted share) as a result of an expanded sublease arrangement. The Company incurred no related charges during the first half of 2010.

The following is a summary of the charges and settlements by category of costs:


($ millions)	Employee Severance			Employee Relocation			Employee Recruiting			Facility			Other			Total
Original charges and reserve balance	$	6.6		$	8.3		$	4.6		$	9.2		$	1.1		$	29.8
Amounts settled in 2008		(4.7	)		(6.2	)		(4.3	)		(3.6	)		(1.0	)		(19.8	)
Reserve balance at January 31, 2009	$	1.9		$	2.1		$	0.3		$	5.6		$	0.1		$	10.0
Reserve reduction in 2009		–			–			–			(1.9	)		–			(1.9	)
Amounts settled in 2009		(1.9	)		(1.7	)		(0.2	)		(1.9	)		(0.1	)		(5.8	)
Reserve balance at January 30, 2010	$	–		$	0.4		$	0.1		$	1.8		$	–		$	2.3
Amounts settled in first quarter 2010		–			–			–			(0.3	)		–			(0.3	)
Reserve balance at May 1, 2010	$	–		$	0.4		$	0.1		$	1.5		$	–		$	2.0
Amounts settled in second quarter 2010		–			(0.4	)		(0.1	)		(0.4	)		–			(0.9	)
Reserve balance at July 31, 2010	$	–		$	–		$	–		$	1.1		$	–		$	1.1

Note 7

Business Segment Information

Applicable business segment information is as follows for the periods ended July 31, 2010 and August 1, 2009:


($ thousands)	Famous Footwear			Wholesale Operations			Specialty Retail			Other			Total

Thirteen Weeks Ended July 31, 2010
External sales	$	347,316		$		178,643	$	59,797		$	–		$	585,756
Intersegment sales		438				47,215		–			–			47,653
Operating earnings (loss)		15,751				9,027		(2,746	)		(9,901	)		12,131
Operating segment assets		548,683				348,148		54,629			125,671			1,077,131

Thirteen Weeks Ended August 1, 2009
External sales	$	314,144		$		142,027	$	55,450		$	–		$	511,621
Intersegment sales		471				52,462		–			–			52,933
Operating (loss) earnings		(846	)			7,882		(4,301	)		(7,713	)		(4,978	)
Operating segment assets		527,013				293,005		75,703			129,097			1,024,818

Twenty-six Weeks Ended July 31, 2010
External sales	$	709,486		$	353,372		$	120,616		$	–		$	1,183,474
Intersegment sales		971			88,328			–			–			89,299
Operating earnings (loss)		43,934			17,706			(5,655	)		(22,526	)		33,459

Twenty-six Weeks Ended August 1, 2009
External sales	$	631,707		$	310,851		$	107,803		$	–		$	1,050,361
Intersegment sales		1,112			97,557			–			–			98,669
Operating earnings (loss)		2,195			13,792			(10,527	)		(17,605	)		(12,145	)

The Other segment includes corporate assets and administrative expenses and other costs and recoveries which are not allocated to the operating segments.

During the thirteen weeks and twenty-six weeks ended July 31, 2010, operating loss of the Other segment included costs related to the Company’s information technology initiatives of $1.7 million and $3.3 million, respectively. During the thirteen weeks and twenty-six weeks ended July 31, 2010, operating earnings of the Company’s Wholesale Operations segment included costs related to the information technology initiatives of $0.2 million and $0.3 million, respectively.

During the thirteen weeks and twenty-six weeks ended August 1, 2009, operating loss of the Other segment included costs related to the Company’s information technology initiatives of $1.9 million and $4.6 million, respectively. The operating earnings of the Company’s Wholesale Operations segment included expenses of $0.1 million for the thirteen weeks ended August 1, 2009 related to the information technology initiatives.

Following is a reconciliation of operating earnings (loss) to earnings (loss) before income taxes:


	Thirteen Weeks Ended						Twenty-six Weeks Ended
($ thousands)	July 31, 2010			August 1, 2009			July 31, 2010			August 1, 2009
Operating earnings (loss)	$	12,131		$	(4,978	)	$	33,459		$	(12,145	)
Interest expense		(4,810	)		(4,914	)		(9,322	)		(10,163	)
Interest income		49			145			67			288
Earnings (loss) before income taxes	$	7,370		$	(9,747	)	$	24,204		$	(22,020	)

Note 8

Intangible Assets

Intangible assets were attributable to the Company's operating segments as follows:


($ thousands)	July 31, 2010		August 1, 2009		January 30, 2010

Famous Footwear	$	2,800	$	2,800	$	2,800
Wholesale Operations		70,876		77,613		74,226
Specialty Retail		200		200		200
	$	73,876	$	80,613	$	77,226

As of July 31, 2010, the Company had intangible assets of $73.9 million, primarily related to trademarks. The decline in the intangible assets of the Company’s Wholesale Operations segment from August 1, 2009 to January 30, 2010 and July 31, 2010 reflected amortization of its licensed and owned trademarks.

Note 9

Share-Based Compensation

During the second quarter of 2010, the Company granted 2,000 stock options to certain employees with a weighted-average exercise price and grant date fair value of $17.45 and $9.73, 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. Share-based compensation expense is recognized on a straight-line basis separately for each vesting portion of the stock option award.

The Company also granted 2,000 restricted shares to certain employees with a weighted-average grant date fair value of $17.45 during the second quarter of 2010. The restricted shares granted to employees vest in four years and share-based compensation expense will be recognized on a straight-line basis over the four-year period.

The Company also granted 7,614 restricted shares to non-employee directors with a weighted-average grant date fair value of $16.63 during the second quarter of 2010. Of the 7,614 restricted shares granted, 1,514 of the restricted shares vested and share-based compensation expense was fully recognized during the second quarter of 2010 and 6,100 of the restricted shares vest in one year and share-based compensation expense will be recognized on a straight-line basis over the one-year period.

The Company recognized share-based compensation expense of $1.4 million and $0.6 million during the thirteen weeks and $2.8 million and $1.9 million during the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively. The Company issued 11,171 shares and 548,031 shares of common stock during the thirteen and twenty-six weeks ended July 31, 2010, respectively, for restricted stock grants and directors’ fees. During the thirteen and twenty-six weeks ended July 31, 2010, the Company cancelled 39,406 and 84,719 shares, respectively, of common stock as a result of forfeitures of restricted stock awards.

The Company also granted 61,973 restricted stock units to non-employee directors with a weighted-average grant date fair value of $16.60 during the second quarter of 2010. Of the 61,973 restricted stock units granted, 973 of the restricted stock units vested and compensation expense was fully recognized during the second quarter of 2010 and 61,000 of the restricted stock units vest in one year and compensation expense will be recognized ratably over the one-year period based upon the fair value of the restricted stock units, as remeasured at the end of each period.

Note 10

Retirement and Other Benefit Plans

The following tables set forth the components of net periodic benefit cost (income) for the Company, including all domestic and Canadian plans:


	Pension Benefits						Other Postretirement Benefits
	Thirteen Weeks Ended						Thirteen Weeks Ended
($ thousands)	July 31, 2010			August 1, 2009			July 31, 2010			August 1, 2009
Service cost	$	2,000		$	1,683		$	–		$	–
Interest cost		3,042			2,783			44			50
Expected return on assets		(5,039	)		(4,878	)		–			–
Settlement cost		–			52			–			–
Amortization of:
Actuarial loss (gain)		59			29			(33	)		(21	)
Prior service income		(3	)		–			–			–
Net transition asset		(11	)		(34	)		–			–
Total net periodic benefit cost (income)	$	48		$	(365	)	$	11		$	29


	Pension Benefits						Other Postretirement Benefits
	Twenty-six Weeks Ended						Twenty-six Weeks Ended
($ thousands)	July 31, 2010			August 1, 2009			July 31, 2010			August 1, 2009
Service cost	$	3,826		$	3,393		$	–		$	–
Interest cost		6,029			5,779			97			109
Expected return on assets		(10,103	)		(9,757	)		–			–
Settlement cost		–			127			–			–
Amortization of:
Actuarial loss (gain)		85			56			(48	)		(42	)
Prior service income		(3	)		(6	)		–			–
Net transition asset		(22	)		(65	)		–			–
Total net periodic benefit (income) cost	$	(188	)	$	(473	)	$	49		$	67

Note 11

Long-Term and Short-Term Financing Arrangements

Credit Agreement

On January 21, 2009, the Company and certain of its subsidiaries (the “Loan Parties”) entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement matures on January 21, 2014. The Credit Agreement provides for revolving credit in an aggregate amount of up to $380.0 million, subject to the calculated borrowing base restrictions. Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base, which is based on stated percentages of the sum of eligible receivables and inventories, less applicable reserves. Under the Credit Agreement, the Loan Parties’ obligations are secured by a first priority security interest in receivables, inventories and certain other collateral.

Interest on borrowings is at variable rates based on the London Inter-Bank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement. The interest rate and fees for letters of credit varies based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the excess availability under the facility and a letter of credit fee payable on the outstanding exposure under letters of credit.

The Credit Agreement limits the Company’s ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. In addition, certain additional covenants would be triggered if excess availability were to fall below specified levels, including fixed charge coverage ratio requirements. Furthermore, if excess availability falls below the greater of (i) 17.5% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $25.0 million for three consecutive business days, or an event of default occurs, the lenders may assume dominion and control over the Company’s cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days.

The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency, judgment defaults and the failure of any guaranty or security document supporting the agreement to be in full force and effect. In addition, if the excess availability falls below the greater of (i) 17.5% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $25.0 million and the fixed charge coverage ratio is less than 1.0 to 1.0, the Company would be in default under the Credit Agreement. The Credit Agreement also contains certain other covenants and restrictions, with which the Company was in compliance as of July 31, 2010.

At July 31, 2010, the Company had $35.5 million outstanding and $12.6 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $331.9 million as of July 31, 2010.

Senior Notes

In April 2005, the Company issued $150.0 million of 8.75% senior notes due in 2012 (“Senior Notes”). 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 the 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 became callable on May 1, 2009. The Company may redeem all or a part of the Senior Notes at specified redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest, if redeemed during the twelve-month period beginning on May 1 of the years indicated below:


Year	Percentage
2010		102.188	%
2011 and thereafter		100.000	%

The Senior Notes also contain certain other covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As of July 31, 2010, the Company was in compliance with all covenants relating to the Senior Notes.

Note 12

Risk Management and Derivatives

In the normal course of business, the Company’s financial results are impacted by currency rate movements in foreign currency denominated assets, liabilities and cash flows as it makes a portion of its purchases and sales in local currencies. The Company has established policies and business practices that are intended to mitigate a portion of the effect of these exposures. The Company uses derivative financial instruments, primarily forward contracts, to manage its currency exposures. These derivative instruments are viewed as risk management tools and are not used for trading or speculative purposes. Derivatives entered into by the Company are designated as cash flow hedges of forecasted foreign currency transactions.

Derivative financial instruments expose the Company to credit and market risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions being hedged. The Company does not believe there is a significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with major financial institutions and have varying maturities through July 2011. Credit risk is managed through the continuous monitoring of exposures to such counterparties.

The Company principally uses foreign currency forward contracts as cash flow hedges to offset a portion of the effects of exchange rate fluctuations. The Company’s cash flow exposures include anticipated foreign currency transactions, such as foreign currency denominated sales, costs, expenses, intercompany charges, as well as collections and payments. The Company performs a quarterly assessment of the effectiveness of the hedge relationship and measures and recognizes any hedge ineffectiveness in the condensed consolidated statement of earnings. Hedge ineffectiveness is evaluated using the hypothetical derivative method, and the ineffective portion of the hedge is reported in the Company’s condensed consolidated statement of earnings. The amount of hedge ineffectiveness for the quarter ended July 31, 2010 was not material.

The Company’s hedging strategy uses forward contracts as cash flow hedging instruments, which are recorded in the Company’s condensed consolidated balance sheet at fair value. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive income (loss) and reclassified to earnings in the period that the hedged transaction is recognized in earnings.

As of July 31, 2010, January 30, 2010 and August 1, 2009, the Company had forward contracts maturing at various dates through July 2011, January 2011 and August 2010, respectively. The contract amount represents the net amount of all purchase and sale contracts of a foreign currency.


(U.S. $ equivalent in thousands)	Contract Amount July 31, 2010		Contract Amount August 1, 2009		Contract Amount January 30, 2010
Deliverable Financial Instruments
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)	$	19,040	$	14,182	$	14,851
Euro		7,244		4,564		5,545
Other currencies		191		–		–
Non-deliverable Financial Instruments
Chinese yuan		12,531		10,264		12,042
Japanese yen		1,552		1,793		1,549
New Taiwanese dollars		1,155		1,242		1,192
Other currencies		716		628		723
	$	42,429	$	32,673	$	35,902

As of July 31, 2010, the fair values of derivative instruments included within the condensed consolidated balance sheet were as follows:

Asset Derivatives

Liability Derivatives

($ in thousands)

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments:

Foreign exchange forward contracts

Prepaid expenses and other current assets

165

Other accrued expenses

715

As of August 1, 2009, the fair values of derivative instruments included within the condensed consolidated balance sheet were as follows:

Asset Derivatives

Liability Derivatives

($ in thousands)

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging

instruments:

Foreign exchange forward contracts

Prepaid expenses and other current assets

276

Other accrued expenses

1,318

As of January 30, 2010, the fair values of derivative instruments included within the condensed consolidated balance sheet were as follows:

Asset Derivatives

Liability Derivatives

($ in thousands)

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging

instruments:

Foreign exchange forward contracts

Prepaid expenses and other current assets

Other accrued expenses

689

For the thirteen weeks ended July 31, 2010, the effect of derivative instruments on the condensed consolidated statement of earnings was as follows:

($ in thousands)

Location of Loss

Amount of Loss

Amount of (Loss)/Gain

Reclassified from

Derivatives in Cash Flow

Recognized in OCI on

Accumulated OCI into

Hedging Relationships:

Derivatives

Earnings

Foreign exchange forward

contracts

(104

)

Net sales

Foreign exchange forward

contracts

859

Cost of goods sold

Foreign exchange forward

contracts

(94

)

Selling and administrative

expenses

Foreign exchange forward

contracts

Interest expense

–

For the thirteen weeks ended August 1, 2009, the effect of derivative instruments on the condensed consolidated statement of earnings was as follows:

($ in thousands)

Location of Loss

Amount of Loss

Reclassified from

Derivatives in Cash Flow

Recognized in OCI on

Accumulated OCI into

Hedging Relationships:

Derivatives

Earnings

Foreign exchange forward

contracts

(113

)

Net sales

Foreign exchange forward

contracts

(1,085

)

Cost of goods sold

Foreign exchange forward

contracts

(381

)

Selling and administrative

expenses

153

Foreign exchange forward

contracts

(17

)

Interest expense

–

For the twenty-six weeks ended July 31, 2010, the effect of derivative instruments on the condensed consolidated statement of earnings was as follows:

($ in thousands)

Location of Loss

Amount of Loss

Amount of (Loss)/Gain

Reclassified from

Derivatives in Cash Flow

Recognized in OCI on

Accumulated OCI into

Hedging Relationships:

Derivatives

Earnings

Foreign exchange forward

contracts

(118

)

Net sales

108

Foreign exchange forward

contracts

580

Cost of goods sold

Foreign exchange forward

contracts

(230

)

Selling and administrative

expenses

102

Foreign exchange forward

contracts

)

Interest expense

–

For the twenty-six weeks ended August 1, 2009, the effect of derivative instruments on the condensed consolidated statement of earnings was as follows:

($ in thousands)

Location of Loss

Amount of Loss

Reclassified from

Derivatives in Cash Flow

Recognized in OCI on

Accumulated OCI into

Hedging Relationships:

Derivatives

Earnings

Foreign exchange forward

contracts

)

Net sales

Foreign exchange forward

contracts

(1,430

)

Cost of goods sold

Foreign exchange forward

contracts

(322

)

Selling and administrative

expenses

131

Foreign exchange forward

contracts

(32

)

Interest expense

–

During 2009, the effect of derivative instruments on the consolidated statement of earnings was as follows:

($ in thousands)

Location of Loss

Amount of Loss

Reclassified from

Derivatives in Cash Flow

Recognized in OCI on

Accumulated OCI into

Hedging Relationships:

Derivatives

Earnings

Foreign exchange forward

contracts

(113

)

Net sales

100

Foreign exchange forward

contracts

(1,330

)

Cost of goods sold

118

Foreign exchange forward

contracts

(175

)

Selling and administrative

expenses

Foreign exchange forward

contracts

)

Interest expense

All of the gains and losses included within accumulated other comprehensive income (loss) associated with the Company’s foreign exchange forward contracts at July 31, 2010, are expected to be reclassified into its net earnings within the next 12 months. Additional information related to the Company’s derivative financial instruments are disclosed within Note 13 to the condensed consolidated financial statements.

Note 13

Fair Value Measurements

Fair Value Hierarchy

FASB guidance on fair value measurements and disclosures specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (“observable inputs”) or reflect the Company’s own assumptions of market participant valuation (“unobservable inputs”). In accordance with the fair value guidance, the hierarchy is broken down into three levels based on the reliability of the inputs as follows:

·	Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

·	Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;

·	Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Classification of the financial or non-financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Measurement of Fair Value

The Company measures fair value as an exit price, the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date, using the procedures described below for all financial and non-financial assets and liabilities measured at fair value.

Money Market Funds

The Company has cash equivalents consisting of short-term money market funds backed by U.S. Treasury securities. The primary objective of these investing activities is to preserve its capital for the purpose of funding operations and it does not enter into money market funds for trading or speculative purposes. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).

Deferred Compensation Plan Assets

The Company maintains a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds selected by the participant generally correspond to the funds offered in the Company’s 401(k) plan, and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to 50% of base salary and 100% of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan are presented in other accrued expenses and the assets held by the trust are classified as trading securities within prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. Changes in deferred compensation are charged to selling and administrative expenses. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).

Deferred Compensation Plan for Non-Employee Directors

Non-employee directors are eligible to participate in a deferred compensation plan, whereby deferred compensation amounts are valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs that is equal to the number of shares of the Company’s common stock which the participant could purchase or receive with the amount of the deferred compensation, based upon the fair value (as determined based on the average of the high and low prices) of the Company’s common stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock, and are re-invested in additional PSUs at the next fiscal quarter-end. The PSUs are payable in cash based on the number of PSUs credited to the participating director’s account, valued on the basis of the fair value at fiscal quarter-end on or following termination of the director’s service. The liabilities of the plan of are based on the fair value of the outstanding PSUs and are presented in other liabilities in the accompanying condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of the PSUs are reported in the Company’s condensed consolidated statement of earnings. The fair value is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency (Level 1).

Derivative Financial Instruments

The Company uses derivative financial instruments, primarily foreign exchange contracts, to reduce its exposure to market risks from changes in foreign exchange rates. These foreign exchange contracts are measured at fair value using quoted forward foreign exchange prices from counterparties corroborated by market-based pricing (Level 2). Additional information related to the Company’s derivative financial instruments are disclosed within Note 12 to the condensed consolidated financial statements.

The table below presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at July 31, 2010, August 1, 2009 and January 30, 2010. The Company did not have any transfers between Level 1 and Level 2 during 2009 or the first half of 2010.


				Fair Value Measurements
($ thousands)		Total			Level 1			Level 2			Level 3
Asset (Liability)
As of July 31, 2010:
Non-qualified deferred compensation plan assets	$	1,226		$	1,226		$	–		$	–
Non-qualified deferred compensation plan liabilities		(1,226	)		(1,226	)		–			–
Deferred compensation plan liabilities for non-employee directors		(899	)		(899	)		–			–
Derivative financial instruments, net		(550	)		–			(550	)		–
As of August 1, 2009: Cash equivalents – money market funds	$	14,500		$	14,500		$	–		$	–
Non-qualified deferred compensation plan assets		788			788			–			–
Non-qualified deferred compensation plan liabilities		(788	)		(788	)		–			–
Deferred compensation plan liabilities for non-employee directors		(467	)		(467	)		–			–
Derivative financial instruments, net		(1,042	)		–			(1,042	)		–

As of January 30, 2010: Cash equivalents – money market funds	$	25,000		$	25,000		$	–		$	–
Non-qualified deferred compensation plan assets		1,033			1,033			–			–
Non-qualified deferred compensation plan liabilities		(1,033	)		(1,033	)		–			–
Deferred compensation plan liabilities for non-employee directors		(747	)		(747	)		–			–
Derivative financial instruments, net		(601	)		–			(601	)		–

Store Impairment Charges

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a negative industry or economic trend. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated store sales and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs. Long-lived store assets held and used with a carrying amount of $52.3 million were written down to their fair value, resulting in an impairment charge of $0.5 million, which was recorded within selling and administrative expenses for the thirteen weeks ended July 31, 2010. Of the $0.5 million impairment charge, $0.4 million related to the Famous Footwear segment and $0.1 million related to the Specialty Retail segment. Impairment charges of $1.7 million were recorded within selling and administrative expenses for the twenty-six weeks ended July 31, 2010, of which $1.2 million related to the Famous Footwear segment and $0.5 million related to the Specialty Retail segment.

Fair Value of the Company’s Other Financial Instruments

The fair values of cash and cash equivalents (excluding money market funds discussed above), receivables and trade accounts payable approximate their carrying values due to the short-term nature of these instruments.

The carrying amounts and fair values of the Company’s other financial instruments subject to fair value disclosures are as follows:


	July 31, 2010					August 1, 2009			January 30, 2010
($ thousands)	Carrying Amount		Fair Value			Carrying Amount		Fair Value	Carrying Amount		Fair Value
Borrowings under revolving credit agreement	$	35,500	$	35,500	$	47,500	$	47,500	$	94,500	$	94,500
Senior Notes		150,000		151,688		150,000		143,813		150,000		152,250

The fair value of borrowings under the revolving credit agreement approximated their carrying value due to the short-term nature and the fair value of the Company’s Senior Notes was based upon quoted prices as of the end of the respective periods.

Note 14

Related Party Transactions

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 2007. 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 2007 and distributes 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 then sells Naturalizer products through retail stores in China. During the thirteen weeks and twenty-six weeks ended July 31, 2010, the Company, through its consolidated subsidiary, B&H Footwear, sold $0.5 million and $1.1 million of Naturalizer footwear on a wholesale basis to Hongguo, with $0.3 million and $0.8 million in corresponding sales during the thirteen weeks and twenty-six weeks ended August 1, 2009, respectively.

Note 15

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 and has been notified that it is or may be a potentially responsible party at several other 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. The on-site remediation calls for the operation of a pump and treat system (which prevents migration of contaminated groundwater off the property) as the final remedy for the site, subject to monitoring and periodic review of the on-site conditions and other remedial technologies that may be developed in the future. Off-site groundwater concentrations have been reducing over time, since installation of the pump and treat system in 2000 and injection of clean water beginning in 2003. However, localized areas of contaminated bedrock just beyond the property line continue to impact off-site groundwater. The modified workplan for addressing this condition includes converting the off-site bioremediation system into a monitoring well network and employing different remediation methods in these recalcitrant areas. In accordance with the workplan, a pilot test was conducted of certain groundwater remediation methods and the results of that test were used to develop more detailed plans for remedial activities in the off-site areas, which were approved by the authorities and are being implemented in a phased manner. The results of groundwater monitoring will be used to evaluate the effectiveness of these activities. The liability for the on-site remediation was discounted at 4.8%. On an undiscounted basis, the on-site remediation liability would be $16.5 million as of July 31, 2010. The Company expects to spend approximately $0.2 million in each of the next five years and $15.5 million in the aggregate thereafter related to the on-site remediation.

The cumulative expenditures for both on-site and off-site remediation through July 31, 2010 are $22.7 million. The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at July 31, 2010, is $7.8 million, of which $1.2 million is recorded within other accrued expenses and $6.6 million is recorded within other liabilities. Of the total $7.8 million reserve, $5.0 million is for on-site remediation and $2.8 million is for off-site remediation. During the thirteen weeks and twenty-six weeks ended July 31, 2010 and August 1, 2009, the Company recorded no expense related to either the on-site or off-site remediation, other than the accretion of interest expense.

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 through 2024. The Company has an accrued liability of $1.8 million at July 31, 2010, related to these sites, which has been discounted at 6.4%. On an undiscounted basis, this liability would be $2.6 million. The Company expects to spend approximately $0.2 million in each of the next five years and $1.6 million in the aggregate 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 sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.

Based on information currently available, the Company has an accrued liability of $9.6 million as of July 31, 2010, to complete the cleanup, maintenance and monitoring at all sites. Of the $9.6 million liability, $1.4 million is recorded in other accrued expenses and $8.2 million is recorded in other liabilities. 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

On April 25, 2008, the Board of Commissioners of the County of La Plata, Colorado, filed suit against a subsidiary of the Company in the United States District Court for the District of Colorado, alleging soil and groundwater contamination associated with a former facility located in Durango, Colorado. The Redfield rifle scope business operated a lens crafting facility on this property, which was subsequently sold to the County. The County seeks reimbursement for its past expenditures and a judgment obligating the Company to pay for cleanup of the site. The trial date is set for October 2010.

The Company 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

In 2004, the Company was notified of 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, for which the Company has an accrued liability of $1.7 million as of July 31, 2010. While management believes it has an appropriate reserve for this matter, the ultimate outcome and cost to the Company may vary.

At July 31, 2010, the Company was contingently liable for remaining lease commitments of approximately $1.4 million in the aggregate, which relate to former retail locations that it exited in prior years. These obligations will continue to decline over the next several years as leases expire. In order for the Company to incur any liability related to these lease commitments, the current lessees would have to default.

Note 16

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 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 operations and cash flows of, each of the consolidated groups.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JULY 31, 2010

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	(2,745	)	$	14,714		$	18,755		$	–		$	30,724
Receivables		78,242			3,183			24,724			–			106,149
Inventories		105,623			470,020			2,442			–			578,085
Prepaid expenses and other current assets		26,221			6,891			94			–			33,206
Total current assets		207,341			494,808			46,015			–			748,164
Other assets		96,235			21,973			676			–			118,884
Intangible assets, net		56,036			17,840			–			–			73,876
Property and equipment, net		25,242			107,683			3,282			–			136,207
Investment in subsidiaries		675,269			81,980			–			(757,249	)		–
Total assets	$	1,060,123		$	724,284		$	49,973		$	(757,249	)	$	1,077,131

Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	35,500		$	–		$	–		$	–		$	35,500
Trade accounts payable		73,720			192,380			28,745			–			294,845
Other accrued expenses		74,225			59,768			5,682			–			139,675
Total current liabilities		183,445			252,148			34,427			–			470,020
Other liabilities
Long-term debt		150,000			–			–			–			150,000
Other liabilities		26,660			38,632			274			–			65,566
Intercompany payable (receivable)		308,947			(241,765	)		(67,182	)		–			–
Total other liabilities		485,607			(203,133	)		(66,908	)		–			215,566
Equity											–
Brown Shoe Company, Inc. shareholders’ equity		391,071			675,269			81,980			(757,249	)		391,071
Noncontrolling interests		–			–			474			–			474
Total equity		391,071			675,269			82,454			(757,249	)		391,545
Total liabilities and equity	$	1,060,123		$	724,284		$	49,973		$	(757,249	)	$	1,077,131

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THIRTEEN WEEKS ENDED JULY 31, 2010

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net sales	$	169,710		$	411,080		$	55,733		$	(50,767	)	$	585,756
Cost of goods sold		129,810			221,340			46,903			(50,767	)		347,286
Gross profit		39,900			189,740			8,830			–			238,470
Selling and administrative expenses		45,227			177,946			1,275			–			224,448
Restructuring and other special charges, net		1,730			–			161			–			1,891
Equity in (earnings) loss of subsidiaries		(12,251	)		(2,480	)		–			14,731			–
Operating earnings (loss)		5,194			14,274			7,394			(14,731	)		12,131
Interest expense		(4,809	)		(1	)		–			–			(4,810	)
Interest income		–			28			21			–			49
Intercompany interest income (expense)		3,459			581			(4,040	)		–			–
Earnings (loss) before income taxes		3,844			14,882			3,375			(14,731	)		7,370
Income tax benefit (provision)		1,417			(3,028	)		(971	)		–			(2,582	)
Net earnings (loss)	$	5,261		$	11,854		$	2,404		$	(14,731	)	$	4,788
Less: Net loss attributable to noncontrolling interests		–			(397	)		(76	)		–			(473	)
Net earnings (loss) attributable to Brown Shoe Company, Inc.	$	5,261		$	12,251		$	2,480		$	(14,731	)	$	5,261

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE TWENTY-SIX WEEKS ENDED JULY 31, 2010

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net sales	$	333,064		$	837,956		$	100,774		$	(88,320	)	$	1,183,474
Cost of goods sold		247,492			453,473			84,799			(88,320	)		697,444
Gross profit		85,572			384,483			15,975			–			486,030
Selling and administrative expenses		96,031			346,409			6,523			–			448,963
Restructuring and other special charges, net		3,273			–			335			–			3,608
Equity in (earnings) loss of subsidiaries		(26,253	)		(4,196	)		–			30,449			–
Operating earnings (loss)		12,521			42,270			9,117			(30,449	)		33,459
Interest expense		(9,318	)		(4	)		–			–			(9,322	)
Interest income		1			29			37			–			67
Intercompany interest income (expense)		7,076			(3,416	)		(3,660	)		–			–
Earnings (loss) before income taxes		10,280			38,879			5,494			(30,449	)		24,204
Income tax benefit (provision)		5,027			(12,316	)		(1,592	)		–			(8,881	)
Net earnings (loss)	$	15,307		$	26,563		$	3,902		$	(30,449	)	$	15,323
Less: Net earnings (loss) attributable to noncontrolling interests		–			310			(294	)		–			16
Net earnings (loss) attributable to Brown Shoe Company, Inc.	$	15,307		$	26,253		$	4,196		$	(30,449	)	$	15,307

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE TWENTY-SIX WEEKS ENDED JULY 31, 2010

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations		Total
Net cash (used for) provided by operating activities	$	(26,863	)	$	44,036		$	9,816		$	–	$	26,989

Investing activities
Purchases of property and equipment		(1,978	)		(10,664	)		(202	)		–		(12,844	)
Capitalized software		(11,734	)		(137	)		–			–		(11,871	)
Net cash used for investing activities		(13,712	)		(10,801	)		(202	)		–		(24,715	)

Financing activities
Borrowings under revolving credit agreement		435,500			–			–			–		435,500
Repayments under revolving credit agreement		(494,500	)		–			–			–		(494,500	)
Intercompany financing		95,216			12,205			(107,421	)		–		–
Acquisition of noncontrolling interests (Edelman Shoe, Inc.)		7,309			(40,001	)		–			–		(32,692	)
Dividends paid		(6,114	)		–			–			–		(6,114	)
Proceeds from stock options exercised		561			–			–			–		561
Tax deficiency related to share-based plans		(142	)		–			–			–		(142	)
Net cash provided by (used for) financing activities		37,830			(27,796	)		(107,421	)		–		(97,387	)
Effect of exchange rate changes on cash		–			4			–			–		4

(Decrease) increase in cash and cash equivalents		(2,745	)		5,443			(97,807	)		–		(95,109	)
Cash and cash equivalents at beginning of period		–			9,271			116,562			–		125,833
Cash and cash equivalents at end of period	$	(2,745	)	$	14,714		$	18,755		$	–	$	30,724

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JANUARY 30, 2010

($ thousands)	Parent		Guarantors			Non-Guarantors		Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	–	$	2,809		$	123,024	$	–		$	125,833
Receivables		51,417		3,002			29,878		–			84,297
Inventories		77,730		376,110			2,842		–			456,682
Prepaid expenses and other current assets		26,751		12,327			2,359		–			41,437
Total current assets		155,898		394,248			158,103		–			708,249
Other assets		92,413		(1,189	)		21,890		–			113,114
Intangible assets, net		58,826		3,000			15,400		–			77,226
Property and equipment, net		25,140		112,580			3,841		–			141,561
Investment in subsidiaries		641,409		199,234			–		(840,643	)		–
Total assets	$	973,686	$	707,873		$	199,234	$	(840,643	)	$	1,040,150

Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	94,500	$	–		$	–	$	–		$	94,500
Trade accounts payable		53,410		93,937			30,353		–			177,700
Other accrued expenses		78,504		55,685			7,674		–			141,863
Total current liabilities		226,414		149,622			38,027		–			414,063
Other liabilities
Long-term debt		150,000		–			–		–			150,000
Other liabilities		19,455		39,386			6,019		–			64,860
Intercompany payable (receivable)		210,439		(261,042	)		50,603		–			–
Total other liabilities		379,894		(221,656	)		56,622		–			214,860
Equity
Brown Shoe Company, Inc. shareholders’ equity		367,378		779,907			95,529		(840,643	)		402,171
Noncontrolling interests		–		–			9,056		–			9,056
Total equity		367,378		779,907			104,585		(840,643	)		411,227
Total liabilities and equity	$	973,686	$	707,873		$	199,234	$	(840,643	)	$	1,040,150

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF AUGUST 1, 2009

($ thousands)	Parent		Guarantors			Non-Guarantors			Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	–	$	7,428		$	29,846		$	–		$	37,274
Receivables		46,328		3,584			22,244			–			72,156
Inventories		79,319		443,301			4,188			–			526,808
Prepaid expenses and other current assets		26,705		12,725			2,447			–			41,877
Total current assets		152,352		467,038			58,725			–			678,115
Other assets		80,504		15,394			14,642			–			110,540
Intangible assets, net		61,653		3,000			15,960			–			80,613
Property and equipment, net		26,474		125,333			3,743			–			155,550
Investment in subsidiaries		651,310		79,239			–			(730,549	)		–
Total assets	$	972,293	$	690,004		$	93,070		$	(730,549	)	$	1,024,818

Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	47,500	$	–		$	–		$	–		$	47,500
Trade accounts payable		36,021		176,029			21,741			–			233,791
Other accrued expenses		65,897		61,338			6,417			–			133,652
Total current liabilities		149,418		237,367			28,158			–			414,943
Other liabilities
Long-term debt		150,000		–			–			–			150,000
Other liabilities		23,156		42,223			6,240			–			71,619
Intercompany payable (receivable)		270,136		(240,896	)		(29,240	)		–			–
Total other liabilities		443,292		(198,673	)		(23,000	)		–			221,619
Equity
Brown Shoe Company, Inc. shareholders’ equity		379,583		651,310			79,239			(730,549	)		379,583
Noncontrolling interests		–		–			8,673			–			8,673
Total equity		379,583		651,310			87,912			(730,549	)		388,256
Total liabilities and equity	$	972,293	$	690,004		$	93,070		$	(730,549	)	$	1,024,818

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THIRTEEN WEEKS ENDED AUGUST 1, 2009

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net sales	$	124,904		$	373,829		$	68,472		$	(55,584	)	$	511,621
Cost of goods sold		99,215			211,318			53,032			(55,584	)		307,981
Gross profit		25,689			162,511			15,440			–			203,640
Selling and administrative expenses		33,264			167,084			6,272			–			206,620
Restructuring and other special charges, net		1,998			–			–			–			1,998
Equity in (earnings) loss of subsidiaries		(4,414	)		(8,296	)		–			12,710			–
Operating (loss) earnings		(5,159	)		3,723			9,168			(12,710	)		(4,978	)
Interest expense		(4,758	)		–			(156	)		–			(4,914	)
Interest income		–			4			141			–			145
Intercompany interest income (expense)		1,384			(1,689	)		305			–			–
(Loss) earnings before income taxes		(8,533	)		2,038			9,458			(12,710	)		(9,747	)
Income tax benefit (provision)		4,288			2,376			(1,133	)		–			5,531
Net (loss) earnings	$	(4,245	)	$	4,414		$	8,325		$	(12,710	)	$	(4,216	)
Less: Net earnings attributable to noncontrolling interests		–			–			29			–			29
Net (loss) earnings attributable to Brown Shoe Company, Inc.	$	(4,245	)	$	4,414		$	8,296		$	(12,710	)	$	(4,245	)

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE TWENTY-SIX WEEKS ENDED AUGUST 1, 2009

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net sales	$	272,040		$	747,230		$	129,494		$	(98,403	)	$	1,050,361
Cost of goods sold		212,788			422,583			101,589			(98,403	)		638,557
Gross profit		59,252			324,647			27,905			–			411,804
Selling and administrative expenses		70,465			333,236			15,636			–			419,337
Restructuring and other special charges, net		4,612			–			–			–			4,612
Equity in (earnings) loss of subsidiaries		(3,505	)		(11,095	)		–			14,600			–
Operating (loss) earnings		(12,320	)		2,506			12,269			(14,600	)		(12,145	)
Interest expense		(10,003	)		(1	)		(159	)		–			(10,163	)
Interest income		1			31			256			–			288
Intercompany interest income (expense)		2,893			(3,433	)		540			–			–
(Loss) earnings before income taxes		(19,429	)		(897	)		12,906			(14,600	)		(22,020	)
Income tax benefit (provision)		7,581			4,402			(1,250	)		–			10,733
Net (loss) earnings	$	(11,848	)	$	3,505		$	11,656		$	(14,600	)	$	(11,287	)
Less: Net earnings attributable to noncontrolling interests		–			–			561			–			561
Net (loss) earnings attributable to Brown Shoe Company, Inc.	$	(11,848	)	$	3,505		$	11,095		$	(14,600	)	$	(11,848	)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE TWENTY-SIX WEEKS ENDED AUGUST 1, 2009

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations		Total
Net cash provided by operating activities	$	12,231		$	14,475		$	23,005		$	–	$	49,711

Investing activities
Purchases of property and equipment		(1,133	)		(16,286	)		(492	)		–		(17,911	)
Capitalized software		(10,307	)		(582	)		(27	)		–		(10,916	)
Net cash used for investing activities		(11,440	)		(16,868	)		(519	)		–		(28,827	)

Financing activities
Borrowings under revolving credit agreement		394,900			–			–			–		394,900
Repayments under revolving credit agreement		(459,900	)		–			–			–		(459,900	)
Tax deficiency related to share-based plans		(89	)		–			–			–		(89	)
Dividends paid		(6,006	)		–			–			–		(6,006	)
Intercompany financing		70,304			(13,598	)		(56,706	)		–		–
Net cash used for financing activities		(791	)		(13,598	)		(56,706	)		–		(71,095	)
Effect of exchange rate changes on cash		–			585			–			–		585

Decrease in cash and cash equivalents		–			(15,406	)		(34,220	)		–		(49,626	)
Cash and cash equivalents at beginning of period		–			22,834			64,066			–		86,900
Cash and cash equivalents at end of period	$	–		$	7,428		$	29,846		$	–	$	37,274

ITEM 2

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

OVERVIEW

We delivered another quarter of solid financial performance in 2010. Our retail and wholesale businesses continue to gain momentum as we head into the key back-to-school season, as evidenced by the same-store sales increase at our retail stores and growth in our wholesale brands resulting from the execution of strong merchandising and marketing plans. Additionally, we have made inventory investments to capitalize on trend-right product offerings, which we believe position us to compete more effectively during this peak shopping period.

The following is a summary of the financial highlights for the second quarter of 2010:

Consolidated net sales increased $74.2 million, or 14.5%, to $585.8 million for the second quarter of 2010, compared to $511.6 million for the second quarter of last year. Net sales of our Wholesale Operations, Famous Footwear and Specialty Retail segments increased by $36.6 million, $33.2 million and $4.3 million, respectively.

·	Consolidated operating earnings were $12.1 million in the second quarter of 2010, compared to a consolidated operating loss of $5.0 million for the second quarter of last year.

Consolidated net earnings attributable to Brown Shoe Company, Inc. were $5.3 million, or $0.12 per diluted share, in the second quarter of 2010, compared to our consolidated net loss attributable to Brown Shoe Company, Inc. of $4.2 million, or $0.10 per diluted share, in the second quarter of last year.

The following items impacted our second quarter operating results in 2010 and 2009 and should be considered in evaluating the comparability of our results:

Marketing initiatives – Marketing expenses were $5.8 million ($3.6 million on an after-tax basis, or $0.08 per diluted share) higher in the second quarter of 2010, compared to the second quarter of last year, due to our continued focus on driving brand awareness across our retail and wholesale businesses and deepening our connection with customers.

Incentive plans – Due to our stronger financial performance in the second quarter of 2010 relative to the second quarter of last year, as well as expectations for the full year of 2010, expenses related to our cash- and share-based incentive plans were $4.3 million ($2.6 million on an after-tax basis, or $0.06 per diluted share) higher in the second quarter of 2010.

Information technology initiatives – We incurred expenses of $1.9 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) during the second quarter of 2010, related to our integrated enterprise resource planning (“ERP”) information technology system that is replacing select existing internally developed and certain other third-party applications, with $2.0 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) in corresponding expenses during the second quarter of last year. See the Recent Developments section that follows and Note 6 to the condensed consolidated financial statements for additional information related to these expenses.

Following is a summary of our operating results in the second quarter of 2010 by segment and the status of our balance sheet. See Note 7 to the condensed consolidated financial statements for additional information regarding our business segments.

Our Famous Footwear segment’s net sales increased 10.6% to $347.3 million for the second quarter of 2010, compared to $314.1 million for the second quarter of last year. Same-store sales increased 11.8% during the second quarter of 2010, reflecting a higher conversion rate in our stores, higher average retail prices and increases in customer traffic levels. The improvement in operating results was broad-based with all major categories, channels and geographic regions contributing to Famous Footwear’s second quarter operating results. A lower store count, as a result of store closings, partially offset the same-store sales increase. Operating earnings increased $16.6 million to $15.8 million for the second quarter of 2010, as compared to an operating loss of $0.8 million for the second quarter of last year, driven primarily by higher net sales and gross profit rate, partially offset by higher selling and merchandising expenses. As a percent of net sales, operating earnings increased to 4.5% in the second quarter of 2010, compared to an operating loss of 0.3% in the second quarter of last year.

Our Wholesale Operations segment’s net sales increased 25.8% to $178.6 million for the second quarter of 2010, compared to $142.0 million for the second quarter of last year. Sales growth was led by our Dr. Scholl’s, Sam Edelman, Vera Wang Lavender and Via Spiga divisions. The increased mix of our wholesale brands sold to third parties as well as shifts in channel and brand mix and increased air freight costs led to a lower gross profit rate. Operating earnings increased $1.1 million, or 14.5%, to $9.0 million for the second quarter of 2010, compared to $7.9 million for the second quarter of last year, as a result of the increase in net sales, partially offset by the decrease in gross profit rate and increase in selling and administrative expenses. As a percent of net sales, operating earnings declined to 5.1% for the second quarter of 2010, compared to 5.5% for the second quarter of last year.

Our Specialty Retail segment’s net sales increased 7.8% to $59.8 million for the second quarter of 2010, compared to $55.5 million for the second quarter of last year. A same-store sales increase of 6.8% in our retail stores, higher net sales at Shoes.com and an increase in the Canadian dollar exchange rate led to an overall increase in our level of net sales. A lower store count, as a result of store closings, partially offset the net sales increases. We incurred an operating loss of $2.7 million for the second quarter of 2010, compared to an operating loss of $4.3 million for the second quarter of last year.

Our debt-to-capital ratio, the ratio of our debt obligations to the sum of our debt obligations and equity, decreased to 32.1% at July 31, 2010, compared to 33.7% at August 1, 2009, primarily due to the $12.0 million decline in borrowings under our revolving credit agreement. Our debt-to-capital ratio decreased from 37.3% at January 30, 2010 primarily due to the $59.0 million decline in borrowings under our revolving credit agreement. Our current ratio, the relationship of current assets to current liabilities, was 1.59 to 1 at July 31, 2010, compared to 1.63 to 1 at August 1, 2009 and 1.71 to 1 at January 30, 2010. Inventories at July 31, 2010 were $578.1 million, up from $526.8 million at the end of the second quarter of last year, primarily in our Famous Footwear and Wholesale Operations segments, in support of higher sales levels, including our investments in wellness initiatives and accessories, and in order to be well positioned for the back-to-school season.

Recent Developments

Additional Investment in Edelman Shoe, Inc.

On June 4, 2010, we acquired the remaining 50% of our noncontrolling interest in Edelman Shoe for $40.0 million, consisting of a combination of $32.7 million of cash, including transaction fees, and $7.3 million in shares of our common stock. Edelman Shoe is a leading designer and marketer of fashion footwear. The Sam Edelman brand was launched in 2004 and is primarily sold through department stores and independent retailers. We believe the acquisition is critical to the execution of our contemporary fashion strategy, which includes providing consumers access to fashion primarily in the bridge/designer footwear price zones. See Note 3 to the condensed consolidated financial statements for additional information regarding our interests in Edelman Shoe during the first half of 2010.

Information Technology Initiatives

During 2008, we began implementation of an integrated ERP information technology system provided by third-party vendors. The ERP information technology system is replacing select existing internally developed and certain other third-party applications, and is expected to support our business model. We expect the implementation will enhance our profitability through improved management and execution of our business operations, financial systems, supply chain efficiency and planning and employee productivity. The phased implementation began during 2008 and is expected to be substantially complete in the fourth quarter of 2010. We incurred expenses of $1.9 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) and $3.6 million ($2.4 million on an after-tax basis, or $0.06 per diluted share) during the second quarter and first half of 2010, respectively, as a component of restructuring and other special charges, net related to these initiatives. We incurred expenses of $2.0 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) and $4.6 million ($3.0 million on an after-tax basis, or $0.07 per diluted share) during the second quarter and first half of 2009, respectively, as a component of restructuring and other special charges, net related to these initiatives.

Outlook for the Remainder of 2010

We believe our brands are well positioned in the marketplace and our investments will enable us to further capitalize on the consumers’ desire for trend-right products. We have seen positive trends continue into the third quarter of 2010, and while there remains uncertainty as to the pace of the broader economic recovery, we continue to believe that we will see solid sales growth for the Company in 2010. We expect the same-store sales of our retail businesses to grow in the high single- to low-double digit percentage range in 2010. For our wholesale business, we expect a net sales increase in 2010 in the high-teens percentage range as compared to 2009. We plan to continue increasing our investment in marketing and sharpening our focus on the consumer throughout the remainder of 2010.

Following are the consolidated results and the results by segment for the thirteen weeks and twenty-six weeks ended July 31, 2010 and August 1, 2009:

CONSOLIDATED RESULTS

	Thirteen Weeks Ended								Twenty-six Weeks Ended
	July 31, 2010				August 1, 2009				July 31, 2010				August 1, 2009
($ millions)				% of Net Sales				% of Net Sales				% of Net Sales				% of Net Sales
Net sales	$	585.8		100.0%	$	511.6		100.0%	$	1,183.5		100.0%	$	1,050.4		100.0%
Cost of goods sold		347.3		59.3%		308.0		60.2%		697.5		58.9%		638.6		60.8%
Gross profit		238.5		40.7%		203.6		39.8%		486.0		41.1%		411.8		39.2%
Selling and administrative expenses		224.5		38.3%		206.6		40.4%		448.9		38.0%		419.3		40.0%
Restructuring and other special charges, net		1.9		0.3%		2.0		0.4%		3.6		0.3%		4.6		0.4%
Operating earnings (loss)		12.1		2.1%		(5.0	)	(1.0)%		33.5		2.8%		(12.1	)	(1.2)%
Interest expense		(4.7	)	(0.8)%		(4.9	)	(0.9)%		(9.4	)	(0.8)%		(10.2	)	(0.9)%
Interest income		–		–		0.2		0.0%		0.1		0.0%		0.3		0.0%
Earnings (loss) before income taxes		7.4		1.3%		(9.7	)	(1.9)%		24.2		2.0%		(22.0	)	(2.1)%
Income tax (provision) benefit		(2.6	)	(0.5)%		5.5		1.1%		(8.9	)	(0.7)%		10.7		1.0%
Net earnings (loss)	$	4.8		0.8%	$	(4.2	)	(0.8)%	$	15.3		1.3%	$	(11.3	)	(1.1)%
Less: Net (loss) earnings attributable to noncontrolling interests		(0.5	)	(0.1)%		–		–		–		–		0.5		0.0%
Net earnings (loss) attributable to Brown Shoe Company, Inc.	$	5.3		0.9%	$	(4.2	)	(0.8)%	$	15.3		1.3%	$	(11.8	)	(1.1)%

Net Sales

Net sales increased $74.2 million, or 14.5%, to $585.8 million for the second quarter of 2010, compared to $511.6 million for the second quarter of last year. All segments experienced an increase in net sales during the second quarter of 2010 as compared to the second quarter of 2009. Our Wholesale Operations segment reported a $36.6 million increase in net sales, primarily as a result of strong demand and sales growth in many of our brands, led by our Dr. Scholl’s, Sam Edelman, Vera Wang Lavender and Via Spiga divisions. Our Famous Footwear segment reported a $33.2 million increase in net sales, reflecting an 11.8% same-store sales increase, resulting from a higher conversion rate in our stores, higher average retail prices and increases in customer traffic levels. The net sales of our Specialty Retail segment increased $4.3 million, primarily reflecting a 6.8% same-store sales increase in our retail stores and higher net sales at Shoes.com.

Net sales increased $133.1 million, or 12.7%, to $1,183.5 million for the first half of 2010, compared to $1,050.4 million for the first half of last year. All segments experienced an increase in net sales during the first half of 2010 as compared to the first half of 2009. Our Famous Footwear segment reported a $77.8 million increase in net sales, reflecting a 13.6% same-store sales increase for the same reasons as those described above for the second quarter. Our Wholesale Operations segment reported a $42.5 million increase in net sales, primarily as a result of strong demand and sales growth in many of our brands, including primarily our Dr. Scholl’s, Sam Edelman, Vera Wang Lavender, Via Spiga and Naturalizer divisions. The net sales of our Specialty Retail segment increased $12.8 million, reflecting an 11.3% same-store sales increase in our retail stores, an increase in the Canadian dollar exchange rate and higher net sales at Shoes.com.

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, and 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 increased $34.9 million, or 17.1%, to $238.5 million for the second quarter of 2010, compared to $203.6 million for the second quarter of last year, resulting from both higher net sales and a higher gross profit rate. As a percent of net sales, our gross profit increased to 40.7% for the second quarter of 2010 from 39.8% for the second quarter of last year. Our Famous Footwear segment contributed to the improvement in the gross profit rate, as the segment experienced strong sales of higher-margin categories, improved sell-through associated with its sharper focus on trend-right merchandise and a significant decrease in promotional activity during the quarter. The gross profit rate increase in our Famous Footwear segment was partially offset by a decline in the gross profit rate recognized by our Wholesale Operations segment resulting primarily from the increased mix of our wholesale brands sold to third parties as well as shifts in channel and brand mix and increased air freight costs.

Gross profit increased $74.2 million, or 18.0%, to $486.0 million for the first half of 2010, compared to $411.8 million in the first half of last year, due to both an increase in net sales and an increase in gross profit rate. As a percent of net sales, our gross profit was 41.1% in the first half of 2010, compared to 39.2% in the first half of last year. The primary driver in our improved gross profit rate was our Famous Footwear segment, as a result of strong sales of higher-margin categories and a significant decrease in promotional activity during the first half of 2010. Our Wholesale Operations segment contributed to the increase in gross profit rate as the segment experienced lower provisions for customer allowances and markdowns, resulting from improved sell-through rates at retail. In addition, our Specialty Retail segment also contributed to the increase in gross profit rate as the segment experienced improved retail sell-through resulting in lower markdowns for our retail stores.

We record warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies.

Selling and Administrative Expenses

Selling and administrative expenses increased $17.9 million, or 8.6%, to $224.5 million for the second quarter of 2010, compared to $206.6 million in the second quarter of last year. The increase was primarily related to increases associated with variable retail store and wholesale payroll expenses, increased marketing expenses and higher expected payments under our incentive plans. As a percent of net sales, selling and administrative expenses decreased to 38.3% for the second quarter of 2010 from 40.4% for the second quarter of last year, reflecting the factors discussed above and better leveraging of our expense base over the higher sales volume.

Selling and administrative expenses increased $29.6 million, to $448.9 million for the first half of 2010, compared to $419.3 million in the first half of last year. We experienced higher direct selling costs, due to higher sales volume across all of our segments, higher expected payments under our incentive plans and increased marketing expenses. These increases were partially offset by a decline in our retail facilities expenses as a result of our lower store count and cost savings from initiatives implemented during 2009. As a percent of net sales, selling and administrative expenses decreased to 38.0% in the first half of 2010 from 40.0% in the first half of last year due primarily to better leveraging of our expense base over higher sales volume.

Restructuring and Other Special Charges, Net

We recorded restructuring and other special charges, net of $1.9 million for the second quarter of 2010, related to our integrated ERP information technology system that is replacing select existing internally developed and certain other third-party applications, with $2.0 million of corresponding charges during the second quarter of last year. As a percent of net sales, restructuring and other special charges, net decreased to 0.3% in the second quarter of 2010, from 0.4% in the second quarter of last year.

We recorded restructuring and other special charges, net of $3.6 million for the first half of 2010, related to our integrated ERP information technology system, with $4.6 million of corresponding charges during the first half of last year. As a percent of net sales, restructuring and other special charges, net decreased to 0.3% in the first half of 2010, from 0.4% in the first half of last year.

Operating Earnings (Loss)

We reported operating earnings of $12.1 million in the second quarter of 2010, compared to an operating loss of $5.0 million during the second quarter of last year, primarily driven by the increase in net sales and gross profit rate, partially offset by the increase in selling and administrative expenses, as described above.

We reported operating earnings of $33.5 million in the first half of 2010, compared to an operating loss of $12.1 million during the first half of last year, primarily driven by the increase in net sales and gross profit rate, partially offset by the increase in selling and administrative expenses, as described above.

Interest Expense

Interest expense decreased $0.2 million, or 2.1%, to $4.7 million for the second quarter of 2010, compared to $4.9 million for the second quarter of last year, primarily reflecting a lower interest rate on average borrowings under our revolving credit agreement.

Interest expense decreased $0.8 million, or 8.3%, to $9.4 million for the first half of 2010, compared to $10.2 million for the first half of last year, primarily reflecting lower average borrowings and lower interest rates on average borrowings under our revolving credit agreement.

Income Tax (Provision) Benefit

Our consolidated effective tax rate was a provision of 35.0% for the second quarter of 2010, compared to a benefit of 56.7% for the second quarter of last year, reflecting a change in the mix of domestic and foreign earnings and losses. Our domestic operations are generally subject to a normal combined tax rate of 35% to 39%, whereas our operations in foreign jurisdictions generally have lower tax rates.

Our consolidated effective tax rate was a provision of 36.7% in the first half of 2010, compared to a benefit of 48.7% in the first half of last year due to the same reasons as described above for the second quarter.

Net Earnings (Loss) Attributable to Brown Shoe Company, Inc.

We reported net earnings attributable to Brown Shoe Company, Inc. of $5.3 million and $15.3 million during the second quarter and first half of 2010, respectively, compared to a net loss attributable to Brown Shoe Company, Inc. of $4.2 million and $11.8 million during the second quarter and first half of last year, respectively, as a result of the factors described above.

FAMOUS FOOTWEAR

	Thirteen Weeks Ended								Twenty-six Weeks Ended
	July 31, 2010				August 1, 2009				July 31, 2010				August 1, 2009
($ millions, except sales per square foot)				% of Net Sales				% of Net Sales				% of Net Sales				% of Net Sales
Operating Results
Net sales	$	347.3		100.0%	$	314.1		100.0%	$	709.5		100.0%	$	631.7		100.0%
Cost of goods sold		187.7		54.0%		179.8		57.2%		385.7		54.4%		360.9		57.1%
Gross profit		159.6		46.0%		134.3		42.8%		323.8		45.6%		270.8		42.9%
Selling and administrative expenses		143.8		41.5%		135.1		43.1%		279.9		39.4%		268.6		42.6%
Operating earnings (loss)	$	15.8		4.5%	$	(0.8	)	(0.3)%	$	43.9		6.2%	$	2.2		0.3%

Key Metrics
Same-store sales % change		11.8%				(6.7)%				13.6%				(5.9)%
Same-store sales $ change	$	35.8			$	(21.5	)		$	82.4			$	(36.9	)
Sales change from new and closed stores, net	$	(2.6	)		$	9.4			$	(4.6	)		$	23.6

Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)	$	44			$	39			$	89			$	78
Sales per square foot, excluding e-commerce (trailing twelve-months)	$	179			$	162			$	179			$	162
Square footage (thousand sq. ft.)		7,845				8,091				7,845				8,091

Stores opened		7				13				18				52
Stores closed		13				12				19				23
Ending stores		1,128				1,167				1,128				1,167

Net Sales

Net sales increased $33.2 million, or 10.6%, to $347.3 million for the second quarter of 2010, compared to $314.1 million for the second quarter of last year. Same-store sales increased 11.8% during the second quarter of 2010, reflecting an improved retail environment resulting in a higher conversion rate in our stores, higher average retail prices and increases in customer traffic levels. A lower store count partially offset the same-store sales increase. During the second quarter of 2010, we opened seven new stores and closed 13 stores, resulting in 1,128 stores and total square footage of 7.8 million at the end of the second quarter of 2010, compared to 1,167 stores and total square footage of 8.1 million at the end of the second quarter of last year. As a result of the same-store sales increase, sales per square foot increased 12.9% to $44, compared to $39 in the second quarter of last year. Our customer loyalty program, Rewards, continues to account for a majority of the segment’s sales, as approximately 59% of our net sales were made to members of our Rewards program in the second quarter of 2010, compared to 61% in the second quarter of last year.

Net sales increased $77.8 million, or 12.3%, to $709.5 million in the first half of 2010, compared to $631.7 million in the first half of last year. Same-store sales increased 13.6% for the first half of 2010 for the same reasons as those described above for the second quarter. Our same-store sales increase was partially offset by a lower store count. As a result of the same-store sales increase, sales per square foot increased 14.4% to $89, compared to $78 in the first half of last year.

Gross Profit

Gross profit increased $25.3 million, or 18.8%, to $159.6 million for the second quarter of 2010, compared to $134.3 million for the second quarter of last year, due to the higher net sales and a higher gross profit rate. As a percent of net sales, our gross profit was 46.0% for the second quarter of 2010, compared to 42.8% for the second quarter of last year. The increase in our gross profit rate was driven by strong sales of higher-margin categories and a significant decrease in promotional activity during the quarter.

Gross profit increased $53.0 million, or 19.6%, to $323.8 million in the first half of 2010, compared to $270.8 million in the first half of last year, reflecting an increase in net sales and a higher gross profit rate. As a percent of net sales, our gross profit was 45.6% in the first half of 2010, up from 42.9% in the first half of last year due to the same factors described above for the second quarter.

Selling and Administrative Expenses

Selling and administrative expenses increased $8.7 million, or 6.4%, to $143.8 million for the second quarter of 2010, compared to $135.1 million for the second quarter of last year. The increase was primarily attributable to higher selling and merchandising expenses, some of which are variable with higher sales volume, higher marketing expenses and higher expected payments under our incentive plans. These increases were partially offset by lower retail facilities expenses, primarily resulting from the lower store count. As a percent of net sales, selling and administrative expenses decreased to 41.5% for the second quarter of 2010, compared to 43.1% for the second quarter of last year, reflecting the above named factors and better leveraging of our expense base over the higher sales volume.

Selling and administrative expenses increased $11.3 million, or 4.2%, to $279.9 million for the first half of 2010, compared to $268.6 million in the first half of last year, due to the same factors as described above for the second quarter of 2010. As a percentage of net sales, selling and administrative expenses decreased to 39.4% in the first half of 2010 from 42.6% in the first half of last year, reflecting the above named factors and better leveraging of our expense base over the higher sales volume.

Operating Earnings (Loss)

Operating earnings increased $16.6 million, or 1,961.8%, to $15.8 million for the second quarter of 2010, compared to an operating loss of $0.8 million for the second quarter of last year. The increase reflects the continued improvement in our business, a higher conversion rate in our stores, higher average retail prices and increases in customer traffic levels. These factors resulted in an increase in net sales and gross profit rate, partially offset by the increase in selling and administrative expenses, as described above. As a percent of net sales, operating earnings increased to 4.5% in the second quarter of 2010, compared to an operating loss of 0.3% in the second quarter of last year.

Operating earnings increased $41.7 million, or 1,900.6%, to $43.9 million for the first half of 2010, compared to $2.2 million in the first half of last year for the same reasons as those described above for the second quarter. As a percent of net sales, operating earnings increased to 6.2% in the first half of 2010, compared to 0.3% in the first half of last year.

WHOLESALE OPERATIONS

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	July 31, 2010			August 1, 2009			July 31, 2010			August 1, 2009
($ millions)			% of Net Sales			% of Net Sales			% of Net Sales			% of Net Sales
Operating Results
Net sales	$	178.6	100.0%	$	142.0	100.0%	$	353.4	100.0%	$	310.9	100.0%
Cost of goods sold		124.5	69.7%		95.7	67.4%		242.7	68.7%		215.2	69.2%
Gross profit		54.1	30.3%		46.3	32.6%		110.7	31.3%		95.7	30.8%
Selling and administrative expenses		44.9	25.1%		38.3	27.0%		92.7	26.2%		81.9	26.4%
Restructuring and other special charges, net		0.2	0.1%		0.1	0.1%		0.3	0.1%		–	–
Operating earnings	$	9.0	5.1%	$	7.9	5.5%	$	17.7	5.0%	$	13.8	4.4%

Key Metrics
Unfilled order position at end of period	$	317.2		$	198.8

Net Sales

Net sales increased $36.6 million, or 25.8%, to $178.6 million for the second quarter of 2010, compared to $142.0 million for the second quarter of last year. Demand for many of our brands continued to strengthen in the second quarter of 2010, as our brand performance at our retail customers improved. We experienced sales growth in many of our brands, including primarily our Dr. Scholl’s, Sam Edelman, Vera Wang Lavender and Via Spiga divisions. The sales growth was partially offset by a sales decline in our Children’s division. The sales growth was driven by sales increases across all of our channels of distribution, particularly in the mid-tier channel. The Company’s unfilled order position increased $118.4 million, or 59.5%, to $317.2 million as of July 31, 2010, as compared to $198.8 million as of August 1, 2009. This percentage increase was consistent with the percentage increase in the first quarter of 2010 and continues to reflect both our strong growth expectations and the earlier receipt of orders from our retail customers in 2010, impacted by shifts in capacity in China and retail order flow. Although our unfilled order position has increased 59.5% over last year, as mentioned earlier, we expect a net sales increase in 2010 for our Wholesale Operations in the high-teens percentage range as compared to 2009.

Net sales increased $42.5 million, or 13.7%, to $353.4 million in the first half of 2010, compared to $310.9 million in the first half of last year. We experienced sales growth from many of our brands, including primarily our Dr. Scholl’s, Sam Edelman, Vera Wang Lavender, Via Spiga and Naturalizer divisions. The sales growth was partially offset by sales declines in our Children’s and Etienne Aigner divisions. The sales growth was driven by sales increases across most of our channels of distribution, partially offset by sales declines in our mass merchandise channel.

Gross Profit

Gross profit increased $7.8 million, or 16.8%, to $54.1 million for the second quarter of 2010, compared to $46.3 million for the second quarter of last year, due to the increase in net sales, partially offset by a decline in gross profit rate. As a percent of net sales, our gross profit decreased to 30.3% for the second quarter of 2010 from 32.6% for the second quarter of last year. The decrease in the gross profit rate was due primarily to the increased mix of our wholesale brands sold to third parties as well as shifts in channel and brand mix and increased air freight costs.

Gross profit increased $15.0 million, or 15.7%, to $110.7 million in the first half of 2010, compared to $95.7 million in the first half of last year. As a percent of net sales, our gross profit increased to 31.3% in the first half of 2010 from 30.8% in the first half of last year. The increase in the gross profit rate was primarily due to lower provisions for customer allowances and markdowns, partially offset by the increased mix of our wholesale brands being sold to third parties, as discussed above.

Selling and Administrative Expenses

Selling and administrative expenses increased $6.6 million, or 17.1%, to $44.9 million for the second quarter of 2010, compared to $38.3 million for the second quarter of last year, due primarily to $1.4 million of higher expected payments under our incentive plans and higher marketing expenses. As a percent of net sales, selling and administrative expenses decreased to 25.1% for the second quarter of 2010, compared to 27.0% for the second quarter of last year, reflecting the above named factors and better leveraging of our expense base over the higher sales volume.

Selling and administrative expenses increased $10.8 million, or 13.1%, to $92.7 million for the first half of 2010, compared to $81.9 million in the first half of last year, due primarily to $4.3 million of higher expected payments under our incentive plans. We also experienced increases in marketing expenses and higher selling and merchandising expenses, some of which are variable with higher sales volume. As a percent of net sales, selling and administrative expenses decreased to 26.2% in the first half of 2010 from 26.4% in the first half of last year, reflecting better leveraging of our expense base over the higher sales volume.

Restructuring and Other Special Charges, Net

We incurred restructuring and other special charges, net of $0.2 million during the second quarter of 2010, with $0.1 million of corresponding charges during the second quarter of last year. All charges incurred during the first half of 2010 and 2009 are related to our integrated ERP information technology system that is replacing select existing internally developed and certain other third-party applications.

Operating Earnings

Operating earnings increased $1.1 million, or 14.5%, to $9.0 million for the second quarter of 2010, compared to $7.9 million for the second quarter of last year. The increase was primarily driven by the increase in net sales, partially offset by the decrease in gross profit rate and increase in selling and administrative expenses, as described above. As a percent of net sales, operating earnings declined to 5.1% for the second quarter of 2010, compared to 5.5% for the second quarter of last year.

Operating earnings increased $3.9 million, or 28.4%, to $17.7 million for the first half of 2010, compared to $13.8 million in the first half of last year due to the increase in net sales and gross profit rate, partially offset by the increase in selling and administrative expenses, as described above. As a percent of net sales, operating earnings increased to 5.0% in the first half of 2010, compared to 4.4% in the first half of last year.

SPECIALTY RETAIL

	Thirteen Weeks Ended								Twenty-six Weeks Ended
	July 31, 2010				August 1, 2009				July 31, 2010				August 1, 2009
($ millions, except sales per square foot)				% of Net Sales				% of Net Sales				% of Net Sales				% of Net Sales
Operating Results
Net sales	$	59.8		100.0%	$	55.5		100.0%	$	120.6		100.0%	$	107.8		100.0%
Cost of goods sold		35.0		58.6%		32.5		58.4%		69.1		57.3%		62.5		58.0%
Gross profit		24.8		41.4%		23.0		41.6%		51.5		42.7%		45.3		42.0%
Selling and administrative expenses		27.5		46.0%		27.3		49.4%		57.2		47.4%		55.8		51.8%
Operating loss	$	(2.7	)	(4.6)%	$	(4.3	)	(7.8)%	$	(5.7	)	(4.7)%	$	(10.5	)	(9.8)%

Key Metrics
Same-store sales % change		6.8%				(3.8)%				11.3%				(4.9)%
Same-store sales $ change	$	2.7			$	(1.6	)		$	8.5			$	(3.8	)
Sales change from new and closed stores, net	$	(1.7	)		$	(0.2	)		$	(3.9	)		$	0.6
Impact of changes in Canadian exchange rate on sales	$	1.4			$	(1.9	)		$	4.3			$	(4.8	)
Sales change of e-commerce subsidiary	$	1.9			$	(3.8	)		$	3.9			$	(5.2	)

Sales per square foot, excluding e-commerce (thirteen and twenty- six weeks ended)	$	94			$	83			$	180			$	152
Sales per square foot, excluding e-commerce (trailing twelve- months)	$	371			$	326			$	371			$	326
Square footage (thousand sq. ft.)		435				467				435				467

Stores opened		–				1				2				2
Stores closed		5				11				20				19
Ending stores		264				289				264				289

Net Sales

Net sales increased $4.3 million, or 7.8%, to $59.8 million for the second quarter of 2010, compared to $55.5 million for the second quarter of last year. A same-store sales increase of 6.8% in our retail stores, higher net sales at Shoes.com and an increase in the Canadian dollar exchange rate led to an overall increase in our level of net sales. A lower store count, as a result of store closings, partially offset the net sales increases. The net sales of Shoes.com increased $1.9 million, or 14.8%, to $14.8 million for the second quarter of 2010, compared to $12.9 million for the second quarter of last year, reflecting an increase in site visits. We did not open any new stores and closed five stores during the second quarter of 2010, resulting in a total of 264 stores (including eight Naturalizer stores in China) and total square footage of 435,000 at the end of the second quarter of 2010, compared to 289 stores (including 13 Naturalizer stores in China) and total square footage of 467,000 at the end of the second quarter of last year. As a result of the increases in same-store sales and the Canadian dollar exchange rate, sales per square foot, excluding e-commerce, increased 13.2% to $94 for the second quarter of 2010, compared to $83 for the second quarter of last year.

Net sales increased $12.8 million, or 11.9%, to $120.6 million in the first half of 2010, compared to $107.8 million in the first half of last year. A same-store sales increase of 11.3% in our retail stores, an increase in the Canadian dollar exchange rate and higher net sales at Shoes.com led to an overall increase in our level of net sales. A lower store count partially offset the same-store sales increase. The net sales at Shoes.com increased $3.9 million, or 13.9%, to $31.8 million in the first half of 2010, compared to $27.9 million in the first half of last year. Sales per square foot, excluding e-commerce, increased 18.7% to $180, compared to $152 in the first half of last year as a result of the increases in same-store sales and the Canadian dollar exchange rate.

Gross Profit

Gross profit increased $1.8 million, or 7.5%, to $24.8 million for the second quarter of 2010, compared to $23.0 million for the second quarter of last year, primarily reflecting higher net sales. As a percent of net sales, our gross profit decreased to 41.4% for the second quarter of 2010 from 41.6% for the second quarter of last year. The decrease in our overall rate was primarily driven by a lower gross profit rate for Shoes.com, partially offset by improved retail sell-through resulting in lower markdowns for our retail stores.

Gross profit increased $6.2 million, or 13.7%, to $51.5 million in the first half of 2010, compared to $45.3 million in the first half of last year, reflecting higher net sales and a higher gross profit rate. As a percentage of net sales, our gross profit increased to 42.7% in the first half of 2010 from 42.0% in the first half of last year due to improved retail sell-through resulting in lower markdowns for our retail stores, partially offset by a decline in gross profit rate for Shoes.com.

Selling and Administrative Expenses

Selling and administrative expenses increased $0.2 million, or 0.6%, to $27.5 million for the second quarter of 2010, compared to $27.3 million for the second quarter of last year, due primarily to an increase in the Canadian dollar exchange rate, partially offset by declines in retail facilities expenses, primarily resulting from the lower store count. As a percent of net sales, selling and administrative expenses decreased to 46.0% for the second quarter of 2010, compared to 49.4% for the second quarter of last year, reflecting the factors listed above and better leveraging of our expense base over the higher sales volume.

Selling and administrative expenses increased $1.4 million, or 2.5%, to $57.2 million for first half of 2010, compared to $55.8 million in the first half of last year, due to the same factors as described above for the second quarter. As a percent of net sales, selling and administrative expenses decreased to 47.4% in the first half of 2010 from 51.8% in the first half of last year, reflecting better leveraging of our expense base over higher sales volume.

Operating Loss

Specialty Retail reported an operating loss of $2.7 million for the second quarter of 2010, compared to an operating loss of $4.3 million for the second quarter of last year, due primarily to an increase in net sales, partially offset by a decline in gross profit rate and increased selling and administrative expenses, as described above.

Specialty Retail reported an operating loss of $5.7 million in the first half of 2010, compared to an operating loss of $10.5 million in the first half of last year, as a result of an increase in net sales and gross profit rate, partially offset by increased selling and administrative expenses, as described above.

OTHER SEGMENT

The Other segment includes unallocated corporate administrative expenses and other costs and recoveries. The segment reported costs of $9.9 million for the second quarter of 2010, compared to costs of $7.7 million for the second quarter of last year.

There were several factors impacting the $2.2 million variance, as follows:

·	Incentive plans – Our selling and administrative expenses were higher by $2.2 million during the second quarter of 2010, as compared to the second quarter of last year, due to higher expected payments under our incentive plans.

·	Lower expenses related to director compensation expenses, as certain director compensation arrangements are variable based on the Company’s stock price, which decreased during the second quarter of 2010.

·	Information technology initiatives – We incurred expenses of $1.7 million during the second quarter of 2010 related to our integrated ERP information technology system, $0.2 million lower than the $1.9 million in corresponding expenses incurred during the second quarter of last year.

Unallocated corporate administrative expenses and other costs, net of recoveries, were $22.5 million in the first half of 2010, compared to $17.6 million in the first half of last year.

There were several factors impacting the $4.9 million variance, as follows:

·	Incentive plans – Our selling and administrative expenses were higher by $3.6 million during the first half of 2010, as compared to the first half of last year, reflecting higher expected payments under our incentive plans.

·	Higher expenses related to director compensation expenses, as certain director compensation arrangements are variable based on the Company’s stock price, which increased during the first half of 2010.

·	Information technology initiatives – We incurred expenses of $3.3 million during the first half of 2010, related to our integrated ERP information technology system, $1.3 million lower than the $4.6 million in corresponding expenses during the first half of last year.

LIQUIDITY AND CAPITAL RESOURCES

Borrowings

($ millions)	July 31, 2010		August 1, 2009		January 30, 2010
Borrowings under revolving credit agreement	$	35.5	$	47.5	$	94.5
Senior notes		150.0		150.0		150.0
Total debt	$	185.5	$	197.5	$	244.5

Despite a $32.7 million cash outlay associated with our investment in Edelman Shoe during the second quarter of 2010, as discussed in Note 3 to the condensed consolidated financial statements, our total debt obligations decreased $12.0 million to $185.5 million at July 31, 2010, compared to $197.5 million at August 1, 2009. Total debt obligations decreased $59.0 million from $244.5 million at January 30, 2010. The decreases between periods resulted from having fewer borrowings outstanding under our revolving credit agreement at July 31, 2010, reflecting our strong financial performance and generation of operating cash flow in the first half of 2010. Interest expense for the second quarter of 2010 decreased $0.2 million to $4.7 million, compared to $4.9 million for the second quarter of last year primarily due to lower interest rates on average borrowings under our revolving credit agreement. Interest expense in the first half of 2010 decreased $0.8 million to $9.4 million, compared to $10.2 million in the first half of last year primarily due to lower average borrowings and lower interest rates on average borrowings under our revolving credit agreement.

Credit Agreement

On January 21, 2009, Brown Shoe Company, Inc. and certain of our subsidiaries (the “Loan Parties”) entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement matures on January 21, 2014. The Credit Agreement provides for revolving credit in an aggregate amount of up to $380.0 million, subject to the calculated borrowing base restrictions. Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base, which is based on stated percentages of the sum of eligible receivables and inventories, as defined, less applicable reserves. Under the Credit Agreement, the Loan Parties’ obligations are secured by a first priority security interest in receivables, inventories and certain other collateral.

Interest on borrowings is at variable rates based on the LIBOR or the prime rate, as defined in the Credit Agreement. The interest rate and fees for letters of credit varies based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the excess availability under the facility and a letter of credit fee payable on the outstanding exposure under letters of credit.

The Credit Agreement limits our ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. In addition, certain additional covenants would be triggered if excess availability were to fall below specified levels, including fixed charge coverage ratio requirements. Furthermore, if excess availability falls below the greater of (i) 17.5% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $25.0 million for three consecutive business days, or an event of default occurs, the lenders may assume dominion and control over our cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days.

The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency, judgment defaults and the failure of any guaranty or security document supporting the agreement to be in full force and effect. In addition, if the excess availability falls below the greater of (i) 17.5% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $25.0 million and the fixed charge coverage ratio is less than 1.0 to 1.0, we would be in default under the Credit Agreement. The Credit Agreement also contains certain other covenants and restrictions, with which we were in compliance as of July 31, 2010.

At July 31, 2010, we had $35.5 million of borrowings outstanding and $12.6 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $331.9 million at the end of the second quarter of 2010.

We believe that borrowing capacity under our Credit Agreement will be adequate to meet our expected operational needs and capital expenditure plans and provide liquidity for potential acquisitions.

Senior Notes

In April 2005, we issued $150.0 million of 8.75% senior notes due in 2012 (“Senior Notes”). 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 the 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 became callable on May 1, 2009. We may redeem all or a part of the Senior Notes at specified redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest, if redeemed during the twelve-month period beginning on May 1 of the years indicated below:


Year	Percentage
2010		102.188	%
2011 and thereafter		100.000	%

The Senior Notes also contain certain other covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of our assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As of July 31, 2010, we were in compliance with all covenants relating to the Senior Notes.

Working Capital and Cash Flow


	Twenty-six Weeks Ended
($ millions)	July 31, 2010			August 1, 2009			Increase/ (Decrease)

Net cash provided by operating activities	$	27.0		$	49.7		$	(22.7	)
Net cash used for investing activities		(24.7	)		(28.8	)		4.1
Net cash used for financing activities		(97.4	)		(71.1	)		(26.3	)
Effect of exchange rate changes on cash		–			0.6			(0.6	)
Decrease in cash and cash equivalents	$	(95.1	)	$	(49.6	)	$	(45.5	)

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

Cash provided by operating activities was lower by $22.7 million, reflecting several factors:

·	A larger increase in inventories in the first half of 2010 compared to the first half of last year due to the timing and amount of sales as well as purchases to support higher sales levels; and

·	An increase in receivables during the first half of 2010 as compared to a decrease in the first half of last year due to the timing and amount of receipts and sales.

Partially offset by,

·	An increase in trade accounts payable during the first half of 2010 as compared to the first half of last year due to the timing and amount of purchases and payments to vendors; and

·	An increase in net earnings.

Cash used for investing activities was lower by $4.1 million primarily as a result of lower purchases of property and equipment related to our new and remodeled stores. In addition, the first half of 2009 included capital expenditures related to a new distribution center, whereas no corresponding expenditures occurred during the first half of 2010. At our retail divisions, we opened 20 stores during the first half of 2010 compared to 54 stores in the first half of 2009. In 2010, we expect purchases of property and equipment and capitalized software of approximately $60.0 million to $63.0 million, primarily related to our information technology initiatives, new and remodeled stores, logistics network and general infrastructure.

Cash used for financing activities was higher by $26.3 million primarily due to the acquisition of the remaining 50% of our noncontrolling interest in Edelman Shoe. See Note 3 to the condensed consolidated financial statements for additional information regarding our interests in Edelman Shoe during the first half of 2010.

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


	July 31, 2010	August 1, 2009	January 30, 2010

Working capital ($ millions)	$ 278.1	$ 263.2	$ 294.2

Current ratio	1.59:1	1.63:1	1.71:1

Total debt as a percentage of total capitalization	32.1%	33.7%	37.3%

Working capital at July 31, 2010, was $278.1 million, which was $16.1 million lower than at January 30, 2010 and $14.9 million higher than at August 1, 2009. Our current ratio, the relationship of current assets to current liabilities, decreased to 1.59 to 1 compared to 1.71 to 1 at January 30, 2010 and 1.63 to 1 at August 1, 2009. The decrease compared to January 30, 2010 was primarily attributable to higher trade accounts payable and lower cash and cash equivalents, partially offset by higher inventories, lower borrowings under our revolving credit agreement and higher receivables. The decrease compared to August 1, 2009 was primarily attributable to higher trade accounts payable, lower prepaid expenses and other current assets and lower cash and cash equivalents, partially offset by higher inventories and receivables and lower 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 equity, was 32.1% as of July 31, 2010, compared to 37.3% as of January 30, 2010 and 33.7% as of August 1, 2009. The decline from January 30, 2010 and August 1, 2009 primarily reflected a decline in borrowings under our revolving credit agreement.

At July 31, 2010, we had $30.7 million of cash and cash equivalents, a portion of which represents cash and cash equivalents of our Canadian and other foreign subsidiaries. As a result of recently issued Internal Revenue Service guidelines expanding the length of time that our parent company can borrow funds from foreign subsidiaries, Brown Shoe Company, Inc. is able to more fully utilize the cash and cash equivalents of its foreign subsidiaries than in the past, better managing the liquidity needs of the consolidated company and minimizing interest expense on a consolidated basis.

We paid dividends of $0.07 per share in both the second quarter of 2010 and the second quarter of 2009. On August 23, 2010, the Board of Directors declared a quarterly dividend of $0.07 per share, payable October 1, 2010 to shareholders of record on September 17, 2010, marking the 351st consecutive quarterly dividend to be paid by the Company. The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors; however, we presently expect that dividends will continue to be paid.

OFF BALANCE SHEET ARRANGEMENTS

At July 31, 2010, we were contingently liable for remaining lease commitments of approximately $1.4 million in the aggregate, which relate to former retail locations that we exited in prior years. These obligations will continue to decline over the next several years as leases expire. In order for us to incur any liability related to these lease commitments, the current lessees would have to default.

CONTRACTUAL OBLIGATIONS

Our contractual obligations primarily consist of operating lease commitments, purchase obligations, long-term debt, interest on long-term debt, minimum license commitments, borrowings under our revolving credit agreement, obligations for our supplemental executive retirement plan and other postretirement benefits and obligations related to our restructuring and expense and capital containment initiatives. There have been no significant changes to our contractual obligations identified in our Annual Report on Form 10-K for the year ended January 30, 2010, other than the reduction of our obligations related to restructuring and expense and capital containment initiatives as a result of settlements during the first half of 2010 as disclosed in Note 6 to the condensed consolidated financial statements and those which occur in the normal course of business (primarily changes in purchase obligations, which fluctuate throughout the year as a result of the seasonal nature of our operations, borrowings/payments under our revolving credit agreement and changes in operating lease commitments as a result of new stores, store closures and lease renewals).

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. The adoption of new accounting pronouncements is described in Note 2 to the condensed consolidated financial statements. For further information, see Item 7 of our Annual Report on Form 10-K for the year ended January 30, 2010.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements and their impact on the Company are described in Note 2 to the condensed consolidated financial statements.

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains certain 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) changing consumer demands, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions; (ii) the timing and uncertainty of activities and costs related to the Company’s information technology initiatives, including software implementation and business transformation; (iii) potential disruption to the Company’s business and operations as it implements its information technology initiatives; (iv) the Company’s ability to utilize its new information technology system to successfully execute its strategies; (v) intense competition within the footwear industry; (vi) rapidly changing fashion trends and purchasing patterns; (vii) customer concentration and increased consolidation in the retail industry; (viii) 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; (ix) the Company's ability to attract and retain licensors and protect its intellectual property; (x) the Company's ability to secure/exit leases on favorable terms; (xi) the Company's ability to maintain relationships with current suppliers; (xii) compliance with applicable laws and standards with respect to lead content in paint and other product safety issues; (xiii) the Company’s ability to successfully execute its international growth strategy; (xiv) the Company’s ability to source product at a pace consistent with increased demand for footwear; and (xv) the impact of rising prices in a potentially inflationary global environment. The Company’s reports to the Securities and Exchange Commission (the “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 January 30, 2010, which information is incorporated by reference herein and updated by the Company’s Quarterly Reports on Form 10-Q. The Company does not undertake any obligation or plan to update these forward-looking statements, even though its situation may change.

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 January 30, 2010.

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 July 31, 2010, 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.

Changes in Internal Control Over Financial Reporting

The Company is in the process of implementing an integrated ERP information technology system that is replacing select existing internally developed and certain other third-party applications. Implementation began in 2008 and is scheduled to be substantially complete in the fourth quarter of 2010. We have updated our internal control over financial reporting as necessary to accommodate the modifications to our business processes and related internal control over financial reporting. This ERP system, along with the internal control over financial reporting impacted by the phased implementation, were appropriately tested for design effectiveness. While some processes and controls will continue to evolve as the phased implementation continues, existing controls and the controls affected by the implementation of the new system were evaluated as being appropriate and effective. As the Company continues the phased implementation of the new ERP system, it expects that there will be additional changes in business processes and related internal control over financial reporting. Our assessment of the operating effectiveness of internal control over financial reporting will be performed as part of our annual evaluation of internal control over financial reporting as of January 29, 2011. There were no other significant changes to internal control over financial reporting during the quarter ended July 31, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s 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 15 to the condensed consolidated financial statements and incorporated by reference herein.

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 January 30, 2010.

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 second quarter of 2010:

Fiscal Period

Total Number

of Shares

Purchased

Average

Price Paid

per Share

Total Number

of Shares Purchased

as Part of Publicly

Announced Program (1)

Maximum Number

of Shares that

May Yet Be

Purchased Under

the Program

(1)

May 2, 2010 – May 29, 2010

–

2,500,000

May 30, 2010 – July 3, 2010

–

2,500,000

July 4, 2010 – July 31, 2010

–

2,500,000

Total

–

2,500,000

(1)

In January 2008, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2.5 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, no shares were repurchased through the end of the second quarter of 2010; therefore, there were 2.5 million shares authorized to be purchased under the program as of July 31, 2010. Our repurchases of common stock are limited under our debt agreements.

ITEM 3

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4

(REMOVED AND RESERVED)

ITEM 5

OTHER INFORMATION

None.

ITEM 6

EXHIBITS

Exhibit No.
3.1		Restated Certificate of Incorporation of Brown Shoe Company, Inc. (the “Company”), incorporated herein by reference to 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 October 2, 2008, incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K dated October 8, 2008 and filed October 8, 2008.
4.1	†	Supplemental Indenture for 8.75% Senior Notes due 2012, dated as of June 18, 2010, between Edelman Shoe, Inc., the Company and U.S. Bank National Association, a national banking association, as successor to SunTrust Bank, as trustee.
10.1 10.2 10.3 10.4 10.5 10.6	†# †* †* †* †* †*	Second Amended and Restated Credit Agreement, dated as of January 21, 2009 (the “Credit Agreement”), among the Company, as lead borrower for itself and on behalf of certain of its subsidiaries, and Bank of America, N.A., as lead issuing bank, administrative agent and collateral agent, Wells Fargo Retail Finance, LLC, as syndication agent, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as co-documentation agents, and the other financial institutions party thereto, as lenders. Summary of compensatory arrangements for the named executive officers of the Company. Amendment letter dated December 18, 2009, to the Severance Agreement (April 1, 2006), between the Company and Ronald A. Fromm. Severance Agreement, effective April 1, 2006, between the Company and Richard M. Ausick. Severance Agreement, effective April 1, 2009, between the Company and Mark D. Lardie. Form of Amendment letter dated December 18, 2009, to the Severance Agreements between the Company and each of: Richard M. Ausick, Mark E. Hood, Mark D. Lardie, Diane M. Sullivan, and Joseph W. Wood.
10.7	†	Joinder to Credit Agreement, made as of June 18, 2010, by and between Edelman Shoe, Inc. and Bank of America, N.A., as Administrative Agent and Collateral Agent for the lenders party to the Credit Agreement.
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.

† Denotes exhibit is filed with this Form 10-Q.

# Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission.

* Denotes management contract or compensatory plan arrangements.

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: September 7, 2010		/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 and Principal Accounting Officer