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

bws10q1q.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 May 1, 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 o	Accelerated filer x

Non-accelerated filer o	Smaller reporting company o
(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 May 29, 2010, 43,402,866 common shares were outstanding.

PART I

FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
($ thousands)	May 1, 2010			May 2, 2009			January 30, 2010
Assets
Current assets
Cash and cash equivalents	$	59,465		$	46,121		$	125,833
Receivables		87,296			68,134			84,297
Inventories		431,488			408,459			456,682
Prepaid expenses and other current assets		47,444			46,853			41,437
Total current assets		625,693			569,567			708,249

Other assets		116,075			106,038			113,114
Intangible assets, net		75,535			82,306			77,226
Property and equipment		414,107			411,697			418,765
Allowance for depreciation		(277,044	)		(255,833	)		(277,204	)
Net property and equipment		137,063			155,864			141,561
Total assets	$	954,366		$	913,775		$	1,040,150

Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	–		$	39,000		$	94,500
Trade accounts payable		190,263			133,000			177,700
Other accrued expenses		128,020			126,521			141,863
Total current liabilities		318,283			298,521			414,063

Other liabilities
Long-term debt		150,000			150,000			150,000
Deferred rent		37,982			41,864			38,869
Other liabilities		27,854			30,251			25,991
Total other liabilities		215,836			222,115			214,860

Equity
Common stock		433			429			429
Additional paid-in capital		152,905			148,989			152,314
Accumulated other comprehensive income (loss)		1,107			(6,074	)		177
Retained earnings		256,257			241,153			249,251
Total Brown Shoe Company, Inc. shareholders’ equity		410,702			384,497			402,171
Noncontrolling interests		9,545			8,642			9,056
Total equity		420,247			393,139			411,227
Total liabilities and equity	$	954,366		$	913,775		$	1,040,150

See notes to condensed consolidated financial statements.

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

	(Unaudited)
	Thirteen Weeks Ended
($ thousands, except per share amounts)	May 1, 2010			May 2, 2009
Net sales	$	597,718		$	538,740
Cost of goods sold		350,158			330,576
Gross profit		247,560			208,164
Selling and administrative expenses		224,515			212,717
Restructuring and other special charges, net		1,717			2,614
Operating earnings (loss)		21,328			(7,167	)
Interest expense		(4,512	)		(5,249	)
Interest income		18			143
Earnings (loss) before income taxes		16,834			(12,273	)
Income tax (provision) benefit		(6,299	)		5,202
Net earnings (loss)	$	10,535		$	(7,071	)
Less: Net earnings attributable to noncontrolling interests		489			532
Net earnings (loss) attributable to Brown Shoe Company, Inc.	$	10,046		$	(7,603	)

Basic earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders	$	0.23		$	(0.18	)

Diluted earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders	$	0.23		$	(0.18	)

Dividends per common share	$	0.07		$	0.07

See notes to condensed consolidated financial statements.

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited)
	Thirteen Weeks Ended
($ thousands)	May 1, 2010			May 2, 2009

Operating Activities
Net earnings (loss)	$	10,535		$	(7,071	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation		8,087			8,623
Amortization of capitalized software		2,497			1,845
Amortization of intangibles		1,691			1,694
Amortization of debt issuance costs		549			549
Share-based compensation expense		1,406			1,373
Tax deficiency related to share-based plans		237			57
Loss on disposal of facilities and equipment		490			117
Impairment charges for facilities and equipment		1,193			1,590
Deferred rent		(887	)		150
Provision for doubtful accounts		26			308
Foreign currency transaction gains		(211	)		(12	)
Changes in operating assets and liabilities:
Receivables		(3,011	)		15,809
Inventories		25,624			57,962
Prepaid expenses and other current and noncurrent assets		(5,323	)		(2,077	)
Trade accounts payable		12,410			(19,372	)
Accrued expenses and other liabilities		(12,145	)		(10,597	)
Other, net		(1,034	)		(1,497	)
Net cash provided by operating activities		42,134			49,451

Investing Activities
Purchases of property and equipment		(5,136	)		(8,559	)
Capitalized software		(6,202	)		(4,783	)
Net cash used for investing activities		(11,338	)		(13,342	)

Financing Activities
Borrowings under revolving credit agreement		111,000			168,400
Repayments under revolving credit agreement		(205,500	)		(241,900	)
Proceeds from stock options exercised		214			–
Tax deficiency related to share-based plans		(237	)		(57	)
Dividends paid		(3,040	)		(3,004	)
Net cash used for financing activities		(97,563	)		(76,561	)
Effect of exchange rate changes on cash		399			(327	)
Decrease in cash and cash equivalents		(66,368	)		(40,779	)
Cash and cash equivalents at beginning of period		125,833			86,900
Cash and cash equivalents at end of period	$	59,465		$	46,121

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 as well as a variable interest entity (“VIE”) for which the Company is the primary beneficiary, 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 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 13 to the condensed consolidated financial statements for additional information related to the VIE.

In January 2010, the FASB issued guidance that provides amendments to Accounting Standards Codification 820, Fair Value Measurements and Disclosures, that 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 12 to the condensed consolidated financial statements for additional information related to fair value measurements.

Note 3

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 May 1, 2010 and May 2, 2009:


		Thirteen Weeks Ended
(in thousands, except per share amounts)	May 1, 2010			May 2, 2009

NUMERATOR
Net earnings (loss) attributable to Brown Shoe Company, Inc. before allocation of earnings to participating securities		$	10,046		$	(7,603	)
Less: Earnings allocated to participating securities			343			–
Net earnings (loss) attributable to Brown Shoe Company, Inc. after allocation of earnings to participating securities		$	9,703		$	(7,603	)

DENOMINATOR
Denominator for basic earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders			41,755			41,566
Dilutive effect of share-based awards			232			–
Denominator for diluted earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders			41,987			41,566

Basic earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders		$	0.23		$	(0.18	)


Diluted earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders		$	0.23		$	(0.18	)

Options to purchase 867,968 shares of common stock for the thirteen-week period ended May 1, 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-week period ended May 2, 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 4

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 May 1, 2010 and May 2, 2009:


	Thirteen Weeks Ended
($ thousands)	May 1, 2010				May 2, 2009
Net earnings (loss)	$	10,535		$		(7,071	)

Other comprehensive income (loss) (“OCI”), net of tax:
Foreign currency translation adjustment		1,120				(106	)
Unrealized losses on derivative instruments, net of tax of $141 and $31 in the thirteen weeks ended May 1, 2010 and May 2, 2009, respectively		(295	)			(165	)
Net loss (gain) from derivatives reclassified into earnings, net of tax of $54 and $3 in the thirteen weeks ended May 1, 2010 and May 2, 2009, respectively		105				(22	)
		930				(293	)
Comprehensive income (loss)	$	11,465		$		(7,364	)
Less: Comprehensive income attributable to noncontrolling interests		489				532
Comprehensive income (loss) attributable to Brown Shoe Company, Inc.	$	10,976			$	(7,896	)

The following table sets forth the balance in accumulated other comprehensive income (loss) for the Company at May 1, 2010, May 2, 2009 and January 30, 2010:


($ thousands)	May 1, 2010			May 2, 2009			January 30, 2010
Foreign currency translation gains	$	5,274		$	614		$	4,154
Unrealized (losses) gains on derivative instruments		(907	)		81			(717	)
Pension and other postretirement benefits		(3,260	)		(6,769	)		(3,260	)
Accumulated other comprehensive income (loss)	$	1,107		$	(6,074	)	$	177

See additional information related to derivative instruments in Note 11 and Note 12 and additional information related to pension and other postretirement benefits in Note 9.

The following tables set forth the changes in Brown Shoe Company, Inc. shareholders’ equity and noncontrolling interests for the thirteen weeks ended May 1, 2010 and May 2, 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		10,976			489		11,465
Dividends paid		(3,040	)		–		(3,040	)
Stock issued under employee benefit and restricted stock plans		(574	)		–		(574	)
Tax deficiency related to share-based plans		(237	)		–		(237	)
Share-based compensation expense		1,406			–		1,406
Equity at May 1, 2010	$	410,702		$	9,545	$	420,247


($ 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		(7,896	)		532		(7,364	)
Dividends paid		(3,004	)		–		(3,004	)
Stock issued under employee benefit and restricted stock plans		(23	)		–		(23	)
Tax deficiency related to share-based plans		(57	)		–		(57	)
Share-based compensation expense		1,373			–		1,373
Equity at May 2, 2009	$	384,497		$	8,642	$	393,139

Note 5

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 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 early 2011. The Company incurred expenses of $1.7 million ($1.2 million on an after-tax basis, or $0.03 per diluted share) during the thirteen weeks ended May 1, 2010, as a component of restructuring and other special charges, net, related to these initiatives. Of the $1.7 million in expenses recorded during the thirteen weeks ended May 1, 2010, $1.5 million was recorded in the Other segment and $0.2 million was recorded in the Wholesale Operations segment. The Company incurred expenses of $2.6 million ($1.7 million on an after-tax basis, or $0.04 per diluted share) during the thirteen weeks ended May 2, 2009, as a component of restructuring and other special charges, net, related to these initiatives. Of the $2.6 million in expenses recorded during the thirteen weeks ended May 2, 2009, $2.5 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 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 quarter of 2010, no additional charges were incurred. The Company recorded settlements of $2.2 million in connection with the retirement of one of the executives, resulting in a remaining liability of $2.4 million as of May 1, 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, but incurred no charges during fiscal year 2009 or the first quarter of 2010. These costs included employee-related costs for severance, including healthcare benefits and enhanced pension benefits, as well as facility and other costs.

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

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 quarter 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

Note 6

Business Segment Information

Applicable business segment information is as follows for the periods ended May 1, 2010 and May 2, 2009:


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


Thirteen Weeks Ended May 1, 2010

External sales	$	362,170	$	174,729	$	60,819		$	–		$	597,718
Intersegment sales		533		44,713		–			–			45,246
Operating earnings (loss)		28,183		8,679		(2,909	)		(12,625	)		21,328
Operating segment assets		458,136		269,384		63,648			163,198			954,366

Thirteen Weeks Ended May 2, 2009

External sales	$	317,563	$	168,825	$	52,352		$	–		$	538,740
Intersegment sales		641		45,095		–			–			45,736
Operating earnings (loss)		3,042		5,912		(6,228	)		(9,893	)		(7,167	)
Operating segment assets		439,168		254,486		86,354			133,767			913,775

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

During the thirteen weeks ended May 1, 2010, operating earnings (loss) of the Other and Wholesale Operations segments included costs related to the Company’s information technology initiatives of $1.5 million and $0.2 million, respectively.

During the thirteen weeks ended May 2, 2009, operating earnings (loss) of the Other and Wholesale Operations segments included costs related to the Company’s information technology initiatives of $2.5 million and $0.1 million, respectively.

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


	Thirteen Weeks Ended
($ thousands)	May 1, 2010			May 2, 2009
Operating earnings (loss)	$	21,328		$	(7,167	)
Interest expense		(4,512	)		(5,249	)
Interest income		18			143
Earnings (loss) before income taxes	$	16,834		$	(12,273	)

Note 7

Intangible Assets

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


($ thousands)	May 1, 2010		May 2, 2009		January 30, 2010

Famous Footwear	$	2,800	$	2,800	$	2,800
Wholesale Operations		72,535		79,306		74,226
Specialty Retail		200		200		200
	$	75,535	$	82,306	$	77,226

As of May 1, 2010, the Company had intangible assets of $75.5 million, primarily related to trademarks. The decline in the intangible assets of the Company’s Wholesale Operations segment from May 2, 2009 to January 30, 2010 and May 1, 2010 reflected amortization of its licensed and owned trademarks.

Note 8

Share-Based Compensation

During the first quarter of 2010, the Company granted 119,000 stock options to certain employees with a weighted-average exercise price and grant date fair value of $13.85 and $7.53, respectively. These options vest in four equal increments, with 25% vesting over each of the next four years. These options have a term of ten years. Compensation expense is recognized on a straight-line basis separately for each vesting portion of the stock option award.

The Company granted 168,375 performance share awards during the first quarter of 2010 with a weighted-average grant date fair value of $13.99. Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals over the next three years. The performance share awards may pay out at a maximum of 150% of the target number of shares. Compensation expense is being recognized based on the fair value of the award on the date of grant and the anticipated number of shares to be awarded on a straight-line basis over the three-year service period.

The Company also granted 534,250 restricted shares to certain employees with a weighted-average grant date fair value of $13.97 during the first quarter of 2010. The restricted shares granted to employees vest in four years and compensation expense will be recognized on a straight-line basis over the four-year period.

The Company recognized share-based compensation expense of $1.4 million in both the first quarter of 2010 and the first quarter of 2009.

The Company issued 536,860 shares of common stock during the first quarter of 2010 for restricted stock grants and directors’ fees. During the first quarter of 2010, the Company cancelled 45,313 shares of common stock as a result of forfeitures of restricted stock awards.

Note 9

Retirement and Other Benefit Plans

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


	Pension Benefits						Other Postretirement Benefits
	Thirteen Weeks Ended						Thirteen Weeks Ended
($ thousands)	May 1, 2010			May 2, 2009			May 1, 2010			May 2, 2009
Service cost	$	1,826		$	1,710		$	–		$	–
Interest cost		2,987			2,996			53			59
Expected return on assets		(5,064	)		(4,879	)		–			–
Settlement cost		–			75			–			–
Amortization of:
Actuarial loss (gain)		26			27			(15	)		(21	)
Prior service income		–			(6	)		–			–
Net transition asset		(11	)		(31	)		–			–
Total net periodic benefit (income) cost	$	(236	)	$	(108	)	$	38		$	38

Note 10

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 May 1, 2010.

At May 1, 2010, the Company had no borrowings outstanding and $10.1 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $369.9 million as of May 1, 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 May 1, 2010, the Company was in compliance with all covenants relating to the Senior Notes.

Note 11

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 April 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 May 1, 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 May 1, 2010, the Company had forward contracts maturing at various dates through April 2011. The contract amount represents the net amount of all purchase and sale contracts of a foreign currency.


(U.S. $ equivalent in thousands)	Contract Amount May 1, 2010
Deliverable Financial Instruments
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)	$	16,623
Euro		9,581
Other		134
Non-deliverable Financial Instruments
Chinese yuan		12,263
Japanese yen		1,490
New Taiwanese dollars		1,174
Other currencies		674
	$	41,939

As of May 2, 2009, the Company had forward contracts maturing at various dates through January 2010. The contract amount represents the net amount of all purchase and sale contracts of a foreign currency.


(U.S. $ equivalent in thousands)	Contract Amount May 2, 2009
Deliverable Financial Instruments
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)	$	9,480
Euro		2,671
Non-deliverable Financial Instruments
Chinese yuan		7,660
Japanese yen		1,160
New Taiwanese dollars		1,025
Other currencies		380
	$	22,376

As of May 1, 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

118

Other accrued expenses

874

As of May 2, 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

292

Other accrued expenses

504

For the thirteen weeks ended May 1, 2010, the effect of derivative instruments on the condensed consolidated statement of earnings was as follows:

Amount of Loss

($ in thousands)

Amount of Loss

Reclassified from

Recognized in OCI on

Location of Loss

Accumulated OCI into

Derivatives

Reclassified from

Earnings

Derivatives in Cash Flow

Thirteen Weeks Ended

Accumulated OCI into

Thirteen Weeks Ended

Hedging Relationships:

May 1, 2010

Earnings

May 1, 2010

Foreign exchange forward

contracts

(14

)

Net sales

Foreign exchange forward

contracts

(279

)

Cost of goods sold

Foreign exchange forward

contracts

(136

)

Selling and administrative expenses

Foreign exchange forward

contracts

)

Interest expense

–

For the thirteen weeks ended May 2, 2009, the effect of derivative instruments on the condensed consolidated statement of earnings was as follows:

Amount of Gain

($ in thousands)

Amount of Gain/(Loss)

Reclassified from

Recognized in OCI on

Location of Gain/(Loss)

Accumulated OCI into

Derivatives

Reclassified from

Earnings

Derivatives in Cash Flow

Thirteen Weeks Ended

Accumulated OCI into

Thirteen Weeks Ended

Hedging Relationships:

May 2, 2009

Earnings

May 2, 2009

Foreign exchange forward

contracts

105

Net sales

)

Foreign exchange forward

contracts

(345

)

Cost of goods sold

–

Foreign exchange forward

contracts

Selling and administrative expenses

(22

)

Foreign exchange forward

contracts

(15

)

Interest expense

–

All of the gains and losses currently included within accumulated other comprehensive income (loss) associated with the Company’s foreign exchange forward contracts 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 12 to the condensed consolidated financial statements.

Note 12

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).

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 11 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 May 1, 2010. The Company did not have any transfers between Level 1 and Level 2 during the first quarter of 2010.


				Fair Value Measurements
($ thousands)		Total			Level 1			Level 2			Level 3

Asset (Liability)
Cash equivalents – money market funds	$	41,978		$	41,978		$	–		$	–
Non-qualified deferred compensation plan assets		1,243			1,243			–			–
Non-qualified deferred compensation plan liabilities		(1,243	)		(1,243	)		–			–
Derivative financial instruments, net		(756	)		–			(756	)		–

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 $55.1 million were written down to their fair value, resulting in an impairment charge of $1.2 million, which was recorded within selling and administrative expenses for the thirteen weeks ended May 1, 2010. Of the $1.2 million impairment charge, $0.8 million related to the Famous Footwear segment and $0.4 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:


	May 1, 2010				May 2, 2009			January 30, 2010
($ thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value	Carrying Amount		Fair Value
Borrowings under revolving credit agreement	$	–	$	–	$ 39,000	$	39,000	$	94,500	$	94,500
Senior Notes		150,000		153,225	150,000		125,438		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 13

Variable Interest Entity

In 2007, the Company invested cash of $7.1 million in Edelman Shoe, Inc. (“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%. The Company has an option to buy the remaining interest in the future. See Note 17 to the condensed consolidated financial statements for additional information related to the Company’s subsequent investment in Edelman Shoe.

The Sam Edelman brand was launched in 2004 and is primarily sold through department stores and independent retailers across the country. The Company believes the investment in Edelman Shoe complements its portfolio of wholesale footwear brands by adding owned brands that sell primarily in the bridge/designer footwear price zones.

Beginning November 3, 2008, the Company’s consolidated financial statements include the accounts of Edelman Shoe as a result of the Company’s determination that Edelman Shoe is a VIE, for which the Company is the primary beneficiary. At the beginning of fiscal 2010, the Company adopted amended consolidation guidance applicable to VIEs and evaluated the impact on the existing variable interests in Edelman Shoe. As a part of the Company’s qualitative analysis, it determined that Edelman Shoe continues to be a VIE, for which the Company is the primary beneficiary. Therefore, the Company’s condensed consolidated financial statements continue to include the accounts of Edelman Shoe.

During the fall of 2009, the Company began leveraging its sourcing and administrative infrastructure to manage certain of the business operations of Edelman Shoe. Accordingly, virtually all Sam Edelman branded footwear is now sold to customers and sourced through the Company’s other consolidated subsidiaries. Due to the Company’s variable interests in Edelman Shoe, including those resulting from the operational changes noted above, the Company determined that it is the primary beneficiary as it directs the activities of the entity that most significantly impact the entity’s economic performance and it has the obligation to absorb losses or the right to receive benefits of the entity that are significant to the entity. The Company’s variable interests in Edelman Shoe include the equity investments described above and amounts payable to and receivable from Edelman Shoe. At May 1, 2010, Edelman Shoe had assets of approximately $7.6 million and liabilities of approximately $1.6 million. Excluding products sold through the Company’s other consolidated subsidiaries, Edelman Shoe had an immaterial amount of sales during the first quarter of 2010.

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 each of the thirteen weeks ended May 1, 2010 and May 2, 2009, the Company, through its consolidated subsidiary, B&H Footwear, sold $0.5 million of Naturalizer footwear on a wholesale basis to Hongguo.

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 May 1, 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 remediations through May 1, 2010 are $22.5 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 May 1, 2010, is $7.9 million, of which $1.2 million is accrued within other accrued expenses and $6.7 million is accrued within other liabilities. Of the total $7.9 million reserve, $5.0 million is for on-site remediation and $2.9 million is for off-site remediation. During the thirteen weeks ended May 1, 2010 and May 2, 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 May 1, 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 had an accrued liability of $9.7 million as of May 1, 2010, to complete the cleanup, maintenance and monitoring at all sites. Of the $9.7 million liability, $1.4 million is included in other accrued expenses and $8.3 million is included 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 May 1, 2010. While management believes it has an appropriate reserve for this matter, the ultimate outcome and cost to the Company may vary.

At May 1, 2010, the Company was contingently liable for remaining lease commitments of approximately $1.5 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 MAY 1, 2010

($ thousands)	Parent		Guarantors			Non- Guarantors			Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	32,000	$	1,986		$	25,479		$	–		$	59,465
Receivables		66,808		2,878			17,610			–			87,296
Inventories		54,310		375,122			2,056			–			431,488
Prepaid expenses and other current assets		32,142		15,461			(159	)		–			47,444
Total current assets		185,260		395,447			44,986			–			625,693
Other assets		92,544		28,373			(4,842	)		–			116,075
Intangible assets, net		57,415		3,000			15,120			–			75,535
Property and equipment, net		24,535		108,983			3,545			–			137,063
Investment in subsidiaries		694,356		76,368			–			(770,724	)		–
Total assets	$	1,054,110	$	612,171		$	58,809		$	(770,724	)	$	954,366

Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	–	$	–		$	–		$	–		$	–
Trade accounts payable		38,790		130,285			21,188			–			190,263
Other accrued expenses		63,506		58,903			5,611			–			128,020
Total current liabilities		102,296		189,188			26,799			–			318,283
Other liabilities
Long-term debt		150,000		–			–			–			150,000
Other liabilities		26,956		38,540			340			–			65,836
Intercompany payable (receivable)		364,156		(309,913	)		(54,243	)		–			–
Total other liabilities		541,112		(271,373	)		(53,903	)		–			215,836
Equity
Brown Shoe Company, Inc. shareholders’ equity		410,702		694,356			76,368			(770,724	)		410,702
Noncontrolling interests		–		–			9,545			–			9,545
Total equity		410,702		694,356			85,913			(770,724	)		420,247
Total liabilities and equity	$	1,054,110	$	612,171		$	58,809		$	(770,724	)	$	954,366

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THIRTEEN WEEKS ENDED MAY 1, 2010

($ thousands)	Parent			Guarantors			Non- Guarantors			Eliminations			Total
Net sales	$	163,355		$	426,873		$	45,044		$	(37,554	)	$	597,718
Cost of goods sold		117,685			232,132			37,895			(37,554	)		350,158
Gross profit		45,670			194,741			7,149			–			247,560
Selling and administrative expenses		50,790			170,840			2,885			–			224,515
Restructuring and other special charges, net		1,557			–			160			–			1,717
Equity in (earnings) loss of subsidiaries		(14,524	)		(2,455	)		–			16,979			–
Operating earnings (loss)		7,847			26,356			4,104			(16,979	)		21,328
Interest expense		(4,509	)		–			(3	)		–			(4,512	)
Interest income		–			1			17			–			18
Intercompany interest income (expense)		3,617			(3,997	)		380			–			–
Earnings (loss) before income taxes		6,955			22,360			4,498			(16,979	)		16,834
Income tax benefit (provision)		3,091			(7,836	)		(1,554	)		–			(6,299	)
Net earnings (loss)	$	10,046		$	14,524		$	2,944		$	(16,979	)	$	10,535
Less: Net earnings attributable to noncontrolling interests		–			–			489			–			489
Net earnings (loss) attributable to Brown Shoe Company, Inc.	$	10,046		$	14,524		$	2,455		$	(16,979	)	$	10,046

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE THIRTEEN WEEKS ENDED MAY 1, 2010

($ thousands)	Parent			Guarantors			Non- Guarantors			Eliminations		Total
Net cash (used for) provided by operating activities	$	(17,758	)	$	52,573		$	7,319		$	–	$	42,134

Investing activities
Purchases of property and equipment		(281	)		(4,837	)		(18	)		–		(5,136	)
Capitalized software		(6,114	)		(88	)		–			–		(6,202	)
Net cash used for investing activities		(6,395	)		(4,925	)		(18	)		–		(11,338	)

Financing activities
Borrowings under revolving credit agreement		111,000			–			–			–		111,000
Repayments under revolving credit agreement		(205,500	)		–			–			–		(205,500	)
Proceeds from stock options exercised		214			–			–			–		214
Tax deficiency related to share-based plans		(237	)		–			–			–		(237	)
Dividends paid		(3,040	)		–			–			–		(3,040	)
Intercompany financing		153,716			(48,870	)		(104,846	)		–		–
Net cash provided by (used for) financing activities		56,153			(48,870	)		(104,846	)		–		(97,563	)
Effect of exchange rate changes on cash		–			399			–			–		399
											–
Increase (decrease) in cash and cash equivalents		32,000			(823	)		(97,545	)		–		(66,368	)
Cash and cash equivalents at beginning of period		–			2,809			123,024			–		125,833
Cash and cash equivalents at end of period	$	32,000		$	1,986		$	25,479		$	–	$	59,465

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 MAY 2, 2009

($ thousands)	Parent		Guarantors			Non- Guarantors		Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	–	$	4,213		$	41,908	$	–		$	46,121
Receivables		41,515		2,213			24,406		–			68,134
Inventories		50,889		350,231			7,339		–			408,459
Prepaid expenses and other current assets		22,733		22,573			1,547		–			46,853
Total current assets		115,137		379,230			75,200		–			569,567
Other assets		75,699		15,664			14,675		–			106,038
Intangible assets, net		63,066		3,000			16,240		–			82,306
Property and equipment, net		26,672		125,504			3,688		–			155,864
Investment in subsidiaries		646,580		70,888			–		(717,468	)		–
Total assets	$	927,154	$	594,286		$	109,803	$	(717,468	)	$	913,775

Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	39,000	$	–		$	–	$	–		$	39,000
Trade accounts payable		23,488		91,745			17,767		–			133,000
Other accrued expenses		58,923		61,962			5,636		–			126,521
Total current liabilities		121,411		153,707			23,403		–			298,521
Other liabilities
Long-term debt		150,000		–			–		–			150,000
Other liabilities		23,712		42,007			6,396		–			72,115
Intercompany payable (receivable)		247,534		(248,008	)		474		–			–
Total other liabilities		421,246		(206,001	)		6,870		–			222,115
Equity
Brown Shoe Company, Inc. shareholders’ equity		384,497		646,580			70,888		(717,468	)		384,497
Noncontrolling interests		–		–			8,642		–			8,642
Total equity		384,497		646,580			79,530		(717,468	)		393,139
Total liabilities and equity	$	927,154	$	594,286		$	109,803	$	(717,468	)	$	913,775

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THIRTEEN WEEKS ENDED MAY 2, 2009

($ thousands)	Parent			Guarantors			Non- Guarantors			Eliminations			Total
Net sales	$	147,136		$	373,401		$	61,022		$	(42,819	)	$	538,740
Cost of goods sold		113,573			211,265			48,557			(42,819	)		330,576
Gross profit		33,563			162,136			12,465			–			208,164
Selling and administrative expenses		37,201			166,152			9,364			–			212,717
Restructuring and other special charges, net		2,614			–			–			–			2,614
Equity in loss (earnings) of subsidiaries		909			(2,799	)		–			1,890			–
Operating (loss) earnings		(7,161	)		(1,217	)		3,101			(1,890	)		(7,167	)
Interest expense		(5,245	)		(1	)		(3	)		–			(5,249	)
Interest income		2			26			115			–			143
Intercompany interest income (expense)		1,508			(1,743	)		235			–			–
(Loss) earnings before income taxes		(10,896	)		(2,935	)		3,448			(1,890	)		(12,273	)
Income tax benefit (provision)		3,293			2,026			(117	)		–			5,202
Net (loss) earnings	$	(7,603	)	$	(909	)	$	3,331		$	(1,890	)	$	(7,071	)
Less: Net earnings attributable to noncontrolling interests		–			–			532			–			532
Net (loss) earnings attributable to Brown Shoe Company, Inc.	$	(7,603	)	$	(909	)	$	2,799		$	(1,890	)	$	(7,603	)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE THIRTEEN WEEKS ENDED MAY 2, 2009

($ thousands)	Parent			Guarantors			Non- Guarantors			Eliminations		Total
Net cash provided by operating activities	$	33,594		$	10,998		$	4,859		$	–	$	49,451

Investing activities
Purchases of property and equipment		(342	)		(8,217	)		–			–		(8,559	)
Capitalized software		(4,392	)		(366	)		(25	)		–		(4,783	)
Net cash used for investing activities		(4,734	)		(8,583	)		(25	)		–		(13,342	)

Financing activities
Borrowings under revolving credit agreement		168,400			–			–			–		168,400
Repayments under revolving credit agreement		(241,900	)		–			–			–		(241,900	)
Tax deficiency related to share-based plans		(57	)		–			–			–		(57	)
Dividends paid		(3,004	)		–			–			–		(3,004	)
Intercompany financing		47,701			(20,709	)		(26,992	)		–		–
Net cash used for financing activities		(28,860	)		(20,709	)		(26,992	)		–		(76,561	)
Effect of exchange rate changes on cash		–			(327	)		–			–		(327	)

Decrease in cash and cash equivalents		–			(18,621	)		(22,158	)		–		(40,779	)
Cash and cash equivalents at beginning of period		–			22,834			64,066			–		86,900
Cash and cash equivalents at end of period	$	–		$	4,213		$	41,908		$	–	$	46,121

Note 17

Subsequent Event

On June 4, 2010, the Company acquired the remaining 50% of the outstanding stock of Edelman Shoe for $39.6 million, consisting of a combination of cash and shares of the Company’s common stock.

ITEM 2

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

OVERVIEW

We are pleased to deliver a solid financial performance in the first quarter of 2010, which exceeded our expectations. We are further encouraged with the opportunities that are ahead of us for the remainder of 2010. We believe consumer spending is a leading indicator of the current economic recovery and we have seen increased consumer interest in footwear. We believe our brands are positioned to capture increased market share during the recovery. We developed and executed initiatives to offer trend-right product, continue to enhance the store experience and further strengthen consumer engagement. We also continue to make significant progress on our information technology initiatives and went live with two applications at the beginning of the year.

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

Consolidated net sales increased $59.0 million, or 10.9%, to $597.7 million for the first quarter of 2010, compared to $538.7 million for the first quarter of last year. Net sales of our Famous Footwear, Specialty Retail and Wholesale Operations segments increased by $44.6 million, $8.4 million and $5.9 million, respectively.

·	Consolidated operating earnings were $21.3 million in the first quarter of 2010, compared to a consolidated operating loss of $7.2 million for the first quarter of last year.

Consolidated net earnings attributable to Brown Shoe Company, Inc. were $10.0 million, or $0.23 per diluted share, in the first quarter of 2010, compared to our consolidated net loss attributable to Brown Shoe Company, Inc. of $7.6 million, or $0.18 per diluted share, in the first quarter of last year.

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

Information technology initiatives – We incurred expenses of $1.7 million ($1.2 million on an after-tax basis, or $0.03 per diluted share) during the first 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 $2.6 million ($1.7 million on an after-tax basis, or $0.04 per diluted share) in corresponding expenses during the first quarter of last year. See the Recent Developments section that follows and Note 5 to the condensed consolidated financial statements for additional information related to these expenses.

Incentive plans – Due to our stronger financial performance in the first quarter of 2010 relative to the first quarter of 2009, expenses related to our cash-based incentive plans were $4.9 million ($3.0 million after tax, or $0.07 per diluted share) higher in the first quarter of 2010. These higher incentive costs impacted all operating segments.

Following is a summary of our operating results in the first quarter of 2010 by segment and the status of our balance sheet. See Note 6 to the condensed consolidated financial statements for additional information regarding our business segments.

Our Famous Footwear segment’s net sales increased 14.0% to $362.2 million for the first quarter of 2010, compared to $317.6 million for the first quarter of last year. Same-store sales increased 15.5% during the first quarter of 2010, reflecting a higher conversion rate in our stores, higher average retail prices and higher traffic levels. The improvement in operating results was broad-based with all categories and genders contributing to Famous Footwear’s strong first quarter operating results. A lower store count partially offset the same-store sales increase. Operating earnings increased $25.2 million to $28.2 million for the first quarter of 2010, as compared to $3.0 million for the first quarter of last year, driven primarily by higher net sales and gross profit rate, partially offset by higher selling and merchandising expenses, as a result of the higher net sales volume, and higher incentive plan costs due to changes in expected payouts. As a percent of net sales, operating earnings increased to 7.8% in the first quarter of 2010, compared to 1.0% in the first quarter of last year.

Our Wholesale Operations segment’s net sales increased 3.5% to $174.7 million for the first quarter of 2010, compared to $168.8 million for the first quarter of last year. Sales growth in our Naturalizer, Sam Edelman, Via Spiga, Vera Wang Lavender and Carlos by Carlos Santana divisions was partially offset by sales declines in our Dr. Scholl’s, Etienne Aigner, Fergie/Fergalicious and Nickels Soft divisions. Lower provisions for customer allowances, lower markdowns and an increased mix of higher-margin branded sales led to a higher gross profit rate. Operating earnings increased $2.8 million, or 46.9%, to $8.7 million for the first quarter of 2010, compared to $5.9 million for the first quarter of last year, as a result of the increase in net sales and gross profit rate, partially offset by an increase in selling and administrative expenses, primarily as a result of higher incentive plan costs due to changes in expected payouts. As a percent of net sales, operating earnings increased to 5.0% for the first quarter of 2010, compared to 3.5% for the first quarter of last year.

Our Specialty Retail segment’s net sales increased 16.2% to $60.8 million for the first quarter of 2010, compared to $52.4 million for the first quarter of last year. A same-store sales increase of 16.2% 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. We incurred an operating loss of $2.9 million for the first quarter of 2010, compared to an operating loss of $6.2 million for the first quarter of last year. The improvement in our operating results was primarily due to an increase in net sales and a higher gross profit rate, partially offset by an increase in our selling and merchandising expenses, as a result of an increase in the Canadian dollar exchange rate.

Our debt-to-capital ratio, the ratio of our debt obligations to the sum of our debt obligations and equity, decreased to 26.3% at May 1, 2010, compared to 32.5% at May 2, 2009, primarily due to the $39.0 million decline in borrowings under our revolving credit agreement, partially offset by an increase in total Brown Shoe Company, Inc. shareholders’ equity as a result of our net earnings attributable to Brown Shoe Company, Inc. in the first quarter of 2010 and the second half of 2009. Our debt-to-capital ratio decreased from 37.3% at January 30, 2010 primarily due to the $94.5 million decline in borrowings under our revolving credit agreement. Our current ratio, the relationship of current assets to current liabilities, was 1.97 to 1 at May 1, 2010, compared to 1.91 to 1 at May 2, 2009 and 1.71 to 1 at January 30, 2010. Inventories at May 1, 2010 were $431.5 million, up from $408.5 million at the end of the first quarter last year, primarily due to an increase in inventories for our Famous Footwear segment, in support of higher sales, and our investments in the women’s wellness initiatives and accessories.

Recent Developments

Subsequent Event – Additional Investment in Edelman Shoe

On June 4, 2010, we acquired the remaining 50% of the outstanding stock of Edelman Shoe for $39.6 million, consisting of a combination of cash and shares of the Company’s common stock. See Note 13 to the condensed consolidated financial statements for additional information regarding our variable interests in Edelman Shoe during the first quarter 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 early 2011. We incurred expenses of $1.7 million ($1.2 million on an after-tax basis, or $0.03 per diluted share) during the thirteen weeks ended May 1, 2010, as a component of restructuring and other special charges, net related to these initiatives. We incurred expenses of $2.6 million ($1.7 million on an after-tax basis, or $0.04 per diluted share) during the thirteen weeks ended May 2, 2009, as a component of restructuring and other special charges, net related to these initiatives.

Organizational Changes

During November 2009, we made a series of changes within our leadership team as two executives announced plans to retire in early to mid-2010. During 2009, we 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 our Other segment as a component of restructuring and other special charges, net. During the first quarter of 2010, no additional charges were incurred. We recorded settlements of $2.2 million in connection with the retirement of one of the executives, resulting in a remaining liability of $2.4 million as of May 1, 2010.

Outlook for the Remainder of 2010

Looking ahead, we believe we have made the right investments and have an opportunity to further capitalize on the consumers’ desire for trend-right products. While there remains uncertainty as to the pace of the broader economic recovery, we believe that we will see solid sales growth for the Company in 2010. We expect that the same-store sales of our retail businesses will grow into the mid- to high-single digit percentage range in 2010. For our wholesale business, we expect a net sales increase in 2010 in the range of low- to mid-teens percentage growth as compared to 2009. We plan to continue to increase our investment in marketing and sharpen our focus on the consumer throughout the remainder of 2010, while remaining focused on generating additional efficiencies from our operating platform.

Following are the consolidated results and the results by segment for the thirteen weeks ended May 1, 2010 and May 2, 2009:

CONSOLIDATED RESULTS

	Thirteen Weeks Ended
	May 1, 2010				May 2, 2009
($ millions)				% of Net Sales				% of Net Sales
Net sales	$	597.7		100.0%	$	538.7		100.0%
Cost of goods sold		350.1		58.6%		330.5		61.4%
Gross profit		247.6		41.4%		208.2		38.6%
Selling and administrative expenses		224.6		37.5%		212.8		39.4%
Restructuring and other special charges, net		1.7		0.3%		2.6		0.5%
Operating earnings (loss)		21.3		3.6%		(7.2	)	(1.3)%
Interest expense		(4.5	)	(0.8)%		(5.2	)	(1.0)%
Interest income		–		–		0.1		0.0%
Earnings (loss) before income taxes		16.8		2.8%		(12.3	)	(2.3)%
Income tax (provision) benefit		(6.3	)	(1.0)%		5.2		1.0%
Net earnings (loss)	$	10.5		1.8%	$	(7.1	)	(1.3)%
Less: Net earnings attributable to noncontrolling interests		0.5		0.1%		0.5		0.1%
Net earnings (loss) attributable to Brown Shoe Company, Inc.	$	10.0		1.7%	$	(7.6	)	(1.4)%

Net Sales

Net sales increased $59.0 million, or 10.9%, to $597.7 million for the first quarter of 2010, compared to $538.7 million for the first quarter of last year. All segments experienced net sales increases during the first quarter of 2010 as compared to the first quarter of 2009. Our Famous Footwear segment reported a $44.6 million increase in net sales, reflecting a 15.5% same-store sales increase, resulting from a higher conversion rate in our stores, higher average retail prices and higher traffic levels. The net sales of our Specialty Retail segment increased by $8.4 million, reflecting a 16.2% same-store sales increase in our retail stores, an increase in the Canadian dollar exchange rate and higher net sales at Shoes.com. Our Wholesale Operations segment reported a $5.9 million increase in net sales, primarily as a result of strong demand and sales growth in many of our brands, including primarily our Naturalizer, Sam Edelman, Via Spiga, Vera Wang Lavender and Carlos by Carlos Santana divisions.

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 $39.4 million, or 18.9%, to $247.6 million for the first quarter of 2010, compared to $208.2 million in the first quarter of last year, resulting from higher net sales and a higher gross profit rate. As a percent of net sales, our gross profit increased to 41.4% for the first quarter of 2010 from 38.6% for the first quarter of last year. The most significant improvement in the gross profit rate was recognized by our Wholesale Operations segment as a result of lower provisions for customer allowances and markdowns, resulting from improved sell-through rates at retail, and an increased mix of higher-margin branded sales. An increase in mix of our retail business, which generates a higher gross profit rate than our wholesale business, also contributed to the increase in gross profit rate. Our Famous Footwear segment contributed to the increase in 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 across all categories and decreased promotional activity during the quarter. In addition, our Specialty Retail segment also contributed to the increase in gross profit rate as the segment experienced a strong performance with 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 $11.8 million, or 5.5%, to $224.6 million for the first quarter of 2010, compared to $212.8 million in the first quarter of last year. The increase was primarily related to an increase of $4.9 million due to changes in expected payments under our incentive plans, as well as other increases associated with merit increases, variable retail store payroll expenses, director compensation and expenses associated with our information technology platform. As a percent of net sales, selling and administrative expenses decreased to 37.5% for the first quarter of 2010 from 39.4% for the first quarter of last year, reflecting the factors discussed above and the leveraging of our expense base over the higher net sales volume.

Restructuring and Other Special Charges, Net

We recorded restructuring and other special charges, net of $1.7 million for the first 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 $2.6 million of corresponding charges during the first quarter of last year. As a percent of net sales, restructuring and other special charges, net decreased to 0.3% in the first quarter of 2010, from 0.5% in the first quarter of last year.

Operating Earnings (Loss)

We reported operating earnings of $21.3 million in the first quarter of 2010, compared to an operating loss of $7.2 million during the first 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.

Interest Expense

Interest expense decreased $0.7 million, or 14.0%, to $4.5 million for the first quarter of 2010, compared to $5.2 million for the first quarter of last year, primarily reflecting lower average borrowings under our revolving credit agreement.

Income Tax (Provision) Benefit

Our consolidated effective tax rate was a provision of 37.4% for the first quarter of 2010, compared to a benefit of 42.4% for the first quarter of last year, reflecting a change in the mix of domestic and foreign earnings. 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.

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

We reported net earnings attributable to Brown Shoe Company, Inc. of $10.0 million during the first quarter of 2010, compared to a net loss attributable to Brown Shoe Company, Inc. of $7.6 million during the first quarter of last year as a result of the reasons noted above.

FAMOUS FOOTWEAR

	Thirteen Weeks Ended
	May 1, 2010				May 2, 2009
($ millions, except sales per square foot)				% of Net Sales				% of Net Sales
Operating Results
Net sales	$	362.2		100.0%	$	317.6		100.0%
Cost of goods sold		198.0		54.7%		181.1		57.0%
Gross profit		164.2		45.3%		136.5		43.0%
Selling and administrative expenses		136.0		37.5%		133.5		42.0%
Operating earnings	$	28.2		7.8%	$	3.0		1.0%

Key Metrics
Same-store sales % change		15.5%				(4.9)%
Same-store sales $ change	$	46.6			$	(15.4	))
Sales change from new and closed stores, net	$	(2.0	)		$	14.2

Sales per square foot, excluding e-commerce (thirteen weeks ended)	$	45			$	39
Sales per square foot, excluding e-commerce (trailing twelve-months)	$	174			$	165
Square footage (thousand sq. ft.)		7,897				8,096

Stores opened		11				39
Stores closed		6				11
Ending stores		1,134				1,166

Net Sales

Net sales increased $44.6 million, or 14.0%, to $362.2 million for the first quarter of 2010, compared to $317.6 million for the first quarter of last year. Same-store sales increased 15.5% during the first quarter of 2010, reflecting a higher conversion rate in our stores, higher average retail prices and higher traffic levels. A lower store count partially offset the same-store sales increases. During the first quarter of 2010, we opened 11 new stores and closed six stores, resulting in 1,134 stores and total square footage of 7.9 million at the end of the first quarter of 2010, compared to 1,166 stores and total square footage of 8.1 million at the end of the first quarter of last year. As a result of the same-store sales increase, sales per square foot increased 16.2% to $45, compared to $39 in the first quarter of last year. Approximately 61% of our net sales were made to members of our customer loyalty program, Rewards, in the first quarter of 2010, compared to 63% in the first quarter of last year.

Gross Profit

Gross profit increased $27.7 million, or 20.3%, to $164.2 million for the first quarter of 2010, compared to $136.5 million for the first 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 45.3% for the first quarter of 2010, compared to 43.0% for the first quarter of last year. The increase in our gross profit rate was driven by strong sales of higher-margin categories and decreased promotional activity during the quarter.

Selling and Administrative Expenses

Selling and administrative expenses increased $2.5 million, or 1.9%, to $136.0 million for the first quarter of 2010, compared to $133.5 million for the first quarter of last year. The increase was primarily attributable to higher selling and merchandising expenses, some of which are variable with higher sales volume, and higher expenses related to our incentive plans. These increases were partially offset by lower retail facilities expenses, primarily resulting from the lower store count, lower marketing expenses and lower impairment charges for underperforming stores. As a percent of net sales, selling and administrative expenses decreased to 37.5% for the first quarter of 2010, compared to 42.0% for the first quarter of last year, reflecting the above named factors and the leveraging of our expense base over the higher net sales volume.

Operating Earnings

Operating earnings increased $25.2 million, or 826.5%, to $28.2 million for the first quarter of 2010, compared to $3.0 million for the first quarter of last year. The increase reflects the overall improvement in our business, a higher conversion rate in our stores, higher average retail prices and higher customer traffic. 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 7.8% in the first quarter of 2010, compared to 1.0% in the first quarter of last year.

WHOLESALE OPERATIONS

	Thirteen Weeks Ended
	May 1, 2010			May 2, 2009
($ millions)			% of Net Sales			% of Net Sales
Operating Results
Net sales	$	174.7	100.0%	$	168.8	100.0%
Cost of goods sold		118.0	67.6%		119.4	70.7%
Gross profit		56.7	32.4%		49.4	29.3%
Selling and administrative expenses		47.8	27.3%		43.4	25.8%
Restructuring and other special charges, net		0.2	0.1%		0.1	0.0%
Operating earnings	$	8.7	5.0%	$	5.9	3.5%

Key Metrics
Unfilled order position at end of period	$	362.7		$	227.4

Net Sales

Net sales increased $5.9 million, or 3.5%, to $174.7 million for the first quarter of 2010, compared to $168.8 million for the first quarter of last year. Despite a challenging retail environment, demand for many of our brands strengthened in the first quarter of 2010, as our brand performance at our retail customers began to improve. We experienced sales growth in many of our brands, including our Naturalizer, Sam Edelman, Via Spiga, Vera Wang Lavender and Carlos by Carlos Santana divisions. The sales growth was partially offset by sales declines in our Dr. Scholl’s, Etienne Aigner, Fergie/Fergalicious and Nickels Soft divisions. The Company’s unfilled order position increased $135.3 million, or 59.5%, to $362.7 million as of May 1, 2010, as compared to $227.4 million as of May 2, 2009. This increase reflects 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 range of low- to mid-teens percentage growth as compared to 2009.

Gross Profit

Gross profit increased $7.3 million, or 14.6%, to $56.7 million for the first quarter of 2010, compared to $49.4 million for the first quarter of last year due to the increase in net sales and a higher gross profit rate. As a percent of net sales, our gross profit increased to 32.4% for the first quarter of 2010 from 29.3% for the first quarter of last year. The increase in gross profit rate was due primarily to lower provisions for customer allowances and markdowns and an increased mix of higher-margin branded sales.

Selling and Administrative Expenses

Selling and administrative expenses increased $4.4 million, or 10.0%, to $47.8 million for the first quarter of 2010, compared to $43.4 million for the first quarter of last year, due primarily to higher expenses of $2.9 million related to our incentive plans due to changes in expected payments. We also experienced increases in product development expenses related to product launches. These increases were partially offset by declines in selling and merchandising expenses. As a percent of net sales, selling and administrative expenses increased to 27.3% for the first quarter of 2010, compared to 25.8% for the first quarter of last year, reflecting the above named factors.

Restructuring and Other Special Charges, Net

We incurred restructuring and other special charges, net of $0.2 million during the first 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 $0.1 million of corresponding charges during the first quarter of last year.

Operating Earnings

Operating earnings increased $2.8 million, or 46.9%, to $8.7 million for the first quarter of 2010, compared to $5.9 million for the first quarter of last year. The increase was 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. As a percent of net sales, operating earnings increased to 5.0% for the first quarter of 2010, compared to 3.5% for the first quarter of last year.

SPECIALTY RETAIL

	Thirteen Weeks Ended
	May 1, 2010				May 2, 2009
($ millions, except sales per square foot)				% of Net Sales				% of Net Sales
Operating Results
Net sales	$	60.8		100.0%	$	52.4		100.0%
Cost of goods sold		34.1		56.0%		30.1		57.5%
Gross profit		26.7		44.0%		22.3		42.5%
Selling and administrative expenses		29.6		48.8%		28.5		54.4%
Operating loss	$	(2.9	)	(4.8)%	$	(6.2	)	(11.9)%

Key Metrics
Same-store sales % change		16.2%				(6.1)%
Same-store sales $ change	$	5.8			$	(2.2	)
Sales change from new and closed stores, net	$	(2.3	)		$	0.9
Impact of changes in Canadian exchange rate on sales	$	2.9			$	(2.9	)
Sales change of e-commerce subsidiary	$	2.0			$	(1.4	)

Sales per square foot, excluding e-commerce (thirteen weeks ended)	$	87			$	69
Sales per square foot, excluding e-commerce (trailing twelve-months)	$	361			$	335
Square footage (thousand sq. ft.)		447				483

Stores opened		2				1
Stores closed		15				8
Ending stores		269				299

Net Sales

Net sales increased $8.4 million, or 16.2%, to $60.8 million for the first quarter of 2010, compared to $52.4 million for the first quarter of last year. A same-store sales increase of 16.2% 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. The net sales increase was partially offset by a lower store count, reflected in the sales change from new and closed stores, net. The net sales of Shoes.com increased $2.0 million, or 13.1%, to $17.0 million for the first quarter of 2010, compared to $15.0 million for the first quarter of last year, reflecting an increase in site visits. We opened two new stores and closed 15 stores (including six Naturalizer stores in China) during the first quarter of 2010, resulting in a total of 269 stores (including eight Naturalizer stores in China) and total square footage of 447,000 at the end of the first quarter of 2010, compared to 299 stores (including 16 Naturalizer stores in China) and total square footage of 483,000 at the end of the first 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 26.7% to $87 for the first quarter of 2010, compared to $69 for the first quarter of last year.

Gross Profit

Gross profit increased $4.4 million, or 20.2%, to $26.7 million for the first quarter of 2010, compared to $22.3 million for the first quarter of last year, reflecting a higher gross profit rate and higher net sales. As a percent of net sales, our gross profit increased to 44.0% for the first quarter of 2010 from 42.5% for the first quarter of last year. The increase in our overall rate was primarily the result of improved retail sell-through and lower markdowns for our retail stores.

Selling and Administrative Expenses

Selling and administrative expenses increased $1.1 million, or 4.1%, to $29.6 million for the first quarter of 2010, compared to $28.5 million for the first quarter of last year due primarily to an increase in the Canadian dollar exchange rate, as well as increases in selling and merchandising expenses, some of which are variable with higher sales volume, and warehousing expenses. These increases were partially offset by declines in retail facilities expenses, primarily resulting from the lower store count, and marketing expenses. As a percent of net sales, selling and administrative expenses decreased to 48.8% for the first quarter of 2010, compared to 54.4% for the first quarter of last year, reflecting the factors listed above and the leveraging of our expense base over the higher net sales volume.

Operating Loss

Specialty Retail reported an operating loss of $2.9 million for the first quarter of 2010, compared to an operating loss of $6.2 million for the first quarter of last year due primarily to 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 $12.6 million for the first quarter of 2010, compared to costs of $9.9 million for the first quarter of last year.

There were several factors impacting the $2.7 million variance, as follows:

·	Incentive plans – Our selling and administrative expenses were higher by $1.4 million during the first quarter of 2010, as compared to the first quarter of last year, due to changes in 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 quarter of 2010.

·	Higher charitable contributions.

·	Information technology initiatives – We incurred expenses of $1.5 million during the first quarter of 2010 related to our integrated ERP information technology system, $1.0 million lower than the $2.5 million in corresponding expenses incurred during the first quarter of last year.

LIQUIDITY AND CAPITAL RESOURCES

Borrowings

($ millions)	May 1, 2010		May 2, 2009		Increase/ (Decrease)
Borrowings under revolving credit agreement	$	–	$	39.0	$	(39.0	)
Senior notes		150.0		150.0		–
Total debt	$	150.0	$	189.0	$	(39.0	)

Total debt obligations decreased $39.0 million to $150.0 million at May 1, 2010, compared to $189.0 million at May 2, 2009, due to having no borrowings under our revolving credit agreement at May 1, 2010, reflecting our strong financial performance and generation of operating cash flow in the first quarter of 2010. Interest expense for the first quarter of 2010 decreased $0.7 million to $4.5 million, compared to $5.2 million for the first quarter of last year primarily due to lower 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 May 1, 2010.

At May 1, 2010, we had no borrowings outstanding and $10.1 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $369.9 million at the end of the first quarter of 2010.

We believe that borrowing capacity under our Credit Agreement will be adequate to meet our expected operational needs, 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 May 1, 2010, we were in compliance with all covenants relating to the Senior Notes.

Working Capital and Cash Flow


	Thirteen Weeks Ended
($ millions)	May 1, 2010			May 2, 2009			Increase/ (Decrease)

Net cash provided by operating activities	$	42.1		$	49.4		$	(7.3	)
Net cash used for investing activities		(11.3	)		(13.3	)		2.0
Net cash used for financing activities		(97.6	)		(76.6	)		(21.0	)
Effect of exchange rate changes on cash		0.4			(0.3	)		0.7
Decrease in cash and cash equivalents	$	(66.4	)	$	(40.8	)	$	(25.6	)

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

Cash provided by operating activities was lower by $7.3 million, reflecting several factors:

·	A smaller decline in inventories in the first quarter of 2010 compared to the first quarter of last year due to the timing and amount of purchases and sales;

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

·	A larger increase in prepaid expenses and other current and noncurrent assets due primarily to the timing of payments to vendors.

Partially offset by,

·	An increase in trade accounts payable during the first quarter of 2010 as compared to a decrease in the first quarter 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 $2.0 million as a result of lower purchases of property and equipment primarily related to our distribution centers and new stores. The first quarter of 2009 included capital expenditures related to a new distribution center, whereas no corresponding expenditures occurred during the first quarter of 2010. At our retail divisions, we opened 13 stores during the first quarter of 2010 compared to 40 stores in the first quarter of 2009. The decline was partially offset by higher capitalization of software primarily related to our information technology initiatives during the first quarter of 2010. In 2010, we expect purchases of property and equipment and capitalized software of approximately $62.0 million to $65.0 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 $21.0 million primarily due to higher repayments, net of borrowings, under our revolving credit agreement.

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


	May 1, 2010	May 2, 2009	January 30, 2010

Working capital ($ millions)	$ 307.4	$ 271.0	$ 294.2

Current ratio	1.97:1	1.91:1	1.71:1

Total debt as a percentage of total capitalization	26.3%	32.5%	37.3%

Working capital at May 1, 2010, was $307.4 million, which was $13.2 million higher than at January 30, 2010 and $36.4 million higher than at May 2, 2009. Our current ratio, the relationship of current assets to current liabilities, increased to 1.97 to 1 compared to 1.71 to 1 at January 30, 2010 and 1.91 to 1 at May 2, 2009. The increase compared to January 30, 2010 was primarily attributable to lower borrowings under our revolving credit agreement and accrued expenses, partially offset by lower cash and cash equivalents and inventories. The increase compared to May 2, 2009 was primarily attributable to lower borrowings under our revolving credit agreement and higher cash and cash equivalents, receivables, inventories and prepaid expenses and other current assets, partially offset by higher trade accounts payable. Our debt-to-capital ratio, the ratio of our debt obligations to the sum of our debt obligations and equity, was 26.3% as of May 1, 2010, compared to 37.3% as of January 30, 2010 and 32.5% as of May 2, 2009. The decline from January 30, 2010 and May 2, 2009 primarily reflected a decline in borrowings under our revolving credit agreement, partially offset by an increase in total Brown Shoe Company, Inc. shareholders’ equity as a result of our net earnings attributable to Brown Shoe Company, Inc. in the first quarter of 2010 and the second half of 2009, respectively. At May 1, 2010, we had $59.5 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 first quarter of 2010 and the first quarter of 2009. On May 26, 2010, the Board of Directors declared a quarterly dividend of $0.07 per share, payable July 1, 2010 to shareholders of record on June 18, 2010, marking the 350th 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 May 1, 2010, we were contingently liable for remaining lease commitments of approximately $1.5 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 quarter of 2010 as disclosed in Note 5 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 May 1, 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 early 2011. During the quarter ended May 1, 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 May 1, 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 first 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)

January 31, 2010 – February 27, 2010	4,503	(2)		$ 11.93	(2)	–		2,500,000

February 28, 2010 – April 3, 2010	56,056	(2)		14.41	(2)	–		2,500,000

April 4, 2010 – May 1, 2010	–			–		–		2,500,000

Total	60,559	(2)		$ 14.23	(2)	–		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 first quarter of 2010; therefore, there were 2.5 million shares authorized to be purchased under the program as of May 1, 2010. Our repurchases of common stock are limited under our debt agreements.

(2)

Includes 60,559 shares that were tendered by employees related to certain share-based awards. These shares were tendered in satisfaction of the exercise price of stock options and/or to satisfy minimum tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards. Accordingly, these share purchases are not considered a part of our publicly announced stock repurchase program.

ITEM 3

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4

(REMOVED AND RESERVED)

ITEM 5

OTHER INFORMATION

None.

ITEM 6

EXHIBITS

Exhibit No.
3.1		Restated Certificate of Incorporation of 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.
10.2	†*	Summary of non-employee director compensation.
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 management contract or compensatory plan arrangements.

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

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: June 8, 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