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 August 1, 2009
[  ]	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 R        Accelerated filer £          Non-accelerated filer £        Smaller reporting company £

            (Do not check if a smaller reporting company)

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

    Yes  £     No R

As of August 29, 2009, 42,863,292 common shares were outstanding.

1

PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
($ thousands)	August 1, 2009			August 2, 2008			January 31, 2009
Assets
Current assets
Cash and cash equivalents	$	37,274		$	64,420		$	86,900
Receivables		72,156			108,911			84,252
Inventories		526,808			502,856			466,002
Prepaid expenses and other current assets		41,877			22,671			44,289
Total current assets		678,115			698,858			681,443
Other assets		110,540			103,769			103,137
Investment in nonconsolidated affiliate		–			6,274			–
Goodwill and intangible assets, net		80,613			213,732			84,000
Property and equipment		423,704			408,361			416,635
Allowance for depreciation		(268,154	)		(259,604	)		(259,184	)
Net property and equipment		155,550			148,757			157,451
Total assets	$	1,024,818		$	1,171,390		$	1,026,031
Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	47,500		$	–		$	112,500
Trade accounts payable		233,791			241,958			152,339
Accrued expenses		133,652			133,667			137,307
Total current liabilities		414,943			375,625			402,146
Other liabilities
Long-term debt		150,000			150,000			150,000
Deferred rent		42,049			41,547			41,714
Other liabilities		29,570			43,177			29,957
Total other liabilities		221,619			234,724			221,671
Equity
Common stock		428			423			423
Additional paid-in capital		149,530			144,009			147,702
Accumulated other comprehensive (loss) income		(4,279	)		14,536			(5,781	)
Retained earnings		233,904			400,359			251,760
Total Brown Shoe Company, Inc. shareholders’ equity		379,583			559,327			394,104
Noncontrolling interests		8,673			1,714			8,110
Total equity		388,256			561,041			402,214
Total liabilities and equity	$	1,024,818		$	1,171,390		$	1,026,031

See notes to condensed consolidated financial statements.

2

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

	(Unaudited)						(Unaudited)
	Thirteen Weeks Ended						Twenty-six Weeks Ended
($ thousands, except per share amounts)	August 1, 2009			August 2, 2008			August 1, 2009			August 2, 2008
Net sales	$	511,621		$	569,219		$	1,050,361		$	1,123,710
Cost of goods sold		307,981			345,722			638,557			683,751
Gross profit		203,640			223,497			411,804			439,959
Selling and administrative expenses		206,620			207,963			419,337			419,138
Restructuring and other special charges, net		1,998			10,134			4,612			1,747
Equity in net loss of nonconsolidated affiliate		–			253			–			367
Operating (loss) earnings		(4,978	)		5,147			(12,145	)		18,707
Interest expense		(4,914	)		(3,965	)		(10,163	)		(8,261		)
Interest income		145			504			288			1,042
(Loss) earnings before income taxes		(9,747	)		1,686			(22,020	)		11,488
Income tax benefit (provision)		5,531			369			10,733			(2,611		)
Net (loss) earnings	$	(4,216	)	$	2,055		$	(11,287	)	$	8,877
Less: Net earnings (loss) attributable to noncontrolling interests		29			(162	)		561			(535		)
Net (loss) earnings attributable to Brown Shoe Company, Inc.	$	(4,245	)	$	2,217		$	(11,848	)	$	9,412
Basic (loss) earnings per common share attributable to Brown Shoe Company, Inc.shareholders	$	(0.10	)	$	0.05		$	(0.28	)	$		0.22
Diluted (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders	$	(0.10	)	$	0.05		$	(0.28	)	$		0.22
Dividends per common share	$	0.07		$	0.07		$	0.14		$		0.14

See notes to condensed consolidated financial statements.

3

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited)
	Twenty-six Weeks Ended
($ thousands)	August 1, 2009			August 2, 2008
Operating Activities
Net (loss) earnings	$	(11,287	)	$	8,877
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation		18,204			19,895
Amortization of capitalized software		3,993			4,003
Amortization of intangibles		3,387			3,422
Amortization of debt issuance costs		1,098			740
Share-based compensation expense (income)		1,944			(360	)
Loss on disposal of facilities and equipment		293			219
Impairment charges for facilities and equipment		2,094			819
Deferred rent		335			132
Provision for doubtful accounts		477			414
Foreign currency transaction (gains) losses		(61	)		8
Undistributed loss of nonconsolidated affiliate		–			367
Changes in operating assets and liabilities:
Receivables		11,643			7,536
Inventories		(59,120	)		(67,683	)
Prepaid expenses and other current assets		2,755			1,941
Trade accounts payable		81,073			69,125
Accrued expenses		(4,004	)		18,097
Other, net		(3,113	)		(3,644	)
Net cash provided by operating activities		49,711			63,908
Investing Activities
Purchases of property and equipment		(17,911	)		(27,825	)
Capitalized software		(10,916	)		(10,000	)
Net cash used for investing activities		(28,827	)		(37,825	)
Financing Activities
Borrowings under revolving credit agreement		394,900			177,000
Repayments under revolving credit agreement		(459,900	)		(192,000	)
Proceeds from stock options exercised		–			244
Tax impact of share-based plans		(89	)		87
Dividends paid		(6,006	)		(5,927	)
Net cash used for financing activities		(71,095	)		(20,596	)
Effect of exchange rate changes on cash		585			(868	)
(Decrease) increase in cash and cash equivalents		(49,626	)		4,619
Cash and cash equivalents at beginning of period		86,900			59,801
Cash and cash equivalents at end of period	$	37,274		$	64,420

See notes to condensed consolidated financial statements.

4

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 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, Easter and Christmas 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 (loss) earnings attributable to Brown Shoe Company, Inc.

The Company evaluated the effects of all subsequent events from the end of the second quarter of 2009 through September 9, 2009, the date the Company filed its condensed consolidated financial statements with the SEC.

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 31, 2009.

Note 2 Impact of New and Prospective Accounting Pronouncements

New Accounting Pronouncements

FASB Statement No. 157, Fair Value Measurement

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurement (“SFAS No. 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. This statement was effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position FAS No. 157-2, Effective Date of FASB Statement No. 157 (“FSP No. 157-2”), which amends SFAS No. 157 by delaying its effective date by one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company adopted the provisions of SFAS No. 157, as amended, for financial assets and financial liabilities at the beginning of 2008. The Company adopted SFAS No. 157 for non-financial assets and non-financial liabilities at the beginning of 2009. The adoption of SFAS No. 157 for non-financial assets and non-financial liabilities did not have a material impact on the Company’s condensed consolidated financial statements, although additional disclosures related to fair value measurements are required. See Note 12 to the condensed consolidated financial statements for additional information related to fair value measurements.

FASB Statement No. 141(R), Business Combinations

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, a replacement of FASB Statement No. 141 (“SFAS No. 141(R)”), which significantly changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring goodwill acquired in a business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective prospectively, except for certain retrospective adjustments to deferred tax balances, for fiscal years beginning after December 15, 2008. SFAS No. 141(R) is effective for business combinations made by the Company beginning in 2009.

5

FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”). This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Minority interests have been recharacterized as noncontrolling interests and classified as a component of equity separate from the parent’s equity. In addition, SFAS No. 160 establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective prospectively for fiscal years beginning after December 15, 2008, except for certain retrospective disclosure requirements. Accordingly, the Company adopted SFAS No. 160 at the beginning of 2009. The presentation and disclosure requirements of this standard impacted how the Company presents and discloses noncontrolling interests in the condensed consolidated financial statements and this standard was applied retrospectively for all periods presented.

FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No. 161”). This statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby seeks to improve the transparency of financial reporting. Entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company adopted SFAS No. 161 at the beginning of 2009. See Note 11 and Note 12 to the condensed consolidated financial statements for additional information related to derivative instruments.

FASB Staff Position Emerging Issues Task Force No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities

In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF No. 03-6-1”), which addresses whether instruments granted in share-based payment awards are participating securities prior to vesting and, therefore, must be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, Earnings Per Share. Under FSP EITF No. 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents should be treated as participating securities in computing earnings per share. However, 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. FSP EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008 and for interim periods within those years, and shall be applied retrospectively to all prior periods. Accordingly, due to the adoption of FSP EITF No. 03-6-1 at the beginning of 2009, restricted stock awards are now considered participating units in the calculation of (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders. The adoption of FSP EITF No. 03-6-1 did not have a material impact on the Company’s condensed consolidated financial statements for any periods presented. See Note 3 to the condensed consolidated financial statements for the calculation of (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders.

FASB Staff Position FAS No. 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of Financial Instruments

In April 2009, the FASB issued Staff Position FAS No. 107-1 and Accounting Principles Bulletin (“APB”) No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP No. 107-1 and APB No. 28-1”), to require, on an interim basis, disclosures about the fair value of financial instruments for public entities. FSP No. 107-1 and APB No. 28-1 is expected to improve the transparency and quality of information provided to financial statement users by increasing the frequency of disclosures about fair value for interim periods as well as annual periods. FSP No. 107-1 and APB No. 28-1 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted FSP No. 107-1 and APB No. 28-1 during the second quarter of 2009. See Note 12 to the condensed consolidated financial statements for additional information related to the fair value of the Company’s financial instruments.

6

FASB Statement No. 165, Subsequent Events

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”). The objective of this statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this statement sets forth: (a) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. In accordance with this statement, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009. The Company adopted SFAS No. 165 in the second quarter of 2009. See Note 1 to the condensed consolidated financial statements for the related subsequent events disclosure.

Prospective Accounting Pronouncements

FASB Staff Position FAS No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets

In December 2008, the FASB issued Staff Position FAS No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP No. 132(R)-1”). FSP No. 132(R)-1 requires enhanced disclosures about the plan assets of a Company’s defined benefit pension and other postretirement plans. The enhanced disclosures required by this FSP are intended to provide users of financial statements with a greater understanding of: (a) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (b) the major categories of plan assets; (c) the inputs and valuation techniques used to measure the fair value of plan assets; (d) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (e) significant concentrations of risk within plan assets. This requirement is effective for financial statements issued for fiscal years ending after December 15, 2009, with early application permitted. The Company will include the required disclosures of FSP No. 132(R)-1 in its 2009 and future Form 10-K filings.

FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R)

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). SFAS No. 167 amends FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (“FIN 46(R)”), and changes the consolidation guidance applicable to a variable interest entity (“VIE”). SFAS No. 167 also amends the guidance 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 will 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 standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. SFAS No. 167 also requires enhanced disclosures about an enterprise’s involvement with a VIE. SFAS No. 167 will be effective as of the beginning of interim and annual reporting periods that begin after November 15, 2009. Accordingly, the Company will adopt SFAS No. 167 in 2010. The Company is currently evaluating the effects, if any, that the adoption of this standard will have on its consolidated financial statements.

FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162 (“SFAS No. 168”). SFAS No. 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to allow the FASB Accounting Standards Codification to become the single source of authoritative U.S. accounting and reporting standards, other than guidance issued by the SEC. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. SFAS No. 168 will be effective for the Company’s third quarter of 2009 and is not anticipated to have a material effect on the Company’s condensed consolidated financial statements.

7

Note 3 Earnings Per Share

As discussed in Note 2, the Company adopted FSP EITF 03-6-1 and began using the two-class method to compute basic and diluted (loss) earnings 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 (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders for the periods ended August 1, 2009 and August 2, 2008:

	Thirteen Weeks Ended						Twenty-six Weeks Ended
(in thousands, except per share amounts)	August 1, 2009			August 2, 2008			August 1, 2009			August 2, 2008
NUMERATOR
Net (loss) earnings attributable to Brown Shoe Company, Inc. before allocation of earnings to participating securities	$	(4,245	)	$	2,217		$	(11,848	)	$	9,412
Less: Earnings allocated to participating securities		–			(41	)		–			(169	)
Net (loss) earnings attributable to Brown Shoe Company, Inc. after allocation of earnings to participating securities	$	(4,245	)	$	2,176		$	(11,848	)	$	9,243
DENOMINATOR
Denominator for basic (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders		41,583			41,538			41,574			41,500
Dilutive effect of stock options		–			32			–			25
Denominator for diluted (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders		41,583			41,570			41,574			41,525
Basic (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders	$	(0.10	)	$	0.05		$	(0.28	)	$	0.22
Diluted (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders	$	(0.10	)	$	0.05		$	(0.28	)	$	0.22

Due to the net loss attributable to Brown Shoe Company, Inc. for the thirteen weeks and twenty-six weeks ended August 1, 2009, the denominator for diluted loss per common share attributable to Brown Shoe Company, Inc. shareholders is the same as the denominator for basic loss per common share attributable to Brown Shoe Company, Inc. shareholders.  Options to purchase 980,689 shares of common stock for the thirteen weeks and 975,064 shares for the twenty-six weeks ended August 2, 2008 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.

Note 4 Comprehensive Income and Changes in Equity

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

8

The following table sets forth the reconciliation from net (loss) earnings to comprehensive (loss) income for the periods ended August 1, 2009 and August 2, 2008:

	Thirteen Weeks Ended						Twenty-six Weeks Ended
($ thousands)	August 1, 2009			August 2, 2008			August 1, 2009			August 2, 2008
Net (loss) earnings	$	(4,216	)	$	2,055		$	(11,287	)	$	8,877
Other comprehensive (loss) income (“OCI”), net of tax:
Foreign currency translation adjustment		2,767			(265	)		2,661			(1,243	)
Unrealized (losses) gains on derivative instruments, net of tax of $484 and $47 in the thirteen weeks and $515 and $250 in the twenty-six weeks ended August 1, 2009 and August 2, 2008, respectively		(1,112	)		72			(1,277	)		446
Net gain from derivatives reclassified into earnings, net of tax of $71 and $19 in the thirteen weeks and $68 and $55 in the twenty-six weeks ended August 1, 2009 and August 2, 2008, respectively		142			(37	)		120			(103	)
		1,797			(230	)		1,504			(900	)
Comprehensive (loss) income	$	(2,419	)	$	1,825		$	(9,783	)	$	7,977
Less: Comprehensive income (loss) attributable    to noncontrolling interests		31			–			563			(373	)
Comprehensive (loss) income attributable to    Brown Shoe Company, Inc.	$	(2,450	)	$	1,825		$	(10,346	)	$	8,350

The following table sets forth the balance in accumulated other comprehensive (loss) income for the Company at August 1, 2009, August 2, 2008 and January 31, 2009:

($ thousands)	August 1,  2009			August 2,  2008		January 31, 2009
Foreign currency translation gains	$	3,379		$	9,859	$	720
Unrealized (losses) gains on derivative instruments		(889	)		213		268
Pension and other postretirement benefits		(6,769	)		4,464		(6,769	)
Accumulated other comprehensive (loss) income	$	(4,279	)	$	14,536	$	(5,781	)

See additional information related to derivative instruments in Note 2, 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 twenty-six weeks ended August 1, 2009 and August 2, 2008:

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

9

($ thousands)	Brown Shoe Company, Inc. Shareholders’ Equity			Noncontrolling Interests			Total Equity
Equity at February 2, 2008	$	558,577		$	2,087		$	560,664
Comprehensive (loss) income		8,350			(373	)		7,977
Dividends paid		(5,927	)		–			(5,927	)
Stock issued under employee benefit and restricted stock plans		(1,400	)		–			(1,400	)
Tax impact of share-based plans		87			–			87
Share-based compensation income		(360	)		–			(360	)
Equity at August 2, 2008	$	559,327		$	1,714		$	561,041

Note 5 Restructuring and Other Special Charges, Net

Information Technology Initiatives

During 2008, the Company announced plans to implement an integrated enterprise resource planning (“ERP”) information technology system provided by third-party vendors. The ERP information technology system will replace select existing internally developed and certain other third-party applications, and is expected to support the Company’s business model. The Company anticipates the implementation will enhance its profitability and deliver increased shareholder value through improved management and execution of its business operations, financial systems, supply chain efficiency and planning and employee productivity. The phased implementation began during the second quarter of 2008 and is expected to continue through 2011. The Company incurred expenses of $2.0 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) and $4.6 million ($3.0 million on an after-tax basis, or $0.07 per diluted share) during the thirteen weeks and twenty-six weeks ended August 1, 2009, respectively, as a component of restructuring and other special charges, net related to these initiatives. Of the $2.0 million in expenses recorded during the thirteen weeks ended August 1, 2009, $1.9 million was recorded in the Other segment and $0.1 million was recorded in the Wholesale Operations segment. During both the thirteen weeks and twenty-six weeks ended August 2, 2008 the Company incurred expenses of $0.5 million ($0.3 million on an after-tax basis, or $0.01 per diluted share). The Company incurred expenses of $3.7 million ($2.4 million on an after-tax basis, or $0.06 per diluted share) during the full year of 2008. The expenses recorded during the twenty-six weeks ended August 1, 2009 and for the full year of 2008 were reflected within the Other segment.

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 no charges during the thirteen weeks or twenty-six weeks ended August 1, 2009, but incurred charges of $30.9 million ($19.1 million on an after-tax basis, or $0.46 per diluted share) during the fourth quarter of 2008. These costs included employee-related costs for severance, including health care 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 first quarter 2009		(3.7	)		(1.3	)		(0.1	)		(5.1	)
Reserve balance at May 2, 2009	$	15.7		$	2.0		$	0.1		$	17.8
Amounts settled in second quarter 2009		(4.0	)		(0.3	)		0.3			(4.0	)
Reserve balance at August 1, 2009	$	11.7		$	1.7		$	0.4		$	13.8

10

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 of $0.5 million, included in facility costs, was a noncash item.

Headquarters Consolidation

During 2008, the Company announced plans to relocate its Famous Footwear division headquarters from Madison, Wisconsin to St. Louis, Missouri. The relocation of the division was intended to foster collaboration, increase the Company’s speed to market and strengthen its connection with consumers. The Company incurred no charges during the thirteen weeks or twenty-six weeks ended August 1, 2009, but 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.

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
Amounts settled in first quarter 2009		(1.5	)		(0.6	)		–			(0.3	)		(0.1	)		(2.5	)
Reserve balance at May 2, 2009	$	0.4		$	1.5		$	0.3		$	5.3		$	–		$	7.5
Amounts settled in second quarter 2009		(0.3	)		(0.6	)		(0.2	)		(0.8	)		–			(1.9	)
Reserve balance at August 1, 2009	$	0.1		$	0.9		$	0.1		$	4.5		$	–		$	5.6

During the thirteen weeks ended August 2, 2008, the Company incurred charges of $9.7 million ($5.9 million on an after-tax basis, or $0.14 per diluted share) related to the plan: $3.6 million for employee severance, $2.2 million for employee recruiting, $1.9 million for employee relocation, $1.4 million for facility and $0.6 million for other costs. A tax benefit of $3.8 million associated with the costs was recorded during the thirteen weeks ended August 2, 2008.

During the twenty-six weeks ended August 2, 2008, the Company incurred charges of $11.4 million ($7.0 million on an after-tax basis, or $0.17 per diluted share) related to the plan: $4.7 million for employee severance, $2.2 million for employee recruiting, $2.2 million for employee relocation, $1.6 million for facility and $0.8 million for other costs. A tax benefit of $4.4 million associated with the costs was recorded during the twenty-six weeks ended August 2, 2008.

Environmental Insurance Recoveries, Net

During the first quarter of 2008, the Company reached agreements with certain insurance carriers to recover environmental remediation costs associated with its facility in Denver, Colorado (the “Redfield” facility). As a result of these settlements, all claims among the parties were dismissed. The Company recorded income within its Other segment related to these recoveries, net of associated fees and costs, of $10.2 million ($6.2 million on an after-tax basis, or $0.15 per diluted share) as a component of restructuring and other special charges, net. See Note 15 to the condensed consolidated financial statements for additional information related to these recoveries.

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Note 6 Business Segment Information

Applicable business segment information is as follows for the periods ended August 1, 2009 and August 2, 2008:

($ thousands)	Famous Footwear			Wholesale Operations		Specialty Retail			Other			Total
Thirteen Weeks Ended August 1, 2009
External sales	$	314,144		$	142,027	$	55,450		$	–		$	511,621
Intersegment sales		471			52,462		–			–			52,933
Operating (loss) earnings		(846	)		7,882		(4,301	)		(7,713	)		(4,978	)
Operating segment assets		527,013			293,005		75,703			129,097			1,024,818
Thirteen Weeks Ended August 2, 2008
External sales	$	326,164		$	180,069	$	62,986		$	–		$	569,219
Intersegment sales		465			38,514		–			–			38,979
Operating earnings (loss)		11,254			11,588		(3,138	)		(14,557	)		5,147
Operating segment assets		488,074			446,874		85,782			150,660			1,171,390
Twenty-six Weeks Ended August 1, 2009
External sales	$	631,707		$	310,851	$	107,803		$	–		$	1,050,361
Intersegment sales		1,112			97,557		–			–			98,669
Operating earnings (loss)		2,195			13,792		(10,527	)		(17,605	)		(12,145	)
Twenty-six Weeks Ended August 2, 2008
External sales	$	645,013		$	357,733	$	120,964		$	–		$	1,123,710
Intersegment sales		1,114			80,791		–			–			81,905
Operating earnings (loss)		18,853			20,274		(7,798	)		(12,622	)		18,707

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

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

During the thirteen weeks and twenty-six weeks ended August 2, 2008, the operating loss of the Other segment included charges related to the headquarters consolidation of $9.7 million and $11.4 million, respectively. Also included within the operating loss of the Other segment were environmental insurance recoveries, net of associated fees and costs, of $10.2 million during the twenty-six weeks ended August 2, 2008 and information technology initiatives expenses of $0.5 million during the thirteen weeks and twenty-six weeks ended August 2, 2008.

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

	Thirteen Weeks Ended						Twenty-six Weeks Ended
($ thousands)	August 1, 2009			August 2, 2008			August 1, 2009			August 2, 2008
Operating (loss) earnings	$	(4,978	)	$	5,147		$	(12,145	)	$	18,707
Interest expense		(4,914	)		(3,965	)		(10,163	)		(8,261	)
Interest income		145			504			288			1,042
(Loss) earnings before income taxes	$	(9,747	)	$	1,686		$	(22,020	)	$	11,488

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Note 7 Goodwill and Intangible Assets

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

($ thousands)	August 1, 2009		August 2, 2008		January 31, 2009
Famous Footwear	$	2,800	$	6,279	$	2,800
Wholesale Operations		77,613		193,119		81,000
Specialty Retail		200		14,334		200
	$	80,613	$	213,732	$	84,000

Famous Footwear

The impairment of goodwill during the fourth quarter of 2008, as described below, resulted in a decline in goodwill and intangible assets for the Famous Footwear segment from August 2, 2008 to January 31, 2009 and August 1, 2009.

Wholesale Operations

The significant decline in the goodwill and intangible assets of the Wholesale Operations segment from August 2, 2008 to January 31, 2009 and August 1, 2009 was primarily the result of the impairment of goodwill and intangible assets during the fourth quarter of 2008, as described below, and ongoing amortization of licensed and owned trademarks.

During the fourth quarter of 2008, the Company acquired goodwill of $3.8 million and an intangible asset related to an owned trademark of $16.8 million in connection with the consolidation of Edelman Shoe, Inc., which resulted in an increase in goodwill and intangible assets for the Wholesale Operations segment.

Specialty Retail

The decline in the goodwill and intangible assets of the Company’s Specialty Retail segment from August 2, 2008 to January 31, 2009 and August 1, 2009 was primarily due to an impairment of goodwill (described below) and changes in the Canadian dollar exchange rate, partially offset by an additional investment in Shoes.com of $3.6 million during the fourth quarter of 2008.

Impairment Charges

Goodwill Impairment

As a result of the difficult market conditions and industry trends, and the resulting decline in the market price of the Company’s common stock at the end of 2008, the Company performed an impairment test as of January 31, 2009 and concluded that its entire goodwill balance of $140.9 million was impaired. As a result, the Company recorded a non-cash goodwill impairment charge of $140.9 million in the fourth quarter of 2008.

Intangible Asset Impairment

Due to declines experienced in the private label business, the Company performed an impairment test as of January 31, 2009 and determined that the Company’s private label customer relationships acquired during the Bennett Footwear Holdings, LLC (“Bennett”) acquisition during 2005 were impaired. As a result, the Company recorded a non-cash impairment charge of $8.2 million in the fourth quarter of 2008.

In total, during the fourth quarter of 2008, the Company recorded non-cash impairment charges for goodwill and intangible assets of $149.2 million ($119.2 million on an after-tax basis, or $2.87 per diluted share). The Company’s Wholesale Operations, Specialty Retail and Famous Footwear segments incurred charges of $120.8 million, $16.6 million and $3.5 million, respectively, related to the impairment of goodwill and its Wholesale Operations segment incurred $8.2 million in impairment charges for intangible assets. For the Wholesale Operations segment, the goodwill impaired primarily related to goodwill associated with the acquisition of Bennett. The goodwill impaired for the Company’s Specialty Retail and Famous Footwear segments were primarily related to goodwill associated with the acquisition of Shoes.com and goodwill associated with the acquisition of retail stores, respectively.

Note 8 Share-Based Compensation

During the second quarter of 2009, the Company did not grant any stock options. All 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. 

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The Company did not grant any performance share awards during the second quarter of 2009. 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 granted 4,000 restricted shares to directors with a weighted-average grant date fair value of $7.75 per share during the second quarter of 2009. The restricted shares granted vest in one year and compensation expense will be recognized on a straight-line basis over the one-year period.

The Company recognized share-based compensation expense (income) of $0.6 million and $(0.3) million during the thirteen weeks and $1.9 million and $(0.4) million during the twenty-six weeks ended August 1, 2009 and August 2, 2008, respectively. Income was recognized during 2008 as a result of reductions in expected payout percentages in connection with the Company’s stock performance plans granted in 2006, 2007 and 2008.

The Company issued 7,240 shares and 600,354 shares of common stock during the thirteen weeks and twenty-six weeks ended August 1, 2009, respectively, for restricted stock grants and directors’ fees. During the thirteen weeks and twenty-six weeks ended August 1, 2009, the Company cancelled 45,876 shares and 53,189 shares, respectively, of common stock as a result of forfeitures of restricted stock awards.

Note 9 Retirement and Other Benefit Plans

The following tables set 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)	August 1, 2009			August 2, 2008			August 1, 2009			August 2, 2008
Service cost	$	1,683		$	1,852		$	–		$	–
Interest cost		2,783			2,660			50			79
Expected return on assets		(4,878	)		(4,672	)		–			–
Settlement cost		52			69			–			–
Special termination benefits		–			3			–			–
Amortization of:
Actuarial loss (gain)		29			53			(21	)		(5	)
Prior service income		–			(86	)		–			–
Net transition asset		(34	)		(38	)		–			–
Total net periodic benefit (income) cost	$	(365	)	$	(159	)	$	29		$	74

	Pension Benefits						Other Postretirement Benefits
	Twenty-six Weeks Ended						Twenty-six Weeks Ended
($ thousands)	August 1, 2009			August 2, 2008			August 1, 2009			August 2, 2008
Service cost	$	3,393		$	3,987		$	–		$	–
Interest cost		5,779			5,453			109			129
Expected return on assets		(9,757	)		(9,379	)		–			–
Settlement cost		127			139			–			–
Special termination benefits		–			6			–			–
Amortization of:
Actuarial loss (gain)		56			117			(42	)		(5	)
Prior service income		(6	)		(11	)		–			–
Net transition asset		(65	)		(76	)		–			–
Total net periodic benefit (income) cost	$	(473	)	$	236		$	67		$	124

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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 August 1, 2009.

At August 1, 2009, the Company had $47.5 million in borrowings outstanding and $11.8 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $320.7 million as of August 1, 2009.

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 are callable any time on or after May 1, 2009, at specified redemption prices plus accrued and unpaid interest. The Senior Notes also contain certain other covenants and restrictions which 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 August 1, 2009, 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.

15

Derivative 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 August 2010. 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 second quarter and first half of 2009 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 (loss) income and reclassified to earnings in the period that the hedged transaction is recognized in earnings.

As of August 1, 2009, the Company had forward contracts maturing at various dates through August 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  August 1, 2009 (1)
Currency
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)	$	14,182
Chinese yuan		10,264
Euro		4,564
Japanese yen		1,793
New Taiwanese dollars		1,242
Other currencies		628
	$	32,673
(1) All currencies contain various maturity dates through 2010

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

	Asset Derivatives			Liability Derivatives
($ in thousands)	Balance Sheet Location		Fair Value	Balance Sheet Location	Fair Value
Derivatives designated as hedging    instruments under SFAS No. 133:
Foreign exchange forward contracts	Prepaid expenses and other current assets	$	276	Accrued expenses	$	1,318

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

						Amount of Gain
($ in thousands)	Amount of Loss					Reclassified from
	Recognized in OCI on				Location of Gain/(Loss)	Accumulated OCI into
Derivatives in	Derivatives				Reclassified from	Earnings
SFAS No. 133 Cash Flow	Thirteen Weeks Ended				Accumulated OCI into	Thirteen Weeks Ended
Hedging Relationships	August 1, 2009				Earnings	August 1, 2009 (1)
Foreign exchange forward contracts		$	(113	)	Net sales		$	48
Foreign exchange forward contracts			(1,085	)	Cost of goods sold			12
Foreign exchange forward contracts			(381	)	Selling and administrative expenses			153
Foreign exchange forward contracts			(17	)	Interest expense			–

(1)   For the thirteen weeks ended August 1, 2009, the Company recorded in the condensed consolidated statement of earnings an immaterial amount of ineffectiveness from cash flow hedges.

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

						Amount of Gain
($ in thousands)	Amount of Loss					Reclassified from
	Recognized in OCI on				Location of Gain/(Loss)	Accumulated OCI into
Derivatives in	Derivatives				Reclassified from	Earnings
SFAS No. 133 Cash Flow	Twenty-six Weeks Ended				Accumulated OCI into	Twenty-six Weeks Ended
Hedging Relationships	August 1, 2009				Earnings	August 1, 2009 (1)
Foreign exchange forward contracts		$	(8	)	Net sales		$	45
Foreign exchange forward contracts			(1,430	)	Cost of goods sold			12
Foreign exchange forward contracts			(322	)	Selling and administrative expenses			131
Foreign exchange forward contracts			(32	)	Interest expense			–

(1)   For the twenty-six weeks ended August 1, 2009, the Company recorded in the condensed consolidated statement of earnings an immaterial amount of ineffectiveness from cash flow hedges.

All but an immaterial portion of the gains and losses currently included within accumulated other comprehensive (loss) income associated with our foreign exchange forward contracts is expected to be reclassified into our net (loss) earnings within the next 12 months. Additional information related to the Company’s derivative financial instruments are disclosed within Note 2 and Note 12 to the condensed consolidated financial statements.

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Note 12 Fair Value Measurements

Fair Value Hierarchy

SFAS No. 157 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 SFAS No. 157, 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 in accordance with SFAS No. 157, 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 the Company’s short-term investment activities is to preserve its capital for the purpose of funding operations and it does not enter into short-term investments 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”). In accordance with the provisions of EITF No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested (“EITF 97-14”), the liabilities of the Deferred Compensation Plan are presented in 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 2 and Note 11 to the condensed consolidated financial statements.

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The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at August 1, 2009, consistent with the fair value hierarchy provisions of SFAS No. 157.

				Fair Value Measurements
($ thousands)		Total			Level 1		Level 2			Level 3
Asset (Liability)
Cash equivalents – money market funds	$	14,500		$	14,500	$	–		$	–
Non-qualified deferred compensation plan assets		788			788		–			–
Derivative financial instruments, net		(1,042	)		–		(1,042	)		–

Store Impairment Charges

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), 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 as defined by SFAS No. 157. In accordance with the provisions of SFAS No. 144, long-lived store assets held and used with a carrying amount of $73.0 million were written down to their fair value, resulting in an impairment charge of $0.5 million, which was recorded within selling and administrative expenses for the thirteen weeks ended August 1, 2009. Of the $0.5 million impairment charge, $0.4 million related to the Famous Footwear segment and $0.1 million related to the Specialty Retail segment. Impairment charges of $2.1 million were recorded within selling and administrative expenses for the twenty-six weeks ended August 1, 2009, of which $2.0 million related to the Famous Footwear segment and $0.1 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:

	August 1, 2009					August 2, 2008			January 31, 2009
($ thousands)	Carrying Amount		Fair Value			Carrying Amount		Fair Value	Carrying Amount		Fair Value
Borrowings under revolving credit agreement	$	47,500	$	47,500	$	–	$	–	$	112,500	$	112,500
Senior Notes		150,000		143,813		150,000		147,750		150,000		116,250

The fair value of borrowings under the revolving credit agreement approximate 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.

The Sam Edelman brand was launched in 2004 and is sold in department stores and independent and specialty stores 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.

19

As a part of the Company’s qualitative and quantitative analyses, it determined that Edelman Shoe is a variable interest entity (“VIE”) as defined by FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (“FIN 46(R)”), for which the Company is the primary beneficiary; therefore, the Company’s condensed consolidated financial statements include the accounts of Edelman Shoe beginning November 3, 2008. The Company determined that it is the primary beneficiary as it absorbs the majority of the entity's expected losses. Prior to consolidation, the Company accounted for the investment in accordance with the equity method. The Company’s variable interests in Edelman Shoe include the equity investments described above and amounts payable from Edelman Shoe to the Company. At August 1, 2009, Edelman Shoe had assets of approximately $8.9 million and liabilities of approximately $6.9 million. During the thirteen weeks and twenty-six weeks ended August 1, 2009, Edelman Shoe had net sales of approximately $14.3 million and $27.9 million, respectively.

Note 14 Related Party Transactions

Hongguo International Holdings

The Company entered into a joint venture agreement with a subsidiary of Hongguo International Holdings Limited (“Hongguo”) to begin marketing Naturalizer footwear in China in 2007. The Company is a 51% owner of the joint venture (“B&H Footwear”), with Hongguo owning the other 49%. B&H Footwear began operations in 2007 and distributes the Naturalizer brand in department store shops and free-standing stores in several of China’s largest cities. In addition, B&H Footwear sells Naturalizer footwear to Hongguo on a wholesale basis. Hongguo then sells Naturalizer products through retail stores in China. During the thirteen weeks and twenty-six weeks ended August 1, 2009, the Company, through its consolidated subsidiary, B&H Footwear, sold $0.3 million and $0.8 million, respectively, of Naturalizer footwear on a wholesale basis to Hongguo, with $1.2 million and $2.0 million in corresponding sales during the thirteen weeks and twenty-six weeks ended August 2, 2008.

Edelman Shoe, Inc.

A consolidated subsidiary of the Company sold footwear to Edelman Shoe on a wholesale basis, which was then sold by Edelman Shoe to department stores and independent specialty stores across the country.  During the thirteen weeks and twenty-six weeks ended August 2, 2008, this consolidated subsidiary of the Company sold $5.6 million and $6.0 million, respectively, of footwear on a wholesale basis to Edelman Shoe, prior to consolidation. Beginning in the fourth quarter of 2008, Edelman Shoe is included within the Company’s condensed consolidated financial statements. Accordingly, all intercompany sales activity is eliminated.

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 $16.7 million as of August 1, 2009. The Company expects to spend approximately $0.2 million in each of the next five years and $15.7 million in the aggregate thereafter related to the on-site remediation.

20

The cumulative expenditures for both on-site and off-site remediations through August 1, 2009 are $21.7 million. The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at August 1, 2009, is $8.1 million, of which $1.2 million is accrued within accrued expenses and $6.9 million is accrued within other liabilities. Of the total $8.1 million reserve, $5.0 million is for on-site remediation and $3.1 million is for off-site remediation. During the thirteen weeks and twenty-six weeks ended August 1, 2009 and August 2, 2008 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 over the next 15 years. The Company has an accrued liability of $1.9 million at August 1, 2009, related to these sites, which has been discounted at 6.4%. On an undiscounted basis, this liability would be $2.8 million. The Company expects to spend approximately $0.2 million in each of the next five years and $1.8 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 $10.0 million as of August 1, 2009, to complete the cleanup, maintenance and monitoring at all sites. Of the $10.0 million liability, $1.4 million is included in accrued expenses and $8.6 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

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 $2.2 million as of August 1, 2009. While management believes it has an appropriate reserve for this matter, the ultimate outcome and cost to the Company may vary.

At August 1, 2009, the Company was contingently liable for remaining lease commitments of approximately $2.0 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 owners 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 consolidating groups.

21

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF AUGUST 1, 2009

($ thousands)	Parent		Guarantors			Non-Guarantors			Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	–	$	7,428		$	29,846		$	–		$	37,274
Receivables		46,328		3,584			22,244			–			72,156
Inventories		79,319		443,301			4,188			–			526,808
Prepaid expenses and other current assets		26,705		12,725			2,447			–			41,877
Total current assets		152,352		467,038			58,725			–			678,115
Other assets		142,157		18,394			30,602			–			191,153
Property and equipment, net		26,474		125,333			3,743			–			155,550
Investment in subsidiaries		651,310		79,239			–			(730,549	)		–
Total assets	$	972,293	$	690,004		$	93,070		$	(730,549	)	$	1,024,818
Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	47,500	$	–		$	–		$	–		$	47,500
Trade accounts payable		36,021		176,029			21,741			–			233,791
Accrued expenses		65,897		61,338			6,417			–			133,652
Total current liabilities		149,418		237,367			28,158			–			414,943
Other liabilities
Long-term debt		150,000		–			–			–			150,000
Other liabilities		23,156		42,223			6,240			–			71,619
Intercompany payable (receivable)		270,136		(240,896	)		(29,240	)		–			–
Total other liabilities		443,292		(198,673	)		(23,000	)		–			221,619
Equity
Brown Shoe Company, Inc. shareholders’ equity		379,583		651,310			79,239			(730,549	)		379,583
Noncontrolling interests		–		–			8,673			–			8,673
Total equity		379,583		651,310			87,912			(730,549	)		388,256
Total liabilities and equity	$	972,293	$	690,004		$	93,070		$	(730,549	)	$	1,024,818

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THIRTEEN WEEKS ENDED AUGUST 1, 2009

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

22

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE TWENTY-SIX WEEKS ENDED AUGUST 1, 2009

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

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE TWENTY-SIX WEEKS ENDED AUGUST 1, 2009

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations		Total
Net cash provided by operating activities	$	12,231		$	14,475		$	23,005		$	–	$	49,711
Investing activities
Purchases of property and equipment		(1,133	)		(16,286	)		(492	)		–		(17,911	)
Capitalized software		(10,307	)		(582	)		(27	)		–		(10,916	)
Net cash used for investing activities		(11,440	)		(16,868	)		(519	)		–		(28,827	)
Financing activities
Borrowings under revolving credit agreement		394,900			–			–			–		394,900
Repayments under revolving credit agreement		(459,900	)		–			–			–		(459,900	)
Tax impact of share-based plans		(89	)		–			–			–		(89	)
Dividends paid		(6,006	)		–			–			–		(6,006	)
Intercompany financing		70,304			(13,598	)		(56,706	)		–		–
Net cash used for financing activities		(791	)		(13,598	)		(56,706	)		–		(71,095	)
Effect of exchange rate changes on cash		–			585			–			–		585
Decrease in cash and cash equivalents		–			(15,406	)		(34,220	)		–		(49,626	)
Cash and cash equivalents at beginning of period		–			22,834			64,066			–		86,900
Cash and cash equivalents at end of period	$	–		$	7,428		$	29,846		$	–	$	37,274

23

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JANUARY 31, 2009

($ thousands)	Parent		Guarantors			Non-Guarantors		Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	–	$	22,834		$	64,066	$	–		$	86,900
Receivables		43,705		4,417			36,130		–			84,252
Inventories		91,669		362,299			12,034		–			466,002
Prepaid expenses and other current assets		29,810		12,915			1,564		–			44,289
Total current assets		165,184		402,465			113,794		–			681,443
Other assets		143,011		12,951			31,175		–			187,137
Property and equipment, net		31,102		122,310			4,039		–			157,451
Investment in subsidiaries		647,979		68,062			–		(716,041	)		–
Total assets	$	987,276	$	605,788		$	149,008	$	(716,041	)	$	1,026,031
Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	112,500	$	–		$	–	$	–		$	112,500
Trade accounts payable		30,948		88,109			33,282		–			152,339
Accrued expenses		76,629		55,144			5,534		–			137,307
Total current liabilities		220,077		143,253			38,816		–			402,146
Other liabilities
Long-term debt		150,000		–			–		–			150,000
Other liabilities		23,263		41,854			6,554		–			71,671
Intercompany payable (receivable)		199,832		(227,298	)		27,466		–			–
Total other liabilities		373,095		(185,444	)		34,020		–			221,671
Equity
Brown Shoe Company, Inc. shareholders’ equity		394,104		647,979			68,062		(716,041	)		394,104
Noncontrolling interests		–		–			8,110		–			8,110
Total equity		394,104		647,979			76,172		(716,041	)		402,214
Total liabilities and equity	$	987,276	$	605,788		$	149,008	$	(716,041	)	$	1,026,031

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CONDENSED CONSOLIDATING BALANCE SHEET

AS OF AUGUST 2, 2008

($ thousands)	Parent		Guarantors			Non-Guarantors			Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	909	$	34,305		$	29,206		$	–		$	64,420
Receivables		66,566		3,609			38,736			–			108,911
Inventories		77,107		423,764			1,985			–			502,856
Prepaid expenses and other current assets		11,048		9,099			2,524			–			22,671
Total current assets		155,630		470,777			72,451			–			698,858
Other assets		276,274		30,183			11,044			–			317,501
Investment in nonconsolidated affiliate		–		–			6,274			–			6,274
Property and equipment, net		36,686		107,863			4,208			–			148,757
Investment in subsidiaries		673,628		76,271			–			(749,899	)		–
Total assets	$	1,142,218	$	685,094		$	93,977		$	(749,899	)	$	1,171,390
Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	–	$	–		$	–		$	–		$	–
Trade accounts payable		24,332		185,135			32,491			–			241,958
Accrued expenses		65,522		72,335			(4,190	)		–			133,667
Total current liabilities		89,854		257,470			28,301			–			375,625
Other liabilities
Long-term debt		150,000		–			–			–			150,000
Other liabilities		58,495		26,104			125			–			84,724
Intercompany payable (receivable)		284,542		(272,108	)		(12,434	)		–			–
Total other liabilities		493,037		(246,004	)		(12,309	)		–			234,724
Equity
Brown Shoe Company, Inc. shareholders’ equity		559,327		673,628			76,271			(749,899	)		559,327
Noncontrolling interests		–		–			1,714			–			1,714
Total equity		559,327		673,628			77,985			(749,899	)		561,041
Total liabilities and equity	$	1,142,218	$	685,094		$	93,977		$	(749,899	)	$	1,171,390

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE THIRTEEN WEEKS ENDED AUGUST 2, 2008

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net sales	$	134,608		$	395,042		$	82,950		$	(43,381	)	$	569,219
Cost of goods sold		104,366			216,216			68,521			(43,381	)		345,722
Gross profit		30,242			178,826			14,429			–			223,497
Selling and administrative expenses		33,554			162,900			11,509			–			207,963
Restructuring and other special charges, net		10,134			–			–			–			10,134
Equity in net loss of nonconsolidated affiliate		–			–			253			–			253
Equity in (earnings) loss of subsidiaries		(14,400	)		(2,874	)		–			17,274			–
Operating earnings (loss)		954			18,800			2,667			(17,274	)		5,147
Interest expense		(3,965	)		–			–			–			(3,965	)
Interest income		52			190			262			–			504
Intercompany interest income (expense)		1,368			(1,610	)		242			–			–
(Loss) earnings loss before income taxes		(1,591	)		17,380			3,171			(17,274	)		1,686
Income tax benefit (provision)		3,808			(2,980	)		(459	)		–			369
Net earnings (loss)	$	2,217		$	14,400		$	2,712		$	(17,274	)	$	2,055
Less: Net loss attributable to noncontrolling interests		–			–			(162	)		–			(162	)
Net earnings (loss) attributable to Brown Shoe Company, Inc.	$	2,217		$	14,400		$	2,874		$	(17,274	)	$	2,217

25

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE TWENTY-SIX WEEKS ENDED AUGUST 2, 2008

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net sales	$	281,467		$	777,121		$	147,768		$	(82,646	)	$	1,123,710
Cost of goods sold		211,864			431,154			123,379			(82,646	)		683,751
Gross profit		69,603			345,967			24,389			–			439,959
Selling and administrative expenses		73,299			328,474			17,365			–			419,138
Restructuring and other special charges, net		1,747			–			–			–			1,747
Equity in net loss of nonconsolidated affiliate		–			–			367			–			367
Equity in (earnings) loss of subsidiaries		(18,894	)		(7,605	)		–			26,499			–
Operating earnings (loss)		13,451			25,098			6,657			(26,499	)		18,707
Interest expense		(8,261	)		–			–			–			(8,261	)
Interest income		82			401			559			–			1,042
Intercompany interest income (expense)		2,863			(3,388	)		525			–			–
Earnings (loss) before income taxes		8,135			22,111			7,741			(26,499	)		11,488
Income tax benefit (provision)		1,277			(3,217	)		(671	)		–			(2,611	)
Net earnings (loss)	$	9,412			18,894			7,070			(26,499	)		8,877
Less: Net loss attributable to noncontrolling interests		–			–			(535	)		–			(535	)
Net earnings (loss) attributable to Brown Shoe Company, Inc.	$	9,412		$	18,894		$	7,605		$	(26,499	)	$	9,412

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE TWENTY-SIX WEEKS ENDED AUGUST 2, 2008

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations		Total
Net cash (used for) provided by operating activities	$	(6,708	)	$	54,821		$	15,795		$	–	$	63,908
Investing activities
Purchases of property and equipment		(10,103	)		(17,106	)		(616	)		–		(27,825	)
Capitalized software		(8,332	)		(1,654	)		(14	)		–		(10,000	)
Net cash used for investing activities		(18,435	)		(18,760	)		(630	)		–		(37,825	)
Financing activities
Borrowings under revolving credit agreement		177,000			–			–			–		177,000
Repayments under revolving credit agreement		(192,000	)		–			–			–		(192,000	)
Proceeds from stock options exercised		244			–			–			–		244
Tax benefit related to share-based plans		87			–			–			–		87
Dividends (paid) received		(5,927	)		7,105			(7,105	)		–		(5,927	)
Intercompany financing		46,648			(32,010	)		(14,638	)		–		–
Net cash provided by (used for) financing activities		26,052			(24,905	)		(21,743	)		–		(20,596	)
Effect of exchange rate changes on cash		–			(868	)		–			–		(868	)
Increase (decrease) in cash and cash equivalents		909			10,288			(6,578	)		–		4,619
Cash and cash equivalents at beginning of period		–			24,017			35,784			–		59,801
Cash and cash equivalents at end of period	$	909		$	34,305		$	29,206		$	–	$	64,420

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

OVERVIEW

Our retail and wholesale businesses continue to be impacted by reductions in consumer spending and the challenging economic climate. We remain focused on managing effectively the fundamentals that we control, including: managing our balance sheet, tightening control over expenses and continually evaluating our planned capital expenditures and store closures. We continue to make significant progress on our information technology initiatives and during the second quarter we opened our west coast retail distribution center in Tejon Ranch, California on-time and on-budget. By launching our largest branding initiative in history at Famous Footwear and making strategic inventory investments to capitalize on trend-right product during a peak shopping period, we believe we have positioned ourselves to more effectively compete during the back-to-school season.

The following is a summary of the financial highlights for the second quarter of 2009:

·   Consolidated net sales declined $57.6 million, or 10.1%, to $511.6 million for the second quarter of 2009, compared to $569.2 million for the second quarter of last year. Net sales of our Wholesale Operations, Famous Footwear and Specialty Retail segments decreased by $38.1 million, $12.1 million and $7.5 million, respectively.

·   Our consolidated operating loss was $5.0 million in the second quarter of 2009, compared to operating earnings of $5.1 million in the second quarter of last year.

·   The consolidated net loss attributable to Brown Shoe Company, Inc. was $4.2 million, or $0.10 per diluted share, in the second quarter of 2009, compared to consolidated net earnings attributable to Brown Shoe Company, Inc. of $2.2 million, or $0.05 per diluted share, in the second quarter of last year.

There were several items that impacted our second quarter operating results in 2009 and 2008 that should be considered in evaluating the comparability of our results. These items include:

·   Information technology initiatives – We incurred expenses of $2.0 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) during the second quarter of 2009, related to our integrated enterprise resource planning (“ERP”) information technology system that will replace select existing internally developed and certain other third-party applications, with $0.5 million ($0.3 million on an after-tax basis, or $0.01 per diluted share) in corresponding expenses during the second 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.

·   Headquarters consolidation – We incurred costs of $9.7 million ($5.9 million on an after-tax basis, or $0.14 per diluted share) during the second quarter of last year, related to the relocation and transition of our Famous Footwear division headquarters, with no corresponding charges during the second quarter of 2009. These costs included employee-related costs for severance, recruiting and relocation as well as facility and other costs. See Note 5 to the condensed consolidated financial statements for additional information related to these charges.

·   Cash-based employee incentive plans – Our selling and administrative expenses were higher by $1.1 million during the second quarter of 2009, as compared to the second quarter of last year, due to changes in our accruals for expected payments under our cash-based employee incentive plans.

Following is a summary of our operating results in the second quarter of 2009 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:

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·   Our Famous Footwear segment’s net sales decreased 3.7% to $314.1 million in the second quarter of 2009, compared to $326.2 million in the second quarter of last year. Same-store sales decreased 6.7% during the second quarter of 2009, reflecting lower traffic levels in our stores as a result of the weak consumer environment. An increase in store count partially offset the same-store sales decline. We had an operating loss of $0.8 million in the second quarter of 2009, compared to operating earnings of $11.3 million in the second quarter of last year, driven by lower net sales and gross profit rate and higher retail facilities expenses, partially offset by a decline in marketing expenses, due to a shift in the timing of expenses as a result of a later back-to-school, and other administrative expenses.

·   Our Wholesale Operations segment’s net sales decreased 21.1% to $142.0 million in the second quarter of 2009, compared to $180.1 million in the second quarter of last year. The challenging retail environment continued to soften demand for most of our brands. Although we had strong sales growth in our Sam Edelman (Edelman Shoe, Inc. was first consolidated during the fourth quarter of 2008) and Carlos by Carlos Santana divisions as well as initial sales of Fergie/Fergalicious and Vera Wang Lavender divisions, this growth could not offset sales declines from our other divisions including Women’s Specialty (composed of private brands and private label business), Dr. Scholl’s, Franco Sarto, Children’s and Specialty Athletic, Etienne Aigner and LifeStride. An increased mix of higher-margin branded sales accompanied by an increased mix of our wholesale brands being sold through our retail channels led to a higher gross profit rate. Operating earnings decreased to $7.9 million in the second quarter of 2009, compared to $11.6 million in the second quarter of last year, as a result of lower net sales, partially offset by an increase in gross profit rate and a decline in selling and administrative expenses. As a percent of net sales, operating earnings decreased to 5.5% in the second quarter of 2009, compared to 6.4% in the second quarter of last year.

·   Our Specialty Retail segment’s net sales decreased 12.0% to $55.5 million in the second quarter of 2009, compared to $63.0 million in the second quarter of last year. Lower net sales at Shoes.com, a decline in the Canadian dollar exchange rate, a same-store sales decline of 3.8% in our retail stores and a decline in store count led to an overall decrease in our net sales. We incurred an operating loss of $4.3 million in the second quarter of 2009, compared to an operating loss of $3.1 million in the second quarter of last year. The higher operating loss was primarily a result of lower net sales and a decline in the gross profit rate in our retail stores due to increased promotional activity, partially offset by a decline in our selling and administrative expenses.

Our debt-to-capital ratio, the ratio of our debt obligations to the sum of our debt obligations and equity, increased to 33.7% at August 1, 2009, compared to 21.1% at August 2, 2008, primarily due to a decline in total Brown Shoe Company, Inc. shareholders’ equity as a result of the net loss attributable to Brown Shoe Company, Inc. in 2008 and the first half of 2009 and our $47.5 million increase in borrowings under our revolving credit agreement. Our debt-to-capital ratio decreased from 39.5% at January 31, 2009 primarily due to the $65.0 million decline in borrowings under our revolving credit agreement. Our current ratio, the relationship of current assets to current liabilities, was 1.63 to 1 at August 1, 2009, compared to 1.69 to 1 at January 31, 2009 and 1.86 to 1 at August 2, 2008. Inventories at August 1, 2009 were $526.8 million, up from $502.9 million at the end of the second quarter last year, primarily due to an increase in our Famous Footwear inventories due to strategic pull-forward of receipts for key, on-trend product in order to be well positioned for the back-to-school season and an increase in store count as well as an increase in our Wholesale Operations inventories resulting from the consolidation of Edelman Shoe, Inc. Average inventories on a per store basis at Famous Footwear increased 3.2% in the quarter, while at the same time the division improved its aged-inventory position.

Recent Developments

Information Technology Initiatives

During 2008, we announced plans to implement an integrated ERP information technology system provided by third-party vendors. The ERP information technology system will replace select existing internally developed and certain other third-party applications, and is expected to support our business model. We anticipate the implementation will enhance our profitability and deliver increased shareholder value through improved management and execution of our business operations, financial systems, supply chain efficiency and planning and employee productivity. The phased implementation began during the second quarter of 2008 and is expected to continue through 2011. We incurred expenses of $2.0 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) and $4.6 million ($3.0 million on an after-tax basis, or $0.07 per diluted share) during the second quarter and first half of 2009, respectively. We incurred expenses of $0.5 million ($0.3 million on an after-tax basis, or $0.01 per diluted share) during the second quarter and first half of 2008. We incurred $3.7 million ($2.4 million on an after-tax basis, or $0.06 per diluted share) during the full year of 2008 related to these initiatives.

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Outlook for the Remainder of 2009

Looking ahead, we expect that we will return to profitability in the third and fourth quarters of 2009. We anticipate that net sales will be flat to down slightly in the second half of 2009, but we expect to generate positive operating earnings in the second half of 2009 as compared to the second half of 2008. We expect that our retail business will experience a decline in same-store sales during the second half of 2009. For the full year of 2009, we are currently planning to open 54 new Famous Footwear stores, while closing 55 to 70 stores. For our wholesale business, we expect a net sales decline in the third quarter of 2009 with an offsetting increase in the fourth quarter of 2009. We expect a decline in sales of our existing brands and continued decline in sales from our private label business, partially offset by growth in our new brands and channels of distribution. We believe that our brands are well positioned in the marketplace and we will continue to focus on our liquidity and capital management, balance sheet management, expense disciplines and investment in brands and other portions of our business that are expected to drive our future growth and provide the foundation for future success.

Following are the consolidated results and the results by segment for the thirteen weeks and twenty-six weeks ended August 1, 2009 and August 2, 2008:

CONSOLIDATED RESULTS

	Thirteen Weeks Ended								Twenty-six Weeks Ended
	August 1, 2009				August 2, 2008				August 1, 2009				August 2, 2008
($ millions)				% of Net Sales				% of Net Sales				% of Net Sales				% of Net  Sales
Net sales	$	511.6		100.0%	$	569.2		100.0%	$	1,050.4		100.0%	$	1,123.7		100.0%
Cost of goods sold		308.0		60.2%		345.7		60.7%		638.6		60.8%		683.7		60.8%
Gross profit		203.6		39.8%		223.5		39.3%		411.8		39.2%		440.0		39.2%
Selling and administrative    expenses		206.6		40.4%		208.0		36.5%		419.3		40.0%		419.1		37.3%
Restructuring and other special charges, net		2.0		0.4%		10.1		1.9%		4.6		0.4%		1.8		0.2%
Equity in net loss of    nonconsolidated affiliate		–		–		0.3		0.0%		–		–		0.4		0.0%
Operating (loss) earnings		(5.0	)	(1.0)%		5.1		0.9%		(12.1	)	(1.2)%		18.7		1.7%
Interest expense		(4.9	)	(0.9)%		(3.9	)	(0.7)%		(10.2	)	(0.9)%		(8.2	)	(0.8)%
Interest income		0.2		0.0%		0.5		0.1%		0.3		0.0%		1.0		0.1%
(Loss) earnings before    income taxes		(9.7	)	(1.9)%		1.7		0.3%		(22.0	)	(2.1)%		11.5		1.0%
Income tax benefit    (provision)		5.5		1.1%		0.4		0.1%		10.7		1.0%		(2.6	)	(0.2)%
Net (loss) earnings		(4.2	)	(0.8)%		2.1		0.4%		(11.3	)	(1.1)%		8.9		0.8%
Less: Net earnings (loss) attributable to noncontrolling interests		–		–		(0.1	)	0.0%		0.5		0.0%		(0.5	)	0.0%
Net (loss) earnings attributable to Brown Shoe Company, Inc.	$	(4.2	)	(0.8)%	$	2.2		0.4%	$	(11.8	)	(1.1)%	$	9.4		0.8%

Net Sales

Net sales decreased $57.6 million, or 10.1%, to $511.6 million in the second quarter of 2009, compared to $569.2 million in the second quarter of last year. All segments were impacted by the challenging consumer environment. The largest decline came from our Wholesale Operations segment, which reported a $38.1 million decline, primarily related to retailers reducing inventory levels across our channels of distribution in response to weak consumer spending as well as the continued decline in our private label business. Our Famous Footwear segment reported a $12.1 million decline in net sales, reflecting a 6.7% same-store sales decrease, partially offset by a higher store count in the current period. The net sales of our Specialty Retail segment declined by $7.5 million, due to lower net sales at Shoes.com, a decline in the Canadian dollar exchange rate, a same-store sales decline of 3.8% in our retail stores and a lower store count.

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Net sales decreased $73.3 million, or 6.5%, to $1,050.4 million in the first half of 2009, compared to $1,123.7 million in the first half of last year. The largest decline came from our Wholesale Operations segment, which reported a $46.8 million decline, as a result of the same issues described above for the second quarter. Our Famous Footwear segment’s net sales decreased by $13.3 million, reflecting a same-store sales decline of 5.9%, partially offset by a higher store count in the current period. The net sales of our Specialty Retail segment declined by $13.2 million, due to a reduction in net sales at Shoes.com, a decline in the Canadian dollar exchange rate, a same-store sales decline of 4.9% in our retail stores, partially offset by an increase in net sales from our net new and closed stores.

Gross Profit

Gross profit decreased $19.9 million, or 8.9%, to $203.6 million for the second quarter of 2009, compared to $223.5 million in the second quarter of last year as a result of lower net sales, partially offset by an increase in our gross profit rate. As a percent of net sales, our gross profit increased to 39.8% in the second quarter of 2009 from 39.3% in the second quarter of last year. The increase in our gross profit rate was primarily driven by our Wholesale Operations segment as a result of an increased mix of higher-margin branded sales accompanied by an increased mix of our wholesale brands being sold through our retail channels. An increase in mix of the Company’s retail business, which generates a higher gross profit rate than wholesale also contributed to the increase in gross profit rate. Increased promotional activity in our Famous Footwear and Specialty Retail stores partially offset the increase in our gross profit rate.

Gross profit decreased $28.2 million, or 6.4%, to $411.8 million for the first half of 2009, compared to $440.0 million in the first half of last year due to a decline in net sales. As a percent of net sales, our gross profit was 39.2% in the first half of 2009, consistent with the first half of last year.

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 decreased $1.4 million, or 0.6%, to $206.6 million for the second quarter of 2009, compared to $208.0 million in the second quarter of last year, driven primarily by a decrease in marketing and selling expenses and other various expenses as a result of our expense and capital containment initiatives, partially offset by an increase in retail facilities, warehousing and shipping expenses. The decline in marketing expenses is primarily due to a shift in the timing of expenses as a result of the later back-to-school. Also, we experienced higher expenses of $1.1 million in the second quarter of 2009 related to our cash-based employee incentive plans, due to changes in our accruals for expected payments under our cash-based employee incentive plans. As a percent of net sales, selling and administrative expenses increased to 40.4% in the second quarter of 2009 from 36.5% in the second quarter of last year, reflecting the de-leveraging of the expense base over lower net sales volume.

Selling and administrative expenses increased $0.2 million, to $419.3 million for the first half of 2009, compared to $419.1 million in the first half of last year. We experienced higher retail facilities and direct selling costs due to a higher store count in our retail segments and higher warehousing and shipping expenses. Also, we incurred higher expenses of $2.3 million in the first half of 2009 related to share-based incentive plans, reflecting higher anticipated payouts under these plans. This was partially offset by a decline in our marketing and other selling expenses as well as a decline in other various expenses as a result of our expense and capital containment initiatives. The decline in marketing expenses is primarily due to a shift in the timing of expenses as a result of the later back-to-school. As a percent of net sales, selling and administrative expenses increased to 40.0% in the first half of 2009 from 37.3% in the first half of last year due primarily to de-leveraging of the expense base over lower net sales volume.

Restructuring and Other Special Charges, Net

We recorded restructuring and other special charges, net of $2.0 million for the second quarter of 2009, compared to $10.1 million in the second quarter of last year as a result of several factors, as follows (see Note 5 to the condensed consolidated financial statements for additional information related to these charges and recoveries):

·   Information technology initiatives – We incurred expenses of $2.0 million during the second quarter of 2009, related to our integrated ERP information technology system, with $0.5 million in corresponding expenses during the second quarter of last year.

·   Headquarters consolidation – We incurred costs of $9.7 million during the second quarter of last year, related to the relocation and transition of our Famous Footwear division headquarters, with no corresponding charges during the second quarter of 2009.

30

We recorded restructuring and other special charges, net of $4.6 million for the first half of 2009, compared to $1.8 million in the first half of last year as a result of several factors, as follows (see Note 5 to the condensed consolidated financial statements for additional information related to these charges and recoveries):

·   Information technology initiatives – We incurred expenses of $4.6 million during the first half of 2009, related to our integrated ERP information technology system, with $0.5 million in corresponding expenses during the first half of last year.

·   Environmental insurance recoveries and charges – During the first half of last year, we recorded income related to environmental insurance recoveries, net of associated fees and costs, of $10.2 million, with no corresponding recoveries during the first half of 2009.

·   Headquarters consolidation – We incurred charges of $11.4 million during the first half of last year, related to the relocation and transition of our Famous Footwear division headquarters, with no corresponding charges during the first half of 2009.

Equity in Net Loss of Nonconsolidated Affiliate

Since the time of our initial investment in Edelman Shoe, Inc. (“Edelman Shoe”) during 2007, we recorded our portion of Edelman Shoe’s operating results into our financial statements based upon the equity method of accounting, as equity in net loss of nonconsolidated affiliate. We continued to record the results of Edelman Shoe using the equity method until November 3, 2008, when we purchased additional shares of Edelman Shoe. Since that date, the results of Edelman Shoe are fully consolidated into our financial statements, with any net earnings or loss related to the noncontrolling interests reflected in the line titled Less: Net earnings (loss) attributable to noncontrolling interests on our condensed consolidated statement of earnings.  See Note 13 and Note 14 to the condensed consolidated financial statements for additional information related to Edelman Shoe.

Operating (Loss) Earnings

We reported an operating loss of $5.0 million in the second quarter of 2009, compared to operating earnings of $5.1 million during the second quarter of last year due to the decline in net sales, partially offset by an increase in gross profit rate and a decrease in restructuring and other special charges, net and selling and administrative expenses, as described above.

We reported an operating loss of $12.1 million in the first half of 2009, compared to operating earnings of $18.7 million during the first half of last year due to the decline in net sales and the increase in restructuring and other special charges, net and selling and administrative expenses, as described above.

Interest Expense

Interest expense increased $1.0 million to $4.9 million in the second quarter of 2009, compared to $3.9 million in the second quarter of last year, primarily reflecting higher average borrowings under our revolving credit agreement.

Interest expense increased $2.0 million to $10.2 million in the first half of 2009, compared to $8.2 million in the first half of last year due to the same reason described above for the second quarter.

Income Tax Benefit (Provision)

Our consolidated effective tax rate was a benefit of 56.7% in the second quarter of 2009, compared to a benefit of 21.9% in the second quarter of last year. During the second quarter of 2009, we incurred a pre-tax loss in our domestic operations, which are generally subject to a combined tax rate of 35% to 39%. However, we generated pre-tax earnings in foreign jurisdictions, which generally have lower tax rates. The mix of a domestic loss and foreign earnings resulted in an overall effective tax benefit rate of 56.7% in the second quarter of 2009.

Our consolidated effective tax rate was a benefit of 48.7% in the first half of 2009, compared to a provision of 22.7% in the first half of last year due to the same reasons as described above.

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

We reported a net loss attributable to Brown Shoe Company, Inc. of $4.2 million during the second quarter of 2009, compared to net earnings attributable to Brown Shoe Company, Inc. of $2.2 million during the second quarter of last year as a result of the factors described above.

We reported a net loss attributable to Brown Shoe Company, Inc. of $11.8 million in the first half of 2009, compared to net earnings of $9.4 million in the first half of last year for the reasons discussed above.

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FAMOUS FOOTWEAR

	Thirteen Weeks Ended							Twenty-six Weeks Ended
	August 1, 2009				August 2, 2008			August 1, 2009			August 2, 2008
($ millions, except sales  per square foot)				% of Net Sales			% of Net Sales			% of Net Sales			% of Net  Sales
Operating Results
Net sales	$	314.1		100.0%	$	326.2	100.0%	$	631.7	100.0%	$	645.0		100.0%
Cost of goods sold		179.8		57.2%		180.5	55.3%		360.9	57.1%		362.2		56.2%
Gross profit		134.3		42.8%		145.7	44.7%		270.8	42.9%		282.8		43.8%
Selling and administrative expenses		135.1		43.1%		134.4	41.2%		268.6	42.6%		263.9		40.9%
Operating (loss) earnings	$	(0.8	)	(0.3)%	$	11.3	3.5%	$	2.2	0.3%	$	18.9		2.9%
Key Metrics
Same-store sales % change		(6.7)%				(2.9)%			(5.9)%			(5.1)%
Same-store sales $ change	$	(21.5)			$	(9.0)		$	(36.9)		$	(32.0)
Sales change from new and closed stores, net	$	9.4			$	19.1		$	23.6		$	35.6
Sales per square foot,    excluding e-commerce	$	39			$	42		$	78		$	83
Square footage (thousand sq. ft.)		8,091				7,822			8,091			7,822
Stores opened		13				30			52			67
Stores closed		12				3			23			14
Ending stores		1,167				1,127			1,167			1,127

Net Sales

Net sales decreased $12.1 million, or 3.7%, to $314.1 million in the second quarter of 2009, compared to $326.2 million in the second quarter of last year. Same-store sales decreased 6.7% during the second quarter of 2009, reflecting lower traffic levels in our stores as a result of the difficult consumer environment. A higher store count partially offset the same-store sales decline. During the second quarter of 2009, we opened 13 new stores and closed 12 stores, resulting in 1,167 stores and total square footage of 8.1 million at the end of the second quarter of 2009, compared to 1,127 stores and total square footage of 7.8 million at the end of the second quarter of last year. As a result of the same-store sales decline, sales per square foot decreased 7.7% to $39, compared to $42 in the second quarter last year. Our customer loyalty program, Rewards, continues to gain momentum, as approximately 61% of our net sales were made to our Rewards members in the second quarter of 2009, compared to 58% in the second quarter of last year.

Net sales decreased $13.3 million, or 2.1%, to $631.7 million in the first half of 2009, compared to $645.0 million in the first half of last year. Same-store sales decreased 5.9% for the first half of 2009 for the same reasons as those described above for the second quarter. Our same-store sales decline was partially offset by a higher store count. As a result of the same-store sales decline, sales per square foot decreased 6.9% to $78, compared to $83 in the first half of last year.

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 decreased $11.4 million, or 7.8%, to $134.3 million in the second quarter of 2009, compared to $145.7 million in the second quarter of last year. The decrease reflects the decline in net sales and gross profit rate. As a percent of net sales, our gross profit was 42.8% in the second quarter of 2009, compared to 44.7% in the second quarter of last year. The decrease in our gross profit rate was primarily a result of increased promotional activity as we sought to maintain market share during the quarter.

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Gross profit decreased $12.0 million, or 4.2%, to $270.8 million in the first half of 2009, compared to $282.8 million in the first half of last year, reflecting a decline in net sales and a lower gross profit rate. As a percent of net sales, our gross profit was 42.9% in the first half of 2009, down from 43.8% in the first half of last year due to the increased promotional activity.

Selling and Administrative Expenses

Selling and administrative expenses increased $0.7 million, or 0.5%, to $135.1 million for the second quarter of 2009, compared to $134.4 million in the second quarter of last year. The increase was primarily attributable to higher retail facilities expenses as a result of the increase in store count, partially offset by a decline in marketing expenses, due to a shift in the timing of expenses as a result of the later back-to-school, and other administrative expenses. As a percent of net sales, selling and administrative expenses have increased to 43.1% in the second quarter of 2009, compared to 41.2% in the second quarter of last year, reflecting the above named factors and the de-leveraging of our expense base over the lower net sales volume.

Selling and administrative expenses increased $4.7 million, or 1.8%, to $268.6 million for the first half of 2009, compared to $263.9 million in the first half of last year. The increase was primarily due to higher retail facilities and selling expenses, partially offset by lower marketing expenses, due to a shift in the timing of expenses as a result of the later back-to-school, and other administrative expenses. As a percentage of net sales, selling and administrative expenses increased to 42.6% in the first half of 2009 from 40.9% in the first half of last year, reflecting the above named factors and the de-leveraging of our expense base over lower net sales volume.

Operating (Loss) Earnings

Famous Footwear reported an operating loss of $0.8 million for the second quarter of 2009, compared to operating earnings of $11.3 million for the second quarter of last year, reflecting lower net sales and gross profit rate and higher selling and administrative expenses as described above.

Operating earnings decreased $16.7 million, or 88.4%, to $2.2 million for the first half of 2009, compared to $18.9 million in the first half of last year. The decrease in operating earnings was driven by our 5.9% same-store sales decline, a lower gross profit rate and higher retail facilities and selling expenses, partially offset by lower marketing expenses, due to a shift in the timing of expenses as a result of the later back-to-school, and other administrative expenses. As a percent of net sales, operating earnings declined to 0.3% in the first half of 2009, compared to 2.9% in the first half of last year.

WHOLESALE OPERATIONS

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	August 1, 2009			August 2, 2008			August 1, 2009			August 2, 2008
($ millions)			% of Net Sales			% of Net Sales			% of Net Sales			% of Net  Sales
Operating Results
Net sales	$	142.0	100.0%	$	180.1	100.0%	$	310.9	100.0%	$	357.7	100.0%
Cost of goods sold		95.7	67.4%		128.7	71.5%		215.2	69.2%		252.2	70.5%
Gross profit		46.3	32.6%		51.4	28.5%		95.7	30.8%		105.5	29.5%
Selling and administrative expenses		38.3	27.0%		39.5	22.0%		81.9	26.4%		84.8	23.7%
Restructuring and other special charges, net		0.1	0.1 %		–	–		–	–		–	–
Equity in net loss of    nonconsolidated affiliate		–	–		0.3	0.1%		–	–		0.4	0.1%
Operating earnings	$	7.9	5.5%	$	11.6	6.4%	$	13.8	4.4%	$	20.3	5.7%
Key Metrics
Unfilled order position at end of period	$	198.8		$	274.1

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Net Sales

Net sales decreased $38.1 million, or 21.1%, to $142.0 million in the second quarter of 2009, compared to $180.1 million in the second quarter of last year. The challenging retail environment softened demand for many of our brands as retailers reduced inventory levels across our channels of distribution in response to weak consumer spending as well as the continued decline in our private label business. We experienced sales declines from most of our brands, including primarily our Women’s Specialty (composed of private brands and private label business), Dr. Scholl’s, Franco Sarto, Children’s and Specialty Athletic, Etienne Aigner and LifeStride divisions. These declines were partially offset by sales growth in our Sam Edelman (Edelman Shoe, Inc. was first consolidated in the fourth quarter of 2008) and Carlos by Carlos Santana divisions as well as initial sales from our Fergie/Fergalicious and Vera Wang Lavender divisions. By channel of distribution, we experienced sales declines primarily from mass merchandisers and mid-tier retailers.

Net sales decreased $46.8 million, or 13.1%, to $310.9 million in the first half of 2009, compared to $357.7 million in the first half of last year. We experienced sales declines from most of our brands, including primarily our Women’s Specialty, Franco Sarto, Dr. Scholl’s, Children’s and Specialty Athletic and LifeStride divisions. Sales growth in our Sam Edelman (Edelman Shoe, Inc. was first consolidated in the fourth quarter of 2008) and Carlos by Carlos Santana divisions as well as initial sales from our Fergie/Fergalicious and Vera Wang Lavender divisions partially offset the declines. By channel of distribution, we experienced sales declines primarily from mass merchandisers.

Gross Profit

Gross profit decreased $5.1 million, or 9.9%, to $46.3 million in the second quarter of 2009, compared to $51.4 million in the second quarter of last year due to a decline in net sales, partially offset by an increase in gross profit rate. As a percent of net sales, our gross profit increased to 32.6% in the second quarter of 2009 from 28.5% in the second quarter of last year. The increase in gross profit rate was due primarily to an increased mix of higher-margin branded sales accompanied by an increased mix of our wholesale brands being sold through our retail channels.

Gross profit decreased $9.8 million, or 9.3%, to $95.7 million in the first half of 2009, compared to $105.5 million in the first half of last year. As a percent of net sales, our gross profit increased to 30.8% in the first half of 2009 from 29.5% in the first half of last year. The decrease in gross profit and the increase in gross profit rate were due to the same factors as described above for the second quarter.

Selling and Administrative Expenses

Selling and administrative expenses decreased $1.2 million, or 3.1%, to $38.3 million for the second quarter of 2009, compared to $39.5 million in the second quarter of last year, due primarily to a decline in other selling and marketing expenses, partially offset by an increase in expenses as a result of the consolidation of Edelman Shoe, Inc. during the fourth quarter of 2008. Also, we experienced higher expenses of $1.3 million in the second quarter of 2009 related to our cash-based employee incentive plans, due to changes in our accruals for expected payments under our cash-based employee incentive plans. As a percent of net sales, selling and administrative expenses increased to 27.0% in the second quarter of 2009, compared to 22.0% in the second quarter of last year, reflecting the de-leveraging of our expense base over lower net sales volume.

Selling and administrative expenses decreased $2.9 million, or 3.5%, to $81.9 million for the first half of 2009, compared to $84.8 million in the first half of last year, due primarily to a decline in general and administrative expenses as a result of a decrease in salaries and benefits resulting from our expense and capital containment initiatives as well as a decline in our other selling and marketing expenses. These declines were partially offset by an increase in expenses as a result of the consolidation of Edelman Shoe, Inc. during the fourth quarter of 2008. As a percent of net sales, selling and administrative expenses increased to 26.4% in the first half of 2009 from 23.7% in the first half of last year, reflecting the de-leveraging of our expense base over lower net sales volume.

Equity in Net Loss of Nonconsolidated Affiliate

Since the time of our initial investment in Edelman Shoe during 2007, we recorded our portion of Edelman Shoe’s operating results into our financial statements based upon the equity method of accounting, as equity in net loss of nonconsolidated affiliate. We continued to record the results of Edelman Shoe using the equity method until November 3, 2008, when we purchased additional shares of Edelman Shoe. Since that date, the results of Edelman Shoe are fully consolidated into our financial statements, with any net earnings or loss related to the noncontrolling interests reflected in the line titled Less: Net earnings (loss) attributable to noncontrolling interests on our condensed consolidated statement of earnings.

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Operating Earnings

Operating earnings decreased $3.7 million, or 32.0%, to $7.9 million for the second quarter of 2009, compared to $11.6 million in the second quarter of last year, reflecting lower net sales, partially offset by a higher gross profit rate and lower selling and administrative expenses. As a percent of net sales, operating earnings declined to 5.5% in the second quarter of 2009, compared to 6.4% in the second quarter of last year.

Operating earnings decreased $6.5 million, or 32.0%, to $13.8 million for the first half of 2009, compared to $20.3 million in the first half of last year due to the same factors that impacted the second quarter. As a percent of net sales, operating earnings declined to 4.4% in the first half of 2009, compared to 5.7% in the first half of last year.

SPECIALTY RETAIL

	Thirteen Weeks Ended								Twenty-six Weeks Ended
	August 1, 2009				August 2, 2008				August 1, 2009				August 2, 2008
($ millions, except sales per square foot)				% of Net Sales				% of Net Sales				% of Net Sales				% of Net  Sales
Operating Results
Net sales	$	55.5		100.0%	$	63.0		100.0%	$	107.8		100.0%	$	121.0		100.0%
Cost of goods sold		32.5		58.4%		36.6		58.1%		62.5		58.0%		69.3		57.2%
Gross profit		23.0		41.6%		26.4		41.9%		45.3		42.0%		51.7		42.8%
Selling and administrative expenses		27.3		49.4%		29.5		46.9%		55.8		51.8%		59.5		49.2%
Operating loss	$	(4.3	)	(7.8)%	$	(3.1	)	(5.0)%	$	(10.5	)	(9.8)%	$	(7.8	)	(6.4)%
Key Metrics
Same-store sales % change		(3.8)%				(0.2)%				(4.9)%				(3.0)%
Same-store sales $ change	$	(1.6)			$	(0.1)			$	(3.8)			$	(2.5)
Sales change from new and closed stores, net	$	(0.2)			$	0.6			$	0.6			$	(0.2)
Impact of changes in Canadian exchange rate on sales	$	(1.9)			$	1.1			$	(4.8)			$	3.1
Sales change of      e-commerce subsidiary	$	(3.8)			$	(0.6)			$	(5.2)			$	(1.7)
Sales per square foot, excluding e-commerce	$	83			$	93			$	152			$	175
Square footage (thousand sq. ft.)		467				470				467				470
Stores opened		1				6				2				14
Stores closed		11				2				19				3
Ending stores		289				295				289				295

Net Sales

Net sales decreased $7.5 million, or 12.0%, to $55.5 million in the second quarter of 2009, compared to $63.0 million in the second quarter of last year. Lower net sales at Shoes.com, a decline in the Canadian dollar exchange rate, a same-store sales decline of 3.8% in our retail stores and a lower store count led to an overall decrease in our level of net sales. The net sales of Shoes.com decreased $3.8 million, or 22.9%, to $12.9 million in the second quarter of 2009, compared to $16.8 million in the second quarter of last year, reflecting a decline in site visits as a result of the challenging consumer environment. We opened one new store and closed 11 (including three Naturalizer stores in China) during the second quarter of 2009, resulting in a total of 289 stores (including 13 Naturalizer stores in China) and total square footage of 467,000 at the end of the second quarter of 2009, compared to 295 stores (including 15 Naturalizer stores in China) and total square footage of 470,000 at the end of the second quarter of last year. As a result of the decline in Canadian dollar exchange rate and same-store sales, sales per square foot decreased 10.6% to $83, compared to $93 in the second quarter of last year.

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Net sales decreased $13.2 million, or 10.9%, to $107.8 million in the first half of 2009, compared to $121.0 million in the first half of last year. The decrease is due to lower net sales at Shoes.com, a decline in the Canadian dollar exchange rate and a decline in same-store sales of 4.9% in our retail stores, partially offset by an increase in net sales from our net new and closed stores. Net sales at Shoes.com decreased $5.2 million, or 15.7%, to $27.9 million in the first half of 2009, compared to $33.1 million in the first half of last year. Sales per square foot decreased 13.0% to $152, compared to $175 in the first half of last year as a result of the decline in the Canadian dollar exchange rate and same-store sales.

Gross Profit

Gross profit decreased $3.4 million, or 12.7%, to $23.0 million in the second quarter of 2009, compared to $26.4 million in the second quarter of last year, reflecting lower net sales and gross profit rate. As a percent of net sales, our gross profit decreased to 41.6% in the second quarter of 2009 from 41.9% in the second quarter of last year. The decrease in our overall rate was primarily due to increased promotional activity in our retail stores to drive sales. An increase in gross profit rate for Shoes.com as a result of more targeted promotions and lower freight expenses partially offset the decline in our overall gross profit rate.

Gross profit decreased $6.4 million, or 12.4%, to $45.3 million in the first half of 2009, compared to $51.7 million in the first half of last year, reflecting lower net sales and gross profit rate. As a percentage of net sales, our gross profit decreased to 42.0% in the first half of 2009 from 42.8% in the first half of last year due to the same reasons described above for the second quarter.

Selling and Administrative Expenses

Selling and administrative expenses decreased $2.2 million, or 7.4%, to $27.3 million for the second quarter of 2009, compared to $29.5 million in the second quarter of last year due primarily to a decline in marketing and selling expenses. A decline in the Canadian dollar exchange rate also impacted our results for the second quarter. As a percent of net sales, selling and administrative expenses increased to 49.4% in the second quarter of 2009 from 46.9% in the second quarter of last year, reflecting de-leveraging of the expense base over lower net sales volume.

Selling and administrative expenses decreased $3.7 million, or 6.2%, to $55.8 million for first half of 2009, compared to $59.5 million in the first half of last year. The decrease was primarily due to a decline in marketing and selling expenses. A decline in the Canadian dollar exchange rate also impacted our results for first half of the year. As a percent of net sales, selling and administrative expenses increased to 51.8% in the first half of 2009 from 49.2% in the first half of last year, reflecting de-leveraging of the expense base over lower net sales.

Operating Loss

Specialty Retail reported an operating loss of $4.3 million in the second quarter of 2009, compared to an operating loss of $3.1 million in the second quarter of last year, due primarily to lower net sales and a decline in the gross profit rate, partially offset by lower selling and administrative expenses.

Specialty Retail reported an operating loss of $10.5 million in the first half of 2009, compared to an operating loss of $7.8 million in the first half of last year as a result of the above listed factors.

OTHER SEGMENT

The Other segment includes unallocated corporate administrative expenses and other costs and recoveries. The segment reported costs of $7.7 million in the second quarter of 2009, compared to costs of $14.6 million in the second quarter of last year. There were several factors impacting the $6.9 million variance, as follows:

·   Information technology initiatives – We incurred expenses of $1.9 million during the second quarter of 2009, related to our integrated ERP information technology system, with $0.5 million in corresponding expenses during the second quarter of last year.

·   Headquarters consolidation – We incurred costs of $9.7 million during the second quarter of last year, related to the relocation and transition of our Famous Footwear division headquarters, with no corresponding charges during the second quarter of 2009.

Unallocated corporate administrative expenses and other costs, net of recoveries, were $17.6 million in the first half of 2009, compared to cost of $12.6 million in the first half of last year. There were several factors impacting the $5.0 million variance, as follows:

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·   Information technology initiatives – We incurred expenses of $4.6 million during the first half of 2009, related to our integrated ERP information technology system, with $0.5 million in corresponding expenses during the first half of last year.

·   Headquarters consolidation – We incurred costs of $11.4 million during the first half of last year, related to the relocation and transition of our Famous Footwear division headquarters, with no corresponding charges during the first half of 2009.

·   Environmental insurance recoveries and charges – During the first half of last year, we recorded income related to environmental insurance recoveries, net of associated fees and costs, of $10.2 million, with no corresponding recoveries during the first half of 2009.

·   Share-based incentive plan – We experienced higher expenses of $1.5 million during the first half of 2009 related to share-based incentive plans, reflecting higher anticipated payouts under these plans.

LIQUIDITY AND CAPITAL RESOURCES

Borrowings

($ millions)	August 1, 2009		August 2, 2008		January 31, 2009
Borrowings under revolving credit agreement	$	47.5	$	–	$	112.5
Senior notes		150.0		150.0		150.0
Total debt	$	197.5	$	150.0	$	262.5

Total debt obligations increased $47.5 million to $197.5 million at August 1, 2009, compared to $150.0 million at August 2, 2008, due to higher borrowings under our revolving credit agreement. Total debt obligations decreased $65.0 million from $262.5 million at January 31, 2009, due to lower borrowings under our revolving credit agreement. Interest expense in the second quarter of 2009 increased $1.0 million to $4.9 million, compared to $3.9 million in the second quarter of last year. Interest expense in the first half of 2009 increased $2.0 million to $10.2 million, compared to $8.2 million in the first half of last year. These increases were due primarily to higher 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 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 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 August 1, 2009.

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At August 1, 2009, we had $47.5 million in borrowings outstanding and $11.8 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $320.7 million at the end of the second quarter of 2009.

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 are callable any time on or after May 1, 2009, at specified redemption prices plus accrued and unpaid interest. The Senior Notes also contain certain other covenants and restrictions which 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 August 1, 2009, we were in compliance with all covenants relating to the Senior Notes.

Working Capital and Cash Flow

	Twenty-six Weeks Ended
($ millions)	August 1,  2009			August 2,  2008			Increase/ (Decrease)
Net cash provided by operating activities	$	49.7		$	63.9		$	(14.2	)
Net cash used for investing activities		(28.8	)		(37.8	)		9.0
Net cash used for financing activities		(71.1	)		(20.6	)		(50.5	)
Effect of exchange rate changes on cash		0.6			(0.9	)		1.5
(Decrease) increase in cash and cash equivalents	$	(49.6	)	$	4.6		$	(54.2	)

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

Cash provided by operating activities was lower by $14.2 million, reflecting several factors:

·   A decrease in the first half of 2009 in accrued expenses primarily due to accrued expense settlements related to our expense and capital containment plan and the relocation of the Famous Footwear division headquarters from Madison, Wisconsin to St. Louis, Missouri, compared to an increase last year primarily due to the relocation of the Famous Footwear division headquarters; and

·   A net loss in 2009 compared to net earnings in 2008.

Partially offset by,

·   A larger increase in trade accounts payable due to the timing and amount of purchases and payments to vendors;

·   A smaller increase in our inventory balance due to the timing and amount of purchases; and

·   A larger decrease in our receivables balance due to a decline in sales and the timing of receipts.

Cash used for investing activities was lower by $9.0 million as a result of lower purchases of property and equipment primarily related to our new and remodeled stores, distribution centers and headquarters over the first half of last year. The decline was partially offset by higher capitalization of software primarily related to our information technology initiatives during the first half of 2009 compared to last year. At our retail divisions, we opened 54 stores during the first half of 2009 compared to 81 in the first half of 2008. In 2009, we expect purchases of property and equipment and capitalized software of approximately $53 million to $55 million, primarily related to our information technology initiatives, new stores and remodels, logistics network and general infrastructure.

Cash used for financing activities was higher by $50.5 million primarily due to higher payments on borrowings under our revolving credit agreement.

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

	August 1, 2009	August 2, 2008	January 31, 2009
Working capital ($ millions)	$ 263.2	$ 323.2	$ 279.3
Current ratio	1.63:1	1.86:1	1.69:1
Total debt as a percentage of total capitalization	33.7%	21.1%	39.5%

Working capital at August 1, 2009, was $263.2 million, which was $16.1 million lower than at January 31, 2009 and $60.0 million lower than at August 2, 2008. Our current ratio, the relationship of current assets to current liabilities, decreased to 1.63 to 1 compared to 1.69 to 1 at January 31, 2009 and 1.86 to 1 at August 2, 2008. The decrease compared to January 31, 2009 was primarily attributable to an increase in our trade accounts payable and a decline in our cash and cash equivalents, partially offset by a decline in our borrowings under our revolving credit agreement and an increase in our inventories. The decrease compared to August 2, 2008 was primarily attributable to higher borrowings under our revolving credit agreement and a decline in our receivables. Our debt-to-capital ratio, the ratio of our debt obligations to the sum of our debt obligations and equity, was 33.7% as of August 1, 2009, compared to 39.5% as of January 31, 2009 and 21.1% as of August 2, 2008. The decline from January 31, 2009 primarily reflected a decline in borrowings under our revolving credit agreement. The increase from August 2, 2008 was due to a decline in total Brown Shoe Company, Inc. shareholders’ equity as a result of our net loss attributable to Brown Shoe Company, Inc. in 2008 and the first half of 2009 and an increase in borrowings under our revolving credit agreement. At August 1, 2009, we had $37.3 million of cash and cash equivalents, most of which represents cash and cash equivalents of our Canadian and other foreign subsidiaries. As a result of recently issued IRS guidelines expanding the length of time that our parent company can borrow funds from foreign subsidiaries, Brown Shoe Company 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.

As described in Note 5 to the condensed consolidated financial statements, we announced plans during 2008 to implement an integrated ERP information technology system, relocate our Famous Footwear division headquarters from Madison, Wisconsin to St. Louis, Missouri and complete objectives related to our expense and capital containment initiatives. We also recently opened a new west coast distribution center for our retail operations. We have completed a number of the initiatives identified under these plans and have several yet to complete. We believe we have adequate liquidity and cash flow to complete these remaining projects.

We paid dividends of $0.07 per share in both the second quarter of 2009 and the second quarter of 2008. 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 August 1, 2009, we were contingently liable for remaining lease commitments of approximately $2.0 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 owners 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 other significant changes to our contractual obligations identified in our Annual Report on Form 10-K for the year ended January 31, 2009, other than the reduction of our obligations related to restructuring and expense and capital containment initiatives as a result of settlements during the first half of 2009 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).

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year. The adoption of new accounting pronouncements are 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 31, 2009.

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 business model; (v) intense competition within the footwear industry; (vi) compliance with applicable laws and standards with respect to lead content in paint and other product safety issues; (vii) rapidly changing fashion trends and purchasing patterns; (viii) customer concentration and increased consolidation in the retail industry; (ix) 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; (x) the Company's ability to attract and retain licensors and protect its intellectual property; (xi) the Company's ability to secure/exit leases on favorable terms; (xii) the Company's ability to maintain relationships with current suppliers; and (xiii) the Company’s ability to successfully execute its international growth strategy. 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 31, 2009, 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 31, 2009.

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.

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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 August 1, 2009, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective at the reasonable assurance level.

There have been no changes in our internal control over financial reporting during the quarter ended August 1, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

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

Information regarding Legal Proceedings is set forth within Note 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 31, 2009.

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ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information relating to our repurchases of common stock during the second quarter of 2009:

Fiscal Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number of Shares that May Yet Be Purchased Under the Program  (1)
May 3, 2009 – May 30, 2009	­–		­–	­–		2,500,000
May 31, 2009 – July 4, 2009	–		–	–		2,500,000
July 5, 2009 – August 1, 2009	–		–	–		2,500,000
Total	–		–	–		2,500,000

(1)   In January 2008, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2.5 million shares of our outstanding common stock. We can utilize the repurchase program to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase program does not have an expiration date. Under this plan, no shares were repurchased during the second quarter of 2009; therefore, there were 2.5 million shares authorized to be purchased under the program as of August 1, 2009. Our repurchases of common stock are limited under our debt agreements.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The information in Item 4 of Part II of our Form 10-Q for the quarterly period ended May 2, 2009 is incorporated herein by reference.

ITEM 5 OTHER INFORMATION

None.

ITEM 6 EXHIBITS

Exhibit No.
3.1		Restated Certificate of Incorporation of the Company incorporated herein by reference from Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 5, 2007 and filed June 5, 2007.
3.2		Bylaws of the Company as amended through October 2, 2008, incorporated herein by reference from Exhibit 3.1 to the Company’s Form 8-K dated October 8, 2008 and filed October 8, 2008.
31.1	†	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	†	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	†	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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SIGNATURES

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

	BROWN SHOE COMPANY, INC.
Date: September 9, 2009	/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

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