• Consolidated Review of Operations - an analysis of our consolidated results of operations for the three years presented in our consolidated financial statements.

• Reporting Segment Review of Operations - an analysis of our results of operations for the three years presented in our consolidated financial statements for our four reporting segments: Payless Domestic, Payless International, Stride Rite Retail and Stride Rite Wholesale.

• Liquidity and Capital Resources - an analysis of cash flows, aggregate financial commitments and certain financial condition ratios.

• Critical Accounting Policies - a discussion of our critical accounting policies that involve a higher degree of judgment or complexity. This section also includes the impact of new accounting standards.

Our Business
Collective Brands, Inc. is the holding company of Payless ShoeSource, Inc. ("Payless"), The Stride Rite Corporation ("Stride Rite"), and Collective Licensing, LP ("Collective Licensing"). We operate a hybrid business model that includes retail, wholesale and licensing businesses. Payless is one of the largest footwear retailers in the Western Hemisphere. It is dedicated to democratizing fashion and design in footwear and accessories and inspiring fun, fashion possibilities for the family at a great value. Stride Rite markets the leading brand of high-quality children's shoes. Stride Rite also markets products for children and adults under well-known brand names, including Keds®, Sperry Top-Sider®, and Saucony®. Collective Licensing is a youth lifestyle marketing and global licensing business within the Payless Domestic segment. Our mission is to become the leader in bringing compelling lifestyle, performance and fashion brands for footwear and accessories to consumers worldwide. Our strategy has four strategic themes: consumer connections; powerful brands; operational excellence; and dynamic growth.
We strive to create meaningful connections with consumers and meet their varied desires for style, performance, quality and value. We do so by building and leveraging deep consumer insights that will allow us to continually anticipate trends and increase our relevance to our consumers' lifestyles. In addition, we strive to create outstanding experiences at each touch point with consumers - online, in our stores and through our customers.
We are building a diverse portfolio of leadership brands that forge emotional connections with target consumers. Each of our brands is infused with unique qualities to meet the lifestyle and aspirational needs of our consumers. Our messaging communicates each brand's essence and helps create the connection between our brands and their target consumers.
We are committed to executing core processes at a best-in-class level. These core processes include: consumer insight, product creation, branding, supply chain and logistics, and talent development. We also leverage new technologies to streamline and enable new business processes. We strive to consistently deliver effective and efficient solutions to serve our customers and consumers. We plan to fully extend our brand platforms across global markets, expand our brands into other relevant categories from a traditional base in footwear, and build out all relevant delivery channels for all of our brands - wholesale, retail, licensing and e-commerce/direct-to-consumer. In addition, we plan to continue to grow our portfolio of brands through internal development, licensing and acquisition.
We acquired Collective Licensing on March 30, 2007 and Stride Rite on August 17, 2007. The results of these acquisitions are included in our consolidated financial statements as of those dates. The Company used cash on hand to fund the

acquisition of Collective Licensing and the proceeds from a $725 million term loan as well as cash on hand to fund the acquisition of Stride Rite. Payless
Payless operates over 4,500 retail stores in 16 countries and territories in North America, the Caribbean, Central America, and South America. In the third quarter of 2008, we opened our first stores in Colombia and announced plans for further international expansion to the Middle East through a franchising agreement. Our franchisor plans to open stores in 2009. Our mission is to democratize fashion and design in footwear and accessories. Payless sells a broad assortment of quality footwear, including athletic, casual and dress shoes, sandals, work and fashion boots, slippers, and accessories such as handbags and hosiery. Payless stores offer fashionable, quality, branded and private label footwear and accessories for women, men and children at affordable prices in a self-selection shopping format. Stores sell footwear under brand names including Airwalk®, American Eagle™, Champion® and Dexter®. Select stores also currently sell exclusive designer lines of footwear and accessories under names including Abaete for Payless, Lela Rose for Payless, and alice + olivia for Payless. Payless seeks to compete effectively by bringing to market differentiated, trend-right merchandise before mass-market discounters and at the same time as department and specialty retailers but at a more compelling value.
Payless is comprised of two reporting segments, Payless Domestic and Payless International. The Payless strategy focuses on four key elements: on-trend, targeted product; effective brand marketing; a great shopping experience; and efficient operations.
By offering on-trend targeted product, we successfully build a connection with our customers. We interpret fashion trends timely and translate this into on-trend product in our stores through an extensive due diligence process. Beginning about a year in advance, we review key fashion markets worldwide. We employ trend services and examine the industry's ready-to-wear forecasts; then, we test product. By doing so, we gain valuable intelligence well in advance of the seasons' arrival. We refine our ideas, commit to a product assortment, and display that assortment in our stores at about the same time as other fashion-oriented higher-priced competitors. Customers demand on-trend products, but have different definitions of what that means. Importantly, we believe merchandise can be on-trend at a great value. Customers will always find tiered pricing at Payless with good-better-best price points. Through elements of promotion and pricing tiers, we strive to maintain market share with budget-oriented shoppers while driving the opportunity to increase market share with expressive customers.
The next component of the Payless strategy is brand marketing effectiveness, and the development of a "House of Brands" architecture. We are building, licensing and buying appropriate authentic and aspirational brands to appeal to our major customer segments. As we continue to increase the proportion of branded footwear in our assortment, we will have more pricing flexibility to increase the average selling price per unit. The results of our branded programs validate our strategy and demonstrate that we have additional expansion opportunities ahead. We are also creating a great shopping experience through improved store operations execution. Our passionate and skilled store teams offer friendly helpful service. In addition, our Hot Zone store design improves our ability to showcase our merchandise, improve the in-store experience for our customers, and further support the Payless brand identity. Our Hot Zone design features attractive gondolas and tables with product featured by style in the front of the store, while maintaining the traditional shopping experience by size in the back of the store. Hot Zone will be the design for our remodels, new stores, and relocations as we move forward.
The last major component of our Payless strategy is improving the efficiency of our operations. Our new distribution center model allows us to better service our customer base in the United States, which is located predominately on the nation's coasts and borders. The distribution center investments are intended to improve speed-to-market and replenishment of product for our stores. The distribution center initiative will also reduce our disaster recovery and business interruption risk. We opened our West Coast distribution center in California in the second quarter of 2007 and opened another distribution center in Ohio in the fourth quarter of 2008. Once both new distribution centers are operating satisfactorily, we plan to close our current facility in Topeka, Kansas, which is expected to be in the second quarter of 2009. We also plan on incorporating some of Stride Rite's operations into Payless' distribution network by shifting distribution from Stride Rite's Huntington, Indiana distribution center to our Brookville, Ohio distribution center. Stride Rite
Stride Rite is one of the leading marketers of high quality men's, women's and children's footwear. Stride Rite was founded on the strength of the Stride Rite® children's brand, but today includes a portfolio of brands addressing different markets within the footwear industry. Stride Rite is predominantly a wholesaler of footwear, selling its products mostly in North America in a wide variety of retail formats including premier department stores, independent shoe stores, value retailers and specialty stores. Stride Rite markets products in countries outside North America through owned operations, independent distributors and licensees. Stride Rite also markets its products directly to consumers by selling children's footwear through its

Stride Rite retail stores and by selling all of its brands through Stride Rite outlet stores and through e-commerce. In total, Stride Rite operates over 350 retail locations. Stride Rite is comprised of two operating segments, Stride Rite Retail and Stride Rite Wholesale.
The Stride Rite retail stores are one of the largest premium retailers of children's non-athletic shoes. Stride Rite has over 80 years of expertise in the development of children's shoes. Most of the Stride Rite brand's sales come from its 350-plus retail stores, which account for approximately 500 thousand square feet of retail space. The rest of the brand's sales come from a variety of channels including department stores and licensed dealers. Stride Rite is currently merchandised and marketed at premium price points primarily for consumers up to six years of age. One of the elements of our Stride Rite brand strategy is to expand our market to older children.
We intend to build upon Stride Rite's position as the premier brand in children's footwear. We also continue to build Sperry Top-Sider® and Keds® into nautical lifestyle and athletic lifestyle brands, respectively, and to leverage Saucony's authentic running heritage to build a greater global athletic and lifestyle footwear and apparel business.
Sperry Top-Sider® ("Sperry") is a brand with a powerful heritage in the boat shoe category. Our strategy for the Sperry brand is centered primarily on expanding beyond boat shoes, driving its women's business and expanding internationally. We have created new footwear products in the dress casual, casual and performance markets. We are also building upon our early success in women's - a larger footwear market than our core men's target market. New women's products are multi-generational, year-round, and distributed at a broad array of retail channels. International growth trends are to be strengthened by focusing on specific markets with the best opportunities, adding resources to our international infrastructure, and leveraging U.S. marketing and imagery. The Saucony® brand strategy is focused on creating and delivering authentic technical running products; growing share in new and existing wholesale channels; and re-establishing a product line known as Saucony Originals. We are driving business with those who shop the specialty running channel by evolving and improving our designs. We offer an array of award winning products specifically engineered with emphasis on different levels of performance including stability, cushioning, and motion control. Our Saucony products are expected to be compelling due to improved technical design, aesthetic design, and broader pricing. In addition, we have launched an apparel line focused on the specialty running channel.
Keds® is an iconic American brand. The strategy to grow this brand is predicated upon executing opportunities related to Keds' consumer, product, distribution, and operations. The Keds target consumer is a woman up to twenty-four years old. We believe twenty-four years old is an age that many potential and existing Keds consumers aspire to be in their lifestyles. Key 2008 Events
The significant challenges facing the global economy in 2008 and the highly uncertain global economic outlook have adversely affected consumer confidence and spending levels. We believe that these conditions are likely to persist throughout 2009. These conditions, along with severe credit market disruptions, among other factors, have also adversely affected the global footwear retailing industry. To mitigate this impact, we plan to continue to focus on reaching customers with new styles at compelling prices with great service. In addition, we are managing inventory very closely; flowing seasonal product closer to the time it is worn; and executing a number of gross margin driving initiatives. We are also allocating our capital more heavily towards investments which have higher financial returns, such as our international business. Finally, we intend to reduce our operating cost structure through a series of continuous improvement initiatives which focus on reducing costs and increasing cash flow. These include: occupancy cost rationalization, prudent marketing and advertising spending, renegotiating procurement contracts and re-examining existing contracts for cost reduction opportunities, and establishing new processes in merchandise sourcing that more effectively utilize factory capacity and ensure the best pricing. See Item 1A "Risk Factors" for a further discussion of the potential impact of the weak economy on our financial position and results of operations.
We are experiencing inflationary pressures in China, where the majority of our products are made. These pressures are exacerbated by a weak U.S. dollar. We are working to control costs by partnering with our factories on opportunities for production further inland and north in China and other countries such as Indonesia and India, as well as expanding our existing presence in Vietnam. We believe we will be able to manage cost by using a number of initiatives such as more direct sourcing and the consolidation of raw material suppliers and factories. In addition, with the current development of lower crude oil prices and the stabilization of the U.S. dollar, we expect to see a softening of inflationary pressure for 2009.
As discussed in Note 18 of our consolidated financial statements, we are currently involved in litigation with adidas America, Inc. and adidas-Salomon AG (collectively, "adidas"), Crocs, Inc., American Eagle Outfitters, Inc. and others in the ordinary course of business. On May 5, 2008, a jury returned a verdict against us in the aggregate amount of $304.6 million in connection with our litigation with adidas. On September 12, 2008 the Court reduced the monetary award to $65.3 million and

on March 18, 2009, the court entered a supplemental judgment of approximately $1.0 million that increases the total award to approximately $66.3 million. We believe that the verdict and resulting judgment were excessive, unjustified and the product of legal error. As described under "Legal Proceedings" herein, although we are expeditiously taking steps to protect our legal rights, there can be no assurances that our efforts will be successful.
The jury verdict and judgment in our litigation with adidas have negatively impacted our business and we expect the negative impacts to continue until the matter is finally resolved. Our litigation with adidas has occupied a significant amount of management time and resources. Since the entry of the jury verdict, management's time commitment and the related expenses, including the expenses associated with outside advisors, have increased and are expected to continue until the litigation is finally resolved. We are also subject to an injunction preventing us from selling certain two and four striped shoes. The injunction could adversely affect our financial results if we are not able to find suitable replacements to sell in our stores. See Item 1A "Risk Factors" for a further discussion of the risks to our business resulting from our litigation with adidas.
During the first quarter of 2008, we recorded a $30.0 million pre-tax loss in connection with our adidas litigation. This loss, which was recorded within cost of sales on our consolidated statement of earnings, resulted in an equal amount being recorded in accrued expenses on our consolidated balance sheet. The likelihood of further losses and the ultimate amount of any such losses are not reasonably determinable at this time; however, the actual resolution of our litigation may result in a reversal of the loss or further losses, which could be significant and could materially adversely affect our financial position, results of operations and cash flows in the period in which those losses are recorded.
On June 24, 2008, we entered into a settlement agreement with K-Swiss Inc. ("K-Swiss") to resolve our outstanding claims with them. Under the settlement agreement neither party admits liability to the other; however, we have paid K-Swiss $30.0 million, which was recorded within cost of sales on our consolidated statement of (loss) earnings. K-Swiss has given us a full release of all known or unknown claims with respect to any shoe advertised, marketed, or sold by Payless or its affiliates up to June 24, 2008, including claims that were or could have been brought in the pending action. Under the settlement agreement, we have also agreed to refrain from making, advertising, promoting or selling footwear confusingly similar to that sold by K-Swiss, including footwear that bears K-Swiss' trademark or trade dress and had until December 31, 2008 to sell any existing inventory of shoes whose sale would be precluded under the terms of the settlement agreement.
In 2008, we incurred $45.1 million of net pre-tax expenses related to our litigation with adidas and K-Swiss. This amount includes the $30.0 million pre-tax loss related to adidas and the $30.0 million settlement paid to K-Swiss, as well as legal fees and other expenses related to both matters, partially offset by the impact of insurance recoveries.
In the fourth quarter of 2008, due to weakening economic conditions combined with weaker than expected holiday sales, we revised our financial projections related to certain tradenames and reporting units. As described in our "Critical Accounting Policies" these revisions indicated a potential impairment of our goodwill and intangible assets and, as such, we assessed the fair value of these items to determine if their book value exceeded their fair value. As a result of this assessment, we determined that the book value of certain indefinite-lived tradenames and goodwill exceeded their fair value and we recognized $88.2 million of pre-tax impairment charges for our indefinite-lived tradenames and $42.0 million of pre-tax impairment charges for goodwill.
In 2008, we also incurred tangible asset impairment (primarily for stores) and other charges (consisting of performance share unit cancellation and severance costs) totaling $20.1 million. We also incurred $3.5 million related to pre-tax incremental costs resulting from the flow through of acquired inventory recorded at fair value purchased in the Stride Rite acquisition.
Total pre-tax charges related to key 2008 events are summarized by reporting segment in the table below:

                                                 Payless         Stride Rite         Stride Rite
(in millions)                                   Domestic            Retail            Wholesale           Total

Impairment of tradenames                         $    -          $        -          $     88.2          $ 88.2
Net litigation expenses                            45.1                   -                   -            45.1
Impairment of goodwill                                -                42.0                   -            42.0
Tangible asset impairment and other
charges                                            16.8                 0.6                 2.7            20.1
Costs resulting from the flow through of
acquired inventory recorded at fair value             -                 3.5                                 3.5

Impairment of goodwill is recorded as a separate line item on the consolidated statement of (loss) earnings. Impairment of tradenames, net litigation expenses and costs resulting from the flow through of acquired inventory recorded at fair value are recorded within total cost of sales on the consolidated statement of
(loss) earnings. Of the $20.1 million of tangible asset impairment and other charges, $13.2 million is recorded within cost of sales and $6.9 million is recorded within selling, general and administrative expenses on the consolidated statement of (loss) earnings.

Consolidated Review of Operations
The following discussion summarizes the significant factors affecting
consolidated operating results for the fiscal years ended January 31, 2009
(2008), February 2, 2008 (2007), and February 3, 2007 (2006). Fiscal year 2006
contains 53 weeks of operating results compared to fiscal years 2008 and 2007
which contain 52 weeks. References to years relate to fiscal years rather than
calendar years unless otherwise designated. Results for the past three years
were as follows:

                                                  52 Weeks Ended                   52 Weeks Ended                  53 Weeks Ended
(dollars in millions, except per share)                2008                             2007                            2006
                                                               % of                             % of                            % of
                                                               Sales                            Sales                           Sales
Net sales                                    $ 3,442.0          100.0 %       $ 3,035.4          100.0 %      $ 2,796.7          100.0 %
Cost of sales:
Cost of sales                                  2,344.6           68.1           2,044.5           67.4          1,821.0           65.1
Impairment of tradenames                          88.2            2.6                 -              -                -              -

Total cost of sales                            2,432.8           70.7           2,044.5           67.4          1,821.0           65.1

Gross margin                                   1,009.2           29.3             990.9           32.6            975.7           34.9
Selling, general and administrative
expenses                                       1,007.2           29.3             899.4           29.6            808.5           28.9
Impairment of goodwill                            42.0            1.2                 -              -                -              -
Restructuring charges                              0.2              -               0.2              -              0.8              -

Operating (loss) profit from continuing
operations                                       (40.2 )         (1.2 )            91.3            3.0            166.4            6.0
Interest expense                                  75.2            2.2              46.7            1.5             19.2            0.7
Interest income                                   (8.1 )         (0.2 )           (14.4 )         (0.5 )          (22.7 )         (0.8 )

(Loss) earnings from continuing
operations before income taxes and
minority interest                               (107.3 )         (3.2 )            59.0            2.0            169.9            6.1
(Benefit) provision for income taxes(1)          (48.0 )         44.7               8.6           14.6             39.9           23.5

(Loss) earnings from continuing
operations before minority interest              (59.3 )         (1.7 )            50.4            1.7            130.0            4.6
Minority interest, net of income taxes            (8.7 )         (0.3 )            (7.7 )         (0.3 )           (4.6 )         (0.1 )

Net (loss) earnings from continuing
operations                                       (68.0 )         (2.0 )            42.7            1.4            125.4            4.5
Loss from discontinued operations, net
of income taxes and minority interest             (0.7 )            -                 -              -             (3.4 )         (0.1 )

Net (loss) earnings                          $   (68.7 )         (2.0 )%      $    42.7            1.4 %      $   122.0            4.4 %


Basic (loss) earnings per share:
(Loss) earnings from continuing
operations                                   $   (1.08 )                      $    0.66                       $    1.90
Loss from discontinued operations                (0.01 )                              -                           (0.05 )


Basic (loss) earnings per share              $   (1.09 )                      $    0.66                       $    1.85

Diluted (loss) earnings per share:
(Loss) earnings from continuing
operations                                   $   (1.08 )                      $    0.65                       $    1.87
Loss from discontinued operations                (0.01 )                              -                           (0.05 )


Diluted (loss) earnings per share            $   (1.09 )                      $    0.65                       $    1.82


Return on sales from continuing
operations                                       (2.0) %                            1.4 %                           4.5 %
Return on equity, including
discontinued operations(2)                       (9.8) %                            6.1 %                          18.7 %
Return on net assets, including
discontinued operations(3)                         1.8 %                            8.0 %                          12.3 %
Return on invested capital, continuing
operations(4)                                    (1.4) %                            6.2 %                          14.5 %