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:

· 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.

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
                               % of                % of                 % of                 % of
                                Net                 Net                  Net                  Net
($ millions)                  Sales               Sales                Sales                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.

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.

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.

FAMOUS FOOTWEAR



                       Thirteen Weeks Ended                              Twenty-six Weeks Ended
                August 1, 2009      August 2, 2008          August 1, 2009                 August 2, 2008
                            % of                % of                        % of                             % of
($ millions, except sales    Net                 Net                         Net                              Net
 per square foot)          Sales               Sales                       Sales                            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 . . .