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TOPEKA, KS-The number of Payless ShoeSource stores decreased by 18 during the second quarter of 2006 as the footwear retailer worked to make good on a promise by president and CEO Matthew Rubel to “make progress toward our goal of achieving more consistent sales and earnings performance.”

The Topeka, KS company, which has 4,584 stores in the United States and Latin America, is apparently heading in that direction. Earnings jumped to $32.5 million, or 48 cents a share, on sales of $706.4 million during the second quarter, but profits fell short of the 53 cents per share predicted by analysts, sending Payless stock tumbling. Those results, announced Wednesday in a conference call with investors and analysts, were up from last year when Payless recorded a second-quarter profit of $19.9 million, or 29 cents a share, on sales of $693.9 million, including a 3 cent per share loss from discontinued operations.

Yet despite this year’s second quarter earnings shortfall, Rubel said the combination of low single-digit same-store sales growth, gross margin expansion and prudent expense control were working to drive earning improvements.

Gross margins for the quarter were up 0.6% to 34.5% from 33.9% while revenue grew 2%, to $706.4 million, beating analysts’ expectations by nearly $3 million. Sales at stores open at least a year rose 2.2% for the quarter based on strong consumer demand across the board.

Payless, which is in the middle of a multi-year turnaround, hopes to improve the bottom line further next quarter when it closes its single test store in Japan at a cost of between $2 million and $3 million to focus on its thriving Latin American market. The company said it also doesn’t plan to add to its store count next year when it opens 70 stores and closes 70 others.

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