UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number: 000-50563

BAKERS FOOTWEAR GROUP, INC.

(314)621-0699
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 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. x Yes o No.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $0.0001 par value, 5,102,481 shares issued and outstanding as of November 9, 2004

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BAKERS FOOTWEAR GROUP, INC.
INDEX TO FORM 10-Q

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BAKERS FOOTWEAR GROUP, INC.
CONDENSED BALANCE SHEETS

See accompanying notes.

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BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

See accompanying notes.

4

BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)

See accompanying notes.

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BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes.

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BAKERS FOOTWEAR GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited

1.     Basis of Presentation

        The accompanying unaudited condensed financial statements contain all adjustments that management believes are necessary to present fairly Bakers Footwear Group, Inc.’s (the Company’s) financial position, results of operations and cash flows for the periods presented. Such adjustments consist of normal recurring accruals. Certain information and disclosures normally included in notes to financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The Company’s operations are subject to seasonal fluctuations and, consequently, operating results for interim periods are not necessarily indicative of the results that may be expected for other interim periods or for the full year. The condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto contained in our Annual Report on Form 10-K for fiscal year ended January 3, 2004.

        Certain reclassifications of prior year amounts have been made to conform to the current year presentation.

2.      Initial Public Offering

        On February 10, 2004, the Company completed its Initial Public Offering (IPO) and sold 2,160,000 shares of common stock at $7.75 per share. On March 12, 2004, the Company sold an additional 324,000 shares of common stock at $7.75 per share when the underwriters exercised their over-allotment option. The net proceeds to the Company were approximately $15,530,000 after deducting the underwriting discount and other expenses incurred in connection with the IPO.

        The Company used the proceeds from the IPO to repay the $5,680,743 balance on its revolving credit agreement, repay $859,910 of subordinated debt, and repurchase stock warrants for $850,000. The Company used the remaining proceeds for working capital purposes, primarily for the purchase of inventory in the ordinary course of business and capital expenditures. Pending use of the remaining proceeds, the Company has invested in short-term, investment-grade, interest bearing instruments.

        Effective with the IPO, all shares of the Company’s existing Class A, Class B, and Class C common stock were exchanged for shares of new common stock on a one to one basis, excluding fractional shares, and the Company’s related repurchase obligations were terminated.

        The Company issued stock purchase warrants covering 216,000 shares of common stock with an exercise price of $12.7875 per share, subject to antidilution adjustments, to representatives of the underwriters. The warrants become exercisable on February 10, 2005 and expire on February 10, 2009.

        The subordinated convertible debentures were converted into 653,331 shares of common stock at a conversion rate of $7.50 per share. The Company recognized a beneficial conversion expense of $163,333 for the difference between the $7.75 IPO price and the $7.50 conversion price.

3.      Income Taxes

        Effective January 4, 2004, the Company elected, by the consent of its shareholders, to revoke its status as an S corporation and become subject to taxation as a C corporation. Under the S corporation

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provisions of the Internal Revenue Code, the individual shareholders included their pro rata portion of the Company’s taxable income in their personal income tax returns. Accordingly, through January 3, 2004, the Company was not subject to federal and certain state corporate income taxes. However, the Company was subject to income taxes in certain states in which it conducts business.

          The pro forma information on the accompanying statement of operations for the thirteen week and thirty-nine week periods ended October 4, 2003 has been adjusted to reflect a reduction in other income (expense) for these state income tax expenses, and is presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, as if the Company had been a C corporation during that period and thus subject to federal and state income taxes.

          As a result of this change in tax status, the Company recorded deferred tax assets and liabilities for the temporary differences between the book and tax basis of assets and liabilities at the time of conversion. The Company recognized a net benefit of $1,017,511 for the impact of these amounts as a component of the provision for income taxes for the thirteen weeks ended April 3, 2004.

          Significant components of income tax expense (benefit) for the thirteen weeks and thirty-nine weeks ended October 2, 2004 are as follows:

          The differences between income tax expense (benefit) at the statutory U.S. federal income tax rate of 34% and the amount reported in the statement of operations for the thirteen weeks and twenty-six weeks ended July 3, 2004 are as follows:

          Deferred income taxes arise from temporary differences in the recognition of income and expense for income tax purposes. Deferred income taxes were computed using the liability method and reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes.

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          Components of the Company’s deferred tax assets and liabilities are as follows:

4.      Stock-Based Compensation

          SFAS No. 123, Accounting for Stock-Based Compensation, establishes the use of the fair value-based method of accounting for all stock-based compensation arrangements. SFAS No. 123 permits companies to use the intrinsic value accounting method specified in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for stock-based employee compensation arrangements. The Company uses the intrinsic value-based method to account for stock-based employee compensation arrangements and complies with the disclosure provisions of SFAS No. 123.

          Options to purchase 24,718 shares of common stock were granted during the thirty-nine weeks ended October 4, 2003. The Company recorded compensation expense of $2,898 and $220,491 for the thirteen weeks and thirty-nine weeks ended October 4, 2003, respectively, which represents the difference between the estimated fair value of the stock on the date of the grant compared to the $0.01 exercise price per option.

          Effective with the IPO, the Company issued options to purchase 304,500 shares of common stock with an exercise price of $7.75 per share to certain employees and directors. These options vest over five years and expire after ten years. Options covering 2,800 of these shares were forfeited during the thirteen weeks and thirty-nine weeks ended October 2, 2004.

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          Had compensation cost for all options been determined based on the grant date fair values of the options in accordance with SFAS No. 123, net loss and loss per share would have been reduced to the pro forma amounts indicated below:

          The weighted-average fair value of options granted during the thirty-nine weeks ended October 2, 2004 was $4.68. The fair value of these options was estimated at grant date using the Black-Scholes option pricing model assuming no dividends, a risk-free interest rate of 3%, expected volatility of 64%, and expected option life of 6 years.

5.      Earnings (Loss) Per Share

          Basic earnings (loss) per common share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share are computed using the weighted average number of common shares and potential dilutive securities that were outstanding during the period. Potential dilutive securities consist of outstanding stock options, warrants, and, through the effective date of the IPO, convertible debentures and redeemable Class A and Class B stock.

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          The following table presents a reconciliation of our basic and diluted weighted average common shares outstanding for the period.

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

The following discussion should be read in conjunction with the Company’s unaudited condensed financial statements and notes thereto provided herein and the Company’s audited financial statements and notes thereto in our annual report on Form 10-K. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. The factors that might cause such a difference also include, but are not limited to, those discussed in our annual report on Form 10-K under “Item 1. Business - Cautionary Statements Regarding Forward-Looking Statements and Certain Risks.”

Overview

     We are a national, mall-based, specialty retailer of distinctive footwear and accessories targeting young women who demand quality fashion products. We feature private label and national brand dress, casual and sport shoes, boots, sandals and accessories. As of October 2, 2004, we operated 185 Bakers stores and 29 Wild Pair stores located in 36 states.

     During the first quarter of 2004, we completed our initial public offering (IPO) generating net proceeds of $15.5 million, converted $6.8 million of convertible debt and redeemable securities into common stock, and repaid $4.1 million of debt obligations. This has significantly enhanced our financial position and has enabled us to remodel existing stores and open new stores.

     We have developed new formats for our Bakers and Wild Pair stores which have resulted in comparable store sales increases at new format stores that exceed our corporate average. New format stores may not necessarily continue to achieve such above average growth beyond their first comparable year. We have undertaken a program to remodel existing stores and open new stores which should result in more than 50% of our Bakers stores operating in the new format by the end of 2005. We expect remodeled stores to be closed for approximately six to seven weeks during the period of remodeling.

     After experiencing a strong first half of 2004, we experienced soft demand during the third quarter which largely offset the sales and gross margin gains of the first half. Net sales of $104.8 million for the first three quarters of 2004 were essentially unchanged from the prior year. The $1.2 million increase in our gross profit was less than the $2.7 million increase in our operating expenses for the first three quarters of 2004 and, as a result, our loss from operations increased to $3.7 million for the first three quarters of 2004, up from a loss from operations of $2.2 million for the first three quarters of 2003, and our loss before income taxes increased to $4.3 million in 2004 up from $3.6 million in 2003.

     For comparison purposes, we classify our stores as comparable or non-comparable. A new store’s sales are not included in comparable store sales until the thirteenth month of operation. Sales from remodeled stores are excluded from comparable store sales during the period of remodeling.

Critical Accounting Policies

     Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. These differences could be material to the financial statements.

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     We believe that our application of accounting policies, and the estimates that are inherently required by these policies, are reasonable. We believe that the following significant accounting policies may involve a higher degree of judgment and complexity.

Merchandise inventories

     Merchandise inventories are valued at the lower of cost or market using the first-in first-out retail inventory method. Permanent markdowns are recorded to reflect expected adjustments to retail prices in accordance with the retail inventory method. The process of determining our expected adjustments to retail prices requires significant judgment by management. Among other factors, management utilizes performance metrics to evaluate the quality and freshness of inventory, including the number of weeks of supply on hand, sell-through percentages and aging categories of inventory by selling season, to make its best estimate of the appropriate inventory markdowns. If market conditions are less favorable than those projected by management, additional inventory markdowns may be required.

Store closing and impairment charges

     Based on the criteria in Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Disposal of Long-Lived Assets, long-lived assets to be “held and used” are reviewed for impairment when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. We regularly analyze the operating results of our stores and assess the viability of under-performing stores to determine whether they should be closed or whether their associated assets, including furniture, fixtures, equipment, and leasehold improvements, have been impaired. Asset impairment tests are performed at least annually, on a store-by-store basis. After allowing for an appropriate start-up period, unusual nonrecurring events, and favorable trends, fixed assets of stores indicated to be impaired are written down to fair value.

Deferred income taxes

     Through January 3, 2004, we were an S corporation under Subchapter S of the Internal Revenue Code and comparable state tax laws, and consequently were not subject to income taxes on our earnings in those jurisdictions, other than state franchise and net worth taxes. However, we were subject to income taxes in some states which do not recognize S corporation status. Our S corporation status was terminated effective January 4, 2004 and, as a result, we became subject to Federal and state income taxes as a C corporation.

     We calculate income taxes in accordance with SFAS No. 109 Accounting for Income Taxes, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax reporting purposes. Deferred tax assets and liabilities are measured using the tax rates in effect in the years when those temporary differences are expected to reverse. Inherent in the measurement of deferred taxes are certain judgments and interpretations of existing tax law and other published guidance as applied to our operations. No valuation allowance has been provided for the deferred tax assets because we generated taxable income in prior periods and we anticipate that future taxable income will be sufficient to allow us to fully realize the amount of net deferred tax assets.

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Results of Operations

     The following table sets forth our operating results, expressed as a percentage of sales, for the periods indicated.

Thirteen Weeks Ended October 2, 2004 Compared to Thirteen Weeks Ended October 4, 2003

     Net sales. Net sales decreased to $31.6 million for the thirteen weeks ended October 2, 2004 (third quarter 2004) from $34.3 million for the thirteen weeks ended October 4, 2003 (third quarter 2003), a decrease of $2.7 million. Sales continued to be negatively impacted by customer demand for low-priced flip flops and athletics and we experienced soft demand for back-to-school casuals. As a consequence, our comparable store sales for the third quarter of 2004 decreased by 6.0% compared to the third quarter of 2003. We experienced lower unit sales volume and lower average unit prices reflecting greater discounting compared to the third quarter of 2003.

     Gross profit. Gross profit decreased to $7.1 million in the third quarter of 2004 from $9.3 million in the third quarter of 2003, a decrease of $2.2 million. As a percentage of sales, gross profit decreased to 22.5% in the third quarter of 2004 from 27.0% in the third quarter of 2003. This reflects increased

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discounting resulting from the weakness in customer demand during the third quarter of 2004 and increased occupancy and buying expense in a quarter with a decrease in sales.

     Selling expense. Selling expense increased to $7.6 million in the third quarter of 2004 from $7.1 million in the third quarter of 2003, an increase of $0.5 million. The increase was primarily the result of higher supplies and repair expenses and increased depreciation expense partially offset by decreased store salaries.

     General and administrative expense. General and administrative expense increased to $3.5 million in the third quarter of 2004 from $2.7 million in the third quarter of 2003, an increase of $0.8 million. This increase is attributable to higher administrative payroll and to public company expenses incurred in 2004.

     Loss on disposal of property and equipment. Loss on disposal of property and equipment increased to $270,000 in the third quarter of 2004 up from $9,000 in the third quarter of 2003. The 2004 loss relates primarily to expensing leasehold improvements and store fixtures due to the relocation one of our stores in New York City and the remodeling of certain other stores during the third quarter of 2004.

     Interest expense. Interest expense decreased to $191,000 in the third quarter of 2004 from $404,000 in the third quarter of 2003, a decrease of $213,000. The decrease in interest expense reflects the reduction in our borrowings compared to the prior year.

     Income tax expense. Effective January 4, 2004, we converted to a C corporation and became subject to federal and state income taxes. We recognized an income tax benefit of $1.6 million for the third quarter of 2004 related to the taxable loss for the quarter. No valuation allowance has been provided for this tax benefit because we have generated taxable income in prior periods and we anticipate that future taxable income will be sufficient to allow us to fully realize the amount of the resulting tax asset. Because we were an S corporation during the third quarter of 2003 there was no comparable income tax benefit for that period. On a pro forma basis, had we been a C corporation for the third quarter of 2003, we would have had an income tax benefit of $383,000 for the period.

     Net loss. We had a net loss of $2.7 million in the third quarter of 2004 compared to a net loss of $1.0 million in the third quarter of 2003. If we had been taxed as a C corporation for the third quarter of 2003, our net loss would have been $640,000 for that period.

Thirty-nine Weeks Ended October 2, 2004 Compared to Thirty-nine Weeks Ended October 4, 2003

     Net sales. Net sales were $104.8 million for the thirty-nine weeks ended October 2, 2004 (first three quarters of 2004) up from $104.5 million for the thirty-nine weeks ended October 4, 2003 (first three quarters of 2003), an increase of $0.3 million. The increase in sales during the first half of 2004 was largely offset by the decrease in sales in the third quarter. We experienced lower unit sales offset by higher average unit prices compared to the first three quarters of 2003. Our comparable store sales for the first three quarters of 2004 increased by 3.2% compared to the first three quarters of 2003. The comparable store sales increase during the first half of the year (up 7.7%) reversed in the third quarter of 2004 (down 6.0%).

     Gross profit. Gross profit increased to $29.5 million in 2004 from $28.3 million in 2003. As a percentage of sales, gross profit increased to 28.1% in 2004 from 27.1% in 2003. The increase in gross profit for the first half of 2004 was partially offset by the decrease in gross profit during the third quarter of 2004, as customer demand weakened during the course of the first three quarters of 2004.

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     Selling expense. Selling expense increased to $22.5 million in 2004 from $21.6 million in 2003, an increase of $0.9 million. This increase was due primarily to increased supplies and repair expenses and increased depreciation expense.

     General and administrative expense. General and administrative expense increased to $10.3 million in 2004 from $8.8 million in 2003, an increase of $1.5 million. This increase is attributable to higher administrative payroll and to public company expenses incurred in 2004.

     Interest expense. Interest expense decreased to $0.8 million in 2004 from $1.2 million in 2003, a decrease of $0.4 million. The decrease in interest expense reflects the reduction in our borrowings compared to the prior year.

     Income tax benefit. Effective January 4, 2004, we converted to a C corporation and became subject to federal and state income taxes. In accordance with SFAS No. 109, Accounting for Income Taxes, we have reflected the net impact of the temporary differences between the book and tax basis of our assets and liabilities as of the date of conversion as a component of our provision for income taxes for the period. This resulted in the recognition of a nonrecurring income tax benefit of $1.0 million for the first three quarters of 2004. In addition, we recognized an income tax benefit of $1.5 for the first three quarters of 2004 related to our taxable loss during the period. No valuation allowance has been provided for these tax assets because we generated taxable income in prior periods and we anticipate that future taxable income will be sufficient to allow us to fully realize these tax assets. Because we were an S corporation during the first three quarters of 2003 there was no comparable income tax benefit for that period. On a pro forma basis, had we been a C corporation for the first three quarters of 2003, we would have had a tax benefit of $1.3 million for the period.

     Net loss. We had a net loss of $1.7 million in the first three quarters of 2004 compared to a net loss of $3.6 million in the first three quarters of 2003. If we had been taxed as a C corporation for the first three quarters of 2003, our net loss would have been $2.2 million for that period.

Seasonality and Quarterly Fluctuations

     Our operating results are subject to significant seasonal variations. Our quarterly results of operations have fluctuated, and are expected to continue to fluctuate in the future, as a result of these seasonal variances, in particular our principal selling seasons. We have five principal selling seasons: transition (post-holiday), Easter, back-to-school, fall and holiday. Sales and net income in our second and fourth quarters are typically much stronger than in our first and third quarters.

     In addition to our normal seasonal fluctuations, some events, in particular the Easter holiday, shift between fiscal quarters in some years due to the nature of our fiscal year. This shift can influence our quarterly comparable results. Easter was in the second quarter of fiscal years 2003 and 2004.

     Quarterly comparisons may also be affected by the timing of sales promotions and costs associated with remodeling stores, opening new stores, or acquiring stores.

Liquidity and Capital Resources

     During the first quarter of 2004, we completed our IPO which generated net proceeds of $15.5 million. Our cash requirements are primarily for working capital, capital expenditures and principal payments on our capital lease obligations. Historically, these needs for cash have been met by cash flows from operations, borrowings under our revolving credit facility and sales of subordinated debt.

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     At October 2, 2004, we had total assets of $42.2 million and shareholders’ equity of $24.3 million compared to total assets of $29.0 million and shareholders’ equity of $3.6 million at January 3, 2004, and compared to total assets of $32.8 million and a deficit in shareholders’ equity of $1.1 million at October 4, 2003. At October 2, 2004, we had net working capital of $9.6 million, and $13.5 million of unused borrowing capacity under our revolving credit facility, based upon our borrowing base calculation, compared to negative net working capital of $800,000 and $5.6 million of unused borrowing capacity at January 3, 2004 and compared to negative net working capital of $5.6 million and $1.1 million of unused borrowing capacity at October 4, 2003.

     The improvement in our financial position primarily relates to the proceeds from our IPO, the conversion of our subordinated debentures and redeemable Class A and Class B common stock into common stock, offset by weaker operating results.

     We anticipate that our cash flows from operations, borrowings under our revolving credit facility, and proceeds from our IPO will be sufficient for our operating cash requirements for at least the next 12 months and will allow us to further execute our business plan, including our planned expansion.

Operating activities

     For the first three quarters of 2004, our net cash used in operating activities was $2.1 million compared to net cash used by operating activities of $3.1 million in the first three quarters of 2003, an decrease of $1.0 million. The primary uses of operating cash were the pre-tax loss, partially offset by depreciation expense, and investment in inventory, partially offset by increased accounts payable. The increased investment in inventory during 2004 reflects the strong sales during the fourth quarter of 2003. We started 2004 with lower inventories than at the beginning of 2003 due to strong fourth quarter sales in 2003 and we have increased inventory levels at the end of the third quarter of 2004 in order to meet anticipated demand for this year’s fourth quarter. Our inventories at October 2, 2004 were $17.5 million up from $16.9 million at October 4, 2003

     Over two-thirds of our products are currently manufactured in China. Recently the continued significant growth in the Chinese economy has resulted in periodic energy and labor shortages, as well as transportation and shipping bottlenecks. In addition, due to the volume of Chinese imports, there have been delays at ports on the west coast of the United States. We actively monitor these matters and have accelerated the timing of our product sourcing by approximately one week in order to minimize the impact of any production or transportation delays.

Investing activities

     Cash used in investing activities was $7.7 million in the first three quarters of 2004 compared to $2.0 million for the first three quarters of 2003. During each period, cash used in investing activities consisted of capital expenditures for furniture, fixtures and leasehold improvements. A substantial portion of the 2004 capital expenditures relates to new and remodeled stores opened during the third quarter or scheduled to open during the fourth quarter.

     Our capital expenditures during the first three quarters of 2004 were $7.8 million. We anticipate that our total capital expenditures for fiscal year 2004, primarily related to new stores, store remodelings, distribution and general corporate activities, will be approximately $9.0 million.

     We opened 8 new stores during the first three quarters of 2004 and plan to open 9 new stores in the fourth quarter of 2004. We now plan to open approximately 25 to 30 new stores in fiscal year 2005 compared to our earlier projection of 30-35 new stores. We have moderated our expansion plans to better

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focus on expanding sales and gross margins in our existing stores. Net capital expenditures for a new store are expected to average approximately $200,000, including point of sale equipment. The average inventory investment, net of payables, for a new store is expected to range from approximately $45,000 to $75,000, depending on the size and sales expectation of the store and the timing of the new store opening. Pre-opening expenses, such as marketing, salaries, supplies and utilities are expensed as incurred.

     We have remodeled 13 stores during the first three quarters of 2004 and plan to complete the remodeling of approximately three stores in our new format in the fourth quarter of 2004. Remodeling the average existing store into the new format is estimated to cost approximately $200,000 to $250,000. We also plan to complete minor remodeling at approximately ten stores in fiscal year 2004 at an average cost of $40,000 per store.

Financing activities

     On February 10, 2004, we consummated our IPO with the sale of 2,160,000 shares of common stock. On March 12, 2004, we sold an additional 324,000 shares of common stock in connection with the exercise, by the underwriters, of the full over-allotment option. All of the shares of common stock sold to the public were sold at a price of $7.75 per share. The aggregate gross proceeds from the shares of common stock and the warrants sold was approximately $19.3 million. The net proceeds to us from the offering were approximately $15.5 million. As of October 2, 2004, we have used the net proceeds received from the IPO to repay $5.7 million on our revolving credit agreement, $0.9 million to redeem outstanding warrants, $0.9 million to repay subordinated debt, and $7.7 million for capital expenditures. We expect to use the remaining net proceeds for capital expenditures. Pending use of the proceeds, we are investing in short-term, investment-grade interest bearing instruments.

     In connection with our IPO, $4.5 million of subordinated convertible debentures automatically converted into 653,331 shares of common stock at a fixed exercise price of $7.50 per share. Our Class A and Class B common stock was converted into shares of our new common stock on a one to one basis, excluding fractional shares, and $1.9 million of related redemption obligations were terminated. At October 2, 2004, we had 5,102,481 shares of common stock outstanding.

     We have a $25.0 million secured revolving credit facility with Fleet Retail Group, Inc. that was amended effective September 1, 2004. Among other things, the amendment reduced the margin on our base rate loans from 0.75% per annum to 0% per annum and reduced the monthly facility fee paid by us to Fleet. In addition, the amendment eliminates the financial covenant relating to capital expenditures and extends the maturity date of the credit facility to August 31, 2008. As part of the amendment, Fleet released Mr. Peter Edison’s $500,000 limited guaranty of collection under the facility. Prior to this amendment, amounts borrowed under the facility bore interest at a rate equal to the base rate (as defined in the agreement) plus 0.75% per annum, which was equal to 4.75% per annum at January 3, 2004. The aggregate amount that we may borrow under the agreement at any time is established by a formula, which is based on our inventory level but cannot be greater than $25.0 million. The agreement is secured by substantially all of our assets. We repaid the outstanding balance on the credit facility during the first quarter of 2004 from the proceeds of our IPO.

     On October 25, 2004, we made our first draw on our revolving credit agreement since we repaid the balance from the proceeds of our IPO in February 2004. The highest outstanding balance on our facility from October 25, 2004 through November 10, 2004 was $889,000, and on November 10, 2004 the outstanding balance was $425,000. We used the borrowings on our revolving credit facility for working capital purposes.

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     In connection with the closing of our IPO, we sold to the representatives of the underwriters and their designees warrants to purchase up to an aggregate of 216,000 shares of common stock at an exercise price equal to $12.7875 per share, subject to antidilution adjustments, for a purchase price of $0.0001 per warrant for the warrants. The warrant holders may exercise the warrants as to all or any lesser number of the underlying shares of common stock at any time during the four-year period commencing on February 10, 2005.

     Our ability to meet our current and anticipated operating requirements will depend on our future performance, which, in turn, will be subject to general economic conditions and financial, business and other factors, including factors beyond our control.

Off-Balance Sheet Arrangements

     At July 3, 2004 and July 5, 2003, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could otherwise have arisen if we had engaged in such relationships.

Contractual Obligations

     The following table summarizes our contractual obligations as of October 2, 2004:

	(1)		Includes payment obligations relating to our point of sale hardware and software leases.
	(2)		Includes minimum payment obligations related to our store leases.
	(3)		Includes merchandise on order and payment obligations relating to miscellaneous service contracts.

Recent Accounting Pronouncements

     In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, which clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, relating to consolidation of variable interest entities (VIEs). We were not required to consolidate any VIEs.

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Effect of Inflation

     Overall, we do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented. We cannot give assurance, however, that our business will not be affected by inflation in the future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our earnings and cash flows may be subject to fluctuations due to changes in interest rates. Our financing arrangements include both fixed and variable rate debt in which changes in interest rates will impact the fixed and variable rate debt differently. A change in the interest rate of fixed rate debt will impact the fair value of the debt, whereas a change in the interest rate on the variable rate debt will impact interest expense and cash flows. Management does not believe that the risk associated with changing interest rates would have a material effect on our results of operations or financial condition.

ITEM 4. CONTROLS AND PROCEDURES

     Disclosure Controls and Procedures: The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the report that it files or submits under the Exchange Act.

     Internal control Over Financial Reporting: The company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.

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BAKERS FOOTWEAR GROUP, INC.
PART II — OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Use of Proceeds

     On February 5, 2004, the Company commenced its initial public offering. On February 10, 2004, the Company consummated its initial public offering with the sale of 2,160,000 shares of common stock, excluding exercise of the underwriters’ over-allotment option. In connection with the Company’s initial public offering, the Company also sold 216,000 warrants to purchase shares of common stock to Ryan Beck & Co., Inc. and BB&T Capital Markets, a Division of Scott and Stringfellow, Inc. as the representatives of the underwriters, or their designees. On March 12, 2004, the Company sold an additional 324,000 shares of common stock in connection with the exercise, by the underwriters, of the full over-allotment option. The public offering price of the common stock was $7.75 per share. We sold the warrants for $0.0001 per warrant.

     The shares of common stock sold in the offering and the warrants to purchase common stock were registered under the Securities Act of 1933, as amended, on two Registration Statements (Nos. 333-86332 and 333-112477) on Form S-1. The Securities and Exchange Commission declared Registration Statement No. 333-86332 effective on February 3, 2004. Registration Statement No. 333-112477 was effective upon filing on February 4, 2004 pursuant to Rule 462(b) under the Securities Act of 1933. All 2,160,000 shares of common stock sold to the public in the initial closing, plus all 324,000 shares of common stock covered by an over-allotment option granted to the underwriters were sold at a price of $7.75 per share. The warrants were sold to the representatives of the underwriters at a price of $0.0001 per warrant. Each warrant may be converted into one share of common stock at an exercise price $12.7875. The Registration Statements collectively registered 2,484,000 shares of common stock at a maximum aggregate offering price of $26,772,000, 216,000 warrants at a maximum aggregate offering price of $22, all of which common stock and warrants were sold in the offering, and 216,000 shares of common stock underlying the warrants at a maximum aggregate offering price of $2,851,000.

     The aggregate gross proceeds from the shares of common stock and the warrants sold were approximately $19.3 million. The net proceeds to the Company from the offering were approximately $15.5 million after deducting the underwriting discount of $1.9 million and $1.9 million of other expenses incurred in connection with the offering. A reasonable estimate for the amount of expenses incurred has been provided instead of the actual amount of expenses. None of such payments were to directors, officers, ten percent shareholders or affiliates of the issuer.

     As of October 2, 2004, the Company has used the net proceeds received from the initial public offering for the following purposes: $5.7 million to repay the balance on its revolving credit agreement to Fleet Retail Group, Inc., $1.4 million to redeem outstanding warrants and a note payable in favor of Mississippi Valley Capital, LLC, $0.4 million to repay subordinated debt in favor of the Company’s prior Class B shareholders, and $7.7 million for the purchase of property and equipment, primarily store fixtures and leasehold improvements related to new and remodeled stores opened during 2004. Reasonable estimates for the amounts have been provided instead of the actual amounts. The credit agreement and the subordinated debt were secured, in part, by a personal guaranty of Peter Edison, the Company’s Chairman of the Board and Chief Executive Officer. Mississippi Valley Capital, LLC is a member managed limited liability company, of which Mr. Baur, one of the Company’s directors, is one of the two managers. In addition, Mr. Baur’s children are three of the four members. Mr. Baur is also a

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director of Marshall & Ilsley Corporation, which is a ten percent participant in the Company’s credit facility with Fleet Retail Group, Inc. The Company intends to use the remaining net proceeds from the offering to partially fund its remaining planned capital expenditures in fiscal year 2004. Pending use of the remaining proceeds, the Company has invested in short-term, investment-grade interest bearing instruments.

     Except as set forth above, none of proceeds were paid to directors, officers, ten percent shareholders or affiliates of the issuer. Our revolving credit facility prohibits the payment of dividends, except for common stock dividends.

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

     The Company does not have any programs to repurchase shares of its common stock and no such repurchases were made during the thirty-nine weeks ended October 2, 2004.

Issuer Purchases of Equity Securities

ITEM 6. EXHIBITS

(a) Exhibits: See Exhibit Index herein

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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.

Date: November 12, 2004

	BAKERS FOOTWEAR GROUP, INC. (Registrant)
	By:	/s/ Peter A. Edison
		Peter A. Edison
		Chief Executive Officer (On behalf of the Registrant)

	By:	/s/ Lawrence L. Spanley, Jr.
		Lawrence L. Spanley, Jr.
		Chief Financial Officer, Vice President- Finance, Treasurer, and Secretary (As principal financial officer)

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EXHIBIT INDEX

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