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)

Bakers Footwear Group, Inc.’s former fiscal year ended January 1, 2005. On March 10, 2005, Bakers Footwear Group, Inc. changed

(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. þ 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 þ 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, 6,102,481 shares issued and outstanding as of June 10, 2005

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.

See accompanying notes.

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BAKERS FOOTWEAR GROUP, INC.

See accompanying notes.

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BAKERS FOOTWEAR GROUP, INC.

See accompanying notes.

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BAKERS FOOTWEAR GROUP, INC.

See accompanying notes.

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BAKERS FOOTWEAR GROUP, INC.

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 1, 2005.

2. Change in Fiscal Year

     On March 10, 2005, by a vote of its board of directors, the Company changed its fiscal year end to the Saturday closest to January 31. Previously the Company’s fiscal year ended four weeks earlier. As a result of this change, the Company had a four week transition period ended January 29, 2005. The unaudited results of operations and changes in shareholders’ equity and cash flows for this four week transition period are presented in the condensed financial statements. The audited results of operations and changes in shareholders’ equity and cash flows for the four week transition period will be included in the Company’s Annual Report on Form 10-K for the year ended January 28, 2006. For comparison purposes, we have presented the thirteen weeks ended May 1, 2004 as the first quarter of 2004.

3. Private Placement of Common Stock and Warrants

     Effective April 8, 2005, for $8,750,000 the Company sold to certain qualified investors 1,000,000 shares of common stock and warrants to purchase 250,000 shares of common stock at an exercise price of $10.18 per share through April 8, 2010. As of April 30, 2005, the net proceeds to the Company after placement fees and expenses were $7,559,524. The Company also issued warrants to purchase 125,000 shares of common stock at an exercise price of $10.18 through April 8, 2010 to the placement agent.

     In connection with this transaction, the Company entered into a registration rights agreement wherein the Company agreed to make the requisite SEC filings to register, achieve and subsequently maintain the effectiveness of the registration of the common stock sold and the common stock issuable upon exercise of the warrants sold in the private placement. The registration rights agreement is effective through April 8, 2008. Failure to register, achieve and maintain effectiveness of the registration through the term of the registration rights agreement will subject the Company to liquidated damages in the amount of 1% per month of the $8,750,000 gross proceeds of the private placement. On May 5, 2005, the Company filed Form S-3 registering for resale the common stock sold and the common stock underlying the warrants and placement agent warrants. The SEC declared the registration effective on May 25, 2005. The Company is now required to maintain the effectiveness of the registration, subject to certain exceptions, through April 8, 2008 in order to avoid paying liquidated damages. As of April 30, 2005, the maximum amount of liquidated damages that the Company could be required to pay was $2,887,500, which represents 33 potential monthly payments of $87,500.

     The Company has estimated the fair value of the 375,000 stock purchase warrants, including the placement agent warrants, issued in connection with the private placement using the Black-Scholes formula to be $2,160,000. Because the Company has no obligation to settle the warrants by any means other than through the issuance of shares of its common stock, the Company has included the fair value of the warrants as a component of shareholders’ equity.

4. 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 $15,531,000 after deducting the underwriting discount and other expenses incurred in connection with the IPO.

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     The Company used the proceeds from the IPO to repay the $5.7 million 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 capital expenditures during 2004.

     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 became 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.

5. Income Taxes

     Significant components of the provision for income tax expense (benefit) are as follows:

     The differences between income tax expense (benefit) calculated at the statutory U.S. federal income tax rate of 34% and the amount reported in the statement of operations 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:

6. 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.

     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. In the first quarter of 2005, the Company issued options to purchase 198,700 shares of common stock with a weighted-average exercise price of $11.30 per share. These options generally vest over five years and expire after ten years. 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 income and earnings per share would have been reduced to the pro forma amounts indicated below:

     The weighted-average fair value of options granted during the thirteen weeks ended April 30, 2005 and May 1, 2004 was $6.92 and $4.68, respectively. The fair value of these options was estimated at grant date using the Black-Scholes option pricing model assuming no dividends, risk-free interest rates of 3.0% to 3.5%, expected volatility of 64%, and expected option life of 6 years.

7. 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

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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.

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

     The following securities were excluded from the computation of diluted earnings per share because they were anti-dilutive:

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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 April 30, 2005, we operated 193 Bakers stores and 28 Wild Pair stores located in 36 states.

     On March 10, 2005, we changed our fiscal year end to the Saturday closest to January 31. Previously our fiscal year ended four weeks earlier. This change moves us to the standard retail calendar and matches our financial year to our merchandising year. As a result of this change, we had a four week transition period ended January 29, 2005, and our first quarter covers the thirteen weeks ended April 30, 2005. For comparison purposes, we refer to the thirteen weeks ended May 1, 2004 as the first quarter of 2004.

     During the first quarter of 2005, our sales increased 16.2% compared to the first quarter of 2004, and our comparable store sales increased 7.8%. Customer demand was strong, especially for embellished and casual flats, wedges and espadrilles, contributing to the sales increase and to an improvement in gross profit percentage to 34.3% of sales from 32.2%. The sales and margin gains contributed to net income of $1.9 million, up from $0.7 million in the first quarter of 2004.

     During our four week transition period ended January 29, 2005, our sales increased 4.5% to $9.2 million from $8.8 million for the four weeks ended January 31, 2004 while comparable store sales decreased by 0.8%. January typically has the lowest net sales and gross profit of any month in our fiscal year. We had a net loss of $1.9 million in January 2005 compared to net income of $0.3 million in January 2004. Results for January 2004 include a one time gain of $1.2 million from the recognition of deferred tax assets resulting from our conversion to a C corporation from an S corporation in that month.

     During the first quarter of 2005, we completed a private placement of 1,000,000 shares of common stock and warrants to purchase 375,000 shares of common stock, generating net proceeds of approximately $7.5 million. This improved our financial position and will enable us to accelerate our plans to open new stores and remodel existing stores into our new format. Our new format stores are generating higher average net sales and higher comparable store sales growth than our company average.

     We opened seven new stores, completed remodeling at six stores, and closed four stores during the first quarter of 2005. We closed two stores during our transition period. At April 30, 2005 we operated 86 stores in our new format and expect to operate the majority of our Bakers stores in the new format by the end of our fiscal year.

     For comparison purposes, we classify our stores, including our internet store, 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 U.S. generally accepted accounting principles, 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.

     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.

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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 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

     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 difference between their carrying amounts 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 recover the amount of net deferred tax assets.

Stock Purchase Warrants

     In connection with our initial public offering in 2004 and our private placement in 2005, we issued stock purchase warrants. The warrants issued in our private placement are subject to a registration rights agreement that includes a liquidated damages clause. We have considered the guidance of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and Emerging Issues Task Force (EITF) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and have determined that it is appropriate to include the fair value of the warrants issued as a component of additional paid-in capital. However, we are aware that the EITF has included in the agenda for its June 2005 meeting EITF Issue No. 05-4, The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” and understand that it is possible that the EITF may reach a consensus which may require that the fair value of the warrants be classified as a liability and may also reach a consensus that the fair value of the warrants be remeasured at each balance sheet date. This consensus could impact how we disclose our financial position and results of operations. In such an event, we would follow transition guidance provided by EITF on this issue.

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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.

     The following table sets forth our number of stores at the beginning and end of each period indicated and the number of stores opened, acquired and closed during each period indicated.

Thirteen Weeks Ended April 30, 2005 Compared to Thirteen Weeks Ended May 1, 2004

     Net sales. Net sales increased to $44.9 million for the thirteen weeks ended April 30, 2005 (first quarter 2005) from $38.7 million for the thirteen weeks ended May 1, 2004 (first quarter 2004), an increase of $6.2 million. This increase resulted principally from higher average unit sales at lower average unit prices compared to the first quarter of 2004. The lower average unit prices reflect stronger sales of accessories which have lower unit prices but higher markups. Net sales for the first quarter of 2005 reflect strong consumer demand for embellished casuals. Our comparable store sales for the first quarter of 2005 increased by 7.8% compared to a 10.2% increase in comparable store sales in the first quarter of 2004.

     Gross profit. Gross profit increased to $15.4 million in the first quarter of 2005 from $12.5 million in the first quarter of 2004. As a percentage of sales, gross profit increased to 34.3% in the first quarter of 2005 from 32.2% in the first quarter of 2004. This reflects favorable markdown experience resulting from the strong demand for our spring product offering.

     Selling expense. Selling expense increased to $8.6 million in the first quarter of 2005 from $7.7 million in the first quarter of 2004, an increase of $0.9 million, but decreased as a percentage of sales to 19.2% from 19.8%. This increase was due primarily to higher salaries and commissions and higher depreciation expense.

     General and administrative expense. General and administrative expense increased to $3.6 million in the first quarter of 2005 from $3.2 million in the first quarter of 2004, an increase of $0.4 million, but decreased as a percentage of sales to 7.9% from 8.4%. The increase was due primarily to increased public company costs and depreciation expense compared to the first quarter of 2004.

     Income tax expense. We recognized income tax expense of $1.1 million for the first quarter of 2005 compared to income tax expense of $0.5 million for the first quarter of 2004. The increase resulted from higher pre-tax income in the current period. As of April 30, 2005, we had recorded $1.1 million in net deferred income tax assets. No valuation allowance has been provided for these

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tax assets because we generated taxable income in prior years and we anticipate that future taxable income will be sufficient to allow us to fully realize these tax assets.

     Net income. We had net income of $1.9 million, 4.2% of net sales, in the first quarter of 2005 compared to net income of $0.8 million, 1.9% of net sales, in the first quarter of 2004.

Four Week Transition Period Ended January 29, 2005 Compared to Four Weeks Ended January 31, 2004

     Net sales. Net sales increased to $9.2 million for the four week transition period ended January 29, 2005 from $8.8 million for the four weeks ended January 31, 2004, an increase of $0.4 million. January typically is the lowest sales volume month of our year. Our comparable store sales for January 2005 decreased by 0.8% compared to a 8.7% increase in comparable store sales in January 2004.

     Gross profit. Gross profit decreased to $0.6 million in January 2005 from $1.9 million in January 2004. As a percentage of sales, gross profit decreased to 6.6% in January 2005 from 21.4% in January 2004. This reflects unfavorable markdown experience resulting from the tepid demand in January 2005 compared to continued strong demand in January 2004. January 2005 margins also reflect increased occupancy costs and the impact of planned post-Easter clearance sales on end of January inventory valuations.

     Selling expense. Selling expense increased to $2.4 million in January 2005 from $2.2 million in January 2004, an increase of $0.2 million, but were unchanged as a percentage of sales.

     General and administrative expense. General and administrative expense increased to $1.1 million January 2005 from $0.9 million in January 2004, an increase of $0.2 million. The increase was due primarily to public company costs as we were still a private company in January 2004.

     Income tax benefit. We recognized an income tax benefit of $1.1 million in January 2005, down from an income tax benefit of $1.7 million in January 2004. The income tax benefit in January 2004 includes the recognition of a nonrecurring income tax benefit of $1.2 million resulting from our conversion to a C corporation in that month. As of January 29, 2005, we had recorded $2.1 million in net deferred income tax assets. No valuation allowance has been provided for these tax assets because we generated taxable income in prior years and we anticipate that future taxable income will be sufficient to allow us to fully realize these tax assets.

     Net income (loss). We incurred a net loss of $1.9 million in January 2005 compared to net income of $0.3 million in January 2004.

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. With our new fiscal year, sales and net income in our first and fourth quarters are typically much stronger than in our second and third quarters.

     In addition to our normal seasonal fluctuation, some events shift between fiscal quarters in some years due to the nature of our fiscal year. This shift will influence our quarterly comparable results. However, with the change in our fiscal year, the Easter holiday will now always occur in the first quarter of our fiscal year.

     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 2005, we completed a private placement of common stock and warrants which generated net proceeds of approximately $7.5 million. During the first quarter of 2004, we completed our initial public offering which generated net proceeds of $15.5 million. The improvement in our liquidity and overall financial position, as illustrated in the table below, is a result of these equity placements as well as from the profitable results of our operations. 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 equity and subordinated debt.

     The following table summarizes certain key liquidity measurements:

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     We anticipate that our cash flows from operations, borrowings under our revolving credit facility, and proceeds from our private placement of common stock and warrants 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 quarter of 2005, our net cash generated by operating activities was $0.4 million compared to net cash used by operating activities of $0.5 million in the first quarter of 2004, an improvement of $0.9 million. The primary cause of this improvement was increased operating income in 2005. The primary use of cash for operating activities during the first quarter of 2005 and 2004 is the seasonal change in inventory which increased $2.6 million in the first quarter of 2005 and $3.7 million in the first quarter of 2004. As a result of the increase in our total stores operated and the increase in our comparable store sales, we have increased our inventory to $20.4 million at April 30, 2005, up $3.5 million from $16.9 million at May 1, 2004. Although we believe that at April 30, 2005, inventory levels and valuations are appropriate given current and anticipated sales trends, there is always the possibility that fashion trends could change suddenly. We monitor our inventory levels closely and will take appropriate actions, including taking additional markdowns, as necessary, to maintain the freshness of our inventory.

     Substantially all of our products are currently manufactured in China. The significant growth in the Chinese economy has resulted in periodic energy and labor shortages, as well as transportation and shipping bottlenecks. In prior years there have been delays at ports on the west coast of the United States resulting from the volume of Chinese imports We actively monitor these matters and adjust the timing of our product sourcing in order to lessen the impact of any production or transportation delays.

Investing activities

     Cash used in investing activities was $4.3 million in the first quarter of 2005 compared to $1.5 million for the first quarter of 2004. The increase relates to the continuation of the store expansion and remodeling plan that commenced subsequent to our initial public offering in February 2004. During each quarter, cash used in investing activities consisted of capital expenditures for furniture, fixtures and leasehold improvements for both new and remodeled stores.

     We anticipate that our capital expenditures in fiscal year 2005, primarily related to new stores, store remodelings, distribution and general corporate activities, will be approximately $15.0 million.

     We plan to open approximately 30 to 35 new stores in fiscal year 2005. Capital expenditures for a new store are expected to average approximately $225,000 to $300,000. We generally receive landlord allowances in connection with new stores averaging approximately $25,000 to $75,000. We expect to receive approximately $1.5 million of landlord allowances in fiscal year 2005. The average cash investment in inventory 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, rent and utilities are expensed as incurred.

     We plan to remodel approximately 20 to 25 stores in our new format in fiscal year 2005. Remodeling the average existing store into the new format is estimated to cost approximately $225,000 to $300,000.

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Financing activities

     Effective April 8, 2005, we closed on a private placement in which we sold for gross proceeds of $8,750,000 to certain qualified investors 1,000,000 shares of common stock and warrants to purchase 250,000 shares of common stock at an exercise price of $10.18 per share through April 8, 2010. As of April 30, 2005, the net proceeds after placement fees and expenses were $7,559,524. We also issued warrants to purchase 125,000 shares of common stock at an exercise price of $10.18 through April 8, 2010 to the placement agent.

     In connection with this transaction, we entered into a registration rights agreement wherein we agreed to make the requisite SEC filings to register, achieve and subsequently maintain the effectiveness of the registration of the common stock sold and the common stock issuable upon exercise of the warrants sold in the private placement. The registration rights agreement is effective through April 8, 2008. Failure to register, achieve and maintain effectiveness of the registration through the term of the registration rights agreement will subject us to liquidated damages in the amount of 1% per month of the $8,750,000 gross proceeds of the private placement. On May 5, 2005, we filed Form S-3 registering for resale the common stock sold and the common stock underlying the warrants and placement agent warrants. The SEC declared the registration effective on May 25, 2005. We are now required to maintain the effectiveness of the registration, subject to certain exceptions, through April 8, 2008 in order to avoid paying liquidated damages. As of April 30, 2005, the maximum amount of liquidated damages that we could be required to pay was $2,887,500, which represents 33 potential monthly payments of $87,500.

     We have estimated the fair value of the 375,000 stock purchase warrants, including the placement agent warrants, issued in connection with the private placement using the Black-Scholes formula to be $2,160,000. Because we have no obligation to settle the warrants by any means other than through the issuance of shares of its common stock, among other considerations, we have included the fair value of the warrants as a component of shareholders’ equity.

     On February 10, 2004, we consummated our initial public offering 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. We used the net proceeds received from the initial public offering 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 $8.0 million for capital expenditures.

     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 April 30, 2005, we had 6,102,481 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. The credit agreement also provides that the Company can fix the interest rate on a designated portion of the outstanding balance for periods of at least 30 days based on the LIBOR ( London Interbank Offered Rate) plus 1.75% to 2.50% by entering into a basis swap, such swaps do not meet the criteria for hedge accounting. 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.

     At January 3, 2004, we had a balance of $2.2 million on our credit facility. This balance increased to $5.7 million prior to our IPO. We repaid this outstanding balance from the proceeds of our IPO during the first quarter of 2004. On October 25, 2004 we made our first draw on the credit facility since the IPO, ultimately increasing our draw to $2.7 million in the fourth quarter of 2004 before repaying the entire balance from our December operating cash flow such that there was no outstanding balance as of January 1, 2005 or January 29, 2005. On February 17, 2005, we made our first draw on our revolving credit agreement in fiscal 2005. The highest outstanding balance on our facility from February 17, 2005 through April 10, 2005 was $5.1 million, and on April 11, 2005

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the outstanding balance was repaid with part of the proceeds from our private placement. We used the borrowings on our revolving credit facility for working capital purposes.

     In connection with 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 April 30, 2005, January 29, 2005, January 1, 2005, and May 1, 2004, 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 April 30, 2005:

Recent Accounting Pronouncements

     In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (“SFAS 123R”), a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R will require the Company to, among other things, measure employee stock-based compensation awards where applicable using a fair value method and record related expense in the Company’s consolidated financial statements. The provisions of SFAS 123R are effective for the first annual reporting period that begins after June 15, 2005; therefore, the Company will adopt the new requirements beginning in its first quarter of fiscal 2006. Adoption of the expensing requirements will reduce the Company’s reported earnings. Management is currently evaluating the specific impacts of adoption, which include whether the Company should adopt the requirements on a retrospective basis and which valuation model is most appropriate.

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

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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

     The company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s four week transition period ended January 29, 2005 and first fiscal quarter ended April 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, except as discussed below, there has been no such change during the Company’s four week transition period ended January 29, 2005 or first quarter of fiscal year 2005.

     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 periods 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.

     In February 2005, the Company, in consultation with its Audit Committee and its independent registered public accounting firm, concluded that it must correct its previously issued financial statements to properly account for landlord allowances and the commencement of lease terms. This correction resulted in the restatement of operating results and financial position for the fiscal years 1999 through 2003, which was reflected in the Company’s amended fiscal year 2003 Annual Report on Form 10-K/A, and for the first thirty-nine weeks of 2004, which was reflected in amended Quarterly Reports on Form 10-Q/A for the relevant periods.

     The Public Company Accounting Oversight Board’s Auditing Standard No. 2, “An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements,” states that a restatement of financial statements in prior filings with the SEC is a strong indicator of the existence of a “material weakness” in the design or operation of internal control over financial reporting. Based on that definition, the Company’s Chief Executive Officer and Chief Financial Officer concluded that a material weakness existed in the Company’s internal control over financial reporting, and disclosed this to the Audit Committee and to the independent registered public accounting firm.

     The Company’s Chief Executive Officer and Chief Financial Officer also concluded that this matter constituted ineffectiveness of its disclosure controls and procedures as of the end of the four week transition period covered by this Quarterly Report on Form 10-Q, in ensuring that material information relating to the Company, required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

     The Company has remediated the material weakness in internal control over financial reporting and the ineffectiveness of its disclosure controls and procedures by conducting a review of its accounting related to leases, and correcting its method of accounting for landlord allowances and the commencement of lease terms. The Company has established procedures designed to ensure that landlord allowances will be properly classified and that rent expense will be recognized in the appropriate periods in the Company’s financial statements.

     As a result of the remediation discussed above, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of first quarter of fiscal year 2005, 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.

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BAKERS FOOTWEAR GROUP, INC.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

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 four weeks ended January 29, 2005 and the thirteen weeks ended April 30, 2005.

Issuer Purchases of Equity Securities

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ITEM 6. EXHIBITS

     (a) Exhibits: See Exhibit Index herein

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed, on its behalf by the undersigned thereunto duly authorized.

Date: June 14, 2005

	BAKERS FOOTWEAR GROUP, INC.
	(Registrant)
	By:	/s/ Peter A. Edison
		Peter A. Edison
		Chairman of the Board and Chief Executive Officer Bakers Footwear Group, Inc. (On behalf of the Registrant)

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

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EXHIBIT INDEX

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