Sept 1 (Reuters) - Collective Brands Inc (PSS.N) posted a smaller-than-expected second-quarter profit as weak sales and promotions hurt margins at its low-cost Payless brand, the footwear retailer's biggest revenue source.

Designers for Payless shoes

Footwear retailers like Collective Brands have seen lower U.S. sales hurt by the still weak American economy and high unemployment rates.

The retailer, the holding company of Payless ShoeSource and Stride Rite, said lower traffic and reduced average selling prices led to a fall in Payless sales in the United States and a decline in comparable sales at the segment.

"We are seeing lower traffic where the economy is particularly challenging such as the southwest and border markets," Finance Chief Douglas Boessen said on a conference call with analysts.

For the second quarter, the Topeka, Kansas-based company earned $21.1 million, or 32 cents a share, compared with $18.7 million, or 29 cents a share, a year ago. Sales rose marginally to $841.3 million.

Analysts on average were looking for a profit of 45 cents a share, on revenue of $862.8 million, according to Thomson Reuters I/B/E/S.

Sales at the U.S. Payless business fell 7 percent to $508.0 million.

Collective Brands, which competes with retailers like Brown Shoe Co (BWS.N) and DSW Inc (DSW.N)said it expects 2010 capital expenditure of about $100 million, compared with $84 million in 2009.

The company's shares, which have shed almost half their value since touching a year high of $26.65 in April, were down 5 percent at $13.04 in extended trade.

(Reporting by Vidya Lakshmi in Bangalore; Editing by Don Sebastian and Vinu Pilakkott)