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ROCKAWAY, NJ-In its third fiscal quarter ended April 2, discount party-supply franchiser Party City reported a net loss of $7.2 million, or 42 cents per share on a diluted basis. This compares with a net loss of $5.6 million, or 33 cents per diluted share, for the same time last year.

The results included a charge of $4.1 million related to the settlement of a California class action litigation relating to overtime wage and hour laws, but the company also attributed the loss to a decrease in net sales markdowns related to merchandise clearance activities, costs associated with the implementation of its distribution initiative and increases in certain corporate expenses.

“This management team clearly understands that we need to turn around the company’s performance,” Lisa Laube, chief merchandising officer, told investors during a Monday earnings call. Laube said the company plans on “blending the best of the old and the new,” which entails “reinstating ads for discounting party supplies, and resetting store configuration.”

Company-owned stores recorded $91.0 million for the third quarter of fiscal 2005, a decrease of 6.8% as compared with $97.7 million in the third quarter of 2004. Same-store net sales for company-owned stores decreased 7.1% in the third quarter of fiscal 2005 as compared with the third quarter of fiscal 2004, while same-store net sales for franchise stores decreased 7.4% for the same period.

Gross profit declined $5.3 million to $20.9 million and, expressed as a percentage of net sales, declined to 23.0% from 26.9% in the same period last fiscal year. Party City executives attributed the decline to a 260 basis point reduction in merchandise margin from markdowns related to merchandise clearance activities and higher costs of distribution.

“We believe that our every day prices are completive in market but our prices and items have become too predictable,” Laube said. “We’re striving to become more creative with our promotions to create a sense of urgency in the market.”

While the company admitted sales and earnings results for the third quarter were “very disappointing,” it quickly boasted the implementation of several important strategic initiatives in the period, such as an extensive array of new non-seasonal products and coordinated assortments, and its repositioning in corporate stores to support the new products and promote better in-store merchandising.

“We have a solid foundation,” Rick Griner, chief operating officer, told investors. “In this quarter, we had the physical reset of stores ready for delivery of new project on time and under budget.”

In the last nine months, Party City has opened one store and closed three stores, compared with eight store openings and one store closing during the same period last fiscal year. The company also added three franchise stores and closed one franchise store in the first nine months of fiscal 2005. Party City currently operates 247 company-owned stores and has 258 franchise stores in the United States and Puerto Rico.

Griner also said Party City will open a new corporate store by Halloween and has told franchisees it is willing to expand into new territories. Employees working in Party City’s corporate offices will also be relocating to a new facility, which is expected to “boost productivity and moral” for the company.

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