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PHILADELPHIA-Mothers Work Inc. suffered a tougher than expected third quarter. Sales dropped 6.5% to $153.2 million from $163.9 million in the same quarter a year ago. Comp-store sales fell 8.2% based on 1,393 locations in third-quarter 2007, versus an increase of 6.4% during the third quarter of 2006 when 1,472 locations were in operation.

The locally based maternity apparel chain continued its ongoing strategy of expanding multi-brand concept stores, which typically involves closing two or more smaller units. Five new units, including four multi-brand ones, were opened during the quarter ended June 30, and 13 were closed, with eight of the closures related to multi-brand store openings. The stores operate under the names A Pea in the Pod, Mimi Maternity and Motherhood Maternity.

During a conference call, Rebecca Matthias, president and CEO, acknowledged that third-quarter sales “we weaker than we had planned.” She attributed the dip “primarily to a continued difficult overall economic and retail environment, unseasonably cool weather early in the quarter, and, importantly, a negative impact from the current popularity of certain styles in the non-maternity women’s apparel market.” Trapeze and baby-doll dresses and tops, she said, “can more readily fit a pregnant woman in her pregnancy than typical non-maternity fashions.”

As a result of weak sales, the company took increased markdowns, partly to manage inventory levels and partly in response to “a greater level of clearance markdowns by our maternity competition,” Matthias said. Thus, margins were also lower than planned. Despite this, she said “our overall inventory level is less than 1% higher than last year, and we believe we can continue to manage our inventory levels without resorting to excessive markdown levels.”

Net income fell precipitously to $1 million this third quarter, compared with $8.8 million for the same quarter of 2006. However, this third quarter the company redeemed $90 million in senior notes, which resulted in a hefty after-tax charge. Without that debt-repurchase charge, net income for this third quarter would have been $5.5 million.

In addition to expanding its multi-brand concept, designed to generate higher sales per store at lower operating expense, the company is also continuing to build on its leased department and license relationships with other retailers. Mothers Work currently has relationships with Sears, Kohl’s, Macy’s, Boscov’s and Gordmans and plans to develop partnerships with others, which were not identified.

Another area of growth is a plan to leverage the relationship Mothers Work has with customers, which Matthias said is “a highly valued demographic for a range of consumer products and services companies.” This calls for marketing partnership programs that use the company’s database to drive customers to other baby- and parent-related products and services by third parties that market to families with children.

A MasterCard-based college saving program, “futuretrust,” which Mothers Work markets in stores and on its internet sites, is such an existing program. “In the future, we anticipate further developing our futuretrust program to a full-service financial services and information resource for our members, known as the Futuretrust Family Financial Center,” Matthias said. The services such centers may provide include “online banking, life insurance and other financial services needed by families with children.”

Meanwhile, July sales continue to be weak, Matthias reported. Management assumes a comp-store sales decline of between 2% and 6% for this year’s fourth quarter. For the year, it anticipates an overall sales decline of about 2% to 3%, which would result in net sales in a range of between $584 million and $589 million.

Looking to 2008, the company projects a 1% to 4% increase in comp-store sales for the year and nets sales of between $595 million and $611 million. Plans call for the opening of 25 to 30 new units, including 10 to 15 multi-brand stores, and the closing of 50 to 60 units, with about 25 to 30 of those resulting from multi-brand unit openings.

AT the quarter ended this June 30, the company operated 1,599 maternity locations, including 787 stores along with its departments in other retail units.

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