Our fiscal year ends on September 30. All references in this discussion to our fiscal years refer to the fiscal year, or periods within the fiscal year, ended on September 30 in the year mentioned. For example, our "fiscal 2009" will end on September 30, 2009.

Restructuring

On July 1, 2008, we announced that we were streamlining our merchandise brands and store nameplates and implementing cost reductions in order to simplify our business model, reduce overhead costs and improve and tighten our merchandise assortments. Pursuant to the strategic restructuring, we rebranded our Mimi Maternity ® merchandise brand under our A Pea in the Pod® brand beginning with the Spring 2009 collection, which initially debuted in November 2008. We also streamlined our store nameplates, which began in November 2008, by renaming our single-brand Mimi Maternity stores as A Pea in the Pod, and by renaming our multi-brand Mimi Maternity stores as Destination Maternity®. In connection with the strategic restructuring we also reduced our corporate and field management headcount. During the first nine months of fiscal 2009 we began to implement actions to achieve further cost reductions. We incurred pretax expense of approximately $0.9 million from our restructuring and cost reduction actions in the fourth quarter of fiscal 2008, consisting of approximately $0.7 million for cash severance expense and severance-related benefits, and approximately $0.2 million of non-cash expense for accelerated depreciation of existing store signs resulting from planned store signage changes. We incurred pretax expense of approximately $0.6 million in the first nine months of fiscal 2009, consisting of approximately $0.3 million for cash severance expense, $0.2 million for other cost reduction initiatives and $0.1 million of non-cash expense for accelerated depreciation. We expect to incur additional pretax expense of approximately $0.3 million in the fourth quarter of fiscal 2009.

Goodwill Impairment

For purposes of our impairment testing under SFAS No. 142, Goodwill and Other Intangible Assets, we have one reporting unit based on our reporting structure. The fair value of our single reporting unit is determined based on a combination of the fair market value of our outstanding common stock on a control basis, a discounted cash flow analysis and other generally accepted valuation methodologies and, if necessary, with the assistance of an outside independent valuation specialist. As a result of a substantial decrease in the market price of our common stock subsequent to September 30, 2008, reflecting deteriorating overall economic conditions and the very difficult equity market conditions, we reassessed the carrying value of our goodwill as of December 31, 2008, in accordance with the interim period requirements of SFAS No. 142, and concluded that our goodwill was impaired. Consequently, we recorded a preliminary non-cash goodwill impairment charge of $47.0 million, on both a pretax and after tax basis, in the first quarter of fiscal 2009. The preliminary goodwill impairment charge reflected the indication from the impairment analysis performed in the first quarter of fiscal 2009, was subject to finalization of certain fair value estimates being performed with the assistance of an outside independent valuation specialist, and was subject to adjustment when all aspects of the analysis were completed. The final results of our evaluation completed during the second quarter of fiscal 2009 indicated the goodwill was fully impaired. Accordingly, we recorded a $3.4 million non-cash goodwill impairment charge, on both a pretax and after tax basis, in the second quarter of fiscal 2009, representing the remaining carrying value of the goodwill as of December 31, 2008. The goodwill impairment analysis involved calculating the implied fair value of our goodwill by allocating the fair value of our single reporting unit to all assets and liabilities other than goodwill (including both recognized and unrecognized intangible assets) and comparing the residual amount to the carrying value of goodwill. The non-cash goodwill impairment charges do not have any adverse effect on the covenant calculations under our debt agreements or our overall compliance with the covenants of our debt agreements.

Results of Operations

The following tables set forth certain operating data as a percentage of net
sales and as a percentage change for the three and nine months ended June 30:



                                                                                         % Period to Period
                                                    % of Net Sales (1)                   Increase (Decrease)
                                                                                        Three           Nine
                                                                                        Months         Months
                                               Three                  Nine              Ended          Ended
                                            Months Ended          Months Ended         June 30,       June 30,
                                              June 30,              June 30,           2009 vs.       2009 vs.
                                          2009       2008       2009        2008         2008           2008
Net sales                                 100.0 %    100.0 %    100.0 %     100.0 %        (6.4 )%        (6.1 )%
Cost of goods sold (2)                     45.6       48.6       47.2        49.4         (12.2 )        (10.3 )

Gross profit                               54.4       51.4       52.8        50.6          (0.9 )         (2.1 )
Selling, general and administrative
expenses (3)                               45.3       45.0       48.2        47.4          (5.9 )         (4.5 )
Store closing, asset impairment and
asset disposal expenses                     0.2        0.6        0.1         0.6         (76.3 )        (85.4 )
Restructuring charges                       0.3         -         0.1          -           N.M.           N.M.
Goodwill impairment expense                  -          -        12.4          -           N.M.           N.M.

Operating income (loss)                     8.7        5.7       (8.0 )       2.6          42.8           N.M.
Interest expense, net                       0.8        1.1        0.9         1.3         (35.7 )        (32.7 )
Loss on extinguishment of debt              0.0        0.0        0.0         0.0         (50.8 )         (2.1 )

Income (loss) before income taxes           7.9        4.5       (8.9 )       1.3          63.1           N.M.
Income tax provision                        3.1        1.8        1.4         0.6          61.8          129.2

Net income (loss)                           4.8 %      2.7 %    (10.3 )%      0.8 %        64.0           N.M.

N.M.-Not meaningful

(1) Components may not add to total due to rounding.

(2) The "Cost of goods sold" line item includes merchandise costs (including customs duty expenses), expenses related to inventory shrinkage, product related corporate expenses (including expenses related to our payroll, benefit costs and operating expenses of our buying departments), inventory reserves (including lower of cost or market reserves), inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and the other costs of our distribution network.

(3) The "Selling, general and administrative expenses" line item includes advertising and marketing expenses, corporate administrative expenses, store expenses (including store payroll and store occupancy expenses), and store opening expenses.

The following table sets forth certain information concerning the number of our stores and leased departments for the periods indicated:

                                                                          Three Months Ended
                                                  June 30, 2009                                        June 30, 2008
                                                  Leased           Total Retail                        Leased           Total Retail
Retail Locations                  Stores        Departments         Locations          Stores        Departments         Locations
Beginning of period                  734                354               1,088           766                771               1,537
Opened                                 2                  3                   5             7                 -                    7
Closed                                (6 )               -                   (6 )         (12 )             (477 )              (489 )

End of period                        730                357               1,087           761                294               1,055


                                                                          Nine Months Ended
                                                  June 30, 2009                                        June 30, 2008
                                                  Leased           Total Retail                        Leased           Total Retail
Retail Locations                  Stores        Departments         Locations          Stores        Departments         Locations
Beginning of period                  754                278               1,032           781                795               1,576
Opened                                11                 80                  91            24                  4                  28
Closed                               (35 )               (1 )               (36 )         (44 )             (505 )              (549 )

End of period                        730                357               1,087           761                294               1,055

Three Months Ended June 30, 2009 and 2008

Net Sales. Our net sales for the third quarter of fiscal 2009 decreased by 6.4%, or $9.7 million, to $142.5 million from $152.2 million for the third quarter of fiscal 2008. The decrease in sales versus last year resulted primarily from a decrease in comparable store sales and a decrease in Sears® leased department sales, due to the closure of all of our remaining leased departments within Sears stores during the month of June 2008. Comparable store sales decreased by 5.5% for the third quarter of fiscal 2009, based on 958 retail locations, versus a comparable store sales increase of 2.4% for the third quarter of fiscal 2008, based on 989 retail locations.

As of June 30, 2009, we operated a total of 730 stores and 1,087 total retail locations, compared to 761 stores and 1,055 total retail locations as of June 30, 2008. In addition, our Oh Baby by Motherhood™ collection is available at Kohl's® stores throughout the United States. During the third quarter of fiscal 2009, we opened two stores, one of which was a multi-brand store, and closed six stores, with two of the store closings related to multi-brand store openings. The increase in leased department locations at the end of June 2009 versus the end of June 2008 predominantly reflects the opening of an additional 69 Babies"R"Us ® leased department locations in January and February 2009.

Gross Profit. Our gross profit for the third quarter of fiscal 2009 decreased by 0.9%, or $0.7 million, to $77.5 million from $78.2 million for the third quarter of fiscal 2008 primarily reflecting the effect of our lower sales volume compared to last year, partially offset by increased gross profit as a percentage of net sales (gross margin). Gross margin for the third quarter of fiscal 2009 was 54.4% compared to 51.4% for the third quarter of fiscal 2008. The increase in gross margin for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 was due primarily to higher merchandise gross margin from better pricing and lower overall markdown levels.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses for the third quarter of fiscal 2009 decreased by 5.9%, or $4.0 million, to $64.6 million from $68.6 million for the third quarter of fiscal 2008. This decrease in expense for the quarter resulted primarily from lower corporate payroll from our restructuring, lower store payroll, reflecting our reduced number of stores and leased departments, and a decrease in store occupancy costs, partially offset by higher variable incentive compensation expense resulting from increased profitability. As a percentage of net sales, selling, general and administrative expenses increased to 45.3% for the third quarter of fiscal 2009 compared to 45.0% in the third quarter of fiscal 2008. This increase in the expense percentage for the quarter resulted primarily from negative expense leverage from the decrease in sales, partially offset by the $4.0 million decrease in selling, general and administrative expenses.

Store Closing, Asset Impairment and Asset Disposal Expenses. Our store closing, asset impairment, and asset disposal expenses for the third quarter of fiscal 2009 decreased significantly to $0.2 million from $1.0 million for the third quarter of fiscal 2008. We incurred charges relating to store closings and other asset disposals of $0.1 million for the third quarter of fiscal 2009, as compared to charges of $0.6 million for the third quarter of fiscal 2008. We incurred lower impairment charges for write-downs of long-lived assets of $0.2 million for the third quarter of fiscal 2009, as compared to $0.4 million for the third quarter of fiscal 2008.

Restructuring Charges. In the third quarter of fiscal 2009, we incurred pretax expense of $0.4 million from our strategic restructuring and cost reduction initiatives.

Operating Income. We had operating income of $12.3 million for the third quarter of fiscal 2009 compared to $8.6 million for the third quarter of fiscal 2008. The increase in operating income was primarily due to lower selling, general and administrative expenses. Operating income as a percentage of net sales for the third quarter of fiscal 2009 increased to 8.7% from 5.7% for the third quarter of fiscal 2008. The increase in operating income as a percentage of net sales was primarily due to our higher gross margin, partially offset by our higher operating expense ratio compared to the third quarter of fiscal 2008.

Interest Expense, Net. Our net interest expense for the third quarter of fiscal 2009 decreased by 35.7%, or $0.6 million, to $1.1 million from $1.7 million for the third quarter of fiscal 2008. This decrease was due to our lower debt level, primarily as a result of the $15.0 million of Term Loan prepayments we made in the previous 12 months, and to a lesser extent, lower interest rates and lower credit line borrowings. During the third quarter of fiscal 2009 we did not have any direct borrowings under our Credit Facility. During the third quarter of fiscal 2008 we had average daily borrowings of $3.4 million. We did not have any direct borrowings outstanding under our Credit Facility as of June 30, 2009.

Loss on Extinguishment of Debt. In June 2009, we prepaid $5.0 million principal amount of our outstanding Term Loan. The $5.0 million Term Loan prepayment resulted in a third quarter fiscal 2009 pretax charge of $29,000, representing the write-off of unamortized deferred financing costs. In June 2008, we prepaid $8.0 million in principal amount of our Term Loan resulting in a pretax charge of $59,000 in the third quarter of fiscal 2008.

Income Tax Provision. Our effective tax rate was 39.5% for the third quarter of fiscal 2009 and 39.8% for the third quarter of fiscal 2008. Our effective tax rates reflect the effect of additional income tax expense recognized during the fiscal 2009 and 2008 quarters in connection with FIN No. 48. We expect our effective tax rate for the full year fiscal 2009 to be approximately 40.5%, excluding the effect of goodwill impairment charges.

Net income. Net income for the third quarter of fiscal 2009 was $6.8 million, or $1.12 per share (diluted), compared to net income of $4.1 million or $0.68 per share (diluted) for the third quarter of fiscal 2008.

Our average diluted shares outstanding of 6,066,000 for the third quarter of fiscal 2009 were 0.3% higher than the 6,049,000 average diluted shares outstanding for the third quarter of fiscal 2008. The increase in average diluted shares outstanding reflects the higher shares outstanding in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008, primarily as a result of vesting of restricted stock.

Nine Months Ended June 30, 2009 and 2008

Net Sales. Our net sales for the first nine months of fiscal 2009 decreased by 6.1%, or $26.7 million, to $407.4 million from $434.1 million for the first nine months of fiscal 2008. The decrease in sales versus last year resulted primarily from a decrease in Sears leased department sales and a decrease in comparable store sales. Comparable store sales decreased by 3.0% for the first nine months of fiscal 2009, based on 925 retail locations, versus a comparable store sales decrease of 0.6% for the first nine months of fiscal 2008, based on 842 retail locations.

During the first nine months of fiscal 2009, we opened 11 stores, four of which were multi-brand stores, and closed 35 stores, with eight of the store closings related to multi-brand store openings.

Gross Profit. Our gross profit for the first nine months of fiscal 2009 decreased by 2.1%, or approximately $4.7 million, to $215.2 million from $219.9 million for the first nine months of fiscal 2008, primarily reflecting the effect of our lower sales volume compared to last year, partially offset by increased gross profit as a percentage of net sales (gross margin). Gross margin for the first nine months of fiscal 2009 was 52.8% compared to 50.6% for the first nine months of fiscal 2008. The increase in gross margin for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008 was due primarily to higher merchandise gross margin from better pricing and lower overall markdown levels.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses for the first nine months of fiscal 2009 decreased by 4.5%, or approximately $9.1 million, to $196.6 million from $205.7 million for the first nine months of fiscal 2008. This decrease in expense for the first nine months resulted primarily from lower corporate payroll from our restructuring, lower store payroll, reflecting our reduced number of stores and leased departments, and a decrease in store occupancy costs, partially offset by higher variable incentive compensation expense resulting from increased profitability. As a percentage of net sales, selling, general and administrative expenses increased to 48.2% for the first nine months of fiscal 2009 compared to 47.4% in the first nine months of fiscal 2008. This increase in the expense percentage for the nine-month period resulted primarily from negative expense leverage from the decrease in sales, partially offset by the $9.1 million decrease in selling, general and administrative expenses.

Store Closing, Asset Impairment and Asset Disposal Expenses. Our store closing, asset impairment, and asset disposal expenses for the first nine months of fiscal 2009 decreased significantly to $0.4 million from $2.7 million for the first nine months of fiscal 2008. We incurred charges relating to store closings and other asset disposals of $0.2 million for the first nine months of fiscal 2009, as compared to charges of $1.4 million for the first nine months of fiscal 2008. We incurred lower impairment charges for write-downs of long-lived assets of $0.5 million for the first nine months of fiscal 2009, as compared to $1.3 million for the first nine months of fiscal 2008. We recognized a gain of $0.3 million from the sale of the remaining Costa Rica facility acquired in a fiscal 2002 business purchase.

Restructuring Charges. In the first nine months of fiscal 2009, we incurred pretax expense of $0.6 million from our strategic restructuring and cost reduction initiatives.

Goodwill Impairment Expense. We recorded non-cash goodwill impairment charges of $50.4 million in the first nine months of fiscal 2009 to reflect the full impairment of our goodwill based on the final results of the impairment analysis completed during the second quarter of fiscal 2009.

Operating Income (loss). We had operating loss of $(32.7) million for the first nine months of fiscal 2009. Excluding the goodwill impairment charges, our operating income for the first nine months of fiscal 2009 was $17.7 million, an increase of 55.7% or $6.3 million, from the $11.4 million of operating income for the first nine months of fiscal 2008, which had no goodwill impairment charge. The increase in operating income, excluding the goodwill impairment charges, was primarily due to lower selling, general and administrative expenses, and lower store closing, asset impairment and asset disposal costs, partially offset by the lower sales volume and associated gross profit reduction. Operating income, excluding the goodwill impairment charges, as a percentage of net sales for the first nine months of fiscal 2009 increased to 4.3% from 2.6% for the first nine months of fiscal 2008. The increase in operating income, excluding the goodwill impairment charges, as a percentage of net sales was primarily due to our higher gross margin, partially offset by our higher operating expense ratio compared to the first nine months of fiscal 2008.

Interest Expense, Net. Our net interest expense for the first nine months of fiscal 2009 decreased by 32.7%, or approximately $1.7 million, to $3.7 million from $5.4 million for the first nine months of fiscal 2008. This decrease was due to our lower debt level, primarily as a result of the $15.0 million of Term Loan prepayments we made in the previous 12 months, and to a lesser extent, lower interest rates and lower credit line borrowings. During the first nine months of fiscal 2009, our average daily level of direct borrowings under our Credit Facility was $0.3 million compared to $5.3 million for the first nine months of fiscal 2008. We did not have any direct borrowings outstanding under our Credit Facility as of June 30, 2009.

Loss on Extinguishment of Debt. In the first nine months of fiscal 2009, we prepaid $15.0 million principal amount of our outstanding Term Loan, which resulted in a pretax charge of $0.1 million representing the write-off of unamortized deferred financing costs, compared to prepaying $13.0 million in the first nine months of fiscal 2008 resulting in a pretax charge of $0.1 million of unamortized deferred financing costs for the first nine months of fiscal 2008.

Income Tax Provision. There was no tax benefit associated with our $50.4 million goodwill impairment charges. Excluding the goodwill impairment charges, our income before income taxes was $14.0 million and our effective tax rate was a provision of 40.2% for the first nine months of fiscal 2009. Our effective tax rate was 41.9% for the first nine months of fiscal 2008. Our effective tax rates reflect the effect of additional income tax expense recognized during the first nine months of fiscal 2009 and fiscal 2008 in connection with FIN No. 48.

Net Income (Loss). Net loss for the first nine months of fiscal 2009 was $(42.0) million, or $(7.02) per share (diluted). Net loss for the first nine months of fiscal 2009 includes the goodwill impairment charges of $50.4 million, or $(8.41) per diluted share. Excluding the goodwill impairment charges, our net income was $8.3 million or $1.39 per share (diluted), compared to $3.4 million or $0.56 per share (diluted) for the first nine months of fiscal 2008, which had no goodwill impairment charges.

Our average shares outstanding (basic and diluted) of 5,987,000 for the first nine months of fiscal 2009 were 0.9% lower than the 6,039,000 average shares outstanding diluted for the first nine months of fiscal 2008. The decrease in average diluted shares outstanding reflects the elimination of the dilutive impact of outstanding stock options and restricted stock in the first nine months of fiscal 2009 due to the net loss, compared to the dilutive impact of outstanding stock options and restricted stock awards in the first nine months of fiscal 2008, when we generated net income, partially offset by higher shares outstanding in the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008, as a result of stock option exercises and vesting of restricted stock awards. Had we reported a profit for the nine month period ended June 30, 2009, the weighted average number of dilutive shares outstanding for computation of Diluted EPS would have been approximately 6,015,000.

Following is a reconciliation of net income (loss) and net income (loss) per share (diluted) to net income and net income per share (diluted) excluding goodwill impairment expense for the nine months ended June 30, 2009 and 2008 (in thousands, except per share amounts):

                                                  Nine Months Ended                   Nine Months Ended
                                                    June 30, 2009                       June 30, 2008
                                              Net
                                            Income                 Diluted         Net               Diluted
                                            (Loss)        Shares     EPS         Income    Shares      EPS
As reported                                $ (42,047 )     5,987   $  (7.02 )    $ 3,395    6,039   $    0.56
Goodwill impairment expense, net of tax       50,389          -                       -        -
Incremental shares from the assumed
lapse of restrictions on restricted
stock                                             -           11                      -        -
Incremental shares from the assumed
exercise of outstanding stock options             -           17                      -        -

Excluding goodwill impairment expense      $   8,342       6,015   $   1.39      $ 3,395    6,039   $    0.56

Seasonality

Our business, like that of many other retailers, is seasonal. Our quarterly net sales have historically been highest in our third fiscal quarter, corresponding to the Spring selling season, followed by the first fiscal quarter, corresponding to the Fall/holiday selling season. Given the typically higher gross margin we experience in the third fiscal quarter compared to other quarters, the relatively fixed nature of most of our operating expenses and interest expense, and the historically higher sales level in the third quarter, we have typically generated a very significant percentage of our full year operating income and net income during the third quarter. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Quarterly results may fluctuate materially depending upon, among other things, the timing of new store openings and new leased department openings, net sales and profitability contributed by new stores and leased departments, increases or decreases in comparable store sales, the timing of the fulfillment of purchase orders under our product and license arrangements, adverse weather conditions, shifts in the timing of certain holidays and promotions, changes in inventory and production levels and the timing of deliveries of inventory, and changes in our merchandise mix.

Liquidity and Capital Resources

. . .