NEW YORK -- Hurt by slumping sales of women's flannel, Forstmann & Co. Inc. reported third-quarter earnings applicable to common shareholders fell 20.7 percent while sales rose 4.6 percent.

Earnings for the quarter ended July 31 fell to $2.4 million, or 43 cents a share, from $3 million, or 54 cents, a year ago. Gross profit was $14.2 million against $15.3 million. Sales grew to $69.1 million from $66.1 million.

Christopher L. Shaller, chairman, president and chief executive officer, said, "While earnings for the third quarter were lower than expected, our results are encouraging in light of a significant reduction in women's wear flannel sales in the quarter, as well as an increase in interest rates."

Reflecting the drop in flannel and outerwear fabric sales, backlog as of Aug. 26 was $45.2 million, down slightly from $46.4 million. Based on the composition of the backlog, Schaller said, he expects the women's worsted and men's wear businesses will continue to show strength for the fourth quarter. He noted that women's moderate-price sportswear manufacturers adjusted for ordering too much wool flannel last year, accelerating the decline in demand throughout fiscal 1994. As a result, he said, the company lowered inventories by $7.4 million during the quarter by cutting production. The decreased manufacturing along with higher health care claims reduced gross margins to 20.5 percent from 23.2 percent in 1993, Schaller said.

The decline in flannel orders, Schaller continued, was offset primarily by increases in women's worsted and men's wear fabric sales. Sales in its men's wear group climbed 18.8 percent in the quarter and 8 percent in the nine months.

In the nine months, earnings applicable to shareholders were flat at $6.4 million, or $1.15. The year-ago income included a one-time benefit of $1.8 million, or 33 cents a share, as a result of the company's quasi-reorganization effected at the start of fiscal 1993.

Sales edged up 1.2 percent to $183.1 million from $180.8 million.

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