UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549




FORM
10-Q










x
            Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934




For the quarterly period ended January 24, 2009




o
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the
transition period from   
to








Commission
File Number 1-5893





FREDERICK’S OF HOLLYWOOD
GROUP INC.


(Exact
name of Registrant as specified in its charter)





New York
            
            13-5651322(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      Number)1115 Broadway, New York,
      NY
            
            10010(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s
telephone number, including area code (212) 798-4700





_________________________________________________________________


(Former
name, former address, and former fiscal year, if changed since last
report.)





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Yes x                      No
o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act:








Large accelerated
      filer o
            Accelerated filer
      oNon-accelerated
      filer o
              (do
      not check if a smaller reporting company)
            Smaller reporting
      company x









Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)




Yes o                      No
x




The
number of common shares outstanding on March 1, 2009 was
26,348,870.













FREDERICK’S
      OF HOLLYWOOD GROUP INC.


QUARTERLY
      REPORT ON FORM 10-Q


TABLE
      OF CONTENTS








PagePART
      I.
            Financial
      InformationItem
      1.
            Financial
      StatementsConsolidated
      Balance Sheets at January 24, 2009 (Unaudited) and July 26, 2008
      (Audited)
            3Consolidated Statements of Operations (Unaudited) for the Three and Six
      Months Ended
            4January
      24, 2009 and January 26, 2008Consolidated Statements of Cash Flows (Unaudited) for the Six Months
      Ended
            5January
      24, 2009 and January 26, 2008Notes to Consolidated Unaudited Financial Statements
            6 –
      13Item
      2.
            Management’s
      Discussion and Analysis of Financial
            14
      – 25Condition
      and Results of OperationsItem
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            25Item
      4T.
            Controls
      and Procedures
            25
      – 26PART
      II.
            Other
      InformationItem
      1
            Legal
      Proceedings
            27Item
      1A.
            Risk
      Factors
            27Item
      6.
            Exhibits
            27Signatures
            28




2




PART  I.   FINANCIAL
INFORMATION





Item
1.  Financial Statements





FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED
BALANCE SHEETS


(In
Thousands, Except Share Data)


January
      24,
              
              
              July
      26,2009
              
              
              2008(Unaudited)
              
              
              (Audited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              1,936
              
              
              $
              1,988Accounts
      receivable
              
              
              6,454
              
              
              
              5,788Income
      tax receivable
              
              
              155
              
              
              
              112Merchandise
      inventories
              
              
              27,541
              
              
              
              24,572Prepaid
      expenses and other current assets
              
              
              4,249
              
              
              
              3,515Deferred
      income tax assets
              
              
              2,321
              
              
              
              2,766Total
      current assets
              
              
              42,656
              
              
              
              38,741PROPERTY
      AND EQUIPMENT, Net
              
              
              23,163
              
              
              
              22,576GOODWILL
              
              
              -
              
              
              
              19,100INTANGIBLE
      AND OTHER ASSETS
              
              
              26,609
              
              
              
              27,265TOTAL
      ASSETS
              
              $
              92,428
              
              
              $
              107,682LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Revolving
      credit facility and term loans
              
              $
              16,776
              
              
              $
              11,093Current
      portion of long-term debt
              
              
              20
              
              
              
              50Accounts
      payable and other accrued expenses
              
              
              24,467
              
              
              
              20,709Total
      current liabilities
              
              
              41,263
              
              
              
              31,852DEFERRED
      RENT AND LEASE INCENTIVES
              
              
              4,350
              
              
              
              3,846LONG
      TERM DEBT-related party
              
              
              12,946
              
              
              
              12,561OTHER
              
              
              14
              
              
              
              55DEFERRED
      INCOME TAX LIABILITIES
              
              
              11,357
              
              
              
              11,802TOTAL
      LIABILITIES
              
              
              69,930
              
              
              
              60,116PREFERRED
      STOCK, $.01 par value – authorized, 10,000,000 shares at January 24, 2009
      and July 26, 2008; issued and outstanding 3,629,325 shares of Series A
      preferred stock at January 24, 2009 and July 26, 2008
              
              
              7,500
              
              
              
              7,500COMMITMENTS
      AND CONTINGENCIES ( NOTE 8 )
              
              
              -
              
              
              
              -SHAREHOLDERS’
      EQUITY:Common stock, $.01 par value –
      authorized, 200,000,000 shares at January 24, 2009 and
                July 26, 2008; issued and
      outstanding 26,194,102 shares at January 24, 2009 and
                26,141,194 shares at July 26,
      2008
              
              
              262
              
              
              
              261Additional
      paid-in capital
              
              
              60,023
              
              
              
              59,558Accumulated
      deficit
              
              
              (45,231
              )
              
              
              (19,744
              )Accumulated
      other comprehensive loss
              
              
              (56
              )
              
              
              (9
              )TOTAL
      SHAREHOLDERS’ EQUITY
              
              
              14,998
              
              
              
              40,066TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              92,428
              
              
              $
              107,682




See notes
to consolidated unaudited financial statements.




3




FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)


(In
Thousands, Except Per Share Amounts)





Three
      Months Ended
            
            
            Six
      Months EndedJanuary
      24,
            
            
            January
      26,
            
            
            January
      24,
            
            
            January
      26,2009
            
            
            2008
            
            
            2009
            
            
            2008(see
      Note 2)
            
            
            
            
            
            (see
      Note 2)Net
      sales
            
            $
            52,516
            
            
            $
            42,112
            
            
            $
            95,081
            
            
            $
            79,299Cost
      of goods sold, buying and occupancy
            
            
            34,223
            
            
            
            25,373
            
            
            
            62,110
            
            
            
            47,222Gross
      profit
            
            
            18,293
            
            
            
            16,739
            
            
            
            32,971
            
            
            
            32,077Selling,
      general and administrative expenses
            
            
            18,812
            
            
            
            18,519
            
            
            
            38,187
            
            
            
            37,158Goodwill
      impairment
            
            
            19,100
            
            
            
            -
            
            
            
            19,100
            
            
            
            -Operating
      loss
            
            
            (19,619
            )
            
            
            (1,780
            )
            
            
            (24,316
            )
            
            
            (5,081
            )Interest
      expense, net
            
            
            421
            
            
            
            641
            
            
            
            849
            
            
            
            1,267Loss
      before income tax provision
            
            
            (20,040
            )
            
            
            (2,421
            )
            
            
            (25,165
            )
            
            
            (6,348
            )Income
      tax provision
            
            
            21
            
            
            
            -
            
            
            
            41
            
            
            
            -Net
      loss
            
            
            (20,061
            )
            
            
            (2,421
            )
            
            
            (25,206
            )
            
            
            (6,348
            )Less:
      Preferred stock dividends
            
            
            140
            
            
            
            -
            
            
            
            281
            
            
            
            -Net
      loss available to common shareholders
            
            $
            (20,201
            )
            
            $
            (2,421
            )
            
            $
            (25,487
            )
            
            $
            (6,348
            )Basic
      net loss per share
            
            $
            (0.77
            )
            
            $
            (0.20
            )
            
            $
            (0.97
            )
            
            $
            (0.54
            )Diluted
      net loss per share
            
            $
            (0.77
            )
            
            $
            (0.20
            )
            
            $
            (0.97
            )
            
            $
            (0.54
            )Weighted
      average shares outstanding – basic
            
            
            26,192
            
            
            
            11,845
            
            
            
            26,182
            
            
            
            11,845Weighted
      average shares outstanding – diluted
            
            
            26,192
            
            
            
            11,845
            
            
            
            26,182
            
            
            
            11,845




See notes
to consolidated unaudited financial statements.




4




FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(In
Thousands)


Six
      Months EndedJanuary
      24,
            
            
            January
      26,2009
            
            
            2008(see
      Note 2)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (25,206
            )
            
            $
            (6,348
            )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesGoodwill
      impairment
            
            
            19,100
            
            
            
            -Depreciation
      and amortization
            
            
            3,006
            
            
            
            1,964Provision
      for sales allowances and doubtful accounts
            
            
            157
            
            
            
            -Issuance
      of common stock for directors’ fees
            
            
            25
            
            
            
            -Stock-based
      compensation expense
            
            
            440
            
            
            
            112Loss
      on disposal of property and equipment
            
            
            5
            
            
            
            50Amortization
      of deferred financing costs
            
            
            25
            
            
            
            45Noncash
      accrued interest on long term debt – related party
            
            
            385
            
            
            
            363Amortization
      of deferred rent and lease incentives
            
            
            389
            
            
            
            304Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (1,279
            )
            
            
            (242
            )Merchandise
      inventories
            
            
            (2,969
            )
            
            
            (4,591
            )Prepaid
      expenses and other current assets
            
            
            (734
            )
            
            
            (1,094
            )Income
      tax receivable
            
            
            (43
            )
            
            
            (86
            )Other
      assets
            
            
            35
            
            
            
            68Accounts
      payable and other accrued expenses
            
            
            3,307
            
            
            
            6,647Tenant
      improvements allowances
            
            
            571
            
            
            
            289Net
      cash used in operating activities
            
            
            (2,786
            )
            
            
            (2,519
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
            
            
            (2,919
            )
            
            
            (4,544
            )Cash
      paid for transaction costs
            
            
            -
            
            
            
            (1,340
            )Net
      cash used in investing activities
            
            
            (2,919
            )
            
            
            (5,884
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      borrowings under revolving line of credit
            
            
            5,683
            
            
            
            9,051Repayment
      of capital lease obligation
            
            
            (30
            )
            
            
            -Payments
      of long term debt – related party
            
            
            -
            
            
            
            (100
            )Cash
      paid for issuance costs
            
            
            -
            
            
            
            (411
            )Net
      cash provided by financing activities
            
            
            5,653
            
            
            
            8,540NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            (52
            )
            
            
            137CASH
      AND CASH EQUIVALENTS:Beginning
      of period
            
            
            1,988
            
            
            
            1,898End
      of period
            
            $
            1,936
            
            
            $
            2,035SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during period for:Interest
            
            $
            424
            
            
            $
            1,284Taxes
            
            $
            31
            
            
            $
            87




See notes
to consolidated unaudited financial statements.




5





FREDERICK’S
OF HOLLYWOOD GROUP INC.


NOTES
TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS




1.           Interim
Financial Statements




In the
opinion of Frederick’s of Hollywood Group Inc. (formerly Movie Star, Inc.) (the
“Company”), the accompanying consolidated unaudited financial statements contain
all adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company’s financial position as of January 24, 2009 and the results
of operations and cash flows for the six months ended January 24, 2009 and
January 26, 2008.




The
consolidated unaudited financial statements and notes are presented as required
by Form 10-Q and do not contain certain information included in the Company’s
year-end financial statements.  The July 26, 2008 consolidated balance
sheet is from the Company’s audited financial statements.  The results
of operations for the three and six months ended January 24, 2009 are not
necessarily indicative of the results to be expected for the full
year.  This Form 10-Q should be read in conjunction with the Company’s
audited consolidated financial statements and accompanying notes for the year
ended July 26, 2008 included in the Company’s 2008 Annual Report on Form 10-K
filed with the Securities and Exchange Commission (“SEC”) on October 24,
2008.




2.           Merger




On
December 18, 2006, the Company entered into an Agreement and Plan of Merger and
Reorganization (the “Merger Agreement”), as amended, with Fred Merger Corp., a
wholly-owned subsidiary of the Company, and FOH Holdings, Inc., a Delaware
corporation (“FOH Holdings”).  On January 28, 2008, the Company
consummated its merger with FOH Holdings (the “Merger”).  As a result,
FOH Holdings became a wholly-owned subsidiary of the
Company.  Following the Merger, the Company changed its name from
Movie Star, Inc. to Frederick’s of Hollywood Group Inc.  References
herein to “Movie Star” refer to the Company prior to the Merger.




The
Merger was accounted for under the purchase method of accounting as a reverse
acquisition.  Accordingly, for accounting and financial reporting
purposes, the Company was treated as the acquired company, and FOH Holdings was
treated as the acquiring company.  The historical financial
information presented for the periods and dates prior to January 28, 2008 is
that of FOH Holdings and its subsidiaries, and for periods subsequent to January
28, 2008 is that of the merged company.  In addition, the Company
adopted FOH Holdings’ fiscal year end, which is the last Saturday of
July.




Immediately
prior to the Merger, the Company completed a one-for-two reverse stock split of
its outstanding common stock.  All share and per share data referred
to in this Form 10-Q has been retroactively restated to reflect the reverse
stock split.




The
following condensed pro forma information (herein referred to as the “pro forma
information”) assumes the Merger had occurred as of July 29, 2007 for the period
presented.  The pro forma information has been prepared for
comparative purposes only and is not necessarily indicative of the actual
results that would have been attained had the Merger occurred as of the
beginning of the period presented, nor is it indicative of the Company’s future
results.  Furthermore, the unaudited pro forma information does not
reflect management’s estimate of any revenue-enhancing opportunities or
anticipated cost savings that may occur as a result of the integration and
consolidation of the two companies.




The pro
forma information set forth below reflects nonrecurring transactions related to
Movie Star merger related fees of approximately $558,000 and $917,000 for the
three and six months ended January 26, 2008, respectively.  Merger
related fees are legal fees and accounting costs for due
diligence.  These fees were expensed as a result of the Merger being
treated as a reverse acquisition.




(unaudited)
              Three Months
      Ended
            
            
            (unaudited)
              Six
      Months Ended($
      in thousands except per share amounts)
            
            January
      26, 2008
            
            
            January
      26, 2008Net
      sales
            
            $
            58,493
            
            
            $
            106,978Net
      loss
            
            
            (2,121
            )
            
            
            (8,202
            )Net
      loss available to common shareholders
            
            $
            (2,261
            )
            
            $
            (8,483
            )Basic
      loss per share
            
            $
            (0.11
            )
            
            $
            (0.42
            )Diluted
      loss per share
            
            $
            (0.11
            )
            
            $
            (0.42
            )




6




3.           Summary
of Significant Accounting Policies




Revenue Recognition –The
Company records revenue at the point of sale for stores, at the time of
estimated receipt by the customer for catalog and Internet sales, and at the
time of shipment to its wholesale customers.  Outbound shipping
charges billed to customers are included in net sales.  The Company
records an allowance for estimated returns from its retail consumers in the
period of sale based on prior experience.  If actual returns are
greater than those expected, additional sales returns may be recorded in the
future.  Retail sales are recorded net of sales taxes collected from
customers at the time of the transaction.




The
Company records other revenues for shipping revenues and commissions earned on
direct sell-through programs on a net basis as the Company acts as an agent on
behalf of the related vendor.  For the three months ended January 24,
2009 and January 26, 2008, total other revenues recorded in net sales in the
accompanying consolidated statements of operations were $2,388,000 and
$2,842,000, respectively.  For the six months ended January 24, 2009
and January 26, 2008, total other revenues recorded in net sales in the
accompanying consolidated statements of operations were $4,512,000 and
$5,263,000, respectively.




Gift
certificates and gift cards sold are carried as a liability and revenue is
recognized when the gift certificate or card is redeemed.  Customers
may receive a store credit in exchange for returned goods, which are carried as
a liability until redeemed.  To date, the Company has not recognized
any revenue associated with breakage from the gift certificates, gift cards or
store credits because they do not have expiration dates.




Accounts Receivable/Allowance for
Doubtful Accounts and Sales Discounts – The Company’s accounts
receivable, which is primarily attributable to the wholesale division, is net of
allowance for doubtful accounts and sales discounts.  An allowance for
doubtful accounts is determined through the analysis of the aging of accounts
receivable at the date of the financial statements.  An assessment of
the accounts receivable is made based on historical trends and an evaluation of
the impact of economic conditions.  This amount is not significant,
primarily due to the Company’s history of minimal bad debts. An allowance for
sales discounts is based on discounts relating to open invoices where trade
discounts have been extended to customers, costs associated with potential
returns of products, as well as allowable customer markdowns and operational
charge backs, net of expected recoveries.  These allowances are
included as a reduction to net sales and are part of the provision for
allowances included in accounts receivable.  The foregoing results
from seasonal negotiations and historic deduction trends, net of expected
recoveries and the evaluation of current market conditions.  As of
January 24, 2009 and July 26, 2008, accounts receivable was net of allowances of
$1,136,000 and $979,000, respectively.  Management believes its
allowance for doubtful accounts and sales discounts to be appropriate, and
actual results should not differ materially from those determined using
necessary estimates.  However, if the financial condition of the
Company’s customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be
required.  Also, if market conditions were to worsen, management may
take actions to increase customer incentive offerings, possibly resulting in an
incremental allowance at the time the incentive is offered.




Merchandise Inventories –
Retail store inventories are valued at the lower of cost or market using the
retail inventory first-in, first-out (“FIFO”) method, and wholesale, catalog and
Internet inventories are valued at the lower of cost or market, on an average
cost basis that approximates the FIFO method. Freight costs are included in
inventory and vendor promotional allowances are recorded as a reduction in
inventory cost. These inventory methods inherently require management
judgments and estimates, such as the amount and timing of permanent markdowns to
clear unproductive or slow-moving inventory, which may impact the ending
inventory valuations and gross margins.  Markdowns are recorded when
the sales value of the inventory has diminished.  Factors considered
in the determination of permanent markdowns include current and anticipated
demand, customer preferences, age of the merchandise, and fashion
trends.  Additionally, the Company accrues for planned but unexecuted
markdowns.  If actual market conditions are less favorable than those
projected by management, additional inventory reserves may be
required.  Historically, management has found its inventory reserves
to be appropriate, and actual results generally do not differ materially from
those determined using necessary estimates.  Inventory reserves were
$1,089,000 at January 24, 2009 and $1,312,000 at July 26, 2008.




Deferred Catalog Costs–
Deferred catalog costs represent direct-response advertising that is capitalized
and amortized over its expected period of future
benefit.  Direct-response advertising consists primarily of product
catalogs of FOH Holdings’ mail order subsidiary.  The capitalized
costs of the advertising are amortized over the expected revenue stream
following the mailing of the respective catalog, which is generally six
months.  The realizability of the deferred catalog costs are also
evaluated as of each balance sheet date by comparing the capitalized costs for
each catalog, on a catalog by catalog basis, to the probable remaining future
net revenues.  Direct-responseadvertising
costs of $3,345,000 and $2,297,000 are included in prepaid expenses and other
current assets in the accompanying consolidated balance sheets at January 24,
2009 and July 26, 2008, respectively.  The Company believes that it
has appropriately determined the expected period of future benefit as of the
date of its consolidated financial statements; however, should actual sales
results differ from expected sales, deferred catalog costs may be written off on
an accelerated basis.




7




Impairment of Long-Lived
Assets – The Company reviews long-lived assets, including property and
equipment and its amortizable intangible assets, for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may not
be recoverable based on undiscounted cash flows.  If long-lived assets
are impaired, an impairment loss is recognized and is measured as the amount by
which the carrying value exceeds the estimated fair value of the
assets.  No impairment was recorded for the six months ended January
24, 2009 and January 26, 2008.




Goodwill and Intangible Assets– The Company has certain intangible assets and goodwill. 
Intangible assets consist of trademarks, principally the Frederick’s of
Hollywood trade name, customer relationships, favorable leases and domain names
recognized in accordance with purchase accounting.  Goodwill represented
the portion of the purchase price that could not be attributed to specific
tangible or identified intangible assets recorded in connection with purchase
accounting.  Goodwill was not deductible for tax purposes.  The
Company amortizes customer relationships and favorable leases over estimated
useful lives of four years and the remaining lease term, respectively.  The
customer relationships and favorable leases are amortized on a straight-line
basis.  The Company has determined the trademarks and domain names to have
indefinite lives.  Financial Accounting Standards Board (“FASB”) Statement
No. 142, “Goodwill and Other
Intangible Assets,” (“SFAS 142”) requires the Company to not
amortize goodwill and certain other indefinite life intangible assets, but to
test those intangible assets for impairment annually and between annual tests
when circumstances or events have occurred that may indicate a potential
impairment has occurred.  SFAS 142 requires goodwill to be allocated
to reporting units.  As the Company’s market capitalization was
significantly below its book value at January 24, 2009, the Company
performed an impairment analysis.  The Company determined that
the goodwill balances on both the retail and wholesale segments were impaired as
a result of its current and future projected financial results due to the
poor macroeconomic outlook and a reduction in wholesale business with
Walmart.  Accordingly, the Company recorded a goodwill impairment charge of
$19,100,000.  After recognizing the impairment charge, the Company has
no remaining goodwill on its consolidated balance sheet as of January 24,
2009.




Accounting for Stock-Based
Compensation – The Company follows the provisions of FASB Statement No.
123(R), “Share-Based
Payment,” which requires the measurement and recognition of compensation
expense for all share-based payment awards to employees and directors based on
estimated fair values on the grant date.




The value
of each stock option is estimated on the date of grant using the Black-Scholes
option-pricing model.  The fair value generated by the Black-Scholes
model may not be indicative of the future benefit, if any, that may be received
by the option holder.  The following assumptions were used for options
granted during the six months ended January 24, 2009 and January 26,
2008:




Six
      Months EndedJanuary
      24,
            
            January
      26,2009
            
            2008Risk-free
      interest rate
            
            3.31%
      – 3.34%
            
            4.5%Expected
      life (years)
            
            5 –
      7
            
            6.27Expected
      volatility
            
            60
      – 62%
            
            61%Dividend
      yield
            
            0.0%
            
            0.0%





During
the six months ended January 24, 2009, the Company granted to one of its
officers and certain other employees options to purchase an aggregate of 82,500
shares of common stock under the 2000 Performance Equity
Plan.  Options to purchase 25,000 shares are exercisable at $.96 per
share and vest in six months, and options to purchase 57,500 shares are
exercisable at $.87 per share and vest 20% each year over five
years.




During
the six months ended January 26, 2008, the Company granted to certain employees
options to purchase an aggregate of 93,511 shares of common stock under the
FOH Holdings’ 2003 Employee Equity Incentive Plan, which was assumed by the
Company in the Merger.  These options are exercisable at an exercise
price of $4.52 per share and vest 20% each year over five years.




8




Income Taxes– Income taxes
are accounted for under an asset and liability approach that requires the
recognition of deferred income tax assets and liabilities for the expected
future consequences of events that have been recognized in the Company’s
financial statements and income tax returns.  The Company provides a
valuation allowance for deferred income tax assets when it is considered more
likely than not that all or a portion of such deferred income tax assets will
not be realized.  Due to the Merger, the Company may have had a change
in control under Section 382 of the Internal Revenue Code and, therefore, its
net operating loss carryforwards may be limited.




Supplemental Disclosure of Noncash
Financing Transactions– The
Company had outstanding accounts payable and accrued expenses of $331,000 and
$248,000 at January 24, 2009 and July 26, 2008, respectively, related to
purchases of property and equipment.  During the six months ended
January 24, 2009, the Company also accrued a dividend of $281,000 on its Series
A Preferred Stock.  In addition, during the six months ended January
26, 2008, the Company had $161,000 of leasehold improvements paid on its behalf
by a landlord.




4.           Effect
of New Accounting Standards




In
September 2006, the FASB issued SFAS 157, “Fair Value Measures” (“SFAS
157”).  SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements.   In February 2008, the FASB issued FASB Staff
Positions (“FSP”) 157-1, which amends SFAS 157 to remove leasing transactions
accounted for under SFAS 13, “Accounting for Leases” and
FSP 157-2, which deferred the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis to fiscal years
beginning after November 15, 2008. The Company adopted SFAS 157 on July 27,
2008.  The adoption of SFAS 157 for financial assets and liabilities
did not have a material impact on the Company’s consolidated financial
statements because the Company does not maintain investments or
derivatives.  The Company does not believe the adoption of SFAS 157
for nonfinancial assets and liabilities, effective July 26, 2009, will have a
material impact on the Company’s financial statements.




In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities,” (“SFAS 159”), which amends the
accounting for assets and liabilities in financial statements in accordance with
SFAS 115, “Accounting for
Certain Investments in Debt and Equity Securities.”  SFAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value.  This Statement does not affect any existing accounting
literature that requires certain assets and liabilities to be carried at fair
value.  Entities that choose the fair value option will recognize
unrealized gains and losses on items for which the fair value option was elected
in earnings at each subsequent reporting date.  The Company adopted
SFAS 159 on July 27, 2008.  The Company has currently chosen not to
elect the fair value option for any items that are not already required to be
measured at fair value in accordance with accounting principles generally
accepted in the United States.




In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51” (“SFAS
160”).  SFAS 160 establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  Earlier adoption is prohibited.  The Company does not
have any noncontrolling interests in subsidiaries and believes that SFAS 160
will not have a material impact on its financial statements.




In
December 2007, the FASB issued SFAS 141 (Revised 2007), “Business Combinations” (“SFAS
141R”).  SFAS 141R establishes principles and requirements for the
reporting entity in a business combination, including recognition and
measurement in the financial statements of the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree.  SFAS 141R also establishes disclosure requirements to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination.  SFAS 141R applies prospectively
to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008, and interim periods within those fiscal years.




In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133” (“SFAS 161”).  SFAS 161 requires enhanced
disclosures about how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for, and how they
affect an entity’s financial position, financial performance, and cash
flows.  The Statement is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The Company’s adoption of SFAS 161 will not have a
material impact on its financial Statements.




9




In May
2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”).  SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States. The Company adopted SFAS 162 on November 15,
2008, the effective date, and the adoption did not have a material impact on the
financial statements.




In May
2008, the FASB issued SFAS 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60”
(“SFAS 163”). SFAS 163 requires recognition of an insurance claim liability
prior to an event of default when there is evidence that credit deterioration
has occurred in an insured financial obligation. SFAS 163 is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and all interim periods within those fiscal years. Early application is
not permitted. The Company’s adoption of SFAS 163 will not have a material
impact on its financial statements.




5.           Merchandise
Inventories




Merchandise
inventories consist of the following (in thousands):




January
      24,
            
            
            July
      26,2009
            
            
            2008Raw
      materials
            
            $
            1,461
            
            
            $
            1,945Work-in
      process
            
            
            318
            
            
            
            291Finished
      goods
            
            
            25,762
            
            
            
            22,336$
            27,541
            
            
            $
            24,572




6.           Net
Loss Per Share




Basic net
loss per share has been computed by dividing the applicable net loss available
to common shareholders by the weighted average number of shares
outstanding.  Diluted net income per share has been computed by
dividing the applicable net income available to common shareholders by the
weighted average number of shares outstanding and common share
equivalents.  The Company’s calculation of basic and diluted net loss
per share is as follows (in thousands, except per share amounts):




Three
      Months Ended
            
            
            Six
      Months EndedJanuary
      24,
            
            
            January
      26,
            
            
            January
      24,
            
            
            January26,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      loss
            
            $
            (20,201
            )(a)
            
            $
            (2,421
            )
            
            $
            (25,487
            )(b)
            
            $
            (6,348
            )BASIC:Basic
      weighted average number of shares outstanding
            
            
            26,192
            
            
            
            11,845
            
            
            
            26,182
            
            
            
            11,845Basic
      net loss per share
            
            $
            (0.77
            )
            
            $
            (0.20
            )
            
            $
            (0.97
            )
            
            $
            (0.54
            )DILUTED:Basic
      weighted average number of shares outstanding
            
            
            26,192
            
            
            
            11,845
            
            
            
            26,182
            
            
            
            11,845Shares
      issuable upon conversion of stock options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      average number of equivalent shares outstanding
            
            
            26,192
            
            
            
            11,845
            
            
            
            26,182
            
            
            
            11,845Diluted
      net loss per share
            
            $
            (0.77
            )
            
            $
            (0.20
            )
            
            $
            (0.97
            )
            
            $
            (0.54
            )______________________________________________
              (a)Includes
      Series A preferred stock dividends of $140.
              (b)Includes
      Series A preferred stock dividends of $281.




There
were no potentially dilutive shares for the three and six months ended January
24, 2009 because all of the outstanding options had exercise prices greater than
the average market price.  There were 231,000 and 279,000 potentially
dilutive shares that were not included in the computation of diluted net loss
per share for the three and six months ended January 26, 2008 since their effect
would have been anti-dilutive.




10




7.           Financing




Revolving
Credit Facility




On
January 28, 2008, in connection with the Merger, the Company and its U.S.
subsidiaries (collectively, the “borrowers”) entered into an amended and
restated senior credit facility (the “Facility”) that amended the existing
revolving credit facility (“Old Facility”) between FOH Holdings and Wells Fargo
Retail Finance II, LLC (“Senior Lender”).  The Facility extended the
maturity date of the Old Facility to January 28, 2012.




The
Facility is for a maximum amount of $50 million comprised of a $25 million line
of credit with a $15 million sub-limit for letters of credit, and up to an
additional $25 million commitment in increments of $5 million at the option of
the Company so long as the borrowers are in compliance with the terms of the
Facility.  The actual amount of credit available under the Facility
will be determined using measurements based on the borrowers’ receivables,
inventory and other measures.  The Facility is secured by a first priority
security interest in the assets of the borrowers. On November 4, 2008, the
borrowers utilized the accordion feature under the Facility to increase the
current borrowing limit under the Facility from $25 million to $30
million.  In utilizing the accordion feature, the borrowers’ minimum
availability reserve under the Facility increased by $375,000 (7.5% of the
$5,000,000 increase) to $2,250,000 (7.5% of the $30,000,000) and the Company
incurred a one time closing fee of $12,500.  All other material terms
of the Facility remain unchanged.




Interest
accrues at an agreed to reference rate, which shall be, at the borrowers’
election, either the Wells Fargo prime rate less 25 basis points or LIBOR plus
150 basis points.  Interest is payable monthly, in
arrears.  In addition, the Facility provides for certain customary
fees to be paid, which include (i) a 25 basis point fee on the amount of any
increase in the Facility above $25 million, (ii) a 25 basis point fee on any
unused portion of the Facility, (iii) a $2,000 monthly service fee and (iv)
letter of credit fees on stand-by letters of credit and documentary letters of
credit.




As of
January 24, 2009, the Company had $16,776,000 outstanding under the Facility at
a rate of 3.0%.  For the six months ended January 24, 2009, borrowings
under the Facility peaked at $26,386,000 and the average borrowing during the
period was approximately $17,509,000.  In addition, the Company had
$1,995,000 of outstanding letters of credit under the Facility as of January 24,
2009.




The
Facility contains customary representations and warranties, affirmative and
negative covenants and events of default.  The borrowers also agreed
to maintain specified minimum availability reserves in lieu of financial
covenants, fixed charge coverage and overall debt ratios.  At January
24, 2009, the Company was in compliance with its minimum availability reserve
requirements.




Long
Term Debt- related party




As of
January 24, 2009, the Company had $12,946,000 of long term debt due to certain
funds and accounts affiliated with, managed by, or over which Fursa Alternative
Strategies, LLC or any of its affiliates exercises investment authority,
including, without limitation, with respect to voting and dispositive rights
(collectively, “Fursa”).  This debt is referred to as “Tranche C
Debt.”  In connection with the Merger and the amendment of the Old
Facility with the Senior Lender, Fursa extended the maturity date of the Tranche
C Debt to July 28, 2012.  This debt bears interest at the fixed rate
of 7% per annum with 1% payable in cash and 6% payable in kind.




Preferred
Stock




On
January 28, 2008, in connection with the Merger, the Company issued an aggregate
of 3,629,325 shares of Series A 7.5% Convertible Preferred Stock to Fursa in
exchange for a $7,500,000 portion of the debt owed by FOH Holdings and its
subsidiaries.  The Series A Preferred Stock is convertible at any time
at the option of the holders into an aggregate of 1,512,219 shares of common
stock, subject to adjustment.  As of January 24, 2009, the Company has
accrued dividends of $563,000. Holders of Series A Preferred Stock, in
preference to the holders of common stock or any other junior securities, will
be entitled to receive, when, as and if declared by the Company’s board of
directors, but only out of funds that are legally available therefor, cumulative
dividends at the rate of 7.5% per annum of the sum of the original issue price
and any accumulated and unpaid dividends thereon on each outstanding share of
Series A Preferred Stock.  Such dividends will be payable in
additional shares of Series A Preferred Stock or in cash, at the Company’s
option, and will be payable in arrears in equal amounts (with the first payment
to be prorated based on the actual issue date) on the tenth business day after
the end of each of the Company’s fiscal quarters of each year commencing on the
first of these dates to occur after the first issuance of Series A Preferred
Stock.  On the later to occur of (a) January 7, 2010 and (b) the six-month
anniversary of the maturity date (or any extensions thereof) of the Company’s
credit facility, the Company is required to redeem all of the then outstanding
Series A Preferred Stock by paying in cash in exchange for the shares of Series
A Preferred Stock to be redeemed on such date a sum equal to the original issue
price per share of Series A Preferred Stock (as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like) plus accumulated but unpaid
dividends with respect to such shares; provided, that if, on the 60th day
prior to the date of redemption, the current market value is greater than the
original issue price (as adjusted for stock dividends, combinations, splits,
recapitalizations and the like) plus accumulated and unpaid
dividends with respect to such shares, then all of the outstanding shares of
Series A Preferred Stock will be automatically converted to common stock on the
date of redemption.




11




8.           Commitments
and Contingencies




The
Company has certain contingent liabilities resulting from litigation and claims
incidental to the ordinary course of business that the Company believes will not
have a material adverse effect on its future consolidated financial position,
results of operations or cash flows.




In
November 2008, Frederick’s of Hollywood, Inc. and MarketLive, Inc., a California
corporation, participated in a mediation in an attempt to resolve the claims
brought in May 2008 in the Superior Court of California, County of Los Angeles
by Frederick’s of Hollywood against MarketLive in connection with MarketLive’s
alleged failure to create an e-commerce platform for Frederick’s of Hollywood
that worked properly and had appropriate security, and MarketLive’s related
cross-claims.  In December 2008, the parties entered into a
confidential settlement agreement, without either party admitting liability,
pursuant to which Frederick’s of Hollywood received a lump sum cash payment and
other non-cash consideration.  The case was subsequently dismissed
with prejudice.




The
Company is involved from time to time in litigation incidental to its
business.  The Company believes that the outcome of any other
litigation will not have a material adverse effect on its results of operations
or financial condition.




9.           Segments




The
Company has two reportable segments – retail and wholesale.  Each
segment primarily sells women’s intimate apparel through different distribution
channels.  The retail segment sells products through the Company’s
retail stores, as well its catalog and its e-commerce website.  The
retail segment sells products purchased from the Company’s outside suppliers and
from the wholesale segment.  The wholesale segment is engaged solely
in the design, manufacture, distribution and sale of women’s intimate apparel to
mass merchandisers, specialty and department stores, discount retailers,
national and regional chains and direct mail catalog marketers throughout the
United States and Canada.  Canadian sales represented approximately
2% and 4% of wholesale net sales for the three and six months ended January
24, 2009, respectively.


Sales and
transfers between segments generally are recorded at cost and treated as
transfers of inventory, and all intercompany revenues are eliminated in
consolidation.  Each segment’s performance is evaluated based upon
operating income or loss.  Corporate overhead expenses (exclusive of
expenses for senior management, certain other corporate-related expenses and
interest) are allocated to the segments based upon specific usage or other
allocation methods.
  12


Net
sales, operating loss and total assets for each segment are as
follows:





($
      in thousands)
            
            Three
      Months Ended
            
            
            Six
      Months EndedJanuary
      24,
            
            
            January
      26,
            
            
            January
      24,
            
            
            January
      26,2009(1)
            
            
            2008
            
            
            2009(1)
            
            
            2008Net
      Sales:Retail
            
            $
            38,352
            
            
            $
            42,112
            
            
            $
            71,481
            
            
            $
            79,299Wholesale
            
            
            14,164
            
            
            
            -
            
            
            
            23,600
            
            
            
            -Total
      net sales
            
            $
            52,516
            
            
            $
            42,112
            
            
            $
            95,081
            
            
            $
            79,299Operating
      Loss:Retail
            
            $
            (6,444
            )
            
            $
            (1,780
            )
            
            $
            (8,589
            )
            
            $
            (5,081
            )Wholesale
            
            
            (12,616
            )
            
            
            -
            
            
            
            (14,704
            )
            
            
            -Total
      operating loss
            
            $
            (19,060
            )
            
            $
            (1,780
            )
            
            $
            (23,293
            )
            
            $
            (5,081
            )Less
      Unallocated Corporate Expenses:Corporate
      expenses
            
            $
            559
            
            
            $
            -
            
            
            $
            1,023
            
            
            $
            -Interest
      expense
            
            
            421
            
            
            
            641
            
            
            
            849
            
            
            
            1,267Total
      unallocated expenses
            
            $
            980
            
            
            $
            641
            
            
            $
            1,872
            
            
            $
            1,267Loss
      before income tax provision
            
            $
            (20,040
            )
            
            $
            (2,421
            )
            
            $
            (25,165
            )
            
            $
            (6,348
            )Total
      AssetsRetail
            
            
            
            
            
            
            
            
            
            $
            66,148Wholesale
            
            
            
            
            
            
            
            
            
            
            26,280Total
      Assets
            
            
            
            
            
            
            
            
            
            $
            92,428





____________________________________


(1)  Reflects
      the merged entity.




13






ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF
FINANCIAL


CONDITION AND RESULTS OF
OPERATIONS




Forward
Looking Statements




When used in this Form 10-Q of
Frederick’s of Hollywood Group Inc. and in our future filings with the
Securities and Exchange Commission (“SEC”), the words or phrases “will likely
result,” “management expects” or “we expect,” “will continue,” “is anticipated,”
“estimated” or similar expressions are intended to identify “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995.  Readers are cautioned not to place undue reliance on any
such forward-looking statements, each of which speaks only as of the date
made.  We have no obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.




Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or
projected.  These risks are included in “Item 1: Business,” “Item 1A:
Risk Factors” and “Item 7: Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of our Form 10-K for the fiscal year ended
July 26, 2008.  In assessing forward-looking statements contained
herein, readers are urged to carefully read those statements.  Among
the factors that could cause actual results to differ materially are:
competition; business conditions and industry growth; rapidly changing consumer
preferences and trends; general economic conditions; large variations in sales
volume with significant customers; addition or loss of significant customers;
continued compliance with government regulations; loss of key personnel; labor
practices; product development; management of growth; increases of costs of
operations or inability to meet efficiency or cost reduction objectives; timing
of orders and deliveries of products; and foreign government regulations and
risks of doing business abroad.




Corporate
History




Frederick’s of Hollywood Group Inc.
(formerly, Movie Star, Inc.) (the “Company”) is a New York corporation
incorporated on April 10, 1935.  On January 28, 2008, the Company
consummated its merger with FOH Holdings, Inc., a privately-held Delaware
corporation (“FOH Holdings”).  As a result of the
transaction, FOH Holdings became a wholly-owned subsidiary of the
Company.  FOH Holdings is the parent company of Frederick’s of
Hollywood, Inc.  Upon consummation of the merger, the Company changed
its name from Movie Star, Inc. to Frederick’s of Hollywood Group Inc. and
its trading symbol on the NYSE Alternext US (formerly, the American Stock
Exchange) was changed to “FOH.”




The merger was accounted for as a
reverse acquisition, which means that for accounting and financial reporting
purposes, the Company was treated as the acquired company, and FOH Holdings was
treated as the acquiring company. The historical financial information presented
for the periods and dates prior to January 28, 2008 is that of FOH Holdings and
its subsidiaries, and for periods subsequent to January 28, 2008 is that of the
merged company.




Immediately prior to the merger, we
completed a one-for-two reverse stock split of our outstanding common
stock.  All share and per share data referred to in this Form 10-Q has
been retroactively restated to reflect the reverse stock split.




Unless otherwise indicated, as used in
this Form 10-Q:




·
              “Movie
      Star, Inc.” or “Movie Star” refers to the business, operations and
      financial results of Movie Star, Inc. prior to the closing of the
      merger;


·
              “FOH
      Holdings” or “Frederick’s of Hollywood” refers to the business, operations
      and financial results of FOH Holdings, Inc., a privately-held Delaware
      corporation, prior to the closing of the merger and after the merger, as
      the context requires; and


·
              the
      “Company,” “we,” “our” or “us” refers to the operations and financial
      results of Frederick’s of Hollywood Group Inc., together with FOH
      Holdings, Inc. and its subsidiaries on a consolidated basis after the
      closing of the merger.
  14


Overview




As a
merged company, we conduct our business through two operating divisions, which
represent two distinct business reporting segments:  the multi-channel
retail division and the wholesale division.  We believe this method of
segment reporting reflects both the way our business segments are managed and
the way each segment’s performance is evaluated.  The retail segment
includes our Frederick’s of Hollywood retail stores, catalog and e-commerce
website operations.  The wholesale segment includes our wholesale
operations in the United States and Canada.




Through
our multi-channel retail division, we sell women’s intimate apparel and related
products under our proprietary Frederick’s of Hollywood® brand
exclusively through our mall-based specialty retail stores in the United States,
which we refer to as “Stores,” and through our catalog and website at www.fredericks.com,
which we refer to collectively as “Direct.”  As of January 24, 2009,
we operated 136 Frederick’s of Hollywood stores
nationwide.  Subsequent to the end of the second fiscal quarter, we
closed six stores at the end of the applicable lease termination dates and
anticipate closing one additional store prior to the end of fiscal year
2009.




Through
our wholesale division, we design, manufacture, source, distribute and sell
women’s intimate apparel to mass merchandisers, specialty and department stores,
discount retailers, national and regional chains, and direct mail catalog
marketers throughout the United States and Canada.




Financial
information about the retail segment for the three and six months ended January
24, 2009 and January 26, 2008 and about the wholesale segment for the three and
six months ended January 24, 2009 is included in the consolidated financial
statements contained herein.




Fiscal
2009 Initiatives




Our efforts remain focused on
implementing changes in our business strategy as described below that we believe
over time will both increase revenues and reduce costs.  Some of these
initiatives have had an immediate impact on our operating results and we expect
that others will take more time.  These key initiatives
include:




·
            Reducing operating
      expenses.While the macroeconomic environment continues
      to present challenges to both our retail and wholesale divisions,
      following the consummation of the merger in January 2008, we have taken
      and are continuing to take a number of actions to reduce operating
      expenses, which include reducing personnel through the elimination of
      executive and support positions, decreasing the use of outside
      consultants, and consolidating employee benefits and
      insurance.  Since the consummation of the merger, excluding
      store personnel, we have reduced our domestic workforce by approximately
      25% and have transitioned certain manufacturing support functions
      previously performed by some of these employees to our facility in the
      Philippines.  This net reduction in workforce has resulted in an
      annualized net salary savings of approximately $4.5 million and an
      additional savings of approximately $1.0 million in benefits and other
      related costs.




·
            Consolidating
      functions.  The wholesale division accounted for
      approximately 6% and 8% of the dollar value of the retail division’s
      merchandise purchases for fiscal year 2008 and the first half of fiscal
      year 2009, respectively, and we expect these amounts to increase as we
      continue to vertically integrate our retail and wholesale operations where
      complementary in order to derive additional margin benefits.  To
      this end, we have continued with the consolidation of the retail and
      wholesale divisions’ merchandising and design, distribution, information
      technology and finance functions. We also have been transitioning
      manufacturing support functions to our manufacturing facility in the
      Philippines.




·
            Management
      changes.  To streamline our consolidation efforts and
      provide for the coordinated operation of the retail and wholesale
      divisions, we have implemented a number of senior management changes,
      including the appointment of Thomas Lynch as Chief Executive Officer, the
      promotion of Linda LoRe to President and the early transition of Melvyn
      Knigin into his new role as Senior Vice President of Sales – Wholesale
      Division.  In addition, we have hired a Senior Vice President of
      Manufacturing based in the Philippines to assist us in maintaining product
      quality and timely delivery to our
customers.




15




·
            More focused marketing
      efforts.  As a result of rising paper, production and
      mailing costs, we reduced Frederick’s of Hollywood’s annual catalog
      circulation from approximately 26.3 million in fiscal year 2006 to
      approximately 20.4 million in fiscal year 2007 to approximately 18.7
      million in fiscal year 2008.  During fiscal year 2009, we have
      been able to target customers through improved analysis and monitoring of
      their purchasing habits and to execute a more focused marketing strategy,
      resulting in a 17% decrease in catalog circulation for the first half of
      fiscal year 2009 compared to the first half of fiscal year
      2008.  With a planned increase in catalog circulation for the
      second half of fiscal year 2009, we anticipate an overall 3% reduction for
      the full fiscal year.  At the same time, we are endeavoring to
      expand our Internet customer base through various methods, including
      partnering with Internet search engines and participating in affiliate
      programs.  We also have focused our efforts on replacing our
      website with a state-of-the-art e-commerce system hosted by a third-party
      service provider, which we expect to be operational in Spring
      2009.  We believe our upgraded and enhanced website, combined
      with improved customer acquisition and retention capabilities, will enable
      www.fredericks.com
      to provide customers with an enhanced pleasurable online shopping
      experience for intimate apparel and related
  products.




·
            Reducing planned store
      openings.  Following the consummation of the merger in
      January 2008, we had anticipated that we would open, relocate and/or
      remodel approximately 40 to 50 new stores over three
      years.  However, due to uncertain economic conditions and our
      poor operating performance in fiscal year 2008, we revised our retail
      store expansion plans for fiscal year 2009 to include only three store
      openings and one store remodeling.  In addition, subsequent to
      the end of the second fiscal quarter, we closed six underperforming stores
      at the end of the applicable lease termination dates and anticipate
      closing one additional store prior to the end of fiscal year
      2009.  We continuously evaluate our longer-term store expansion
      plans and intend to make appropriate adjustments as business conditions
      permit.




Critical
Accounting Policies and Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the appropriate
application of certain accounting policies, many of which require estimates and
assumptions about future events and their impact on amounts reported in the
financial statements and related notes.  Since future events and their
impact cannot be determined with certainty, the actual results will inevitably
differ from our estimates.  Such differences could be material to the
financial statements.




Management
believes that the application of accounting policies, and the estimates
inherently required by the policies, are reasonable.  These accounting
policies and estimates are constantly re-evaluated, and adjustments are made
when facts and circumstances dictate a change.  Historically,
management has found the application of accounting policies to be appropriate,
and actual results generally do not differ materially from those determined
using necessary estimates.




Our
accounting policies are more fully described in our audited consolidated
financial statements and accompanying notes for the year ended July 26, 2008
included in our Annual Report on Form 10-K filed with the SEC on October 24,
2008.  Management has identified certain critical accounting policies
that are described below.




Our most significant areas of
estimation and assumption are:




·
            determination
      of the appropriate amount and timing of markdowns to clear unproductive or
      slow-moving retail inventory and overall inventory
      obsolescence;




·
            determination
      of appropriate levels of reserves for accounts receivable allowances and
      sales discounts;




·
            estimation
      of future cash flows used to assess the recoverability of long-lived
      assets, including trademarks and
goodwill;




·
            estimation
      of expected customer merchandise
returns;




·
            estimation
      of the net deferred income tax asset valuation allowance;
    and




·
            estimation
      of deferred catalog costs and the amount of future benefit to be derived
      from the catalogs.




16




Accounts Receivable/Allowance for
Doubtful Accounts and Sales Discounts –Accounts receivable, which is
primarily attributable to the wholesale division, is net of allowance for
doubtful accounts and sales discounts.  An allowance for doubtful
accounts is determined through the analysis of the aging of accounts receivable
at the date of the financial statements.  An assessment of the
accounts receivable is made based on historical trends and an evaluation of the
impact of economic conditions.  This amount is not significant,
primarily due to our history of minimal bad debts. An allowance for sales
discounts is based on discounts relating to open invoices where trade discounts
have been extended to customers, costs associated with potential returns of
products, as well as allowable customer markdowns and operational charge backs,
net of expected recoveries.  These allowances are included as a
reduction to net sales and are part of the provision for allowances included in
accounts receivable.  The foregoing results from seasonal negotiations
and historic deduction trends, net of expected recoveries and the evaluation of
current market conditions.  As of January 24, 2009 and July 26, 2008,
accounts receivable was net of allowances of $1,136,000 and $979,000,
respectively.  Management believes its allowance for doubtful accounts
and sales discounts to be appropriate, and actual results should not differ
materially from those determined using necessary estimates.  However,
if the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.  Also, if market conditions were to worsen, management may
take actions to increase customer incentive offerings, possibly resulting in an
incremental allowance at the time the incentive is offered.




Merchandise Inventories –
Retail store inventories are valued at the lower of cost or market using the
retail inventory first-in, first-out (“FIFO”) method, and wholesale, catalog and
Internet inventories are valued at the lower of cost or market, on an average
cost basis that approximates the FIFO method.  Freight costs are
included in inventory and vendor promotional allowances are recorded as a
reduction in inventory cost. These inventory methods inherently require
management judgments and estimates, such as the amount and timing of permanent
markdowns to clear unproductive or slow-moving inventory, which may impact the
ending inventory valuations and gross margins.  Markdowns are recorded
when the sales value of the inventory has diminished.  Factors
considered in the determination of permanent markdowns include current and
anticipated demand, customer preferences, age of the merchandise, and fashion
trends.  Additionally, we accrue for planned but unexecuted
markdowns.  If actual market conditions are less favorable than those
projected by management, additional inventory reserves may be
required.  Historically, management has found its inventory reserves
to be appropriate, and actual results generally do not differ materially from
those determined using necessary estimates.  Inventory reserves were
$1,089,000 at January 24, 2009, and $1,312,000 at July 26, 2008.




Deferred Catalog Costs–
Deferred catalog costs represent direct-response advertising that is capitalized
and amortized over its expected period of future
benefit.  Direct-response advertising consists primarily of product
catalogs of FOH Holdings’ mail order subsidiary.  The capitalized
costs of the advertising are amortized over the expected revenue stream
following the mailing of the respective catalog, which is generally six
months.  The realizability of the deferred catalog costs are also
evaluated as of each balance sheet date by comparing the capitalized costs for
each catalog, on a catalog by catalog basis, to the probable remaining future
net revenues.  Direct-response advertising costs of $3,345,000
and $2,297,000 are included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets at January 24, 2009 and July 26, 2008,
respectively.  We believe that we have appropriately determined the
expected period of future benefit as of the date of our consolidated financial
statements; however, should actual sales results differ from expected sales,
deferred catalog costs may be written off on an accelerated basis.




Impairment of Long-Lived
Assets – We review long-lived assets, including property and equipment
and our amortizable intangible assets, for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable based on undiscounted cash flows.  If long-lived assets
are impaired, an impairment loss is recognized and is measured as the amount by
which the carrying value exceeds the estimated fair value of the
assets.  No impairment was recorded for the three and six months ended
January 24, 2009 and January 26, 2008.




Goodwill and Intangible
Assets – We have certain intangible assets and
goodwill.  Intangible assets consist of trademarks, principally the
Frederick’s of Hollywood trade name, customer relationships, favorable leases
and domain names recognized in accordance with purchase
accounting.  Goodwill represented the portion of the purchase price
that could not be attributed to specific tangible or identified intangible
assets recorded in connection with purchase accounting.  Goodwill was
not deductible for tax purposes.  We amortize customer relationships
and favorable leases over estimated useful lives of four years and the remaining
lease term, respectively.  The customer relationships and favorable
leases are amortized on a straight-line basis.  We have determined the
trademarks and domain names to have indefinite lives.  Financial
Accounting Standards Board (“FASB”) Statement No. 142, “Goodwill and Other Intangible
Assets,” (“SFAS 142”) requires us to not amortize goodwill and certain
other indefinite life intangible assets, but to test those intangible assets for
impairment annually and between annual tests when circumstances or events have
occurred that may indicate a potential impairment has
occurred.  SFAS 142 requires goodwill to be allocated to
reporting units.  As our market capitalization was significantly below
our book value at January 24, 2009, we performed an impairment
analysis.  We determined that the goodwill balances on both the retail
and wholesale segments were impaired as a result of our current and future
projected financial results due to the poor macroeconomic outlook and a
reduction in wholesale business with Walmart.  Accordingly, we
recorded a goodwill impairment charge of $19,100,000.  After
recognizing the impairment charge, we have no remaining goodwill on our
consolidated balance sheet as of January 24, 2009.




17




Income Taxes– Income taxes
are accounted for under an asset and liability approach that requires the
recognition of deferred income tax assets and liabilities for the expected
future consequences of events that have been recognized in our financial
statements and income tax returns.  We provide a valuation allowance
for deferred income tax assets when it is considered more likely than not that
all or a portion of such deferred income tax assets will not be
realized.  Due to the merger, we underwent a change in control under
Section 382 of the Internal Revenue Code and, therefore, our net operating loss
carryforwards may be limited.




Results
of Operations




As a
result of the merger being accounted for as a reverse acquisition in which the
Company was treated as the acquired company, and FOH Holdings was treated as the
acquiring company, Movie Star’s historical financial results are not included in
the financial statements presented in this Form 10-Q and the historical
financial statements reflect only FOH Holdings’ consolidated financial
statements.  Therefore, the historical financial information for
periods and dates prior to January 28, 2008 is that of FOH Holdings and its
subsidiaries and for periods subsequent to January 28, 2008 is that of the
merged company.




Management
considers certain key indicators when reviewing our results of operations and
liquidity and capital resources.  Because the results of operations
for both our retail and wholesale divisions are subject to seasonal variations,
retail sales are reviewed against comparable store sales for the similar period
in the prior year and wholesale sales are reviewed in conjunction with our
backlog of orders to determine the total position for the year.  When
reviewing sales, a material factor that we consider is the gross profit
percentage.  We also consider our selling, general and administrative
expenses as a key indicator in evaluating our financial performance. Inventory,
accounts receivable and our outstanding borrowings are the main indicators we
consider when we review our liquidity and capital resources, particularly the
size and age of the inventory and accounts receivable. We review all of our key
indicators against the prior year and our operating projections in order to
evaluate our operating performance and financial condition.




The
following table shows each specified item as a dollar amount and as a percentage
of net sales in each fiscal period, and should be read in conjunction with the
consolidated financial statements included elsewhere in this report (in
thousands, except for percentages, which percentages may not add due to
rounding):




Three
      Months Ended
            
            
            Six
      Months EndedJanuary
      24, 2009(1)
            
            
            January
      26, 2008
            
            
            January
      24, 2009(1)
            
            
            January
      26, 2008Net
      sales
            
            $
            52,516
            
            
            
            100.0
            %
            
            $
            42,112
            
            
            
            100.0
            %
            
            $
            95,081
            
            
            
            100.0
            %
            
            $
            79,299
            
            
            
            100.0
            %Cost
      of goods sold, buying and occupancy
            
            
            34,223
            
            
            
            65.2
            %
            
            
            25,373
            
            
            
            60.3
            %
            
            
            62,110
            
            
            
            65.3
            %
            
            
            47,222
            
            
            
            59.5
            %Gross
      profit
            
            
            18,293
            
            
            
            34.8
            %
            
            
            16,739
            
            
            
            39.7
            %
            
            
            32,971
            
            
            
            34.7
            %
            
            
            32,077
            
            
            
            40.5
            %Selling,
      general and administrative expenses
            
            
            18,812
            
            
            
            35.8
            %
            
            
            18,519
            
            
            
            44.0
            %
            
            
            38,187
            
            
            
            40.2
            %
            
            
            37,158
            
            
            
            46.9
            %Goodwill
      impairment
            
            
            19,100
            
            
            
            36.4
            %
            
            
            -
            
            
            
            0.0
            %
            
            
            19,100
            
            
            
            20.1
            %
            
            
            -
            
            
            
            0.0
            %Loss
      from operations
            
            
            (19,619
            )
            
            
            (37.4
            %)
            
            
            (1,780
            )
            
            
            (4.3
            %)
            
            
            (24,316
            )
            
            
            (25.6
            %)
            
            
            (5,081
            )
            
            
            (6.4
            %)Interest
      expense, net
            
            
            421
            
            
            
            0.8
            %
            
            
            641
            
            
            
            1.5
            %
            
            
            849
            
            
            
            0.9
            %
            
            
            1,267
            
            
            
            1.6
            %Loss
      before income taxes
            
            
            (20,040
            )
            
            
            (38.2
            %)
            
            
            (2,421
            )
            
            
            (5.8
            %)
            
            
            (25,165
            )
            
            
            (26.5
            %)
            
            
            (6,348
            )
            
            
            (8.0
            %)Income
      tax expense
            
            
            21
            
            
            
            0.0
            %
            
            
            -
            
            
            
            0.0
            %
            
            
            41
            
            
            
            0.0
            %
            
            
            -
            
            
            
            0.0
            %Net
      loss
            
            
            (20,061
            )
            
            
            (38.2
            %)
            
            
            (2,421
            )
            
            
            (5.8
            %)
            
            
            (25,206
            )
            
            
            (26.5
            %)
            
            
            (6,348
            )
            
            
            (8.0
            %)Less:
      Preferred stock dividends
            
            
            (140
            )
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            (281
            )
            
            
            
            
            
            
            -Net
      loss available to common shareholders
            
            $
            (20,201
            )
            
            
            
            
            
            $
            (2,421
            )
            
            
            
            
            
            $
            (25,487
            )
            
            
            
            
            
            $
            (6,348
            )






____________________________
 (1)
  18




Net
Sales




Net sales
for the three and six months ended January 24, 2009 increased to $52,516,000 and
$95,081,000 as compared to $42,112,000 and $79,299,000 for the three and six
months ended January 26, 2008, and was comprised of retail and wholesale sales
as follows (in thousands):




Three
      Months Ended
            
            
            Six
      Months EndedNet
      Sales:
            
            January
      24,
                2009
            
            
            January
      26, 2008
            
            
            Increase/
      (Decrease)
            
            
            January
      24,
                2009
            
            
            January
      26, 2008
            
            
            Increase/
      (Decrease)Retail
      Stores
            
            $
            24,327
            
            
            $
            26,145
            
            
            $
            (1,818
            )
            
            $
            45,538
            
            
            $
            50,201
            
            
            $
            (4,663
            )Retail
      Direct (catalog and internet)
            
            
            14,025
            
            
            
            15,967
            
            
            
            (1,942
            )
            
            
            25,943
            
            
            
            29,098
            
            
            
            (3,155
            )Total
      Retail
            
            
            38,352
            
            
            
            42,112
            
            
            
            (3,760
            )
            
            
            71,481
            
            
            
            79,299
            
            
            
            (7,818
            )Total
      Wholesale
            
            
            14,164
            
            
            
            -
            
            
            
            14,164
            
            
            
            23,600
            
            
            
            -
            
            
            
            23,600Total
      net sales
            
            $
            52,516
            
            
            $
            42,112
            
            
            $
            10,404
            
            
            $
            95,081
            
            
            $
            79,299
            
            
            $
            15,782




The
increase in net sales for the three and six months ended January 24, 2009
resulted from the addition of $14,164,000 and $23,600,000 of net sales from the
wholesale division following the consummation of the merger.  These
increases were partially offset by a decrease in retail net sales of $3,760,000
and $7,818,000 for the three and six months ended January 24, 2009 as compared
to the three and six months ended January 26, 2008.  This decrease was
primarily due to a decrease in consumer spending resulting from the challenging
macroeconomic environment.  In addition:




·
            Total
      store sales decreased by $1,818,000, or 7.0%, and $4,663,000, or
      9.3%, for the three and six months ended January 24, 2009 as compared
      to the three and six months ended January 26,
  2008.




·
            Comparable
      store sales decreased by $1,735,000, or 7.2%, and $4,595,000, or 9.9%, for
      the three and six months ended January 24, 2009 as compared to the
      three and six months ended January 26, 2008.  Comparable store
      sales are defined as net sales for stores that have been open for at least
      one complete year.




·
            Direct
      sales, which are comprised of sales from our catalog and website
      operations, decreased by $1,942,000, or 12.2%, and $3,155,000, or
      10.8%, for the three and six months ended January 24, 2009 as
      compared to the three and six months ended January 26,
    2008.




The wholesale division’s net sales by
customer for the three and six months ended January 24, 2009, which are included
in total net sales, and for the three and six months ended January 26, 2008,
which are not included in total net sales and are provided for comparative
purposes only, were as follows ($ in thousands):




Three
      Months Ended
            
            
            Six
      Months EndedNet
      Sales:
            
            January
      24,
                2009
            
            
            January
      26, 2008
            
            
            Increase/
      (Decrease)
            
            
            January
      24,
                2009
            
            
            January
      26, 2008
            
            
            Increase/
      (Decrease)Walmart
            
            $
            7,556
            
            
            $
            7,294
            
            
            $
            262
            
            
            $
            9,050
            
            
            $
            15,080
            
            
            $
            (6,030
            )All
      other U.S.
            
            
            6,277
            
            
            
            5,366
            
            
            
            911
            
            
            
            13,621
            
            
            
            12,637
            
            
            
            984Total
      U.S. customers
            
            
            13,833
            
            
            
            12,660
            
            
            
            1,173
            
            
            
            22,671
            
            
            
            27,717
            
            
            
            (5,046
            )Canada
            
            
            331
            
            
            
            170
            
            
            
            161
            
            
            
            929
            
            
            
            453
            
            
            
            476Total
            
            $
            14,164
            
            
            $
            12,830
            
            
            $
            1,334
            
            
            $
            23,600
            
            
            $
            28,170
            
            
            $
            (4,570
            )




19




The wholesale division’s backlog of
open orders by customer as of January 24, 2009 and January 26, 2008 was as
follows ($ in thousands):




Customer
            
            January
      24, 2009
            
            
            January
      26, 2008(1)Walmart
            
            $
            1,383
            
            
            
            16.3
            %
            
            $
            15,769
            
            
            
            62.7
            %All
      other U.S. customers
            
            
            6,773
            
            
            
            80.2
            %
            
            
            9,044
            
            
            
            36.0
            %Total
      U.S. customers
            
            
            8,156
            
            
            
            96.5
            %
            
            
            24,813
            
            
            
            98.7
            %Canada
            
            
            292
            
            
            
            3.5
            %
            
            
            320
            
            
            
            1.3
            %Total
            
            $
            8,448
            
            
            
            100.0
            %
            
            $
            25,133
            
            
            
            100.0
            %




The
backlog of orders was $8,448,000 as of January 24, 2009 and $25,133,000 as of
January 26, 2008.  Orders are booked upon receipt.  Our open
order position with Walmart as of January 24, 2009 was $1,383,000 as compared to
$15,769,000 at January 26, 2008.  This reduction is the result of
Walmart shifting its focus to product categories that differ from the main
product categories that we historically have presented to Walmart and that
Walmart historically has purchased from us.  We are working closely
with Walmart to develop new products to accommodate these business changes and
appeal to their customers; however, we cannot be assured that our sales to
Walmart will return to historical levels.


__________________




(1)           Information
and discussion provided for comparative purposes only.




Gross
Profit




The gross
margin (gross profit as a percentage of net sales) for the three and six months
ended January 24, 2009 was 34.8% and 34.7% as compared to 39.7% and 40.5% for
the three and six months ended January 26, 2008.  The decrease was
partially due to the lower gross margin for the wholesale division, which was
approximately 27.0% and 27.3% for the three and six months ended January 24,
2009.  For comparative purposes only, the gross margin for the
wholesale division for the three and six months ended January 26, 2008 was
approximately 28.1% and 28.0%.  The gross margin for the retail
division also decreased for the three and six months ended January 24, 2009 to
37.7% and 37.1% as compared to 39.7% and 40.5% for the three and six months
ended January 26, 2008.




The
largest contributors to the decrease in gross margin for the retail division
were the following:




·
            Occupancy
      costs, which consist of rent, common area maintenance, utilities and real
      estate taxes, decreased by $207,000 for the three months ended January 24,
      2009 as compared to the three months ended January 26, 2008; however, as a
      percentage of sales, occupancy costs increased by 0.8 percentage
      points as a result of lower retail sales.  Occupancy costs
      were flat for the six months ended January 24, 2009 as compared to the six
      months ended January 26, 2008; however, as a percentage of sales,
      occupancy costs increased by 1.5 percentage points as a result of lower
      retail sales.  The decrease in occupancy costs for the three
      months ended January 24, 2009 is attributable to reductions in real estate
      management, repair and maintenance costs and other related expenses,
      partially offset by increased rent expense and common area maintenance
      costs.




·
            Depreciation
      increased by $46,000 and $210,000 for the three and six months ended
      January 24, 2009 as compared to the three and six months ended January 26,
      2008.  As a percentage of sales, depreciation increased by 0.3
      percentage points and 0.5 percentage points for the three and six months
      ended January 24, 2009 as compared to the three and six months ended
      January 26, 2008.  These increases were due to eight new and
      remodeled stores opened in the second half of fiscal year 2008 for which
      depreciation was recorded in the first half of fiscal year 2009 and not
      recorded in the comparable period of fiscal year
  2008.




·
            Product
      costs as a percentage of sales increased by 0.5 and 0.9 percentage
      points for the three and six months ended January 24, 2009 as compared to
      the three and six months ended January 26, 2008.  The increase
      was primarily the result of higher
markdowns.




20




Selling,
General and Administrative Expenses




Selling,
general and administrative expenses for the three months ended January 24, 2009
increased by $293,000 to $18,812,000 or 35.8% of sales, from $18,519,000 or
44.0% of sales for the three months ended January 26, 2008.  Selling,
general and administrative expenses for the wholesale division for the three
months ended January 26, 2008 were approximately $5,118,000, which are not
included in selling, general and administrative expenses for the three months
ended January 26, 2008 and are provided for comparative purposes
only.




Selling,
general and administrative expenses for the six months ended January 24, 2009
increased by $1,029,000 to $38,187,000 or 40.2% of sales, from $37,158,000 or
46.9% of sales for the six months ended January 26, 2008.  Selling,
general and administrative expenses for the wholesale division for the six
months ended January 26, 2008 were approximately $10,177,000, which are not
included in selling, general and administrative expenses for the six months
ended January 26, 2008 and are provided for comparative purposes
only.




The
increase in selling, general and administrative expenses as reflected in the
consolidated financial statements contained elsewhere in this report was
primarily the result of the following:




·
            The
      addition of the selling, general and administrative expenses for the
      wholesale division following the consummation of the
      merger.  These expenses were $4,014,000 and $8,733,000 of the
      total selling, general and administrative expenses for the three and six
      months ended January 24, 2009.




·
            Unallocated
      expenses related to our corporate executive office were also added to
      selling, general and administrative expenses following the consummation of
      the merger.  These expenses were $559,000 and $1,023,000 of the
      total selling, general and administrative expenses for the three and six
      months ended January 24, 2009 and include costs associated with our
      Executive Chairman, Chief Executive Officer, Chief Financial Officer and
      our Board of Directors.




The addition
of the wholesale division’s selling, general and administrative expenses and the
unallocated expenses related to our corporate executive office was partially
offset by a decrease of $4,280,000 and $8,727,000 in selling, general and
administrative expenses in the retail division for the three and six months
ended January 24, 2009 as compared to the three and six months ended January 26,
2008.  These decreases consist of the following:




For the
three months ended January 24, 2009 as compared to the three months ended
January 26, 2008,




·
            Store
      selling, general and administrative expenses decreased by $465,000, which
      was primarily due to decreases in (1) store salaries and salary-related
      costs of $192,000, which is the result of reductions in store staffing
      requirements, and decreases in earned incentives as a result of lower
      sales, (2) credit card fees of $40,000 due to lower sales and (3) store
      operations costs of $95,000 due to reductions in personnel, fewer district
      sales meetings and corresponding reductions in travel
      expenses.




·
            Direct
      selling, general and administrative expenses decreased by $2,753,000,
      primarily as a result of a $1,411,000 reduction in catalog costs, a
      $108,000 decrease in costs relating to our call center and a $299,000
      decrease in equipment maintenance costs.  The reduction in
      catalog costs was due to an 18% decrease in circulation compared to the
      similar period in the prior year.  With a planned increase in
      catalog circulation during the second half of fiscal year 2009 to expand
      our customer base and drive sales, we expect to reduce catalog
      circulation by approximately3%in fiscal year 2009 compared to
      fiscal year 2008.  The decrease in the call center costs
      was due to a reduction in staffing requirements related to lower sales and
      the decrease in equipment maintenance costs was due to the maintenance of
      one website platform instead of two separate platforms in the prior year
      as a result of an unsuccessful transition to a new platform.  We
      also settled a lawsuit related to the unsuccessful launch of the new
      website platform in fiscal year 2008, pursuant to which we received a lump
      sum cash payment and other non-cash consideration totaling
      $756,000.




·
            Expenses
      related to the retail division’s overhead decreased by
      $970,000.  This decrease was primarily due to a decrease in
      accounting, legal and other professional and consulting fees of $539,000
      resulting from a reduction in third party service providers that were
      hired to assist with the restatement of FOH Holdings’ financial statements
      for prior periods.  Also contributing to the decrease was a
      decrease in salaries and salary-related costs of $368,000, which is
      primarily due to a reduction in personnel.  The decrease was
      partially offset by an increase in stock compensation expense of $98,000,
      which resulted from the issuance of stock options and restricted stock
      grants in accordance with three employees’ equity incentive agreements in
      connection with the merger (including the Chief Executive Officer of the
      retail division).




21




For the
six months ended January 24, 2009 as compared to the six months ended January
26, 2008,




·
            Store
      selling, general and administrative expenses decreased by $1,361,000,
      which was primarily due to decreases in (1) store salaries and
      salary-related costs of $513,000, which is the result of reductions in
      store staffing requirements, and decreases in earned incentives as a
      result of lower sales, (2) credit card fees of $161,000 due to lower sales
      and (3) store operations costs of $307,000 due to reductions in personnel,
      fewer district sales meetings and corresponding reductions in travel
      expenses.




·
            Direct
      selling, general and administrative expenses decreased by $3,498,000,
      primarily as a result of a $1,792,000 reduction in catalog costs, a
      $267,000 decrease in costs relating to our call center, a $440,000
      decrease in equipment maintenance costs and $756,000 from the settlement
      of a lawsuit related to the unsuccessful launch of the new website
      platform in fiscal year 2008 described above.  The reduction in
      catalog costs was due to a 17% decrease in circulation compared to the
      similar period in the prior year.  As described above, we plan
      to increase catalog circulation during the second half of fiscal year
      2009. The decrease in the call center costs was due to a reduction in
      staffing requirements related to lower sales and the decrease in equipment
      maintenance costs was due to the maintenance of one website platform
      instead of two separate platforms in the prior year as a result of an
      unsuccessful transition to the new
platform.




·
            Expenses
      related to the retail division’s overhead decreased by
      $2,336,000.  This decrease was primarily due to a decrease in
      accounting fees of $813,000, which was attributable to the accelerated
      audit of FOH Holdings’ fiscal 2007 year end financial statements in the
      prior year.  Contributing to the decrease was a reduction in
      consulting fees of $823,000, primarily due to a reduction in consultants
      hired to assist with the restatement of FOH Holdings’ financial statements
      for prior periods and a reduction in outside IT
      consultants.  The decrease was partially offset by an increase
      in stock compensation expense of $212,000, which resulted from the
      issuance of stock options and restricted stock grants in accordance with
      three employees’ equity incentive agreements in connection with the merger
      (including the Chief Executive Officer of the retail
      division).




·
            Brand
      marketing expenses decreased by $1,531,000 to $326,000.  The
      decrease was primarily due to brand marketing expenses incurred in
      connection with a fashion show and a charity auction that were held in the
      first quarter of fiscal year 2008 and not held in the comparable period in
      fiscal year 2009. Brand marketing is used to increase brand awareness
      through the announcement of new product launches, the arrival of seasonal
      collections and the opening of new stores.  This is accomplished
      primarily through public relations activities, including press releases
      and media events.




Goodwill
Impairment




As our
market capitalization was significantly below our book value at January 24,
2009, we performed an impairment analysis.  We determined that the
goodwill balances on both the retail and wholesale segments were impaired as a
result of our current and future projected financial results due to the poor
macroeconomic outlook and a reduction in wholesale business with
Walmart.  Accordingly, we recorded a goodwill impairment charge of
$19,100,000.  After recognizing the impairment charge, we have no
remaining goodwill on our consolidated balance sheet as of January 24,
2009.




Interest
Expense, Net




During
the three and six months ended January 24, 2009, net interest expense was
$421,000 and $849,000 as compared to $641,000 and $1,267,000, respectively, for
the three and six months ended January 26, 2008.  These decreases are
primarily the result of lower interest rates as compared to the prior
year.




Income
Tax Provision




Our
income tax provision for the three and six months ended January 24, 2009
represents estimated minimum and net worth taxes due in various
states.  Due to the uncertainty of realization in future periods, no
tax benefit has been recognized on the current period
loss.  Accordingly, a full valuation allowance has been established on
the current loss and all net deferred tax assets existing at the end of the
period excluding the deferred tax liability related to
trademarks.  Due to the merger, we may have had a change in control
under Section 382 of the Internal Revenue Code with respect to the Movie Star
entity and, therefore, the pre-merger net operating loss carryforwards of Movie
Star may be subject to annual limitations.




22




Due to
the uncertainty of realization in future periods, no tax benefit has been
recognized for the three and six months ended January 26,
2008.  Accordingly, a full valuation allowance has been established on
the current loss and all net deferred tax assets existing at the end of the
period excluding the deferred tax liability related to trademarks




Liquidity
and Capital Resources




Cash
Used in Operations




Net cash
used in operating activities for the six months ended January 24, 2009 was
$2,786,000, resulting primarily from the following:




·
            a
      net loss of $6,106,000 (excluding a non-cash impairment to goodwill of
      $19,100,000) for the six months ended January 24,
  2009;




·
            an
      increase in merchandise inventories of $2,969,000 due to normal seasonal
      fluctuations in the finished goods inventory
  levels;




·
            an
      increase in accounts receivable of $1,279,000, which was due to higher
      wholesale sales during the last two months (December and January) of the
      six months ended January 24, 2009 as compared to the last two months (June
      and July) of the six months ended July 26, 2008;
  and




·
            an
      increase in prepaid expenses and other current assets of $734,000, which
      was primarily due to increased prepaid direct response advertising costs
      of $1,048,000, partially offset by decreases in other prepaid
      expenses.




These
decreases in cash flow were partially offset by:




·
            non-cash
      expenses of $3,006,000 for depreciation and
  amortization;




·
            non-cash
      stock-based compensation expense of
$440,000;




·
            non-cash
      accrued interest on long term related party debt of
    $385,000;




·
            a
      non-cash expense for deferred rent and lease incentives of
      $389,000;




·
            an
      increase in accounts payable and accrued expenses of $3,307,000 due to
      normal seasonal fluctuations; and




·
            $571,000
      received from landlords for tenant improvement
  allowances.




Cash
Used in Investing Activities




Net cash
used in investing activities for the six months ended January 24, 2009 was
$2,909,000, which resulted primarily from expenditures for new stores of
$1,392,000 and for a store relocation of $370,000.




Cash
Provided by Financing Activities




Net cash
provided by financing activities for the six months ended January 24, 2009 was
$5,653,000, resulting primarily from net borrowings under our revolving credit
facility of $5,683,000.




Revolving
Credit Facility




On
January 28, 2008, in connection with the merger, we and our U.S. subsidiaries
(collectively, the “borrowers”) entered into an amended and restated senior
credit facility (the “Facility”) that amended the existing revolving credit
facility (“Old Facility”) between FOH Holdings and Wells Fargo Retail Finance
II, LLC (“Senior Lender”).  The Facility extended the maturity date of
the Old Facility to January 28, 2012.




23




The
Facility is for a maximum amount of $50 million comprised of a $25 million line
of credit with a $15 million sub-limit for letters of credit, and up to an
additional $25 million commitment in increments of $5 million at our option so
long as the borrowers are in compliance with the terms of the
Facility.  The actual amount of credit available under the Facility is
determined using measurements based on the borrowers’ receivables, inventory and
other measures.  The Facility is secured by a first priority security
interest in the assets of the borrowers.  On November 4, 2008, the
borrowers utilized the accordion feature under the Facility to increase the
current borrowing limit under the Facility from $25 million to $30
million.  In utilizing the accordion feature, the borrowers’ minimum
availability reserve under the Facility increased by $375,000 (7.5% of the
$5,000,000 increase) to $2,250,000 (7.5% of the $30,000,000) and we incurred a
one time closing fee of $12,500.  All other material terms of the
Facility remain unchanged.




Interest
accrues at an agreed to reference rate, which shall be, at the borrowers’
election, either the Wells Fargo prime rate less 25 basis points or LIBOR plus
150 basis points.  Interest is payable monthly, in
arrears.  In addition, the Facility provides for certain customary
fees to be paid, which include (i) a 25 basis point fee on the amount of any
increase in the Facility above $25 million, (ii) a 25 basis point fee on any
unused portion of the Facility, (iii) a $2,000 monthly service fee and (iv)
letter of credit fees on stand-by letters of credit and documentary letters of
credit.




The
Facility contains customary representations and warranties, affirmative and
negative covenants and events of default.  The borrowers also agreed
to maintain specified minimum availability reserves in lieu of financial
covenants, fixed charge coverage and overall debt ratios.  At January
24, 2009, we were in compliance with our minimum availability reserve
requirements.




Long
Term Debt – Related Party




As of
January 24, 2009, we had $12,946,000 of long term debt due to certain funds and
accounts affiliated with, managed by, or over which Fursa Alternative
Strategies, LLC or any of its affiliates exercises investment authority,
including, without limitation, with respect to voting and dispositive rights
(collectively referred to herein as “Fursa”).  This debt is referred
to as “Tranche C Debt.”  In connection with the merger and the
amendment of the Old Facility with the Senior Lender, Fursa extended the
maturity date of the Tranche C Debt to July 28, 2012.  This debt bears
interest at the fixed rate of 7% per annum with 1% payable in cash and 6%
payable in kind.




Preferred
Stock




On
January 28, 2008, in connection with the merger, we issued an aggregate of
3,629,325 shares of our Series A 7.5% Convertible Preferred Stock to Fursa in
exchange for a $7,500,000 portion of the debt owed by FOH Holdings and its
subsidiaries.  The Series A Preferred Stock is convertible at any time
at the option of the holders into an aggregate of 1,512,219 shares of common
stock, subject to adjustment.  As of January 24, 2009, we had accrued
dividends of $563,000.




Future
Financing Requirements




For the
six months ended January 24, 2009, our working capital decreased by $5,496,000
to $1,393,000, primarily due to our loss from operations.




Our sole
source of external financing consists of available borrowings under the
Facility.  We believe that the available borrowing under the Facility,
along with our projected operating cash flows and the implementation of our
fiscal 2009 initiatives, will be sufficient to cover our working capital
requirements and capital expenditures through July 25, 2009.




As of
January 24, 2009, we had capital expenditures of $2,919,000, primarily for new
store openings and remodelings, as well as our new enhanced website and other
general corporate expenditures.  We do not expect that our capital
expenditures will exceed $4,000,000 for fiscal year 2009.




Off
Balance Sheet Arrangements




We are
not a party to any material off-balance sheet financing arrangements except as
described in Note 7 “Financing” included in the Notes to the consolidated
financial statements contained elsewhere in this report.




Effect
of New Accounting Standards




See Note 4, “Effect of New Accounting
Standards,” included in the Notes to the consolidated financial statements
contained elsewhere in this report for a discussion of recent accounting
developments and their impact on our consolidated financial
statements.  None of the new accounting standards are anticipated to
impact us.




24




Seasonality
and Inflation




Our
retail and wholesale businesses both experience seasonal sales
patterns.  Sales and earnings for the retail division typically peak
during the second and third fiscal quarters (November through April), primarily
during the holiday season in November and December, as well as the Valentine’s
Day holiday in the month of February.  As a result, we maintain higher
inventory levels during these peak selling periods. Sales and earnings for the
wholesale division typically peak in the first and second fiscal quarters
(August through January) as orders from retail customers are typically placed
four to five months prior to the peak retail selling periods.




We do not
believe that our operating results have been materially affected by inflation
during the preceding three years.  There can be no assurance, however,
that our operating results will not be affected by inflation in the
future.




Imports




Transactions
with our foreign manufacturers and suppliers are subject to the risks of doing
business outside of the United States.  Our import and offshore
operations are subject to constraints imposed by agreements between the United
States and the foreign countries in which we do business.  These
agreements often impose quotas on the amount and type of goods that can be
imported into the United States from these countries.  Such agreements
also allow the United States to impose, at any time, restraints on the
importation of categories of merchandise that, under the terms of the
agreements, are not subject to specified limits.  Our imported
products are also subject to United States customs duties and, in the ordinary
course of business, we are from time to time subject to claims by the United
States Customs Service for duties and other charges.  The United
States and other countries in which our products are manufactured may, from time
to time, impose new quotas, duties, tariffs or other restrictions, or adversely
adjust presently prevailing quotas, duty or tariff levels, which could adversely
affect our operations and our ability to continue to import products at current
or increased levels.  We cannot predict the likelihood or frequency of
any such events occurring.




ITEM 3. – QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK




Interest
Rate Risks




We are
exposed to interest rate risk associated with our revolving credit
facility.  Interest accrues at an agreed to reference rate, which
shall be, at our election, either the Wells Fargo prime rate less 25 basis
points or LIBOR plus 150 basis points.  Outstanding borrowings were at
the rate of 3.0% at January 24, 2009.  For the six months ended
January 24, 2009, borrowings under the revolving credit facility peaked at
$26,386,000 and the average borrowing during the period was approximately
$17,509,000.




An
increase in the interest rate of 100 basis points would have increased the
interest on the revolving credit facility borrowings by approximately $88,000
for the six months ended January 24, 2009.




Foreign
Currency Risks




We enter into a significant amount of
purchase obligations outside of the United States, all of which are negotiated
and settled in U.S. dollars.  Therefore, on our current open purchase
order position we have no exposure to foreign currency exchange
risks.  However, fluctuations in foreign currency rates could have an
impact on our future purchases.




ITEM
4T – CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures


Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in company reports filed or
submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in company reports filed or submitted under the Exchange Act is
accumulated and communicated to management, including our principal executive
officer and principal financial and accounting officer, as appropriate to allow
timely decisions regarding required disclosure.
  25


As
required by Rules 13a-15 and 15d-15 under the Exchange Act, our principal
executive officer and principal financial and accounting officer performed an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of January 24, 2009.  Based upon their
evaluation, they concluded that our disclosure controls and procedures were
effective.


Internal
Control Over Financial Reporting


Our
internal control over financial reporting is a process designed by, or under the
supervision of, our principal executive officer and principal financial and
accounting officer and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of our financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States.  Internal control over financial reporting includes
policies and procedures that pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; provide reasonable assurance that transactions are
recorded as necessary to permit preparation of our financial statements in
accordance with generally accepted accounting principles in the United States,
and that our receipts and expenditures are being made only in accordance with
the authorization of our board of directors and management; and provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on our financial statements.


Changes
in Internal Control Over Financial Reporting


During
the three months ended January 24, 2009, there were no changes made in our
internal control over financial reporting (as such term is defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
  26


PART
II          OTHER
INFORMATION




ITEM
1 – LEGAL PROCEEDINGS




In November 2008, Frederick’s of
Hollywood, Inc. and MarketLive, Inc., a California corporation, participated in
a mediation in an attempt to resolve the claims brought in May 2008 in the
Superior Court of California, County of Los Angeles by Frederick’s of Hollywood
against MarketLive in connection with MarketLive’s alleged failure to create an
e-commerce platform for Frederick’s of Hollywood that worked properly and had
appropriate security, and MarketLive’s related cross-claims.  In
December 2008, the parties entered into a confidential settlement agreement,
without either party admitting liability, pursuant to which Frederick’s of
Hollywood received a lump sum cash payment and other non-cash
consideration.  The case was subsequently dismissed with
prejudice.




We are
involved from time to time in litigation incidental to our
business.  We believe that the outcome of any other litigation will
not have a material adverse effect on our results of operations or financial
condition.




ITEM
1A – RISK FACTORS




There are no material changes from the
risk factors set forth the “Risk Factors” section of our Annual Report on Form
10-K filed with the SEC on October 24, 2008.  Please refer to this
section for disclosures regarding the risks and uncertainties in our
business.




ITEM
6 – EXHIBITS




Exhibit
      No.
            Description31.1
            Certification
      by Chief Executive Officer and Principal Executive
  Officer31.2
            Certification
      by Chief Financial Officer and Principal Accounting
  Officer32
            Section
      1350 Certification




27




SIGNATURES




Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned hereunto duly
authorized.




FREDERICK’S OF HOLLYWOOD
      GROUP INC.Date: March 6, 2009
              By:
              /s/ Thomas
      J. LynchTHOMAS J.
      LYNCHChief
      Executive Officer andPrincipal
      Executive Officer




Date:
      March 6, 2009
              By:
              /s/ Thomas
      RendeTHOMAS
      RENDEChief Financial Officer
    andPrincipal Accounting
    Officer


28