Clothestime’s New Strategy Reduces Its Profit : Earnings: A new merchandising and discount strategy has increased sales but depressed earnings. Company officials say they anticipated the sharp decline.

Clothestime Inc., the chain of women’s discount fashion stores, said Friday that a change in merchandising strategy resulted in higher sales but lower profits for the second quarter ended July 28.

The Anaheim-based chain has introduced more name-brand clothing in its 369 stores nationwide and has offered deep discounts to attract new customers. The move has cut profits, said John Shanklin, vice president for finance.

Clothestime’s second-quarter earnings dropped 53% to $1.5 million from $2.3 million a year earlier. Sales were $57 million, a 9.5% increase from $52 million in the 1989 quarter.

For the first six months of fiscal 1990, sales rose 11.3% to $103.8 million, from $93.2 million a year earlier. Earnings were down sharply to $100,000, from $2.4 million last year.

Shanklin said the strategy to offer more brand-name merchandise and lower prices was part of a “long-term decision on our part to build market share. . . . People are trading up and being more price and quality conscious. It was done after a tremendous amount of market research.”

He said the chain is attracting an older, more sophisticated customer.

Clothestime is still expanding, with 385 stores expected to be open by the end of the year. Some of the new stores are in Southern California, he said.

Thomas Tashjian, a retail analyst for Seidler Amdec Securities in Los Angeles, said Clothestime’s earnings were in line with company predictions.

The downturn in profits, Tashjian said, also reflects the continuing slowdown in the retail trade. “The company is back in an expansion mode and opening new stores up around the country,” he said.