MONTREAL - Clothing retailer Reitmans (Canada) Ltd. (TSX:RET) doesn't expect a significant recovery in its business until next year but hopes the higher Canadian dollar will help to boost profitability and compensate for sluggish sales.

"The consumer is holding back on discretionary spending and hopefully that will see some improvement...(but) I don't think it will be substantial until next year," president Jeremy Reitman said in an interview Thursday.

The Montreal-based women's clothing company said reduced spending and poor weather contributed to a 25 per cent drop in profits during the summer quarter.

Ontario and Alberta, which have suffered deeply from the recession and a cold, wet summer, were the poorest performing provinces. Quebec was better but not great, Reitman said.

He said the results were disappointing but understandable given the circumstances.

Part of its challenge has been rising overhead costs, primarily because of the reduced buying power of the Canadian dollar.

The company earned $26.4 million, or 38 cents per share, for the period ended Aug. 1, down from the comparable period of 2008 when net income was $35.4 million or 50 cents per share.

Revenue fell to $286 million from $289.5 million, a year-to-year decline of 1.2 per cent, but the cost of goods sold, selling and administrative expenses increased three per cent to $232.4 million from $225.5 million.

Reitmans said its profit margin was reduced primarily because of a decline in the average value of Canadian dollar compared with the U.S. currency. From year-to-year, the American greenback rose nearly 18 per cent compared with the loonie.

But the rising loonie in the last couple of months should allow Reitmans to recover some of currency losses into next year and boost its profitability once product ordered months ago begin to hit store shelves, said analyst Neil Linsdell of Versant Partners.

Although sales were weaker than expected, Linsdell said net earnings were surprisingly strong, signalling the retailer's ability to keep costs in line through careful merchandising and making the bottom line as strong as it can be.

"It's almost surprising how minimal the declines (in profits) have been considering the retail environment and the weather," he said in an interview.

Linsdell, who had forecast 30 cents of earnings, said Reitmans has done a good job keeping their mark downs in line, "which is normally the killer in retail."

Reitman said the company has taken a conservative approach by controlling operating expenses and not inflating inventories in the hope of finding sales.

The sales picture weakened further in the opening month of the third quarter as sales for established stores fell by 5.8 per cent in August, worse than the 2.2 per cent decline in same-store sales in the second quarter.

But Linsdell said he expects sales will continue to be weak for the remainder of the year before undergoing modest growth next year, assisted by an economic recovery.

Reitmans said it is well-positioned for the future despite the current economic conditions. It has virtually no debt and sufficient cash for merchandising and acquisitions.

The company operates stores under a variety of banners, including Reitmans, Smart Set, RW & Co., Thyme Maternity, Cassis, Penningtons and Addition Elle.

During the second quarter, the company closed five stores and opened two - one under the RW & Co. banner and one Thyme Maternity. It plans to open 14 new stores, close 12 stores and remodel 14 stores during the last half of the year.

On the Toronto Stock Exchange, Reitmans shares closed at $13.33, down 37 cents or 2.7 per cent.