J. Jill's Higher Calling

If you've ever seen a fight break out at a garage sale over some old trinket, something that looked completely worthless to you, you might have an idea of just how some of us retail-watchers feel about today's announcement that J. Jill (Nasdaq: JILL  ) would be purchased by Talbots (NYSE: TLB  ) .

This $24.05-per-share cash offer trumps a recent bid from Liz Claiborne, which trumped a previously rebuffed Claiborne bid, which trumped a rumored Urban Outfitters (Nasdaq: URBN  ) bid. Were there other trumps and rebuffs out there? It's been tough to keep track.

As an investor who's watched Jill pretty closely off and on, my first thought was surprise. My next was regret or something near to it -- because I gave these shares a serious sniffing about the dozen-dollar mark last year. My conclusion then was that Jill was a no-go. Some observers might have thought we were seeing a company bottoming out of a dive. I thought we were looking at a firm that was increasing sales while consistently losing profitability. A few upward blips up wouldn't fool me into buying the turnaround story.

Take a look at the tape:

2001

2002

2003

2004

TTM as of 9/05

Revs.*

$287

$347.6

$376.9

$434.9

$438.2

Net Inc.*

$13.1

$18.4

$7

$8.7

$1.1

Gross Marg.

34.2%

38.1%

33.6%

36.0%

33.4%

EBIT Marg.

8.2%

9.4%

3.4%

3.5%

0.4%

Net Marg.

4.6%

5.3%

1.9%

2.0%

0.2%

*Numbers in millions.
Data courtesy of Capital IQ.


Now you know why I didn't put my own money on the line. Now you know why my Fool colleague Alyce Lomax called Jill a Halloween trick. Now you know why Rick Munarriz advised investors to take the money and run back when the Liz Claiborne offer came through. And now you know why I'd be worried if I held Talbot's stock.

Of course, Talbot's hasn't exactly been tearing it up lately, last quarter's "beat by a penny" notwithstanding. Will two mediocre prospects lashed together make a better business? It's possible, but with competition like Ann Taylor (NYSE: ANN  ) and Chico's FAS (NYSE: CHS  ) out there, and an ever-hungry Gap (NYSE: GPS  ) looking to get into the act, I wouldn't make that bet. Talbots shareholders had better watch for real evidence of "synergy" and "accretive" earnings. The $400 million Talbots will borrow to fund this transaction isn't going to be paid down by Jill's contribution any time soon -- at least, not if Jill's past is any indication of its future.

For related Foolishness:

Seth Jayson spend far too much time in women's clothing stores which, he reminds you, is strictly a "comfort issue." At the time of publication, he had no positions in any firm mentioned here. View his stock holdings and Fool profile here. Gap is aMotley Fool Inside Valuerecommendation. Fool rules are here.


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