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J. Jill's Toll on Talbots

Investors waiting for the good news from Talbots (NYSE: TLB  ) will just have to wait a little longer, as the retailer continues reeling from the effects of its acquisition of J. Jill.

Talbots' third-quarter earnings may have been at the high end of the company's own expectations, according to its press release headline. But in the same period, its net income dropped 60% to $8.1 million, or $0.15 per share. That includes acquisition costs and adjustments of $0.16 per share and stock-option expense of $0.04 per share. Total sales increased to 33% to $569 million, but that includes extra sales from J. Jill, in comparison to last year, when Talbots was solo.

Same-store sales for the quarter increased 2.3%; while Talbots improved to a 4% increase in comps, J. Jill is still struggling, with comps down 6.6%. The company's update on store expansions for the quarter included 31 new Talbots stores and 18 J. Jill stores, and the company says it will end the year with 1,346 total stores.

Did Talbots overpay for J. Jill? Talbots says the acquisition will yield $36 million in cost savings next year, better than its original estimate of $25 million. However, let's not forget that Talbots took on $400 million in debt to acquire J. Jill, and its cash reserve at the moment is a mere $43 million.

Talbots said that while its "core" customers are strong, "we have not yet seen the level of demand from the non-core customer that we anticipate." The company also said that it's not ready to provide any earnings-per-share outlook yet. Plenty of good companies don't play the quarterly expectations game, but Talbots already ratcheted down the information available to investors earlier this year. The company announced that it would be among several retailers reducing the frequency of same-store sales data, which I considered a dangerous trend. Especially with turbulent companies like Talbots, investors definitely need and prefer more information, not less.

Talbots also said that it remains "focused on creating the leading brand portfolio for the age 35+ female market." Well, that's all well and good, but Talbots has seriously hungry competitors clamoring for those very same customers: Chico's (NYSE: CHS  ) , Coldwater Creek (NYSE: CWTR  ) , Ann Taylor (NYSE: ANN  ) , and even Gap's (NYSE: GPS  ) Forth & Towne brand.

Over the last year, I've wondered whether Talbots bit off more than it could chew with the J. Jill acquisition. I've also doubted its strategy; it's great when retailers expand by opening new stores, and J. Jill could theoretically be a growth vehicle with only 228 stores, but shouldn't its merchandising strategy get worked out first?

There's still considerable uncertainty about how well this combined entity will perform, and whether J. Jill might become a pricey albatross. For that reason, I'd say that those who invest in Talbots now are taking a leap of faith.

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Alyce Lomax does not own shares of any of the companies mentioned.

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