Still Tough for Talbots

We Fools have wondered before whether Talbots (NYSE: TLB) overpaid for J. Jill -- and whether two struggling retailers could combine to make one strong company. On Tuesday, Talbots announced a sobering forecast for its fourth quarter. It seems things still aren't taking off for the combined entity.

Talbots now anticipates a breakeven fourth quarter, a far cry from the $0.30 per share in profit analysts expected. The retailer cited a $0.07-per-share decline in its Talbots concept's performance, a higher-than-anticipated loss of $0.12 per share for the J. Jill unit, acquisition costs of $0.14 per share, and stock-option expense of $0.04 per share.

According to the retailer, fourth-quarter comps were flat, coming in slightly negative for Talbots and slightly positive for J. Jill. Talbots had to take markdowns on inventory during the holiday season after some items didn't sell. (Of course, to be fair, that isn't too surprising, since we all know that this year was a promotional holiday season for most retailers.)

Things aren't looking too great for the first quarter, either. Talbots' earnings are expected to fall dramatically, to between $0.36 and $0.43 per share, versus a $0.51-per-share profit last year. (Analysts were expecting a profit of $0.56 per share.) J. Jill is expected to remain unprofitable, with an anticipated per-share loss of $0.05 to $0.03. Talbots said its efforts to revive both concepts should leave the company better positioned for future success.

Talbots said it plans to take a more conservative approach to inventory management while ratcheting down store expansion plans. (Last spring, I questioned whether aggressive store expansion plans were prudent, when it seemed Talbots might be wiser to woo back customers by working on more irresistible merchandise.) The company now expects to open 70 stores (40 Talbots and 30 J. Jills) instead of the 90 previously slated for 2007.

Slowing down its new-store expansion should lower its expected capital expenditures by $21 million to $87 million, the company said, giving it stronger cash flow and the ability to accelerate paying off the acquisition debt. (It took on $400 million in debt for the purchase).

In retrospect, I wouldn't say Liz Claiborne (NYSE: LIZ) was wrongheaded when it passed on acquiring J. Jill. In my opinion, J. Jill shareholders made out like bandits on the acquisition (back in 2005, I was a J. Jill bear). After all, both Talbots and J. Jill face formidable competition for the mature female demographic, including Ann Taylor (NYSE: ANN), Coldwater Creek (Nasdaq: CWTR), Chico's (NYSE: CHS), Urban Outfitters' (Nasdaq: URBN) Anthropologie, and even Gap's (NYSE: GPS) new Forth & Towne. Even when they first combined, both Talbots and J. Jill had experienced their share of struggles.

Although Talbots said it is pleased with the progress of the J. Jill integration, so far, J. Jill doesn't seem to be making a very positive contribution. I wonder whether shareholders feel more punch-drunk than pleased. After all, Talbots shares have fallen 19% in the last 12 months. Of course, their status as a bargain seems questionable; J. Jill's potential as a serious growth driver still deserves considerable doubt.

Further finely stitched Foolishness

• In November, I examined J. Jill's toll on Talbots.
• Did J. Jill have a higher calling?
• In October 2005, I bearishly dubbed Talbots a Halloween Trick.

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Alyce Lomax owns shares of Urban Outfitters. The Fool has a disclosure policy.