One Heck of a "What the …?" Stock

Call me crazy, but a stock that's climbed about 35% in one week just doesn't make sense to me. Even more mind-boggling is when it happens to a company like Talbots (NYSE: TLB  ) -- which is in the midst of a major turnaround and holding on for dear life.

I know it's kind of mean to imply that some investors out there got their drinks spiked (a move the Justice Department says Broadcom's (Nasdaq: BRCM  ) CEO was allegedly fond of). But I'm sorry, 35%! That's what I call crazy.  

Talbots' "good news" this week was that its majority shareholder, Japan's Aeon Co., agreed to give the retailer a $50 million credit facility for its turnaround initiatives this year, and that will bring its borrowing capacity to $215 million.

I can see why that's positive, especially since, earlier this year, investors freaked when it came to light that HSBC and Bank of America (NYSE: BAC  ) had pulled $265 million letters of credit from Talbots. In this day and age, any hint that liquidity could dry up is a serious risk, especially for turnaround companies that need access to capital to not only get growth back on track, but merely run business as usual.

But is this news worthy of a 35% pop? I don't think so. Although Talbots was able to reconfirm its earnings outlook for this year, let's not forget that like some of its retail niche peers -- Chico's (NYSE: CHS  ) and Coldwater Creek (Nasdaq: CWTR  ) , for instance -- it still needs to attract fickle customers during tough economic times, and I've often contended that the mature women these retailers target are going to be among the toughest to woo in an economic downturn.

Last but not least, Talbots may have access to additional credit, but let's not forget it still has $541.6 million in debt already. And judging by the fact that this company has negative operating income, it can't cover its interest on its existing debt from operations alone. Ouch. Here's another element that might bake your noodle: Compare the amount of debt Talbots already has to its $622 million market cap, and its negligible $31.8 million in cash. And who does this make sense to, again?

Some sources out there say Talbots' huge increase this week may be related to a short squeeze, but still, even a small increase would seem too euphoric to me at this point in the game. Talbots still has a long way to go to prove it can get itself back on track, and its debtor's ways just don't attract me as an investor.

Stock up on some related Foolishness:

  • Talbots was one of the stocks I thought investors should steer clear of in April.
  • That's because it was still tricky.
  • Of course, Talbots had another stretch where it took off in March.

If you're looking for some other great retail stock ideas -- as well as high-quality companies in a variety of different industries -- check out Motley Fool Stock Advisor for 30 days, free. 

Alyce Lomax does not own shares of any of the companies mentioned. Bank of America has been recommended by Income Investor. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (6)

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  • Report this Comment On June 13, 2008, at 5:29 PM, TMFSarahGen wrote:

    Alyce, I gave you a rec for writing about TLB. But I totally don't agree with you. :)

    I talked about TLB a little in my recent CAPS blog post about comings and goings in the exec suite. TLB's recently offloaded deadweight from the exec suite.

    TLB's has a number of reform efforts that are already working. Success in their inventory control reform was reflected in their most recent earnings. And the credit issues forced them to finally go open account with most of their suppliers - which means a big increase in free cash flow. Right?

    And don't forget TLB just presented at the Piper Jaffray conference on the 11th. So there's recent reason for the analysts to be paying attention.

    I'm a happy owner of TLB shares, but I never would have paid any attention if you young-uns hadn't got my hackles up with all the "it's so over, it's so matronly" talk. CWTR is matronly. CHS is so over. TLB? Classic. :)

    - Sarah aka TMFSarahGen

  • Report this Comment On June 14, 2008, at 1:36 AM, Corporality wrote:

    TMFSarahGen, I appreciate you are older and thus wiser but I don't agree with your assessment. :)

    The Piper Jaffray conference was just what it was supposed to be; a medium in which to convince analysts and investors that hydrogen dirigibles were the future. Perhaps if the Hindenberg showed up for a demonstration they did indeed pay attention but perhaps didn't understand it was meant to be a form of travel not a firework. ;)

    The WSJ had an interesting tid bit on TLB last month: "Trudy Sullivan confronted a major problem when she became the new chief executive of Talbots Inc. last summer. A survey found that all the chain's customers -- even those older than 65 -- thought its styles were meant for someone older than them." Subscription needed:

    Right now it's got 467M in debt while 31M in cash, great bet for a turn around? IMHO, it's time to fold and walk.

    Respectfully yours,

    Tyler Durden aka Corporality

  • Report this Comment On June 14, 2008, at 5:22 PM, TMFSarahGen wrote:

    hmm Tyler, I wouldn't suggest that older necessarily equals wiser.

    I just disagree about TLB, especially at the recent stock price. It's now up about 50% in a short time, so I'm not sure I would recommend anyone run out and buy any now.

    I read that old WSJ article - and it shows one thing. They know now that they have a problem. And they're working on it. Before they didn't seem to even realize they had a problem.

    When I read all those suggestions and plans from the recently completed consultants' assessment, I thought "yeah yeah, I've heard that before." But then they really were able to bring their inventory under control. And they really have been making those changes.

    It's extremely risky to buy into TLB right now, because it's assuming that the turnaround will be successful. I'm just betting that the management finally has it right.

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