Dangerous Fashion Stocks

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Are some of the struggling women's retailers' getting their businesses back on track? Let's take a look at three that reported their quarterly results last week: Talbots (NYSE: TLB), Chico's (NYSE: CHS), and Coldwater Creek (Nasdaq: CWTR), none of which has earned a bullish five-star rating in our Motley Fool CAPS community intelligence database.

Company	CAPS rating	Quarterly profit	Sales	Impact on price
Talbots	*	N/A	(7.7%)	33%
Chico's	***	(82.7%)	(7.1%)	2.2%
Coldwater Creek	***	(64.4%)	(4.8%)	7.9%

Gosh, not a positive increase in the house -- other than some arguably goofy moves on the part of the stocks themselves.

Promises, promises at Talbots
As usual, Talbots takes the prize for "reality disconnect" over the course of the past year or so, its stock plunging, soaring, plunging, soaring -- which is why I dubbed it "one heck of a what the …?" stock awhile back (mostly because of its tendency to soar). Talbots' shares skyrocketed on its quarterly results, despite the sad decrease in net sales as well as the fact that its quarterly net loss just about doubled on a year-over-year basis.

Apparently, investors were excited about Talbots' annual forecast, though. As it turns out, closing its men's and kids' concepts will be cheaper than previously expected. Talbots expects earnings of $0.15 to $0.25 per share for fiscal 2008. Sure, that's a far cry better than the mind-boggling loss of $3.56 per share it recorded for fiscal 2007.

Still, though, this is a company that has had difficulties luring customers for quite some time now, has a difficult competitive landscape to contend with, and also faces an overall weak consumer (and I've long believed the mature female shopper is more likely to pull in her wallet when times are tough). I still think this stock is more of a nonsensical trade than a good long-term investment, because I still see no compelling signs that the company is getting its act together when it comes to its actual business.

Apparently, the Motley Fool CAPS community agrees, since Talbots has a sad one-star rating. As I've pointed out about long-struggling Gap (NYSE: GPS), cost-cutting is nice, and inventory control is helpful, but these stocks are still risky as long as they're not getting far more customers back in the door (without being forced to promise major super sales). This retailer still needs to accomplish a lot to look like a compelling idea to me.

Turning the other Chico's
I haven't felt too terribly optimistic about Chico's for quite some time either. (The CAPS community isn't entirely bearish; the stock has a middle-of-the-road three-star rating.)

Granted, I found some reason to feel a little bit more optimistic about Chico's last week, having done a little impromptu retail bag checking. I noticed at a nearby shopping venue that shoppers carrying Chico's shopping bags far surpassed those of rival and neighbor Talbots, but Chico's quarterly tidings certainly didn't give too many bullish indications.

Both net income and sales decreased, and same-store sales fell an agonizing 15.9% in the quarter. So far in August, Chico's said, its consolidated comps were running at negative 10.7%, as of its press release.

Still, Chico's does have something Talbots doesn't have (other than Debbie Phelps), and that's a clean balance sheet, with $278 million in cash and equivalents and no debt.

Tepid Coldwater
Coldwater Creek was a hot stock once (and like Chico's, has held onto a three-star rating in CAPS), but it has been a lot colder here lately. Its latest quarter delivered more of the same, even though investors seemed to focus on its "better-than-expected" earnings of $0.03 per share.

Still, sales were lethargic in the quarter, and its same-store sales also dropped a formidable 13.7%, hardly seeming to signal a concrete turnaround.

Coldwater Creek also took a non-cash impairment charge of $0.01 per share in the quarter, related to its ancillary concept, The Spa. So much for hopes that The Spa would prove to be a secondary growth vehicle (and the idea that it will pick up steam seems even more risky in a down economy).

Fortunately, though, like Chico's, Coldwater Creek doesn't have any liquidity problems to speak of, with $89.2 million in cash and no borrowings under its credit facility.

Caveat emptor
For all three of these stocks, it looks to me like many investors are hanging on "hope" rather than any real sign of turnaround. Personally, I think Talbots is the riskiest of the three, and suspect that Chico's is probably the least risky, but still, these stocks continue to strike me as majorly speculative instead of bargains.

I still prefer retail stocks like Urban Outfitters (Nasdaq: URBN), which is one that has managed to buck the summer's nasty trends (and has one of the smartest retail managements I can think of), or even American Eagle Outfitters (NYSE: AEO) or Abercrombie & Fitch (NYSE: ANF), both of which have faltered recently but look pretty darn cheap; each trades at just 10 times earnings.

Talbots, Chico's, and Coldwater Creek suffer from a variety of major headwinds that go beyond the current economic malaise. Talbots and Chico's have each needed turnarounds for years, and all three cater to mature female shoppers (who are likely more fiscally conservative in tough times, plus, they may be in a demographic shift, fashion wise). For these three stocks, I still have to say: caveat emptor.