Fool Blog: Talbots Turnaround? Dream On!

To put it bluntly, we're irate over Talbots (NYSE: TLB  ) . For months, we've been ranting in the office about investors who have been suckered into believing, and then unbelieving, the turnaround story supposedly in the works for this ailing retailer. Since the beginning of the year, the stock has peaked and troughed seven times, with movements greater than 25% between each top and bottom.

Date

Price

Change

11-Jan

$6.96

N/A

4-Apr

$14.11

103%

22-May

$7.08

(50%)

20-Jun

$13.74

94%

15-Jul

$10.28

(25%)

5-Aug

$14.99

46%

25-Aug

$9.29

(38%)

5-Sep

$13.97

50%

For a mundane business that sells apparel to grown women, even with turnaround speculation, that a whole lot of unnecessary volatility. Mindboggling as these movements are, with no actual progress to support them, we're even more perplexed that nothing in the press release or conference call actually suggests a successful turnaround is on the way. Still, the stock jumped nearly 30% in one day last week as it reported "earnings." One Forbes columnist even highlighted Talbots as the "bright spot" in retail last week. Fortunately, we're here to bring you back down to reality.

Kristin:
I'm going bring you the true Talbots, straight from where it counts most: its customers. I'll admit that its style isn't my cup of tea, since I'm not the company's target demographic. But I've been dragged into the retailer for years with my mom, so I've done my fair share of in-store due diligence.

It's not a particularly good sign that my mom and her baby boomer friends now snub the full-priced merchandise they used to buy while dashing back to the clearance racks. Once dubbed as an exclusive classic clothing store for upper-middle-class women, offering limited price reductions, Talbots' inadequate inventory planning led to a string of dramatic markdowns, essentially transforming its core customer into a bargain-shopper.  

A biased opinion? Perhaps. But I think the company's $3.56 loss per share in 2007 backs up my sightings pretty well.

So do the rest of the financials. Talbots is unflattering top to bottom; even the most skilled Extreme Makeover crew couldn't remedy its problem areas. Carrying the unwanted pounds it gained with the J.Jill acquisition in 2006, the retailer sports a plus-size debt load it can't even begin to afford. Its negative operating income might just explain the vanishing cash on the balance sheet. The only features that look slimming these days are its margins, which resemble the starved model on the cover of its catalogue.

In my eyes, there isn't even a glimmer of hope for this company. It needs to revive sales while simultaneously cutting costs. That's not an easy task, folks, particularly when overburdened by debt. This is a tragedy waiting to happen. And now that it's trading at nearly 30 times the company's own projections for this year's earnings (excluding charges), there are a lot of impending victims.

Alyce:
Oh my -- Talbots as a retail "bright spot"? I suspect investors who think that stock's a bright spot will end up feeling like they stared at an eclipse. But instead of burned retinas, they'll have burned portfolios.

When I saw Kristin's data regarding Talbots' rollercoaster stock price over a mere nine months, I cringed, thinking, well, Viva Las Vegas! That kind of volatility -- matched with every indication that Talbots' business is still floundering, for all the reasons Kristin mentioned -- made me think of playing the slots, betting it all on red, or picking a pony because you like its name. Dream on, people.

Of course, this lottery-ticket mentality, utterly detached from operational or financial strength and high on hope, seems common these days. Watching airline stocks like UAL (Nasdaq: UAUA  ) skyrocket in the last month -- apparently on falling oil prices, although maybe people are excited about the prospect of abusing customers by charging for everything short of using the lavatory -- has made me nuts. Or how about General Motors (NYSE: GM  ) , a company to which many investors stubbornly cling, even though it can't seem to excel on its own merits?

Last but not least, somebody please tell me why Talbots is trading at 30 times projected earnings? Look around at some other retailers, and tell me why a premium multiple for Talbots makes a lick of sense. Urban Outfitters (Nasdaq: URBN  ) is trading at a cheaper multiple, and it's actually been performing. Plus, it doesn't have an onerous debt load. Investing without considering business realities, and hinging this much on hope (and maybe even other people's stupidity), is just asking to get burned.

In conclusion...
Turnarounds happen to companies that deserve them. Look at how Apple (Nasdaq: AAPL  ) muscled its innovative technology expertise to rebuild a loyal customer base over the last several years. Still, every successful turnaround is accompanied by a greater number of failures. Sears (Nasdaq: SHLD  ) can't seem to post a month of positive comps. Even Starbucks (Nasdaq: SBUX  ) , with its devoted patrons, is struggling to revive its operations.

Comebacks are tough in general, but in this type of economic situation, they're nearly impossible. We told you what we think about Talbots, but what do you think? Tell us below in the comments box.

Apple and Starbucks are Stock Advisor selections. Sears and Starbucks have been recommended by Inside Value, and the Fool owns shares of Starbucks. Try either service free for 30 days.

Kristin Graham owns shares of Apple and Starbucks. Alyce Lomax owns shares of Starbucks and Urban Outfitters. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 05, 2008, at 6:29 PM, girlfromdc wrote:

    Talbots is a mess. HR staff telling employees if they can't take the heat, get out of the kitchen. Meanwhile the kitchen is sweltering. The prices are going up on product, so your Mother may have to wait even longer for the clearance items to be reasonable. It is not so much a turn-around, as it is a group of very well paid people doing whatever they want for the time being, until the heat from the kitchen spreads and burns the place down.

  • Report this Comment On September 08, 2008, at 11:26 AM, VernElliot wrote:

    Your understanding of Talbots is only exceeded by your ability as a writer, which is marginal at best.

    Sullivan is cutting loose the dead weight, getting rid of the old boys network, remaking the entire brand.

    Turnarounds happen to companies that deserve them. What makes you think Talbots doesn't deserve a turnaround? Because it lost its focus to its core? It deserves a second chance. Yes the J Jill aquisition was foolish. But I'm willing to wait it out for a few quarters. I'm sure Trudy has something planned for it

  • Report this Comment On September 09, 2008, at 10:56 AM, girlfromdc wrote:

    I am glad to hear that you have a full understandig as to why all the product is late and prices being raised- at least someone does. I hope Trudy has a plan, it hasn't looked that way so far. So of the the "good ol' boy replacements" are beyond questionable.

  • Report this Comment On September 09, 2008, at 12:15 PM, MissJulia wrote:

    I have been a loyal Talbots customer since the late 1970's. There was quality, and it was classic. I'm not trendy, but I'm not frumpy either. Talbots has been missing it on finding their style groove for boomers.

    So, I'm saying that it's about the product. I just received what I believe is the first catalogue produced by T. Sullivan's new team. It has some interesting changes, graphically and otherwise, but I'm not convinced yet. I wouldn't order anything without seeing and examining it in person--especially the shoes. Ugh. They have been lacking quality. I would pay more for something better. That's how I feel about the stock as well.

    It would be very disappointing to see Talbots evaporate into the retail has-been ether. I particularly detested all of their pants, so I'm going to buy better/buy less and purchase good black ones from Armani or Akris. That below-the-navel sansabelt look is so over.

  • Report this Comment On September 15, 2008, at 11:27 AM, PerceptionQueen wrote:

    I see that we have a few back-seat executives making calls on Talbots. Your comments on turn-arounds clearly demonstrate your lack of research and in-depth knowledge on such undertakings. Turn-arounds take years to execute and are rarely led by the CEO that created the problems. As such, the new CEO has to assess the situation, develop a strategy that will position them for growth years out, fire and hire the right people and then execute. I will remind you that Talbots rolled out its strategic plan at its investor day in April 2008 AND is attempting to navigate the turn-around during one of the most difficult retail periods we have seen in years. I guess you think Trudi has a wand she can wave and presto-chango, Talbots is an outperformer. You are slamming a company that has identified its problems and has brought to the table a viable plan to fix the business and it hasn't even been five months since the plan was announced. Clearly, you have little, if any, understanding of managing a company undergoing a turn-around. While execution is key, I have enough hands-on experience to know that companies undergoing a transition such as this have ups and downs, especially in the first 12 months. Do your research. It's people like you that create the volatility in the stock price.

  • Report this Comment On September 15, 2008, at 12:50 PM, girlfromdc wrote:

    "Trudy" has definitely made strides and having witnessed the new old boys club in action- I can tell you, there is a reality show in the works, you can't make this stuff up. I am not in the backseat, unfortunately, I am in the front with no belt.

  • Report this Comment On September 15, 2008, at 2:09 PM, WhoTookHrvat wrote:

    I thought the article was brilliant. I worked in Talbots for a number of years, in their IT Data Center in Tampa. I jumped ship early this year as I did not see any signs of things improving.

    The IT side of the company, is run by a group of people who are the epitome of a"Good Old Boys" idea. They are Incompetent, and haven't the slightest idea of how to recognize talent, nor of how to eliminate dead weight.

    When the first round of layoffs came about, they had the change to get rid of people who had been coasting at the company for years and not doing any work, and they choose not to. To top it all off, upper management gave themselves promotions (some making up new titles in the process) and raises.

    There are a small group of under appreciated people being worked like dogs down at the Data Center... and when those few who actually know what they are doing leave... the company will be doomed.

  • Report this Comment On October 23, 2008, at 11:55 AM, talcallgirl wrote:

    Its true that Talbots has transformed its core customer into a bargain hunter or the core customer has left trading up for the max mara or armani. through catalog the inventory levels are too low and cust cancel orders due to backorders and no availability. based on our web sales it seems our web customers may be our best cust so talbots need to grow their web cust base. it is also true that they have continually added upper level executives while cutting their lower level staff, the ones who actually process the orders and merchandise. catalog workers are expected to perform stronger with less but you can't sell from an empty cart.

  • Report this Comment On February 04, 2009, at 7:42 PM, lynster8 wrote:

    The last Talbots administration was bad. The current one is alot worse. Just imagine how bad things would be if it were not for the great product development and inventory management improvements. Trudy has been in her position 18 months an has shown nothing. No leadership or strategic direction. New CFO was a great hire and should help, but overall team is week. Perception Queen is clearly working under Trudy's direction.No spin is going to turn this company around

  • Report this Comment On October 05, 2010, at 12:43 PM, julsinrichmond wrote:

    Personally, I like the changes in the ad campaigns and product assortment. I did not shop Talbot's until the past year. I was surprised to find clothes that I felt were more current, while still being classic. I found several items that fit into my work wardrobe - I work for a conservative company. Turn-arounds do take time and often it's painful during the process. I agree that Talbot's has a long way to go, but with the right leadership, they can get there.

  • Report this Comment On December 11, 2012, at 9:40 PM, antitalbot wrote:

    Well I have been working for talbots for 1 year, and that has been 1 year too many!! Trudy took talbots for 5 million dollars, that was her exit money!! Don't do your job and get 5 million!! And now the new management gave no pay raises this year!! But yet are sending out pearls to their 2500 best customers for xmas!! Guess they forgot about their employees at the stores !!! And last month they were disappointed in that the employees didn't spend as much as usual - well how does disappointment feel, we know when we didn't get pay increases!!!

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