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It's Halloween, a time to ponder scary, spooky things that might be lurking in the shadows to hurt you. And if you want to talk "scary," let's talk about volatile, debt-laden retail "turnaround play" Talbots (NYSE: TLB ) .
You want to see something really scary? Just take a look at Talbots' stock chart. That is one volatile stock. (My colleague Kristin Graham and I recently charted its bizarre price moves for your reading enjoyment.) For the most part, these unearthly trading contortions rarely relate to any real news about the company or its progress toward its long-awaited turnaround. Unless there's witchcraft or possession involved, I can't explain this odd behavior -- particularly the periods of inexplicable euphoria.
On the rare occasions that the stock's moves relate to anything we can glean, it's usually a frightening event, like when HSBC and Bank of America (NYSE: BAC ) pulled $265 million in letters of credit last spring. (Talbots' majority shareholder, Japan's Aeon, swooped in to save the day with a credit facility.) There was also the announcement that its major cost cuts and store closures would help Talbots report an annual profit at long last. Still, I see no real proof of true progress in getting robust, full-price-purchasing customer traffic through its doors.
Of course, slicing and dicing expenses won't create organic growth. Simply shuttering stores to cut costs and bolster profit may be a step in the right direction, but it should also make serious long-term investors wonder what the future really holds for this retailer when the cutting's done.
As you might have gathered, Talbots has a lot of debt -- not the best idea in good times, and even worse in our current morbid market. I recently took a harsh look at Talbots, Borders Group (NYSE: BGP ) , and Circuit City (NYSE: CC ) , wondering whether we'll have to kiss these three retailers goodbye after the coming Black Christmas-inspired holiday season, as consumer confidence plunges. All three carry onerous amounts of debt, which is a big part of the reason why they make my hair stand on end.
Furthermore, Talbots hasn't even been able to cover its interest expenses with operating income. If that doesn't scare you, I don't know what will.
Meanwhile, macroeconomic risks have been frightening investors away from much stronger retailers. Look at Urban Outfitters (Nasdaq: URBN ) and The Buckle (NYSE: BKE ) -- both retailers have been performing extremely well, even in these economic hard times, and both stocks recently plunged, leaving them with forward price-to-earnings ratios of 13 and 11, respectively. Compare that to Talbots' forward P/E of 17, and explain to me why on earth this long-struggling retailer deserves a premium multiple.
Like Jason Voorhees, it just keeps coming back
I've consistently been leery of Talbots as a stock idea, including its ill-fated acquisition of J. Jill. (In a bit of creepy deja vu, I even nominated J. Jill as a 2005 Halloween Trick.)
Talbots does have a lot of fans, judging by the comments I get on many of my not-so-optimistic articles, which says something about its brand. I also keep hearing that Talbots' merchandise has greatly improved this fall. Still, the macroeconomic headwinds are intense right now, and the older female demographic that Talbots and rivals like Chico's (NYSE: CHS ) target knows how to pinch pennies when need be. I fear that even if Talbots' efforts finally produce more appealing merchandise, shoppers just won't be shopping.
In total, I believe Talbots is just the type of stock Fool Richard Gibbons was talking about in his article "Avoid These Ugly, Risky Stocks."
Do you agree with me that Talbots gives new meaning to the word "scary?" Is it, in fact, the World's Scariest Stock? If so, go to our community intelligence database, Motley Fool CAPS, and rate it "underperform." (And of course if you don't agree that this stock's more of a treat than a trick, feel free to rate it "outperform" as well.) We'll reveal your choice for the World's Scariest Stock next week. Until then, happy Halloween!