World's Scariest Stock: Talbots

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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.

Scary things
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!

Bank of America is a Motley Fool Income Investor pick. Borders Group is an Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns shares of Urban Outfitters. The Fool's disclosure policy is the hero in the market's scary movie.

Read/Post Comments (3) | Recommend This Article (15)

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 November 04, 2008, at 6:44 PM, hwml wrote:

    Yes, the JJill purchase was a huge mistake and will take a very long time to repair the damage at Talbots. The holiday collection seems a bit pricey for the economy. Upper management at TLB seems to have misunderstood that their customer is more like Michelle Obama-that is a well educated working woman with kids- and not Cindy McCain-the aging "Hostess" as their new holiday strategy hopes.

    That said, if Talbots can continue to make wear-to-work classics at a fairly decent price point for the quality of merch they will survive. TLB has smart, responsive frontline people who keep their core customer coming back through honesty and service. The new emphasis on multichannel selling can only be a benefit in introducing younger buyers to the line. Yes, Talbots may be where her mother shopped, but her mom looked great then and she will now.

  • Report this Comment On November 06, 2008, at 12:46 PM, rabbitrabbit wrote:

    i'm wondering how today's announcement of talbots intention to sell j.jill changes things. also, i'm sorry, but i just wish ms. lomax was a better writer. it's hard to get on board with her thinking when i'm cringing at clichés and ill-used metaphors. when she sticks to straight talk, she's a lot more convincing.

  • Report this Comment On November 06, 2008, at 3:02 PM, Jeffsdate wrote:

    I'm no financier, but as a clotheshorse and former fan of Talbots I thought I'd weigh in from the customer's viewpoint. Their newest catalogs are waaaay too dowdy, not to mention the stuff is overpriced. Not that Talbots has ever been cheap, but usually the quality and service were worth the relatively high prices. I have Talbots things that I've cherished for more than a decade. But, my Lord -- $78 for a cotton/spandex shirt or a plastic-bead necklace, in this economy? Plus the sizes seem to be running smaller than before -- is this company trying to commit suicide by making us all feel fat? And I'm sorry, but many of the models in the catalog photos are just not attractive (or else the pix of them are unflattering). And who thought the musty, quaint buzzword "charming" would be a way to bring in the customers? The clothes look very 1950s-ladylike-prissy, and even my 76-year-old mom isn't interested in them. And as for 46-year-old me, forget it. With most companies' dresscodes skewing toward casual, I just think this stuff is the wrong strategy.

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