It looks like investors are celebrating news of the latest life preserver thrown at Talbots (NYSE: TLB ) by its majority shareholder, Aeon. But I wouldn't say it's all smooth sailing from here -- far, far from it.
Paying the piper
Talbots announced it has received a $200 million loan from Aeon to pay off its existing acquisition debt. As you may know, that's certainly bittersweet, because the acquisition in question is J. Jill, the unit the retailer overpaid for, couldn't turn around, and is now trying to sell.
Aeon's giving Talbots a pretty nice deal in that the loan has no financial covenants and is payable in three years, giving Talbots some time and leeway, both of which it sorely needs. It must be nice to have a shareholder that is consistently willing to help out, right? It's also interesting that in fiscal 2009, the Aeon loan is apparently an interest-only one, which certainly will make it easier for Talbots to handle the near term. (We have all learned that the thing about interest-only loans is, you've got to pay the piper sometime.) Aeon also expects to guarantee the retailer's other debt.
In another interesting note, the loan is subject to a few instances regarding incoming excess cash flows that trigger mandatory prepayments; for instance, when J. Jill is sold, Talbots must pay 100% of the proceeds to Aeon.
Last but not least, I still can't get over the idea that it's not exactly optimal for a company to be paying off debt with more debt, but that's an issue I've had with Talbots for quite some time.
Talbots' troubles are far from over, though. Further into the press release, the company said that given its weak fourth-quarter sales, it "currently anticipates a significant decrease in its gross margins and a deleveraging of expenses." It will report a net loss from continuing operations for the fourth quarter, and it said this will be significantly below analysts' expectations and last year's fourth-quarter results.
And sales were indeed weak; same-store sales fell 24.6%, with total sales down 23%.
Talbots is also streamlining, including layoffs, as many other retail and consumer-facing companies like Macy's (NYSE: M ) , Target (NYSE: TGT ) , and Liz Claiborne (NYSE: LIZ ) have been doing recently. Talbots will cut 370 corporate jobs and tinker with things like employee hours, and is suspending 401(K) matching contributions and requiring employees to pay more toward their health-care coverage. There also won't be any merit raises in 2009. These moves are expected to save $150 million.
Better opportunities out there
In the fall, I nominated Talbots as a scary Halloween stock and said we might have to kiss it goodbye. And judging by Aeon's moves, it certainly looks like we might have had to, because this looks like a rescue mission. And while many investors seem to be excited that the liquidity issues Talbots might have faced appear to be behind it, I still think there are many other retailers that are much stronger to invest in.
Just like a month ago, when I said just don't do it, I still don't consider Talbots a good stock for long-term investors who are shopping around in the retail space. The company has been struggling since long before the current economic storm, and as I've said too many times to count, if it's hard to turn around a retailer in good times, then it's exponentially harder to achieve a turnaround in bad. There are healthier retailers out there; I still see little reason to spin the wheel on Talbots.