Talbots Still Bobbing Along

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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.

More cuts
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.

For example, consider The Buckle (NYSE: BKE  ) , Aeropostale (NYSE: ARO  ) , and Urban Outfitters (Nasdaq: URBN  ) , which have been doing quite well despite the miserable economy.

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.

Alyce Lomax owns shares of Urban Outfitters. The Fool has a disclosure policy. Try any of our Foolish newsletters today, free for 30 days.

Read/Post Comments (10) | Recommend This Article (14)

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 February 08, 2009, at 7:02 AM, MrTalbots wrote:

    First and foremost - get your retail research market straight. Comparing revenue sales between Talbots and retailers like Aeropostale is like comparing sales of Lowes and Kentucky Fried Chicken (That's right: does not match). The customer base of these retails don't even close, which makes me question your research.

    Talbots' TTM Quick and Current ratio are above 1.00 and their Sell/Gen/AdminExpenses totals have been decreasing every quarter since 2/2/2008. These are clear indicators that they are doing something to get out of the mess.

    And regarding Talbots paying old debt with more debt, it is not different that what anyone else would do to save themselves from complete failure - restructuring your contracts to buy you more time to pass this worldwide recessional storm.

  • Report this Comment On February 09, 2009, at 8:41 PM, bababaseh wrote:

    I am wondering are you against Talbots compony,

    you are always trying to put the effort of this great compony down and make it look like it is going out of businees.

    Tlbots is a great compny and customers love the mercherndise. If you have not notice all retailers are in trouble and even wallmart is trying to make profit in this economy, may be you are bais about this compony, I am tired of your negetive comments.

    Ask some customers about their openion in regard to Tlbots.

  • Report this Comment On February 10, 2009, at 10:46 AM, VernElliot wrote:

    Talbots still dad 1.5 billion - thats with a B in sales in 08. Lomax sems to have a personal axe to grind with Talbots and its very obvious. Give it a rest Lomax.

  • Report this Comment On February 10, 2009, at 3:32 PM, vmb63 wrote:

    Alyce defintely has an axe to grind with Talbots......It's so sadly clear that she's obsessed with the company and appears to be trying to do anything in her power to ensure it's demise....As I've said in the past - maybe someone couldn't fit their rearend into the petites pants they were once able to and had to step it up to plus sizes? Bitter much?

  • Report this Comment On February 12, 2009, at 8:42 PM, girlfromdc wrote:

    Firstly, vm, Petite pants are shorter than regular missy pants, the are made in all sizes-- so the rear-end would not be of concern. Odd that you would say that.

    Secondly, baba, learn how to spell or type correctly one of the two.

    And lastly, unfortunately Talbots deserves the scrutiny, as last year at this time they were merrily, merrily, spending all kinds of money making no excuse for themselves and hiring anyone they could away from Ann Taylor, I am sure spending top dollar for the superstars trying to shake the old lady image. They no longer wanted to be associated with their 60-70 something customers, giving her the perfect excuse not to buy anything in this economy. Maybe it the customer who is bitter.

  • Report this Comment On February 13, 2009, at 11:13 AM, MaMitch121 wrote:

    I shopped at Talbots for years. Clothes were classic, well-made and lasted forever. Then, the stores started discounting. Things you bought one week were 40% off the next. Both the quality and the styles changed. Clothes tore up after a few times. A new CEO from Liz Claiborne probably is the death of the chain. She has completely changed the inventory and alienated a huge segment of baby boomers. A good marketer would protect a repeat market. It makes no sense. Ironically, she looks to be about 60 years old or more--heavy, gray hair. Someone old enough to know better.

  • Report this Comment On February 13, 2009, at 5:46 PM, AShoreThing wrote:

    First of all, I do not see the demise of Talbot's!

    This is a brand name and people have been

    buying it for years and will continue to do so in

    the future. Their garments are stylish and of

    quality workmanship and material. I have been

    shopping Talbot's for years and will continue to

    do so, even in the downturn of the economy.

    Looking forward to the spring/summer sales....

    Talbot's is a staple you can pull out of your closet

    year after year and add additional pieces to your

    wardrobe, dress it down with jeans or dress it up

    with a classic jacket.

    Last year, I noticed that their advertising had

    changed immensely in regard to fashion styles

    they were now carrying. I think they were on

    board, to change the dowdy appearance of the

    older look and go for the younger look, which I

    think has been a great upgrade from the old

    look, it was too old school and not changing with

    the times.. Last spring, I was excited to see a

    new look at Talbot's... The new styles

    were fresh, stylish and colorful! Talbot's had

    reinvented itself!

    Every company is in a downturn right now and

    Talbot's might have to discount and drop some

    prices, but their clothes are classic and timeless..

    Talbot's made their mistake by buying J.Jill... What

    were they thinking with this acquisition? I'm in my

    early 50's and have never ever purchased in there...

    The clothes look un-stylish, old and frumpy, Maybe,

    their market is middle-aged woman who are trying

    to hide some excess; however, they could make

    an effort with style...

    The other thing positive about Talbot's is that,

    everyone is so busy now days and Talbot's is

    a one stop shop. If you know your Talbot size,

    their clothes are true to size, and this saves you

    a lot of time and effort having to waste time,

    trying on clothes that don't fit...

    Anyway, I wish Talbot's luck with the economic

    down turn and I'm sure they will be fine in the

    future and the Talbot's shopping experience will

    be passed down from generation to generation....

    Good Luck Talbot's!!!

  • Report this Comment On February 27, 2009, at 1:50 PM, lindadon wrote:

    The people at Talbots should take a good hard look at Brooks Brothers. I too was a long time shopper of Talbots. I loved everthing about them classic styling, great quality and real affordability. I try very hard now when I go into a Talbots to purchase from them and I am amazed at the quality and styling. I also do not understand how they can market fashion in their catalogs gearing it towards the older consumer when much of the style and most of the fit clearly is for a younger customer. In my opinion Brooks Brothers although much more limited in their selection and priced somewhat higher should take over where Talbots has dropped the ball.

    I love Talbots and hope they are able to continue in business, but their demise would not surprise me.

  • Report this Comment On March 06, 2009, at 7:46 AM, talcallgirl wrote:

    It is true that Talbots is only staying afloat by paying debt with debt. it is also true that the quality has gone way down both with the clothes and with customer service. i work at talbots and receive a generous discount but would rather pay full price with quality retailers like jcrew or garnet hill. Talbots has to "promote" the merchandise at discount constantly and this frustrates the customers because one day an item is one price and the next day it' s another price. Also Talbots wants all customers to shop either through the stores or the internet and so have reduced staffing and the hours of the staff at the call center. Customers calling in will have to wait a long time to place an order. This also frustrates customers. Until Talbots learns how to provide excellant service and quality merchandise they will continue to slide.

  • Report this Comment On April 16, 2009, at 10:37 PM, Jeffsdate wrote:

    I was a loyal Talbots customer for decades (I'm 47), and even have a Talbots charge -- which I rarely use anymore. And of the few things I've bought in the last two years, about 90% have been returned -- usually due to poor fit. I think their current styles are very old-lady-ish, but the fit (especially in pants) is for young, skinny women! Huh? And the prices are as astronomical as ever. I think the safari/Marrakech theme of the '09 spring/ summer catalogs is awful -- mostly because the colors are all in the beige/ brown/ orange family, which I cannot wear. And there are too many hideous, unwearable prints. All in all, I don't see how they can win with this strategy. When I go in my local Talbots store it's always empty. Sad.

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