Talbots Plays the Shell Game

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Longtime Talbots (NYSE: TLB  ) shareholders have endured a long and convoluted odyssey, most of it headed downward. Yesterday’s latest odd twist may give them a great opportunity to get the heck out of the stock. When the company reported earnings, it also announced a new deal that brings it much-needed cash - in a weird, complicated way.

Talbots reported a third-quarter profit of $14.6 million, or $0.26 per share, compared to its whopping loss of $170.8 million, or $3.19 a share, this time last year. Take out restructuring charges and write-downs, and the profit rose to $0.31 per share.

However, let’s not call Talbots' turnaround a done deal yet. Revenue dropped 13.5%, to $308.9 million, and same-store sales fell a nauseating 15.9%. The company expects a 6%-8% sales decline in the fourth quarter, and a net loss from continuing operations.

The more interesting news, though, was the company's announcement that it’s acquiring BPW Acquisition (NYSE: BPW  ) , a special purpose acquisition company, or SPAC. This type of company goes public with the express purpose of making acquisitions.  

To make its purchase, Talbots is issuing 38 million to 56 million shares to BPW, which will become Talbots' new majority shareholder, with 60%-69% of outstanding shares. Talbots shareholders, say hello to a diluted stake in an historically messy company.

In return for all those shares, BPW will spend at least $300 million of its $350 million kitty to buy out the 54% stake held by Japan’s Aeon, Talbots' current majority shareholder, which has long lent the retailer money and kept it afloat. In addition, Talbots has scored a $200 million credit line from GE Capital, which it will use to pay off debts it owes to Aeon and others.

The beleaguered company undoubtedly does need to free itself from the yoke of debt. But to do so, Talbots is entangling investors in a whole new pile of complicated moving parts, none of which address its fundamental problem: luring customers back to its stores.

Don't forget where all that debt came from, either. Talbots followers surely remember that the retailer's buyout of rival J. Jill was not a successful strategy. But at least J. Jill could have been a growth driver, even if some of us doubted it. This deal may improve the retailer's debt situation, but it won't necessarily move Talbots forward.

Like every other retailer these days, Talbots faces a challenging economic climate. It still projects a loss in the current quarter, and it still needs to turn its business around. I’ve never been too keen on Gap (NYSE: GPS  ) , but at least its high cash levels offset the risks in its own turnaround question.

The recent rally in Talbots' shares suggests to me that now's a great time for shareholders to move on to greener, less complicated pastures.  Consider investing in stronger retailers like Wal-Mart (NYSE: WMT  ) or Costco (Nasdaq: COST  ) . And if you want to stick with specialty retailers, look for those with stockpiles of cash and positive sales increases, such as Buckle (NYSE: BKE  ) or Urban Outfitters (NYSE: URBN  ) .

What do you think? Let us know in the comments boxes below. Or check out TSIF’s excellent post on the topic in our CAPS community, where Talbots has a pitiful one-star rating.

Costco and Wal-Mart are Motley Fool Inside Value recommendations. Costco is a Stock Advisor recommendation. The Fool owns shares of Costco. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax owns shares of Urban Outfitters. The Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (6)

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 December 09, 2009, at 6:47 PM, pseud wrote:

    With due respect I don't think you fully understand the nature of the BPW deal. You characterize it as messy, but it is quite simply the most amazing coup pulled off by TLB. This otherwise worthless concept will leave to see another day purely because of the BPW deal.

    Here's how it works. Effectively, TLB has agreed to pay Aeon's debt in full ($491 mm), in exchange for Aeon surrendering its 54% equity stake for a grand sum of ZERO - well, almost zero as Aeon is getting a mere 1 million warrants in exchange for its 30 million shares. Aeon's equity stake was valued at approx. $200 mm. By doing this deal, the company has created $200 mm value in one day! Additionally, the new structure will have much lower debt and significantly less dilution compared to a bankruptcy scenario which was looming.

    I'm shaking at my head at why Aeon agreed to this deal. They could have put the company into bankruptcy and come out owning 100% of the company or sold it to a higher bidder. My guess is that they were simply fatigued and just wanted out.

    I still hate the concept and believe that its a declining brand but the operational improvements and reduced interest burden have ensured that the company will survive a few more years. In full disclosure, I had some puts on TLB and I'm not very happy with that investment right now, but hats off to the bankers (or whoever) structured this deal for TLB.

  • Report this Comment On December 09, 2009, at 7:34 PM, TMFLomax wrote:

    Thanks for your very well-reasoned rebuttal, pseud. I am really curious how it's all going to work out and do stand by my stance that with stocks, why not go for the ones that are less risky (we are definitely in agreement about the declining brand!) and confusing. But I guess we shall see. It certainly continues to be interesting to watch, that's for sure.

  • Report this Comment On December 09, 2009, at 9:19 PM, pseud wrote:

    Alyce, I agree with your argument that it makes sense to avoid confusing situations. And since you own URBN, I am happy to report that on my Tuesday evening visit to the neighborhood mall, URBN and ARO were the only two stores packed in an otherwise empty mall.

    I am long ARO in real life and CAPS. If you like URBN you will love ARO at today's prices.

  • Report this Comment On December 10, 2009, at 2:20 AM, Clint35 wrote:

    Alice, I agree. I think they're going about a "turn around" all wrong. It's going to turn into a bigger mess than it already is and the real problems aren't being addressed. The part that bothers me the most though, GE lent them money! Makes me wanna stay far away from GE stock. Before this big financial crisis happened I really liked GE. Sure has been an eye opener for me. Until 2007 I didn't even know GE had a financial branch. Good article.

  • Report this Comment On December 10, 2009, at 3:26 PM, jolaz wrote:

    I can't believe GE lent these guys money. They probably maxed out that credit line already.

  • Report this Comment On December 11, 2009, at 3:16 AM, jolaz wrote:

    This is how I see it......BPW raised 350 million selling stock. BPW then swaps its cash/stock for newly issued TLB stock....if TLB had just issued new shares and sold them on the open market it would be called a is "buying" BPW a secondary-secondary? LOL

  • Report this Comment On December 13, 2009, at 8:42 PM, Jeffsdate wrote:

    For the second time in a week, Talbots' website isn't working properly. It is virtually impossible to order anything. And here we are in the middle of peak shopping season! Are these people trying to commit suicide? Did they fire all their IT staff?

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