Talbots (NYSE: TLB) is in danger of a nasty derailment. Investors, switch tracks and steer clear of this retail wreck.
Emergency on the horizon?
The clothing retailer recently broke bad news to investors. Talbots expects its adjusted fourth-quarter loss to be $0.15 to $0.19 per share, a far cry from the $0.02 per-share loss analysts expected. It also revealed that its same-store sales have decreased 6% so far in the quarter, which includes the all-important holiday season.
Unfortunately for Talbots, a promising beginning to the holiday shopping season ended up falling flat. According to the company, sales were going strong from Thanksgiving until Cyber Monday. But in the last couple of weeks of December, and into this month, sales weakened, even though the company was redlining its merchandise to move it out the door.
Should investors be surprised? Retail sales jingle-jangled pretty briskly during the holidays. However, some retailers seem to have benefited at the expense of others, and clearly, Talbots was one of the losers. That probably shouldn't be a shock, since Talbots has been struggling to turn its operations around for quite some time.
Retail sales will remain difficult and highly competitive going forward. Plenty of consumers are still jobless, underemployed, or saddled with too much debt. Even Wal-Mart's (NYSE: WMT) had its share of problems drumming up U.S. sales growth in this environment.
Where's the growth engine?
However, Talbots faces an additional challenge in the demographic to which it caters: baby boomer women. It competes with retailers such as AnnTaylor (NYSE: ANN), Chico's (NYSE: CHS), and Coldwater Creek (Nasdaq: CWTR) for these shoppers' business. (AnnTaylor and Chico's shares dropped on Talbots' bad news, in fact.)
Beyond those specialty boutiques, older women have plenty of choice when it comes time to restock their closets, including department stores such as Macy's (NYSE: M) or Nordstrom (NYSE: JWN). Worst of all, the same baby boomers on whom Talbots depends are facing a bust as they head into retirement.
Bloomberg Businessweek was the latest media company to cover "The Financial Nightmares Facing Boomers." According to a Pew Research Center survey, 60% of the boomers it questioned are considering delaying retirement, and 57% say their household finances have taken a turn for the worse in the last several years.
In other words, many female boomers will have much less money to spend. When they do spend it, they'll likely be very picky. That's an enormously bad sign for already-struggling companies like Talbots.
Hit the emergency brake
Talbots trades at just eight times forward earnings, which certainly sounds cheap enough. However, the retailer's recent tendency to pre-announce very negative news should leave investors suspicious that Talbots's further growth might not measure up to the current estimates.
Retail turnarounds can be difficult to pull off, even in a good economy. Talbots faces many negative headwinds beyond the tough environment. Many of the consumers it hopes to attract either can't afford to shop right now, or will pinch every penny when they do. In that light, investors should jump off this potential train wreck before it's too late.
