Avoid This Train Wreck: Talbots

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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.

Wal-Mart is a Motley Fool Inside Value pick and a Motley Fool Global Gains recommendation. The Fool owns shares of Wal-Mart. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | 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 January 13, 2011, at 3:29 PM, rdwwdr wrote:

    A little late to tell us to avoid now, after it is down 50% since early December.

  • Report this Comment On January 13, 2011, at 4:33 PM, TMFLomax wrote:

    Hi there rdwwdr,

    I've been negative on Talbots for quite some time now. Here's an article from September:



  • Report this Comment On January 13, 2011, at 8:22 PM, janissmitzy wrote:

    As someone who shops (or should I say used to shop) at Talbots, the quality of the clothing has gone way down. I've had several buttons that have fallen off. Seams ripping at the arm, and a pocket off a pretty sweater that was worn only once which peeled right off. I paid a lot for that sweater too. I'm really disappointed because the styles are great, and the prices are reasonable, but the quality of the fabric and stitching are subpar..

  • Report this Comment On January 14, 2011, at 11:43 AM, sweetsour wrote:

    Purchased a few items at a Talbots outlet last month and was actually surprised by the good quality - fashionable and wearable, straight seams. In fact after this experience i started to look at the shares. The company has potential, hope they get back on track fast.

  • Report this Comment On January 16, 2011, at 5:19 PM, classicreddoor wrote:

    I am a boomer and have been shopping at Talbot's over 20 years. Their motto was 'Classic' and so was their clothing. They always had an extensive line of business and casual clothing along with shoes, handbags and accessories. The Christmas catalog was full of wonderful bathrobes, slippers, sleeping apparel, etc, and worth the wait! Since the CEO Trudy Sullivan took over there is nothing 'Classic' about Talbots. There is very little business or casual clothing to found anymore and the shoes, handbags and accessories are sparse. Everything is designed for the Boston and New York A-List cocktail attendees and covered in ruffles, large flowers, frills, and lace. I went to my local store last September and it had been 'gutted' - down to the bare minimum of clothing and they no longer carry any shoes, handbags or accessories in the shop. According to the sales rep - this is the 'new look' for Talbots. The store appeared very cold and unwelcoming - I turned around and left. One cannot compare Talbot's to Chico's and Coldwater

    Creek. Another reason for Talbot's slide is the merchandise is over priced - that's why there are so many sale/price reductions going on - this for a store that only had two sales a year - one in Spring and the other in Fall. Will Talbot's survive? - I sure hope so. A new CEO who returns to the hertiage of Talbot's "Classic" can turn this company around.

  • Report this Comment On January 19, 2011, at 12:05 PM, TMFLomax wrote:

    Thanks for all the feedback on what's going wrong -- or right -- at this retailer, folks.



  • Report this Comment On January 22, 2011, at 6:51 PM, JamesRCoulter wrote:

    Talbot's definitely isn't a long term investment, for many reasons, some listed within this article.

    But, i think there's still some life left and at its current price will provide some short term gains.


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