Is Talbots a Good Buy?

Return on my hard-earned money is the first thought that comes to my mind when I think about investing. I look for good returns from small investments. In an earlier article on Talbots (NYSE: TLB  ) , I wrote about how the company continues to struggle. Let us now chew over its intrinsic value to see if it might be worth an investment.

Reasons to worry
The struggling retailer has been suffering from declining revenue and gross margins for quite some time. Sales tumbled 9.8% and operating margins were 16% lower than the year-ago quarter. The company tried aggressively to sell off its slow-moving spring and summer collection with promotions, but had difficulty resonating with customers. This is reflected in their disappointing 9.6% decrease in same-store sales from the same quarter last year. The promotional activities on these items also noticeably deteriorated their gross margin, hurting bottom-line performance.

These lower-than-expected sales resulted in higher inventory levels. What concerns me more is that its short-term debt shot up 124% from this quarter last year to $83.9 million. These liabilities are the result of Talbots tapping their revolving credit facility. The move will likely increase its interest obligation and put further pressure on its operational activities. Additionally, Talbots foresees continued promotional activity going forward, which will keep putting pressure on their gross margins.

Reasons to smile
Talbots is taking measures to weather the erratic economic environment and inflationary pressure. The company is working toward checking its costs, improving its operational efficiency and gradually bringing its working capital on track. It has entered into an agreement with Li & Fung, its strategic partner, to extend credit for merchandise purchases by 30 days. This should help relax Talbots' operational cash flow.

Talbots is improving on its apparel assortment by focusing on sweaters, pants, and sportswear. Its two new pant styles, "curvy" and "modern," are picking up in the market. They are also experimenting with prints, patterns, and fabrics based on customer feedback.

During the quarter the retailer opened seven upscale outlets and closed nine stores, and now has a total of 566 stores. Also, it plans to close down its not-so-productive 110 outlets by 2013. These stores contributed a $1.4 million operating loss in Q2 2011, so their presence won't be missed.

While these things do look good, is the stock looking cheap?

A comparative picture
Considering the fact that the company is losing money, conventional valuation based on returns would produce hard-to-compare ratios. Thus, I am taking a look at the following two metrics to see the position of the company when compared to its peers.

Company

Enterprise Value / EBITDA

Enterprise Value / Revenue

Talbots

5.6

0.2

New York & Company (NYSE: NWY  )

5.5

0.2

ANN (NYSE: ANN  )

5.0

0.5

Chico's FAS (NYSE: CHS  )

5.1

0.8

Coldwater Creek (Nasdaq: CWTR  )

N/A

0.1

Source: S&P Capital IQ. N/A = not applicable due to negative EBITDA.

Talbots' enterprise value/EBITDA multiple looks to be somewhat high for its industry, likely affected by depressed sales. Operational earnings, or EBITDA, are currently depressed, likely due to lower revenue from continued promotional activity. In addition, the enterprise value/revenue ratio seems quite cheap. Think about it this way: someone who's buying Talbot's stock today is paying just $0.23 for each dollar of sales.

Together, these two metrics show that the company is having decent sales as compared to the price of its stock, but continues to struggle with worse margins as promotional activity and markdowns persist. Management sees this trend continuing for at least the short term.

The Foolish bottom line
Investors will probably think twice before investing in this stock. However, I am curious. These are testing times for Talbots, but I have faith in the management. Already their September sales have largely improved over August. Many people might be bearish about this company's future, but I will bet my money on it and add it to my portfolio. What do you think?

Fool contributor Navneet Bajaj does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of New York & Company. Try any of our Foolish newsletter services free for 30 days. 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 (3) | Recommend This Article (11)

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 October 14, 2011, at 2:19 PM, prginww wrote:

    The company is closing stores, some are making sales and profit. They are getting rid of stores with short leases so it does not cost them as much on the bottom line. This company is going down next year, but the senior execs will bail with a lot of money. Sounds familiar.

  • Report this Comment On October 17, 2011, at 11:58 PM, ixtlan07 wrote:

    Talbot's CEO, Trudy Sullivan's, total compensation for 2010 was $6,268,760.00 This is even though the company is worth less than 1/10th of what it was when she took over. Talk about being over paid. Talk about being rewarded for doing a horrendously awful job. Talbots' market cap is 172.54M. At the rate they are paying Trudy and her friends, soon they'll have to liquidate the entire company just to line her pockets. How many other companies are paying their CEO's over 3.6% of their market cap each year? Heck, Jobs didn't make that from Apple and he actually saved the company and made it's shareholders a lot of money. If Apple had, Apple would have been paying Jobs $14,146,673,700.00 Yeah, that's right 14.147 billion dollars per year. Now do you understanding how overpaid Trudy Sullivan is and why Talbots is going down the tubes?

  • Report this Comment On October 20, 2011, at 6:01 PM, goofymike wrote:

    Talbots had its run in the 70s, 80, and early 90s. I know I worked there. The generation that it served is gone and so are they.

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