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2 Retail Stocks to Avoid

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Don't let the penny stock prices fool you -- Talbots (NYSE: TLB  ) and Coldwater Creek (Nasdaq: CWTR  ) continue to be two retail stocks to avoid. I've had "underperform" CAPSCalls on both for quite some time and see no reason to reverse my negative stance.

Talbots' excruciatingly long and ultimately pathetic turnaround efforts continue to yield nothing but disappointment. The retailer swung to a third-quarter loss from continuing operations of $22.1 million, or $0.32 per share, compared to last year's third-quarter net income of $17 million, or $0.24 per share. Total revenue fell 6.6% to $279.5 million, and consolidated same-store sales fell 4%.

Talbots has revealed other harrowing tidings. It is embarking on a brutal (but necessary) cost savings program. It's suspending national advertising and TV campaigns and cutting jobs through a 9% reduction in corporate headcount. Talbots will also close a total of 110 stores through fiscal 2013.

The Wall Street Journal has reported that Talbots is searching for a new president who could potentially succeed current Chief Executive Officer Trudy Sullivan. Although Talbots and its board have long defended Sullivan's performance (and pay), I'd say shareholders have little to appreciate about her tenure at this struggling retailer. (Shareholders also voted against Talbots' compensation policies at last year's annual meeting.)

Talbots may be cutting its marketing expenditures and exiting the airwaves, but I've noticed Coldwater Creek pushing its wares with a series of TV ads recently. Let's just say those ads haven't helped.

Investors are snapping up Coldwater Creek shares today because its quarterly loss was narrower than analysts expected, but I truly believe they're missing the plot here. The retailer's net loss was a staggering $29.2 million, or $0.31 per share, compared to a net loss of $10.9 million, or $0.12 per share. Meanwhile, anybody who's actually been hanging on to this stock for any period of time shouldn't be thrilled about that secondary offering Coldwater Creek conducted in October. Stock dilution stinks.

Total revenue at Coldwater Creek plunged 19.2% to $187.5 million, and same-store sales likewise plunged 19.8%. The company cited "weak traffic trends" -- again, clearly the expense of TV advertising hasn't helped this struggling retailer in the least.

The retail sector is horribly competitive right now, and Talbots and Coldwater Creek both face competition from specialty retailers like Chico's (NYSE: CHS  ) and Ann Taylor (NYSE: ANN  ) as well as department store retailers like Saks (NYSE: SKS  ) , Macy's (NYSE: M  ) , and Nordstrom (NYSE: JWN  ) . Today's consumers are fickle and budget conscious, and neither Talbots nor Coldwater Creek has much room to work to woo them at this point.

Last quarter, I warned that Talbots was a bad bet, as I have many other times in the past. I've had Talbots red thumbed in Motley Fool CAPS off and on for years; I initiated my most recent red-thumb call in March 2008. I've racked up quite a few CAPS points on my January 2010 "underperform" call on Coldwater Creek, too. You can check my page to see how my CAPSCalls on these two retailers have performed.

And of course, leave these two stocks on the rack.

Alyce Lomax does not own shares of any of the companies mentioned. 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.

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  • Report this Comment On December 02, 2011, at 4:19 PM, TMFLomax wrote:

    I thought the Coldwater Creek TV ads seemed surprising; here is some info from CWTR's 10-Q: "Our brand marketing campaign aims to restore Coldwater Creek’s brand value, which includes television, national magazine advertising, and online media. During the third quarter of fiscal 2011, we introduced our first national television advertising campaign, which was designed to drive brand engagement and brand trial to both new customers and to those customers we have lost over the years." Good luck!

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