Talbots: Just Don't Do It

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I've complained in the past about Talbots' (NYSE: TLB) beleaguered business and its stock's trading volatility. Yesterday, the shares closed up 33% on word that the company had secured more credit. Don't be fooled, folks: Talbots is still a great stock to avoid.

The company said it has entered agreements with three banks to convert uncommitted working capital lines of credit into committed lines, for a total of $150 million in available credit. It's also negotiating with a fourth bank to convert the remaining $15 million credit facility to a committed line as well.

On a related note, investors flipped last spring, when HSBC and Bank of America (NYSE: BAC) pulled $265 million in letters of credit from Talbots, with major shareholder Aeon riding in to save the day. The freak-out made sense: In our constricted credit market, it's frightening for any company to desperately need credit but not be able to obtain it.

Talbots already has a heck of a lot of debt piled up, and it hasn't posted a profit in the last 12 months; if anybody's getting bullish about its ability to secure more credit, that just flummoxes me. Granted, when a stock is trading as low as Talbots is -- now around $2 a share -- big percentage pops are pretty easy to achieve, and such low prices sometimes encourage a lottery-ticket mentality among investors.

Still, it's no secret that the holiday shopping season stunk for most retailers. Analysts expect a 1% drop in December retail comps overall, and the extreme frenzy of markdowns that marked the holiday season will hit retailers' margins right where it hurts. Borders (NYSE: BGP), another debt-laden retailer, reported lackluster holiday sales data and executed a management shakeup. If a retailer's not Wal-Mart (NYSE: WMT), its holiday sales were probably pretty bad, and retailers that were already weak are really going to be struggling to survive in the coming months.

Talbots' long-term debt-to-equity ratio stands at 89.4%. Its quick ratio is 0.4. (Read more about the debt-to-equity ratio and the quick ratio.) Access to additional credit may help Talbots' near-term survival, but I'm sorry, I just can't see how long-term investors could possibly believe the idea of piling on more debt would be a good thing for this company.

There are far healthier stocks out there in the retail universe -- my Foolish colleague Kristin Graham recently took an in-depth look at The Buckle (NYSE: BKE) as a solid stock idea, for example. Investors should stay away from debt-heavy retailers like Talbots now more than ever, especially when the news really isn't that good.

• I nominated Talbots as the World's Scariest Stock around Halloween.
• I also think it's a retailer we may have to kiss goodbye.