Fool Blog: Talbots Turnaround? Dream On!

To put it bluntly, we're irate over Talbots (NYSE:TLB). For months, we've been ranting in the office about investors who have been suckered into believing, and then unbelieving, the turnaround story supposedly in the works for this ailing retailer. Since the beginning of the year, the stock has peaked and troughed seven times, with movements greater than 25% between each top and bottom.

For a mundane business that sells apparel to grown women, even with turnaround speculation, that a whole lot of unnecessary volatility. Mindboggling as these movements are, with no actual progress to support them, we're even more perplexed that nothing in the press release or conference call actually suggests a successful turnaround is on the way. Still, the stock jumped nearly 30% in one day last week as it reported "earnings." One Forbes columnist even highlighted Talbots as the "bright spot" in retail last week. Fortunately, we're here to bring you back down to reality.

Kristin:
I'm going bring you the true Talbots, straight from where it counts most: its customers. I'll admit that its style isn't my cup of tea, since I'm not the company's target demographic. But I've been dragged into the retailer for years with my mom, so I've done my fair share of in-store due diligence.

It's not a particularly good sign that my mom and her baby boomer friends now snub the full-priced merchandise they used to buy while dashing back to the clearance racks. Once dubbed as an exclusive classic clothing store for upper-middle-class women, offering limited price reductions, Talbots' inadequate inventory planning led to a string of dramatic markdowns, essentially transforming its core customer into a bargain-shopper.  

A biased opinion? Perhaps. But I think the company's $3.56 loss per share in 2007 backs up my sightings pretty well.

So do the rest of the financials. Talbots is unflattering top to bottom; even the most skilled Extreme Makeover crew couldn't remedy its problem areas. Carrying the unwanted pounds it gained with the J.Jill acquisition in 2006, the retailer sports a plus-size debt load it can't even begin to afford. Its negative operating income might just explain the vanishing cash on the balance sheet. The only features that look slimming these days are its margins, which resemble the starved model on the cover of its catalogue.

In my eyes, there isn't even a glimmer of hope for this company. It needs to revive sales while simultaneously cutting costs. That's not an easy task, folks, particularly when overburdened by debt. This is a tragedy waiting to happen. And now that it's trading at nearly 30 times the company's own projections for this year's earnings (excluding charges), there are a lot of impending victims.

Alyce:
Oh my -- Talbots as a retail "bright spot"? I suspect investors who think that stock's a bright spot will end up feeling like they stared at an eclipse. But instead of burned retinas, they'll have burned portfolios.

When I saw Kristin's data regarding Talbots' rollercoaster stock price over a mere nine months, I cringed, thinking, well, Viva Las Vegas! That kind of volatility -- matched with every indication that Talbots' business is still floundering, for all the reasons Kristin mentioned -- made me think of playing the slots, betting it all on red, or picking a pony because you like its name. Dream on, people.

Of course, this lottery-ticket mentality, utterly detached from operational or financial strength and high on hope, seems common these days. Watching airline stocks like UAL (NASDAQ:UAUA) skyrocket in the last month -- apparently on falling oil prices, although maybe people are excited about the prospect of abusing customers by charging for everything short of using the lavatory -- has made me nuts. Or how about General Motors (NYSE:GM), a company to which many investors stubbornly cling, even though it can't seem to excel on its own merits?

Last but not least, somebody please tell me why Talbots is trading at 30 times projected earnings? Look around at some other retailers, and tell me why a premium multiple for Talbots makes a lick of sense. Urban Outfitters (NASDAQ:URBN) is trading at a cheaper multiple, and it's actually been performing. Plus, it doesn't have an onerous debt load. Investing without considering business realities, and hinging this much on hope (and maybe even other people's stupidity), is just asking to get burned.

In conclusion...
Turnarounds happen to companies that deserve them. Look at how Apple (NASDAQ:AAPL) muscled its innovative technology expertise to rebuild a loyal customer base over the last several years. Still, every successful turnaround is accompanied by a greater number of failures. Sears (NASDAQ:SHLD) can't seem to post a month of positive comps. Even Starbucks (NASDAQ:SBUX), with its devoted patrons, is struggling to revive its operations.

Comebacks are tough in general, but in this type of economic situation, they're nearly impossible. We told you what we think about Talbots, but what do you think? Tell us below in the comments box.