Longtime Talbots (NYSE:TLB) shareholders have endured a long and convoluted odyssey, most of it headed downward. Yesterday’s latest odd twist may give them a great opportunity to get the heck out of the stock. When the company reported earnings, it also announced a new deal that brings it much-needed cash - in a weird, complicated way.
Talbots reported a third-quarter profit of $14.6 million, or $0.26 per share, compared to its whopping loss of $170.8 million, or $3.19 a share, this time last year. Take out restructuring charges and write-downs, and the profit rose to $0.31 per share.
However, let’s not call Talbots' turnaround a done deal yet. Revenue dropped 13.5%, to $308.9 million, and same-store sales fell a nauseating 15.9%. The company expects a 6%-8% sales decline in the fourth quarter, and a net loss from continuing operations.
The more interesting news, though, was the company's announcement that it’s acquiring BPW Acquisition (NYSE:BPW), a special purpose acquisition company, or SPAC. This type of company goes public with the express purpose of making acquisitions.
To make its purchase, Talbots is issuing 38 million to 56 million shares to BPW, which will become Talbots' new majority shareholder, with 60%-69% of outstanding shares. Talbots shareholders, say hello to a diluted stake in an historically messy company.
In return for all those shares, BPW will spend at least $300 million of its $350 million kitty to buy out the 54% stake held by Japan’s Aeon, Talbots' current majority shareholder, which has long lent the retailer money and kept it afloat. In addition, Talbots has scored a $200 million credit line from GE Capital, which it will use to pay off debts it owes to Aeon and others.
The beleaguered company undoubtedly does need to free itself from the yoke of debt. But to do so, Talbots is entangling investors in a whole new pile of complicated moving parts, none of which address its fundamental problem: luring customers back to its stores.
Don't forget where all that debt came from, either. Talbots followers surely remember that the retailer's buyout of rival J. Jill was not a successful strategy. But at least J. Jill could have been a growth driver, even if some of us doubted it. This deal may improve the retailer's debt situation, but it won't necessarily move Talbots forward.
Like every other retailer these days, Talbots faces a challenging economic climate. It still projects a loss in the current quarter, and it still needs to turn its business around. I’ve never been too keen on Gap (NYSE:GPS), but at least its high cash levels offset the risks in its own turnaround question.
The recent rally in Talbots' shares suggests to me that now's a great time for shareholders to move on to greener, less complicated pastures. Consider investing in stronger retailers like Wal-Mart (NYSE:WMT) or Costco (NASDAQ:COST). And if you want to stick with specialty retailers, look for those with stockpiles of cash and positive sales increases, such as Buckle (NYSE:BKE) or Urban Outfitters (NYSE:URBN).
What do you think? Let us know in the comments boxes below. Or check out TSIF’s excellent post on the topic in our CAPS community, where Talbots has a pitiful one-star rating.
