"Once we rid ourselves of traditional thinking, we can get on with creating the future."
-- James Bertrand

Running a business is all about innovation. Whether it's a biotechnology upstart, a cutting-edge technology company, or a large-scale retailer, innovation is paramount to success. Without innovation, companies run the risk of getting complacent, being outflanked by competitors, or, even worse, folding up shop altogether, the way Circuit City did a couple of years ago.

No company gets a free pass when it comes to adapting its business plan, so when push comes to shove we need to ask ourselves: Will this company innovate or die?

Today, let's take a closer look at Talbots (NYSE: TLB) to determine whether the company can adapt to rapidly changing consumer demands or whether it will be pushed into the background.

What's wrong with Talbots?
I don't have the finger strength, nor you the attention span, to make a laundry list of everything wrong at Talbots, but the crux of its problems can be traced to merchandising and marketing woes.

Talbots is struggling to clear out a large percentage of its inventory that simply cannot be sold without large markdowns. These discounts cripple Talbots' margins, and the unwanted merchandise ties up valuable floor space.

But the real problem underlying the company's inventory woes is that baby boomer women, its target audience, are simply not spending as much as they did in the past. The economic downturn took a deeper toll on Talbots' consumer base than the company realized, and women are curbing their spending even with the economy bouncing off its lows. Sector rivals Coldwater Creek (Nasdaq: CWTR), Chico's (NYSE: CHS), and Ann's (NYSE: ANN) Ann Taylor have also seen similar struggles recently.

Getting Talbots back on track
I'm not the CEO of Talbots, but for a moment let's pretend I am. As I see it, Talbots needs to focus on three things to turn its ailing business around:

  • Shake up its merchandising team: I would never go so far as to advocate firing anyone, but it's clear that within the past five years, whatever Talbots' merchandising team has tried to achieve, it has failed. Its earnings results have been miserable, and, frankly, shareholders are getting tired of hearing that consumers didn't take well to the new styles. That's code for "it's time to shake up your merchandising team."
  • Cater to a slightly younger demographic: I know -- blasphemy, right? Talbots has prided itself on catering to the professional and mature woman for more than a decade, but that's a struggling and crowded market right now. Instead, the company should try to get its foot in the door with the 30s and 40s crowd, attempting to pry what customers it can from Nordstrom (NYSE: JWN) and Macy's (NYSE: M).
  • Downsize its stores: Talbots has already announced plans to close 110 stores by 2013, so this plan is already in motion. However, I can't emphasize enough that Talbots needs to not be gun-shy about closing underperforming locations.

What's the verdict?
Based on Talbots' quarterly results filed earlier this week, the company's cautiousness about the second quarter portends a considerably larger loss than the $0.02 loss analysts had been looking for last week. The company has responded by closing some of its underperforming locations, which is a positive step in the right direction, but its stubbornness with regard to changing up its merchandise could be the factor that cripples this company for good. When push comes to shove, I don't see any light at the end of the tunnel for Talbots.

You be the judge. What do you see ahead for Talbots: a turnaround or a Chapter 11 reorganization? Chime in with your ideas in the comments section below, and consider tracking Talbots with our free watchlist service to keep up on the latest news in the retailing sector.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy is always in fashion.