A Stock for Mom: Talbots

This is part of The Motley Fool's annual "Stocks for Mom" special.

Talbots (NYSE: TLB)
Trading at $27.77 as of May 2, 2003

Everyone knows Talbots(NYSE: TLB), with its can't-miss-'em bright red doors and brass handles that have beckoned adult women for decades. Proof? I've never shopped in one, yet I can tell you where to find stores wherever I've lived. Mom shops there -- or has friends who do.

I finally started paying investing attention to the company when it announced a new store in a building I pass on the way to Fool HQ. Sure enough, on opening day a bevy of women sat and stood and tapped their feet by the door. They were the retailer's bull's-eye: a little gray hair here and there, their dress a studied casualness offset by the very expensive accessory.

You don't need a weatherman to tell you which way the wind blows. Women buy stuff, and women with means, or who want to look like they have means, buy at Talbots. Is there anyone reading this column who thinks the percentage of adult women who work outside the home is decreasing? Is there any man today who still does not get it that women must buy more clothes for work than men do? It's there that Talbots owns a certain space -- more traditional than Ann Taylor(NYSE: ANN), but not as stuffy as Brooks Brothers for women.

Dear Mater, is this you? A middle-years professional neighbor confessed to me that she buys at Talbots. She doesn't want to consider herself in its market, yet it's the place to find the sizes and styles she wants. Talbots women's clothes are just not as stuffy as they might once have been. And whatever its past, the company now aims squarely at whatever female you may be -- and even male -- with 86 net new stores in the fiscal year ended Feb. 2 covering its Misses, Petites, Woman, Accessories & Shoes, Kids, outlets and the very first Men's concept stores.

Under the hood
But what, mothers with calculators may ask, about the two years of flat revenues -- up 1% and then down 1% -- and management's EPS forecast of a range from $1.75 to $2.15 this year versus last year's $2.01? Hardly the stuff of growth.

Mumsy, look at something that really matters. Balance flat revenues and 86 net new stores last year against the company's prodigious free cash flow -- $0.58, $0.96, $0.98, and $2.05 a share for the last four years. The business not only produces more than enough for the new store buildout, but also to pay a 1.3% dividend and buy back shares. And the company gets more bang for every buck through ever-better inventory and cash management.

This is a company whose brand isn't going away, that serves a solid core market with a shot at careful expansion, and sports a stock selling for an enterprise value to EBITDA multiple of 8, with an enterprise value to free cash flow ratio of 11. The stock at its current price offers a margin of safety in exchange for steady returns.

Just what Mom's after.

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Tom Jacobs (TMF Tom9) honors Thoreau's dictum to "Distrust any enterprise that requires new clothes." At press time, he owned no shares in companies mentioned in this story. To see his stock holdings, view hisprofile, served up piping hot pursuant to The Motley Fool'sdisclosure policy.

A Stock for Mom represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts.