The Good and the Bad for Talbots: What about the Ugly?

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On Friday, the stocks of Massachusetts-based retailer Talbots (NYSE: TLB) took a hit as the company offered strong bad news and relatively weaker good news. The troubled retailer, which was in talks with a private equity firm Sycamore Partners for getting acquired, announced that the deal was off and as an instant reaction of Wall Street, the stock price plunged 41%. Even the company’s improved fiscal 2012 first quarter earnings, announced on the same day, could not pull the retailer out of this new trouble.

Glance at the quarter – The Good
Talbots’ financials have not been attractive for some time now. In the past five years, the company reported losses in four of them (2010 was the sole positive). However, after such a dismal display of performance, the company managed to take a U-turn this quarter and reported a 47.9% increase in its bottom line. The earnings per share increased from 1 cent per share in Q1 2011 to 1.5 cents per share. But still, the top line growth was in the red.

The company reported total revenue of $275.9 million, down by 8.4% from the year ago quarter.  The fall in the revenue can be partially attributed to the store closings that took place in 2011 as a part of Talbots’ Store Rationalization Plan. Year-on-year, store sales decreased by 9.1% and comparable store sales decreased 2.2%.

The retailer is trying to tone itself down by shedding the extra pounds from stores that are not adding value to the company. In the recent quarter, the company closed eight locations, including five Talbots stores, and opened four Talbots upscale outlets. So far, the company has closed stores in 90 locations, including 74 Talbots stores. The company ended the quarter with 516 stores, including 47 Talbots upscale outlets.

A comparative landscape
Talbots is having a difficult time surviving. But what about the others in the industry? Well, two among the other players I follow are Ascena (NASDAQ: ASNA) and rue21 (NASDAQ: RUE). Ascena is going to come out with its earnings release on May 31 and it is expected to report a sluggish third quarter. On the other hand, rue21, which came out with its 2012 first quarter earnings one day prior to Talbots, did well. The company's top line and the bottom line both displayed good year-on-year surges of 18.9% and 20.6%.  The company has also announced plans to give back up to $50 million to its shareholders through a share repurchase program, showing how confident rue21 management is about its capabilities.

The failed deal with Sycamore – The Bad
Sycamore is an existing shareholder of the company with a 9.95% holding. The PE firm, which had initially offered to buy the retailer at a price of $215 million, or $3.05 per share, backed out of the deal, saying that it is not prepared to carry on with the transaction presently. In response, Talbots said it is still open to Sycamore’s offer. However, the company now will be looking for other similar opportunities as well.

It seems that buying out Talbots did not look that attractive to Sycamore anymore. Talbots’ financial condition has been pretty weak for quite some time now. On top of this, Faruqi & Faruqi LLP, a New York-based national law firm, announced an investigation of the board of directors of Talbots for a possible breach of their fiduciary duties to the shareholders of the company in connection with the Sycamore deal. The law firm wanted to check if the board was acting in the best interest of the shareholders, whether a fair sales process was being followed, and if the proposed transaction was undervaluing the company. Poor financials coupled with this legal dispute of the company may have been a turn off for Sycamore. Also, it could be that the PE firm is looking for a lower purchase price.

The final takeaway – Not that Ugly
The company is providing a ray of hope to the investors with improved performance in the recent quarter. Its strong and aggressive restructuring strategies seem to have started working. Right now the company’s focus is not revenue maximization. Rather, Talbots is focusing on cost reduction and profit maximization. Though the company lost out on the deal with Sycamore, it does not need to get into extreme worry about surviving. With ample liquidity to sustain itself for some more time, Talbots can focus on new opportunities and its survival strategies.

All in all, things are not totally black or totally white for Talbots, but are dark-grey. We should wait and let the company sort things out before we can take a final call on Talbot’s fate.

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