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Talbots Coming Apart At The Seams

By Glenn Curtis

Tickers in this Article: TLB, HBC, BAC, ANN, M

Last month the clothing retailer Talbots (NYSE:TLB) made headlines when we learned that HSBC (NYSE:HBC) and Bank of America (NYSE:BAC) were cutting its credit lines. Well, Talbots is back in the news now fresh off its Q1 earnings release, and it looks like the company's problems have gone from bad to worse.

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Sales Nosedive
Before the opening bell on Thursday May 8, Talbots let us in on its sales numbers for the 13 weeks ended May 3. They weren't worth the wait. Total sales declined to $542 million from $574 million in the comparable period last year. Sales were lower at both its traditional Talbots stores and its J. Jill locations. Making matters worse, and frankly the point that I'm fixated on, is that total same store sales were down 9.8% during the period. (For related reading, check out Great Expectations: Forecasting Sales Growth.)

We all know retail is suffering right now, but most of the other retailers aren't suffering this badly. For example, in its fourth quarter Macy's (NYSE:M) saw its same store sales trail off only 2%. Meanwhile, Ann Taylor (NYSE:ANN) saw its same store sales drop off 3.2%. That makes Talbots' 9.8% drop look especially bad.

The same store sales numbers from last year's Q1 were already pretty awful. They dropped 3.5% one year ago. So, beating these numbers shouldn't have been overly hard to begin with. Basically this shows me that Talbots is having a tough time competing in this environment and weathering the economic slowdown.

Margins, Guidance Provide Optimism
Talbots CEO Trudy Sullivan said the company saw improved merchandise gross margins in the period thanks to good inventory management. The fact that the company was able to retain some margin strength is a sign that Talbots will survive this mess. It's also nice to know that management is focused on its inventory levels. After all, in a sluggish economy the last thing any retailer needs is to get stuck with a slew of unsold merchandise. (Take a deeper look at company profitability in The Bottom Line On Margins.)

The other tidbit of good news was that the company confirmed its outlook for fiscal 2008 from continuing operations. It expects to earn 47-52 cents a share, excluding certain items. The confirmation is good news because investors right now need a bit of hand holding these days. Also, Talbots' willingness to go out on a limb this early in the year implies confidence.

Bottom Line
Talbots first-quarter sales results were dismal. Same-store declines were particularly telling when stacked against the much smaller drops from the competition. The bright spot on the horizon is that the company has a firm grip on its margins and has confirmed its 2008 forecast. It may not be great news, but it could be a sign that at least things are stabilizing.

For related reading, check out Analyzing Retail Stocks.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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