At the end of the first week of 2008, clothing retailer Talbots (NYSE:TLB) announced it will close 78 stores throughout the United States and ax the company's Talbots Kids and Talbots Mens concepts by September 2008. In all, about 800 employees, or 5% of the Talbots crew, will lose their jobs.
The move will impact approximately $100 million on an annualized basis. What's more, the company stated that it expects the ongoing operational benefit resulting from these closings to be approximately $13 to $15 million per year (15 to 18 cents per diluted share). The news from Talbots raises a few questions:
1. If Talbots is in such rough shape, why didn't the company try to sell off the divisions?
2. Is the news from Talbots part of a larger trend that's about to surface in the retail sector?
Tapering Talbots
First and foremost, the closure of the Talbots Kids and Talbots Mens concepts will cause the company to take a charge of approximately $5 million, or $0.06 per diluted share in the fourth quarter 2007.” For fiscal 2008, the company will incur charges of approximately $34 to $42 million, according to the company's press release. (For related reading, check out Impairment Charges: The Good, The Bad And The Ugly.)
This begs the question, why didn't the company simply sell off the divisions? More interesting, if it tried, were there no interested buyers?
It seems a little awkward that the company would simply close the divisions, taking charges, if a more viable solution for shareholders was available. All of the aforementioned raises a few concerns about management and the company's larger business strategy.
One thing is certain, though, Talbots is in trouble, with sales potentially far below expectations. While the company has yet to actually post holiday numbers (likely it's still waiting for post-holiday numbers to come in), the store closures certainly insinuate that sales have not been good. Fundamentally, the stock seems healthy, trading with an extremely low price-to-sales ratio of 0.25 and a price-to-book of 0.95. However, these numbers will drag (especially the price to sales), when we consider that the division closures will clip about $100 million in revenue. Right now, it's probably a good idea to stay out of the stock. (To learn more, check out Use Price-To-Sales Ratios To Value Stocks.)
The Larger Picture
There's a grim cloud hanging over the retail sector right now. Sales this season were not stellar. While doing my Christmas shopping this year, I noticed most stores were surprisingly empty. I shopped in New York City, Baltimore, and in Denver; at every store I stopped at in the three cities, I spent a little time inquiring about sales. At virtually every store, the sales people told me this was not a good season.
The International Council of Shopping Centers released weekly chain store sales numbers on January 2, stating that sales grew 2.3% in the final week of December. Much of the sales came from consumers buying gift cards. There are two points to mention here:
1. Even though the final week in December showed reasonable numbers, the overall results for the entire month are not blowout.
2. The trend in shoppers buying gift cards is certainly increasing, but the problem is that the most consumers then use the cards post-holiday, when they can get merchandise at a discount. The end result is lower margins for retailers. Interestingly, Wal-Mart (NYSE:WMT) mentioned just prior to Christmas that some of the company's stores were having trouble processing gift cards. Ouch! Bad karma, perhaps?
Conclusion
Overall, with gas prices about 30% higher this holiday season than the previous, and with economic uncertainty looming, consumers reacted very conservatively. While some stores may have faired well, it's likely that the bulk did not. The numbers aren't in yet, but as retailers begin to post numbers over the next few weeks, investors could find themselves disappointed.
Finally, if Talbots is any sign of what to expect, caution within retail may be the best course at this time.
