TALBOT'S EXECUTES SUCCESSFUL TURNAROUND AND ADDS A NEW, MORE YOUTHFUL LOOK

After spending last year atop the retail death-watch list, Talbots Inc. is now a favorite on Wall Street, thanks to cost cuts and a complex financial arrangement for unloading its enormous debt.

Talbots

Talbots' fall line features trendier jeans and prints as it attempts to attract younger shoppers to its brand.

But to solidify its comeback and boost sales, Talbots must complete a merchandise and image overhaul aimed at attracting younger customers. And that's a tall order for a brand that many women think of as perfect for their grandmothers.

Tuesday, analysts expect the retailer to report its second quarterly profit in a row after five quarters of losses. Analysts forecast a profit of two cents a share, compared with a loss of $1.17 a share, excluding charges, a year earlier.

That would be a marked turnabout. The Hingham, Mass., company entered the recession in a precarious state. It was hundreds of millions of dollars in debt, largely the result of overpaying for retailer J. Jill. Sales of Talbots' staid merchandise, already declining, soon deteriorated further. Then, amid the economic turmoil, its majority shareholder and main provider of credit, Aeon Co., told executives it wanted to divest itself of its Talbots stake.

A creative deal, which closed last week, has eliminated much of Talbots' debt. Now, the retailer says it has the liquidity to reinvest in its business and plans to remodel some of its stores in the next few years.

"It was a serious situation," Chief Executive Trudy Sullivan said of the company's formerly debt-laden balance sheet. "The culmination of this transaction gives us the financial wherewithal to continue to push hard on the turnaround of Talbots."

Talbots

Talbots, known for classic apparel targeted at the middle- and upper-class suburban set, still has work to do. Its image had gotten so old that in a customer survey a couple of years ago, women 65 years of age and older said the brand was for "someone older," says Ms. Sullivan.

Ms. Sullivan is attempting to refocus on women 35 and older. Making a brand younger is notoriously tricky: Talbots must make its clothes more youthful without alienating its core customers during the transition, and it has to persuade a new swath of women in their 30s and 40s to consider shopping there.

"Talbots not only needs to get its core customer spending more, it also needs to get a new customer," said Roxanne Meyer, executive director of specialty retail at UBS Investment Research.

Ms. Sullivan, who joined the company in autumn 2007, introduced some younger items, including slim jackets and feminine dresses. But as new products began to hit stores in late 2008, the recession crushed consumer spending. Sales fell to $1.5 billion in the year ended Jan. 31, 2009, down 12% from the year before.

The company began 2009 with an aggressive $150 million expense-reduction plan. It cut its head count 40%, reduced some employees' hours and slashed inventory. Last summer, it sold J. Jill to a private-equity firm for $75 million, far below the $517 million it paid in early 2006.

But the company's liquidity problems continued. The Japanese retailer Aeon, then Talbots' majority shareholder, stepped in several times to help, including extending a $200 million loan facility in February 2009.

But after more than two decades with Talbots, Aeon also began to express its desire to divest itself of its interest in the retailer and focus on its Japanese operations.

To repay the $486.5 million that it owed Aeon, Talbots executives turned to BPW Acquisition Corp, a special-purpose acquisition company with which Talbots had shared a financial adviser. BPW was created as a shell company, and it raised $350 million through an initial public offering in February 2008 with the intent to acquire or merge with another company.

With its two-year charter nearing an end, BPW agreed to be acquired by Talbots in December. The retailer issued roughly 42 million additional shares for the transaction, but the net dilution was only about 12 million shares because Aeon agreed to retire its roughly 30 million shares in exchange for one million warrants.

Talbots

Talbots absorbed BPW's funds and applied that money, which, minus fees, totaled roughly $330 million, to pay down its debt. The acquisition of BPW also opened up a line of credit from GE Capital for $200 million, of which it has drawn $125 million. (The outstanding balance of the debt to Aeon was paid with cash on hand.)

Ms. Sullivan called the deal "a dream transaction," and it was well received by Wall Street. Since plans for it were announced in early December, shares have more than doubled, closing at $14.35 on Friday.

Talbots has stepped up its fashion quotient, with offerings that include a sequin-trimmed sweater and leopard-print-lined black booties. So far, it has had some hits and misses. Last spring, "ethnic" prints in bright colors including orange and lime green misfired.

But this fall, a "pant fit initiative" gave customers a $5 gift card for trying on a pair from its new pants styles. The retailer sold 590,000 pairs in nine weeks. And First Lady Michelle Obama has been spotted numerous times in Talbots clothing, including a black-and-white blouse last week.

COMMENTARY:  Last year, at the height of the recession, I didn't give Talbot much of a chance of surviving.  Most retail analysts said that the handwriting was on the wall.

Trudy Sullivan, CEO, Talbot's has done a great job of re-inventing Talbots for a younger demographic, improved profitability, acquired BPW and used that public shells cash to payoff the debt they owed to Aeon. 

I am totally impressed with what appears to be a very successful turnaround, the new more contemporary look of the stores and merchandise.   Great job, Trudy.

Talbot's is a retailer worth tracking.

Courtesy of an article dated April 9, 2010 appearing in The Wall Street Journal