If you've ever had your credit card denied when you went to pay at a restaurant or at the movies, you know how Talbots (NYSE:TLB) felt last week. On Wednesday, April 16, some scary news hit the tape regarding the well-known clothing retailer; it seems HSBC (NYSE:HBC) and Bank of America (NYSE:BAC) are phasing out Talbots' lines of credit. No word on if the managers from the banks came down to cut up the cards personally.

No one likes to have their credit card denied, and it's certainly not a good omen, but just as embarrassed restaurant patrons survive the humiliation, so too will Talbots. Let's examine the situation a little closer. (For an easy to understand breakdown of corporate credit, read When Companies Borrow Money.)



What This Means To Talbots
Talbots, like other retailers, used its credit lines to pay for goods that it imports. The company had a $135 million facility from HSBC and a $130 million facility from Bank of America for just this purpose. And so, the absence of such credit lines means that the company will likely need to find alternative funds - and fast. As of February Talbots sported about $25.5 million in cash on its balance sheet.

This is a problem because it means Talbots will have to quickly renegotiate terms with its vendors, and that could be difficult. Talbots is in no position to bargain for the perfect deal at this point.

The timing of the news is also a problem. The slowing economy has made liquidity all the more important these days. The company faces stiff competition from AnnTaylor (NYSE:ANN) and Macy's (NYSE:M) who could both turn up the heat now that they see Talbots struggling. It might also have an impact on its future ability to grow.

The analyst community will also likely shy away from the stock and be more conservative in terms of forecasting. We are already starting to see this. On the same day that we learned Talbots' credit was cut off last week, DA Davidson downgraded the shares to 'underperform' from 'neutral'. I think we will see more negative research in the days ahead, which could cause a further sell off. (For information on using ratios to test company survivability, read Do Your Investments Have Short-Term Health?)

Not The End Of The World
I think that some investors have misinterpreted the news as meaning Talbots will have to immediately shut its doors and fold up shop. That's not the case; Talbots is still doing business. There are even a few positive tidbits that have been missed.

For example, Talbots is reportedly talking to banks and trying to land a $50 million credit line. The Associated Press also reported that it has renegotiated terms with vendors that provide about 75% of its overseas goods. If Talbots lands a new sizable line of credit quickly, it bodes well for the future. I also think that renegotiated vendor terms will help quell some worries that it might see its merchandise cut off.

Watch For New Growth
Earlier this month Talbots outlined a plan for growth for investors. The company will focus on high margin accessories and better sourcing. It also announced plans to improve its struggling J. Jill brand by bettering its merchandise selection and marketing.

Later in the year there could be some positive news to report on these fronts. The stock could actually be in for a nice jump.

Bottom Line
The loss of two major credit lines was a blow, no doubt about it. Talbots needs the credit to import goods, and so it's certainly not a situation that can continue for long. However, the company has already started looking for alternative lines of credit and has negotiated with its suppliers. If these moves work out then the embarrassment of last week could quickly be just a faded memory. Investors should watch closely to see how this plays out.

For further reading, check out Analyzing Retail Stocks.

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

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