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Talbots: Still a Stock to Avoid
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If you had asked me last year to pick one retail turnaround play destined to fail, I would have, without a doubt, picked Talbots (NYSE: TLB). Plagued with debt and a line of merchandise no longer appealing to its target demographic, the specialty women's retailer had been struggling to make ends meet.
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Signs of Improvement
To my surprise, however, the company is not only still in operations today, but it's actually starting to make some progress with its restructuring efforts. While TLB's financials remains disastrous, management seems to be making some headway in terms of re-establishing the Talbots brand and creating a leaner and more efficient business model.
Several initiatives caught my eye from the conference call:
The merchandise quality that Talbots was once known for was sorely lacking the last few years, so I applaud the company for finally addressing that problem. By selling clothing made with cheaper fabrics, Talbots lost its ability to charge premium prices and consequently faced margin erosion. In addition, the company's efforts to clear out old inventory proved successful; inventory levels in the second quarter were down 29% from last year.
In terms of efforts being made to clean up its operations and brand image, this certainly is the most impressive quarter I've seen in awhile. Yet, I'm still not convinced management has what it takes to recover.
Bleeding Red
Sales from continuing operations dropped 23% to $305 million and comps fell 24.9%. Granted, the retail sector as a whole is struggling to sell merchandise these days, but this performance is far worse than the industry average. The ability to improve expense control and improve margins can only take a company so far if its sales are continuously weak. At some point, Talbots must find a way to grow sales again, or at least avoid double-digit sales declines.
And while the company cleaned up its inventory levels, the balance sheet is still messy. Talbots already had excessive debt last year and has tacked on more than $100 million more since then. Management suggested that it has plenty of capacity to meet its working capital needs with its $150 million revolver, but the reality is that a highly-leveraged profitless company can only handle large fixed-interest payments for so long. (Learn about the components of the balance sheet in our article Reading The Balance Sheet.)
Bottom Line
While Talbots has impressed me with its turnaround efforts, I still stand firm on my recommendation to avoid this stock as an investment. Clearly, others disagree, as the stock has risen nearly 250% since the beginning of the year.
Like its rivals Coldwater Creek (Nasdaq: CWTR), Chicos (NYSE: CHS) and Ann Taylor (NYSE: ANN), Talbots is struggling to please the older-women crowd. Talbots, in particular, has tarnished its brand severely; it went from a luxury label that rarely went on sale to more cheaply made merchandise sold at large markdowns.
Talbots may be making strides with its efforts, but I think it's very unlikely that it will ultimately return to a prosperous brand. Even in a booming economy, rebranding is one of the most difficult tasks a retailer faces. It's nearly impossible to successfully rebrand during a recession while carrying loads of debt on a balance sheet.
Wall Street may be warming up to this stock for now, but I'm still betting that Talbots' signature red door is symbolic of its future bottom line. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)
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Signs of Improvement
To my surprise, however, the company is not only still in operations today, but it's actually starting to make some progress with its restructuring efforts. While TLB's financials remains disastrous, management seems to be making some headway in terms of re-establishing the Talbots brand and creating a leaner and more efficient business model.
Several initiatives caught my eye from the conference call:
- Launched a new website design to improve the online shopping experience as online sales are taking over catalog purchasing.
- Formed a strategic alliance with Li & Fung to act as its exclusive global apparel sourcing agent in order to improve quality that had been deteriorating in the past.
- Created a "head of stores" position to visit individual stores across the
U.S. - Established a productivity standard to measure each sales associates' performance to make associates more productive.
- Tightened inventory control.
The merchandise quality that Talbots was once known for was sorely lacking the last few years, so I applaud the company for finally addressing that problem. By selling clothing made with cheaper fabrics, Talbots lost its ability to charge premium prices and consequently faced margin erosion. In addition, the company's efforts to clear out old inventory proved successful; inventory levels in the second quarter were down 29% from last year.
In terms of efforts being made to clean up its operations and brand image, this certainly is the most impressive quarter I've seen in awhile. Yet, I'm still not convinced management has what it takes to recover.
Bleeding Red
Sales from continuing operations dropped 23% to $305 million and comps fell 24.9%. Granted, the retail sector as a whole is struggling to sell merchandise these days, but this performance is far worse than the industry average. The ability to improve expense control and improve margins can only take a company so far if its sales are continuously weak. At some point, Talbots must find a way to grow sales again, or at least avoid double-digit sales declines.
Bottom Line
While Talbots has impressed me with its turnaround efforts, I still stand firm on my recommendation to avoid this stock as an investment. Clearly, others disagree, as the stock has risen nearly 250% since the beginning of the year.
Like its rivals Coldwater Creek (Nasdaq: CWTR), Chicos (NYSE: CHS) and Ann Taylor (NYSE: ANN), Talbots is struggling to please the older-women crowd. Talbots, in particular, has tarnished its brand severely; it went from a luxury label that rarely went on sale to more cheaply made merchandise sold at large markdowns.
Talbots may be making strides with its efforts, but I think it's very unlikely that it will ultimately return to a prosperous brand. Even in a booming economy, rebranding is one of the most difficult tasks a retailer faces. It's nearly impossible to successfully rebrand during a recession while carrying loads of debt on a balance sheet.
Wall Street may be warming up to this stock for now, but I'm still betting that Talbots' signature red door is symbolic of its future bottom line. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Kristin Graham
Kristin Graham is an equity analyst with experience in covering retail and consumer stocks. She obtained a unique global perspective by sailing around the world on the Semester at Sea study abroad program. She also specializes in global equities and international investing. Graham is a Level III CFA candidate.
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