Zacks Investment Research



|The TALBOTS INC. |(TLB-NYSE) |$8.17 |

Note: All new or revised material since the last report is highlighted.

Reason for Report: Changes in Management and Plans to Close Kids’ and Men’s Concepts.

Prev. Ed.: Nov. 29, 2007; 3Q07 Earnings Update

Brokers’ Recommendations: Neutral: 100.0% (10 firms); Positive: 0.0% (0); Negative: 0.0% (0) Prev. Ed.: 11; 0; 0

Brokers’ Target Price: $10.75 (↓ $3.25 from last edition; 6 firms) Brokers’ Avg. Expected Return: 31.6%

Recent Events: Summary

On January 22, 2008, Talbots named Lizanne Kindler for the post of Senior Vice President of Merchandising, General Merchandise Manager of the Talbots Brand.

On January 8, 2008, Talbots appointed Paula Bennett as new president of J. Jill Brand.

On January 4, 2008, Talbots announced that it plans to close 78 kids’ and men’s stores, as sales continue to disappoint. The company also commented on its 4Q07 results.

Overview

|Key Positive Arguments |Key Negative Arguments |

|Gross margin is expected to expand slightly given continued improvements in|Increasing competition from other retailers |

|product assortment. |Unpredictable consumer spending environment |

|Compelling assortments coupled with several marketing initiatives are |Rise in expenses based on increased stock-based options and marketing |

|expected to provide a further impetus to sales. |expenses. |

|Increasing the number of product offerings at the entry price points is |Acquisition of an under-performing business (J. Jill Group) presents |

|expected to boost sales by expanding the target market base. |potential challenges. |

|The Women’s segment continues to boost TLB’s earnings. |Execution risk related to the J. Jill acquisition |

|The J. Jill acquisition is estimated to be advantageous if synergies are |Decelerating square footage growth at TLB’s core brand could lead to |

|realized through cost savings and improved sourcing and distribution. |multiple compression. |

| |Volatile monthly same-store sales results |

The Talbots, Inc. (TLB) was founded in 1947 and is headquartered in Hingham, Massachusetts. Talbots is a leading national specialty retailer and cataloger of women's, children's, and men's classic apparel, shoes, and accessories. The company currently operates 1,428 stores in 47 states, the District of Columbia, Canada, and the U.K., with 1,157 stores under the Talbots brand name and 271 stores under the J. Jill brand name. Talbots offers a distinctive collection of classic sportswear, casual wear, dresses, coats, sweaters, accessories, and shoes, consisting almost exclusively of Talbots’s own branded merchandise in Misses, Petites, Woman's, and Woman's Petite sizes. Talbots Kids offers an assortment of high-quality classic clothing and accessories for infants, toddlers, boys, and girls. Talbots Men’s offers a distinguished line of classic men's sportswear and dress furnishings. Talbots has an online shopping site located at and a J. Jill brand online shopping site at . TLB’s fiscal year ends on January 31.

January 24, 2008

Recent Events: Details

On January 22, 2008, Talbots, Inc. announced that it has named Lizanne Kindler, an accomplished merchant with experience in both store-based and online retailing, to the position of Senior Vice President of Merchandising, General Merchandise Manager, of the Talbots brand. The appointment of Lizanne reflects the company’s ongoing initiative to strengthen, reposition and reinvigorate Talbots’s brand, according to management.

On January 8, 2008, Talbots Inc. announced that it has appointed Paula Bennett as president of its J. Jill brand, effective January 28, 2008. Bennett will replace Phil Kowalczyk, who was recently appointed company chief operating officer at Talbots.

On January 4, 2008, the company said it will close its kids' and men’s concepts by September 2008 as part of a strategic review bid to focus more on its core strength – the age 35 plus female market. As a part of this initiative the company plans to close 78 stores in its kids’ and men’s segment. The company also announced that its quarter-to-date sales for both its Talbots and J. Jill brands are trending below its expectations.

Revenue

|Revenue |

|Positive |0.0% |

|Neutral |100.0% |

|Negative |0.0% |

|Digest Low |$9.00↓ |

|Digest High |$15.00 |

|Avg. Target Price |$10.75↓ |

|Analysts with Target Price/Total |6/10 |

Risks to attainment of target price include, but are not limited to, heightened competitive environment, consumer receptivity to merchandising changes, delay in J. Jill’s turnaround, inability to meet debt covenants, deterioration in macroeconomic conditions, rising energy costs, and change to import tariffs/quotas.

Metrics detailing current management effectiveness are as follows:

|Metric (TTM) |Company |Industry |S&P 500 |

|Return on Assets (ROA) |-1.0% |11.7% |8.7% |

|Return on Investments (ROI) |-1.34% |16.4% |12.6% |

|Return on Equity (ROE) |-2.75% |22.9% |21.2% |

ROA, ROI and ROE of the company are much below the industry averages and the market averages as measured by S&P500.

Please refer to the separately published spreadsheet of TLB for additional details & updated forecast.

Capital Structure/Solvency/Cash Flow/Governance/Other

Balance Sheet

The company ended the quarter with approximately $32.1 million of cash and cash equivalents, $328.5 million of long-term debt and shareholders’ equity of $613.3 million.

Total inventory levels at the end of the quarter were $380.3 million, up about 3.4% y/y on store unit growth of approximately 5% y/y. Management maintained its guidance for 4Q07 ending inventories to be down in the mid-to-high single-digit range and FY07 ending inventories are expected to decline at least 10% y/y. Management expects total consolidated inventories to be down greater than 10% at the end of 4Q07 compared to the prior year.

Stores Update

During 3Q07 the company opened 19 net new Talbots stores and 10 net new J. Jill stores to end the quarter with a total store count of 1,418. Management reiterated its guidance for 70 new stores in FY07, which equates to about 5% square footage growth.

One firm (D.A. Davidson) believes that the conservative square footage growth is appropriate as the company is in the process of evaluating its current real estate portfolio and reassessing the potential store count for each concept.

Strategic Review

Given the company's continued underperformance, management recently launched a strategic review of the business and has identified several immediate actions to improve performance in the short term as well as over the long term. The highlights of these actions as stated by one firm (Citigroup) is as follows:

➢ Prudent Expense and Inventory Control: The firm believes that the prudent inventory strategy is necessary to reduce markdown risk in 4Q07. Additionally, tight expense control drove upside to 3Q07 EPS results.

➢ New COO's Focus on Shared Services: TLB recently promoted Philip H. Kowalczyk, former President of J. Jill to Chief Operating Officer, who focuses his immediate attention on sourcing and supply chain management, to optimize relationships with key suppliers, manufacturers to maximize the effectiveness of the supply chain and improve inventory flow.

➢ New Promotional Cadence: Management has implemented a significant change to the Talbots brand promotional strategy by taking markdowns on goods as needed, while maintaining a high level of full price selling. The firm believes this strategy is a step in the right direction to improving sales and margins.

➢ Increased Contact with Customer: The firm believes a stronger connection with the customer should allow management to obtain a better understanding of the customer’s wants and needs (in terms of product, store environment, service levels, and pricing) as well as drive higher traffic to stores.

➢ Engaged Global Consulting Firm: TLB has hired a global business consulting firm to assist management in a strategic review of the company with a focus on repositioning the brand.

➢ Filling Job Openings: TLB is working diligently to find replacements.

➢ New Creative Advertising Agency: Management has identified Publicis as TLB's new creative advertising agency. The firm believes that the new ad agency is a step in the right direction as a more comprehensive approach to reinvigorating the brand.

Despite the management's decision to launch a strategic review of the business, including store growth, productivity, non-core concepts and distribution channels, to improve performance and drive sustainable profitable growth, the firm, although having positive views, believes that significant changes will not likely be reflected in results until at least 2H08 and potentially not until 2009.

Closure of Kids’ and Men’s Concepts

On January 4, 2008, the company announced that after a thorough evaluation of its business, decided to exit from its Talbots Kids and Talbots Men’s concepts by September 2008. This decision is part of Talbots’s strategic business review that was announced on October 9, 2007, which is expected to be completed in the first quarter of 2008. The strategic review revealed that these concepts did not demonstrate the potential to deliver acceptable long-term return on investment.

The executive management team, with the full support of the Company’s Board of Directors, determined that discontinuing these businesses will enable TLB to redirect resources and capital toward its core businesses.

The company plans to close approximately 78 stores throughout the U.S. as a result of this decision, including 66 Talbots Kids and 12 Talbots Men’s stores. The closures will impact approximately 800 full and part-time positions, or approximately 5% of the company’s total workforce. The company is considering ways to offer the affected associates other opportunities, where feasible.

As a result of these actions, the company currently anticipates total revenue to be impacted by approximately $100 million on an annualized basis and expects the ongoing operations to benefit approximately $13 to $15 million, or $0.15 to $0.18 per diluted share, on an annualized basis.

It anticipates pre-tax expenses associated with the closings of approximately $5 million, or $0.06 per diluted share in 4Q07 and approximately $34 to $42 million, or $0.40 to $0.49 per diluted share in FY08.

One firm (Wedbush) is positive on TLB’s strategic actions, which it believes would enhance the company’s long-term prospects. However, the firm believes that the near-term trends of the company remain difficult given the challenging missy sector and the macro environment.

January 24, 2008

Potentially Severe Problems

There are none other than those discussed in other sections of this report.

January 24, 2008

Long-Term Growth

The long-term growth rates by analysts for TLB range from 9.0% (Friedman, Billings) to 20.0% (Lazard). The average long-term growth rate is 14.6%.

Management believes TLB is well positioned to maximize the long-term synergies of the two brands, enabling it to capture the growth potential of retail markets. Management is focused on putting the necessary infrastructure and initiatives in place to achieve long-term growth that it has anticipated from the acquisition of J. Jill.

One brokerage firm (Lazard) believes that fashion seems to be moving away from the over-embellishments of the last few years to a ‘classic’ cycle that is cleaner and more basic. This shift should be favorable for classically inspired brands such as Talbots. Additionally, TLB's merchandising strategy is evolving, moving to a broader assortment while increasing novelty and SKU count.

Management feels TLB is well positioned for growth, given the company’s strong fundamentals and significant growth opportunities. One brokerage firm (CIBC) sees growth in Talbots Woman and Petites as an opportunity to expand market share, through both in-store and catalog sales. It also expects Talbots Woman standalone stores to help drive square footage growth over the next several years. The Company is also offering more women’s styles, including large-sized clothes in the catalog, which analysts see as a big opportunity for catalog shopping. Another brokerage firm (Stifel Nicolaus) believes that the large-size business is an attractive and underserved niche.

Reflecting on the long-term impact of the J. Jill acquisition, most of the analysts believe TLB’s acquisition of J. Jill makes sense given the lack of customer overlap between the two brands, the spending power of the Missy customer, the still-fragmented nature of the Missy market, and the fact that TLB now has control over one of its closest competitors. Based on the inconsistent performance at both core Talbots Missy business and J. Jill over the past couple of years, the company’s ability to affect a quick turnaround is somewhat uncertain.

From a longer-term perspective, one firm (Piper Jaffray) is encouraged by the company’s following initiatives: (1) Talbots's focus on growth concepts (e.g., Talbots Woman); (2) J. Jill’s updated merchandise to start to flow in 2Q07; (3) potential to achieve at least $36 million in cost savings from the J. Jill integration; and (4) high organic growth opportunities through J. Jill (projecting +15% in FY08).

January 24, 2008

Upcoming Events

None

Individual Analyst Opinions

POSITIVE RATINGS (0.0%)

None

NEUTRAL RATINGS (100.0%)

D.A. Davidson – Neutral ($10.50) – (01/08/2008): The firm maintained a Neutral rating with a target price of $10.50 per share. INVESTMENT Summary: The firm prefers to remain on the sidelines until the company provides more specific turnaround initiatives and some traction is established in sales and earnings improvement.

Lazard – Hold – (01/07/2008): The firm maintained a Hold rating. The firm appreciates TLB’s decision of closure of its Kids and Mens concept, as it will not only improve margins but also free up human resources and capital. The firm believes this decision will enable TLB to focus more on its core missy brand and J. Jill.

Wedbush – Hold ($11.00) – (01/04/2008): The firm maintained a Hold rating but lowered the target price from $15.00 to $11.00 per share. INVESTMENT SUMMARY: The firm believes the strategic actions announced by management may enhance the long term prospects but the near term trends remain difficult for the company given the challenging missy sector and macro environment.

Buckingham – Neutral – (01/07/2008): The firm maintained a Neutral rating. INVESTMENT SUMMARY: The firm continues to rate the shares of TLB Neutral due to valuation and lack of visibility on the timing of the turnaround. The firm believes the changes will take time to show a positive impact and continue to pressure earnings.

Citigroup – Hold ($10.00) – (01/04/2008): The firm maintained a Hold rating but lowered the target price from $14.00 to $10.00 per share. INVESTMENT SUMMARY: The firm appreciates management’s decision to launch a strategic review of the business, including store growth, productivity, and distribution channels, to improve performance and drive sustainable profitable growth. However, the firm will have a more constructive outlook on TLB if a) there is progress in turning around and b) improvement in core division comps and operating margins.

Cowen – Neutral – (01/04/2008): The firm maintained a Neutral rating. INVESTMENT SUMMARY: The firm appreciates TLB’s decision of closure of its Kids and Mens concept, but maintains a neutral outlook until the positive impact of operational discipline, merchandise changes and brand messaging is evident .

Deutsche Bank – Hold ($15.00) – (11/28/2007): The firm maintained a Hold rating with a target price of $15.00.

Friedman, Billings – Market Perform ($9.00) – (01/07/2008): The firm maintained a Market Perform rating with a target price of $9.00 per share.

Piper Jaffray – Neutral ($9.00) – (01/04/2008): The firm maintained a Neutral rating but lowered the target price from $14.00 to $9.00 per share. INVESTMENT SUMMARY: The firm believes that with the intention of integrating the operational platform of TLB with J.Jill, the Company will make further cost-saving opportunities with respect to sourcing and catalog costs.

Stifel Nicolaus – Hold – (01/04/2008): The firm maintained a Hold rating. INVESTMENT SUMMARY: The firm believes that TLB's initiatives are well focused and offer significant opportunity. Moreover, it believes that there is a tremendous opportunity for Talbots to redesign and refine its product assortment to regain its customers. However, TLB's real challenge remains with hiring a new top merchant and creating a more broadly appealing assortment and communicating improvement to target customers.

NEGATIVE RATINGS (0.0%)

None

DROPPED COVERAGE

CIBC – (01/13/2008): The firm dropped coverage on the stock.

Research Associate: Rajani Lohia

Copy Editor: Pushpanjali B.

Content Ed: Jewel Saha

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Zacks Research Digest

January 24, 2008

Research Associate: Rajani Lohia, BBA

Editor: Jewel Saha, ACS

Sr. Ed: Ian Madsen, CFA, imadsen@; 1-800-767-3771, x9417

111 N. Canal Street, Suite 1101 ( Chicago, IL 60606

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