Clearance sales coming at Talbots

The number of planned store closures at Talbot’s was bumped to 110 units recently when the company reported disappointing first-quarter results and indicated most of the underperforming units would close during the second half of the year.

Talbots currently operates 568 stores, so lopping 110 units off of that base represents a meaningful 20% reduction in store count. It is also a larger number of stores than originally envisioned when the company first announced its store rationalization program as a component of a three-year turnaround strategy it shared with investors last fall.

At that time, store closings were first discussed and were expected to be in a range of 75 to 100 units. However, that range was narrowed to 90 to 100 units after disappointing fourth-quarter financial results were reported in February. More disappointing results came recently when the company reported first-quarter results and bumped the store closure figure to 110.

The first wave of closures is expected to begin in August with 83 of the planned 110 closings expected to occur this year. Another 25 stores will close in 2012 with two additional units not due to close until 2013. According to the company, the stores that are planned for closure generated annual sales of $21 million during the first quarter and produced an operating loss of $4 million.

Overall, first-quarter sales declined 6% to $301 million and same-store sales declined 8.2%, but several measures of profitability improved. According to the company, first quarter income from continuing operations was $900,000 or a penny a share compared with last year’s loss from continuing operations of $7.1 million, or 12 cents a share. Viewed another way, the company said adjusted first quarter income from continuing operations was $5.3 million, or eight cents a share, but that figure excludes one time item totaling $4.4 million, or seven cents a share and compares with last year’s adjusted income from continuing operations of $21.7 million or 38 cents a share.

“Our first quarter performance reflects an inconsistent customer response to our merchandise assortments, a challenging competitive environment and high levels of promotional activity,” said Trudy Sullivan, Talbots’ president and CEO. “Although we did see a positive customer reaction to our March brand moment, our February and April brand moments underperformed and sales in each month of the quarter decreased year over year.”

Even though Talbots is embarking on an ambitious store closing program, the company continues to invest in its base of outlet stores. Although Talbots is closing a large number of its conventional stores, it continues to expand its base of outlet units. Six outlet stores were opened during the first quarter giving the company a total of 34 outlets with 20 openings planned for this year.

Even so, Talbots has resigned itself to the fact that 2011 is a transition year for the company.

 “We expect second-quarter sales and gross margin will be significantly below last year, resulting from high promotional and markdown activity as we work to clear slower moving goods and better position ourselves for fall,” Sullivan said. “As previously stated, fiscal 2011 will be a transition year and as we move forward in our turnaround efforts this year, our financial flexibility and liquidity are expected to fully enable us to support our anticipated working capital needs and the implementation of our strategic initiatives.” 

According to Stifel Nicolaus analyst Richard Jaffe, “The lack of success resulting from management's promotional, marketing and re-branding efforts coupled with its increased inventory position undermine management’s prospects for 2Q and longer term.” He added that “the numerous missteps evident at Talbots over the past three years color any optimism offered by management.”

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