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Talbots Inc. (NYSE:TLB)

F4Q09 Earnings Call

April 13, 2009 5:00 pm ET

Executives

Julie Lorigan - Senior Vice President, Investor and Media Relations

Trudy F. Sullivan – President and Chief Executive Officer

Michael Scarpa - Chief Financial Officer and Chief Operating Officer

Greg Poole - Chief Supply Chain Officer

Analysts

Neely Tamminga - Piper Jaffray

Jennifer Black - Jennifer Black & Associates

Tracy Kogan - Credit Suisse

Todd Slater – Lazard Capital Markets

Betty Chen - Wedbush Morgan

Roxanne Meyer - UBS

Janet Kloppenburg - JJK Research

Marni Shapiro - The Retail Tracker

Stacy Pak - SP Research

Operator

Good morning ladies and gentlemen and on behalf of Talbots, we would like to welcome you to the Talbots Incorporated conference call covering its fourth quarter and full year 2008 earnings results. Today’s call is being recorded and at this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

I would now like to turn the call over to Julie Lorigan, Senior Vice President of Investor and Media Relations.

Julie Lorigan

Thank you and good afternoon everyone. Welcome to the Talbots Inc. fourth quarter and full year earnings conference call. Today we have with us Trudy Sullivan, President and CEO; Michael Scarpa, Talbots Chief Operating Officer and Chief Financial Officer; and Greg Poole, our Chief Supply Chain Officer.

As a reminder, certain statements to be made today are forward-looking. These are based on assumptions and expectations of future events, which may not prove to be accurate. They involve substantial risks and uncertainties. Actual results may differ materially from those expected or implied. These forward-looking statements may be identified by such terms as will, expect, believe, anticipate, outlook, target, plan, initiative, estimated, strategy and similar terms or variations. All of our outlook and financial expectations and plans constitute forward-looking statements. We direct you to the cautionary statement being read at the end of this presentation and in our earnings release issued today, as well as in our recent SEC filings, all of which are available under the Investor Relations section at our website at www.thetalbotsinc.com

A replay will be available from approximately one hour after the conclusion of the call until end of day April 15, 2009. The webcast will also be available on the Investor Relations page of our website.

With that, I would like to turn it over to Trudy Sullivan.

Trudy F. Sullivan

Good afternoon everyone and thanks for joining us. In a moment I will discuss Talbots’ results for the 13-week and 52-week period ending January 31, 2009. Mike will cover our financial performance, and then I will make some closing remarks. Greg is here to answer any questions you might have on the letter of preliminary intent we signed with Li & Fung. Given the comprehensive nature of our press release this afternoon, we will keep our prepared comments brief to allow sufficient time for your questions. So with that, let’s begin.

2008 was a challenging year to say the least. That said, I am proud of what we have accomplished in a very challenging macro environment. We have made a strong start in presenting a re-invented brand to our customers while still focused on our classic positioning, we have reinvigorated our product assortment and marketing voice with a fresh relevant and exciting approach to classics, an approach we refer to as tradition transformed.

We have valuable learnings from our initial deliveries and we are rapidly incorporating these learnings as we proceed. We also invested in our direct business, refreshing our catalogue design and imagery, increasing our circulation to target last and new customers, and revamping the visual presentation of our merchandise.

All channels are now in sync with the consistent brand message to the customer, wherever she chooses to encounter the brand. We have made the necessary operational decisions to focus exclusively on our core Talbots’ business by closing our non-core concepts in announcing our plans to sell J. Jill.

As we entered September 2008 we were pleased with the progress we had made, particularly with our merchandise and creative direction and our customer gave us high marks on both. In fact, this past fall was the first time since 2004 that we saw a favorable improvement in our consumer intent to purchase study, which increased 10% over the fall of 2007. And we improved further on this in January by another 5%.

Most encouraging is the reaction from thousand of Talbots’ customers who write with words of encouragement, hailing the change they see, a number thanking us for bringing back their Talbots. We certainly cannot claim victory but we have made progress and we have confidence in our strategic direction.

When the world rights itself we will emerge as a stronger and better brand. Unfortunately, in mid-September Talbots, along with our industry, began to feel the impact of the financial crisis that resulted in the rapidly deteriorating economy. We experienced a dramatic decline in customer traffic and sales that became increasingly more difficult, most notably in late November and the first three weeks of December.

Our costs in the fourth quarter declined 24% driven by a 14% decrease in transactions and a decrease in average unit retail of 13%, offset by a slight increase in units per transaction. Our average transaction value in the quarter declined 12% to last year, with our conversions essentially flat.

In early February we completed an extensive external consumer research study, interviewing both customers and non-customers in the marketplace and here are the highlights of what we learned:

The tough news, our customers are spending less overall but the good news is they are not shifting their spending to other retailers at the same rate that they were. Approximately 80% of our best customers indicate to us that they are cutting back on their spending due to the current economic situation;

Next, our customers continue to view our merchandise better than a year ago, up 16% in January 2009 and up 13% in the fall of 2008. Specifically, more than twice as many customers report a positive change versus no positive change with our merchandise and catalogue over the last twelve months; and

The high price perception of the Talbots brand that we had been dealing with historically also improved since the fall of 2008.

In sum, increased regard for our product and less defection to other brands, we believe are promising, leading indicators of success when the economy recovers. We were rigorous throughout the fall executing programs that further strengthen our connection with the consumer, especially the launch of the three-tiered expanded loyalty program in January that extends our reach to incorporate non-Talbots charge customers as well as our loyal Talbots charge customers.

We have also learned a great deal about our customers likes and dislikes as deliveries from our new creative and merchant teams hit the floors in mid-September. We have captured those learnings and incorporated them into our design and planning for subsequent deliveries.

Overall we saw more interest in demand for our casual versus our refined merchandise. In addition, our customer continues to gravitate towards newness, novelty, and a broad color palette across all categories.

While our fourth quarter results were affected by the difficult environment, we are proud of the critical decisions we’ve made and the decisive actions we have taken to adjust to this new retail reality. At this point we are still in the early stages of transforming our brand and improving our operating performance, but we are encouraged by positive signs as evidenced in the consumer research I have already shared.

To that end, we stayed the course and moved forward with the implementation or our strategic initiatives including finalizing our plans to roll out our upscale outlet concept this spring. But we did take further action to reduce our expenses and bring our cost structure in line with our sales trend.

I have no doubt that we will emerge a stronger and definitely more viable brand as the economy recovers. With that, I will turn it over to Mike to review the financials and then I will be back with some closing comments.

Michael Scarpa

Turning to the details of our fourth quarter, total sales from continuing operations were $328.0 million compared to $428.0 million last year.

Retail store sales were $279.0 million compared to $361.0 million last year. This decrease was driven by a 24% decline in comp store sales for the 13-week period.

Direct marketing sales in the fourth quarter, which includes catalogue and Internet, were $49.0 million compared to $67.0 million last year.

Fourth quarter cost of sales, buying, and occupancy was 85.4% of net sales versus 70.3% last year. This deterioration was primarily due to a 960 basis point decline in merchandise gross margin due to increased marked downs and promotions as well as a 440 basis point deleveraging of occupancy cost resulting from significantly lower sales.

Selling, general, and administrative expenses in the fourth quarter were $141.0 million at 42.9% of net sales versus $129.0 million at 30.1% of net sales last year. This increase in expense is due to an increase in catalogue costs and costs associated with consulting and professional services for the development and implementation of our corporate strategy.

Net interest expense for the quarter was $5.0 million versus $8.1 million last year. The decline in interest expense reflects lower balances on our acquisition debt and lower interest rates partially offset by higher working capital borrowings.

Our fourth quarter net loss from continuing operations on an adjusted basis, excluding restructuring charges and store asset impairment was $128.0 million, or $2.40 per share, compared to last year’s adjusted net loss of $7.1 million, or $0.13 per share, on a comparable basis.

We recorded a non-cash charge of $66.0 million, or $1.23 per share, related to a valuation allowance against net deferred tax assets in accordance with FAS 109 accounting for income taxes.

The establishment of this valuation allowance did not have an impact on our cash position and it does not preclude us from using our loss carry forwards, tax credits, or other deferred tax assets in the future.

On a GAAP basis fourth quarter net loss from continuing operations was $136.3 million, or $2.55 per share, compared to last year’s net loss of $10.3 million, or $0.19 per share.

Attached to today’s earnings release is a Reg G table which details the reconciliation of GAAP to non-GAAP or adjusted results from continuing operations for the fourth quarter and full year 2008.

Let me briefly review fourth quarter results from discontinued operations. Net loss from discontinued operations was $230.2 million, or $4.30 per share, including impairment and restructuring charges of approximately $137.0 million, or $2.55 per share, compared to last year’s net loss of $161.0 million, or $3.03 per share, on a comp basis including impairment and restructuring charges of approximately $143.0 million, or $2.69 per share.

We established the full valuation allowance for our net deferred tax assets during the fourth quarter and as a result reversed any income tax benefits we had recorded in the prior three quarters of fiscal 2008.

Moving to the balance sheet, we ended the fourth quarter with total accounts receivable of $169.0 million versus $211.0 million last year, a reduction in line with our sales decrease. Talbots’ charge penetration increased to 48% of total sales in fiscal 2008 compared to 45% in fiscal 2007.

Finance charge revenue increased to $12.2 million in the fourth quarter, compared to $11.0 million last year, representing a gain of 11%. This increase reflects a change in our policies on late fees and interest rate charged on outstanding balances.

We ended the quarter with $477.0 million of total debt outstanding compared to $389.0 million total debt outstanding in the same period last year.

Our 2008 capital expenditures from continuing operations were $29.0 million net of allowances compared to $43.0 million last year.

As we move into 2009 we are focused on improving liquidity and enhancing our operating efficiency with a focus on cost reduction and inventory control. Regarding our liquidity, as we mentioned in our release today, we now have in place a new $150.0 million secured revolving loan facility from Aeon, which supplements our existing $215.0 million in committed working capital facilities.

This additional loan, which matures in April 2010, is secured by our accounts receivables and will be secured by mortgages on our Hingham, Massachusetts, headquarters and Lakeville, Massachusetts, distribution facilities.

With this new $150.0 million revolving loan facility in place we have excess capacity to fund our planned working capital needs and the implementation of our strategic initiatives throughout fiscal 2009.

That said, this continues to be a volatile and uncertain environment and predictability on consumer spending behavior is difficult. Therefore, we continue to take steps to enhance our operating efficiency, reduce our costs and inventory commitments as we tightly control our discretionary spending.

To that end, we have identified approximately $100.0 million of our $150.0 million cost reduction program, up from our previously disclosed $85.0 million that we expect will be realized in fiscal 2009.

We have taken several employee and other overhead-based actions to reduce our costs and better align our business with current and near-term expected sales trends. These include corporate headcount reductions, rationalization of hourly workforce in stores and call center, increase in employee health care contributions, suspension of our company’s matching contribution to the 401(k) plan, elimination of 2009 merit increases across the entire organization, suspension of our quarterly dividend, and the freezing of our defined benefit pension plan, amongst others.

We have also greatly reduced our 2009 capital plan for continuing operations, which is currently planned at $22.0 million net of allowance compared to $29.0 million last year. This plan reflects the opening of approximately 12 locations, 10 of which are new, upscale outlets.

Let me address one other key item. We are in active discussions and have signed a non-binding letter of intent with Li & Fung Limited, the global consumer products firm based in Hong Kong to mutually explore a potential outsourcing relationship for Li & Fung to become Talbots’ primary global sourcing agent.

Li & Fung has tremendous scale, back office resources and infrastructure that Talbots could effectively leverage, allowing us to focus more on the design and product development process. A partnership could create significant benefits by simplifying our sourcing processes, reducing operating expenses, and potentially further reducing our cost of goods sold.

We believe this could be a significant step in driving improved operating efficiency for Talbots and we will keep you updated on our progress.

Now on our outlook going forward, given the substantial volatility and continuing macroeconomic uncertainty, we are not providing a full year fiscal 2009 outlook at this time. However, we are commenting on the first quarter.

Specifically, we have assumed no improvement in the economic environment and therefore are basing our first quarter outlook on a continuation of the negative sales trends that we experienced in the fourth quarter. As a result, we expect sales to be down in the mid-20% range compared to last year’s first quarter.

Cost of sales, buying, and occupancy rate is expected to increase approximately 900 basis points compared to last year as a result of the expense deleveraging and increased markdowns.

With the aggressive steps we have taken to streamline our organization and reduce costs, SG&A dollars for the first quarter are expected to be down approximately 10% compared to last year.

Interest expense in the first quarter would be approximately $7.0 million, reflecting the changes that our debt structure has addressed.

Because we recorded a full valuation allowance against our deferred tax assets in fiscal 2008, we will not have a tax benefit in the first quarter of fiscal 2009, regardless of our expected operating loss, thus we expect first quarter loss per share from continuing operations, net of any special items, to be in the range of $0.47 to $0.52 compared to earnings per share of $0.35 reported last year.

Our posture in 2009 will be conservative and we are not planning for any improvement in the economy. Our priorities in 2009 include our ongoing focus on liquidity and cash flow and those initiatives that will support improvement.

Now let me turn it back over to Trudy for some closing comments.

Trudy F. Sullivan

I would like to summarize the fourth quarter as the most challenging I have ever experienced in my career. We do believe that the decisive actions we have taken are going to help us navigate through 2009. We have made many positive changes to our brand, but that aside, we are particularly focused on our measures to improve liquidity and cut expenses.

And it goes without saying we are very grateful to have Aeon’s support and confidence in our leadership team and in the strategic direction of our company during this volatile and uncertain economic time. The loan facility has greatly increase our borrowing capacity and with their help, all of our debt is now committed with Aeon’s guarantee and it is free of covenants.

We are acutely focused on driving improved performance. To that end, we continue to connect with our customers, fine tune our merchandise, and explore new avenues to enhance the overall shopping experience.

We have a great team, dedicated and energetic, and have further strengthened our leadership in two key areas of the company, our stores and finance organizations, with our recent appointments.

And finally, as I am sure you are all curious, our process to sell the J. Jill brand is proceeding as planned and we have several interested parties actively at work. Of course, we cannot be assured of a transaction or the timing of such, but we continue to move forward.

In summary, our focus in 2009 is continued execution of our strategic initiatives to drive the profitable growth of our business.

With that, we would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Neely Tamminga - Piper Jaffray.

Neely Tamminga - Piper Jaffray

On the product side, are you seeing in Q1 trends so far that your conversion rates have actually improved relative to Q4? I know you were talking about the same comp rate. Maybe said another way, are you just lacking some inventory? Can you just give us some sense behind the health of the Q1 comp versus Q4?

And housekeeping for Michael, off of what base rate are you making the increase in cost of sales? Guidance in Q1.

Trudy F. Sullivan

We are seeing conversion rates in Q1 slightly favorable to Q1 a year ago, but obviously the conversion in Q4 is a different, is a seasonality that’s very different. So, it’s slightly less than Q4 but slightly better than Q1 2007.

Michael Scarpa

From a buying and occupancy perspective, obviously we restated first quarter for discontinuing operations so we are looking at roughly a 59.3% rate for cost of sales, buying, and occupancy.

Operator

Your next question comes from Jennifer Black - Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

I wonder going forward what percent of your business will be refined, casual, and special occasion. Just kind of guesstimates. And I then I wondered, also, with your merchandise assortment, do you feel you have the right breadth or do you feel you go narrower and deeper?

Trudy F. Sullivan

As I said in my opening remarks, we are seeing the customer reacting more favorably on the casual side of the business, so you know casual has always been a dominant part of the Talbots offer but it’s increasing for 2009.

I’m not quite sure what you mean, mentioning breadth and narrowing deep. One of our key learnings, certainly in the fall season, is that she still likes the breadth of color assortment and doesn’t like the offer to be too singular, so we are very, very conscious of that. We have a customer that has a very high visit rate to our stores and we know we need to continue to have enough breadth of assortment but within that we want depth in key items, which are also critical to driving the business.

Operator

Your next question comes from Tracy Kogan - Credit Suisse.

Tracy Kogan - Credit Suisse

Just looking at your SG&A in the fourth quarter, given your cost reduction per [rams], I would have expected it to come in a little lower. So I was hoping you could maybe quantify some of the moving pieces in SG&A, such as marketing and maybe how much that consulting fee was.

And my second question relates to J. Jill and I know that you can’t comment on the sale process but maybe if you could talk to us about your fall back options there and whether you’ve discussions with landlords as to the cost of potentially closing some of those stores.

Trudy F. Sullivan

Let me take the J. Jill question first. There’s nothing more we really can say about it other than I gave to you in our opening remarks. The process is going as we expected, we do have several interested parties who are diligently at work and I would have to say stay tuned.

Michael Scarpa

As far as some color around the SG&A expenses, you may remember in the third quarter we had indicated that there were catalogue costs that were being deferred until fourth quarter as we changed the timing of some of the mailings and the circulation, so that contributed close to $6.0 million of additional expenses. And as far as the strategic and professional fees, that was up around $8.0 million, also.

Operator

Your next question comes from Todd Slater – Lazard Capital Markets.

Todd Slater – Lazard Capital Markets

I know it’s sometimes hard to take solace, but the product is clearly coming along much better than in the past. It’s sometimes you don’t see it in this type of environment, but we see it.

When you look at the incremental cost takeouts in SG&A that you mentioned, could you give us a sense of sort of where the biggest buckets will be coming. And I assume that with the Li & Fung deal, which will bring some higher costs, because obviously they’re going to have an agency fee, you’re be able to cut your own sourcing organization by an even greater amount. Is that sort of the trade off?

Michael Scarpa

I think from a Li & Fung perspective, obviously we think that we can use their network, not only to lower our own operating costs but also drive some gross margins, obviously from an initial markup perspective. So we see two great benefits there.

As far as expenses overall, we’ve looked at headcount, which I rattled a litany of things that we’ve done from an employee side, but we also took a hard look in terms of our spend around our marketing and catalogues and also took a hard look in terms of IT spend, also.

Operator

Your next question comes from Betty Chen - Wedbush Morgan.

Betty Chen - Wedbush Morgan

Michael, I was also wondering, in terms of a housekeeping question, given the guidance you mentioned for COGS to increase by 900 basis points over a year and SG&A dollars to be down approximately 10%, we’re having a hard time kind of arriving at the EPS loss for the quarter guidance that you’ve given for $0.47 to $0.52. Could you clarify the SG&A dollar rate that we should be comparing it against in Q1 2008?

Michael Scarpa

We recorded approximately $131.0 million in the first quarter of last year, which was roughly a 31.6% operating SG&A rate. We expect that we will be under that by about 10% in terms of pure dollars being spent. And I mentioned that sales would be down in the mid-20% range. So if you take that off a base of $415.0 million in sales in the quarter, you should be able to get there.

The key to all of this, though, is even though we’re generating an operating loss, there is no tax benefit associated with that operating loss, so normally you would see roughly 30% to 35% of that loss being a benefit in terms of the tax rate, but it’s a pure loss that drops directly to net income with no tax benefit.

Operator

Your next question comes from Roxanne Meyer – UBS.

Roxanne Meyer - UBS

I was just wondering on the sourcing organization, or in your switch to Li & Fung, are you concerned that after years of having your own organization that you won’t have as much control over the product and product direction and that ultimately it might a near-term benefit to your cost but over the longer term sourcing through Li & Fung will actually be more expensive?

Greg Poole

We have just begun to study the Li & Fung organization but historically Talbots has used a number of third-party sourcing organizations, as well as our own organization. And I’m really confident that a partnership with Li & Fung will actually give us greater control over the quality of the products that we’re bringing to market.

And this will also allow us to focus a much greater emphasis on the design and product development process. So we are confident that the product that we are delivering today will actually improve.

Trudy F. Sullivan

And to the point of control over design and creative, we will continue to have that organization based in our creative offices in New York. We will own the entire range of decisions that get made between design, catalogue creative, store visual creative, all of the creative and design will stay in-house.

Operator

Your next question comes from Janet Kloppenburg - JJK Research.

Janet Kloppenburg - JJK Research

I agree with Todd, the stores look a lot better and to help us understand how far the customer hasn’t responded as well as we thought she would, could you tell us maybe how you take the learnings from the fourth quarter and what changes we might see in the assortments next fourth quarter, I mean, as you think through what you could have done better, after the season was over. And maybe what you’re seeing here in this quarter as well.

And particularly if you could touch on a little bit of the changes that you’ve been making on the refined side of the assortments.

Trudy F. Sullivan

That’s a great question and I think one of the reasons that we felt so strongly about keeping our customer research activities here extremely robust, because this is an environment where she just isn’t shopping as much. She has told us that she is pressured by what’s happening, you know, globally. She doesn’t actually feel terribly responsible for the over-shopping right now. So we have really needed to get a real handle on what she likes and what she doesn’t like aesthetically.

I will tell you that we have had several thousand letters and the favorability rate is running 70% to 30% negative. Let me tell you what they like. They definitely are reacting to the casual side of the line. They are definitely reacting to what we call beautiful key items, or charming key items. Something with a twist that makes them irresistible. And those are things that we feel very, very good about.

She has told us to just stay steady. That when she is willing to engage in the shopping activity again she is going to come to us. And one of the things that we were most encouraged is that she indicated that her defection rate to other brands will be less. I mean, she really is giving us credibility for the change.

She is not in a refined mode. Certainly this past holiday we did present a holiday dress collection but it was a time when she wasn’t in the mood to party and so that wasn’t as successful as it might have been in a normal season. That doesn’t mean we will abandon it but we certainly are going to put a little different twist on it against next holiday.

We have also presented resort to her but this holiday she didn’t travel. So our resort collection wasn’t as successful. She like it, but she didn’t need it. And at the time when she was in a very conservative shopping mode it wasn’t as successful as we hoped.

She gave us some very good direction on sweaters that she would like to see, an addition to our sweater assortment. That’s always a critical category for holiday and frankly, I think we have a really good strategy for that going forward.

But overall, she’s very pleased with the aesthetic direction of the brand. You know, we have always been a causal brand. I know we have the reputation of being a classic, refined brand, but we’re about refined sportswear here, and so casual has always been an important part of Talbots. And that’s where she wants to see more from us.

Janet Kloppenburg - JJK Research

Anything on price? I mean any consideration of tweaking the price strategy a bit?

Trudy F. Sullivan

We say probably in our better opening price structure. And what we did see from this research is that the price/value perception got better in 2008 than it had been in 2007. We are very focused on staying classic and staying in this price range.

We do have a classic pyramid. I mean, we have the top of the line. But the majority of our business is driven by kind of the base and the core of the assortment.

Janet Kloppenburg - JJK Research

And could you update us on how you’re doing in obtaining that customer. Is there any difference in shopping pattern with the Internet versus the stores?

Trudy F. Sullivan

Our Internet business has been good. Obviously we’re on a quest for a customer who is mid-40s, will bring the age and the brand down slightly. But we are very, fiercely loyal to our core customer. She is the one that is shopping with us, she stays with us through thick and thin. So number one, we want to keep her happy.

We are seeing, we successfully reactivated customers that haven’t shopped in the brand in the last three to five years. We are pleased to see that activity picking up. This will be a build over time, especially in a period where customers aren’t high on trial right now, but I think we’ve done some very clever things and you will see some more very clever things as this season progresses in terms of how we are attracting this mid-40s customer into the brand.

Operator

Your next question comes from Marni Shapiro - The Retail Tracker.

Marni Shapiro - The Retail Tracker

It seems to me you guys have had some different marketing and PR, whether around Michelle Obama or the most recent windows, it feels much more current, it feels a little bit more useful without being young. I know you are putting a very careful watch on your expenses, so if you could just talk to us a little bit about things like marketing for next year and catalogue circulation for next year, because clearly that’s how—that will help get her into the store.

Trudy F. Sullivan

Look, we’re doing some very innovative things that frankly aren’t a huge investment but creates some great buzz. So obviously we are thrilled that Michelle Obama engaged in the brand. We ran a really great contest for Valentine’s Day. We really are using things, even like Facebook and blogs and outreach programs that are very different for this brand, in order to attract a new customer in. And we will continue on the reactivation side. We are really prioritizing consumer facing spend.

In terms of catalogue circulation, the one part of our circulation that wasn’t successful in 2008 was really the amount that we had invested in prospecting circulation. We got much better results with reactivation. So we have rationalized that for 2009. We have brought our circulation down in terms of not doing as much prospecting circulation. We will use these grass roots efforts to attract a brand new customer in and we will prioritize our spend with the house file and with the reactivation circulation.

We don’t have unlimited resources and we are extremely, extremely focused on expenses. We’re also focusing on our windows. We have miles and miles of windows in our stores and so because we have this beautiful creative that we are creating for the catalogue, we are able to import that over into our stores with a much stronger visual impact.

We have also prioritized locations so we really are segmenting stores with the best possibility for return on these kinds of investment and really prioritizing the spend there.

Marni Shapiro - The Retail Tracker

Could you just talk a little bit about the women’s and the petite businesses versus the core misses business and if there is a difference in that customer is spending or if it’s all parallel with each other.

Trudy F. Sullivan

It’s pretty parallel. Women’s might be slightly stronger because we’re one of the few providers of great fashion apparel to that customer.

Operator

Your next question comes from Stacy Pak - SP Research.

Stacy Pak - SP Research

Can you comment some on dresses. I’m curious, I was in a couple of your San Francisco area stores and they did not have the dress that Michelle Obama was photographed in and I’m wondering are you getting that to stores. And just in general, how are those floral, I think very pretty dresses, selling? And how do you feel about the April and May deliveries, particularly with regard to the dress category? The more feminine side.

Trudy F. Sullivan

Dresses are great. The floral dresses have been really strong. We might have sold out in the stores you in in San Francisco because obviously we had a great reaction to that particular dress. But we are really pleased with our dress business. We think April is a great assortment and we’re even more excited about May.

Stacy Pak - SP Research

Are you expanding dresses as a percentage of the business? And I guess what I’m getting at is it something that can kind of help the comp run rate going forward here. It seems like it’s a really strong trend and you have the right look. And I’m wondering how much more of that you can get in the store and how quickly?

Trudy F. Sullivan

I think we have a great position on dresses, but candidly, we’ll sell a lot more t-shirts and shorts and capris and sweaters. And so we’re really pleased with how our dress business is going and we’re able to react nicely and I think we have a great flow but it’s never going to drive the comp, so to speak. But we’re very pleased with it.

Stacy Pak - SP Research

Can you share what it is or at least how much it’s up as a percent of the business going forward here into Q2 versus last year?

Trudy F. Sullivan

In another few weeks we’ll come back and give you all that information, when we do the first quarter earnings call.

Operator

Your next question is a follow-up from Betty Chen - Wedbush Morgan.

Betty Chen - Wedbush Morgan

In your opening remarks you talked about the loyalty program and the three-tier system, could you give us a little bit more color around how that’s been doing in terms of, like you said, maybe signing up some of your last customers and how that’s been turning for your more loyal customers, if they’ve been able to upgrade it to the highest level. Because it does seem like their purchase activity, in terms of overall sales, continues to increase as Mike had mentioned, year-over-year.

Trudy F. Sullivan

We just launched the program in January so I think it’s premature to give you definitive results. We really are pleased with the fact that we are able to access the non-Talbots customer into the loyalty program, so that’s been very favorably received. And we actually have seen activity with our Talbots’ customers migrating up to the highest level. So the initial results are very promising but it’s early days. And I promise when we come back on the first quarter call we will give you some information.

But I would say we are pleased with the early results.

Betty Chen - Wedbush Morgan

And it does sound like the dress category continues to trend down, as you mentioned, and we will continue to see the May floors that come out even better. The Q4 inventory level was obviously very clean coming out of that quarter. Could you remind us what are the inventory plans for Q1 as well as the rest of the year? I believe at one point you had mentioned that it could continue to be down double digit. Is that correct?

Michael Scarpa

We would expect our inventory in Q1 to be down, you know in the 10% range. And for second quarter probably more in the 18% to 20% range. We looked at obviously what we could do from an inventory position perspective in Q1, based on our Q4 results, and our planning process but we weren’t able to catch everything that we wanted to.

But I do feel comfortable with the double digits down.

Operator

Your next question is a follow-up from Jennifer Black - Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

I wondered if you could give us your thoughts on the accessories as a category. And then are there any new areas in accessories you’re looking at? And then I wondered if you could comment if there were any differences in the geographic regions and also, I think on the last call you said that the upscale malls were affected more negatively.

Trudy F. Sullivan

We are big believers in accessories as a growth category for us. We particularly are aggressive in the scarf category. We’ve had very strong results there. We are also pursuing the jewelry category aggressively. So those would be the two big winners. I would put scarves right up there. We have been consistently strong in our scarf selling, really all the way from holiday forward.

And we’re re-engineering the whole process of accessories. We’re much more coordinated to the line. We’re also working very hard in the handbag category. We have a way to go there but it’s very promising what we have coming up. So accessories as a whole look strong.

I guess the only category I didn’t mention in accessory is shoes and we are in the process of really pushing the quality and comfort of our shoes and rationalizing the assortment there. It happens to be a category our Talbots customer loves and we are trying to really understand how to bring it to her in a more effective way. So stay tuned on that one.

And then your second question was on the geographic businesses. Actually our business in the South and the West has been a little bit more challenging than some of the other regions. I will tell you, weather has effect on people’s emotions and shopping and as the weather trends have moderated we have seen the regions such as the South and South Central also get somewhat better. The Northeast has been a little bit more challenged from a weather perspective.

Operator

Your next question is a follow-up from Neely Tamminga - Piper Jaffray.

Neely Tamminga - Piper Jaffray

Michael, tax rate. So am I understanding correctly is that 0% is what we should be using for Q1 and should we be applying that for the balance of the quarters of this year, if we’re assuming losses?

Michael Scarpa

Actually there will be a slight tax expense to the tune of a couple of hundred grand and you should be modeling that out for the whole year even though I haven’t given you full year guidance.

Neely Tamminga - Piper Jaffray

Per quarter?

Michael Scarpa

Right.

Neely Tamminga - Piper Jaffray

Did you actually give the D&A and capex numbers of what you’re planning for this year?

Michael Scarpa

Capex, net of landlord allowances, was $22.0 million.

Neely Tamminga - Piper Jaffray

And then D&A?

Michael Scarpa

We haven’t given full year D&A guidance.

Neely Tamminga - Piper Jaffray

It would be helpful considering we had to pull Jill out, etc. And then also any sort of guidance you can give, I mean, are you at least directionally thinking you will be free cash flow positive this year?

Michael Scarpa

Just to give you a little guidance on D&A, it will be in the $75.0 million to $80.0 million range. And we look at it, if we were able to generate positive cash, given the year that we’ve had in 2008 our goals and objectives for 2009 would be to be positive.

Operator

This concludes our Q&A session.

Trudy F. Sullivan

First, may I thank each and every one of you. We really appreciate your comments on the merchandise, so keep watching us closely and keep passing those comments along. We feel we are making progress and we are proud of what we’ve done. It’s a long process to turn around a brand but we have a number of positive signs and we are encouraged and we are convince that as the world gets better we will emerge a much stronger and profitable brand. And so thank you. Keep shopping. We’re staying the course. Thanks for being with us tonight.

Operator

This concludes the Talbots Inc conference call. We will now proceed with the full forward-looking statement.

In addition to the information set forth in this press release, you should carefully consider the risk factors and risks and uncertainties included in the company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, as well as in this press release below.

This press release contains forward-looking information within the meaning of The Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as expect, achieve, plan, look, believe, anticipate, outlook, will, would, should, guidance, or similar statements or variations of such terms. All of the information concerning our financial outlook and prospects, future access to credit facilities, future cash flows and cash needs, and other future financial performance or financial position, constitutes forward-looking information. Our forward-looking statements are based on a series of expectations, assumptions, estimates, and projections about our company, are not guarantees of future results or performance, and involve substantial risks and uncertainty, including assumptions and projections concerning our regular-price and markdown selling, operating cash flows, liquidity, and funds available under our credit facilities for all forward periods. All of our forward-looking statements are as of the date of this release only. The company can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. The company does not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this release, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. An occurrence of or any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this press release or included in our periodic reports filed with the Securities and Exchange Commission could materially and adversely affect our continuing operations and our future financial results, cash flows, prospects, and liquidity.

Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the following risks and uncertainties:

The material impact on our business, continuing operations, and financial results of the significant deterioration in the U.S. economic environment, including continued substantial negative impact on consumer discretionary spending and, if such economic conditions continue or worsen, can be expected to continue to have an increasing impact on our business, continuing operations, liquidity, and results of operations;

The company's decision concerning, and the risks and uncertainties associated with, the decision to pursue a sale or disposition of the J. Jill brand business, including the timing, ultimate consummation, consideration which may be received, and other terms of any such sale or disposition;

The ability to access, on satisfactory terms or at all, adequate, additional financing and sources of liquidity necessary to fund our business and continuing operations and to obtain further increases in our credit facilities as may be needed from time to time;

Satisfaction of all borrowing conditions under our working capital credit facilities, including accuracy of all representations and warranties, no events of default, absence of material adverse effect or change, and all other borrowing conditions;

Ability to obtain extensions of our commitment dates and maturity dates of our existing credit facilities;

Consummation of any sourcing transactions;

Risk of ability to purchase merchandise on open account purchase terms at existing payment terms and expected levels, and risks and uncertainties in connection with any need to source merchandise from alternate vendors;

Risk of impairment of goodwill and other intangible and long-lived assets;

Any disruption in our supply of merchandise;

Ability to reduce spending as needed;

Ability to achieve our 2009 financial plan for operating results, working capital and cash flows;

The risk of continued compliance with NYSE continued listing conditions, including thirty day average of $1 trading price and $75.0 million market capitalization and stockholders’ equity, and other continued listing conditions;

Future store closings and success of and necessary funding for closing underperforming stores;

Ability to successfully execute, fund and achieve the benefits from our strategic initiatives and restructuring and cost savings initiatives;

Ability to accurately forecast future sales, cash flows, and other future financial results; and

Customer acceptance of our new merchandise offerings including our spring, summer and other seasonal fashions.

In each case, actual results may differ materially from such forward-looking information. Any future public statements or disclosures by us which modify or impact any of the forward-looking statements contained in or accompanying this release will be deemed to modify or supersede such statements in or accompanying this release. Certain other factors which may impact our continuing operations, prospects, financial results, and liquidity, or which may cause actual results to differ from such forward-looking statements, are also discussed or included in the company's periodic reports filed with the Securities and Exchange Commission and available on the Talbots website at www.thetalbotsinc.com under "Investor Relations”. You are urged carefully to consider all such factors.

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Source: Talbots Inc. F4Q08 (Qtr End 01/31/09) Earnings Call Transcript

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