The Talbots, Inc. Q2 2009 (Qtr End 8/1/09) Earnings Call Transcript

The Talbots, Inc. (TLB)

Q2 2009 Earnings Call

September 9, 2009 10:00 am 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

Analysts

Todd Slater - Lazard Capital Markets

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Janet Kloppenburg - JJK Research

Betty Chen - Wedbush Morgan Securities Inc.

Marni Shapiro - The Retail Tracker

Richard Jaffe - Stifel Nicolaus & Company, Inc.

Kimberly Greenberger - Citigroup

Tracy Kogan - Credit Suisse

Neely Tamminga - Piper Jaffray

Presentation

Operator

Good morning, ladies and gentlemen. On behalf of Talbots, we would like to welcome you to the Talbots, Inc. conference call covering its second quarter 2009 earnings results. (Operator Instructions)

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

Julie Lorigan

Thank you. Good morning, everyone, and welcome to the Talbots, Inc. second quarter 2009 earnings conference call.

Today we have with us Trudy Sullivan, President and CEO, and Michael Scarpa, Talbots' Chief Operating Officer and Chief Financial 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 outlooks 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 included 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 September 11, 2009. The webcast will also be available on the Investor Relations page of our website.

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

Trudy F. Sullivan

Thank you, Julie. Good morning, everyone, and thanks for joining us.

Today I will discuss Talbots Inc. results for the 13 weeks ending August 1, 2009. Mike will cover our financial performance, and then I will make some closing remarks and we will take your questions.

In this challenging environment we've taken a number of actions to aggressively manage those areas within our control and improve our performance. We're pleased with our progress as these actions are beginning to more fully benefit our business, particularly in the areas of improved merchandise, brand-building, inventory management, expense control and sourcing practices, all of which contributed to significantly better-than-expected second quarter operating results.

We narrowed our operating loss sequentially for the second quarter in a row and believe there is even further benefit to both SG&A and gross margin in the second half of the year, which Mike will talk more about in a moment. First, let me walk you through other components of the quarter.

Our second quarter sales results came in as expected and reflect the continuation of lackluster customer shopping behaviors. Although we have seen little evidence that suggests the environment will be materially better as we look to the back half, we are wrapping around easier comparisons.

When our customer did shop during the quarter the key items under $100 continued to be a main driver of sales. That is not to say, however, that she is buying just basics. Actually, the more emotional fashion items were in demand and anything novel, such as dresses, sweaters, scarves and tops with feminine details, special embellishments and trends, performed well.

Importantly, we cleared through our inventory and entered the fall season with total inventories from continuing operations down 29% compared to last year.

We've approached the fall armed and ready. First and foremost, we believe we have a compelling merchandise assortment, which includes the debut of our three new pant fits - Signature, Heritage and the Classic Side Zip, something our customers had asked for and something for everyone.

All of our efforts are coming together nicely, and we are seeing improved selling trends. Although August is a small transitional month, customer response to our floor set was good, with our August catalog performing ahead of our expectations and last year.

And customer response to our September catalog, our largest book of the season, is also off to a good start, with selling trends continuing to improve thus far in the month across all of our channels.

We are most pleased with the evolution of our merchandise and excited with our customers' response to fall; however, we are not projecting a sustainable turn in our sales trends as the economic environment remains uncertain. We will continue with our conservative posture and stay the course with our efforts to tightly manage inventory and costs and drive improved efficiencies throughout the organization. In other words, over the near term we will continue to maintain a laser focus on those aspects of our business within our control as we look for steady progress. Our proprietary research shows our best customers recognize the improvements we have made to our product and brand experience.

Fall so far validates our efforts. This fall we've planned an innovative marketing strategy and are executing a number of new grassroots programs, including increased customer outreach and incentives, along with prospecting with our September catalog to broaden our reach beyond our core customer and reactivate [those] customers.

We are also participating in a number of industry events as well, including Fashion's Night Out, Vogue shopping night on September 10th, which we are hosting at our Madison Avenue flagship store. So those of you in New York City are cordially invited. Also, in a strategic partnership with MORE Magazine, we are a key sponsor for this year's Reinvention Convention, which will take place in New York City on October 6th.

As part of our fall marketing campaign we are proud to feature two of our favorite style icons - Katherine Hepburn and Grace Kelly - as we welcome back the pants this season in stores, catalog and the web.

Through these coordinated efforts we are addressing our customers with clear and strong messages regarding our fall merchandise offerings. In addition, we are moving forward with key corporate initiatives that are critical to the future success of Talbots.

In early August we had a small re-launch of our Talbots online website. This new platform offers much greater functionality, so our customers can now shop seamlessly across all three channels. The visuals, navigation and product information are enhanced, with a particular emphasis on personalization of content and recommendations. This new platform gives us improved segmentation of our customer file.

Overall, this was an important strategic investment for Talbots as we have seen a shift in demand away from catalog towards the web. At the end of the second quarter, Internet sales represented approximately 75% of our total direct business compared to 69% last year.

Moving on, also during the quarter we entered the upscale outlet business, opening 10 upscale outlet stores. The customer response to this new concept has been very positive to both product and store environment, and to date we have added over 3,000 new customers to our database. Overall we believe this concept has great growth potential that can generate strong profitability.

And in July we completed the sale of J. Jill to Jill Acquisition LLC, an affiliate of Golden Gate Capital, a San Francisco-based private equity investment firm, and have closed the 75 stores that did not transition with the sale.

Lastly, in August we formed a strategic alliance with Li & Fung to act as our exclusive global apparel sourcing agent for substantially all of our apparel business. We feel very good about this partnership and are pleased that our vendor community is fully on board. A transition plan is in place and we are on track to complete critical milestones by mid-September, at which time Li & Fung will assume responsibility for orders. It is important to note that we continue to directly control all creative and design functions. We are confident in maintaining the superior quality that our customers value so much.

These are all exciting programs that we've executed in alignment with our strategy to reinvigorate our brand and restore our profitability.

And that leads me to a new initiative that we have recently launched in our stores' organization. As you all know, John Fiske was appointed Head of Stores for Talbots in March. He has visited over 150 stores across 24 states to conduct an evaluation of the in-store experience both from the customer and sales associate perspective. His observations resulted in a set of key initiatives designed to further enhance customer service and drive improved in-store productivity, with a strong emphasis on strengthening our relationship with our core customers as well as building new clientele.

Specifically, in late August we rolled out in all stores an enhanced selling skills program designed to reinvigorate our selling culture. By fully integrating the selling and customer service processes we believe this program will enable stronger customer engagement and improve the overall shopping experience.

We have also stepped up our store associate retention program. We feel this is a great motivator, with strong potential to drive increased sales throughout the chain.

Finally, we have formalized a productivity standard to measure each of our associates' performance. We are providing the right tools for our sales associates to be more effective.

All of these actions will foster a stronger relationship with our customer and will create a positive and compelling shopping environment that reflects the Talbots brand, which we believe will drive further top and bottom line improvement.

Before Mike reviews the financials, I would like to announce that Michael Smaldone, our Chief Creative Officer, has recently been accepted into the Council of Fashion Designers of America. The CFDA is a not-for-profit trade association who by invitation-only membership consists of more than 300 of America's foremost fashion and accessory designers. With over 20 years of design and brand-building experience, Michael's acceptance further extends Talbots' recognition as a design-led brand. He joins a notable group of designers and brand architects that include some of America's most-admired brands. Congratulations, Michael.

Now I would like to turn it over to Mike.

Michael Scarpa

Thank you, Trudy.

Turning to the details of our second quarter, total sales from continuing operations were $305 million compared to $395 million last year. Retail sales were $255 million compared to $334 million last year. This decrease was driven by a 24.9% decline in comp store sales for the 13-week period. Direct marketing sales in the second quarter, which include catalog and Internet, were $50 million compared to $61 million last year.

Second quarter cost of sales, buying and occupancy was 72.3% of net sales versus 70.5% last year. This deterioration was primarily due to buying and occupancy deleverage of 410 basis points offset by a 230 basis point improvement in merchandise margin. This performance was well ahead of our guidance.

Selling, general and administrative expenses in the second quarter were $95 million versus $125 million last year, representing a $30 million or 50 basis point decline. This decline was due to the execution of our expense reduction program, which tracked above our guidance of a 20% reduction from last year.

Despite a $91 million decline in sales our second quarter operating loss excluding restructuring and impairment was $10.5 million compared to a loss of $8.2 million last year. This performance validates that our initiatives are appropriate and working as we continue to narrow the gap in our operating loss.

In discontinued operations the net loss was $4 million or $0.07 per share compared to last year's net loss of $13.1 million or $0.25 per share.

Moving to the balance sheet, we continue to make solid progress in taking costs out of our operations through supply chain and overhead initiatives that are directed at driving efficiencies as well as improving our working capital and operating cash flows. As a result, our cash flow from operating activities at the end of the second quarter was $41 million despite the operating losses generated.

As a result of the decrease in sales we ended the second quarter with total accounts receivable of $163 million versus $200 million last year. Our receivables remain in excellent condition.

Our continued focus on aggressively managing inventory levels resulted in total inventory from continuing operations of $145 million, down 29% to last year. On a two-year basis our total inventory levels from continuing operations are down approximately 46%. We believe these levels serve us appropriately as we enter our fall season, allowing our business in the third quarter to be driven by new receipts and fall forward goods.

Our total debt outstanding at the end of the quarter was $497 million compared to $383 million in the same period last year.

We ended the quarter with a cash balance of $113 million. This includes net cash proceeds from the sale of J. Jill which will be used to fund outstanding obligations, including lease termination fees associated with the 75 retained leases as well as a final working capital adjustment to be settled in the third quarter of this year. Excess cash proceeds from the sale of J. Jill will be used to pay down related-party debt as required in our loan agreements with EON.

With the addition of our new $150 million revolving loan facility announced earlier this year we believe we have excess capacity to fund our planned working capital needs. Currently we are undrawn on this facility.

Capital expenditures from continuing operations in the first six months of the year were $13 million compared to $20 million last year. Our capital expenditure plan for 2009 is currently forecasted to be approximately $22 million compared to $45 million last year.

In terms of our six-month operating performance I would ask you to please review today's press release for the financials.

Turning now to our third quarter earnings expectations, at this time we are projecting an adjusted loss per share from continuing operations excluding restructuring and impairment to be in the range of $0.24 to $0.30 compared to an adjusted loss per share of $0.23 reported last year. We are currently planning for total sales to be down in the range of 14% to 17% compared to last year's third quarter.

Cost of sales, buying and occupancy rate is expected to improve by approximately 50 to 150 basis points compared to last year, driven by a solid improvement in merchandise gross margins.

SG&A expenses for the third quarter are expected to be down approximately 50 to 100 basis points compared to last year, reflecting our cost reduction initiatives offset by certain investments in marketing, including the re-launch of our website. In absolute dollars, SG&A will be reduced in the low $20 million range compared to last year.

While our posture remains conservative given the uncertain environment, we look for continued steady progress, particularly in the areas of expense reduction and gross margin improvement, as we gain greater benefits from several of our initiatives. Our priorities remain expense management, liquidity and cash flow and reaching profitability.

Thank you and let me turn it back to Trudy.

Trudy F. Sullivan

Thanks, Mike.

In summary, we're in a much stronger position today than we were when we talked last quarter. We have accomplished a great deal in managing the near term, we've completed key corporate initiatives that will benefit our long term, and we launched a new store initiative to drive increased productivity and significantly improve our operating performance.

We have a lot of work ahead of us and we recognize the challenges imposed by the uncertain economic environment, but we are managing conservatively and continue to take the appropriate actions to best position the business. I am proud of what we have accomplished over the last year in particular and of the dedication and commitment of our associates. Everyone at every level has stepped up to the plate and worked hard to re-energize our brand. As always, we remain confident in our long-term success.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Todd Slater - Lazard Capital Markets.

Todd Slater - Lazard Capital Markets

I love the marketing of the three new pant fits, by the way, and I like the $5 try-on offer. It seems like it's working.

But, Trudy, about the merchandising, to me the store looks better, but also it seems very flat and kind of conservative. Dresses don't look that important in the assortment at the moment. The store looks kind of solid. And to me the denim is - unfortunately, it's kind of a step backwards in one of the strongest denim trends in a long time.

So I'm trying to be constructive here, but I'm wondering what direction you're taking the brand. Is it more fun and assorted over time or is it more basic and narrow, and can you get back to double-digit operating margin on safe and traditional and predictable?

Trudy F. Sullivan

Well, Todd, that's a mouthful, so first of all thank you for the positive on the $5 incentive and yes, it has worked extremely well.

We are a brand that's rooted, as you know, in classics and we talk about this as tradition transforms. And so you're always going to see in our assortment what we call the Talbots always piece, which our customers absolutely love and expect to see in every season. Obviously, we do not see it as safe. We see it as part of our heritage and it must be there.

The re-launch of pants has been nothing short of terrific, to tell you the truth, and that is the big initial thrust for our fall merchandising. But I have to tell you that our business is being driven not only by pants but also by jackets and sweaters, and those are the key winning categories for Talbots - always will, always have been. So we're actually quite pleased.

And, yes, we think on this assortment, with this quality level and the kind of choice and fresh flow that we are now bringing to our customers we can get back to double-digit operating levels.

Todd Slater - Lazard Capital Markets

I guess my second question goes to Mike. Excellent job on the SG&A line and, to Trudy's point, with a more efficient cost structure now, what type of productivity as in sales per square foot would the model require to return you to double-digit operating margins? I'm assuming you don't believe that that level of seven or eight years ago is out of the question.

Michael Scarpa

Well, we definitely do not believe that is out of the question.

We look at a sales decline for the quarter of 23% and basically in a position where, from an operating margin perspective, we lost $10 million. So to drop $90 million in sales and lose $2 million more than we did the prior year tells us we're heading in the right direction.

As I look at guidance in the 14% to 17% range for Q3 and backing out what we're looking at from an interest and a tax perspective of, call it $8 million, we're looking at operating losses in the $5 to $8 million range. So we're definitely making progress.

As I look at sales and I look at productivity, obviously we want to get back to the point where we're trending positively from a comp perspective. And we believe if we can get to that positive comp that, with the right cost structure now in place, the right sourcing organization and the right focus on operating margins and markdown control, that we can get there.

Todd Slater - Lazard Capital Markets

But is there a productivity or sales per square foot goal that you'd like to get to that tells you in your model you get back to that double-digit operating margin type of level if you got productivity up to $400 or $425 or whatever the number is from where you're at now?

Michael Scarpa

When we look at where we are on a gross square footage basis, definitely a 20% increase in that number should get us very close to where we want to go.

Operator

Your next question comes from Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

My first question is really on the taxes. How should we be looking at the taxes for the back half and then into '10? Is it just no taxes?

Michael Scarpa

We put a valuation allowance up in the fourth quarter of last year and we're modeling currently to run taxes at around the $0.5 million mark on a quarterly basis. We need to show profitability, sustained profitability, for us to reverse that valuation allowance, so I would model out into '10 that we would be looking at approximately about $0.5 million on a quarterly basis.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

And then a quick question on the SG&A for the third quarter. The guidance is low $20 million range, but you just came off a quarter that was down $30 million and it would seem that a lot of the changes that you've made should push forward into the back half. Is there a reason why we don’t see as much dollar decline?

Michael Scarpa

There's two major components to that.

One is the reinvestment that we're making in marketing expense in the third quarter, including the launch of the website, so there's expenses associated with that.

And the second one is that, if you looked at our 10-Q from last year, under SG&A there is a comment that we changed our vacation policy in the third quarter which resulted in a reversal of approximately $7.3 million of vacation accrual. So last year's SG&A line got the benefit of that $7.3 million.

Excluding those two factors we'd be running at a better pace than what we did in the second quarter.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

So we should see that go back to kind of the $30 million decline in the fourth quarter - $30 million plus?

Michael Scarpa

While we're not giving guidance, I'd say that that's appropriate.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

When do we see the impact - I guess if Li & Fung is contractually taking over at the end of September, do we have like a nine-month lead time before we see the benefits to AUC and how much in sort of basis points should we be looking at in 2010?

Michael Scarpa

Well, I'll tell you that from an IMU perspective Li & Fung should play a major role starting with our summer season. But I will also tell you that we're still in the process of modeling out our 2010, so I'm not prepared to talk about that.

Operator

Your next question comes from Janet Kloppenburg - JJK Research.

Janet Kloppenburg - JJK Research

A question on the cost of goods sold. The merchandise margin improvement of, I think, 230 basis points, Trudy, did that all come through lower markdown rates? Is that how that was derived?

Trudy F. Sullivan

No, the majority of it really came from effective sourcing practices.

Michael Scarpa

It really was I'd say almost evenly split between the sourcing practices and markdown control that we've put into the business.

Janet Kloppenburg - JJK Research

So do you expect that both of those factors could have a great effect on the business going forward? And then do we layer in additional benefit because of Li & Fung starting, I think you said, in the summer, Mike?

Michael Scarpa

I would anticipate that we would continue the progress pre-Li & Fung and continue it afterwards in terms of IMUs.

Trudy F. Sullivan

Also, Janet, I think you should realize that our inventories are really in terrific shape as we go into the fall season. We're really working on increasing the penetration of full-price sales and the fresh flow of product for the customers, and I feel we're really in excellent shape this far into the quarter and as we go forward.

Janet Kloppenburg - JJK Research

And, Trudy, can you talk a little bit about the correlation between the catalog business - or let's say the direct business now that it's mostly Internet - the direct business and the retail store sales? It sounds like the direct business is running at a much better rate than the stores, and if you could maybe explain that, if there's a lag there, and is there a greater selection in the catalogs, etc.? Maybe you could help us understand that relationship and what effect it should have on comps as we go through the rest of the quarter.

Trudy F. Sullivan

First of all, Janet, the stores and the direct business are running almost comparable, so there isn't that big a lag.

There is a broader - and in the quarter the retail business was slightly worse than direct. But what we're seeing now is that they're running closer, number one. We always have a broader offering in our catalog in terms of numbers of styles offered; there are certain key categories that we really emphasize in direct such as refined, such as shoes, where we can carry broader numbers of styles. And so there is a bit of a broader style selection. But the marketing emphasis and the brand moment, if you will, are the same in all channels.

And this particular launch of our pant initiative we very effectively used our direct channel to actually drive customers into the stores. We were very pleased with the connectivity between our efforts in direct and stores.

Janet Kloppenburg - JJK Research

Could you also talk, Trudy, a bit about your emphasis more on casual away from refined, if that is the case, and perhaps what level of the mix is casual versus last year and refined as well. And also if you could give us some comments on what's happening in the refined segment of the business.

Trudy F. Sullivan

First of all, the way we look at it, Janet, is our penetrations in what you would probably call refined versus casual really haven't changed that much; we look at it all as sportswear. So we have a spectrum of sportswear that does range from casual to more refined, and we're seeing, frankly, good results. We have pants on all sides of the spectrum; they're working. Jackets on both sides of the spectrum are working. Sweaters on both sides of the spectrum are working. So we don't really measure it in terms of more traditional suited versus casual.

We are a brand that carries a broad classification structure and both our classification structure and our pricing structure are really well within our historical viewpoint. So as a brand we tend to skew a little bit more to the casual as you would define it, but we do have a good offer across that whole spectrum.

Janet Kloppenburg - JJK Research

And just, Mike, if you could comment on your SG&A projections and what level of bonus accrual they may include this year versus last year?

Michael Scarpa

We made significant progress through the $150 million expense reduction program that we announced at year end. We're currently tracking at the $135 million against the $150 million and feel very good about the progress we've made.

As far as bonus accruals, we might have mentioned in previous disclosures that we have eliminated all merit increases for this year and have eliminated all bonus programs for this year.

Janet Kloppenburg - JJK Research

So that might be something that could affect SG&A next year but not this year?

Michael Scarpa

Well, we're always in the hope that as we look at SG&A increases associated with bonuses that the operating income line would more than cover any kind of offset that a bonus would offset it by, so our sense is that if we do begin to offer bonus programs that they'll be at the appropriate level of operating income targets.

Operator

Your next question comes from Betty Chen - Wedbush Morgan Securities Inc.

Betty Chen - Wedbush Morgan Securities Inc.

Trudy, I was wondering if you can give us a little bit more color on the product side. I know you mentioned that the customers really reacted well to key items under $100 as well as your pant and jacket. Could you give us some more color on refined versus casual; obviously with the seasonality there's probably different interest around those two categories.

And then also I'd be curious to hear how the customer is reacting to the outlet division, which appears to be very strong initially.

Trudy F. Sullivan

Well, I'll answer the second part of your question first, which is customers are responding very nicely to the new outlet division, as I said in my opening remarks, both in terms of product content and the store environment, so we're quite pleased with how we've launched into that business.

Again, Betty, as I answered Janet's question, we carry a pretty broad spectrum between refined and casual. Different months have different characteristics, obviously. As we go into third quarter, the refined end of our business always has a bit higher penetration than it would, for example, in second quarter.

But the key initiatives that we have again in classifications such as jackets, sweaters and pants are doing very well, both at the casual and refined level. These are the big fundamental categories for the Talbots brand, and for them to be off to a strong start is a very promising indicator as we go forward in the season.

Betty Chen - Wedbush Morgan Securities Inc.

Any color around accessories, Trudy? I think you mentioned scarves are doing well.

Trudy F. Sullivan

Scarves are doing very well and this is an initiative that we really - you know, scarves are iconic to the Talbots brand. We've put a lot of effort behind it over the last several quarters, and we're very pleased with the results there.

We also, I believe, have even great opportunity in categories such as jewelry. I believe it's an opportunity for Talbots to increase its penetration in the non-apparel segment. We're under penetrated vis-à-vis other brands that you would look at.

But we're quite pleased with scarves, quite pleased with the performance in jewelry. We have taken a new approach to our shoe category which the Talbots' customer absolutely loves, and we're pleased with the early indications of what's happening there.

So we have solid opportunity in non-apparel.

Betty Chen - Wedbush Morgan Securities Inc.

As for the outlet, are you seeing a different profile in the customers so far and any sort of variance between what they're buying versus in the retail stores?

Trudy F. Sullivan

It is a different customer. We're definitely seeing that we're attracting a whole new segment into Talbots. You would expect - the categories that are performing are what you would expect in second quarter. We had strong performance on knits, strong performance on sweaters, strong performance on pants and shorts. So it is as you would expect it to be and so far has been really promising.

Operator

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

Marni Shapiro - The Retail Tracker

I have one bigger question and I wasn't paid or swayed to ask this. It sounds like a lot of things are moving in the right direction - product-wise the stores look good, your sales associates have been in very good moods lately, your website looks great - so I'm curious. You've really pounded the pavement with your grassroots marketing and with the windows and, to a degree or a lesser degree, with your direct mail, maybe a little more through e-mail. Is it time to start thinking a little bit bigger and could it be holiday that we see more of a national-type of campaign or maybe a little bit more of a push to get that incremental shopper in, not the core Talbots' shopper? Because it seems that's where there's still a lot of opportunity that hasn't been tapped.

Trudy F. Sullivan

Well, Marni, that's a really good question, and I would tell you that we are very much in the walk before we run stage there. As I said in the opening remarks, we are really focused on returning this brand to profitability, and we have a lot to do between now and the end of the year. I would like to say that we certainly think about it, we strategize when we would kind of throttle forward on national advertising or those kinds of marketing efforts.

I will tell you we're very pleased with the return we get on these grassroots marketing campaigns, and we did get more aggressive with our September catalog in both reactivation and in prospecting. But we're going to see how the season develops. It's still an uncertain world out there. We still feel it's very important to stay extremely focused and extremely conservative and get through the next several quarters.

That's not to say, though, that - we are prospecting and we are reactivating. And some of these grassroots programs have been extremely effective. We're quite pleased with reaching a new customer that way.

Marni Shapiro - The Retail Tracker

Can you just bring us up to speed for the back half of the year of stores that you plan to open and close and the square footage you expect to have at the end of the year?

Trudy F. Sullivan

All of our store openings really this year is focused on the outlet, so by the end of the year we'll have 16 of the upscale outlets opened and five more in this quarter.

Marni Shapiro - The Retail Tracker

And then any stores closing through the rest of the year?

Michael Scarpa

We have approximately 13 stores that we'll be closing in the second half of the year.

Operator

Your next question comes from Richard Jaffe - Stifel Nicolaus & Company, Inc.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

A follow-on question regarding the outlets: The upscale outlets, do they have a different inventory than the traditional Talbots outlet stores or at this point are the traditional Talbots outlet stores starting to look like the upscale, that is to say with unique merchandise made for those stores?

Trudy F. Sullivan

The traditional are what we call surplus and they're really that, they're surplus stores. The upscale outlets are products manufactured specifically for those stores. So they have different assortments, Richard.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

So they're continuing to stay true to their respective mission?

Trudy F. Sullivan

Correct.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

What was catalog circulation in 2Q and what do you look for circulation in the second half?

Trudy F. Sullivan

Q2 catalog circulation was down about 25% and Q3 is also down around 25%, but really what's happening is we are prospecting. We eliminated certain books that weren't productive last year and we put prospecting predominantly into the 12 to 18-month buyer file, where a year ago we had gone as deep as 24 months. The results in the 12 to 18-month was two times better than the deeper file, so we have prioritized our spend there.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

And fourth quarter we should assume the same sort of trend?

Trudy F. Sullivan

Yes, that's [inaudible].

Richard Jaffe - Stifel Nicolaus & Company, Inc.

And I guess just closing costs for the J. Jill stores, can you provide an estimate for that for the 75 remaining stores? I assume that would be charges taken in the second half.

Michael Scarpa

We have not provided an estimate of that, but it's incorporated into our $4 million loss from discontinued ops in the quarter.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

And those stores should be gone? That liability should not go forward into next year, 2010?

Michael Scarpa

Well, we've provided for what we believe is our best estimate of the current liability. All the stores are shut. We've come to an agreement either in writing or have come to agree in terms with approximately 45% to 50% of the stores.

Trudy F. Sullivan

And, Richard, just to add a little color on your question on catalog circulation, we've really pushed a lot into our web in terms of customer contacts, so we have a much more aggressive activity web-based versus just purely in catalog.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

Understood. I was just trying to think of - the savings catalogs are expensive to mail and with the web being so productive no reason to push harder on the catalog side.

Trudy F. Sullivan

We've been pushing very hard on the website.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

And I guess the same component of that, the credit card business. Obviously, it's been historically a very loyal customer. Do you see that level of loyalty continuing - about 40% of your transactions on that card? And any concerns about the quality of that debt?

Michael Scarpa

Well, we see actually a higher percentage. We're in the, call it - I think we ended the first six months around 49%. And obviously there's been a little bit of a slowdown in terms of payment history, but we have an average FICO credit score of over 760 and, frankly, the receivables are in really excellent condition. We're very pleased with the way we're managing them.

Operator

Your next question comes from Kimberly Greenberger - Citigroup.

Kimberly Greenberger - Citigroup

Mike, could you comment on your comp metrics during the quarter - transaction count and average dollar value of a transaction?

Michael Scarpa

Actually I can, but I think I'm going to flip it over to Trudy and let her handle that.

Trudy F. Sullivan

So for Q2 the actual - our traffic was down mid to high teens and our transaction value was down around 5%. And that actually was an improvement over the first quarter.

And as we roll forward into the quarter that we're currently in, quarter-to-date, we've seen a significant increase actually in the numbers of transactions and actually increasing UPTs and a very significant increase in conversion.

So we've seen a steady improvement on these metrics from Q1 to Q2 and then on to Q3.

Kimberly Greenberger - Citigroup

So it's the traffic piece that seems to be the big driver of comp?

Trudy F. Sullivan

The traffic piece in Q1 and Q2, yes. So we have actually seen the traffic metric improve in the current quarter.

Kimberly Greenberger - Citigroup

Trudy, what do you attribute that to?

Trudy F. Sullivan

Well, I could say superior product. I do think that it's just interesting. We have seen that traffic metric that had been particularly tough to deal with in the first half of the year moderate in this quarter-to-date. So we're encouraged to see that. I mean, we did have a very strong reaction to the re-launch of this whole pant fit and the incentive to come in and try and the coordination between all our channels. So we really are encouraged.

For the quarter-to-date we're really looking at sales that are running down about 10%. Now, we're not projecting that for the balance of the quarter, but if we're able - and that's 10% against the strongest comp comparison in the quarter because we really don't wrap around the weak comparisons for another several weeks. So if we're able to maintain the current trend we're on it's a different picture than we're guiding to.

Kimberly Greenberger - Citigroup

Mike, last question for you. Could you give us finance charge revenue in the quarter?

Michael Scarpa

Yes. It was approximately $11 million.

Operator

Your next question comes from Tracy Kogan - Credit Suisse.

Tracy Kogan - Credit Suisse

Two questions - the first is for Trudy. I'm wondering what you're seeing from your customer research. Is it telling you that you've been able to attract a younger demographic at all?

And then the second question is on the marketing spend. I was hoping you could quantify the dollars in the second half versus what they were last year and then also what it was in second quarter.

Trudy F. Sullivan

Well, Tracy, we are seeing a younger customer come into the file, but frankly, in this environment that we're in, which is a low trial environment, it's encouraging but we think it can get better as the environment improves.

I will say we're quite pleased with our own proprietary research on our best customer and also our last customer in terms of their perception of the improvements in the brand. We have some of the best product in stores we've had in over four years, and we just recently completed an update to that research.

So I guess the short answer is first and foremost we're very anxious to take care of our most loyal customer, who's our most frequent shopper, and we're encouraged by her reaction to the improvements in the brand. Secondly, we have a lot of effort out there to attract a new customer into the brand. And those are promising, but they are slower in this environment. But that doesn't mean we're going to back off because it's important for us to bring this customer in as well.

Michael Scarpa

We really don't disclose specific dollars around marketing spend. I will tell you that we will see a decrease in the fall season of approximately 25% in terms of spend, but the absolute dollar spend between spring '09 and fall '09 will be consistent and spring '08 was consistent to that number.

We stepped out in marketing in the second half of the year last year, did a lot of prospecting. And some other catalogs were produced over and above what was produced the previous year and, in looking at the returns on those items, we've cut back on those.

Operator

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

Neely Tamminga - Piper Jaffray

Just two follow ups off of Kimberly's questions.

So, Trudy, would you expect the AUR, the out-the-door sort of average pricing, to be up in the second half, tied more to not having the level of promos that we had last year and just kind of the flash-and-burn strategy broadly out there in retail, or do you think there's some fashion elements that are skewing back towards mix? I'm just curious on your perspective on that.

And then just real quick, too, if Mike or Trudy could talk a little bit more about the Li & Fung changes. It's very intriguing to us over here and just wondering if you could give a little bit more with respect to some process changes, either in like how will it now work between your product development team and does it change the timing of shipments, calendar, or just, you know, what's different and why wouldn't everybody do this, I suppose. So kind of give us a bigger picture perspective on Li & Fung.

Trudy F. Sullivan

Neely, first on your AUR, we do expect it would be up.

And Li & Fung is really - we look at it as a kind of seamless transition from how we run our calendar, our whole product process. As I said in the opening remarks, we retain all decisions around design and creative, and Li & Fung really functions as our sourcing partner.

And so we do that now. We've done that with our own team in-house. Now Li & Fung is our team. So it doesn't necessitate a changing calendar. It enables us to have some cost savings on our end. But our fundamental processes remain intact.

I can't answer your question why wouldn't everybody -

Neely Tamminga - Piper Jaffray

Oh, so you've gone pretty much just from direct to a third-party agency, using them?

Trudy F. Sullivan

We've been direct.

Neely Tamminga - Piper Jaffray

You've just [down-rivered]?

Trudy F. Sullivan

Right.

Operator

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

Todd Slater - Lazard Capital Markets

I was just wondering, could you talk more broadly about which categories, if any, are starting to comp positively because your comps are running down 10 kind of month-to-date. The pants are doing very well. I would imagine there's some actually doing - the category's in the green. And then also which are lagging.

And then on the down 10 so far this month, which is a 15% shift or so obviously from trend to the positive, how much do you think is driven by the Labor Day shift?

Trudy F. Sullivan

I don't think anything in our brand is driven by the Labor Day shift.

And I will tell you that we have our big categories - jackets, pants, sweaters - comping positively in the quarter.

Todd Slater - Lazard Capital Markets

And so what are sort of the laggard categories you think you can get back?

Trudy F. Sullivan

You know, I think we can do - some of it is timing and we've brought some of our kind of heavier weights in a little bit later, so I think we'll see that starting to click in as we're getting into September.

We do have, not to be too specific here, we started some of our accessories, some of our shoe business, even though we've taken a new approach to it that we're pleased, it's not positively comping. However, our scarf business is significantly ahead of last year.

So that kind of gives the color I think you need. I also think there are some categories like outerwear that we might have brought in a little bit earlier last year that are coming now that drive some of the AUR, so our unit comp is more favorable than our dollar comp and that's really just based upon some of the timing of when we're bring in some of the higher AUR categories such as outerwear.

Todd Slater - Lazard Capital Markets

By the way, did I mention your jewelry is phenomenonal?

Trudy F. Sullivan

It is. Thank you.

Todd Slater - Lazard Capital Markets

I imagine that's probably comping pretty well.

Trudy F. Sullivan

It is comping well. We can do better there. There's definitely more opportunity for us.

Operator

Your final question comes from Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

I'm wondering if I missed this. Did you have ending square footage and the number of stores opened and closed in the second quarter?

Michael Scarpa

Okay, so annual closings, we are closing 21. And total openings will be 12. In the quarter itself we closed six stores and opened eight.

From a square footage perspective, in the U.S. we ended about 3.2 million square feet; all in including Canada is 3250.

Operator

We do not have time for any more questions. Ms. Sullivan, please continue with any closing comments.

Trudy F. Sullivan

Well, thank you so much for joining us today. Again, I'd like to just reiterate that we are pleased with the positive momentum that we are currently seeing and the return on some of these initiatives that we've worked very hard to put in place over the last year. So stay tuned. We remain confident and look forward to talking to you all in the next quarter. Thank you.

Operator

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

In addition to the information included as part of this call or as part of our press release issued today you should carefully consider the risk factors and risk uncertainties and other additional information which may cause actual results to differ materially from those forward-looking statements expressed during this call which are included in the company's annual report on Form 10-K and quarterly reports on Form 10-Q as well as our press release furnished today with the Securities and Exchange Commission, all of which are available under the Investor Relations section at our website at www.TheTalbotsInc.com.

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