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Executives

Julie Lorigan – SVP, Investor and Media Relations

Trudy Sullivan – President and CEO

Michael Scarpa – COO and CFO

Analysts

Jennifer Black – Jennifer Black and Associates

Kimberly Greenberger – Citi

Todd Slater – Lazard Capital Markets

Barbara Wyckoff – Jesup & Lamont

Roxanne Meyer – UBS

Marni Shapiro – The Retail Tracker

Stacy Pak – SP Research

Richard Jaffe – Stifel Nicolaus

Susan Sansbury – Miller Tabak

Tracy Kogan – Credit Suisse

Dana Telsey – Telsey Advisory Group

Janet Kloppenburg – JJK Research

Betty Chen – Wedbush Securities

The Talbots Inc. (TLB) Q1 2010 Earnings Call June 8, 2010 10:00 AM ET

Operator

Good morning, Ladies and Gentlemen. On behalf of Talbots, we would like to welcome you to the Talbots Inc. Conference Call covering its First Quarter 2010 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, at which time instructions will follow.

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

Julie Lorigan

Thank you. Good morning, everyone. And welcome to the Talbots Inc. first quarter 2010 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, initiatives, estimated, strategy, and similar terms or variations.

All of our outlook and financial expectations and plans as well as our assumptions underlying this information constitute forward-looking information. 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 June 10, 2010. The webcast will also be available on the Investor Relations website.

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

Trudy Sullivan

Thank you, Julie. Good morning, everyone and thanks for joining us. In a moment I will discuss Talbots results for the 13 weeks ending May 1, 2010. Mike will cover our financial performance and comment on our outlook for the second quarter and full year. After that I will make some closing remarks and then we’ll be happy to take your questions.

Our first quarter results exceeded our expectations. We are pleased with our performance, especially with our sales growth and strong profitability, as the momentum that began in our business last fall continues to gain traction. After 11 quarters of year-over-year sales declines, we have turned the corner to positive sales growth.

Top-line sales grew 4.7% in the quarter driven by a 2.4% comp increase while direct marketing sales increased 26.7% from last year. Total full price selling increased 21% in the quarter and markdown selling declined 31% compared to a year ago.

A few of our other important highlights in the quarter included a strong year-over-year improvement in operating income, which excluding special items was $31.7 million or just shy of 10% of net sales. We also saw a solid improvement in gross margins of 1260 basis points, which resulted from strong IMU, improved full price selling and disciplined inventory management.

We experienced a positive reaction to each of our merchandise deliveries during the quarter. Our customers responded well to our brand appropriate aesthetics, which we refer to as tradition transformed.

Further, in April, we completed our spring 2010 best customer intent to purchase survey, which measures our customer’s perception of our merchandise and creative direction. As such, our net better merchandise score is at a historical high of plus 35%, a very strong improvement over spring 2009.

In the first quarter 2010, customers traffic while sequentially stable decreased 11.3% due in part to a highly promotional first quarter last year. The number of transactions however was only down 5.9% as the rate of conversion increased 6.1%.

Units per transaction were up 3.4%, which when combined with a 5.3% increase in average unit retail drove an approximate 9% increase in dollars per transaction, again reflecting strong full price selling. Our key sales metrics continued to improve throughout the first quarter of 2010 and have sustained thus far in the second quarter.

Further, we are making progress in improving our store sales productivity and believe that we’re starting to benefit from the evolution of our store selling skills program.

In the first quarter, we saw strong sales increases in Style by Design, our personal shopping appointment program, which was up greater than 60% compared to last year, and our large value transaction sales, those greater than $1000 grew over 20% to the prior year. These are encouraging trends in the improvement in our first quarter conversions, UPT, VPT and red line phone orders are proof of our progress.

From a merchandise perspective we saw continued momentum in tops both sweaters and wovens, with novelty across the board particularly strong. Within sports where jackets performed well as did pants due to a healthy key item selling and successful March promotion, which was a spring repeat of the successful pant fit initiative program we launched last fall.

Our accessory business remains strong in the quarter driven by our customers growing enthusiasm for jewelry, scarves, belts and fashion accessories. We continue to believe that accessories represent one of our significant growth opportunities and are planning for further expansion.

Now let me update you on two of our other 2010 corporate initiative, store segmentation and our store refresh and renovation. First, on store segmentation as stated last quarter, we are pursuing an opportunity to increase our sales per square foot productivity by sorting our stores along two dimensions, customer lifestyle and behavior and climate.

We have developed a timeline for systematic roll-out of segmentation across the business. While this is a multi-year initiative, we have a number of elements that will be implemented in the third quarter. Although segmentation will occur across all stores the most notable initial impact will be on the premium stores or our top 100 stores, each will carry elevated merchandise and accessory assortments beginning with the August delivery. In addition, these premium stores will have enhanced and distinct visual packages.

In order to support our segmentation strategy, we will launch our store refresh and renovation program with an initial focus on the premium and classic stores. We will take a phased in approach and have targeted 14 stores in three key markets to undergo a refresh in August 2010.

We will learn, adjust and apply what works from this effort to additional stores in the fourth quarter. These programs begin a multi-year initiative to upgrade the store experience in our retail environment, a crucial component in our brands reinvigoration and in attracting new customers.

Looking ahead in terms of early reads on the second quarter, our comps are currently trending positive, fueled by strengthen artisan tops, pants, dresses, jackets and accessories. In addition, we believe we are appropriately positioned for the promotional activity that is typical for this time period.

Now, I’d like to comment on our marketing plans over the next nine months. Our overall brand marketing strategies will continue to support our mission to attract new and retain core customers, and to broaden our demographic reach. These strategies include rich reward programs for best customers through exclusive targeted offers. We continue to refine our customer contact strategy and have better aligned our brand deliveries across all channels.

Up to this point, we have focused on the majority of our marketing resources on several key areas of opportunity, catalog and the web, and aggressive grass roots PR effort. Given the considerable progress we have made in updating our merchandise and elevating our brand image, we are confident that this is the right time to push forward and accelerate our marketing efforts and our spending.

Therefore beginning in the second quarter we’re significantly stepping up our brand awareness efforts through additional innovative advanced marketing and PR initiatives. These include increased catalog circulation aimed at customer reactivation, increased prospecting via the web to capture new customers and enhance the visual presentation in our stores.

We are also building strong brand awareness through the re-launch of our Corporate Scholarship Fund, celebrity dressing, appearances by our spokesperson Mary Alice Stephenson and our hostess events.

Beginning in the third quarter, we will be adding brand advertising to our media mix, including a national print advertising campaign for the fall with regional advertising in those markets where we are renovating stores. We are pleased to be featuring Linda Evangelista, a new face for Talbots.

While this will be at a cost to us in the near-term it is a critical investment in our future and represents another exciting step forward for our brand and our company. So we are off to a solid start in 2010 and have a number of programs and initiatives in place throughout the year to drive ongoing improvement in our business over the short and long-term.

With that, I’ll turn it over to Mike to review the financials and then, I’ll be back with some closing comments.

Michael Scarpa

Thank you, Trudy. Good morning, everyone. Let me first cover the details of our first quarter financial performance. Total sales from continuing operations were $320.7 million, compared to $306.2 million last year, in line with company expectations. As a result of improvement in our inventory management, full price selling increased 21% and markdown sales declined 31% in the quarter.

Store sales were $257.6 million, compared to $256.4 million last year. Comp store sales increased 2.4% for the 13 week period.

Direct marketing sales in the first quarter were up 26.7% to $63.1 million, compared to $49.8 million last year. Of this increase, approximately $6.7 million was due to strong red line in-store phone orders, which is an encouraging trend.

Approximately $5.5 million of the increase was due to a shift in the timing of the best customer event in which the sales were captured in the first quarter of 2010, compared to the first and second quarter last year. As well as a change in the timing of our May catalog release to one week earlier compared to prior year.

First quarter cost of sales buying and occupancy was well ahead of last year at 56.4% of net sales versus 69.0% last year. Merchandise margin accounted for 1070 basis points of improvement of which approximately three quarters of that improvement was driven by an increase in IMU and the remainder due to a strong mix of full price to markdown merchandise. We also realized buying and occupancy leverage of 190 basis points in the quarter due to increased sales and lower costs.

SG&A expenses in the first quarter were $108.1 million or 33.7% of sales versus $110.8 million or 36.2% of sales last year, representing a $2.7 million expense decline over the prior year. This is especially noteworthy as we were able to decrease expenses in the quarter, while reinstating operating performance based and certain other compensation programs that were suspended in the prior year, which resulted in approximately $10.5 million in incremental expense.

Adjusted operating income for the first quarter increased $47.5 million to $31.7 million or 9.9% of net sales, excluding $23.8 million in merger related costs and $5 million in restructuring charges, compared to the same period last year.

Our adjusted earnings per share from continuing operations of $0.38, was significantly above our previously announced expectation.

On a GAAP basis we achieved operating income of $2.9 million. This result compares to an operating loss of $22.2 million last year.

Moving to the balance sheet, we ended the first quarter with total accounts receivable of $185 million versus $187 million last year. Our receivables remain in excellent condition. Year-to-date Talbots charge penetration continues to represent approximately half of our total sales volume.

Merchandise inventories at the end of the quarter were $157 million, down 17.9% to last years $191 million and down 19% on a selling square foot basis. This decrease is due to lower levels of markdown merchandise and our continued focus on inventory management.

Total debt outstanding at the end of the quarter was $94.1 million, down $420.6 million to last year’s balance of $514.7 million. With approximately $100 million available on our credit facility at the end of Q1, we believe we have sufficient funds to now invest in our strategic initiatives. Capital expenditures from continuing operations for the quarter were $1.4 million, compared to $7.9 million last year.

Cash used in operations of $44.4 million, compared to $13.8 million last year reflects the year-over-year changes in inventory and accounts payable of $71.2 million, and $23.8 million in merger related costs offset by higher adjusted operating income.

Before commenting on our outlook for 2010, let me update you on our strategic partnership Li & Fung, which is now eight months old. Overall we are pleased with the relationship and the progress Li & Fung continues to make in building a dedicated Talbots support team across six international offices, adding talent and key leadership roles of merchandising, technical and quality assurance.

With the infrastructure in place and a shift of more volume to our most important suppliers, we continue to explore low cost, duty free alternatives to source our product more efficiently. We, like many other retailers are challenged by rising commodity prices as we enter the fall and holiday seasons, and we are doing what we can to mitigate this impact.

While we anticipate higher merchandise margins in the second half of the year, compared to a year ago, the overall mix of our merchandise resulting from the implementation of our segmentation strategy will be a partial offset to the improvement.

Turning now to our 2010 outlook, for the full year, we currently anticipate top-line sales growth in the range of approximately three to 5%, compared to last year.

Full year adjusted earnings per share, excluding merger related costs, restructuring and impairment are anticipated to be in the range of approximately $0.75 to $0.83 per share. I want to point out that as Trudy has mentioned, we have made the decision to significantly invest in our marketing initiatives, which we believe is a critical step in the long-term growth and success of our company.

As such for the remainder of 2010, we now anticipate incremental marketing spend of approximately $18 million compared to last year, which is approximately $8 million greater than what we had anticipated in our previously announced guidance. Based on this, we are now anticipating total SG&A expenses for 2010 to be in the range of $410 to $420 million.

Capital expenditures for 2010 are planned to be approximately $40 million, up $20 million from last year. A majority of this increase will be allocated to refreshing and renovating our stores, as well as IT initiatives beginning in the second quarter.

For the second quarter of fiscal 2010, we expect total sales to increase approximately low single digits, compared to last years second quarter. We anticipate adjusted earnings per share excluding merger related costs, restructuring and impairment to be approximately in the range of zero to $0.05 per share versus last years adjusted loss of $0.33 per share.

In closing, our approach to 2010 will continue to be measured as we respond and react to the business. With the company now on solid financial footing, we will move forward with our key strategic investments in marketing, store segmentation and store refresh. While these investments will impact our earnings in the short-term, we believe these are the appropriate steps to be taking to best position us for long-term growth and profitability.

Thank you. And let me turn it back to Trudy.

Trudy Sullivan

Thanks Mike. In closing, it was a great quarter and we’re off to a strong start to 2010. We’re very excited about our plans going forward.

That said, there is a great deal of work to be done and we’re still in the early stages of our turnaround. We have made tremendous progress in improving our performance in a very challenging time, returning to acceptable levels of operating income with an improved capital structure and strong liquidity.

We’re proud of the improvements made to our brands both product and marketing, and gratified that our customers are responding favorably. Our goal is steady progress, continued operational improvements and investing for the long-term.

Thank you. And with that, we’d be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Jennifer Black with Jennifer Black and Associates.

Jennifer Black – Jennifer Black and Associates

Congratulations. You guys have made a lot of progress. I wondered, Trudy, if you could talk about categories that you think you have opportunities in. It seems like your customer, that denim would be a big opportunity for you and what kind of opportunities do you feel you have with that target customer? And then, I wondered, if you’re working on any other categories as far as your co-branding efforts? Thanks.

Trudy Sullivan

Thanks, Jen. You know, denim is a significant opportunity for us, so I would say stay tuned there, I think, we have some very exciting plans. Obviously, we continue to see great opportunity in the accessory zone. We’re actually quite pleased with our sportswear categories, jackets and pants. In the pant initiative, which really kicked off last fall still has tremendous forward momentum for us all the way through the year.

So we’ve got some significant product opportunities and, we really feel with store segmentation and addressing the customer lifestyle and distinct customer assortment needs and wants, will make us be able to, refine our assortments more and hopefully we’ll unlock the growth and sales per square foot. But denim is big, pants big, jackets big, accessories big.

Operator

Thank you. Your next question comes from the line of Kimberly Greenberger with Citi.

Kimberly Greenberger – Citi

Thank you. I will add my congratulations as well.

Trudy Sullivan

Thanks, Kimberly.

Kimberly Greenberger – Citi

I have one clarification question and then my question on gross margin. Trudy, I’m wondering if you could just expand on your comments about the improvement that you saw throughout the first quarter. Was that specific to merchandise acceptance or were you talking about sales trends and then you talked about the sustained note whatever the first quarter run rate was, has been sustained thus far in the second quarter. Does that mean that the guidance you’ve given implies a slowdown from here?

Just wondering, how we should read that comment. My question on gross margin is the tremendous improvement in the first quarter. I’m wondering what was a function of the comparison and what kind of momentum, we should be thinking about through the second, third and fourth quarter in that gross margin line. Thanks.

Trudy Sullivan

That’s a lot. Let’s start with my comment on the key metric second quarter. I mean, the key selling metrics that we look at, that we talked about in the first quarter in terms of conversion, UPT, EPT, average transaction value, have actually sustained and got somewhat slightly better in the second quarter. You are only midway through second quarter but we’re pleased to see that the customer behavior is right on track. We’re quite pleased in terms of first quarter that we turned to positive sales growth, that’s a real milestone for us after 11 quarters of negative sales growth.

So obviously as Mike mentioned in his remarks, we have some benefit of how we can handle some of the cadence in our direct marketing business benefited the first quarter but over and above that we’re quite pleased to see both positive sales in the stores and in the direct channels. So it’s quite encouraging and we’re encouraged by the continued high marks we’re getting from our best customers in terms of how she is perceiving both merchandise and marketing. So I think there are a number of positive indicators we feel good about as we start to go, wrap the corner on the back half of the year and I’ll let Mike comment on the guidance.

Michael Scarpa

Yeah. I’ll just comment on sales for a moment also is that we saw our full price selling up 21% to markdown down 31. We’re still anniversarying a lot of markdown sales in the second quarter. In fact, we had some liquidation sales to third party jobbers that didn’t even go into our stores or direct channel but affected the overall sales from last year. So with the timing of the events and some of those jobber sales from last year, actually if we looked at the impact of those two, we’re actually seeing a slight uptick of Q2 sales compared to Q1 in our normalized channels.

As far as gross margin goes, obviously second quarter will be a little lower than where we achieved first quarter. We take the markdowns associated with the rest of our spring season so we’re anticipating gross margins in the 32% to 33.5% range for Q2. And we anticipate that the second half of the year margins should be anywhere from 50 to 100 basis points higher than where we were trending in the first half. So you’ll see continued momentum in our gross margins but obviously with the low gross margins of last year as we went through this markdown inventory, the second half is a little tougher comparison.

Operator

Thank you. The next question comes from the line of Todd Slater with Lazard Capital Markets.

Todd Slater – Lazard Capital Markets

Thanks very much and great results, everyone.

Trudy Sullivan

Thanks, Todd.

Todd Slater – Lazard Capital Markets

You raised -- it seems like you raised SG&A guidance, looks like $5 million to $10 million relative to what you said previously so that’s maybe about $0.08 or so more and I’m just assuming this is going into the marketing and PR and advertising buckets that you mentioned. So I was wondering if you could -- my first question is if you can just tell us how much more you plan to spend on marketing and advertising year-over-year and Q2, Q3, Q4 and how that lays out because some of the market you’re translating in the outlook is a guide down for the rest of the year.

And then secondly on comps up 2.4% in the quarter, it’s obviously a great milestone as you put it in the direct result of your good execution. Inventory was down 31% going in and down 17% coming out of the quarter. So it seems like you didn’t have enough inventory to satisfy demand, you did almost $7 million in phone orders in the store. So I’m wondering what the comp might have looked like if you were to combine the stores and direct channel as many of your peers maybe most of your peers do. And I’m just curious if you can give us a little bit more color on that. Thank you.

Michael Scarpa

Okay. So just from an SG&A perspective, as stated we would spend about $410 million in our last conference call. We’ve now upped that from 410 to 420. We will be spending an incremental year-on-year increase of $18 million in marketing and really $8 million of that is an increase over where we were where we first guided to 2010. You’ll see that there’s probably close to $3 million to $4 million of additional marketing in Q2, a bigger chunk in Q3 probably in the $7 million range and then the remainder in the fourth quarter.

Todd Slater – Lazard Capital Markets

So maybe $8 million in the fourth quarter?

Trudy Sullivan

No.

Todd Slater – Lazard Capital Markets

Other than 8.

Michael Scarpa

Four, eight and that’s 12, so another six.

Todd Slater – Lazard Capital Markets

Another six. Okay, thanks. And then just on the comps? It’s obviously a good number given your inventory but some people think it’s not enough. I’m curious how you look at it.

Michael Scarpa

If we just add the red line sales back to the store sales that’s opposed to including it in direct marketing. We would fit a comp of about 5% which considering where we are in an inventory position with less markdowns we feel really good about it and the fact that our full price again was up 21%.

Trudy Sullivan

Yeah, I think you have to be -- understand that the makeup of this inventory decline through the year is really we don’t own the markdown inventory. We actually are in good shape on full price inventory and our results are still highly productive at up 21%. But we deliberately did not anniversary or want to own the same levels of markdown inventories that we were liquidating in the base period.

Michael Scarpa

And Todd, the way I look at this full year guidance is we were 3% to 5% on top line last time we spoke. We’ve kept that consistent for our guidance currently but we didn’t really guide them to EPS as we wanted to get the share counts all settled. So we guided at 5% to 6% operating profit. Our sense is that with the same sales base, our operating profit is going to be in the 6% to 6.5% range. So basically we’re seeing a bit of the good news in Q1 which we beat the high end of our range by about $12 million, $8 million is flowing back into marketing and the rest of it will be dropping to the bottom line along with a couple extra million dollars that we think we can attain.

Todd Slater – Lazard Capital Markets

That’s right, Mike. I mean, I see a 100 plus percent -- a 100 plus basis points increase in the operating margins from where you were despite the 10 million plus in increased marketing from where you were before. So anyway congratulations, I think it’s a terrific result and people should be very positive. Thank you.

Michael Scarpa

Thank you.

Trudy Sullivan

Thank you.

Operator

Thank you. Your next question comes from the line of Barbara Wyckoff of Jesup & Lamont

Barbara Wyckoff – Jesup & Lamont

Hi, everyone. Great quarter. I just have a couple of questions. Trudy and Mike, your sales productivity goal for the next three to five years, where do you think you can go from the low threes where you are now and the same question for the -- goal for the next three to five years penetration of direct-to-consumer to your total business and then lastly could you talk about who do you view as your primary competitors now? Thanks.

Michael Scarpa

So we haven’t really laid out our long-term strategy in terms of sales per square foot but obviously it’s $250 a square foot. There’s plenty of opportunity to push that up. We think a normalized sales per square footage is in the 350 to 400 range. We think that the strategies that we’re employing can get us there.

Barbara Wyckoff – Jesup & Lamont

And in terms of direct-to-consumer penetration?

Michael Scarpa

We were obviously very happy with the sales increase in direct-to-consumer. As our sales productivity in our stores go up, we would like to increase the percentage overall of direct marketing. So we can maybe see it start to go up by a few hundred basis points over the next couple of years but overall we’re going to try to grow both sides of those businesses and long term we said that we believe this Direct Marketing business can double.

Barbara Wyckoff – Jesup & Lamont

Okay. And then the competition?

Trudy Sullivan

I mean, in terms of competition, Barbara, all of our proprietary research continues to point to the fact that when she’s not shopping with us, she tends to be in a better Department Store like a Nordstrom, you know, she will shop every where but that level of Department Store, the really better end.

Barbara Wyckoff – Jesup & Lamont

Okay. Thanks a lot. Good luck.

Trudy Sullivan

Thanks.

Operator

Thank you. Your next question comes from the line of Roxanne Meyer with UBS.

Roxanne Meyer – UBS

Great. Thanks. Let me add my congratulations.

Trudy Sullivan

Thanks.

Roxanne Meyer – UBS

I just wanted to -- a few questions. I’m wondering what was the tipping point for you as to step up your marketing plans versus the last time we spoke in mid April and as part of that I guess I’m just curious to see if you’ve gotten any reads from customers as you’ve done the study in April about what they think about the early fall product?

Trudy Sullivan

Well, frankly, the reaction to early fall is one of the reasons that we felt it was time to step up the marketing. I mean, we’ve consistently gotten good marks from our best customer in terms of our net better scores. We’ve had an upward trend now for the last several types that we’ve conducted this survey so we’re feeling good about that. We’re feeling good about the reads.

Our sell-throughs on our monthly flows have gotten stronger and stronger and we feel, we’re feeling more confident that now is the time to really reach out and attract a new customer and invite her into see what’s happening with the brand. So it’s a combination of just the performance of our business, the customer reaction to the fall preview that we’ve put out there and more importantly, the net better score. So a combination of things have lead us to believe that this is the right time and we’ve always said we’re going to make decisions that are right for the long-term health of the brand and we feel that now is the time and we’ve been asked over and over in the last couple of years when we were going to be able to do it and we said we would know when we had enough positive indicators that showed us it was time to really push forward.

So we’re extremely excited about adding national advertising to the mix for fall. We think Linda is just a tremendous iconic person for us to be dealing with. I mean, she just has absolutely classic beauty that’s the definition of tradition transform and that’s our brand platform and so we’re excited and we think it’s the right thing to do. We think our customers are going to love it. And more importantly we think this will continue to allow us to bring new customers into the brand.

Michael Scarpa

And obviously, our financial performance over the last nine months gives us the confidence that we should be spending this time of money. We reengineered our entire balance sheet. We have much more manageable levels of debt than we did a year ago and if we look at our guidance for the second quarter and we do a rolling 12 months, our operating profits are going to be in about the 6% on an adjusted basis. So we feel good that we have the financial resources in hand now to begin really investing in the business.

Roxanne Meyer – UBS

Great. Thanks. That’s terrific and best of luck.

Trudy Sullivan

Thanks, Roxanne.

Operator

Thank you. Your next question comes from the line of Marni Shapiro with The Retail Tracker.

Marni Shapiro – The Retail Tracker

Hey guys. Congratulations.

Trudy Sullivan

Thanks, Marni.

Marni Shapiro – The Retail Tracker

I’m very much looking forward to this new store renovations and the advertising. But there was a comment made on the call, I’m not sure who said it. I think you guys alluded to the fact that it’s Talbots charge customer is still 50% of the sales. And if this is true, could you talk a little bit more about your charge opportunity and where this was historically and what you’re doing to capitalize on it and possibly push that number higher in the near term?

Michael Scarpa

Actually, the way we look at it is the actual percentages were about 49%, which is historically pretty much in line. We’ve been in the 49% to 50% range. We kind of look at it as sales are increasing and our penetration is remaining stable. That means we must be attracting a different non-Talbots charge customer which we think is a positive overall. We introduced a whole new loyalty program 16, 18 months ago. We continue to market to this customer. She is the one that “we’d like to say she is paying our bills.” So we feel that we have the right marketing programs in place and are doing the right spends and promotional activity against these customers.

Trudy Sullivan

I mean, she absolutely loves our loyalty program that’s associated with the Talbots’ charge and we have very aggressive communication with her. She’s our most loyal customer. So we actually and from what we can see is, it’s a pretty highly penetrated charge business based on what we see out in the market. So…

Marni Shapiro – The Retail Tracker

Are you incenting the sales associates to have them open more charge accounts? Is that a consistent program?

Trudy Sullivan

Yeah. That’s all part of the productivity program that we want. I mean, our sales associates have targets that they work against in terms of opening new Talbots’ charge accounts. So we have given them lots of tools to make that happen, especially the launch of the loyalty program that Mike referred to.

Marni Shapiro – The Retail Tracker

Great. Well, I think you said stores have looked absolutely beautiful and good luck with the summer season.

Trudy Sullivan

Thank you.

Operator

Your next question comes from the line of Stacy Pak with SP Research.

Stacy Pak – SP Research

Thanks, guys. A couple questions. One, Trudy, I was hoping, may be, you could give us more detail on the current quarter comp, May and June or maybe just quarter to date. Two, on the Marketing, why I guess I’m wondering why you felt the need to go with a name like Linda Evangelista, who obviously cost a lot. I know she has the right look but why not more of an unknown and can you give us more detail on print TV, when, et cetera and then finally, can you comment on what you’ve seen from the Vancouver store, whatever you can release in terms of results. Thanks.

Trudy Sullivan

Well, we love Linda simply because she is so beautiful and she’s iconic and she’s 45. She’s right in our target, our sweet spot. She’s a mom, she has, you know, a lot of the attributes that our core customers absolutely love and our core customers love her. I mean the buzz just even in our -- from our core has been really -- has been good, even though it’s quite new since we announced it. We’re quite pleased with the reaction. What I would say is that is one of a number of things that we are investing in Marketing.

I mean, we also will continue with our PR efforts. We’ll continue with our reactivation efforts and we’ll continue with our prospecting for new customers on the web. So we have a number of initiatives in our marketing arsenal, not just -- and it will be national advertising. We’ll not engage in TV. We’ve done an often lot of research on what influences our target consumer and TV really comes in at the bottom of the pile.

So we will really use Linda in a national advertising campaign in the fall and we will be doing some kind of regional advertising in the markets where we’re renovating stores. So I think we have a very comprehensive program and we’re very pleased to be able to step it up. And another very important piece of this additional marketing spend is the visual enhancement of our stores that aligns with our whole segmentation for us that starts in third quarter. So it’s a very comprehensive program. In terms of comps, we’re only half way through the second quarter and our comps for the quarter are in the mid single digits.

Stacy Pak – SP Research

Okay. And then just Vancouver, is there anything more you can say about that, the results so far? It’s a great looking store.

Trudy Sullivan

It’s a great looking store and actually business is very good in Canada. So we’re pleased with how Vancouver is performing. And if you like Vancouver, you’re really going to like the store refresh program.

Stacy Pak – SP Research

Okay. Thank you. Good luck.

Trudy Sullivan

Thanks.

Operator

Thank you. Your next question comes from the line of Richard Jaffe with Stifel Nicolaus.

Richard Jaffe – Stifel Nicolaus

Thanks very much guys and really, impressive performance. Just want to understand better the strategy for inventory going forward. Obviously, as Todd pointed out maybe things have gotten little bit too lien and wondering what your plans are to speed flow into the second half and what levels you might want to achieve in store or if there is an ability to be more responsive to demand in store.

Michael Scarpa

We think by second quarter, the end of the second quarter, our inventory levels will be down in the low mid single digit range and again, we’ve cleaned up a lot of overall areas of inventory that has to do with our surplus stores, we’ve gotten rid of a significant amount of old excess inventory. So I think on a store basis, we should be low-single digits now. And I think you’ll see in the second half of the year that will begin to moderate. And we’re projecting right now that we’ll end the year in a positive manner in terms of inventory over inventory. It will be up like single digits.

Trudy Sullivan

I think it’s important that first quarter is not really indicative of how we are looking to -- we on purpose did not anniversary owning the levels of markdown inventory that we had in the prior period.

Michael Scarpa

Yeah. For the year last year, we averaged down about 28% overall in terms of inventory and ended the year down 31. So we’ve taken the chunk of excess out of inventory and now we’re going to start to anniversary more normalized inventory levels and we’ll see an increase as we enter the second half of the year.

Trudy Sullivan

I think the only other thing I would add is that we’ve been very strategic where we’ve gone back and added an inventory into categories that we have increasing confidence, being as productive as we want them to be. So we’re quite pleased with the inventory strategies as we go through the balance of the year.

Richard Jaffe – Stifel Nicolaus

Okay. So we should just look for incremental improvement and faster flow. Is that the net conclusion?

Michael Scarpa

I think that’s the way to look at it, yes.

Richard Jaffe – Stifel Nicolaus

Okay. Thanks very much.

Operator

Thank you. Your next question comes from the line of Susan Sansbury with Miller Tabak.

Susan Sansbury – Miller Tabak

Hi. Yes, thanks very much. Very good job.

Trudy Sullivan

Thanks.

Susan Sansbury – Miller Tabak

Mike, I have a question for you. You mentioned in your comments that second half margins will be up but will be partially offset by the segmentation implementation expenses. Are there any numbers associated with that that you care to share?

Michael Scarpa

No. I think what I also said was that we should see a 50 to 100 basis point improvement in overall margins in the second half of the year compared to where we’re trending in the first half.

Susan Sansbury – Miller Tabak

Okay. Could you reiterate what you expected year-end inventories to be up? Did you say high single digits?

Michael Scarpa

No. I said low single digits.

Susan Sansbury – Miller Tabak

Okay. Great. Thanks ever so much.

Michael Scarpa

You’re welcome.

Operator

Your next question comes from the line of Tracy Kogan with Credit Suisse.

Tracy Kogan – Credit Suisse

Thanks. Just a follow-up on the merchandise margin question. Is the segmentation strategy just that you’re getting a lower markup on some of these higher-end products and then I was hoping you could give us more detail on the 14 refreshes that you’re doing this year. What is the cost per refresh and what are the kind of returns you’re targeting and maybe some of the things that you’re doing there? Thanks.

Michael Scarpa

From a mix perspective on merchandising, we can see anywhere from 5 to 700 basis points lower in terms of our good, better, best, good margins versus our best margin, and best is growing to be close to 18% to 20% of the overall mix, so it has an impact.

Trudy Sullivan

And we’re really haven’t talked yet about the actual cost of the renovation, I would tell you -- we have talked about we’re taking a market approach. We have three markets that we targeted. We targeted 14 stores in three markets. We actually have a kind of menu of options, depending upon what we think the return on investment by store will be. So we really have, we’ll probably talk more about this in our next earnings call when we have more real results to share.

Michael Scarpa

Right. But you can anticipate out of the $40 million we’ll spend on CapEx that it will be in the $15 to $20 million range, overall. And that’s just not for 14 stores, but that will include a rollout to additional premium stores of some fixture packages once we get a read on performance.

Tracy Kogan – Credit Suisse

Great. Thank you.

Operator

Your next question comes from the line of Dana Telsey with Telsey Advisory Group.

Dana Telsey – Telsey Advisory Group

Good morning, everyone and congratulations. With the updated acceptance of the product that you’ve been seeing in the more full price selling, how are you thinking about changes in product flow going forward transitioning to season -- transitioning between seasons or just new product introductions and launches, how is that changing, and how do you see any product cost adjustments impacting pricing? Thank you.

Trudy Sullivan

Dana, we have a constant flow of products. So we deliver fresh product to the floors every month, sometimes twice a month and that is something we’ve learned. We have a high repeat customer and even our new customer. We need to have constant flow of newness and so that’s what we do.

Obviously, our customer wants to be able to come into the store to buy, so there’s a buy now wear now component that’s important to her. But first and foremost it’s about fresh flow, new product, novelty and just really continuing to have a very dynamic flow of exciting products of the floor, so. And that we’ve learned over the last year or so, I think we’ve refined this any thing and we’ve increased the flow of products somewhat, in terms of the cadence of our floor sets.

Dana Telsey – Telsey Advisory Group

And on pricing?

Trudy Sullivan

Well, we – To Mike’s point, we are adding or increasing our penetration of what we call our best segment in these top premium stores, so that’s going to have an impact on the pricing appropriately. So, and we also have – where we have good experience with some of our key programs. We’ve been opportunistic there to be sure that we.

We always want to offer a great value to her and our focus is on the highest penetration possible full priced selling, so we’re constantly evaluating what the appropriate retail will be. But with the, I said this before that, the hierarchy of values for our customer starts with quality first and then its style and then its price.

And so, when we get the quality and style right, we have very little price resistance and that’s extremely important to her. We are not a kind of price driven brand. We’re a quality style driven brand with an appropriate price value equation. We’re happy to bring the best segment back into the assortment, because we definitely think we’ve underplayed that especially for these premium stores. So overall, that will have an impact on increasing the AIR, but it’s really due to the mix change.

Dana Telsey – Telsey Advisory Group

Thank you.

Operator

Thank you. Your next question comes from the line of Janet Kloppenburg with JJK Research.

Janet Kloppenburg – JJK Research

Hi, everybody. Congratulations. Can you hear me, Trudy?

Trudy Sullivan

Yes. I can, yeah.

Janet Kloppenburg – JJK Research

Okay. Couple of questions. The shift of sale of promotion out of Q2 into Q1, the catalog mailed earlier, is that having an effect on your sales trends in the second quarter, I mean up mid single digits with inventory down 18 and that shift, I mean, that sounds pretty good to me. Maybe you could comment on what affect you thought that shift is having on the business and if other shifts are occurring that could benefit the second quarter later.

Michael Scarpa

Yeah. This was part of an overall planning process that we went through, when we originally talked about the spring six-month season. We think it was the appropriate actions to take based on the trends of our businesses and as I...

Janet Kloppenburg – JJK Research

No. That’s not the question, Mike. That’s fine. I’m sure that’s true. The question is, how much is it hurting the sales trend in the second quarter?

Michael Scarpa

Well, I think, what we’re trying to say is that it had a $5.5 million impact on what would normally, we’re comping against in the second quarter, but we feel comfortable with the trend of business right now.

Trudy Sullivan

Yeah. And I think, I said earlier, Janet, our comps are trending single digits in the quarter to date.

Janet Kloppenburg – JJK Research

Right. With inventory down a lot and markdown levels much lower than last year, so, I mean, I think, that’s a positive. I’m wondering if there will be any shift later in the quarter that could benefit the month of July, in other words some shifts of fall marketing?

Trudy Sullivan

No.

Michael Scarpa

Nothing anticipated.

Trudy Sullivan

There is nothing anticipated, Janet.

Janet Kloppenburg – JJK Research

Okay. The second question is on the investment in marketing. First of all, was Linda Evangelista significantly more expensive than another top notch model? And secondly, I imagine by investing this much more in marketing you expect some sort of incremental sales as a result and I’m wondering if that’s included in your back half guidance or if you’ve decided to take a more conservative approach to guidance?

Trudy Sullivan

So just to be really clear, we didn’t go looking shopping for a super model based on price.

Janet Kloppenburg – JJK Research

No, no. Trudy, I know that. I suspected at 45 that Linda doesn’t demand the price she did at 25.

Trudy Sullivan

You know what, I can’t even comment on that. I really, I don’t know.

Janet Kloppenburg – JJK Research

Okay.

Trudy Sullivan

And I would, but I will tell you that we spent a lot of time really trying to cast for the person that we feel best represents our mantra of tradition transformed. And we were delighted that she was both available and absolutely stunning, so we’re very pleased with that.

It’s also important to note, Janet. It’s one element of a comprehensive reinvestment in marketing. It’s not the only one, so we are reinvesting in reactivation circulation. We are reinvesting in visual enhancement, we are investing in regional advertising. We -- there’s a number of elements that we are investing in and certainly, we’re investing in prospecting on the web, so when you really line the whole thing up, this national advertising is an exciting thing to do but it’s not the most material thing that we are doing.

Janet Kloppenburg – JJK Research

I think that she’s a great choice, Trudy. And my only point was, I’m not sure she’s that much more expensive than other top models and I wanted to get that cleared up?

Trudy Sullivan

I know, okay. I understand, but unfortunately I wouldn’t even know how to answer that question.

Janet Kloppenburg – JJK Research

Okay. That’s fine. And then, Mike, can you comment a little bit about the paybacks on the advertising and was it considered in your back half guidance?

Michael Scarpa

Sure. We view this as long-term brand enhancing. Currently, we have not adjusted our sales range or our EPS guidance to reflect any upside that this may bring us in the short-term.

Janet Kloppenburg – JJK Research

And then, my last question is just on the sales that were done on the red phone. Was that unusual, should that continue? Is it indicative of in-store inventories, perhaps, being too low?

Michael Scarpa

First of all, we think, we have the appropriate amount of inventory currently. We’ve cut back significantly from where we were a year ago and if we look at, what we’re trying to do here is capture missed opportunity in terms of some of the merchandising mix that are in the stores.

Janet Kloppenburg – JJK Research

And so it may continue then?

Michael Scarpa

Yeah. We believe it’s a great service for our customer.

Trudy Sullivan

And it’s really part, Janet, of the store productivity program that we launched last fall. We put this big effort on the in-store service of red phone. Our sales associates and stores get credit for red phone in their productivity targets. So there’s a whole new engagement at the store level of using the red phone to service a customer. We basically said, we want the sale regardless of what channel it comes through. So it’s part of the holistic new productivity program at store level.

Janet Kloppenburg – JJK Research

And my -- can you just remind us at what level of comp that you’re leveraging, your buying occupancy and your SG&A expenses (inaudible)?

Michael Scarpa

What type of comp, what?

Trudy Sullivan

Leverage.

Janet Kloppenburg – JJK Research

Leveraging, buying and occupancy and store expense level?

Michael Scarpa

We’ve been leveraging, buying and occupancy for the last couple of quarters, and we’ve turned the corner now in terms of sales increase, so basically we believe even at flat sales we’ll be leveraging those numbers.

Janet Kloppenburg – JJK Research

Okay. Great quarter. Lots of luck.

Michael Scarpa

Thank you.

Operator

Thank you. And your last question comes from the line of Betty Chen with Wedbush Securities.

Betty Chen – Wedbush Securities

Thank you for taking my question and congratulations on a great quarter. I was wondering, Trudy, if you can speak a little bit about some of the markets being targeted for the segmentation program. If you could remind us on which market, what were the characteristics and the thinking behind choosing them?

And also, I wanted to go back to the red phone question. It looks like it was probably 2, 3-point impact to the comp line. To Janet’s point going forward, should we continue to expect that kind of impact to comp and/or could it possibly increase, given some of the focus you’re having on the sales reps in this multi-channel approach to sales? Thank you.

Trudy Sullivan

Certainly with the – answering your last question first on the red phone, with the increased productivity of this new program, it’s conceivable to increase. We certainly don’t expect to wane. Our customers love it. They love the convenience of filling in size and color or style at store level and having it shipped to them. In many cases they choose to have it shipped to the store and our associates are able to do additional wardrobing. So we think it’s a real enhancement to the productivity program that was launched last fall. We’re very pleased with it.

In terms of the market, the store refresh program is separate from the store segmentation program. We did looked very carefully at markets that we feel represent our portfolio and also give us three distinct geographic reads on the renovation program. So we are going to renovation stores in I believe Chicago, Dallas and Washington. So we have a good kind of geographic and climate reach to the store refresh program and I would say, Mike’s already mentioned the amount of CapEx that we intend to invest and I’d say stay tuned.

Betty Chen – Wedbush Securities

Great. The stores look terrific, so best of luck.

Trudy Sullivan

Thank you.

Operator

Thank you. We don’t have time for anymore questions. Ms. Sullivan, please continue with any closing remarks.

Trudy Sullivan

Okay. Thank you very much everyone. Have a great day and we will talk to you next quarter.

Operator

Thank you. This concludes the Talbots, Inc. conference call. We will now proceed with our forward-looking statement. Cautionary statements and certain risk factors to consider, 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 the press release below.

This press release contains forward-looking statements, 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, projected, anticipate, outlook, will, would, should, potential or similar statement or variations of such terms.

All of the information concerning our outlook, future liquidity, future financial performance and results, future credit facilities, and availability, future cash flows and cash needs and other future financial performance of financial position, as well as our assumptions underlying such information constitute forward-looking information.

Our forward-looking statements are based on a series of expectations, assumptions, estimates, and projections about the company are not guarantees of future results or performance and involve substantial risk and uncertainty including assumptions and projections concerning our liquidity, internal plans, regular price and markdown selling, operating cash flows and credit availability for all forward-looking periods.

Our business and forward-looking statements involve substantial known and unknown risks and uncertainties, including the following risk and uncertainty. The continuing impact of the volatility and the U.S. economic environment and global economic uncertainty on our business, continuing operations, liquidity, financing plans, and financial results including substantial negative impacts on consumer discretionary spending and consumer confidence, substantial loss of household wealth and savings, the disruptions and significant tightening in the U.S. credit and lending markets, and potential long-term unemployment levels, satisfaction of all borrowing conditions under our credit facilities including accuracy of all representations and warranties, no event of default, absence of material adverse effect or change and all other borrowing conditions.

Any lack of sufficiency of available cash flows and other internal resources to satisfy all future operating needs and other cash requirements, ability to access on satisfactory terms or at all adequate financing and sources of liquidity necessary to fund our business and continuing operations and to obtain further increase in our credit facilities as may be needed from time-to-time, the success and customer acceptance of our merchandise offerings, risks associated with appointment of an exclusive global merchandise buying agent, the anticipated benefits and cost savings from this arrangement may not be realized or may take longer to realize than expected in the risks that upon certain any cessation of the relationships for any reason we would be able to successfully transition to an internal or other external sourcing function, ability to continue to purchase merchandise on open account purchase terms at existing or future expected levels with acceptable payment terms, and the risk that suppliers could require early or immediate payment for any other security due to payment concerns.

Risks and uncertainties in connection with any need to source merchandise from alternate vendors, any disruption in our supply of merchandise, ability to successfully execute fund and achieve supply chain initiatives, anticipated lower inventory levels, cost reduction and any other initiative. The risk that anticipated benefits from the sale of the J. Jill Brand business may not be realized or may take longer to realize than expected.

Future store closing and success, and of necessary funding foreclosing underperforming stores, the ability to reduce spending as needed, the ability to achieve our 2010 financial plan for operating results, working capital and cash flows, any negative publicity concerning the specialty retail business and general or our business in particular, the ability to accurately estimate and forecast future regular price and markdown selling, operating cash flows, and other future financial results and financial positions, risk of impairment of goodwill and other intangible and long lived assets, the impact of deterioration and the investment in return of net asset values in the capital markets and the impact on increased expense and funding for pension and other post-retirement obligations and risks and uncertainties associated with the outcome litigation claims and proceedings and risks that actual liabilities, assessments and financial or business impact will exceed any estimated accrued or expected amount or outcomes.

All of our forward-looking statements are as of the date of this press release only. In each case actual results may differ materially from such forward-looking information, the company can give no assurance that such expectations or forward-looking statements will prove to be correct.

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 were included in the periodic reports filed with the Securities and Exchange Commission, could materially and adversely affect our continuing operations in our future financial results, cash flows, prospect and liquidity, except as required by law, the company does not undertake or plan to update or revise any such forward-looking statements to reflect actual results, change in plans, assumptions, estimates or projections or circumstances affecting such forward-looking statements occurring after the date of this release, even if such results change or circumstances make it clear that any forward-looking information will not be realized, any public statements or disclosures by us filing this release which modify or impact any of the forward-looking statements contained in this press release will be deemed to modify or succeed such statements in this release.

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Source: The Talbots Inc. Q1 2010 Earnings Call Transcript
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