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The Talbots (NYSE:TLB)

Q4 2010 Earnings Call

March 24, 2011 10:00 am ET

Executives

Trudy Sullivan - Chief Executive Officer, President and Director

Michael Scarpa - Chief Operating Officer, Chief Financial Officer, Principal Accounting Officer and Treasurer

Julie Lorigan - Senior Vice President of Investor and Media Relations

Analysts

Dana Telsey - Telsey Advisory Group

Randal Konik - Jefferies & Company, Inc.

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

Stacy Pak - Prudential

Susan Sansbury - Miller Tabak

Paul Lejuez - Nomura Securities Co. Ltd.

Michelle Tan - Goldman Sachs Group Inc.

Betty Chen - Wedbush Securities Inc.

Adrienne Tennant - Janney Montgomery Scott LLC

Jennifer Davis - Lazard Capital Markets

Pamela Quintiliano - Oppenheimer & Co. Inc.

Marni Shapiro - The Retail Tracker

Roxanne Meyer - UBS Investment Bank

Jennifer Black - Jennifer Black & Associates

Kimberly Greenberger - Morgan Stanley

Neely Tamminga - Piper Jaffray Companies

Margaret Whitfield - Sterne Agee & Leach Inc.

Janet Kloppenburg - JJK Research

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 fourth quarter and full-year 2010 earnings results. [Operator Instructions] I would now 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 Fourth Quarter and Full Year 2010 Earnings Conference Call. Today, we have with us Trudy Sullivan, President and CEO; and Mike Scarpa, Talbots' Chief Operating Officer and Chief Financial Officer.

We will be disclosing non-GAAP financial measures in this presentation. For a reconciliation of these non-GAAP measures to the corresponding GAAP measures, please see the table attached to this morning's earnings release, available under the Investor Relations section of our website. As a reminder, certain statements to be made today are forward-looking. These are based on assumptions and expectations of future events which may not prove to be accurate. They involve substantial risks and uncertainties. Actual results may differ materially from those expected or implied. These forward-looking statements may be identified by such terms as will, expect, believe, anticipate, outlook, target, plan, initiative, estimated, strategy and similar terms or variations. All of our outlook and financial expectations and plans, 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 filing, 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 the end of the day, March 29, 2011. The webcast will also be available on the Investor Relations page of our website. With that, I would now like to 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-week and 52-week period ended January 29, 2011. Mike will cover our financial performance, comment on the first quarter and provide some color around our full year 2011 plans. After that, I will make some closing remarks, and then we'll be happy to open the call for questions.

Let me begin by pointing out that in April, we will anniversary the acquisition of BPW [BPW Acquisition Corp.], which enabled us to de-lever our balance sheet and begin to reinvest in our business. We further acknowledge that 2010 was a particularly significant year for Talbots, as it was our executive team's and board of directors' first year as an independent public company without a majority owner.

Now, moving on to the details. Although fourth quarter bottom line results were slightly above our revised expectations, as we previously noted on January 11, we are disappointed with our performance. Weaker-than-anticipated customer response to our merchandise assortment and high levels of competitive promotional activity were key factors impacting our results. Specifically, we believe that the forward styling of merchandise in our catalog and a less-than-optimal assortment in our tops, including sweaters, had the most significant impact on customer response. The initial allocation of product in the early implementation of our store segmentation strategy was also a factor.

We have made progress with the implementation of this initiative and there are key learnings which we have already begun to put into place. We have modified our classic stores' assortments to include an increase of our premium product. We have also modified the always store assortments to include a better representation of fashions. Lastly, we have refined volume groups further within both classic and always to better align assortment to volume.

As we discussed on last quarter's call, we were able to make some adjustments to influence the allocation for the fourth quarter and have made even further progress in allocation for spring and summer 2011. We continue to refine our segmentation strategy, and we expect the implementation of IT support systems, specifically the Oracle store clustering and analysis service, the Oracle site-optimization service and the JDA product-allocation tool, which are all taking place in mid-2011, will ensure better execution.

Let me comment further on the presentation and styling of merchandise in our holiday and January transitional catalog. We conducted extensive consumer research on our January catalog and found that a number of our core customers were confused by the presentation of our merchandise, as they perceive the styling as being too fashion-forward. Beginning with our March catalog, which features Julianne Moore, we have adjusted the styling and presentation of our merchandise in our catalogs to better represent our "Tradition Transformed" brand image in a manner that will appeal to both our core and new customer. We are also using a broader selection of models to illustrate that our brands offer appeal to a wider age, diversity and size spectrum. In fact, we have already launched the dedicated thumbnail on our Talbots online website specifically for women, our plus size concept.

From a merchandise perspective, key categories that performed well during the fourth quarter were skirts, dresses, outerwear and suiting. As I mentioned earlier, the tops category underperformed to our plan. Jackets and sweaters were disappointing. Sweaters, in particular, are typically a strong driver during the holiday season, and we did not see the performance that we had planned. In addition, we believe our January delivery did not resonate well with our customer as it was not "buy now, wear now" in many markets and led spring forward.

Now turning to our key growth initiatives. In addition to our segmentation strategy, which we are continuing to enhance, we believe our store reimage program, initiated in August 2010, will contribute to improved productivity over time. In 2011, we plan to expand this program with a refresh and renovation of an additional 70 stores versus our original plan for approximately 50 stores. We continue to be pleased with the performance of our renovated store, with comps in our premium renovated stores trending approximately 660 basis points above the control group.

We also recently opened our new design concept store at the Westfield Garden State Plaza in Paramus, New Jersey, a unique store whose key features will be evaluated for potential use in existing stores in support of our overall store reimage program. We're pleased with the positive feedback that we have received from our customers since its opening in February. And while it is only one store, sales trends are very strong.

Another one of our key initiatives is to optimize our real estate portfolio. At our investor event in October, we outlined our new three-year plan, which incorporated the potential to close 75 to 100 stores over the next three years, representing a reduction of approximately 500,000 gross square feet. Based on a market-by-market analysis, we are now planning an accelerated store closing time frame that would allow us to more quickly reduce our store base and square footage while improving overall store productivity. At this time, we anticipate closing approximately 90 to 100 stores and consolidating and/or downsizing approximately 15 to 20 stores over the next two years. By the end of fiscal 2011, we anticipate that we will complete the majority of these actions. With over 300 lease events coming due over the next three years, the majority of the closings will come from lease expirations and the exercise of lease termination rights.

We believe the acceleration of store closings is an appropriate strategy based on our customer, the market and how we want our operations to be structured. The store closings will provide us with a more appropriate cost structure and allow us to make better use of our inventory dollars. In conjunction with the store closings, we plan to implement a targeted marketing program to support the transfer of customer spend to other stores in the same markets or to our direct business. Based on the expected timing of the closures this year, we anticipate that we will start to see the benefits of these actions next year and beyond. We also plan to maintain our focus on building brand awareness and engaging with current customers as well as non-customers. At the end of 2010, our buyer file was flat, with reactivated and new customers offsetting defecting customers.

As we have updated our brand, marketing and products, we have seen and expected to see defection in the older-aged segments of our buyer file. Interestingly, our reactivations have more than mitigated the defections in the 55-to-65 age segment where we have seen year-over-year growth in the number of buyers. We view this as an endorsement from our critical core customer of the "Tradition Transformed" strategy. We have also seen growth in the under-35-year age segment of our file. Our focus, going forward, is to continue to prospect and reactivate to achieve total file growth. And with our relatively recent financial ability to invest in customer acquisition, we are hopeful to see customer acquisition accelerate. This is a key initiative, and we are highly focused on increasing both new customer acquisitions and customer reactivations, while maintaining and re-engaging our core.

As such, we view our investment in marketing as an essential component in this process and in achieving our long-term objectives. Communicating with our customers and soliciting feedback is a vital component in our decision-making process. As such, we are now increasing the frequency and depth with which we solicit feedback and are creating action plans to react more quickly. Consumer insight is an important initiative that we will be concentrating on in 2011, and we believe it works hand-in-hand with the other initiatives I have discussed as a holistic approach to managing the business.

To recap, we recognize that 2010 was a year with accomplishments and challenges, experiencing some speed bumps along the way in executing our turnaround plan. Although we're not as far along on our strategy as we would've hoped, we continue to believe that the three-year financial goals we announced last October are achievable. We are reassessing the time frame to achieve these goals in light of our new or accelerated initiatives. Overall, we believe we have made considerable progress over the past 18 months, particularly in transforming our Talbots brand and refreshing our product offering.

This would not have been possible were it not for our efforts to increase our financial flexibility and improve our balance sheet, which put us on stronger footing. As we enter 2011, we realize that we are still faced with a great deal of work and continued transition, which exists with any multi-stage turnaround, but we remain confident in our strategy and will continue to move forward on our initiatives.

Looking ahead, let me comment on the first quarter. As indicated in our press release, top line sales are currently trending down approximately 4%, with our Direct [Direct Marketing] business approximately flat to last year. Although still negative, we have seen sequential improvement in our comp trends across all segments. As discussed, our January delivery was disappointing. February was marginally better, although not to our expectations. That said, March is performing even better and currently trending above last year. It is still a promotional environment, and we will maintain a higher level of promotional activity for the foreseeable future as we seek to attract new customers.

Before I turn it over to Mike, I also want to comment on the status of our open positions, Head of Stores and EVP of Merchandising. We have active searches underway for both of these positions. That said, we have a strong bench in place and are very confident in these organizations to continue to move forward with day-to-day operations, as well as the implementation of our key initiatives. We will keep you updated with our progress as it pertains to filling these positions. So with that, I will turn the call 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. I will now cover the details of our fourth quarter financial performance, as well as provide some comments on the first quarter and full year 2011. Total sales in the fourth quarter were $292.6 million compared to $315.9 million last year, down 7.4%. Store sales were $240.8 million compared to $261.2 million last year. Comp store sales decreased 7.3% for the 13-week period, due primarily to a 5.7% decrease in customer traffic and a 2% decline in conversion.

Direct Marketing sales, which include catalog, Internet and Red Line [Red Line Phone], were down 5.3% from last year at $51.8 million. For the year, Internet sales represented approximately 72% of our total Direct business. Fourth quarter cost of sales, buying and occupancy increased 610 basis points over last year at 70.8% of net sales versus 64.7% last year. Merchandise margin accounted for 650 basis points of deterioration, due to lower-than-anticipated sales and higher level of markdowns, as well as higher levels of promotional activity. This was partially offset by buying costs, which declined 40 basis points in the quarter.

SG&A expenses in the fourth quarter were $86 million at 29.4% of sales, versus $98.3 million at 31.1% of sales last year. This improvement was due to continued, tight expense management, as well as a one-time cumulative adjustment of $6.3 million in gift card breakage income. In the fourth quarter, we changed our estimates related to gift card breakage. As a result, we recorded income of $6.3 million, reflecting a one-time cumulative adjustment to our gift card liability where the likelihood of redemption from gift cards issued in prior years is considered remote.

Adjusted operating loss for the fourth quarter was $6.8 million, a decrease of $20.1 million compared to the same period last year. Our adjusted loss per share from continuing operations was $0.14, slightly above our revised expectations for an adjusted loss of $0.15 to $0.19 per share. For the full year, adjusted earnings per share from continuing operations was $0.61 versus last year's adjusted loss of $0.10 per share.

Moving to the balance sheet. We ended the fourth quarter with total accounts receivable of $145.5 million, down 11.1% versus $163.6 million last year. Our receivables remain in excellent condition at year-end. Our Talbots charge penetration continues to represent just under half of our net sales volume. Merchandise inventories at the end of the quarter were $158 million, up 10.8% to last year's $142.7 million due to a planned increase in receipts and lower-than-anticipated sales volume in Q4. The timing of spring receipts also had an impact on year-end inventory levels.

Total debt outstanding at the end of the quarter was approximately $25.5 million, down $461 million from last year. Cash provided by operating activities was $54.1 million for the year compared to cash provided by operating activities of $81.2 million last year. The decrease of $27.1 million is primarily due to changes in certain working capital items, specifically the level of investment in inventory this year versus last, primarily offset by higher income, excluding noncash items.

Now, let me comment on the first quarter of fiscal 2011. At this time, we are expecting continued weakness in our top line performance. Although sales trends and customer traffic have improved from the fourth quarter, first quarter to date top line sales are currently trending down 4% compared to last year, with both traffic and conversion negative. That said, keep in mind the shift in Easter from March of last year to April this year has impacted first quarter sales to date as we have moved key promotional events to coincide with the shift.

We have a number of marketing events planned throughout the remainder of the quarter to help drive improve customer traffic and sales. As we maintain a higher level of promotional activity, we are expecting cost of sales, buying and occupancy in Q1 to be up roughly 600 basis points compared to the year-ago period, particularly given the difficult comparison as the first quarter of 2010 was a historically strong quarter.

Selling, general and administrative expenses are expected to be slightly higher compared to last year on a dollar basis, primarily due to continued investment in marketing. Looking at the full year 2011, while we are not providing specific outlook on sales or earnings per share, in an effort to maintain some transparency we are providing some additional thoughts around our planned initiatives and the anticipated impact of industry cost pressures.

In terms of our accelerated store closings, we plan to eliminate approximately 500,000 gross square feet over the next two years, including downsizing and consolidations of certain stores. We expect to close 90 to 100 stores and consolidate and/or downsize approximately 15 to 20 stores over two years, with the majority of these actions taking place in 2011. As a reminder, this plan to reduce our square footage is one of the initiatives we discussed at our investor event in October as part of our three-year plan. We are not adding to the total number of planned closures; rather, we are now accelerating this action. While we are still in the process of finalizing our plan, we currently anticipate the costs associated with store closures, consolidations and downsizings will be approximately $18 million over two years.

As Trudy mentioned, we plan to invest in the refresh or renovation of 70 stores this year as part of our reimage program. In addition to the store reimaging initiative and store closures, we plan to open approximately 20 upscale outlets this year, another key component of our overall real estate strategy. We continue to be pleased with the performance of our Upscale Outlet business with sales per square foot in excess of $400 and comps trending up high-single digits.

Capital expenditures for 2011 are planned to be approximately $60 million, relating to investments in refreshing and renovating our stores, opening upscale outlets and our IT initiatives. Of the $60 million, approximately $16 million is earmarked for IT projects, which includes the full implementation of the allocation and planning system and overhaul of our financial systems, with the remainder or approximately $40 million to be allocated to store openings, store refresh, renovation and store maintenance.

We expect that our initial markups will be down approximately 50 to 100 basis points in fiscal 2011, primarily due to increased commodity costs and the mix of our merchandise compared to last year. We have been able to mitigate some of the headwinds by taking early positions in raw materials and pushing hard on our country diversification, with a focus on trade-preference countries. We are also strengthening and leveraging our key vendor partnerships. Our top 10 vendors will represent more than 50% of our first cost purchases in 2011. We look forward to updating you in June when we report our first quarter 2011 results. Thank you. Let me turn it back over to Trudy.

Trudy Sullivan

Thanks, Mike. In closing, 2010 was a year of significantly increased profitability despite a fourth quarter difficulty. At this stage in our turnaround, we are clearly focused on better execution of our key initiatives, and we will continue to push forward and put the necessary building blocks in place that we believe will position the company for long-term, sustainable, profitable growth. Overall for 2011, we anticipate that this will be another transition year for Talbots. A special thanks goes out to all of our Talbots associates for their continued hard work and ongoing commitment to our turnaround effort. We've made good progress and are strongly positioned for the challenges and opportunities ahead. And with that, I'd be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Adrienne Tennant with Janney Capital Markets (sic) [Janney Montgomery Scott LLC].

Adrienne Tennant - Janney Montgomery Scott LLC

Trudy, my first question: On the 70 remodels/refreshes, how many of those are actually the fixture package update versus a full renovation? And then Mike, can you just talk about the timing of closures and what the finance charge revenue and income was for the quarter -- or for the year, actually?

Trudy Sullivan

Adrienne, we are still putting the finishing touches on what store gets what treatment, but in all cases it goes beyond just a fixture package. It includes façade, paint treatment, fixture, different capacity hanging on walls. So we do have various levels of refresh and we are assigning those now. I will tell you that refresh stores for 2011 are heavily concentrated in our premium stores, with a few very-high-volume classics as well.

Adrienne Tennant - Janney Montgomery Scott LLC

How many stores do you have currently in some sort of a refresh renovated format?

Trudy Sullivan

We have about 14, right now, in our first wave.

Michael Scarpa

And the good news there is as we look at our overall portfolio of square footage, those 14 stores represent about 130,000 square feet and the 70 that we have planned will represent a little over 600,000 square feet. So we think by the end of 2011, we'll have roughly 25% of our portfolio refreshed.

Adrienne Tennant - Janney Montgomery Scott LLC

And then the closures and finance charge revenue income?

Michael Scarpa

We said the majority of the closures will take place in 2011, more back-half weighted than front-half weighted. We're still working through the final numbers on that. Finance charge income was approximately $39 million last year.

Adrienne Tennant - Janney Montgomery Scott LLC

And then the income number? The $39 million would be the revenue piece of it?

Michael Scarpa

Yes, that's correct.

Adrienne Tennant - Janney Montgomery Scott LLC

And then do you have the operating income number?

Michael Scarpa

We really don't talk about that.

Operator

Your next question comes from the line of Betty Chen with Wedbush Securities.

Betty Chen - Wedbush Securities Inc.

Trudy, I was wondering if you can speak a little bit more about the March assortments? It sounds like it's getting some better reaction from the customers. Are you able to make the adjustments in the tops category as well, especially in sweaters? Or what do you think is happening differently with the March assortment that's getting the customers to react? And related to that, I was wondering what's been the feedback on the marketing around Julianne Moore and any sort of learnings from the previous marketing campaigns that we can think about for 2011.

Trudy Sullivan

We are getting better traction on the March assortment, and as you know, we kicked off the March assortment with the Julianne Moore campaign. Julianne Moore was actually featured in seven fashion and lifestyle magazines and our March catalog and on online media, so kind of comprehensive view. We are seeing better performance in some of the categories that were difficult in the fourth quarter. For example, we're seeing much better performance in jackets. Our pant promotion that we launched this spring has been very successful. So I think all in all, it's been a color palette that is absolutely beautiful and she responds to. We're seeing strength in our woven knit category. And frankly, virtually everything that Julianne Moore wore in these campaigns has done very well. I think that we learned from our first national ad campaign that we really had to have a very strong assortment perspective on the Julianne-Moore-advertised style, so I think we did a much better job of having those represented through all of our segments. So we really kind of backed up -- our product was solidly in place for the start of that campaign. And to Mike's point, with the shift in Easter, we've also pushed -- we've reformatted some of our key marketing events into April to follow along with the shift of Easter, so we still have some significant campaigns left to launch in the quarter.

Betty Chen - Wedbush Securities Inc.

And Mike, I was wondering if you can give us a little bit more color around the inventory position. I think you mentioned that maybe there was some carryover inventory. Can you give us what that is year-over-year on the carryover part?

Michael Scarpa

Sure. We were up roughly 11% or about $15 million in inventory. I would say that approximately 70% of the inventory increase is due to the impact of higher receipts in Q4 and lower sales. And about 30% would be regarding the timing of spring receipts.

Betty Chen - Wedbush Securities Inc.

And is there an expectation we should have in mind for inventory at the end of Q1?

Michael Scarpa

I think inventory at the end of Q1 will be up about low- to mid-teens, based on our increased investment in inventory and lower-than-anticipated sales to date. I'll just point out that Q1 last year, we ended at $156 million, which was down 18% to '09 and 35% to '08. So it is at a pretty low level of inventory, as I'm sure you remember our cash availability, and we were pretty tight on inventory in the first quarter last year.

Operator

Your next question comes from the line of Neely Tamminga with Piper Jaffray.

Neely Tamminga - Piper Jaffray Companies

Mike, I was just wondering if you could give us a little bit more details on the CapEx. You had talked about $40 million for the 20 upscale outlets and the 70 refreshes. Just wondering how that might break out of the $40 million and if that included some of the tenant allowances that typically can be given for new stores. And then just a follow-up question on D&A, kind of what you're expecting, broadly, for D&A.

Michael Scarpa

Okay. So, as to the $40 million that we're allocating to our stores, approximately $8 million will be allocated to the opening of upscale outlets. We're expecting, all in, approximately $30 million associated with all the refresh.

Neely Tamminga - Piper Jaffray Companies

And then the D&A for the year? And then just one quick follow-up.

Michael Scarpa

D&A for the year will be in the $55 million to $60 million range.

Neely Tamminga - Piper Jaffray Companies

That's helpful. And I guess, just, it's pretty assured about some of the initial refreshes, the 14, I guess, that you have in the chain so far. You're seeing, what, 660, 700 basis points better on top line. Are you also seeing a lift in contribution margin?

Michael Scarpa

We are seeing a lift in our gross margins associated with those stores. Just to clarify, the 660 represents the premium doors that we've refreshed. There are three classic doors that have had some fixture remodels, which we think is more of an indication of some of our thought processes around segmentation. Overall, the chain is performing about 500 basis points up.

Operator

Our next question comes from the line of Stacy Pak with Barclays Capital.

Stacy Pak - Prudential

Trudy, I guess what I'm wondering is: Who is the customer? And where does Talbot sit? When you look at some of the charts that you showed us at that October meeting terms of breaking down your customer, has that changed at all? Sort of where you should be focusing and where you're going to be focusing. So I guess that's one fundamental question. I'm also wondering if you could update some of those brand health numbers you gave us in terms of better merchandise, must-have, product scores and catalog scores. And what you're suggesting on March doing better, I mean, are you sort of trying to tell us that you think you have the product figured out, because that's what I'm sort of struggling with? It seems like maybe you guys don't have it really figured out, where Talbots should be in the market.

Trudy Sullivan

First of all, let me start with your last comment first. Product is always a work in process here. As I mentioned in my opening remarks, we've really amped up our consumer insights focus. We're more rapid. We have a more rapid response to our learnings and an example of that is the research that we fielded in January, just to really understand her response to that particular book. We have not changed in our target customer. The chart that we presented in our October meeting is solidly the consumer that we are going after. As I said in my opening remarks, I'm particularly pleased to see -- even though our overall customer file is flat and the penetration of those age segments that we showed you was relatively unchanged, we have seen due to our reactivation efforts, an increase in the core customer age segment 55 and 65. We think this is really an important point to talk about because, for us, it's an affirmation of the "Tradition Transformed" product and marketing strategies that we have put in place. First and foremost, need to say -- this is our core customers. This is the customer who has the highest loyalty factor at Talbots. She's the one who sent us on the mission, when we started, that said, "Fix the product, and we will become more engaged." And so we're encouraged to see that as we work through "Tradition Transformed" -- and as I say, product is always a work in process. We're never going to be 100% done. But we are seeing that she is coming back to the brand. So we're encouraged with that. And now that we have more wherewithal -- financial wherewithal, we're really committed to total file growth. I think it's significant to note that we've seen some shifts. She's come back in the 55 to 65 age bracket. We actually have brought more customers under the age of 35, but frankly, our focus is not 35 and under. I think that our aesthetic can apply to a broad age range. Our focus is clearly aligned to the chart that we presented in October, and we are seeing traction in some of the key segments there. And we have a way to go in 45 and 50-year-old segment. But we believe the "Tradition Transformed" merchandising not only appeals to our core loyalists, but will also appeal to this customer as she becomes aware of our change. An important part of her becoming aware of our change, frankly, is also the renovation of the stores, because our research has shown us that customers get intrigued with what they see in the catalog but when they come to the store and it's not refreshed, they might have a tendency to think that we haven't changed as much as she might have thought. So that's a very important piece of our overall strategy.

Stacy Pak - Prudential

And then just two follow-ups, Trudy. One is: What explains, in your mind, why the 45- to 50-year-old customer would've gone down -- or 54? And then also, can you explain how you changed the distribution of fashion amongst your three segments of the stores?

Trudy Sullivan

First, I want you to know that the change in the 35-to-44 and 45-to-54 is insignificant. It's 0.1%, very insignificant change. We just haven't seen the additions there that we hope to see. And I would tell you that -- our breakdown -- you actually asked about the brand health metrics, and we will actually field that research again in March, so it's a little premature for us to be talking about that. We do a few more times a year. I'm sorry, the ratio of fashion to...?

Stacy Pak - Prudential

Well, I thought you were changing the ratio of how you distributed the fashion amongst the always and the classic and the...

Trudy Sullivan

We did. As I mentioned, one of our early lines on segmentation is we needed to put more premium products into the classic segments, and we need to put more fashion products into the always segment. They were a little bit -- they were too heavily weighted to key items. Those changes have started to take effect for spring and summer.

Operator

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

Janet Kloppenburg - JJK Research

I was wondering if you could talk a little bit about the trends in March. It sounds like they're pretty good, even though we have a shift, and I think you're up against a tough comparison. Trudy, I was wondering if the planned promotions were helping -- if you were more promotional versus last year. Perhaps you're not because of the shift in events that you talked about. But maybe you could talk a little bit about full price selling trends. That would help. And also, going forward, I was wondering what you were thinking about planning in terms of planned promotions. A lot of the other companies in the women's apparel business have built in margin to some of their promos and have been able to offer value or perceived value without damaging their merchandise margin lines. And lastly, for Mike, I heard what you said about inventories at the end of the first quarter. I'm just wondering how we should be thinking about inventory for the rest of the year. Will we see an increase -- a double-digit increase as we move through the remainder of the year?

Trudy Sullivan

Janet, as we said in the opening statement, we are more promotional than we were a year ago in a targeted fashion, I would have to say. We've used -- I think we've used our Internet business quite effectively for that. We have a repeat of our pant promotional. We amped it up this year in terms of the value of the offer. And so, the bottom line is we see a higher ratio of full price promotions at full price versus a year ago. And I'm sure that, that has had a positive effect in the fact that we have a slightly better traffic -- although still negative, but a slightly better traffic metric in the first quarter. And we -- and that's a fact of life. We feel we need to be more promotional to not only compete, but to promote tries for the acquisition of a new customer. The March trends we're seeing -- we're definitely seeing -- jacket trend comp is much improved in the March delivery. Our woven trend is very strong. Our pant promotion has done extremely well. So those are kind of three big callouts out of the March delivery. And frankly, I think, there was a tremendous amount of positive interest raised for us with the Julianne Moore campaign, and we performed very well with the product that we style "by Julianne Moore." And that was truly full price selling. So we're pleased with that. Obviously, we continue -- as to Mike's points on margin, we continue to have some, really, work on the margin side in order to allow us to be able to increase our promotional activity and that's an ongoing effort here.

Janet Kloppenburg - JJK Research

So do you think that planned promotions can be less costly to margins in the back half?

Michael Scarpa

We're still evaluating that.

Trudy Sullivan

There is the promotion and there's just raw material pressure, so there are some other variables that we have to continue to work on.

Janet Kloppenburg - JJK Research

And on the inventory, Mike?

Michael Scarpa

I think we're going to see inventory through the first half of the year be up in the low- to mid-teens, and then we'll start to see that ramp down as we get through the third quarter and fourth quarter. I would expect year-on-year inventories to be up mid-single digits at year-end.

Janet Kloppenburg - JJK Research

And Trudy, did you say that the remodels are comping positive? Is that what you said?

Trudy Sullivan

We said that the premium remodel stores had a 660 basis point improvement over their control group.

Janet Kloppenburg - JJK Research

And what about just the regular remodels?

Trudy Sullivan

Well, they're virtually all premium except for a handful of classic, and there's mixed results in classic that we feel had more to do with the initial allocation issues than with the remodel. As we get deeper into first quarter on several of the classic stores, we're actually seeing their trends improve in different allocations.

Operator

[Operator Instructions] Your next question comes from the line of Jennifer Davis with Lazard Capital.

Jennifer Davis - Lazard Capital Markets

Can I ask a clarification question? On renovated premium stores, you said that they were up 660 basis points against the control group. I guess, what's the control group? Is that the entire store base? Or is that just other premium stores? Or what?

Michael Scarpa

It's a light premium store in a light market.

Jennifer Davis - Lazard Capital Markets

And how much higher do premium stores trend versus classic and always stores in general?

Michael Scarpa

Premiums usually have anywhere from 400 to, I'd say, 600 basis points performance over our always group and maybe slightly less than that on the classic side.

Jennifer Davis - Lazard Capital Markets

And then last quarter, you talked about a façade update that you had done on nine stores. Can you talk about what you've seen from that?

Trudy Sullivan

That's all been incorporated in our thinking going forward. We've done -- I guess the bottom line is: Any store that we would refresh would have some façade treatment go with it, so...

Jennifer Davis - Lazard Capital Markets

So you're not trying any just-façade updates?

Trudy Sullivan

We're trying a number of different flavors, and all stores will have some treatment on the façade and some treatment on the inside as well.

Jennifer Davis - Lazard Capital Markets

And the one last one, Mike. I understand what you're saying about inventories. They've been down for several years. They've been down significantly. But even if they are tracking up mid-single digits for the year, that's probably still above comp, so just kind of wondering about your thinking there.

Michael Scarpa

Well, I could tell you that they'd be down, but I'm being conservative in terms of my overall guidance right now and comments on the full year. We still have a lot of work to do in terms of our inventory plans. We haven't purchased our full set of Q4 inventory yet, but we do see it starting to come down. Obviously, a lot is going to depend on what we anticipate for sales trend in Q4.

Operator

Your next question comes from the line of Michelle Tan with Goldman Sachs.

Michelle Tan - Goldman Sachs Group Inc.

Trudy, I wanted to make sure I understand something. As you're hindsight-ing, and this is from holiday season, do you think the primary miss in your opinion is really about how you assorted, allocated and merchandised the stores? Or were there also some meaningful issues on the assortment side and the product side that you're looking to address for fall?

Trudy Sullivan

On those, I mean, it's not all one thing. We definitely had misses on the assortment side. As I said in my opening remarks, we were disappointed in the performance of our top categories to how we had planned it. There were definite misses there. We felt our January delivery was not "buy now, wear now" in too many of our markets, so we were very disappointed in reaction there. So there were definitely product mixes. Our allocation strategy evolved in fourth quarter but it was really only the second, kind of, second allocation under our segmentation initiative, so we were able to tweak some things. But I would say that those were minor changes, and some of that, I think -- we did impact some of our classic stores in the fourth quarter by not having a high enough ratio of the premium product there. And I think the last thing that our research showed us was some of the styling in our catalog, particularly our January book, was a little bit extreme for our core customer. And she is very, very generous with her remarks, and she told us loud and clear that she thought some of that was inappropriate, and thankfully, we were able to catch that with the March book.

Michelle Tan - Goldman Sachs Group Inc.

And then Mike, sorry if I missed this, but thinking about the IMUs for the year down 50 to 100. What's the trend by quarter, or first half versus second half in that?

Michael Scarpa

It's much less in the first half than it is in the second half. So my sense is we're between flat and 50 in the first half, and we'll be 75 to 125 in the back half.

Operator

Your next question comes from the line of Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger - Morgan Stanley

Trudy, my question's on the store segmentation. I'm wondering if you can just take us back to six to eight months ago when you started the store segmentation. It sounds like you have two strategies on store segmentation. One is that from the six-to-eight-months-ago time frame, you're moving some of the stores out of classic into premium. And then you're also adjusting the assortment of product to your classic stores and your always stores. Can you just help us understand the different moving parts: where we were in terms of the quantity of stores in each segment, where we are today and ultimately, where you'd like to be? And it sounds like you're making progress here in the first quarter but you're not where you ultimately want to be. So if you can just help us understand the time frame to when the store product will get to the point that you want it to be.

Trudy Sullivan

Kimberly, going-in premise on what determines a premium or classic or an always store was tied to customer demographics and behavior and actually where the store was co-located. So for example, a store co-located to a better department store had different customer behavior than a store that might be in a village center or a store that would be in a strip center co-located to a Penny's [jcpenny] or a Kohl's. So a lot of rigor went into the assignment of what stores fell into what segment. So there's been relatively little shifting out of segments that have happened. We might have touched -- put a couple more stores in premium, taken a few stores that were lower classic and made them upper classic. But shifting out of segments hasn't been the big move here. The big move has been really learning how the product performs, what our assortment strategies really should be. And there's two big changes as we go forward. One is, we're refining, also, a volume approach within segments. So for example, we had some high-volume classic stores that are appropriately assigned as classic but still carry very high volume sales potential. And we felt in those cases that they have the ability to have a bit more of their mix skewed towards what we call premium product. And that, we started to do in the spring and summer. Conversely, going-in hypothesis on always was that they would be pretty much key item, basic, more heavily weighted to opening-price-point product. And our view has evolved there to say that they still need to have a higher mix of fashion, the key items, than we initially assorted them to. So those are kind of the shift vector we've gone through. Really, spring is our third season under segmentation. As to when we're ever done, I believe product is always a work in process for us, so there will never be a date certain that we think that they're done, but I am pleased to see that the performance in all segments for the first quarter so far has improved. It's still negative, but in every segment the sales performance has improved. So we still have a lot of learnings, and as I said in my opening comments, it will be greatly enhanced when some of these IT initiatives go live in the middle of the year. That's going to help our execution against segmentation tremendously. But we feel it's a significant and very promising initiative that we're working on.

Kimberly Greenberger - Morgan Stanley

And just one follow-up question. As you think about the fleet five years from now, is there an ideal number of stores that you'd like to have? And at that point in time, would you expect all of your stores that remained open to be in the refreshed/remodeled/updated store format?

Trudy Sullivan

As we sit here today looking at it, we think a store fleet of around 400 stores makes sense. Obviously, we would continue to evolve our thinking but for today, that's what it feels like: 400 much more highly productive stores than we own today. And we also believe -- not to lose sight of the fact that the upscale outlet initiatives -- we certainly have significant proof-of-concept there, and there's a lot of growth ahead in that strategy. And we'd refresh the majority of the 400.

Operator

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

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

A quick question on catalog distribution year-over-year. I'm just wondering where that ended up and where it's headed for 2011. And I guess in the same breath, the marketing spend, how it ended up in 2010 and how you'd think it will be in 2011.

Michael Scarpa

From a marketing spend perspective, we ended the year up about $10 million over 2009, and we're currently thinking in the range of $7 million to $10 million of additional marketing spend in 2011.

Trudy Sullivan

And in terms of catalog distribution, you're talking about circulation, Richard?

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

Yes, please.

Trudy Sullivan

That's a dynamic process here. We're constantly looking at circulation, but I wouldn't anticipate there'd be huge shifts from where we were year-over-year. It's just that we don't -- we continue to prioritize reactivation and prospecting.

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

So does that mean in 2010 it was flat to 2009, and it will be flat in 2011, more or less?

Michael Scarpa

It was up approximately 6% in '10 over '09.

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

And we should look closer to flat in 2011.

Michael Scarpa

Yes. I think you got to look at catalog circulation, our use of different medium to contact the customer, whether it's other marketing tools or e-mails, Internet, things like that.

Trudy Sullivan

I guess you could say customer contact will be up, but it won't actually be up just due to catalog distribution.

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

Right. And that would be the marketing spend, the $10 million billed -- or $7 million to $10 million billed -- that you just mentioned.

Trudy Sullivan

It's our use of the enhanced Web capability, e-mails, those kinds of contacts.

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

What are the total marketing dollars for 2010? You had mentioned up $10 million, but what was the base?

Michael Scarpa

I don't have that handy.

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

Okay. I'll grab that offline.

Operator

Your next question comes from the line of Jennifer Black with Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

The merchandise is looking better and better and the glimpses of fall looked great. I wondered what the biggest callouts are as far as what you're doing differently for summer -- late summer and fall relative to this last year. That's my first question.

Trudy Sullivan

I'm sorry, just -- relative to last year's...?

Jennifer Black - Jennifer Black & Associates

As far as what you're doing differently with the merchandise. For example, I think that you didn't have enough of a jacket collection. I think they were too short. Are there any callouts? Maybe there are no callouts for -- but fall looks really, really great.

Trudy Sullivan

Again, I'd go back to -- as you well know, the product is a work in process here. I'd like to believe that we've addressed some of the jacket deficiencies we saw in fourth quarter. We're seeing much better performance in March. I think our allocation of the product, certainly, as we go out of spring into summer continues to improve. We believe -- we love our summer assortments. I think it's appropriate. It is more cleaned up. And especially as we ramp into fall, we are getting a lot cleaner. I'd say the trends really favor our classic, more clean kind of aesthetics. So we're excited to see the evolution of the line that way. So I think we're in a continuous learning, and I think stepping up this whole consumer insight -- customer insight methodology and presence here really helps us to stay much more aggressively in touch with our consumer, get their reaction, read and react. So I'd like to believe that we incorporate our learnings as quickly as possible.

Jennifer Black - Jennifer Black & Associates

My follow-up question is if you could discuss your Accessories business and just give us an update as far as your strategy. It appears you've made headway, especially with belts, shoes and bags. Jewelry, looks like a little bit light on inventory, and then I wondered if you could comment on denims.

Trudy Sullivan

Rest assured that jewelry is not light on inventory. We continue to make progress there, Jen. We believe that Accessories can be a significant contributor going forward. We have had success in belts and scarves and certainly, our shoe assortment is doing very well. We're having a very strong reaction to shoes. We're still focused on landing our handbag strategy in a way that it can become a bigger contributor, but work in process. And I'd say, 2010, we made solid progress in the Accessory business.

Jennifer Black - Jennifer Black & Associates

In denim?

Trudy Sullivan

We launched denim in August, and we are very pleased with her reaction to denim. As we wrap into fall, you will see that we're going to add a couple of new fits, not just in denim but in the whole pant category, which is just -- she loves our pant fit. She loves our denim fit. She loves the quality of our denim. We've actually put denim on the map for her. It's gone from a virtually non-existent part of our assortment to a very meaningful part of our pant assortment, and pants are a driving category for us.

Jennifer Black - Jennifer Black & Associates

Can I ask one last question? I've noticed that in a number of different items, you're doing up to 10 colors in a specific item, and I was curious to know: Do you need to do that many colors? I wasn't sure of your thought process behind that.

Trudy Sullivan

We've had a evolution of our basics business from just pure, key item to what we call "fashion essential." And the fashion essential is a basic that has a bit more design, might be a more novelty fabric that has some additional trim that bears a slightly higher price. And as we've evolved our key item businesses into fashion essentials, which by the way are performing well, we've held on to our tried and true, the things that she loves from us the most like the pima tee or the charming cardigan. And in those cases, especially with the Direct business, we really can sell multiple colors. What we do is we tend to have the broadest color range in the Direct business, not in the store inventory. But because she can come into our store and pick up the Red Phone [Red Line Phone] and get a color that sees on an item that she loves, that works well for us. We don't do those color spreads in a huge number of items, but there are certain, specific items that she really expects us to have that range of color.

Operator

Your next question comes from the line of Randy Konik with Jefferies.

Randal Konik - Jefferies & Company, Inc.

Trudy or Mike, is there a change in the, I guess, the way you're thinking about the promotional strategy of the company? I guess if you look at -- back over the four or five quarters x the fourth quarter, the story was more about inventory discipline, gross margins going up. And now we have gross margins going down, promotions going up and more of, I guess, a focus on trying to drive comp. Are we safe to assume that's kind of the -- is there a change in strategy there? And if so, how should we be thinking about your gross margins for this year? And then does it change your outlook of the 2013 type of plan you gave at the meeting? And then Mike, I just need to know what the tax rate -- how to think about the tax rate for this year. And then lastly, on the inventory comments for the end of the year, you said that inventory dollars should be up, I think, in mid-single digits. Just want to confirm that. And how should the inventory look on a unit basis?

Trudy Sullivan

I would say, Randy, we are going to be -- as I've always said, we're going to be -- we will be more promotional in a targeted way. We believe that it's a way to accelerate not only try for a new customer, but it frankly is a more effective way to compete in today's environment. We continue to believe that we can drive -- we can get very profitable growth by pursuing this strategy. In terms of how it affects 2013, in my opening comments -- I believe I clearly stated, anyway, that we still believe that the financial targets we talked about in 2013 are valid. We are reassessing the time frame that we would get to those targets, but clearly, that strategy has not changed. I'll pass it off to Mike.

Michael Scarpa

As far as our tax rate goes, we're expecting, for '11, around $4 million in tax expense. But due to our full valuation situation and the timing of the store closure expenses, tax expenses on a quarter-by-quarter basis could be highly volatile. So we're not giving guidance at this point until we get a better handle on our store closure expenses. As far as my inventory comments, value of inventory up mid-single digits. We could expect actual units to be down year-on-year.

Operator

Your next question comes from the line of Margaret Whitfield from Sterne Agee.

Margaret Whitfield - Sterne Agee & Leach Inc.

Based on the strong performance of the outlets, are there any learnings that you could apply to the full-price stores? And is your upper limit on outlets still 60? Also, on the stores you're going to be closing, are they mainly always stores? And finally on the DTC, disappointed in the progress there. Is this a business that you see as flattish going forward? Or if you could comment.

Trudy Sullivan

Margaret, I believe that the learnings that we have on outlet are really specific to outlet. I mean, we're practicing -- we have great forward product there the same way we would in a core store, but we run the outlet completely separately with a separate team. It's a separate product line manufactured exclusively for them, and that appears to be the winning formula. And we certainly do not want to tinker with that too much since it is working. As to, "Is 60 in our upper limit?" Probably not. We will do more than 60, especially if we continue on the pace that we're going. In terms of store closings, the majority of the stores that we would be closing would fall into the always segment. That would be correct. And finally, we believe direct-to-consumer should be providing more growth than it is, and we're working very hard. We do not see it as a flattish business, and so we are working very hard to deliver on that.

Margaret Whitfield - Sterne Agee & Leach Inc.

And for Mike, the share count that we should use for the year or the quarter?

Michael Scarpa

We're expecting around 70 million shares outstanding on a diluted basis.

Operator

Your next question comes from the line of Paul Lejuez with Nomura.

Paul Lejuez - Nomura Securities Co. Ltd.

Historically, your first quarter is the best gross margin quarter and your highest net income quarter. Is there anything, any reason, that we should expect that pattern to change this year? And then just secondly, Mike, back in October, you guided free cash flow to flat. Results actually came in a bit worse than expected. So just wondering what were the offsets that helped you generate free cash flow this year.

Michael Scarpa

Okay, so we haven't guided for the full year, so I'm not going to comment on your first question. And as I look at the cash flow situation -- and it was cash from operating activities, not what we consider free cash flow -- but obviously, our backup in inventory definitely hurt us, and our shortfall in income hurt us and prevented us from being flat on a year-on-year basis.

Paul Lejuez - Nomura Securities Co. Ltd.

Didn't you generate cash this year, Mike, net of CapEx?

Michael Scarpa

Yes. We generated $54 million in cash net of about roughly $29 million in CapEx.

Paul Lejuez - Nomura Securities Co. Ltd.

Wasn't that better than what you were guiding to back in your Analyst Day in October?

Michael Scarpa

It was roughly the same. Payment came in lower. We had modeled out upper 30s back in October and it came in at roughly $29 million.

Paul Lejuez - Nomura Securities Co. Ltd.

And what's the plan for free cash flow this year net of CapEx?

Michael Scarpa

We haven't given that.

Operator

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

Susan Sansbury - Miller Tabak

Going back to the inventory question, Mike. Units, can you shed some light on how much you expect units to be up or how much you expect higher product costs to -- can you give us some sort of analysis of year-end mix or first quarter mix between product and units?

Michael Scarpa

What I just said was that we expect dollars to be up mid-single digits, and I would expect units to be down about mid-single digits, if that's helpful.

Susan Sansbury - Miller Tabak

That's helpful. And then what about cost management, lower cost initiatives this year versus last? Where are you focused? Is there a number?

Michael Scarpa

We're not guiding to that at this point. I will tell you that, obviously, SG&A is under continuous scrutiny here. We were able to bring in 2010 under our 2009 levels despite the additional marketing expense, and we did add back certain costs associated with employee benefits. So the bucket of those two was approximately -- over $20 million. So we were still able to come in under SG&A after cutting 150 the year prior. So it's a focus here. That's all I'll say.

Operator

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

Dana Telsey - Telsey Advisory Group

Can you talk about the stores that you're closing, what the expected savings are from those store closings and what the timing of those expense savings that you're getting? And then also, can you talk a little bit about direct versus stores? What have you seen in terms of sell-through of products? Has there been a different response online versus stores?

Michael Scarpa

From a store-closure perspective, I will say that approximate sales volume for those stores is $100 million, and that we would trend them out to actually produce a low-single digit four-wall operating loss. What we're attempting to do here is be in a position where we could transfer the sales of those closed stores into existing stores in the marketplace or to our Direct business. Historically, the company has been able to do between 15% and 20% with virtually zero marketing efforts, so as Trudy mentioned in her script, we'll be stepping up marketing activities around -- to those customers at the doors that we'll be closing. And we hope for a much higher transfer to existing stores. Obviously, those sales transfers have very little expense associated with them, so we expect that there could be significant drops of gross margin to the bottom line.

Trudy Sullivan

And, Dana, in terms of response differences between the online business and stores, they track relatively the same in terms of margins. It's stronger in online as it is stronger in stores. There are certain categories that our Direct business has a higher penetration in, such as footwear and accessories or suiting, but actual product response are similar by channel.

Operator

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

Roxanne Meyer - UBS Investment Bank

Viewing from the question on store closings. I know you mentioned that you're targeting, longer term, about 400 stores being the right size of the chain. But with 300 leases that are coming due in the next few years, wondering what incremental moves could be in terms of additional closings or downsizings or just accelerated renovations. Anything you can share at this point for the out years?

Michael Scarpa

We're definitely going to look at that opportunistically, and we're not in a position to share anything further than we shared this morning.

Roxanne Meyer - UBS Investment Bank

I appreciate your comments on the customer file. It's great to hear that you're actually seeing an increase in reactivated customers and new customers in that 55-to-65-year-old segment and not much change for the others. But when you think about the average dollar spend of each of these segments, can you provide us a little more clarity on how that shift has been trending to really appreciate where you need to see a step up in that average sell or spend the most by age bracket?

Trudy Sullivan

I can tell you that our core retained customer spending is slightly off around 1%. And our new and reactivated customers are spending slightly more than they have in the past -- than that segment has in the past. It's up about 2%. So our new and reactivated have offset a slight decline in core.

Operator

Your next question comes from the line of Pamela Quintiliano from Oppenheimer.

Pamela Quintiliano - Oppenheimer & Co. Inc.

Two things I was wondering about. Just with ownership of fabrication, if you could talk about that through the back half of the year and where you stand.

Trudy Sullivan

In terms of taking stands on raw materials?

Pamela Quintiliano - Oppenheimer & Co. Inc.

Yes.

Trudy Sullivan

We don't actually give a number there but I can tell you that we will take a stand on raw materials, on materials that are absolutely core to the assortment. But I don't believe we've ever actually issued a number on that.

Pamela Quintiliano - Oppenheimer & Co. Inc.

So you have taken a stand, though, for the back half?

Trudy Sullivan

Of course, on key fabrications, yes.

Pamela Quintiliano - Oppenheimer & Co. Inc.

Also, just when I think about the traditional core customer versus that newer target customer and both of them shopping in the same footprint, can you provide some detail on whether they're responding to different product or whether they are both responding equally well to the updated assortments? And I understand that's a work in process but just how we should think about that.

Trudy Sullivan

I think what's encouraging to us is that the core customer is responding to what we refer to as "Tradition Transformed", and it's that same product that is more appealing to a customer who's likely to try the brand. So we see a similar response to what the core is buying and what the new customer is buying. But we needed to upgrade and improve the brand in order for the new customer to even want to try it and, frankly, for the core customers to come back into the brand.

Operator

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

Marni Shapiro - The Retail Tracker

I guess sort of bigger picture question here. It sounds like it's been a tough go but in spite of everything, you guys are seeing some really good signs, be it the older customer leaving, a younger customer coming in, fashion selling. Could you just talk a little bit about two things? The first is it feels like we've been going two steps forward, one step back for a while and with the transition, I know this is expected. But if you're looking out in 2011 into 2012, do you see the light where you're going two steps forward and it's sticking? And I guess the other thing is if the fashion is selling, and it sounds like you're closing the everyday, the always stores, is it possible that this new Talbots is actually a little bit more high-end than Talbots used to be? And I guess what's your thoughts around that, as well?

Trudy Sullivan

Marni, I don't have a crystal ball. So I tell you two steps forward and one step back, two steps forward, two steps forward. We're in the middle of a big, transformational project. We've accomplished a lot. We still have a lot to accomplish. So as I said, we look at 2011 as a transition year. Are there things that are working? Yes. Are there things that we thought would work better than they did? Yes. And so it's -- we feel we're on the right path. We are encouraged by the core consumer reactivating and the growth in actual numbers on our core consumer segment. And that's really important to us because she's the one that sends us down the road to reinvigorate the brand. So we worked very hard to do that, and the first test is if it appeals to her. And we feel that the product that appeals to her is also valid product for us to prospect for a slightly younger customer to try the brand. And part of getting that customer in is tied to the store renovation. So these things are very intertwined, and it's also incumbent upon us to continue to refresh our marketing approach both for our core customer and to attract this new customer, and that's where this step up in consumer insight takes us and enhanced capabilities we have in direct-to-consumer takes us. So it's very much still a work in process. Are we enthusiastic, and do we feel that we are on the right strategies? Yes. But I cannot predict exactly how this will go. I do believe, however -- to your last question, we're not trying to invent a more exclusive or higher-priced Talbots. That's not the mission. I mean, this is a great brand. It's a democratic brand. It's a brand that can appeal to a broad size spectrum, a broad age spectrum, diversity. We want all of those to remain in this brand as we continue down this road of transformation. So a better brand.

Operator

We don't have time for any more questions. Mrs. Sullivan, please continue with any closing comments.

Trudy Sullivan

Well, thank you, all, for dialing in this morning. Again, I want to acknowledge that we have work to do and are very focused on our initiatives, but we are making solid progress. We ended the year with significantly improved profitability. We continued with our product evolution.

As I said, some things worked and some things did not but our brand transformation is well underway. We have a much stronger balance sheet and are now investing in store renovation, critical IT systems and increased marketing to improve customer acquisition and productivity. We are accelerating our program in 2011 to reduce stores and square footage, and we have achieved proof-of-concept in our upscale outlet program, which is performing well. So thank you, all again and have a great day.

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

This press release contains forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as expect, achieve, plan, look, projected, believe, anticipate, outlook, will, would, should, potential, or similar statements or variations of such terms. All of the information concerning our future liquidity, future financial performance and results, future credit facilities and availability, future cash flows and cash needs, strategic initiatives and other future financial performance or 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 risks and uncertainties, including assumptions and projections concerning our internal plans, regular price and markdown selling, operator cash flows, liquidity and credit availability for all forward periods. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the following risks and uncertainties:

the ability to successfully increase our store customer traffic and the success and customer acceptance of our merchandise offerings in our stores, on our website and in our catalog;

the continuing, material impact of the U.S. economic environment on our business, continuing operations, liquidity and financial results, including any negative impact on our consumer discretionary spending, substantial loss of household wealth and savings, significant tightening of the U.S. credit markets and continued high unemployment levels;

the risks associated with our efforts to successfully implement and achieve the benefits of our current strategic initiatives, including store segmentation, store reimaging, store rationalization and the reduction of the company's store base and square footage, enhancing marketing, information technology, reinvestments and any other future initiatives that we may undertake;

the risks associated with competitive pricing pressures and the current increased promotional environment;

the risks associated with our ongoing efforts to adequately manage rising raw material and freight costs;

the ability to attract and retain talented and experienced executives that are necessary to execute our strategic initiatives;

the risks associated with maintaining our traditional customer and expanding to attract new customers;

the ability to accurately estimate and forecast future regular price and markdown selling and other future financial results and financial position;

the satisfaction of all borrowing conditions under our credit facility, including accuracy of all representations and warranties, no events of default, absence of material adverse effects or a change in all other borrowing conditions;

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

the risks associated with our appointment of an exclusive global merchandise buying agent, including that of the anticipated benefits in cost savings from the arrangement may not be realized or take longer to realize than expected, and the risk that upon any cessation of the relationship for any reason we would be unable to successfully transition to an internal or other external sourcing function;

the ability to continue to purchase merchandise on open account purchase terms at existing or future expected levels and with acceptable payment terms and the risk that suppliers could require earlier or immediate payment or other securities due to any payment concern;

the risks and uncertainties in connection with any need to source merchandise from alternate vendors;

any impact or disruption of our supply of merchandise, including any current or any future increased political, social or other unrest or future labor shortages in various Asian countries;

the ability to successfully execute, fund and achieve the expected benefits of supply chain initiatives;

any significant interruption or disruption in the operation of our distributions facility or the domestic and international transportation infrastructure;

the impact of the current regulatory environment and financial system reforms on our business, including new consumer credit rules;

the risk that estimated or anticipated cost, charges and liabilities to settle and complete the transition and exit from disposal of the J. Jill business, including both retained obligations and contingent risks for assigned obligations, may materially differ from or be materially greater than anticipated;

any future store closings and the success of and necessary funding for closing underperforming stores;

the risks associated with our upscale outlet expansion;

the ability to reduce spending as needed;

the ability to achieve our 2011 financial plan and three-year strategic plan for operating results, working capital and cash flows;

any negative publicity concerning the specialty retail business in general or our business in particular;

the risk of impairment of goodwill and other intangible or long-lived assets;

the risks associated with our efforts in transforming our information technology systems to meet our changing business systems and operations;

any lack of sufficiency of available cash flows and other internal cash resources to satisfy all future operating needs and other cash requirements;

and the risk and uncertainties associated with the outcome of current and future litigation, claims, tax audit and tax and other proceedings and the risk that actual liabilities, assessments or financial impact will exceed any estimated, accrued or expected amounts or outcomes.

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