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The Talbots, (NYSE:TLB)

Q1 2011 Earnings Call, Jun 07, 2011

June 07, 2011 10:00 am ET

Executives

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

Trudy F. Sullivan - Chief Executive Officer, President and Director

Julie Lorigan - Senior Vice President of Investor and Media Relations

Analysts

Stacy W. Pak - Barclays Capital, Research Division

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Roxanne Meyer - UBS Investment Bank, Research Division

Dana Telsey - Telsey Advisory Group

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Pamela Nagler Quintiliano - Oppenheimer & Co. Inc., Research Division

Michelle Tan - Goldman Sachs Group Inc., Research Division

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division

Marni Shapiro - The Retail Tracker

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

Susan R. Sansbury - Miller Tabak + Co., LLC, Research Division

Jennifer Black - Jennifer Black & Associates

Randal J. Konik - Jefferies & Company, Inc., Research Division

Betty Y. Chen - Wedbush Securities Inc., Research Division

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 2011 earnings results. Today's call is being recorded. [Operator Instructions] I would like to turn the call over to Julie Lorigan, Senior Vice President of Investor and Media Relations.

Julie Lorigan

Thank you, and good morning, everyone, and welcome to the Talbots, Inc.'s First Quarter 2011 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 end of day, June 9, 2011. The webcast will also be available on the Investor Relations page of our website.

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

Trudy F. Sullivan

Thank you, Julie. Good morning, everyone, and thanks for joining us. In a moment, I will discuss Talbots, Inc. results for the 13-week period ended April 30, 2011. Mike will cover our financial performance and provide some color around second quarter. After that, I will make some closing remarks, and then we'll open the call for questions.

Overall for the first quarter, net sales declined 6%, driven by lower-than-expected performance across all channels. We achieved profitability in the quarter reporting adjusted operating income of $7.6 million and adjusted earnings per share of $0.08. But nonetheless, results we are not satisfied with. The predominant factors impacting our results were an inconsistent customer response to our merchandise assortment. Although we did see a positive reaction to our March brand moment, our February and April brand moments underperformed and sales in each month of the quarter declined year-over-year. Our April sales were better than March, but not to the level that we had anticipated given the Easter holiday shift.

From a product perspective, the majority of our mix was in knits and sweaters. Similar to what we experienced in the fourth quarter, we were challenged in these 2 key categories, primarily due to a lack of novelty and print and to a certain -- and to certain lighter weight fabrications that did not resonate with our customers. These issues were identified earlier, and we have already taken corrective action which will be reflected in our back half assortment.

Our Accessory business, primarily scarves and jewelry, did not perform to our expectations. However, shoes were strong. In pants, while our Missy pant category was flat to last year, our special-sized pants business was below last year. We are vigorously working to address all of our challenges, focusing on directing our merchandise strategy to ensure the proper balance of classic to fashion forward styles. At the same time, we know we need to implement broader-based marketing initiatives that better connect with our core and our target customers to drive improved customer traffic and top line sales.

While we anticipate the second quarter will continue to be challenging, we have taken the following actions to better position ourselves for fall. Specifically in merchandising, beginning in the third quarter, our sweater assortment has been modified to include new styles, adding more novelty and variety to the mix. In knits, we have increased the penetration of print, pattern and addressed fabric weight. And we have added breadth to some of our smaller categories, including dresses, skirts, suiting and woven tops where we have seen increased customer demand and have room for expansion.

Further, we have added 2 new fits to our pants assortments, modern and curvy. Both of these fits have been market tested in the current quarter, and we are pleased with these test results, with curvy the clear front-runner. And lastly, we have enhanced the fit of our pants for our Petite and Women customers, also to be introduced this fall.

As we look at the back half of the year, we will deliver a stronger balance of classic versus fashion forward styles in our assortments. Our goal is to offer our core customer the updated modern classic merchandise that she has asked us for and which we believe will allow us to expand our customer base as we also seek to attract a new customer. Overall, we believe our fall assortment is a more balanced representation of the "Tradition Transformed" platform.

Now let me address progress on our key strategic initiatives, segmentation, marketing and store refresh. In terms of our segmentation strategy, we continue to refine our approach based on our learning. During the first quarter, we upgraded 31 always stores to classic stores and we plan to upgrade a handful more of our classic stores to premium stores. We are increasing the overlap in product between our premium and classic assortment, with the biggest increases coming in the third and fourth quarters.

We also recently realigned our store organizational structure to better support our portfolio of stores. We believe these updated segmentation and coverage effort will strengthen execution at the store level. We expect that our capabilities will also be enhanced by our new IT system being implemented this year.

Our JDA Allocation tool is now live, and our Oracle store clustering and size profile optimization analysis tool are on track for full implementation by mid-July. We believe that we have not yet reached the tipping point needed to change perceptions with enough non-customers. And we plan to continue investing in marketing during the second half of the year to increase reach and frequency and build greater awareness of The Talbots' new brand image.

As you know, we have already made changes to our initiative to offer our customers promotions in a more targeted way. In the direct channel, we plan to continue to use timed events online to create a sense of urgency. In addition, we plan to increase customer contacts through catalog circulations, mailers and postcards, as well as testing new alternate forms of media as we continue with new customer acquisition efforts.

While details are still being finalized, we are planning a media strategy for the back half of the year that consist of a mix of national publications, including fashion and lifestyle, regional publications, newspaper and digital advertising to continue to dialogue with our current customers, as well as those consumers we are targeting. We are also pleased to announce that our fall national advertising campaign will once again feature Julianne Moore, an ideal investor for our brand in our core and target demographic.

While we saw a modest decline in our customer buyer file in the quarter, down 2% on a comparable basis to last year, we believe this in part reflects the weaker-than-anticipated response to our merchandise assortment, and we remain focused on improving our reach and frequency of customer contact with our marketing strategy.

With respect to our store reimage initiative, we remain on track to complete approximately 60 to 70 refreshes in fiscal 2011. In our reimaging plan for the year, approximately 32 stores are expected to be fully refreshed by the end of September in their existing locations and within their current square footage, and an additional 10 to 15 consolidations and/or downsizing will be completed by the end of September as well.

We anticipate the balance of the stores will be updated by the end of this year through a combination of relocation, consolidations, downsize or lease required events. And as we have indicated to you previously, all refresh stores overall have continued to outperform the non-refresh stores.

In terms of our real estate, we began rightsizing the portfolio starting in the current quarter and plan to close approximately 83 stores in fiscal 2011, 25 stores in fiscal 2012 and 2 stores in fiscal 2013 for a total of approximately 110 store closings. With our first group of approximately 30 stores that are planned to close by the end of August, we have commenced with our elevated marketing efforts to transfer customers from closed stores to other stores in the same markets or to our direct channel in order to increase our revenue capture rate.

So while we have made progress in our turnaround, we recognize that the work we have ahead of us is not easy. However, we continue to believe that we are pursuing the appropriate strategies and that our long-term goals are achievable. Before I turn the call over to Mike, I'd also like to add that we are continuing to make very good progress in the searches for our critical open position of head of stores and lead merchant, and we plan to update you in the very near term.

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, and good morning, everyone. I will now cover the details of our first quarter financial performance, as well as comment on the second quarter.

Total net sales were $301.3 million compared to $320.7 million last year, down 6%. Store sales were $240.8 million compared to $257.6 million last year. Comp store sales, excluding the stores planned for closure, decreased 8.2% for the 13-week period, due primarily to a 6% decrease in customer traffic and a 3.5% decline in conversion. Direct marketing sales in the first quarter, which includes catalog, Internet and Red Line, were down 4% from last year at $60.5 million, driven by a decrease in customer demand. At the end of the first quarter, Internet sales represented approximately 76% of our total direct business.

As stated in this morning's press release and going forward, we will also be reporting a consolidated comp sales result, which decreased 7.7% in the first quarter and includes our direct business and excludes the stores planned for closure. We believe that given the current industry trends and the impact of our strategic initiatives, this is a meaningful measure of our ongoing operations.

First quarter cost of sales, buying and occupancy as a percent of net sales increased 800 basis points over last year at 64.4% of net sales versus 56.4% of net sales last year. This was greater than our previously announced expectation of 600 basis points due to deterioration in our merchandise margin, which accounted for 880 basis points of the increase, resulting from increased markdown and promotional activity as we work toward bringing our inventory in line with our sales level. This increase was partially offset by an 80-basis point improvement in buying and occupancy costs.

SG&A expenses in the first quarter were $100 million at 33.1% of net sales versus $108 million at 33.7% of net sales last year. This improvement was primarily due to the reduction of certain components of performance-based management incentive compensation.

Adjusted operating income for the first quarter was $7.6 million, a decrease of $24.1 million compared to the same period last year. Our adjusted income per share from continuing operations was $0.08 versus $0.38 per share last year.

Moving to the balance sheet. We ended the first quarter with total accounts receivable of $164 million, down 11% versus $185 million last year. Our receivables remain in excellent condition, and year-to-date Talbots charge penetration represents approximately 46% of our net sales volume. Merchandise inventories at the end of the quarter were $177 million, up 13.1% to last year's $157 million, primarily due to lower-than-anticipated sales volumes and a planned increase in spring receipts.

Capital expenditures in the first quarter were $10 million, primarily related to investments in store refresh, the opening of upscale outlet stores and our IT initiatives. Our 2011 capital plan remains at approximately $60 million.

Total debt outstanding at the end of the quarter was approximately $87 million, down $7 million from last year's balance of $94 million. Cash used in operating activities was $51 million compared to cash used in operating activities of $44 million last year. The increase is due to changes in adjusted operating income, merger-related costs and in certain working capital items.

Before I comment on the second quarter, let me address the financial impact of our store rationalization initiative. Today, we announced the closing of approximately 110 stores through fiscal 2013 including consolidations. Beginning with our first quarter 2011 and going forward, we will provide the sales and operating income contribution of these 110 stores.

That said, in the first quarter, the 110 stores contributed approximately $21 million in sales and $4 million in operating losses, including $3.2 million in restructuring charges and impairment of store assets. This compares to last year's first quarter contribution of approximately $22.9 million in sales and approximately $2.5 million in operating income.

Associated with the store closing plan, we expect to record one-time restructuring charges of approximately $15 million, down from our previous estimate of approximately $18 million. In the first quarter of 2011, we incurred restructuring charges of approximately $2.3 million, primarily comprised of lease exit, severance and other related costs.

Now let me comment on the second quarter of fiscal 2011. While we are not providing specific guidance, it would be helpful for you to consider the following: At this time, we are expecting continued weakness in our top line performance, with second quarter to date top line sales trending down approximately low teens compared to last year. With continued high levels of promotional and markdown activity, including the addition of a sale-only catalog, we are expecting cost of sales, buying and occupancy as a percentage of net sales in the second quarter to be up roughly 1,000 basis points compared to a year-ago period.

SG&A expenses on a dollar basis are expected to increase slightly compared to last year, due in part to continued incremental investment in marketing. We expect interest expense of approximately $2.5 million and taxes of approximately $1.5 million in the second quarter. Diluted shares outstanding for the second quarter will be approximately 70 million.

Moving to inventory. We anticipate we will end the second quarter with total inventory up approximately low- to mid-teens compared to the prior year period. As we look to the back half of the year, our average initial retail will be up approximately low teens compared to the prior year, driven by changes in our merchandise mix as we increase the penetration of our better versus good product, as well as employing strategic price increases.

And given our current sales trends, we have taken steps to adjust our inventory buy for the second half of the year and have reduced the number of units we will purchase. All that said, we expect year-end inventories to be up approximately mid-single digits compared to the year-ago period and back half initial markups to be down approximately 75 to 125 basis points, consistent with what we had indicated to you on our fourth quarter conference call in March.

Finally, in addition to reducing our inventory commitment in the back half, we plan to more closely scrutinize our cost structure, and we'll look for opportunities to reduce our SG&A expenses as we continue with our overall turnaround efforts. Our balance sheet remains strong, and as we progress through the -- through our transition this year, our financial flexibility and liquidity are expected to fully enable us to support our working capital needs and the implementation of our strategic initiatives.

With that, let me turn it back over to Trudy.

Trudy F. Sullivan

Thanks, Mike. While we are disappointed in our first quarter and anticipated first half performance, our team remains focused on executing both near- and long-term initiative to drive improved results. In looking at our fall and holiday products, I am encouraged by the changes, and I believe our merchandise reflects a better balance of our "Tradition Transformed" platform. In addition to the actions we have already taken in merchandise and our plans for a broader-based marketing strategy, we are on track with our store refresh and store closing plans, as well as with our IT enhancements to better support segmentation.

Lastly, I want to thank all our associates for their hard work and dedication during this difficult transitional period, and I'd like to extend a special thanks to our shareholders for their patience and support. While we continue to view 2011 as a transition year, we are confident that we have the right strategies and actions in place to benefit our company in 2012 and beyond.

And with that, we'll now turn the call over for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Betty Chen with Wedbush Securities.

Betty Y. Chen - Wedbush Securities Inc., Research Division

I was wondering, Trudy, if you can talk a little bit about the refresh stores. I believe you mentioned earlier that they are still outperforming the overall group. Can you give us a sense of that outperformance? I think it happened about 5 to 6 points prior to that. And then I wanted to ask, Mike, really quickly, I know you mentioned that in the second half you’ve got units down, but at the end of the year inventory will still be up mid-single digit. Is that on a total dollar basis up mid-single digit? Can you give us a sense what units will be? And how much, I guess, how much down unit buys are in the back half?

Trudy F. Sullivan

Betty, let me just give you a quick summary on the refresh performance. Our premium refresh has continued to perform well against their peers on both net sales and traffic. Life-to-date through May on a net sales basis, the premium refreshes have increased their outperformance to the rest of premium to around 6.4, really 600 basis points, due in part to weaker performance in the rest of the premium segment but still the outperformance is growing. Traffic also continues to perform well here so -- so far, we're pleased with how premium refreshes are doing. The classic refreshes are a bit of a mixed performance. We did upgrade one of the classics to a premium store, and we are seeing improved performance there. And for the balance, we really have one classic refresh outperforming and one that's performing at par. And the exterior refreshes are doing well, both on net sales and traffic. Overall, net sales differential for premium exterior refreshes have also increased in the May season to date period, so both in sales and in traffic differential. So bottom line is that the refresh program is working across these various sectors and the one watch out is a classic store that is performing with its peers.

Michael Scarpa

And Betty, from an inventory perspective, inventory -- we're modeling that to be up mid-single digits at year end, that's in dollars. As we look at our second half of the year, buy plan, we're buying units approximately down about 8%. But we will be seeing cost increases on a per unit basis based on the focus on moving some of the good products into better and also, obviously, we're faced with some of the commodity increases that everyone else is faced with.

Betty Y. Chen - Wedbush Securities Inc., Research Division

Best of luck.

Operator

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

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division

I was wondering if you could talk about -- I'm sure you do consumer survey work. What you're hearing from your consumers in varying age groups? And how you're doing with capturing the under 50 crowd, Trudy? How the performance is by age group in terms of the business year-to-date for the under 50 crowd, the core customers and the older population? And what the feedback is on the product?

Trudy F. Sullivan

First of all, as I mentioned in my remarks, Margaret, our total customer file is down just about 2%, 1.8%. We have seen the defection rate in some of the older age groups, frankly, pick up a bit and the defection rate in the younger, I mean, 55 and under, moderate a bit. The -- in our actual file, we are pretty flat in the 55 to 74 age range because of effective reactivation. And just to plan our second-biggest customer segment on our file is the 45 to 54. So we have a lot of 45 to 54 shopping in the brand. In terms of the reaction to spring, net better scores were slightly off from the spring before. So the deficiencies that we've talked about, especially in the knit and sweater category and in the sheerness in the knit category has come through in our research. That said, our net better scores are still positive.

Operator

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

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Can you talk about the current borrowing capacity on your credit facility? Maybe any thoughts on selling your receivables. And what happens to your credit facility if you do so, your receivables?

Michael Scarpa

Well, as I said before, we ended the quarter at about $87 million of debt versus $94 million last year. Second quarter is normally a quarter where seasonal working capital needs decrease. And last year, we were in a position where we paid off roughly $56 million of debt. We don't expect that to happen this year obviously based on the 1,000-basis point margin dilution that we talked about. We believe we have plenty of capacity that's under our line as we model out the rest of this year in terms of our sales expectation and inventory buys. We have enough working capital to support our business operations and our strategic initiatives as we move forward. From a credit card perspective, we ended up with receivables down about 11% versus last year. We have approximately 46% penetration. Write-offs continue to be less than 1% of sales. In fact, they improved in the quarter. We have excellent aging of our receivables with 93% current and 5% due within 30 days, so a really high-quality portfolio with an average FICO score of about 770. We actually were able to even grow our accounts in the first quarter, up about 14% over last year. Obviously, this is to be a source of liquidity for us if we needed to potentially sell this. It's something that we look at as part of the -- our ongoing business. But at this point, it's all I really can comment on.

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Mike, what is the borrowing capacity right now on the credit line?

Michael Scarpa

It's $200 million.

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

So $200 million minus your current outstanding and that's how much you have to go, there's no reduction based on anything else?

Michael Scarpa

Well, the ABL is based on inventory levels and receivable levels and both of those are over $200 million. There are reserves that are taken against both of those items. But currently, we are over $200 million.

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Okay, got you.

Operator

Our next question comes from the line of Adrienne Tennant with Janney Capital Markets.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Trudy, can you talk about some -- any pockets of strength where you're seeing things that are uptrending that you're trying to play? Going into the fall, I think you touched upon it a little bit. And then Mike, just on that AP, as you've looked at the option for monetizing it, can you give us a feel for -- is it 80% of the line that seems like the market rate or any color on that -- in that regard? And then just finally on the marketing, can we assume that when you anniversary your fall marketing dollars, we'll have marketing spend flat year-on-year for the fall season?

Trudy F. Sullivan

Well, first of all, Adrienne, let me touch a little bit on the product. We have -- we're on a very firm woven trend. We're seeing strong positive comps in our woven top business. We have seen good reaction towards sportswear categories, pants, jackets, dresses, outerwear, suiting. And all of those we’ve increased the penetration in the back half of the year. Again, very promising in terms of our ability to push to a broader coverage in those categories. I talked about the fits in knits and sweaters. I think bringing the knit penetration up to its historical penetration, which we will be doing by third quarter in terms of trends, pattern, novelty is a very good fit, so I am encouraged there. And finally, I think we've done some significant things with fixing the bottom fit in both our Women's and our Petite businesses. And I have to say the introduction of these 2 new pant sets we consider to be very promising. So all-in-all, you will see part of our increase in AIRs is due to mix because we are pushing the woven and the sportswear category penetrations higher based on promising results.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

And then Mike?

Michael Scarpa

From a credit card perspective, not really going to comment any further than what I did already. From a marketing perspective, we do expect marketing in the second half of the year to be up about $6 million versus a year ago.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Okay. And then just to clarify on the AP, is that securing the $200 million line of credit?

Michael Scarpa

You mean AR?

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Sorry, the AR, I'm sorry about that.

Michael Scarpa

Yes, that's part of the line.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

So how would you be able to monetize that? Are there -- is it just covenants or something and then you could get around that?

Michael Scarpa

We would look to potentially get another line based on our inventory in our facilities and exclude the AR from the ABL.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Got it. Okay, great. Good luck.

Operator

[Operator Instructions] Our next question comes from the line of Stacy Pak with Barclays Capital.

Stacy W. Pak - Barclays Capital, Research Division

I guess, Trudy, my question is related to you. Thinking about the transition or "Tradition Transformed," totally buy into that, but I guess I'm questioning the marketing, Vogue, Julianne Moore and the look of some of the product which sort of goes with that, which seems very, very fashion forward to me and beyond "Tradition Transformed". And I guess what I'm wondering is when do you let go of that and kind of come back to what Talbots', I think, would, should, could be. Do you need to rethink your -- I don't want to say the people, but that's kind of what I'm getting at, the merchants and the marketing people you have or the real direction you have there because it seems like you're not getting the younger customer and you're really losing the older customer and you're trying to be maybe something Talbots is not. So I was hoping you could kind of address that.

Trudy F. Sullivan

That's a mouthful, Stacy. Despite how difficult this transition is, we're, I think, punishing is the exact word I would use, but we certainly are totally dedicated to the strategies that we are -- we're putting forth. I think you've asked a very good question in terms of the positioning of the Talbots brand, and we talk around here about balance. Now "Tradition Transformed" was always about [indiscernible] modern classics to our core customer who is truly important to us. And I just have to tell you that, as I mentioned earlier, our 2 biggest A segments on our file active today are the 45- to 54- and 55- to 64-year-old age brackets. And she's the one who asked us to update our product, and she is the one that's the genesis of "Tradition Transformed." Julianne Moore, just of note, the one place we did have in the first half of the year was our March delivery, and the March delivery is where we did present with Julianne Moore. I have to tell you, I think that I agree with you in the sense that we might have made it look too fashiony and too sophisticated for -- might not have had as broad a reach. But if we present her in a more, say, true classic fashion in knit apparel that we have for the third and fourth quarter, she looks absolutely beautiful and she's right smack in the middle of our age demographic. So I think we can do a better job of using her to represent the true platform of "Tradition Transformed." And I think you’ll see a different merchant team working on the third and fourth quarter than we did in the first and second quarter, a different blend in a way. And I think you'll see that we’ve kind of come back into our lane. That doesn't mean we've gone back to the future because that's not the fit, but we've gone back to a more balanced presentation of what we truly believe "Tradition Transformed" means.

Stacy W. Pak - Barclays Capital, Research Division

So Trudy, when you're talking about it, do you really think that the third and the fourth quarter stats won't be so -- I'll just call it kind of Vogue-ish, so they -- the marketing won't look so Vogue-ish and the reach won't look so Vogue-ish, it will really speak to, okay, she wants updated but not out there positioning.

Trudy F. Sullivan

I think -- listen, I respect your comment and I think you’re reflecting of our own internal thinking. And so the short answer to that is yes, we have a broad brand. We want to be approachable. We have a woman who loves beautiful clothing and doesn't want us to be too serious and too "fashiony" but wants fashion. So I would agree and I hope we've done a much better job in the third and fourth quarter. I feel very close to it, and I think I'm extremely -- well, I have to be guarded here. But I feel very, very optimistic about the corrections we've made to the product as we lap into the back half. And I think using Julianne Moore in a much more approachable fashion will really appeal to our target consumer.

Stacy W. Pak - Barclays Capital, Research Division

Okay. I look forward to seeing it.

Operator

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

Jennifer Black - Jennifer Black & Associates

I wondered if you could talk about fall and when you look at the overall assortment, what percent will be fashion in the aggregate in-store versus a year ago? And also, will the cover page product on the front, will that be in all stores? And then my other question has to do with, I think I should ask it after you answer the first question.

Trudy F. Sullivan

So when we look at the back half, Jennifer, first of all, we like to consider that all of our product is fashion relevant. But in terms of the balance of classics to fashion forward, I believe we'll be back to a more historic proportion. So we really are trying to be as broad appeal as possible for this "Tradition Transformed" consumer. So I believe that we've struck a very good balance as we look at third and fourth quarter. In terms of the covers being in all stores, they always are in all stores. That is absolutely a mandate that we live by. So the connection between what we present in our cover and what is available in our stores is very much present.

Jennifer Black - Jennifer Black & Associates

Can you quantify -- when you say in the aggregate, what the percentage, just roughly speaking, would be fashion this year versus last year?

Trudy F. Sullivan

Jennifer, that's a very -- we don't really look at it as a penetration. Let's start this way. All of our lines are fashion relevant for the time, right? We have a big classic component, our big foundational categories, our knits, sweaters, pants. We offer a broad range in those big foundational categories of apparel that's appropriate both, first and foremost, to our core consumer and then because of the enhancements we've made in the style and characteristics of these big classifications, we believe they're also attractive to a new consumer that we can bring in because we have updated our classics in a relevant way. So -- and also, it's important to note that there's a higher percent of overlap between our premium stores and our classic stores, so our assortment will have broader coverage on a bigger base of stores. But the balance that we brought back into third and fourth quarter, I feel very confident we have the right approach to certainly to knits, to sweaters. I'm pleased with the performance we're seeing in woven and in sportswear, and we have gone after these categories in a broader way, so we'll have broader coverage in a bigger base of stores. And these, I think, are the big foundational corrections for third and fourth quarter. It certainly goes back to a question I answered earlier in terms of even our imaging of the line, who -- we are using a much more friendly and open and approachable form of marketing in order to reengage our core and also attract us new.

Jennifer Black - Jennifer Black & Associates

Okay. And then my follow-up is if you could talk about the composition of your inventory, what is carryover and what percent is current?

Michael Scarpa

Well, we ended the quarter up about $20 million in inventory. And I'd say approximately half of it is based on lower sales that we achieved in the first quarter.

Jennifer Black - Jennifer Black & Associates

All right. Good luck.

Operator

Our next question comes from the line of Jennifer Davis with Lazard Capital Markets.

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

I guess I just wanted to get a little more clarification on -- Trudy, I think you said that you saw an inconsistent customer response to the merchandise assortment. But our take is kind of the merchandise assortment has been rather inconsistent. I think you were trying to target a younger customer, and then I don't -- I think in the last couple of months, it looks to us like you maybe pulled back a little bit from that. And I'd say there's a disconnect between -- and you did allude to this, the marketing where it's more Vogue as more fashion forward, but then the merchandise in the store isn't as much. I guess I was just hoping to get a little more clarification or understanding about where -- the direction you're headed and what you think the right direction is for the customer?

Trudy F. Sullivan

Listen, let me just reiterate that the inconsistencies were pretty much concentrated in her response to our knit and sweater categories. Our woven, our jackets, dresses, outerwear, suiting categories, all had much stronger performance. So we feel that, first and foremost, was a critical fix in the knit category which we have addressed for third quarter by bringing up the penetration of print and pattern to our more historical levels. In terms of our positioning, we've always been, first and foremost, positioned for the core customer who is in this 55 to 74 age bracket, who frankly has stayed very stable on our buyer file, and we have tried to address her desire to have more modern relevancy to her classics. That has not changed. I will say our execution against that has been uneven, hence the inconsistent performance especially in the knit and sweater categories. But going forward, we believe we've addressed that. We've increased the penetration on the categories that she is responding to. The fix for our core customer, which is always first and foremost in our hearts and minds, we also feel makes us more relevant to the second biggest age segment on our file, which is the 45- to 54-year-old. And so therefore, our marketing is addressed at reengaging our core and reaching out in new ways to bring in more of the 45- to 54-year-old customer because we feel the brand is more relevant for her.

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

All right. Good luck.

Operator

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

Susan R. Sansbury - Miller Tabak + Co., LLC, Research Division

I have a list here, but let me try one for Mike. In as much as you indicated what the losses from the underperforming stores were in the first quarter, can you give us an idea of what you expect the stores that will be closed this year, their level of underperformance? And a related question is, what do you expect the recapture rate -- what are you planning the recapture rate to be?

Michael Scarpa

We're just at the stage where we're shutting our first group of stores, as Trudy mentioned, so obviously we're in liquidation mode. I would prefer to get a sense of the liquidations and the impact that it has on the overall performance before I answer any type of full year question. So I'm going to pass on that one. From a recapture rate, we've modeled out that if we can get 20-plus percentage, it's a win for the company. We're targeting with our increased marketing focus in the 30% to 40%. But we would like it to be even higher than that.

Susan R. Sansbury - Miller Tabak + Co., LLC, Research Division

That was helpful.

Operator

Our next question comes from the line of Alex Fuhrman with Piper Jaffray.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Just wondering if you could talk about the relative performance of your comp stores by different type of real estate centers or mall-based stores versus your off-mall stores and specifically as it relates to traffic and conversion? And then, if I'm interpreting your language correctly, it sounds like this 8.2% comp decline in Q1 is excluding the 20% of your stores that you're closing. So if you could share what your actual same-store sales were versus -- based on your comparable stores, that would be great.

Michael Scarpa

I'll answer your last question first. It was relatively comparable in terms of the comp performance of the stores that we're closing against the stores that remained open. And we really don't comment on the mix from a comp perspective in terms of the type of real estate that we do have.

Operator

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

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

I'm just curious about the marketing initiative and what sounds like an increase in spend in the second half. Can you just give us a sense of how that's going to shake out? Are you willing to quantify it yet and the channels you'll be spending into and how that changes year-over-year? And then a follow-on to that, please.

Trudy F. Sullivan

The marketing spend in the back half of the year, as I said, is roughly $6 million over a year ago, Richard. It will be in a variety of media, as well as increased customer contact through our catalog circulation, postcards and brochures. What -- as I said in my remarks, we are finalizing the media plans now. We'll have more to talk about later, but it's clear to us that we have to reach outside of just the traditional catalog circulation strategy to get the word out on this.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Should we assume that catalog circulation will be down then in the second half and that the capital would be shifted away from that category?

Trudy F. Sullivan

I wouldn't assume that, no. Our contacts, including catalogs, postcards and brochures will be slightly up.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And when should we anticipate the end of one-time charges related to the acquisition?

Michael Scarpa

This is the last quarter.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Sorry?

Michael Scarpa

This first quarter was the last quarter.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

I'm sorry, can you repeat your response?

Michael Scarpa

Sure. The first quarter of 2011 will be the last quarter that we -- you should see any charges associated with the acquisition.

Operator

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

Michelle Tan - Goldman Sachs Group Inc., Research Division

Trudy, I was wondering if you could give us some perspective. I know you made tweaks to the catalog and the store segmentation for the first quarter and second quarter to address some of the issues you were seeing. And yet even with those tweaks the performance obviously deteriorated a bit. So I'm curious, I guess, what your perspective on -- is on why these changes didn't have a bigger impact or what offset them? And then what gives you the confidence that you're making the correct tweaks for the second half of the year?

Trudy F. Sullivan

So I think, Michelle, that the most valid way to look at these changes is as we get into the back half of the year. Because the actual assortment effect really hit in the third quarter of the change in segmentation between the classics elevated to premium and always elevated to classic. But we saw certain performance characteristics in these stores where we felt that they deserved a broader coverage. With assortments, for example, the classic shifts up to premium, we saw certain performance characteristics that indicated that we wanted to put them into these new buckets as we wrap the year and develop the allocation strategies. So I would say stay tuned on that.

Michelle Tan - Goldman Sachs Group Inc., Research Division

All right, great.

Operator

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

Randal J. Konik - Jefferies & Company, Inc., Research Division

Mike, can we just kind of dig through the cash flow statement, and can you kind of walk us through how we should be thinking about sources and uses of cash? Do you think -- where should we see sustainable levels of depreciation and amortization? The CapEx guidance, I think at the analyst meeting you kind of talked about a $60 million number for the next 3 years. I mean, how -- can we pull that -- how far can we pull that down? And then on the revolving credit facility, can you just remind us again where are we in terms of the -- I see where we are in current borrowings. How much more capacity can you borrow? And what are the limitations on your borrowing if it's -- if that revolver’s backed by inventory receivables or anything like that? Can you -- I was just trying to get a sense of how we're looking from a cash flow perspective on the company.

Michael Scarpa

Okay. So let's start with the revolver. It's a $200 million ABL, and it's backed by our receivables and our inventories. And obviously, there's reserves that are taken against those numbers to net down to $200 million. For the most part, during the year, we have capacity at $200 million or above, so we can fund the full $200 million. There are months where it dips below. But frankly, it's not meaningful enough to have an impact in terms of what our expectations are around borrowing. From a cash flow perspective, from a very high level, D&A should be around a little over $60 million this year. We are not planning, at this point, to reduce our CapEx. It's still scheduled for $60 million. Instead, as I mentioned in my prepared remarks, that we will be looking at overhead opportunities within the company to reduce expense. We think it's of the utmost importance to continue our investment in terms of refresh stores, in terms of opening our upscale outlets and moving forward on our IT initiative. We feel it's paramount for the success of the company. So any type of cash flow pressure that we'll be under, we'll be looking to, first of all, reduce our inventory buys in the second half of the year and also reduce our overall SG&A expenses.

Randal J. Konik - Jefferies & Company, Inc., Research Division

And is there any color you can provide on where you can pull the SG&A dollars down? And then can you clarify the comment you said around the credit card receivables? I think you said something to the effect of could resell them from a -- if liquidity needed. What would trigger that? What would you deem a liquidity event to get -- to make you want to sell the credit card receivables?

Michael Scarpa

First of all, we're not anywhere near any kind of liquidity event where we need to sell the receivables. It's something that -- as a company based on our ABL and our capital structure, it's something that -- from a diligence perspective, we would look at. So it's not anywhere near any kind of liquidity event where we're looking to sell our credit card business. And as far as SG&A, we've challenged basically across-the-board in terms of SG&A reduction and we're currently working on plans and we'll be able to share more with you on our next call.

Operator

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

Marni Shapiro - The Retail Tracker

So if you could talk a little bit about 2 things. First of all, color in the store. I thought your March set -- I believe that was the one that was very colorful and very pretty, and it was followed up by, as I recall, the plaids which were olive and khaki and a little bit more muted. So it seems to me when you guys have the brighter colors in the stores she's been responding. And could you just look forward a little bit into summer and into fall and talk a little bit about the percentage of color and what's appealing to her? And then if you could also just touch on, it seems like accessories have been a little hot and cold with you. But across-the-board, the Misses' apparel business has not been good in general and the Accessory business has been very strong as women tend to buy accessories when they're not sure about the apparel. So could you talk about your thoughts on that business, again looking forward into the back half of the year?

Trudy F. Sullivan

You're absolutely right, Marni, she loves color and our March delivery had a very nice percentage of color. She likes color all year round. It's something that we kind of sell on both spectrums. We sell neutral beautifully, especially in the fall season, but we also have to always have a base of color that runs through the assortment. All of our assortments, all our brand moments have a foundation of classics that we build the fashion upon, and within that we really pay attention to color assortment, because it’s very important to her. So with going back and correcting, especially in the knit and sweater categories, adding back in print, pattern and novelties also has an effect of heightening just the excitement in the brand. And alongside that, we will always have the tried-and-true Talbots colors that need to be in the assortment. So you definitely will see that going forward. I have to say honestly in some of our spring floor sets we did not execute on that very well. And the second thing that affected our spring floor sets, frankly, was again in knits was the fact that we tried some fabric qualities that were frankly too sheer, so all of those have been addressed as we look into the back half. Accessories is a mixed bag for us. Our fashion Accessory business is strong. Our shoe business is very strong. Where we lost it in accessories was jewelry and scarves. And we are critical of our execution on jewelry. We do not think we kept pace with trends there. And scarves should come back into play. They're not as strong for us in second quarter, but they come back into play in third and fourth quarter, and I hope we've addressed that.

Marni Shapiro - The Retail Tracker

Great. Good luck, guys.

Operator

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

Dana Telsey - Telsey Advisory Group

Can you talk a little bit about what you're seeing online, what you're seeing in the stores? Is there a difference in sell-through and performance of what you're seeing? And as you think about the increase in costs and prices for the back half of the year, how you're planning for 2012?

Trudy F. Sullivan

We pretty much see the same patterns in our online business as we do in stores, Dana, in terms of the ranking of bestsellers, what works and what doesn't work. Our online business has a broader selection, for example, of our Women's product. It has a broader selection of dresses, has a broader selection of shoes. And those are categories that do well there. But if you were to rank the top 20 styles in stores and online, they're virtually the same. So when we're good it's good in all channels, and when we are deficient we tend to be deficient in all channels. As I said in my opening remarks, in first quarter, we saw weakness across all channels and we are obviously working quite vigorously to address those issues. Our AIR increases for the back half a lot are driven by mix because of the increase of the sportswear categories and the woven categories that we are -- that we're pursuing. So in terms of how we're looking at 2012, we really are not looking to continue the increase in AIR. Well, I think there will be a mix impact in the first half of 2012 as these sportswear categories grow but we are trying to level off. And one thing we have done to kind of mitigate the increased cost is we are taking fabric positions on key core fabrics, so that enables us not -- 2 things. It enables us to kind of mitigate increasing commodity prices. It also allows us to be able to respond more quickly.

Operator

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

Roxanne Meyer - UBS Investment Bank, Research Division

The 70 stores you're updating this year, first I'm wondering how many are going to come out of the comp base and for how long. Second, what percentage of your business is knits and sweaters since it is a really, obviously, material part of your business. And third, you mentioned that the majority of the losses relating to the store closings were basically on a nonrecurring basis, and I'm just wondering if that's going to be the case for the full year or if it's going to be a benefit to the adjusted earnings? And what incremental benefit might we see once you've closed 110 stores from just overhead also coming out?

Michael Scarpa

Let's try to start with part A of your question. One is on what stores come out of the comp basis. What will come out will be the consolidation stores or where there's a reduction in square footage of greater than 15%. So the majority will stay in the comp. From a P&L perspective, I did say that we are expecting one-time costs associated with the 110 closures of approximately $15 million. That will be all that's basically in the one-time charges. What else did you ask?

Trudy F. Sullivan

We don't really reveal the penetration by classification. But I can tell you that knits and sweaters are significant to the total apparel assortment.

Roxanne Meyer - UBS Investment Bank, Research Division

Okay. And then just last, is there a way we should think about what could be the eventual benefit once you do close all the 110 stores from the removal of some overhead related to those stores? That's aside from the 4-wall.

Michael Scarpa

Sure. We look at it a couple of ways. One is the transfer of sales, which should be virtually our merchandise margin on any sales that are transferred over. We don't expect to have any type of increase in fixed expenses besides the marketing program that we're putting against it. So the majority of the margin drops to the bottom line. From a corporate or from a corporate overhead perspective, we have a number that we're targeting, which could approximate close to $5 million.

Operator

Our final question comes from the line of Pamela Quintiliano with Oppenheimer.

Pamela Nagler Quintiliano - Oppenheimer & Co. Inc., Research Division

You had made the comment earlier about feeling much better about the back half assortment. Were you not feeling that great with the first quarter and the second quarter assortments? Did you kind of suspect that the customer would respond the way they did and have been thus far?

Trudy F. Sullivan

Pam, I think the easiest thing is we started to re-examine some of the deficiencies in our knit and sweater categories in fourth quarter last year. So we knew that these were issues to address. We obviously expected to get a stronger reaction to the first half assortment, but we knew that going into the back half we needed to take action on the knit and sweater assortments. So -- and we have and I feel stronger about them going forward, as well as I'm pleased with -- and despite the very difficult performance and a performance that we are not proud of, there are some rays of hope in our woven and our sportswear categories that have consistently performed in the front half, and I'm pleased that we're able to react to those categories and increase their penetration in the back half. And finally, I think we acknowledge starting with the fourth quarter, that we need to strike a much better balance between our classics and our fashion forward product. And I believe that we've been really vigorous about addressing that with the floor sets that start with fall.

Pamela Nagler Quintiliano - Oppenheimer & Co. Inc., Research Division

And how quickly can you adjust, if you need to, for fall and holidays? Is that already bought or is there any wiggle room there?

Trudy F. Sullivan

I mean, we did take raw material positions. I'd say there's a wiggle room but, yes, it's bought.

Operator

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

Trudy F. Sullivan

Okay. Thank you. Well, thank you for dialing in today. I want to acknowledge how these results are disappointing. They are not what we expect to deliver to our shareholders. We are working extremely vigorously to address our merchandise shortfalls, to reinvigorate our marketing initiative. At the same time, we feel confident about our store refresh and our portfolio rationalization projects that are going on. We're on track with those programs and will put us in much better position as we go into 2012 and beyond. And finally, I'm pleased that our IT initiatives are coming on board as they are, which will just do nothing but enable both segmentation and the proper merchandise assortment planning. So we have a lot of work ahead of us. We have said from the beginning of this year that this is a transition year. We are -- we acknowledge our shortcomings. We are working very hard to address them but I do believe and our team believes, that we are employed against the right strategies for the future of this brand going forward. And I thank you for your patience and endurance, and thanks for calling in. Have a good day.

Operator

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

Cautionary Statement and Certain Risk Factors to Consider. This press release contains forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. This statement may be identified by such looking terminology as expect, achieve, plan, look, projected, believe, anticipate, outlook, will, would, should, potential or similar statements or variations of such terms. All the information concerning our future liquidity, future financial performance and results, future credit facilities and availability, future cash flow 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 expectation, 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 plan, regular price and markdown selling, operating cash flows, liquidity and credit availability for all forward periods. Our business, our forward-looking statements involve substantial known and unknown risks and uncertainties, including the following risks and uncertainties: the ability to successfully increase our customer traffic and the success and customer acceptance of our merchandise offering in our stores, on our website and in our catalogs; the risk associated with our efforts to successfully implement, adjust as appropriate and achieve the benefit of our current strategic incentives including store segmentation, store reimaging, store rationalization, enhanced marketing, information technology reinvestments and any other future initiatives that we may undertake; the risks associated with our efforts to maintain our traditional customer and expand to attract new customers; the risk associated with competitive pricing pressure and the current increased promotional environment; the risks associated with our ongoing efforts to adequately manage the increase in various input costs, including increases in the price of raw material, higher labor costs in countries of manufacture and significant increases in the price of fuel, which impacts our freight costs; the risks associated with our ability to access on satisfactory terms, or at all, adequate financing and sources of liquidity as and when necessary to fund our continuing operations, working capital needs and strategic incentives and to obtain future increases in our credit facility or obtain other or additional credit facilities as may needed in cash flow from operations or other capital resources are nonsufficient at any time or times; the satisfaction of all borrowing conditions at all times under our credit facility including accuracy of all representation and warranties, no defaults or events ofdefault, absence of material adverse effect or change and all other borrowing conditions; the continuing material impact of the U.S. economic environment on our business, continuing operations, liquidity and financial results, including any negative impact on consumer discretionary spending, substantial loss of household wealth and saving and continued high unemployment levels; the ability to attract and retain talented and experienced executives that are necessary to execute our strategic incentives; the ability to accurately estimate and forecast future regular price, promotional and markdown selling and other future financial results and financial position; the risks associated with our appointment of an exclusive global merchandise buying agent, including that the anticipated benefits and cost savings from this arrangement may not be realized or may 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 with acceptable payment terms and the risk that suppliers could require earlier or immediate payment or other security due to any payment concerns; the risks and uncertainties in connection with any need to source merchandise from alternate vendors; any impact to or disruption in our supply of merchandise including from 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 our supply chain incentives; any significant interruption or disruption in the operation of our distribution facility or the domestic and international transportation infrastructure; the risk that estimated or anticipated costs, charges and liability to settle and complete the transition and exit from and disposal of the J. Jill business, including both retained obligations and contingent risk for assigned obligations, may materially differ from or be materially greater than anticipated; any future store closing 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 financial plan and strategic plan for operating results, working capital and cash flow; 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 risk 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 risks and uncertainties associated with the outcome of current and future litigation, claims, tax audits and tax or other proceedings and the risk that actual liabilities, assessments and/or other financial impact will exceed any estimated, accrued or expected amounts or outcome.

All of our forward-looking statements as of the date of this press release only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectation or forward-looking statements will prove to be correct. An occurrence over any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this press release or included in our other periodic reports filed with the SEC could materially and adversely affect our continuing operations of our future financial results, cash flows, prospects and liquidity. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this release, even if such results changing or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosure by us following this release which modify or impact any of the forward-looking statements contained in this release will be deemed to modify or supersede such statements in this release.

In addition to the information set forth in this press release, you should carefully consider the risk factors and risks and uncertainties included in annual report on Form 10-K for the fiscal year ending January 29, 2011, and other periodic reports filed with the SEC.

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