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The Talbots (NYSE:TLB)

Q3 2011 Earnings Call

December 01, 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

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

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Jennifer Black

Michelle Tan - Goldman Sachs Group Inc., Research Division

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

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Marni Shapiro - The Retail Tracker

Jennifer M. Davis - Lazard Capital Markets LLC, 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 third quarter 2011 earning results. Today's call is being recorded. [Operator Instructions] I would now like to turn the call over to Julie Lorigan, Senior Vice President of Investor and Media Relation.

Julie Lorigan

Thank you, Dawn. Good morning, everyone, and welcome to Talbots’ Third 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 forward-looking terminology as expect, achieve, plan, look, projected, belief, anticipate, outlook, know, would, should, intend, potential or similar statements or variations of such terms. All of our outlook and financial expectations and plans, as well as our assumptions underlying this information, constitute forward-looking information.

We direct you to the cautionary statement being read at the end of this presentation and included in our earnings release issued today, as well as in our recent SEC filings, all of which are available under the Investor Relations section of our website. A replay will be available from approximately one hour after the conclusion of the call until the end of the day, December 5, 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 October 29, 2011, as well as provide an update on our key strategic initiatives. Mike will cover our financial results and provide our thoughts on the fourth quarter. After that, I will make some closing comments before we open up the call for questions.

For the third quarter, we reported a net sales decline of 6.6%, an adjusted loss per share from continuing operations of $0.22. While we are clearly not satisfied with our performance, we believe the modifications we have made and continue to make to our merchandise assortment is resonating with our core customer.

During the quarter, we were more aggressive in our promotional cadence, including the acceleration of a fall seasonal sale from November into October. This enhanced promotional strategy, combined with stronger performance in key merchandise categories, resulted in improvement in customer traffic, conversion and sales trends as we progress through the third quarter with positive comp store sales and positive consolidated comp sales for the month of October.

While traffic declined 3.6% in the quarter, this was a sequentially improvement from the decline of 5.3% in the second quarter, and customer traffic was positive in the month of October. Sweaters were our best-performing category, driven by print, color and yarn diversity. Other strong performers included skirts, dresses, suiting, fashion accessories and footwear. We were pleased to see continued positive reception to our new pant fits with the curvy, Hepburn and modern styles all performing at or ahead of plan with double weave and corduroy as key fabrications.

Our poorer performing categories were knits and wovens. That said, we did see better performance in the knit category where we have chased pattern and novelty, and we have focused on further improvement in this area. Of note is the performance of our women's plus size business, which ran a positive comp for the quarter with strength in the similar product categories to those I just mentioned.

Our November deliveries have performed well, compared to our prior deliveries. Life to-date, these assortments have generated improved sell-throughs with year-over-year increases in both units and dollar sales, as we've offered brighter colors, more novelty and increased levels of print and pattern.

Additionally, we were able to chase items that showed strength earlier in the fall season such as ponte knit leggings, cashmere sweaters and knit dressing. We are in a better position to chase product as we have taken early positions in key fabrics and have enhanced capabilities provided by our JDA Allocation tool.

Although November consolidated comp sales were down 4.3%, we experienced a strong Black Friday and Cyber Monday and have seen improved customer traffic and strong conversion thus far in the fourth quarter.

Given changes to our promotional cadence, namely the acceleration of the fall sale out of November and into October, we feel a better measure of our current trends is to look at the 2 months combined.

For the 2 months, our consolidated comp sales were approximately flat, which is a significant improvement over the last 8-month period. To continue to build on our improved trends, we are offering an updated classic assortment this holiday, strong in color and novelty and we have maintained our focus on sweaters.

We anticipate that the holiday season will remain challenging and highly promotional. Our most recent customer feedback, including research that we have conducted, validates that our customer views our current product more favorably. The net promoter scores of our October through December merchandise assortments have greatly improved compared to our spring and summer deliveries.

Our customer specifically notes she is finding more must-have items and a marked increase in the number of styles that appeal to her. Just the same, our research also indicates there is some volatility in consumer spending habits and a slight uptick in our best customers’ tightening of discretionary spending.

Important to note, this fall, we conducted a comprehensive psychographic segmentation study within our addressable market. This study profiled attitudes, behaviors and preferences of our potential customer and dimensionalized our market share opportunity.

As part of this initiative, we overlaid our core customer profile with the research, which confirmed our strategy and provided a clearer picture of our market and what we need to do to truly satisfy her. This has provided a rich, sensitive profile that is already a strong filter for product development and customer communication. This research underscored significant growth potential in our core demographics.

Turning now to other key initiatives. With respect to store reimage, we are on track to achieve our target of refreshing approximately 70 stores by the end of this year. In the first half of 2012, we will conduct field studies to get in-depth feedback from our customers. We will incorporate the learnings from this research and the performance of our refresh stores, as we plan our next phase of store renovations scheduled for later in 2012.

In terms of our upscale outlet business, this continues to be an important profitable growth vehicle for us. We ended the quarter with 39 upscale outlets and plan to open an additional 4 locations in the fourth quarter to end the year with 43 in total. Over the long term, we believe this business has the potential to grow to approximately 80 to 100 stores.

Now, let me comment on the actions that are currently underway in our stores' organization. With our new head of stores onboard for only 4 months, we have made a great deal of progress in the training and development of our sales associates, specifically focusing on improved selling skills. We have also implemented an incentive compensation program that reinforces our performance-based culture, creating accountability and urgency within our stores' organization. With conversions trending up, we believe these changes have already had a positive impact on the business.

Going forward, we will continue to look at the stores' organization, its structure and additional opportunities to drive greater efficiency and ongoing improvement. We are continuing to work with urgency to address areas needing improvement within our organization and are taking significant actions across our business. As such, we announced today our plans to implement a cost reduction initiative to drive approximately $50 million in annualized cost savings across all areas of the business.

We plan to focus our investments in those areas of the business that generate proven returns to drive customer retention and engagement.

I will now turn the call over to Mike to review our financials and then I'll be back with some closing remarks.

Michael Scarpa

Thank you, Trudy, and good morning, everyone. I will now cover the details of our third quarter financial performance, as well as comment on our expense management actions and the fourth quarter.

For the third quarter, total net sales were $279 million compared to $299 million last year, down 6.6%. Consolidated comp sales, including direct sales and excluding the stores planned for closure under the store rationalization plan decreased 4% for the 13-week period.

Store sales were $230 million compared to $242 million last year. Comp store sales decreased 2.4% primarily -- due primarily to a 6% in dollars per transaction, offset by an improvement in our conversion rate of 8%.

During the third quarter, we experienced sequential improvement in our comp store sales trends, ending the quarter with a positive high single-digit comp in October of 8.2% due to a change in our promotional calendar.

Also adding to sales has been the development of a direct channel fulfillment program to better manage and utilize our existing inventory while maximizing customer satisfaction. To that end, in October, we went live with our direct fulfill from stores initiative, which allows customer Internet and catalog orders to be fulfilled from store locations when the requested items are no longer available in the Direct Marketing inventory. This fulfillment process is seamless to the customer and represents an opportunity to drive increased sales. We have approximately 280 stores participating in the program at this time. This new channel contributed roughly $2.8 million in net sales in the month.

Direct Marketing sales in the third quarter, which include catalog, Internet and Red Line were down 12.9% from last year at $50 million, driven by a reduction in Red Line phone sales due to higher levels and better allocation of product in our stores.

Third quarter cost of sales, buying and occupancy as a percent of net sales increased 930 basis points over last year at 66.6% of net sales versus 57.3% in the prior year period. This increase was primarily due to an 890 basis point deterioration in our merchandise margin attributable to increased markdown and accelerated promotional activity, as we work to clear slow-moving merchandise and entice our customer back with a fall sale invite.

SG&A expenses in the third quarter were approximately flat to last year at $105 million or 37.6% of net sales versus $106 million or 35.5% of net sales last year. Adjusted operating loss for the third quarter was $11 million, a decrease of $33 million compared to the same period last year. Our adjusted loss per share was $0.22 versus adjusted income of $0.27 per share last year.

Moving to the balance sheet, we ended the third quarter with total accounts receivable of $161 million, down 6% versus $171 million last year. Our receivables remain in excellent condition and year-to-date Talbots' charge penetration represents approximately 45% of our net sales volume.

Merchandise inventories at the end of the quarter were $209 million, up approximately 13% to last year's $185 million, primarily due to lower than anticipated sales volume in addition to earlier timing of holiday receipts compared to a year ago.

Capital expenditures year-to-date is $35 million primarily related to investments in store refresh, opening of upscale outlet stores and IT initiatives. Total debt outstanding under our revolving credit facility at the end of the quarter was approximately $125 million, up $56 million from last year's balance of $69 million.

We ended the quarter with $19 million in cash. Under our trade payable arrangement with Li & Fung, we did extend payment on certain merchandise purchases and ended the third quarter with $39 million in trade payable financing.

This appears as a separate line item in our balance sheet and is classified as cash from financing activities in our cash flow statement. Cash used in operating activities was $91 million this year, compared to cash used in operating activities of $8 million last year. The reduction in cash flow is primarily due to a reduction in earnings along with a higher level of inventory.

Before I comment on the fourth quarter, let me address our capital and expense management actions, as well as our store rationalization plan.

As mentioned in our press release this morning, in the fourth quarter, we've planned to implement the cost reduction program to generate approximately $50 million in annualized cost savings to be completed by the end of fiscal 2012 as part of our ongoing plan to maintain close scrutiny of operating costs.

This cost reduction program will impact all areas of the business. Key components of the program include: a reduction in marketing spending, including the suspension of national advertising and television campaigns in the near term; the implementation of process efficiencies and structural streamlining across all areas of the business, including a 9% reduction in corporate headcount; a rationalization of our store payroll through adjustments to the composition of our store workforce and a reduction of store payroll hours aided by the implementation of a workforce management system; and a reduction of logistic expenses associated with expected reduction in fiscal 2012 planned inventory commitments.

Please note that this cost reduction program excludes four-wall expense savings generated as a result of our store rationalization plan and focuses our investments in those areas of the business that are expected to generate proven returns while driving customer reactivation, retention and engagement.

We continue to expect capital expenditures for fiscal 2011 to be approximately $47 million. Looking ahead, we are planning capital expenditures for fiscal 2012 at approximately $30 million, and we'll continue to invest in our key strategic initiatives including the expansion of upscale outlets, store reimage and upgrades of certain IT systems.

Now turning to our store rationalization plan. Through the end of the third quarter, we have closed 35 locations. The stores closed or planned for closure under our store rationalization plan contributed approximately $18 million in net sales and $6 million in operating loss in the third quarter including a $4 million loss in restructuring and impairment charges.

We are on track to close an additional 45 locations in the fourth quarter, bringing our total closings to approximately 83 in fiscal 2011. As previously stated, we expect to close approximately 110 locations in total through fiscal 2013, and believe there is additional opportunity to close stores beyond this and we’ll look to do so opportunistically in fiscal 2012. We believe all of the above actions will enhance our working capital, improve our cost structure and increase financial flexibility.

Now, let me comment on the fourth quarter of fiscal 2011. While we are not providing specific guidance, it will be helpful for you to consider the following. Fourth quarter total sales through the end of November are down approximately 5.4% to last year. We expect high levels of promotional and markdown activity will continue throughout the period, resulting in an expected increase in cost of sales, buying and occupancy as a percentage of net sales of approximately 600 to 800 basis points compared to the same period last year.

SG&A expenses on a dollar basis are expected to be flat compared to the prior year's fourth quarter, when adjusted for approximately $13 million related to a onetime cumulative adjustment to gift card breakage income, and the reversal of incentive compensation expense recorded in the fourth quarter of last year.

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

Trudy F. Sullivan

Thank you, Mike. While we are encouraged by the better consumer response to our merchandise and improved sales trends, we will continue taking significant actions across our business to drive stronger results.

As we wrap up fiscal 2011 and head into 2012, we will continue to focus on product execution, aggressive inventory management, the completion of our cost reduction initiative, the expansion of our Upscale Outlet Business, and the ongoing implementation of our store reimage and store rationalization programs.

And finally, I want to acknowledge and thank the entire Talbots team for their focus, talent and commitment in this difficult environment.

And with that, we'd be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jennifer Davis with Lazard Capital Markets.

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

Sorry, if I missed this, trying to juggle a couple of calls. But can you talk a little bit about what did comps look like in terms of -- if you include your -- the stores you're planning on closing in 2013?

Michael Scarpa

It doesn't have a material effect. It's a couple hundred basis points.

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

Okay. And then Trudy, I did hear you say that you got positive responses on the customer feedback. I was wondering if you asked about price. I would agree; I think the merchandise is definitely improving. I'm actually wearing a color block sweater right now, which I love. But I bought it at full price at $99. But that seems a little expensive to me and I think it's probably a little expensive for your customer. So I would think that the promotions helped drove sales. So is the promotional activity part of the positive response, the positive consumer response or is -- are the questions strictly about the product without regard to price?

Trudy F. Sullivan

Oh no, we always factor in price. We really want to understand and calibrate how she's feeling about it. It does continually come back to us, Jennifer, that she puts quality and style above price. That said, she definitely likes these marketing events that really give her a price advantage on the styles that she likes and she answers that question pretty consistently. It's quality, style above price, but price is important. And I think we've pretty much maintained our historical price brackets by classification. We have increased our sportswear penetration, so if you look at kind of the total assortment has drifted up in price due to mix, not due to us really altering the price structure by classification.

Operator

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

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

Just a few questions. One housekeeping. Just the August comp, and can you give us the compares to last year by month?

Michael Scarpa

We really only disclose quarterly comps.

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

Okay. I was just wondering because you did give us so much information regarding recent trends. And then of all those timelines [ph] of the recent trends and the timing of the product flows, and when does the new product come in and what do you attribute the recent strength to just as we think about it, particularly over the Black Friday and Thanksgiving weekend? And just a few follow-ups from there, if you could at all give us some guidance on inventories and where you expect them to be into fourth quarter and how to think about next year, and just performance of refresh stores?

Trudy F. Sullivan

Okay. Let's start with kind of the timeline. When we were in the middle of the spring converting into summer season, we recognized a number of shortfalls and we started a very aggressive chase program for Q3. Those chase items which were particularly print and pattern, novelties and sweaters and knits really hit kind of mid Q3, mid September. We've seen a strengthening of our product performance really since that point, and our product scores with our own research would indicate that. So progressively or sequentially, as we've moved through the fall season, we've gotten stronger and stronger product scores, October -- November stronger than October. December, product scores also holding up very nicely. So that's really the time that we chased into Q3. We had more time to get the assortment right into Q4 and going forward.

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

And was there new product that flowed in right ahead of Thanksgiving?

Trudy F. Sullivan

Yes. I mean, our November product really set toward the end of October. And as I said in my opening remarks, our November, the experience with our November product for life to-date is an increase both in units and in dollars year-over-year. So we have 2 flows in November, we’re calling them November 1 and 2.

Michael Scarpa

And from an inventory perspective, we ended the quarter up around 13%, which is an improvement over where we were at the end of the second quarter of up about 26%. If I look at the 13%, half of it is driven by an increase in in-transit and inventory associated with the expansion of our upscale outlets. We are sitting with around $10 million to $12 million of excess goods that will hopefully move through the majority of them in the fourth quarter to get our inventories more in line. As we look at next year, at least from a buy perspective, we're looking at units down about 10% overall. We're looking at store units to be down about 16% and that's against square footage reduction due to closed stores of a little over 9%. So we will see some rationalization of inventory in the existing doors.

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

And just the performance of the refresh?

Michael Scarpa

We continue to be pleased with it. We just reached the anniversary of the refresh if the first set. And up into that anniversary, they were doing about 700 basis points higher and obviously, they're still comping positively for us.

Operator

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

Michelle Tan - Goldman Sachs Group Inc., Research Division

Sorry if I missed this here, I've been jumping around on different calls this morning. But I was wondering if you could give us some way to think about how you guys are approaching inventory investment, and at what point you feel like you can get underneath the gross margin issue? There's obviously a high level of markdown rate that you experienced over the past year or so. You're starting to anniversary that. It would seem like there's opportunity from just controlling the unit levels and the risk exposure and the inventories. So I'm just trying to understand how you guys are philosophically thinking about that.

Michael Scarpa

Well, I think we will expect to see an increase in our gross margins next year based on inventory management. We've looked at it season by season and have done what we think is a better job of managing inventories to the current sales trends. We, when we look at our unit breakdown it's --in terms of the reduction, it's pretty consistent first half to second half of next year. But as I mentioned in our stores, we'd be looking about a 16% decrease overall in units and I think it breaks up like 15% in the first half of the year and 16% in the second half. So we think that, that should be able to drive gross margin for us just based on the fact that we won't have to be as promotional on liquidating these goods. And obviously, the cost associated with just handling all these goods and transferring them to our surplus stores, that all gets eliminated next year so...

Trudy F. Sullivan

And plus we're encouraged with the results of the psychographic research and with the current product trends we feel that we have better product as we go into certainly 2012. We've learned a lot in the last period of time and that's all been incorporated into these future deliveries.

Michelle Tan - Goldman Sachs Group Inc., Research Division

And I guess the question is why did that not start to have a bigger impact between the inventory unit control and the product improvements in the second half of this year? What isn't happening now that starts to happen next year?

Michael Scarpa

Well, from a pure buy perspective, we ended up going in and chasing additional units and we canceled what we could in terms of units that we had placed. We did incur some liabilities around fabric, et cetera. But the fact that we chased units kind of negated a lot of what we were able to go in and cancel with no liability. And it's just -- as Trudy said, product has begun resonate as future deliveries have hit so November's been better than October, which was better than September and...

Trudy F. Sullivan

December scores have held up. So there's still an impact certainly on the third quarter of liquidating the deliveries of the spring season.

Operator

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

Jennifer Black

I have a couple questions. I've seen a lot on the website and I've heard from people that they're placing orders and they're not hearing back for 5 days and then their order's been canceled. And I've actually seen stuff on Facebook today, and I've been seeing it for some period of time. And I wondered what you are doing about that as far as customer service? And then I wondered if you could give us any color on what's in store for spring? Have you changed any of the fabrics versus a year ago? It seems like you’ve used a lot of linens in the past and so I just wondered about that.

Michael Scarpa

Okay. So from a website perspective, Jennifer, we were pretty pleased with the amount of activity and traffic on our website. Over the Thanksgiving holiday, our visits were up actually about 66%. And on Cyber Monday alone, they were up over 115% and that added to some of the issues around our website. Also on our direct fulfill from stores, as I mentioned, we just went live with that in October. We had some operating issues with that just based on the sheer amount of volume that was coming from our website; in fact [indiscernible]. So from a customer service perspective, we've contacted the individuals that we weren't able to fulfill their orders with and issued the right apologies and gave them the right incentive to come back to shop with us.

Jennifer Black

Well, some of the people haven't been contacted because these are people that I know, and so I don't know what to say about that. But as far as spring goes, I'm just wondering about the fabrications that you're planning on using. You've used a lot of linen and I'm not sure so sure women -- that's a fabrication that still appeals.

Trudy F. Sullivan

I mean, Jennifer, we've actually downplayed linen pretty significantly over the last several years. So we're not into that kind of traditional Irish-linen business; we just don't do that anymore. We are going forward with fabrications that she actually loves cotton-based fabrics, the double weaves, all of these that -- we've really pump up our whole knit business, which looks really terrific. We definitely have built the print offering to over 25% of the offer. We have true color up at over 50%. So we have certain tried and true fabrics that she loves in our suiting. For example, Avanos, we continue with that. We continue with really great cotton-based, cotton stretch-based fabrications for spring that look really good. I think our sweater assortment, which again, is really cotton based. Hopefully we'll continue on the strong sweater trend that we're seeing right now. I think we set our first spring deliveries the end of January and just reviewed those floor sets and the color level and the diversity and yarn and pattern looks really very strong. So we're feeling that we've learned a lot over the last 6 months in terms of what it is she likes. The psychographic study certainly has given us an indication of how we can balance our assortment. We have shared spring assortments with a select panel and we've taken that feedback and adjusted some of our buys. So we're feeling that we're in a much stronger position as we get into spring 2012.

Jennifer Black

Well the sweaters do look good. And I do have a follow-up for Mike. I wondered how many stores in the portfolio are cash negative if you exclude the closures that you've already accounted for.

Michael Scarpa

There's a handful of sorts that are cash negative at this point.

Jennifer Black

Okay. Less than 10?

Michael Scarpa

You would know the suspects there. They're in the high-rent districts of our portfolio. Not significant in terms of number.

Operator

Your next question comes from the line of Alex Sharman (sic) [Alex Fuhrman] with Piper Jaffray.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

First question I wanted to throw at you guys, the trade payables arrangement with Li & Fung, curious what kind of availability. How much they will lend you and what interest rate that carries on and should we expect this to be a financing option that we should see on the balance sheet going forward?

Michael Scarpa

Well, the agreement with them is through the end of February 2012 and it's renewable at -- under a mutual agreement. We've been working with Li & Fung for over 2 years at this point. We have a great relationship with them, but the agreement does terminate in February and it is renewable. It provides up to $50 million in trade payables and also, they're opening LCs for us where that's necessary and we typically do around $10 million on a seasonal basis in LC. So it provides availability to us up to around $60 million, $65 million all-in.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

And then I'm just curious to really the puts and takes, why take on the payables this quarter as opposed to just flowing through that money into your revolver?

Michael Scarpa

Well, it just provides us additional liquidity and we have certain minimum to maximum, so we want to maintain on that revolver and we react accordingly.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Sure, sure. And then October, November combined, so I’m going to guess that was flat and that's really maybe a more important way we should be looking at that. Could you kind of share where gross margins and merchandise margins were for that combined October, November period?

Michael Scarpa

We're not been a break that out.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Okay. Would you, I mean, is there -- I mean, if the comp trend there was a little bit different, I mean, should we assume that there was anything meaningfully different with the gross margins then? Was there -- would that hump the results of a different gross margin, really?

Michael Scarpa

I think it's similar overall and again, we're on the retail methods, so depending on when you take your hard marks it impacts the overall gross margins. We originally gave guidance of 600 to 800 basis points. Last time we spoke for the quarter, we ended up at about 930, 890 of it being merchandise margin. Really, that was a result of an acceleration of a hard mark on some of our goods as we moved the sale event from November into October.

Trudy F. Sullivan

And we did, in our opening comments, point to the fact that it was also helped by better performance in key categories such as sweaters. So we definitely saw an improvement in key categories over that time period.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Great. And then just lastly for you guys, the marketing cuts that you guys are going to be making as part of your cost reduction programs, have we seen any of these cuts already, or is this all going to be essentially incremental marketing cuts from this point forward?

Michael Scarpa

This is all 2012 activity.

Operator

Your next question comes from the line of Adrienne Tennant with Janney Montgomery.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

So Mike, my questions are also kind of on the LC. How much of the LC was actually available to you in the third quarter? How much should we think about being drawn down at the end of the fourth quarter, and forgive me if you answered this on just the last caller, but did you say that you expect the trade payables to be paid off at the end of the fourth quarter? And then...

Michael Scarpa

We didn't comment on where we expected the fourth quarter to be in terms of trade payables. And as far as availability on the loan as we ended the quarter, it was at the max at $200 million.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Okay. And then do you have any forecast for the end of the fourth quarter based on your guidance?

Michael Scarpa

Well, our sales are trending down and we did indicate a margin dilution, but we were very cash positive last year. And I think if you looked at where we were last year, we were in the $60 million range cash positive in the fourth quarter. So even if you looked at the differential on the operating income and took into account that we're continuing to work down our inventories, I think you'll see that we'll be cash positive in the fourth quarter.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Okay, great. But the 890 basis point merch margin, how much of that was marked down versus the impact of cost inflation?

Michael Scarpa

We said that -- at least in the past, we said 75 to 125 basis points of initial markup deterioration. That held pretty true in the fourth quarter. So the majority of it was based on promotions and markdowns.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Okay. And then Trudy, as you look to the spring season, are there any ongoing shifts or -- I know earlier receipts for the fall season? Are you going to do the set similar types of things because of the shift in the Easter calendar?

Trudy F. Sullivan

We will be shifting our spring floor set slightly earlier this year than we did last year.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Okay. So we should see that in the inventory numbers even at the end of the first quarter as well, right?

Michael Scarpa

Yes. Well, you should see that at the end of the first quarter and you may see a bit of it in the in-transit numbers at the end of the fourth quarter.

Trudy F. Sullivan

Right.

Operator

Your next question comes from the line of Stacy Park (sic) [Stacy Pak] with Barclays Capital.

Stacy W. Pak - Barclays Capital, Research Division

So I guess on the October comp, how much of that do you think was driven by the sales shift that you did from November? Is there anymore shifts in promotion calendar that we should be aware of in Q4? And how many stores opened earlier this year relative to last? And I don't know if you could give some color before Thanksgiving versus after. And then just 2 others. One is with all of the research that you did, Trudy, what's the number of clients that you're using in this focus group or in this research? And then lastly, Mike, what's a good SG&A dollar number -- growth number for '12?

Trudy F. Sullivan

So if you really look, Stacy, at the October, November period, we did this one move of this fall sale out of November into October. October certainly was aided by the fall sale, but it was also aided by seeing better performance in key merchandise categories such as sweaters. We don't anticipate a shift like that for the balance of the year certainly. We are staying competitively promotional. We have a very planned series of targeted events that we know that she loves, as we focus on really delivering a strong fourth quarter and that's where everybody's focus is right now. So we hopefully are seeing the continuation of strength in the core categories that I talked about in my opening comments and we have what I think is a very competitive promotional calendar for fourth quarter, and that's where we're aiming. In terms of the research, I will tell you it is a highly statistically relevant number that we used in the sample size, okay.

Michael Scarpa

And as far as SG&A in 2012 without getting specific, as we'll give some guidance as on the next call, we're shooting for $50 million of cost reduction annualized. A lot’s going to depend on the timing of that, but we ran -- we're looking to run about a little over $400 million this year. So I would think we'd probably be in around that 350 to 360 range.

Trudy F. Sullivan

In terms of early opening on Black Friday, I mean, we did have stores that because malls opened that we were required to open early. But we didn't do anything like at midnight or there wasn’t any of that nonsense. It's really several hours early in probably a little more than half of our stores.

Operator

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

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

I was wondering since your merchandise does look better and seems to be more in line with the core customer, if you'd seen any changes in the age groups that are in the stores shopping, Trudy, and wondered also if there's any difference between the comps between the premium, classic and always stores? And I'd don't think I heard you mention an upscale outlet comp for period. And finally for Mike, what's a good tax rate to use, Q4 and go forward?

Trudy F. Sullivan

We don't see a significant change in the age group that's shopping in the store, Margaret. I will say that for the third quarter, our customer file was flat and that over the trailing 12 months, it had been declining about 1.5%. So we were pleased to see that on a total file basis that the performance in the quarter was better than the trailing 12 months.

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

And the type of store performance, the premium versus classic, any difference?

Michael Scarpa

The premium and the classic were better trending than always, but not really a markable difference between them. As far as the tax rate, we're expecting taxes in the fourth quarter of between $500,000 and $750,000. We do have a full valuation allowance. So next year, we're modeling taxes for 2012 to be in the $3 million to $4 million range. So it's not a normalized tax rate as of yet.

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

And the outlet business, how did they comp?

Trudy F. Sullivan

They were up, mid single, yes. Did you get that, Margaret? I'm sorry.

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

They were up, you said.

Trudy F. Sullivan

Up mid single digits, yes.

Michael Scarpa

That's year-to-date on the mid single. For the quarter, it was low single digit comp. I'm assuming that was the rest of her comment [ph].

Operator

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

Marni Shapiro - The Retail Tracker

I, too, would like to start with something positive and then ask a couple of questions. You had some phenomenal sales on things like suede clutches and feather bags and shoes and Loracs and anything special. So as I think about spring versus the holiday assortment, to me, it felt like it was about 20% of the assortment when I walked in the door that I said, wow, this is Talbots? And this is amazing. How should I be thinking about spring? How much of that type of product were you able to chase into the spring season?

Trudy F. Sullivan

Well, okay. I don't want to give you a facetious answer. I would think -- I'd love you to be wowed by the entire assortment. I think that we've -- we're really, really pleased with how spring has come together. And I hope when you walk in the store, your wow factor will go up. As Mike said, we have much more novelty, much more color, much more print and pattern, diversity and our sweater category is doing well and we've done some really great things on the spring side in terms of diversity of yarn and pattern. I mean, we're really happy with what we've put together as a knit presentation. Our whole knit dressing efforts for spring, I think looks as evolved as it’s ever looked. So we are -- we feel pretty excited about what we're bringing to the customer and you'll get to see it sometime late January as we set that floor set.

Marni Shapiro - The Retail Tracker

And then could you guys talk a little bit, I'm very happy to hear about all the cuts and the way you guys are managing the expenses. I guess, so as things are slowly starting to turn around on the product side and we are starting to see things pick up a little bit, is there a risk that you sort of squash that momentum or you feel like the product should really be standing for itself? I guess how do you balance these cuts that are needed with not wanting to squash any momentum that might be starting?

Michael Scarpa

Well, we've looked at these cuts very carefully and we've looked at process and efficiencies and where we're getting payback. So while $50 million is a big number based on our cost structure today, we are realizing efficiencies based on some of the system stuff and we looked very closely at the marketing and the return, and we said national advertising and TV advertising were near term. And if we see business start to improve, it doesn't say that we can’t add back some dollars. So we're staying pretty flexible.

Trudy F. Sullivan

And we also have left really ample spending and marketing to speak to. We've increased the frequency to our core customer. We really are prioritizing anything that will engage and retain her and we have solidly budgeted to enable that to happen. So to the core customer, we will be able to even -- we'll touch on more frequently more often and hopefully continue to see her response improve.

Marni Shapiro - The Retail Tracker

So at the store level, that shouldn't be a big change?

Trudy F. Sullivan

No. And I think the other thing that's important is, and I mentioned it, we are in a much better position to chase the things that are working. So we chased early fall winners into late fall, such as cashmere sweaters, ponte leggings. As we see trends develop, again on the -- as we start to deliver our spring merchandise, we're in a position to chase. We've taken fabric positions on things that we have big belief. I think we have a much more rational buy against the top contributors to the assortment and we are really, really focused on chasing into winners. And we're in a position to do that now. We are taking 20 doors and we are setting spring -- actually our late spring delivery's early, so that we can chase back into winners and we'll see that sometime in early January. So we're very aggressive about focusing our resources on what's working and getting back into it very quickly.

Marni Shapiro - The Retail Tracker

Excellent. And could I just ask you one last question? I'm curious what your thoughts were on why the woven's business didn't work? I mean, I have my own thoughts; I'm curious what you guys were thinking.

Trudy F. Sullivan

It's pure and simple; we were too based in silk and she didn't like it.

Operator

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

Trudy F. Sullivan

Well, thank you. In closing, I just want to say we have made incremental improvement to our merchandise over the last few months and we continue to be intensely focused on this project. As we look ahead to 2012, our goal is to achieve sales growth and profitability. All of the actions we've put in place and have just taken, improve product, reducing our cost structure, streamlining our organization to be more effective and efficient, we believe provides us with the roadmap to achieve this goal. So I thank you for your support and calling in today. I wish you all a wonderful holiday and a happy New Year. Have a great 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 forward-looking terminologies as expect, achieve, plan, look, projected, believe, anticipate, outlook, will, would, should, intend, potential or similar statements or variations of such terms. All of the information concerning our future liquidating, future net sales, margins and other future financial performance and results achievement of operating plans or forecast or future periods, sources and availability of credit and liquidity, future cash flows and cash needs, success and results of strategic incident as anticipated cost savings and other reduced spending and other future financial performance or financial position, as well as our assumptions underlying such information constitutes forward-looking information. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about the company are not guarantees of future results or performance and involve substantial risk and uncertainties including assumptions and projections concerning our internal operating plan, regular price, promotional and markdown selling, operating cash flows, liquidity and sources and availability of credit 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 customers’ 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 benefits of our current strategic incentives including store segment segmentation, store reimaging, store rationalization, enhanced marketing, information technologies, reinvestments, upscale outlets, expansions and any other future incidences that we may undertake; the ability to achieve our operating plan and strategic plan for operating results, working capital and cash flows; the ability to access our satisfactory terms or at all adequate financing and other sources of liquidity as when necessary to fund our continuing operating working capital needs, strategic and cost reduction incentives and other cash needs and to obtain further increases in our credit facility; expand and continue our trade payables arrangements with our sourcing agent and obtain other or additional credit facilities or other internal or external liquidity, sources if cash flows from operations or other capital resources are not sufficient for our cash requirements at any time or times; the satisfaction of all borrowing conditions under our credit facility including accuracy of all representation and warranties, no defaults or events or default, absence of material, adverse effects or change and all other borrowing conditions; the risk associated with our efforts to maintain our traditional customer and expand to attract new customers; the risk associated with competitive pricing pressures 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, high labor, costs in countries of manufacturer and any significant increases in the price of fuel, which impacts our freight cost; the ability to reduce spending as needed; 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 discrepancy, pending substantial loss of household wealth and savings and continued high unemployment levels; the ability to continue purchase -- to purchase merchandise on open account purchase terms at existing or future expected levels with acceptable payments, terms and the risk that suppliers could require earlier or immediate payment or other security due to any payment concerns; 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 risk 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 presentation of the relationship for any reason we would be unable to successfully transition to an internal or other external source of function; the risk and uncertainties in connection with any need to source merchandise from alternate vendors, any impact to or disruption in our supply of merchandise; the ability to successfully execute, fund and achieve the expected benefits of our supply chain incentive; any significant interruption or disruption in the operation of our distribution facility or the domestic and internal transportation and fracture, the risk that estimated or anticipated costs, charges and liabilities to settle and complete the transition and exit from and disposal of the J. Jill business, including both routine obligations and common [ph] risks 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; any negative publicity concerning the specialty retail business in general or our business in particular the risk of impairment or of goodwill and other intangible or long-lived assets; the risks associated with our efforts in transforming or our information technology systems to meet our changing business systems and operations, including the ability to maintain adequate system security controls, the risk associated with any future decline in our -- the risk associated with any further decline in our store price, stock price, including satisfaction of nice continued listing criteria which requires the average closing price of our common stock to be greater than $1 over 30 consecutive trading days and minimum levels of marketing capitalization and the risk and uncertainties associated with the outcome of current and future litigation, claims, tax audits and tax of the proceeding and the risks that actual liabilities, assessments or other financial impact will exceed any estimated, accrued or expected amount or outcome.

All of our forward-looking statements are as of the date of this press release only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of or any material adverse change in one or more of the risk factors or risk and uncertainties referred to in this press release or included in our other public disclosure or our other periodic reports or other documents or filings filed with or furnished to the SEC could materially and adversely affect our continued operations and our future financial results, cash flows, available credit, 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 press release. Even if such results change or circumstances make it clear that any forward-looking information will not be realized. And public statements or disclosures by us following this press release, which modify or impact any of the forward-looking statements contained in this press release will be deemed to modify or supersede such statements in this press 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 our annual report on Form 10-K for the fiscal year ended January 29, 2011 and other periodic reports filed with the SEC.

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