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The Talbots (NYSE:TLB)

Q4 2011 Earnings Call

April 16, 2012 4:30 pm ET

Executives

Julie Lorigan - Senior Vice President of Investor and Media Relations

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

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

Analysts

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

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

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

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Dana Telsey

Michelle Tan - Goldman Sachs Group Inc., Research Division

Carla White

Operator

Good afternoon, ladies and gentlemen. On behalf of Talbots, we would like to welcome you to the Talbots, Inc. conference call covering its fourth Quarter and full year 2011 earnings 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 Relations.

Julie Lorigan

Thank you. Good afternoon, everyone, and welcome to the Talbots, Inc. Fourth Quarter and Full Year 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 our 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, believe, anticipate, outlook, will, 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 last week, 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 3 hours after the conclusion of the call today until end of day, April 19, 2012. The webcast will also be available on the Investor Relations page of our website.

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

Trudy F. Sullivan

Thank you, Julie. Good afternoon, everyone, and thanks for joining us. In a moment, I will discuss Talbots, Inc. results for the 13-week and 52-week periods ended January 28, 2012, and provide a brief update on our key strategic initiatives. Mike will cover our financial results in greater detail and provide comments on the first quarter 2012. After that, I will make some closing comments and open the call up for questions.

Before we begin the business review, I'd like to comment on the timing of our earnings release and 10-K filing. Earlier this year, as part of the SEC standard comment letter process, we received an SEC comment letter relating to our 2010 Form 10-K and other periodic reports. While this was a normal review, the process takes time to work through and to clear all comments. The accounting matters under discussion principally focused on our identification of reporting units and on our operating and reportable segments. We understand that the timing was not perfect, but we wanted to complete this comment letter process before we filed our 10-K and issued our year-end earnings release, which we did on our 10-K filing date of last Thursday, April 12. No accounting changes were made as a result of this review process.

We also wanted to give our shareholders and the investment community time to digest all of the information prior to the call and therefore, schedule the call for today. The comment letter and related responses from the company will be made publicly available by the SEC at some future date this year, as is customary.

As indicated in our release Thursday, our Board of Directors continues to evaluate a full range of strategic alternatives, although our Board has not set a definitive timetable for the completion of its evaluation and we have stated there can be no assurance of any transaction as a result of the board's review. They continue to work diligently.

We do not intend to discuss the status of the evaluation process or provide interim updates, and we will not be taking any questions on this process. We appreciate your ongoing support and understanding.

With that, I will proceed with the business review. For the fourth quarter, we reported a net sales decline of 1.1% and adjusted loss per share from continuing operations of $0.52.

During the quarter, we continued with an aggressive promotional strategy and a challenging environment. This resulted in sequential improvement in both customer traffic and sales trends relative to the third quarter, but at the expense of gross margin.

Traffic increased 12.3% in the fourth quarter, a significant improvement from the third quarter decline. We also drove strong conversions, which were up 5.5%, however, offset by a 14.2% decrease in dollars per transaction. More importantly, we were able to clear through excess inventory to better position ourselves for spring.

For the fourth quarter, our buyer file size increased approximately 6% from the prior year. On a trailing 12-month basis, our customer file increased 1%, with growth coming from reactivated and new customers.

For the back half of 2011, we made changes to products, styling, marketing and merchandising based on information gleaned from our consumer insights. With a strong focus on our core customer and meeting her needs, we chased into print, pattern and color offering and worked to hit the correct balance of classic and updated fashion to deliver an assortment that better resonated with her.

We also completed a very comprehensive psychographic profile of our core customer to add greater insight to direct our product, marketing and customer experience initiatives. All this groundwork should benefit us as we move further into 2012.

Now, before I turn it over to Mike, I want to provide an update on our key strategic initiatives. First, on our store re-image program, we completed approximately 50 refreshes in fiscal 2011, for a total of 70 locations since we started this initiative.

Although it is still too early to gauge the impact from our most recent renovation, refreshed store locations, particularly from the first phase of this program, have on average outperformed the comparable store base in terms of net sales and other key store metrics such as customer traffic.

Turning to our upscale outlet channel. During the quarter, we opened 4 outlet stores, ending the year with 43 upscale outlets. Fourth quarter and full year comps were positive low single-digit, with successes across many categories. This has proven to be a successful and profitable channel for growth, and we plan to accelerate the expansion of this business. In 2012, we expect to open approximately 20 new upscale outlet stores.

With regard to our marketing strategy, we are focused on retaining and re-engaging with our existing core customers. For 2012, we've eliminated our national advertising campaign and instead are moving to a more grassroots and targeted approach, where we've seen success and have had measurable results.

In addition, we have revised our marketing programs for the Direct business to encourage cross channel shopping. Our contact approach goes beyond the catalog by an enhanced direct marketing strategy, social and digital media and grassroots outreach. As such, our total number of contacts to our core file is expected to increase year-over-year in 2012.

Lastly, with respect to actions we have taken within the field, we continue to look at ways to drive greater efficiency and improvement within our stores' organization. After initiating performance-based programs to increase the effectiveness with our store organization in late fiscal '11, we are now working on optimizing our staffing model.

In the first quarter of 2012, we have implemented a workforce management system, which will allow for greater staffing flexibility by enhancing our ability to align our sales force with key selling periods.

To take full advantage of this tool, we have completed the restructuring of our stores' organization, streamlining the levels of leadership and enhancing the level of flex time of selling associates to optimize our payroll and drive improved productivity in the stores.

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

Michael Scarpa

Thank you, Trudy, and good afternoon, everyone. I will now cover the details of our fourth quarter financial performance, as well as provide some comments on first quarter 2012.

Total sales in the fourth quarter were $289 million, compared to $293 million last year, down 1.1%. Consolidated comp sales, including stores, direct sales and excluding the stores closed or planned for closure under the store rationalization plan, were approximately flat for the 13-week period.

Fourth quarter cost of sales, buying and occupancy as a percentage of net sales increased 510 basis points over last year, at 75.9% of net sales, versus 70.8% of net sales in the prior year period. This increase was due to a 570-basis-point deterioration in merchandise margin, resulting from higher levels of markdown and promotional activity and partially offset by buying and occupancy costs, which declined 60 basis points in the quarter.

SG&A in the fourth quarter increased $26 million over last year to $112 million, or 38.6% of net sales, versus or $86 million, or 29.4% of net sales last year. After adjusting for approximately $13 million in a one-time cumulative adjustment to gift card breakage income and the reversal of incentive compensation expenses recorded in the fourth quarter last year, fourth quarter 2011 SG&A reflected higher planned marketing expense and was impacted by a total of approximately $10 million in net expense obligations. These expense obligations included certain executive post-employment benefits and legal and advisory fees associated with the company's exploration of strategic alternatives, among other items as outlined in our earnings release.

Adjusted operating loss for the fourth quarter was $32 million, a decrease of $26 million compared to the same period last year. Our adjusted loss per share from continuing operations was $0.52, versus adjusted loss from continuing operations of $0.14 per share last year.

Moving to the balance sheet. We ended the fourth quarter with total accounts receivable of $142 million, down 2%, versus $145 million last year. Our receivables remained in excellent condition and we ended the year with Talbots' charge penetration of approximately 44% of our net sales volume. We have seen our Talbots' penetration improve by 190 basis points in the first 2 months of 2012 when compared to the same period in 2011.

Merchandise inventories at the end of the quarter were $165 million, up approximately 4% to last year's $158 million, in part driven by timing of early receipts. Our focus on maintaining appropriate inventory levels is reflected in the decrease in receipts we are planning for 2012. At the end of March 2012, our inventories were down approximately 4%.

Capital expenditures for the year were $44 million, primarily related to investments in store refreshes, the opening of upscale outlet stores and IT initiatives. Total debt outstanding under our revolving credit facility at the end of the quarter was approximately $116 million, up $90 million from last year's balance of $26 million. We ended the quarter with $9 million in cash.

Under our trade payables arrangement with Li & Fung, we ended the fourth quarter with $22 million in trade payables financing.

Cash used in operating activities for the year was $65 million, compared to cash provided by operating activities of $54 million last year. The reduction in cash flow is primarily due to a loss in earnings.

Before I comment on the first quarter of 2012, let me address our financing and expense management, as well as our store rationalization plan. On February 29, 2012, we agreed with Li & Fung to extend the trade payables arrangement established September 1, 2011, for an additional 6 months, to August 31, 2012, under the existing terms and conditions with an option to renew for an additional 6-month period upon the mutual agreement of both parties.

Additionally, as announced on February 16, 2012, we entered into a new $75 million secured loan -- secured term loan led by Wells Fargo Bank. In connection with this transaction, we also amended our existing $200 million secured revolving credit facility with GE Capital Corporation. Both the term loan and the amended credit facility are expected to mature on February 16, 2017.

Moving to expense management. At this time, we have identified and have implemented approximately $40 million in annual cost savings as part of our $50 million cost reduction initiative announced in December.

We expect to complete our cost savings initiative by the end of fiscal 2012. Capital expenditures for fiscal 2012 are expected to be approximately $30 million, and we will continue to invest in our key strategic initiatives, including the expansion of upscale outlets, store re-image and upgrades of certain IT systems.

Now turning to our store rationalization plan. Through the end of the fourth quarter, we have closed 82 locations, including 69 full stores. The stores closed or planned for closure under our store rationalization plan contributed approximately $85 million in net sales in 2011 and $13 million in operating loss, including $10 million in restructuring charges and $1 million in impairment of store assets.

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 will look to do so opportunistically in fiscal 2012.

Now let me comment on the first quarter of fiscal 2012. First quarter total net sales are expected to be approximately $272 million, down approximately 9.6% compared to the same period last year, due in part to the impact of the fiscal 2011 store closings as a result of the company's store rationalization plan.

First quarter to date consolidated comp sales, which include store, internet, catalog and red-line sales are down approximately 5.4%, which does not reflect the anticipated benefit of the Easter shift later this month.

The company expects cost of sales, buying and occupancy as a percent of net sales to be approximately flat to down 100 basis points compared to the same period last year.

SG&A expenses are expected to be approximately $91 million, net of any special items. We expect interest expense of approximately $5 million and taxes of approximately $600,000. Diluted shares outstanding for the first quarter will be approximately $70 million.

With that, let me turn it back to Trudy.

Trudy F. Sullivan

Thanks, Mike. Fiscal 2011 was a very challenging and disappointing year for us. However, we put a number of building blocks in place and came away with some key learnings, which we are putting into practice.

Our board continues to explore a full range of strategic alternatives to maximize value for all our stockholders. There is no definitive timetable for this evaluation. And pending the completion of these evaluation, we will continue to pursue our long-range plan. Additionally, the Board continues to search for our President and Chief Executive Officer that would succeed me in this role once I retire.

As we move forward, we are concentrating on improving our merchandise, core customer re-engagement, prudently managing our inventory and expenses and executing on our strategic initiatives.

Overall, we will continue to take appropriate actions across our business to drive stronger results.

And with that, we will now turn the call over for questions.

Question-and-Answer Session

Operator

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

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

First, I know you don't want to comment on the evaluation of strategic alternatives. But I was wondering if you could comment on the search for a new CEO, since Trudy, I think, you're retiring at the end of June, which is coming up pretty soon. And then I just had a clarification on the comps to date, down 5.4%, and I think you said that, that excludes the benefit of the later Easter. I was just a little confused about that. Quarter-to-date, what date did that add since Easter was on the eighth? So I would think that you've got a positive impact of it already and you've got a negative impact coming. But so if you could just clarify that.

Trudy F. Sullivan

Jennifer, we're not going to take any questions on your first 2 inquiries. So I'm going to pass it right to Mike on the Easter shift.

Michael Scarpa

Yes, that comp is through both the release date of Thursday and also through this past Sunday.

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

So then it does include the benefit of the Easter and you've got a negative impact coming up, right?

Michael Scarpa

Well, the benefit is that -- actually, we view it a little differently. We were closed for Easter, so we got no sales against the sales that happened last year. The Easter will happen later in the month, so there will be a $0 day for last year and we're not positive this year.

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

Got you. And then could you just talk a little bit about the comp metrics in Q1 versus Q4? I guess, what's driving the deceleration sequentially? Is it traffic or conversion or what?

Michael Scarpa

When we looked at it, we were heavily promotional in the fourth quarter, which helped drive some sales. And as Trudy mentioned, we saw improvements in traffic and conversions based on some of the promotions and markdown activities we had. We were very focused in Q4 on bringing our inventory levels back down to a manageable level. And as you remember, we've been up double digits through most of 2011. We're actually happy to be in a position where we were only at 4%, most of it being driven by early receipts at the end of the year. And I just commented that actually inventory levels have now actually turned negative when we look at end of March last year, down about 4%. So I would attribute some of the positive nature around the comps really dealing with the fact that we were liquidating a lot of inventory.

Trudy F. Sullivan

In the fourth quarter. So we came into the first quarter clean. We do have a -- we are experiencing a positive trend in transactions and conversions still, but we certainly aren't carrying a liquidation inventory that we had in the fourth quarter.

Michael Scarpa

In fact, from a store perspective, the decline is really being driven by units per transaction, and our units are down in our retail stores right now on a comp basis.

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

Okay, great. And then so you're less promotional, so less of a comp but better margins, and that explains sequential gross margin improvement in the first quarter as well?

Michael Scarpa

Exactly, right.

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

Right. Okay. And then one last one, sorry. And for -- you said inventory at the end of March was down 4%. Do you expect to end down around that amount for the quarter?

Michael Scarpa

We're actually hoping it will be down a little more than 4%.

Operator

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

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Trudy, can you talk about the spring receipts, what's working, where you've put a lot of effort and time into, and what you're seeing there with some of the trends? Obviously, we've heard from many Missy retailers that sort of the earlier spring, the weather, the color, all those things are beneficial. Just wondering how they're playing out for you. And then for Mike, just a question on averaging of costs. If you can give us a little bit of detail that, how much was the cost inflation impacting you in the fourth quarter? How much should it impact you in the spring? And then I assume it reverses in the fall. So how should we look at that for the fall season? And then my last question for Mike, really is, the accounts receivable balance continued to go down, obviously, as sales are a little bit soft. And I guess my question there is, since that is securing some of the asset-backed facilities, I was wondering, is there a level at which we should start to get worried? Or is that sort of a moving target along with many other things that go into these asset-backed lines?

Trudy F. Sullivan

Just quickly on some of your opening comments on product, definitely, the warm weather certainly was a benefit for us. I think more importantly, where we were able to address issues that plagued us in fiscal 2011 -- lack of print and pattern, fabric weight and knits -- all of these we really addressed as we came into this quarter, and we're seeing we are encouraging trends in our knit business. We are selling print and pattern across every category that we're offering at and that would include knits, dresses, even pants. So color is definitely playing to our favor. The weather has played to our favor. Print and pattern has been very well received, and we're encouraged. Each floor set that we've actually put on the floor in this quarter has shown good strength. And the research that we're doing with our core consumers shows that she feels that we are getting it right in terms of the balance of classic and updated, in terms of the balance of print, pattern and color. So that's encouraging.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Okay, great. And Mike?

Michael Scarpa

Just from a costing perspective, our initial markups were down about 50 points for the year, 50 basis points in 2011. Fourth quarter was down a little over 75 basis points. We're seeing the first half of the year up slightly and are expecting, based on preliminary fall and holiday costing, that we should end up the year up about in the 30 to 40-basis-point range.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

So does it reverse in the second half or it's still up?

Michael Scarpa

Yes, kind of -- it's stabilized in the first half 2012, and it reverses in the second half, about 30 to 40 basis points.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Okay. So okay, great. And then on the AR?

Michael Scarpa

We've had initiatives in our stores to increase the opening of Talbots' charge, and we're happy to report that it's basically doubled from where it was a year ago, in the first couple of months of 2012. And as I mentioned on the call, the penetration is actually up 190 basis points in February and March, and that's on top of what was up in January by over 300 basis points. So we think it's beginning to stabilize, and in fact, starting to reverse to a positive nature.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Okay. And just a clarification on Jen's question. So we should expect the negative 5.4% comp to actually get better over the course of the next couple of weeks, and then that's for the quarterly comp?

Michael Scarpa

Well, we haven't guided to a quarterly comp. The only point is that Easter last year happens in the last 2 weeks of this quarter, so there was a 0 sales that day. We will be having, hopefully, much more positive response than the 0.

Operator

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

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

I was wondering, Mike, if you can also give us maybe some color around inventory plans? Where should we expect the inventory at the end of the first quarter? And any color around how you thought them for Q2 and possibly on the fall season? And then I was wondering, Trudy, if you could share a little bit more, some of the color around the research or group -- focus group feedback. You mentioned that the customer has certainly feel like their product has gotten its groove, it's a little bit more brand appropriate. Maybe some color around that would be really helpful. And maybe perhaps what other interesting maybe feedback that she's sharing with you.

Michael Scarpa

Betty, from an inventory perspective, we said that at the end of March, we were down 4%, and we expected that to actually improve a little more as we entered -- as we ended the first quarter. We didn't give specific guidance and we won't. I'd tell you from a buy perspective, total company were down about 10% in the first half of the year and down about 10% in the second. From a core store perspective, we actually bought down about 13% in the first half and about 15% in the second half. We're down about 14% overall from a dollar perspective. So it gives you sense that we're cutting back double digits in terms of inventory buys, which we believe will help us from a margin perspective. Obviously, we'll have, hopefully, less goods to mark down and can be a little less promotional than we were in the fourth quarter. And first quarter last year was our strongest margin quarter. And to be guiding to flat to down 100 basis points, we feel that our inventories are back on line to where they need to be.

Trudy F. Sullivan

And just in terms of our research. I mean, we do -- we have a very active online panel now that's almost well over 7,000 participants. We're very active and certainly out, trying to be sure that we are hitting the right balance. I would say our most recent research shows that we have continued improvement in the classic/updated balance, a better presentation of print and pattern and more appropriate model flex and styling in the media that we put out to her. So we are encouraged by seeing that this trend improves across a number of these attributes for her. And as I said, we really do test every single floor set that goes in. So we are seeing certainly improvement in terms of the things that she told us last year was lacking, i.e. print, pattern and color and appropriate fabric weight.

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

Trudy, do you have a sense of where she may be coming from? Is she maybe someone that was shopping to outlets [ph] and kind of there, she's re-embracing the brand again? Or are you perhaps gaining market share from another retailer?

Trudy F. Sullivan

I think, Betty, we're most focused on talking to our core consumer that we've had. She was certainly, not happy with what we've put into the marketplace, especially the first half of last year. So we are successfully reactivating our core customer. That is why our file is up. We've seen her re-engage in the brand. Its early days. We're just starting into 2012, but she's a huge loyalist. She's very willing to share her opinion with us. And so far, she likes what she sees that's a lot better than what we'd offered last year. And it's really our own core customer that's re-engaging. I don't have any comments in terms of where else she would be coming from.

Operator

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

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

If you could talk a little bit about how the Direct business trended? I'm surprised to see it down as much as it was, given the easier comparison from last year. Traffic, as that's rebounded in Q4 in the store shelf, do you see that online as well? And then how is traffic trended here in the first quarter?

Trudy F. Sullivan

You're specifically talking to traffic to the Direct business?

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Specifically, yes. Your e-commerce traffic, yes.

Michael Scarpa

Year-to-date, our traffic in the Direct business is actually, as we monitored through our website, it's up about 3%. We're seeing conversions basically flat, but average order volume is down slightly.

Trudy F. Sullivan

The average order value. And I think that when we look at the Direct business in the first quarter, really, the efficiencies came very early on really in the very beginning. Our books have gotten stronger as this quarter has progressed.

Michael Scarpa

And particularly, as we look at the fourth quarter, we put in place a new inventory management tool. We're fulfilling inventory orders from our direct business through the stores where inventory either is not at hand at the present moment or no longer available. And we did about $8 million worth of business in that direct fulfill from stores. So there was a piece that would've normally been fulfilled from our Direct inventory but wasn't available at the time.

Operator

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

Dana Telsey

Can you give us An update on the upscale outlet strategy, how that's going, how many stores, and what you're seeing from those stores relative to the full-line base of stores? And then also, I think last quarter you had mentioned fulfillment from stores to customer? How is that contributing in terms of sales? How's it working?

Trudy F. Sullivan

So, as I said in my prepared remarks, Dana, we're quite pleased with the progress we're making in the upscale channel. In the first quarter, we are experiencing strong comps, low double-digit comps, in that -- for the quarter-to-date. It's a very strong item business. We have a very strong comp business there. But a number of the characteristics and products that she likes in the brand itself -- color, print, pattern -- work well in the outlet business as well. And we plan to or have on the drawing boards plan for 20 stores to open in 2012.

Michael Scarpa

And Dana, from a direct fulfill from stores, as I mentioned, we did about $8 million worth of sales in the fourth quarter, about $11 million overall for last year. We put a program in place really in the September timeframe. And so far this year, we've done a little over $4 million worth of business in the direct fulfill. So we're pretty pleased with the way it’s working.

Dana Telsey

And how is the margin on that relative to regular fulfillment centers?

Michael Scarpa

It's the same.

Operator

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

Michelle Tan - Goldman Sachs Group Inc., Research Division

Mike, sorry if you answered this already, but I was wondering if you could split out what the buying and occupancy expectation is within your overall gross margin guidance for Q1? And then also, I guess, just a broader question, maybe for the team. It seems like -- I know you talked about a tough environment in Q4. It seems like the environment is better in Q1. Your inventory is down. The comparisons are easy. So what do you think it is that's holding back margin recovery in the business?

Michael Scarpa

All right. So from a Q1 perspective, we would expect buying and occupancy to be relatively flat, given the -- where we are currently on the comp line.

Michelle Tan - Goldman Sachs Group Inc., Research Division

Okay. Great. And I guess, any perspective on kind of broader profitability recovery and what needs to happen, I guess, is the question. Why isn't it happening as some of these things start to move in the right direction? And kind of what's the holdup that potentially goes away going forward?

Michael Scarpa

As I look at it, we achieved margins in the second and fourth quarter in the low 20s and low 30s in the third quarter of last year. So I look at Q1 as relatively our toughest comp, and we have it playing right now, it's flat to down 100 basis points. As we move on, I think the comparisons get easier. I think our inventory positions continue to get stronger. We've gotten some pretty good selling results from the latest brand moment. So we hope that the product continues to perform better than it did last year. So from a conservative aspect, we see the easier comps up ahead.

Operator

Your last question comes from the line of Carla White from Jennifer Black & Associates.

Carla White

Just had a quick question. On last quarter's call, you talked about bringing in your spring receipts earlier versus last year. Can you talk about what you saw as the result of that?

Trudy F. Sullivan

I mean, as I said on the call, Carla, the reaction to our spring products is encouraging. I mean, each floor set has gotten stronger than the prior. We did feel a need to bring in spring products somewhat earlier toward the end of fourth quarter. Thankfully, that performed well. Successive floor sets have done well. We've really pulled up floor sets now for the last several, just based on the trends that we're seeing. We're also -- we are very able to test and chase for our second quarter deliveries. So we're able to buy back in the kind of proven winners. So we're feeling very good about the cadence of how we're bringing units to the floor, and it really did start toward the end of fourth quarter. We're feeling very good about some of these really core fixes that we've put in place -- fabric weight and knits, print and pattern. Our dress business is showing -- is really doing quite well. So we're encouraged. Our accessory business, we lagged a bit coming out of the fourth quarter, but we have a great team in there now and we're chasing that very actively. So we're seeing strength in certain core categories that we feel we should own, such as scarves. So we're feeling good about the progress, not only in the content of the product but how she's ranking it and rating it and our ability to test and react and chase. And our inventories are in very good condition that allow us the flexibility to chase into things that are working.

Operator

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

Trudy F. Sullivan

I just want to thank you all for joining us today, and we'll talk to you soon. Thanks.

Operator

This concludes the Talbots, Inc. conference call. We will now proceed with our forward-looking statement. This conference call contains forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminologies as expect, achieve, plan, look, projected, believe, anticipate, outlook, will, would, should, intend, potential or other similar statements or variations of such terms.

All of the information concerning our future liquidity, future net sales, gross profit margins and other future results, achievement of operating plan or forecasts for future periods, sources and availability of credit and liquidity, future cash flows and cash needs, success and results of strategic initiatives, the outcome of exploring strategic alternatives, anticipated cost savings and other reduced spending and other future financial performance or financial position, as well as our assumptions underlying such information, constitute forward-looking information.

Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about the company, are not guarantees of future results or performance and involve substantial risks and uncertainty, 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 achieve our operating and strategic plans for operating results, working capital and cash flows; the risks associated with our efforts to maintain our traditional customer and expand to attract new customers; the risks associated with competitive pricing pressures and the current increased promotional environment; the ability to reduce spending as needed; the ability to access on satisfactory terms, or at all, adequate financing or other sources of liquidity, as and when necessary, to fund our continuing operations, working capital needs, strategic and cost reduction initiatives and other cash needs and to obtain further increases in our debt facilities, extend and continue our trade payables arrangement with our exclusive sourcing agent and obtain other or additional debt or credit facilities or other internal or external liquidity sources if cash flows from operating activities or other capital resources are not sufficient for our cash requirements at any time or times; the ability to successfully increase our customer traffic and the success and customer acceptance of our merchandise offerings in our stores, on our website and in our catalogs; the satisfaction of all borrowing conditions under our debt facilities including accuracy of all representations and warranties, no defaults or events of default, absence of material adverse effect or change and all other borrowing conditions; the risks associated with our efforts to successfully implement, adjust as appropriate and achieve the benefits of our strategic initiatives including store rationalization, store re-imaging, information technology reinvestments, store segmentation, upscale outlet expansion and any other future initiatives that we may undertake; the ability to attract and retain talented and experienced executives that are necessary to execute our strategic initiatives; the risks associated with our appointment of an exclusive global apparel sourcing 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 this relationship, for any reason, we will be unable to successfully transition to an internal or external sourcing function; any impact to or disruption in our supply of merchandise; the continuing 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 savings and continued high unemployment levels; the ability to continue to purchase merchandise on open account purchase terms at existing or future expected levels and with acceptable payment terms and the risk that suppliers may require earlier or immediate payment or other security due to any payment concerns; the ability to accurately estimate and forecast future regular-price, promotional and markdown selling and any other future financial results and financial position; any negative publicity concerning the specialty retail business in general or our business in particular; the risk of any further increases in postretirement benefit and funding obligations; the risk that estimated or anticipated costs, charges and liabilities to settle and complete the transition and exit from the disposal of the J. Jill business, including both retained obligations and contingent risk for assigned obligations, may be materially greater than anticipated; the risk of material impairment of our goodwill, trademarks or long-lived assets; the risks associated with our efforts in transforming our information technology systems to meet our changing business systems and operations, including the ability to maintain adequate system security controls; any significant interruption or disruption in the operation of our distribution facility or the domestic and international transportation infrastructure; the risks and uncertainties associated with the outcome of current and future litigation, claims, tax audits and tax and other proceedings and the risk that actual liabilities, assessments or other financial impact will exceed any estimated, accrued or expected amounts or outcomes; and the risks associated with any uncertainties arising related to our ongoing review of strategic alternatives.

All of our forward-looking statements are as of the date of this conference call 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 risks and uncertainties referred to in this conference call or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the SEC could materially and adversely affect our continuing operations and our future financial results, cash flows, available credit, prospects or/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 conference call, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this conference call, which modify or impact any of the forward-looking statements contained in this conference call will be deemed to modify or supersede such statements in this conference call.

In addition to the information set forth in this conference call, 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 28, 2012 and other periodic reports filed with the SEC.

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