Talbots Q3 2007 Earnings Call Transcript

Talbots, Inc. (TLB)

Q3 2007 Earnings Call

November 27, 2007, 10:00 a.m. ET

Executives

Trudy F. Sullivan – President and Chief Executive Officer

Philip H. Kowalczyk – Chief Operating Officer

Edward L. Larsen – Senior Vice President, Finance, and Chief Financial Officer

Julie Lorigan – Vice President, Investor Relations

Analysts

Barbara Wyckoff – Buckingham Research Group

Kimberly Greenberger – Citigroup

Tracy Kogan – Credit Suisse, N.A.

Adrienne Tennant – FBR Capital Markets

Todd Slater – Lazard Capital Markets

Neely Tamminga – Piper Jaffray

Lauren Cooks Levitan – Cowen and Company, LLC

Richard Jaffe – Stifel Nicolaus and Company

Mimi Bartow – Telsey Advisory Group

Marni Shapiro – The Retail Tracker

Jennifer Black – Jennifer Black and Associates

Presentation

Operator

Please stand by. The conference is about to begin. Good morning, ladies and gentlemen, and welcome to The Talbots, Inc., third quarter 2007 conference call. Today’s call is being recorded and at this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time.

I would now like to turn the call over to Julie Lorigan, Vice President of Investor Relations.

Julie Lorigan

Thank you. Good morning, everyone, and welcome to The Talbots, Inc., third quarter conference call. Today we have with us Trudy Sullivan, President and CEO, Phil Kowalczyk, our Chief Operating Officer and current President of J. Jill brand, and Ed Larson, our company’s Talbots Chief Financial Officer.

Before I turn the call over to Trudy I would like to remind you that today’s call will include certain forward-looking statements relating to the company’s expectations and beliefs concerning our future business, prospects, and financial performance. These forward-looking statements, which can be identified by such words as expect, may, anticipate, or similar words, are based on various assumptions and projects and are subject to substantial risks and uncertainty. Actual results may differ materially. For further details and a discussion of these and other uncertainties and risks please carefully review the risk factors and cautionary statements contained in this morning’s press release, as well as the company’s filings with the SEC. We will also conclude today’s call with a forward-looking cautionary statement.

A replay of this conference call will be available from 12:00 p.m. today until 12:00 p.m. on November 29^th. The webcast will also be available on the investor relations page of our website.

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

Trudy F. Sullivan

Thank you, Julie, and good morning to everybody. In a moment I will discuss Talbots’ results for the 13 weeks ended November 3^rd, 2007. Phil will then cover J. Jill’s third quarter performance and review a few key initiatives he and his team are focused on as our company’s newly appointed Chief Operating Officer. Ed will review our consolidated third quarter and year-to-date financial results, and discuss our current thinking on the fourth quarter. Finally, I will make some closing remarks and, as always, we will be happy to answer any questions at the end of our presentation.

So with that, let’s begin our review overview of the business. This morning we announced a third quarter loss of $0.18 per diluted share, which includes $0.08 per share of acquisition related and financing costs and $0.06 per share of expenses related to executive compensation and professional consulting fees. This results was better than our recently revised expectations and above the current first call consensus estimate due to a combination of factors.

Specifically, we had a positive variance to forecast in our operating expenses at both brands. In addition, our J. Jill brand sales and gross margin came in better than forecast.

Total company net sales for the third quarter were $556 million. By brand, retail sales were $366 million for Talbots and $81 million for J. Jill.

Total company comparable store sales for the 13-week period decreased 7.9%. By brand, Talbots comp decreased 8.2% and J. Jill comp declined 6.5%. The main driver of negative comps in the third quarter for The Talbots brand was a 7% decline in average transaction value compared to last year’s third quarter, with average transactions essentially flat in the period.

Looking at our combined company direct marketing businesses, which includes catalogue and internet, third quarter sales were $109 million, essentially flat with last year. Talbots performed above plan for the period, driven by internet, including outlet on-line, which was introduced in August, a strong fall must-have catalogue, and an early positive customer response to our holiday gift book.

Both brands continue to experience solid growth in internet sales, with Talbots brand at 53% and J. Jill at 56% of their respective total direct businesses on a year-to-date basis.

Also on a year-to-date basis, total consolidated internet sales are 54% of the combined company’s directiveness, which is up from 47% for the combined company in the same period last year.

Overall, we are disappointed in our third quarter performance, despite an improvement versus our revised expectations. While we clearly understand in our directing merchandise and execution issues at both brands, it stands to reason that our business is also impacted by the widely discussed, challenging macro environment. That said, there are many things that are within our control and we have taken immediate steps in both brands to drive improved results. Specifically, we are managing on leaner inventories, tighter expenses, and a more aggressive posture with our customer contact and promotional strategies. Although our current trends are somewhat stronger, it is too soon to be clear of success.

Focusing on our Talbots brand merchandise, we continue to see lacklustre sales across our casual area. In general, the colour pallet and basic styling of our casual offering is not appealing to our customer and we lack novelty and variety in our assortment. Our refined merchandise is performing better than casual and, while the customers’ are selectively purchasing holiday separates, our business is still softer than we had anticipated.

Sweaters, which appear to be the most promotional category in the marketplace right now, were off to a slow start. That said, our plan to buy one/get one 50% off sweater event started yesterday, which we hope will jump start a stronger selling trend going forward.

Overall, we know from our current research that our merchandise is not satisfying our customer and we understand that our assortments need to be more modern, sophisticated, inspiring and fun. We also know that she remains incredibly loyal and is depending on us to get it right.

We are very confident that we can attract the best talent to help re-invigorate our brand and move our product appropriately forward.

Turning now to J. Jill, quarterly comps declined 6.5%, due in part to a very difficult August. We did see our negative sales trends level off beginning in mid-September, driven by a very successful mid-season clearance event.

I will now turn the call over to Phil to provide more colour on J. Jill’s third quarter performance and to touch on a few key areas of focus in his new role as chief operating officer.

Philip H. Kowalczyk

Thank you, Trudy. At J. Jill our third quarter performance was challenging, but we did see improvement in comparable store sales results as we moved through the quarter driven in part by a much more successful mid-season sale event. Overall , we did end the quarter slightly better than expected on sales and gross margin versus forecast.

We feel that the business is continuing to stabilize with many of the initiatives starting to gain traction. For example, as we said in our call last quarter, beginning with September deliveries we expected to see an improved product offering reflecting both better design and direction from our new merchandising team.

Those key merchandising initiatives included enhancing our colour offering, improving our overall pant sets, reducing number of repeat styles in our total product offer, and increasing the number of wardrobing options for each style. The implementation of these efforts began in the third quarter and will continue through the balance of the year and into next year.

Beginning in September and throughout October we started to see some strong selling styles, particularly in outer wear, cammies, in our knits, and selectively within pants. We look forward to building upon those successes and moving forward, but we’re not ready to declare a victory; we still have work to do.

Some other key volume categories, especially sweaters, were very difficult in the period. And while we did see improved sales in stores, our direct marketing business – primarily the print catalogue – was still operating below expectations. That said, we’ve been working on another key strategy to improve the overall creative presentation of our catalogues which we’re now just beginning to roll out. And in fact, in September, our September book was the first catalogue to outperformance last year and forecast and we believe that is partly due to the more compelling and flattering look of the book. It includes a more updated and stylistic approach to the merchandise, the models and the overall layout.

Lastly, we continue to refine and unify our marketing and promotional programs to make them more impactful and more relevant to our guests. We have a number of events planned throughout the holiday selling season and are cautiously optimistic that this more aggressive posture will support even stronger performance.

Now let me turn to the organization briefly. As previously announced, I’m continuing to lead the J. Jill brand while we search for a new brand president. Over the 18 months, we’ve instilled important strategies, discipline, and operating principles that will benefit the business over the long term.

In addition, we’ve built a very strong, solid management team who are in place and committed to building this great brand. I look forward to enabling a smooth transition once a replacement is named and, in the interim, am actively involved with Talbots, Inc., in my newly appointed role as Chief Operating Officer.

With shared services as the backbone of the company, my immediate attention will be focusing in areas of sourcing and supply chain management. As we look ahead to fiscal 2008 and beyond, one of the critical components to our success will be the ability to optimize the results and relationships with our key suppliers, manufacturing agents, and factories around the world.

In addition, in the merchandising area, our goal is to maximize the effectiveness of our supply chain system to improve the flow of our inventory. To that end, we’re initiating a major initiative around price optimization to augment our work on product flush. In the long run, a better product flow and deeper analytics on pricing will be great for our customers and our bottom line.

Now I’d like to turn it over to Ed, who will review our financials.

Edward L. Larsen

Thanks, Phil. Let me cover the details of our third quarter consolidated financial performance. Specifically, third quarter costs of sales, buying and occupancy, was 65.9% of net sales versus 63.1% last week. This represents a 280 basis point siration of gross margin due to increased mark downs and occupancy deleverage.

Selling, general, and administrative expenses in the third quarter were $198 million at 35.6% of net sales, versus $189 million and 33.2% of net sales last year. This results reflects negative leverage from our comp decline, as well as the executive compensation and consulting fees.

We had a third quarter with a consolidated net loss of $9.4 million and $0.18 loss per share. Our performance was slightly better than our recent expectations due to tight expense controls across both brands and approved gross margins at the J. Jill brand.

However, our results were significantly below our third quarter plan due principally to two factors: a sales shortfall and the resulting effect of much higher than planned markdowns.

Interest expense for the quarter was $8.8 million versus $8 million last year. This increase is due primarily to the inclusion of approximately $700,000 of additional interest charges associated with required implementation in the first quarter of 2007 of Fin-48 (sic) (inaudible) in income taxes.

Income taxes for the quarter reflect a 45.2% effective tax rate. This rate is impacted by required Fin-48 adjustments.

Weighted average shares outstanding for the third quarter were approximately 53 million.

Now turning to the balance sheet. Within the third quarter we had full accounts receivable of $225 million versus $229 million last year, comprised entirely of Talbots’ charged receivables.

Talbots charged penetration remains stable at 45% of sales and bad debts are running at very low rates.

Total consolidated merchandised inventories at the end of the quarter were $380 million, up 3% to last year’s $368 million. At year end our total consolidated inventories will be down greater than 10% compared to last year. We are comfortable at this lower inventory level position as well as we enter the 2008 spring season.

During the fourth quarter, on a per-square-foot basis, inventory for Talbots' brand women’s apparel stores will be down high-single digits compared to last year and J. Jill brand will be flat or slightly up on average per square foot.

Moving to capital expenditures, on a consolidated basis we spent a total of $65 million year to date. Our consolidated 2007 capital spending plan exceeds $3 million.

During the period we paid a quarterly cash dividend of $0.13 per share.

Looking ahead, as stated in our press release this morning, we have reconfirmed our previously announced outlook for the fourth quarter to be a loss per share in the range of $0.05 to $0.10, including $0.06 per share of acquisition related and financing costs, and $0.07 per share of expenses related to executive compensation and professional consulting fees.

This result compares to break even net even per share in the fourth quarter last year and included acquisition related financing costs were approximately $0.15 per share.

The company’s fourth quarter expectations continues to be in the negative mid-single-digit range with Talbots down mid-single digits and J. Jill flat to slightly up.

What we achieve in this fourth quarter plan are fall season earnings per share in a six-month period ending February 2^nd, 2008, would be in the range of a negative $0.23 to a negative $0.28 per share, including approximately $0.14 in acquisition related and financing costs, and $0.13 per share in expenses related to executive compensation and professional consulting fees.

From a four-year perspective, achieving our fourth quarter plan will yield a loss per share in the range of $0.38 to $0.43 for the combined companies, including approximately $0.37 per share and acquisition related financing costs, and $0.14 per share of expenses related to executive compensation and professional consulting fees. This result compares to a net income of $31.6 million or $0.59 per share in fiscal 2006 and included acquisition related financing costs of approximately $0.46 per share.

In closing, we have received an amendment to our acquisition (inaudible) from our banks. The amendment raises the leverage ratio from 2.5 to 4.0 through fiscal 2008 and allows a fixed charged ratio of 1.6 to 1.25 through fiscal 2008. As of the end of the third quarter we are in compliance with these revised thresholds and anticipate that we will be in full compliance through fiscal 2008. (Inaudible) was filed Monday, November 26^th, 2007, disclosing the details of our loan amendment.

Now I would like to turn it back to Trudy.

Trudy F. Sullivan

Thanks, Ed. To conclude, we have put a number of actions into place in the short term to improve our performance. Despite a very difficult environment, we will continue to do what we can internally to drive the business. Our inventories are lean and we will maintain our tight control on expenses throughout the remainder of the period.

Our store, catalogue and website are now fully set for holiday at Talbots and J. Jill, and we will take advantage of high traffic periods, including the recent Thanksgiving weekend, by offering new and compelling customer classic driving events. Our current focus is also on the longer term actions and initiatives that will build momentum in our business as we look ahead to fiscal 2008 and beyond.

Specifically, we are making great progress in identifying key talents for our critical open positions and I am pleased to say that announcements are imminent.

We are full steam ahead with our strategic review and our, in fact, to report back to you in the first quarter of fiscal 2008.

That said, as we approach the mid-point of our assessment, let me share some initial thoughts from the consumer research that has just been completed. Through quantitative internet research, as well as some in-store intercepts, we have found the following: First, a relatively large segment of our core customers are satisfied with Talbots’ plan and are spending approximately 40% of their share of wallet in our stores. They continue to shop with us because of our classic styles, fits and quality, and report that Talbots’ current share of their wallet is higher than it was three years ago.

We also have a large group of occasional customers; those who have made a Talbots purchase over the last 12 months, but who spend less than 25% of their wallet at Talbots; who continue to visit, but are spending less at our stores compared to three years ago. These customers average seven store visits a year.

And our third group, our lapsed customers, is a larger group compared to our competitors, citing merchandise as a major reason for their move away from Talbots. The good news is that even though we have lost some share of wallet with our occasional and lapsed customers, they are still visiting Talbot stores on a regular basis. These customers strongly indicate that we could capture a greater portion of their spending with updated and more fashionable merchandise.

These are fixable issues over the longer term and in the short term we will use marketing and whatever else we can do to increase our competitive positioning, liven up our in-store displays, update our catalogue to improve our brand image, and involve the frequency of customer contact via the web.

With that as a lead in, let me briefly comment on our performance over the Thanksgiving holiday weekend. We did see a marked increase in transactions of the Talbots brand and, as a result of our more aggressive customer contact event, it resulted in solid, positive comps.

For the J. Jill brand the performance was softer. However, we have a major promotional event taking place this week, specifically a friends and family event that should drive increased customer demand.

On a total company basis, our month-to-date comp trends are as expected. Therefore, at this time we see no reason to change our thinking regarding our fourth quarter expectations and, as stated, we have reconfirmed our previously announced outlook.

In closing, we remain optimistic for the future and are determined to get our business back on track. Our management team is embracing more contemporary business practices and, with our initial actions and initiatives, we are seeing results even though we are just at the tip of the iceberg.

Thank you, and now we would be happy to take your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we will be opening up the call for the question and answer session. (Operator Instructions) In order to allow time for everyone’s inquiries to be answered, please limit your questions to one. If time allows, we will re-open the calls to follow up questions. Thank you. Your first question comes from Neely Tamminga of Piper Jaffray.

Neely Tamminga – Piper Jaffray

Great. Good morning. Question for Phil on Jill. Do you think the weakness over the last weekend had something to do with changing the promotional cadence that the J. Jill customer is certainly used to? I think it’s usually a $20-off promotion, not 25% off. I’m just wondering, kind of, what was your thought process about why you changed it? What are you worrying about the J. Jill customer? Do you think it was a mistake? Kind of, you know, a little bit of your insight as to your transition here on J. Jill and just wondering why that culminated to a pretty significant change in their promotional cadence.

Philip H. Kowalczyk

Thanks for the question. It’s a very refined observation. The difference between $20 off sweaters versus 25% off was a very intentional strategy. It was also combined with a free cammie with a purchase of over $50. The concept behind the strategy was two-fold. One, many of our sweater offers includes some pricing, a full range of pricing, from opening all the way to the upper end. And if you offer just a dollar off promotion, the value of that decreases as you’re buying a more expensive sweater. So we wanted to be a little more democratic in the offer and provide 25% off whatever sweater you choose, whether it be at the high end or the low end.

The free cammie was a strategy which was two-fold. One, it’s probably one of the best cammies in the market place and the more guests, particularly over Thanksgiving where we would have more occasional J. Jill shoppers, we want to have them in the cammie because we think that’s a real loyalty driver.

Your follow up question was do we think it was a mistake. Well, if you look at the market place and look at everybody else who was promoting sweaters, I think the only mistake is if we’re offering 25% off and the rest of the market is at 30% to 70% off sweaters, yeah, I’d probably have that one back. But the idea going to the percent from the dollar, no, I’m perfectly happy with that and our guests was as well.

Operator

Thank you. Your next question comes from Tracy Kogan of Credit Suisse.

Tracy Kogan – Credit Suisse, N.A.

Thanks. Good morning. A question for Ed. Could you tell us what your leverage and fixed charge ratios were at the end of the quarter, since we don’t have all of the adjustments that the banks made?

And then just quickly, secondly, you said the bad debt on the credit card was low, but have you seen any pick up in the bad debts? Thanks.

Edward L. Larsen

We’ve seen a very slight pick up on our bad debt. We are still below one half of 1%, but we’ve seen a very slight pickup.

Our leverage ratio, the admitted leverage ratio is 4.0 and at the end of the third quarter we were at 3.3.

And the fixed charge ratio was at 1.25, we were at 1.95.

Tracy Kogan – Credit Suisse, N.A.

Thank you. Good luck.

Operator

Thank you. Your next question comes from Lauren Levitan of Cowen and Company.

Lauren Cooks Levitan – Cowen and Company, LLC

Thanks. Good morning. Trudy, I’m curious about some of the market research figures that you gave us. That was helpful, by the way. But when you look at those core customers who are spending a higher percentage of their wallet than before, what else are you hearing from them? Are they spending less overall? Are they feeling particularly strained and behaving more conservatively?

And then also I’m curious within that core versus the occasional and the lapsed, any difference in the age groups that fall into those buckets? Are you seeing a younger or older group focused in any of those areas and what implications, if any, does that have on your marketing strategy? Thanks.

Trudy F. Sullivan

First, just to start off with the core, they really aren’t spending any less. They actually are the most affluent of the three consumer types that are tested. They’re very satisfied with the brand. I mean, what they tell us is we’d like more of what you do. But on the other hand they kind of, you know, they don’t, they’re so extraordinarily loyal and to have that share of wallet is pretty impressive. So in this tremendous brand house sale we didn’t really expect to see that core quite as settled as she is with the brand.

The next group, the lapsed customer, or excuse me, the occasional customer is slightly younger, slightly less affluent, but I have to tell you all of these segmentations are affluent. So it’s degrees, but it would be considered affluent across all three buckets. She is slightly younger. She’s more critical about us re-energizing and being more fun and being less uptight, as it were. The encouraging to us is she very clearly checks us out all the time. She’s told us that. She said, you know, she speaks of things that she has bought from Talbots in the past very fondly and she’ll refer to things like a great red jacket or great cotton so, or what you can do with your casual because she definitely, she definitely will respond if you bring the product back. And we find that is really, really encouraging.

The last consumer is, again, slightly younger still, and she is a lot more critical about the product. She’s in a bit more of a show-me stage. If you can get it right, I will check you out, but you have a long way to go to get it right.

Lauren Cooks Levitan – Cowen and Company, LLC

Is she also more demanding on discounting and promotional activity?

Trudy F. Sullivan

It’s very interesting, Lauren. If you look at the research, any consumer research I’ve ever looked at price comes into play. But in this particular case they’re not as price sensitive as many other brands that I’ve seen. They’re much more sensitive about the offer and the product and the pace of change. They want us to have a faster flow and a higher pace of change and to be more fun. But price is not, you know, it’s in there, but relative to other issues they point out it’s not the number one issue.

Lauren Cooks Levitan – Cowen and Company, LLC

And I have one last follow up, if I could. Do you see any incompatibility between the things that that occasional and lapse customer is asking for in terms of the rate of change and injecting more novelty and fun. Do you see any incompatibility with that relative to what the core customer is telling you she really likes?

Trudy F. Sullivan

I think that’s a really good question and that’s something that we’re really trying to dissect and dig into. I actually think the core customer would not at all, would not react poorly to the assortment being, having a higher frequency of newness and having a bit more fun. What we certainly have here is one customer that focused on what we call great classic clothing or refined clothing. And so it’s not just the core customer wants us to be serious and the lapse customer wants us to be somebody else. They all want us to be Talbots. So I don’t think this is, you know, some of the issues, our own self-diagnosis of our issues has been that we’ve aimed our refined sportswear to one customer and our casual sportswear to another and the complaint is the one customer coming in the store can’t shop at all walls. It’s confusing to her.

So I think if we, there’s a way for us to kind of target a slightly younger age group than the core customer and really stick to a very cohesive assortment that’s very well bred, but updated and modern and has a lot of colour and fun. I mean, we’ve put together a war room here to reconnect with the DNA of the Talbots brand and it’s really quite exciting and I believe it has characteristics that all of these customer segment groups would respond to positively.

Operator

Thank you. Next question comes from Kimberly Greenberger of Citigroup.

Kimberly Greenberger – Citigroup

Oh, great, thank you. Good morning. Trudy, it sounds like you’re doing a lot of work on the merchandising, obviously, and I was hoping you could address the talent, the merchandising talent you have working on the product, both at the Talbots brand and at J. Jill, and if you’re looking to do any key hires in there.

And then if I could just ask a clarification to Ed. Ed, if you could give us a breakout in the basis point impact on the deleveraging of occupancy within the gross margin line versus the merchandise margin impact, that would be helpful. Thanks.

Trudy F. Sullivan

You know, the issue here, Kimberly, is that we have some very key leadership positions that have not been filled. So first and foremost, my focus has been to find great product talents that we can bring into the picture here to work alongside a very dedicated product and merchant team. Once we secure that talent, and as I said in my opening remarks, I feel pretty confident in saying that we’ll announce something imminently. Once we get these critical positions filled then we’ll start to do a deep evaluation of the talent that is here.

But I have to tell you, these senior leadership positions have been open for almost six months and we have a group of product directors and product people in New York who’ve kept the wheels on the bus here and work very hard to make that happen, and who are really pressing for us to bring leadership in that can help them go in a new direction. I think it’s always great when you have fusion of new and with people who have great institutional capabilities. And that’s what we hope to do here.

Edward L. Larsen

Kimberly, with the spec view cost of sales of various deleverage there, of our 280 basis point decline in gross margin one half of that or 140 basis points is occupancy deleverage. We have 30 basis points is the deleverage on buying expenses, and the remainder of 110 is pure cost of goods sold. And that 110 is a combination of improved mark up by about 100 basis points and then more markdowns of over 200 basis points.

Operator

Thank you. Your next question comes from Barbara Wyckoff of Buckingham Research.

Barbara Wyckoff – Buckingham Research Group

Hi, everyone. Could you quantify the impact of the 53^rd week, please?

Philip H. Kowalczyk

Last year’s 53^rd week?

Barbara Wyckoff – Buckingham Research Group

Yup. In terms of revenue or EPS or ...

Philip H. Kowalczyk

We’ll have to check on that. It’s been some time since I’ve even thought about that.

Barbara Wyckoff – Buckingham Research Group

Okay. Thank you.

Operator

Thank you. Your next question comes from Dana Telsey of Telsey Advisory Group. Dana, please go ahead.

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

Marni Shapiro – The Retail Tracker

Hey, guys, and in case I forget, good luck with the holiday season.

If you could talk just a little bit about two things in your research again. I hate to keep going back to that, but if you could talk a little bit about is there a brand out there that you’ve talked about with her that she likes and that she’s shopping or is there something that she mentioned was missing, a void in the market that she felt like Talbot’s was her place, but maybe hasn’t been living up to her expectations.

And then my other question was just a follow up on the sell through from fall, you talked that refined was better than casual. But could you talk a little bit about your novelty items versus your basic? Because you guys tend to have a pretty novel jacket business and a sweater business, and then you have basics that coordinate or that sit on the floor with them. I’m curious how the sell through was in those two areas.

Trudy F. Sullivan

Well, first on the research. It’s very apparent to us that there’s no, and I think I said this on the last call, there’s no one company that she calls out that is absolutely knocking the cover off the ball for her. She is a broad shopper and she certainly has given us indication of where she shops, but she’s also told us that Talbots, if Talbots would just click on all cylinders on its game that we would be the destination store. And I really believe that. I believe that certainly we have the reach between 1400 stores and the strength of our direct businesses and internet. We have the capability to reach a broad consumer here. So if we reach a broad consumer with an improved product offer I think we would be hard to beat. But our research shows that she mentions a lot of other places, and I’m sure a lot of our peer group are doing the same kind of research, that there’s no one clear winner for this consumer’s statement at this stage in the game.

Operator

Thanks. Your next question comes from Jennifer Black of Jennifer Black and Associates.

Jennifer Black – Jennifer Black and Associates

Good morning. I’ve got a couple of questions. I wonder if you could tell us how your petites, missy, and women’s divisions did.

And then secondly, in talking about the research that you’ve been doing, I wondered if you’re using actual focus groups.

And then any thoughts about the internet versus the web? You have a better selection on the web. Thank you.

Trudy F. Sullivan

Jennifer, do you mean internet versus the catalogue?

Jennifer Black – Jennifer Black and Associates

Oh, I’m sorry. Internet versus the stores.

Trudy F. Sullivan

The stores. Okay. We’re using, we’re doing ethnography. Our research is web based. So it’s kind of web based focus groups. It’s not just focus groups. And it’s really quite interesting and, as I said, we’ll chair a lot more as we get into the first quarter of next year. We have done mall intercepts as well.

In terms of the petite, missy, women’s, you know, our women’s business, frankly, has performed slightly better than our missy business and by all accounts, early accounts, it looks to be a huge opportunity for us. Those, again some early call outs in the research that we’re doing.

The petite business is also a very highly penetrated business and I think where the world has started to walk away from petites and women’s, Talbots' fashions still represents significant opportunity in both places.

But missy is still the biggest business and it’s slightly more challenged than the petites and women’s.

Jennifer Black – Jennifer Black and Associates

Okay.

Trudy F. Sullivan

Okay?

Operator

Thank you. Your next question comes from Adrienne Tennant of FBR Capital Markets.

Adrienne Tennant – FBR Capital Markets

Good morning. My question really is on the balance sheet. It looks like there’s been some pretty heavy reliance on the revolver. I was wondering when you expect that to be paid down. And would there be any consideration in terms of maybe cutting capex to bolster the free cash flow going forward? Thank you.

Edward L. Larsen

Fourth quarter, Adrienne, is very cash flow positive, so we will be bringing those payable down to the fourth quarter. It will not be down to zero. We will make another payment on our acquisition debt in the fourth quarter, but we will bring it well down as we look at the fourth quarter.

We are tidying up our capital expenditures. This year we will open about 73 stores with a capital expenditure budget of about $83 million. We’ll tighten that up next year a little bit and probably open less stores. We haven’t quite finalized that yet.

Operator

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

Richard Jaffe – Stifel Nicolaus and Company

Thanks very much, guys. If we can just spend a second on fourth quarter marketing initiatives and how you anticipate the promotional cadence to proceed this year versus last year. Obviously your more timely with some markdowns and want to know what we should look for here, both in terms of promotional support and then in-store mark downs.

Trudy F. Sullivan

Richard, I’m sure you’ll understand that we’re not going to be very specific about the events that we’re going to run for fourth quarter, just for competitive reasons. But you can be sure that we have a lot more action going on this holiday than we did last holiday. And as we stated earlier, we are, started a cadence of taking monthly mark downs and not relying just on four sales a year.

So it’s a blend. I can tell you it’s a blend of what we think are some really interesting and fun promotions and the timely action on taking our mark downs. And we’ve, like our, I look at it as becoming, at least getting into the game with our competitors that in terms of some of the exciting offers that we’re bringing to the Talbots customers.

Operator

Thank you. Next –

Trudy F. Sullivan

But I can’t give you the specifics.

Operator

Thank you. Your next question comes from Todd Slater of Lazard Capital Markets.

Todd Slater – Lazard Capital Markets

Thanks very much. I just have sort of a bigger picture question about sort of the product cycle. If you could just talk about your views on the down trending traditional missy classifications out there and if you see a move, if you see the more contemporary move as short term or one that you might want to emulate a little bit without overstepping, perhaps. And is there any way in which you see the Talbots brand moving directionally, at least, in a more contemporary way from a style point of view? Thanks.

Trudy F. Sullivan

You know, I think contemporary is a dangerous word to use when you talk about the shift we make in Talbots products. I mean, the Talbots brand positioning is quintessentially in the classic traditional lane. But classic traditional doesn’t need to be boring and dowdy and sombre. It can be very much upbeat and fun, high colour, you know, just have high energy. If I were to take you, Todd, into this war room that we put together that shows the quintessential best pallets over the last 60 years you just get an incredible impression about how high energy this classic brand really can be. It’s always refined and it’s always well bred and it’s always appropriate, but it’s not serious. So those are the kind of things that we’re talking about as we start to evolve the product. It’s not all of a sudden to try to make this into theory or sahari or, because that’s not where this customer wants to go. But we certainly can have a lot more fun with it.

We have great category opportunities. Not just women’s and petites, but non-apparel categories could be really a significant opportunity for the brand. Casual and casual going into sports could be an absolute opportunity for the brand. And we can do this and still hold on to the refined clothing side of it.

So it’s not, but contemporary, I don’t like to use the word contemporary because I think people automatically think that we’re leaving our lane and that’s not our intention. Our intention is to execute our lane in a much more vibrant way.

Operator

Thank you. Your next question comes from Dana Telsey of Telsey Advisory Group.

Mimi Bartow – Telsey Advisory Group

Hi, it’s Mimi Bartow for Dana Telsey. Sorry about the confusion earlier. Just a quick question about the refined and casual wear that mixes, how comfortable you feel with it, and where you wanted to go. And then anything that you might be able to assess about goals in terms of the new ad agency. Thank you.

Trudy F. Sullivan

You know, we’re actually pretty pleased with the mixed that we’re finding in casual. It’s just a question that our casual has to be more polished than, you know, yeah, you can say our casual needs to be more refined, but it actually needs to be more appropriate to what our Talbots consumer would wear for casual. And that has things to do with fit and the refinement of the fabric and not overly washed and destructed and really lady-like. But in terms of the penetration of casuals to refined, I think we’re in a good place there.

We are excited about Publicis. They really knocked our socks off in terms of their understanding of who this consumer is. They’ve worked with a number of clients that do cater into our target consumer. They did it with great style and élan and a really exciting voice, refreshing voice for the brand. So we are looking forward to getting into work with them as quickly as possible.

Operator

Thank you. Your next question comes from Kimberly Greenberger of Citigroup.

Kimberly Greenberger – Citigroup

Hi. Just a follow up for Ed. Ed, could you please comment on finance charge revenue in the third quarter, how that compares to last year. Also, if you have any sort of basis point detail on the SG&A increases in the quarter that would be enormously helpful. And lastly, if you have third quarter comp metrics, that would be great. Thanks.

I know you said, I heard Talbots, I think you said Talbots brand 7% decline in the average dollar value for the sale was transaction flat, I just didn’t hear the J. Jill.

Edward L. Larsen

Finance charge revenue was relatively flat in the last year at $10.2 million for both quarters. SG&A as a percent of sales was down about 230 basis points versus last year’s third quarter. There’s four main areas to that. Store payroll is up as a percent to sales with the decline in comps. Marketing expenditures per level are slightly up. Cap reduction is slightly up. And then we had some compensation and consulting fees that were slightly up.

And we talked about transactions. The transactions ... The Talbots, the average retail was down about 9% during the quarter. The average transactions were up about 2%. So the net transactions at value was down about 7%.

Kimberly Greenberger – Citigroup

Is that for total company, Ed, or just Talbots division?

Edward L. Larsen

That was Talbots.

Kimberly Greenberger – Citigroup

Okay.

Edward L. Larsen

Yeah, J. Jill had, it came in a bit differently in that what we’ve been suffering from is a bit of a decline in transaction count. But our strategies for building wardrobing have been paying off. So we’ve seen a growth in UPT and we also saw a growth in ATV, average transaction value, in the third quarter, but not sufficient to offset the drop in the transactions. So we’re making more of the traffic that’s there, but we’re not driving enough.

Operator

Thank you. At this time I would like to turn the floor over to Ms. Sullivan for any closing remarks.

Trudy F. Sullivan

Thank you. I’d just like to reiterate as we close that we’ve made a lot of strong progress here in the last several weeks. We’re well in the way of our strategic review of the business. We are very encouraged of what we’re learning in our consumer research. We are in a very good position to recapture this very significant consumer. And the good news is, the regard for us is still very high, for which we’re very grateful.

We’ve made great progress on the hiring front. We look forward to sharing with you some of the new team that will come into play here very shortly.

And we have lots more to come. We’re very excited that we’ve made this creative agency decision. So there’s a lot going on with a lot more to come.

Thank you for sticking with us. We look forward to meeting some of you this week. And have a wonderful holiday season and stay tuned. Thank you.

Philip H. Kowalczyk

And keep shopping.

Operator

Thank you. This concludes The Talbots, Inc., third quarter 2007 conference call. We’ll now proceed with the full forward-looking statement.

The foregoing contains forward-looking information within the meaning of The Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as expect, look, believe, anticipate, outlook, will, would, target, would yield, or similar statements or variations of such terms. All of the outlook information (including future revenues, future comparable sales, future earnings, future EPS, and other future financial performance or operating measures) constitutes forward-looking information.

Our outlook and other forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company which involve substantial risks and uncertainty, including assumptions and projections concerning integration costs, purchase-related accounting adjustments, acquisition synergies and, for each of our brands, store traffic, levels of store sales, including meeting our internal plan and budget for regular-price selling and markdown selling for the indicated forward periods, and customer preferences. All of our outlook information and other forward-looking statements are as of the date of this release only. The company can give no assurance that such outlook or expectations will prove to be correct and does not undertake or plan to update or revise any outlook information or any other forward-looking statements to reflect actual results, changes in assumptions, estimates or projections, or other circumstances occurring after the date of this release, even if such results, changes or circumstances make it clear that any projected results will not be realized.

Any public statements or disclosures by us following this release which modify or impact any of the outlook or other forward-looking statements contained in or accompanying this release will be deemed to modify or supersede such outlook or statements in or accompanying this release. Our forward-looking statements involve substantial known and unknown risks and uncertainties as to future events which may or may not occur, including whether our recently announced strategic review of our operations and any significant changes which may result from or in connection with such process will favourably impact our productivity and profitability in the short-term or long-term and the timing of any such matters, acceptance of the company's fashions including its seasonal fashions, effectiveness of the company's brand awareness and marketing programs and new promotional cadence strategy, and any different or any increased negative trends in its regular-price or markdown selling, retail economic conditions including consumer spending trends, the current housing issues and uncertainty in the financial and credit markets, success of our expected marketing events in driving store traffic and store and direct marketing sales, success of our catalogues in driving both our direct marketing sales and in driving store traffic, the company's ability to anticipate and successfully respond to constantly changing customer tastes and preferences and to produce the appropriate balance of merchandise offerings, the company's ability to sell its merchandise at regular prices as well as its ability to successfully execute its sale events including the timing and levels of markdowns and appropriate balance of available markdown inventory, our ability to accurately estimate and forecast future full-price and markdown selling for each of our brands, the success of our current executive-level searches, the risk that the J. Jill business will not be successfully integrated, the risk that the J. Jill merchandise changes will not be well accepted, the risk that the cost savings, operational efficiencies, and other synergies from the transaction may not be fully realized or may take longer to realize than expected, the risk associated with integrating and operating profitably and successfully as a multi-brand chain for the first time, the risk that the acquisition will disrupt Talbots or J. Jill's core business, the reaction of Talbots and J. Jill customers and suppliers to the changes being made within the organization, effectiveness and profitability of new concepts, and the risks associated with CEO succession. In each case, actual results may differ materially from such forward-looking information.

Certain other factors that may cause actual results to differ from such forward-looking statements are included in the company's periodic reports filed with the Securities and Exchange Commission and available on the Talbots website under Investor Relations and you are urged to carefully consider all such factors.

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