Executives
TrudyF. Sullivan – President and Chief Executive Officer
PhilipH. Kowalczyk – Chief Operating Officer
EdwardL. Larsen – Senior Vice President, Finance, and Chief Financial Officer
JulieLorigan – Vice President, Investor Relations
Analysts
BarbaraWyckoff – Buckingham Research Group
KimberlyGreenberger – Citigroup
TracyKogan – Credit Suisse, N.A.
AdrienneTennant – FBR Capital Markets
ToddSlater – Lazard Capital Markets
NeelyTamminga – Piper Jaffray
LaurenCooks Levitan – Cowen and Company, LLC
RichardJaffe – Stifel Nicolaus and Company
MimiBartow – Telsey Advisory Group
MarniShapiro – The Retail Tracker
JenniferBlack – Jennifer Black and Associates
Talbots, Inc. (TLB) Q32007 Earnings Call November 27, 2007 10:00 AM ET
Operator
Please standby. The conference is about to begin. Good morning, ladies and gentlemen, andwelcome to The Talbots, Inc., third quarter 2007 conference call. Today’s callis 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 willfollow at that time.
I would nowlike 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 quarterconference call. Today we have with us Trudy Sullivan, President and CEO, PhilKowalczyk, our Chief Operating Officer and current President of J. Jill brand,and Ed Larson, our company’s Talbots Chief Financial Officer.
Before I turnthe call over to Trudy I would like to remind you that today’s call willinclude certain forward-looking statements relating to the company’sexpectations and beliefs concerning our future business, prospects, andfinancial performance. These forward-looking statements, which can beidentified by such words as expect, may, anticipate, or similar words, arebased on various assumptions and projects and are subject to substantial risksand uncertainty. Actual results may differ materially. For further details anda discussion of these and other uncertainties and risks please carefully reviewthe risk factors and cautionary statements contained in this morning’s pressrelease, as well as the company’s filings with the SEC. We will also concludetoday’s call with a forward-looking cautionary statement.
A replay ofthis conference call will be available from 12:00 p.m. today until 12:00 p.m.on November 29th. The webcast will also be available on the investorrelations page of our website.
With that, Iwould 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 3rd, 2007. Phil will thencover J. Jill’s third quarter performance and review a few key initiatives heand his team are focused on as our company’s newly appointed Chief OperatingOfficer. Ed will review our consolidated third quarter and year-to-datefinancial results, and discuss our current thinking on the fourth quarter.Finally, I will make some closing remarks and, as always, we will be happy toanswer any questions at the end of our presentation.
So with that,let’s begin our review overview of the business. This morning we announced athird quarter loss of $0.18 per diluted share, which includes $0.08 per shareof acquisition related and financing costs and $0.06 per share of expensesrelated to executive compensation and professional consulting fees. Thisresults was better than our recently revised expectations and above the currentfirst call consensus estimate due to a combination of factors.
Specifically,we had a positive variance to forecast in our operating expenses at bothbrands. In addition, our J. Jill brand sales and gross margin came in betterthan forecast.
Total companynet sales for the third quarter were $556 million. By brand, retail sales were$366 million for Talbots and $81 million for J. Jill.
Total companycomparable store sales for the 13-week period decreased 7.9%. By brand, Talbotscomp decreased 8.2% and J. Jill comp declined 6.5%. The main driver of negativecomps in the third quarter for The Talbots brand was a 7% decline in averagetransaction value compared to last year’s third quarter, with averagetransactions essentially flat in the period.
Looking atour combined company direct marketing businesses, which includes catalogue andinternet, third quarter sales were $109 million, essentially flat with lastyear. Talbots performed above plan for the period, driven by internet,including outlet on-line, which was introduced in August, a strong fallmust-have catalogue, and an early positive customer response to our holidaygift book.
Both brandscontinue to experience solid growth in internet sales, with Talbots brand at53% and J. Jill at 56% of their respective total direct businesses on ayear-to-date basis.
Also on ayear-to-date basis, total consolidated internet sales are 54% of the combinedcompany’s directiveness, which is up from 47% for the combined company in thesame period last year.
Overall, weare disappointed in our third quarter performance, despite an improvementversus our revised expectations. While we clearly understand in our directingmerchandise and execution issues at both brands, it stands to reason that ourbusiness is also impacted by the widely discussed, challenging macroenvironment. That said, there are many things that are within our control andwe have taken immediate steps in both brands to drive improved results.Specifically, we are managing on leaner inventories, tighter expenses, and amore aggressive posture with our customer contact and promotional strategies.Although our current trends are somewhat stronger, it is too soon to be clearof success.
Focusing onour Talbots brand merchandise, we continue to see lacklustre sales across ourcasual area. In general, the colour pallet and basic styling of our casualoffering is not appealing to our customer and we lack novelty and variety inour assortment. Our refined merchandise is performing better than casual and,while the customers’ are selectively purchasing holiday separates, our businessis 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% offsweater event started yesterday, which we hope will jump start a strongerselling trend going forward.
Overall, weknow from our current research that our merchandise is not satisfying ourcustomer and we understand that our assortments need to be more modern,sophisticated, inspiring and fun. We also know that she remains incrediblyloyal and is depending on us to get it right.
We are veryconfident that we can attract the best talent to help re-invigorate our brandand move our product appropriately forward.
Turning nowto J. Jill, quarterly comps declined 6.5%, due in part to a very difficultAugust. We did see our negative sales trends level off beginning inmid-September, driven by a very successful mid-season clearance event.
I will nowturn the call over to Phil to provide more colour on J. Jill’s third quarterperformance and to touch on a few key areas of focus in his new role as chief operatingofficer.
Philip H. Kowalczyk
Thank you,Trudy. At J. Jill our third quarter performance was challenging, but we did seeimprovement in comparable store sales results as we moved through the quarterdriven in part by a much more successful mid-season sale event. Overall , wedid end the quarter slightly better than expected on sales and gross marginversus forecast.
We feel thatthe business is continuing to stabilize with many of the initiatives startingto gain traction. For example, as we said in our call last quarter, beginningwith September deliveries we expected to see an improved product offeringreflecting both better design and direction from our new merchandising team.
Those keymerchandising initiatives included enhancing our colour offering, improving ouroverall pant sets, reducing number of repeat styles in our total product offer,and increasing the number of wardrobing options for each style. Theimplementation of these efforts began in the third quarter and will continuethrough the balance of the year and into next year.
Beginning inSeptember and throughout October we started to see some strong selling styles,particularly in outer wear, cammies, in our knits, and selectively withinpants. We look forward to building upon those successes and moving forward, butwe’re not ready to declare a victory; we still have work to do.
Some otherkey 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. Thatsaid, we’ve been working on another key strategy to improve the overallcreative presentation of our catalogues which we’re now just beginning to rollout. And in fact, in September, our September book was the first catalogue tooutperformance last year and forecast and we believe that is partly due to themore compelling and flattering look of the book. It includes a more updated andstylistic approach to the merchandise, the models and the overall layout.
Lastly, wecontinue to refine and unify our marketing and promotional programs to makethem more impactful and more relevant to our guests. We have a number of eventsplanned throughout the holiday selling season and are cautiously optimisticthat this more aggressive posture will support even stronger performance.
Now let meturn to the organization briefly. As previously announced, I’m continuing tolead the J. Jill brand while we search for a new brand president. Over the 18months, we’ve instilled important strategies, discipline, and operatingprinciples 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 committedto building this great brand. I look forward to enabling a smooth transitiononce a replacement is named and, in the interim, am actively involved withTalbots, Inc., in my newly appointed role as Chief Operating Officer.
With sharedservices as the backbone of the company, my immediate attention will befocusing in areas of sourcing and supply chain management. As we look ahead tofiscal 2008 and beyond, one of the critical components to our success will bethe 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 oursupply chain system to improve the flow of our inventory. To that end, we’reinitiating a major initiative around price optimization to augment our work onproduct flush. In the long run, a better product flow and deeper analytics onpricing will be great for our customers and our bottom line.
Now I’d liketo 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 financialperformance. 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 pointsiration of gross margin due to increased mark downs and occupancy deleverage.
Selling,general, and administrative expenses in the third quarter were $198 million at35.6% of net sales, versus $189 million and 33.2% of net sales last year. Thisresults reflects negative leverage from our comp decline, as well as theexecutive compensation and consulting fees.
We had athird quarter with a consolidated net loss of $9.4 million and $0.18 loss pershare. Our performance was slightly better than our recent expectations due totight expense controls across both brands and approved gross margins at the J.Jill brand.
However, ourresults were significantly below our third quarter plan due principally to twofactors: a sales shortfall and the resulting effect of much higher than plannedmarkdowns.
Interestexpense for the quarter was $8.8 million versus $8 million last year. Thisincrease is due primarily to the inclusion of approximately $700,000 ofadditional interest charges associated with required implementation in thefirst quarter of 2007 of Fin-48 (sic) (inaudible) in income taxes.
Income taxesfor the quarter reflect a 45.2% effective tax rate. This rate is impacted byrequired Fin-48 adjustments.
Weightedaverage shares outstanding for the third quarter were approximately 53 million.
Now turningto the balance sheet. Within the third quarter we had full accounts receivableof $225 million versus $229 million last year, comprised entirely of Talbots’charged receivables.
Talbotscharged penetration remains stable at 45% of sales and bad debts are running atvery low rates.
Totalconsolidated merchandised inventories at the end of the quarter were $380million, up 3% to last year’s $368 million. At year end our total consolidatedinventories will be down greater than 10% compared to last year. We arecomfortable at this lower inventory level position as well as we enter the 2008spring season.
During thefourth quarter, on a per-square-foot basis, inventory for Talbots' brandwomen’s apparel stores will be down high-single digits compared to last yearand J. Jill brand will be flat or slightly up on average per square foot.
Moving tocapital expenditures, on a consolidated basis we spent a total of $65 millionyear to date. Our consolidated 2007 capital spending plan exceeds $3 million.
During theperiod we paid a quarterly cash dividend of $0.13 per share.
Lookingahead, as stated in our press release this morning, we have reconfirmed ourpreviously announced outlook for the fourth quarter to be a loss per share inthe range of $0.05 to $0.10, including $0.06 per share of acquisition relatedand financing costs, and $0.07 per share of expenses related to executivecompensation and professional consulting fees.
This resultcompares to break even net even per share in the fourth quarter last year andincluded acquisition related financing costs were approximately $0.15 pershare.
The company’sfourth quarter expectations continues to be in the negative mid-single-digitrange with Talbots down mid-single digits and J. Jill flat to slightly up.
What weachieve in this fourth quarter plan are fall season earnings per share in asix-month period ending February 2nd, 2008, would be in the range ofa negative $0.23 to a negative $0.28 per share, including approximately $0.14in acquisition related and financing costs, and $0.13 per share in expensesrelated to executive compensation and professional consulting fees.
From afour-year perspective, achieving our fourth quarter plan will yield a loss pershare in the range of $0.38 to $0.43 for the combined companies, includingapproximately $0.37 per share and acquisition related financing costs, and$0.14 per share of expenses related to executive compensation and professionalconsulting fees. This result compares to a net income of $31.6 million or $0.59per share in fiscal 2006 and included acquisition related financing costs ofapproximately $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 andallows a fixed charged ratio of 1.6 to 1.25 through fiscal 2008. As of the endof the third quarter we are in compliance with these revised thresholds andanticipate that we will be in full compliance through fiscal 2008. (Inaudible)was filed Monday, November 26th, 2007, disclosing the details of ourloan amendment.
Now I wouldlike 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 toimprove our performance. Despite a very difficult environment, we will continueto do what we can internally to drive the business. Our inventories are leanand we will maintain our tight control on expenses throughout the remainder ofthe period.
Our store,catalogue and website are now fully set for holiday at Talbots and J. Jill, andwe will take advantage of high traffic periods, including the recentThanksgiving weekend, by offering new and compelling customer classic drivingevents. Our current focus is also on the longer term actions and initiativesthat will build momentum in our business as we look ahead to fiscal 2008 andbeyond.
Specifically,we are making great progress in identifying key talents for our critical openpositions and I am pleased to say that announcements are imminent.
We are fullsteam ahead with our strategic review and our, in fact, to report back to youin the first quarter of fiscal 2008.
That said, aswe approach the mid-point of our assessment, let me share some initial thoughtsfrom the consumer research that has just been completed. Through quantitativeinternet research, as well as some in-store intercepts, we have found thefollowing: First, a relatively large segment of our core customers are satisfiedwith Talbots’ plan and are spending approximately 40% of their share of walletin 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 ishigher than it was three years ago.
We also havea large group of occasional customers; those who have made a Talbots purchaseover the last 12 months, but who spend less than 25% of their wallet atTalbots; who continue to visit, but are spending less at our stores compared tothree years ago. These customers average seven store visits a year.
And our thirdgroup, our lapsed customers, is a larger group compared to our competitors,citing merchandise as a major reason for their move away from Talbots. The goodnews is that even though we have lost some share of wallet with our occasionaland lapsed customers, they are still visiting Talbot stores on a regular basis.These customers strongly indicate that we could capture a greater portion oftheir spending with updated and more fashionable merchandise.
These arefixable issues over the longer term and in the short term we will use marketingand whatever else we can do to increase our competitive positioning, liven upour in-store displays, update our catalogue to improve our brand image, andinvolve the frequency of customer contact via the web.
With that asa lead in, let me briefly comment on our performance over the Thanksgivingholiday weekend. We did see a marked increase in transactions of the Talbotsbrand and, as a result of our more aggressive customer contact event, itresulted in solid, positive comps.
For the J.Jill brand the performance was softer. However, we have a major promotionalevent taking place this week, specifically a friends and family event that shoulddrive increased customer demand.
On a totalcompany basis, our month-to-date comp trends are as expected. Therefore, atthis time we see no reason to change our thinking regarding our fourth quarterexpectations and, as stated, we have reconfirmed our previously announcedoutlook.
In closing,we remain optimistic for the future and are determined to get our business backon track. Our management team is embracing more contemporary business practicesand, with our initial actions and initiatives, we are seeing results eventhough 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 andgentlemen, at this time we will be opening up the call for the question andanswer session. (Operator Instructions) In order to allow time for everyone’sinquiries 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 firstquestion comes from Neely Tamminga of Piper Jaffray.
Neely Tamminga – Piper Jaffray
Great. Goodmorning. Question for Phil on Jill. Do you think the weakness over the lastweekend 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 aboutwhy you changed it? What are you worrying about the J. Jill customer? Do youthink it was a mistake? Kind of, you know, a little bit of your insight as toyour transition here on J. Jill and just wondering why that culminated to apretty significant change in their promotional cadence.
Philip H. Kowalczyk
Thanks forthe question. It’s a very refined observation. The difference between $20 offsweaters versus 25% off was a very intentional strategy. It was also combinedwith a free cammie with a purchase of over $50. The concept behind the strategywas two-fold. One, many of our sweater offers includes some pricing, a fullrange of pricing, from opening all the way to the upper end. And if you offerjust a dollar off promotion, the value of that decreases as you’re buying amore expensive sweater. So we wanted to be a little more democratic in theoffer and provide 25% off whatever sweater you choose, whether it be at thehigh end or the low end.
The freecammie was a strategy which was two-fold. One, it’s probably one of the bestcammies in the market place and the more guests, particularly over Thanksgivingwhere we would have more occasional J. Jill shoppers, we want to have them inthe cammie because we think that’s a real loyalty driver.
Your followup question was do we think it was a mistake. Well, if you look at the marketplace and look at everybody else who was promoting sweaters, I think the onlymistake is if we’re offering 25% off and the rest of the market is at 30% to70% off sweaters, yeah, I’d probably have that one back. But the idea going tothe percent from the dollar, no, I’m perfectly happy with that and our guestswas as well.
Operator
Thank you. Yournext question comes from Tracy Kogan of Credit Suisse.
Tracy Kogan – Credit Suisse, N.A.
Thanks. Goodmorning. A question for Ed. Could you tell us what your leverage and fixedcharge ratios were at the end of the quarter, since we don’t have all of theadjustments that the banks made?
And then justquickly, secondly, you said the bad debt on the credit card was low, but haveyou seen any pick up in the bad debts? Thanks.
Edward L. Larsen
We’ve seen avery slight pick up on our bad debt. We are still below one half of 1%, butwe’ve seen a very slight pickup.
Our leverageratio, the admitted leverage ratio is 4.0 and at the end of the third quarterwe were at 3.3.
And the fixedcharge 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. Goodmorning. Trudy, I’m curious about some of the market research figures that yougave us. That was helpful, by the way. But when you look at those corecustomers who are spending a higher percentage of their wallet than before,what else are you hearing from them? Are they spending less overall? Are theyfeeling particularly strained and behaving more conservatively?
And then alsoI’m curious within that core versus the occasional and the lapsed, anydifference in the age groups that fall into those buckets? Are you seeing ayounger or older group focused in any of those areas and what implications, ifany, does that have on your marketing strategy? Thanks.
Trudy F. Sullivan
First, justto start off with the core, they really aren’t spending any less. They actuallyare the most affluent of the three consumer types that are tested. They’re verysatisfied with the brand. I mean, what they tell us is we’d like more of whatyou do. But on the other hand they kind of, you know, they don’t, they’re soextraordinarily loyal and to have that share of wallet is pretty impressive. Soin this tremendous brand house sale we didn’t really expect to see that corequite as settled as she is with the brand.
The nextgroup, the lapsed customer, or excuse me, the occasional customer is slightlyyounger, slightly less affluent, but I have to tell you all of these segmentationsare affluent. So it’s degrees, but it would be considered affluent across allthree buckets. She is slightly younger. She’s more critical about usre-energizing and being more fun and being less uptight, as it were. Theencouraging to us is she very clearly checks us out all the time. She’s told usthat. She said, you know, she speaks of things that she has bought from Talbotsin the past very fondly and she’ll refer to things like a great red jacket orgreat 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 isreally, really encouraging.
The lastconsumer is, again, slightly younger still, and she is a lot more criticalabout the product. She’s in a bit more of a show-me stage. If you can get itright, 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 alsomore demanding on discounting and promotional activity?
Trudy F. Sullivan
It’s veryinteresting, Lauren. If you look at the research, any consumer research I’veever looked at price comes into play. But in this particular case they’re notas price sensitive as many other brands that I’ve seen. They’re much moresensitive about the offer and the product and the pace of change. They want usto have a faster flow and a higher pace of change and to be more fun. But priceis not, you know, it’s in there, but relative to other issues they point outit’s not the number one issue.
Lauren Cooks Levitan – Cowen and Company, LLC
And I haveone last follow up, if I could. Do you see any incompatibility between thethings that that occasional and lapse customer is asking for in terms of therate of change and injecting more novelty and fun. Do you see anyincompatibility with that relative to what the core customer is telling you shereally likes?
Trudy F. Sullivan
I thinkthat’s a really good question and that’s something that we’re really trying todissect 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 ofnewness and having a bit more fun. What we certainly have here is one customerthat focused on what we call great classic clothing or refined clothing. And soit’s not just the core customer wants us to be serious and the lapse customerwants us to be somebody else. They all want us to be Talbots. So I don’t thinkthis is, you know, some of the issues, our own self-diagnosis of our issues hasbeen that we’ve aimed our refined sportswear to one customer and our casualsportswear to another and the complaint is the one customer coming in the storecan’t shop at all walls. It’s confusing to her.
So I think ifwe, there’s a way for us to kind of target a slightly younger age group thanthe core customer and really stick to a very cohesive assortment that’s verywell 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 Talbotsbrand and it’s really quite exciting and I believe it has characteristics thatall 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 onthe merchandising, obviously, and I was hoping you could address the talent,the merchandising talent you have working on the product, both at the Talbotsbrand and at J. Jill, and if you’re looking to do any key hires in there.
And then if Icould just ask a clarification to Ed. Ed, if you could give us a breakout inthe basis point impact on the deleveraging of occupancy within the gross marginline versus the merchandise margin impact, that would be helpful. Thanks.
Trudy F. Sullivan
You know, theissue here, Kimberly, is that we have some very key leadership positions thathave not been filled. So first and foremost, my focus has been to find greatproduct talents that we can bring into the picture here to work alongside avery dedicated product and merchant team. Once we secure that talent, and as Isaid in my opening remarks, I feel pretty confident in saying that we’llannounce something imminently. Once we get these critical positions filled thenwe’ll start to do a deep evaluation of the talent that is here.
But I have totell you, these senior leadership positions have been open for almost sixmonths and we have a group of product directors and product people in New Yorkwho’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 goin a new direction. I think it’s always great when you have fusion of new and withpeople who have great institutional capabilities. And that’s what we hope to dohere.
Edward L. Larsen
Kimberly,with the spec view cost of sales of various deleverage there, of our 280 basispoint decline in gross margin one half of that or 140 basis points is occupancydeleverage. We have 30 basis points is the deleverage on buying expenses, andthe remainder of 110 is pure cost of goods sold. And that 110 is a combinationof improved mark up by about 100 basis points and then more markdowns of over 200basis 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 53rd week, please?
Philip H. Kowalczyk
Last year’s53rd week?
Barbara Wyckoff – Buckingham Research Group
Yup. In termsof revenue or EPS or ...
Philip H. Kowalczyk
We’ll have tocheck on that. It’s been some time since I’ve even thought about that.
Barbara Wyckoff – Buckingham Research Group
Okay. Thankyou.
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 couldtalk just a little bit about two things in your research again. I hate to keepgoing back to that, but if you could talk a little bit about is there a brandout there that you’ve talked about with her that she likes and that she’sshopping or is there something that she mentioned was missing, a void in themarket that she felt like Talbot’s was her place, but maybe hasn’t been livingup to her expectations.
And then myother question was just a follow up on the sell through from fall, you talkedthat refined was better than casual. But could you talk a little bit about yournovelty items versus your basic? Because you guys tend to have a pretty noveljacket business and a sweater business, and then you have basics thatcoordinate or that sit on the floor with them. I’m curious how the sell throughwas in those two areas.
Trudy F. Sullivan
Well, firston the research. It’s very apparent to us that there’s no, and I think I saidthis on the last call, there’s no one company that she calls out that isabsolutely knocking the cover off the ball for her. She is a broad shopper andshe certainly has given us indication of where she shops, but she’s also toldus that Talbots, if Talbots would just click on all cylinders on its game thatwe would be the destination store. And I really believe that. I believe thatcertainly we have the reach between 1400 stores and the strength of our directbusinesses 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 wouldbe hard to beat. But our research shows that she mentions a lot of otherplaces, and I’m sure a lot of our peer group are doing the same kind ofresearch, that there’s no one clear winner for this consumer’s statement atthis stage in the game.
Operator
Thanks. Yournext 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 thensecondly, in talking about the research that you’ve been doing, I wondered ifyou’re using actual focus groups.
And then anythoughts about the internet versus the web? You have a better selection on theweb. Thank you.
Trudy F. Sullivan
Jennifer, doyou mean internet versus the catalogue?
Jennifer Black – Jennifer Black and Associates
Oh, I’msorry. Internet versus the stores.
Trudy F. Sullivan
The stores.Okay. We’re using, we’re doing ethnography. Our research is web based. So it’skind of web based focus groups. It’s not just focus groups. And it’s reallyquite interesting and, as I said, we’ll chair a lot more as we get into thefirst quarter of next year. We have done mall intercepts as well.
In terms ofthe petite, missy, women’s, you know, our women’s business, frankly, hasperformed slightly better than our missy business and by all accounts, earlyaccounts, it looks to be a huge opportunity for us. Those, again some earlycall outs in the research that we’re doing.
The petitebusiness is also a very highly penetrated business and I think where the worldhas started to walk away from petites and women’s, Talbots' fashions stillrepresents significant opportunity in both places.
But missy isstill the biggest business and it’s slightly more challenged than the petitesand 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 somepretty heavy reliance on the revolver. I was wondering when you expect that tobe paid down. And would there be any consideration in terms of maybe cuttingcapex to bolster the free cash flow going forward? Thank you.
Edward L. Larsen
Fourthquarter, Adrienne, is very cash flow positive, so we will be bringing those payabledown to the fourth quarter. It will not be down to zero. We will make anotherpayment on our acquisition debt in the fourth quarter, but we will bring itwell down as we look at the fourth quarter.
We aretidying up our capital expenditures. This year we will open about 73 storeswith a capital expenditure budget of about $83 million. We’ll tighten that upnext year a little bit and probably open less stores. We haven’t quitefinalized that yet.
Operator
Thank you.Your next question comes from Richard Jaffe of Stifel Nicolaus.
Richard Jaffe – Stifel Nicolaus and Company
Thanks verymuch, guys. If we can just spend a second on fourth quarter marketinginitiatives and how you anticipate the promotional cadence to proceed this yearversus last year. Obviously your more timely with some markdowns and want toknow what we should look for here, both in terms of promotional support andthen in-store mark downs.
Trudy F. Sullivan
Richard, I’msure you’ll understand that we’re not going to be very specific about theevents that we’re going to run for fourth quarter, just for competitivereasons. But you can be sure that we have a lot more action going on thisholiday than we did last holiday. And as we stated earlier, we are, started acadence of taking monthly mark downs and not relying just on four sales a year.
So it’s ablend. I can tell you it’s a blend of what we think are some really interestingand 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 ourcompetitors that in terms of some of the exciting offers that we’re bringing tothe Talbots customers.
Operator
Thank you.Next –
Trudy F. Sullivan
But I can’tgive you the specifics.
Operator
Thank you.Your next question comes from Todd Slater of Lazard Capital Markets.
Todd Slater – Lazard Capital Markets
Thanks verymuch. I just have sort of a bigger picture question about sort of the productcycle. If you could just talk about your views on the down trending traditionalmissy classifications out there and if you see a move, if you see the morecontemporary move as short term or one that you might want to emulate a littlebit without overstepping, perhaps. And is there any way in which you see theTalbots brand moving directionally, at least, in a more contemporary way from astyle point of view? Thanks.
Trudy F. Sullivan
You know, Ithink contemporary is a dangerous word to use when you talk about the shift wemake in Talbots products. I mean, the Talbots brand positioning is quintessentiallyin the classic traditional lane. But classic traditional doesn’t need to beboring 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 warroom that we put together that shows the quintessential best pallets over thelast 60 years you just get an incredible impression about how high energy thisclassic brand really can be. It’s always refined and it’s always well bred andit’s always appropriate, but it’s not serious. So those are the kind of thingsthat we’re talking about as we start to evolve the product. It’s not all of asudden to try to make this into theory or sahari or, because that’s not wherethis customer wants to go. But we certainly can have a lot more fun with it.
We have greatcategory opportunities. Not just women’s and petites, but non-apparelcategories could be really a significant opportunity for the brand. Casual andcasual going into sports could be an absolute opportunity for the brand. And wecan 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 thinkpeople automatically think that we’re leaving our lane and that’s not ourintention. 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 MimiBartow for Dana Telsey. Sorry about the confusion earlier. Just a quickquestion about the refined and casual wear that mixes, how comfortable you feelwith it, and where you wanted to go. And then anything that you might be ableto 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’sjust 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 bemore appropriate to what our Talbots consumer would wear for casual. And thathas things to do with fit and the refinement of the fabric and not overlywashed and destructed and really lady-like. But in terms of the penetration ofcasuals to refined, I think we’re in a good place there.
We areexcited about Publicis. They really knocked our socks off in terms of theirunderstanding of who this consumer is. They’ve worked with a number of clientsthat do cater into our target consumer. They did it with great style and élanand a really exciting voice, refreshing voice for the brand. So we are lookingforward 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 afollow up for Ed. Ed, could you please comment on finance charge revenue in thethird quarter, how that compares to last year. Also, if you have any sort ofbasis point detail on the SG&A increases in the quarter that would beenormously helpful. And lastly, if you have third quarter comp metrics, thatwould be great. Thanks.
I know yousaid, I heard Talbots, I think you said Talbots brand 7% decline in the averagedollar value for the sale was transaction flat, I just didn’t hear the J. Jill.
Edward L. Larsen
Financecharge revenue was relatively flat in the last year at $10.2 million for bothquarters. SG&A as a percent of sales was down about 230 basis points versuslast year’s third quarter. There’s four main areas to that. Store payroll is upas a percent to sales with the decline in comps. Marketing expenditures perlevel are slightly up. Cap reduction is slightly up. And then we had somecompensation and consulting fees that were slightly up.
And we talkedabout transactions. The transactions ... The Talbots, the average retail wasdown about 9% during the quarter. The average transactions were up about 2%. Sothe net transactions at value was down about 7%.
Kimberly Greenberger – Citigroup
Is that fortotal company, Ed, or just Talbots division?
Edward L. Larsen
That wasTalbots.
Kimberly Greenberger – Citigroup
Okay.
Edward L. Larsen
Yeah, J. Jillhad, it came in a bit differently in that what we’ve been suffering from is abit of a decline in transaction count. But our strategies for buildingwardrobing have been paying off. So we’ve seen a growth in UPT and we also sawa growth in ATV, average transaction value, in the third quarter, but notsufficient to offset the drop in the transactions. So we’re making more of thetraffic that’s there, but we’re not driving enough.
Operator
Thank you. Atthis time I would like to turn the floor over to Ms. Sullivan for any closingremarks.
Trudy F. Sullivan
Thank you.I’d just like to reiterate as we close that we’ve made a lot of strong progresshere in the last several weeks. We’re well in the way of our strategic reviewof the business. We are very encouraged of what we’re learning in our consumerresearch. We are in a very good position to recapture this very significantconsumer. And the good news is, the regard for us is still very high, for whichwe’re very grateful.
We’ve madegreat progress on the hiring front. We look forward to sharing with you some ofthe new team that will come into play here very shortly.
And we havelots more to come. We’re very excited that we’ve made this creative agencydecision. So there’s a lot going on with a lot more to come.
Thank you forsticking with us. We look forward to meeting some of you this week. And have awonderful holiday season and stay tuned. Thank you.
Philip H. Kowalczyk
And keepshopping.
Operator
Thank you.This concludes The Talbots, Inc., third quarter 2007 conference call. We’ll nowproceed with the full forward-looking statement.
The foregoing containsforward-looking information within the meaning of The Private SecuritiesLitigation Reform Act of 1995. These statements may be identified by suchforward-looking terminology as expect, look, believe, anticipate, outlook,will, would, target, would yield, or similar statements or variations of suchterms. All of the outlook information (including future revenues, futurecomparable sales, future earnings, future EPS, and other future financialperformance or operating measures) constitutes forward-looking information.
Our outlook and other forward-lookingstatements are based on a series of expectations, assumptions, estimates andprojections 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 ofour brands, store traffic, levels of store sales, including meeting ourinternal plan and budget for regular-price selling and markdown selling for theindicated forward periods, and customer preferences. All of our outlookinformation and other forward-looking statements are as of the date of thisrelease only. The company can give no assurance that such outlook orexpectations will prove to be correct and does not undertake or plan to update orrevise any outlook information or any other forward-looking statements toreflect actual results, changes in assumptions, estimates or projections, orother circumstances occurring after the date of this release, even if suchresults, changes or circumstances make it clear that any projected results willnot be realized.
Any public statements or disclosures byus following this release which modify or impact any of the outlook or otherforward-looking statements contained in or accompanying this release will bedeemed to modify or supersede such outlook or statements in or accompanyingthis release. Our forward-looking statements involve substantial known andunknown risks and uncertainties as to future events which may or may not occur,including whether our recently announced strategic review of our operations andany significant changes which may result from or in connection with suchprocess will favourably impact our productivity and profitability in theshort-term or long-term and the timing of any such matters, acceptance of the company'sfashions including its seasonal fashions, effectiveness of the company's brandawareness and marketing programs and new promotional cadence strategy, and anydifferent or any increased negative trends in its regular-price or markdownselling, retail economic conditions including consumer spending trends, thecurrent housing issues and uncertainty in the financial and credit markets,success of our expected marketing events in driving store traffic and store anddirect marketing sales, success of our catalogues in driving both our directmarketing sales and in driving store traffic, the company's ability toanticipate and successfully respond to constantly changing customer tastes andpreferences and to produce the appropriate balance of merchandise offerings,the company's ability to sell its merchandise at regular prices as well as itsability to successfully execute its sale events including the timing and levelsof markdowns and appropriate balance of available markdown inventory, ourability to accurately estimate and forecast future full-price and markdownselling for each of our brands, the success of our current executive-levelsearches, the risk that the J. Jill business will not be successfullyintegrated, the risk that the J. Jill merchandise changes will not be wellaccepted, the risk that the cost savings, operational efficiencies, and othersynergies from the transaction may not be fully realized or may take longer torealize than expected, the risk associated with integrating and operatingprofitably and successfully as a multi-brand chain for the first time, the riskthat the acquisition will disrupt Talbots or J. Jill's core business, thereaction of Talbots and J. Jill customers and suppliers to the changes beingmade within the organization, effectiveness and profitability of new concepts,and the risks associated with CEO succession. In each case, actual results maydiffer materially from such forward-looking information.
Certain other factors that may causeactual results to differ from such forward-looking statements are included inthe company's periodic reports filed with the Securities and ExchangeCommission and available on the Talbots website under Investor Relations andyou are urged to carefully consider all such factors.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!