Talbots Inc Q4 2007 Earnings Call Transcript

Talbots Inc (TLB)

Q4 2007 Earnings Call

March 12, 2008 10:00 am ET

Executives

Julie Lorigan – Vice President of Investor Relations

Trudy Sullivan - President and Chief Executive Officer

Phil Kowalczyk - Chief Operating Officer

Paula Bennett - President of J. Jill Brand

Ed Larsen - Chief Financial Officer

Analysts

Neely Tamminga - Piper Jaffray

Lauren Levitan - Cowen & Company

Richard Jaffe – Stifel Nicolaus

Betty Chen - Wedbush Morgan Securities Increase

Barbara Wyckoff – Buckingham Research

Tracy Kogan – Credit Suisse

Janet Kloppenburg – JJK Research

Crystal Kallik – D.A. Davidson

Dana Telsey - Telsey Advisory Group

Kimberly Greenberger - Citigroup

Marni Shapiro – The Retail Tracker

Jennifer Black - Jennifer Black & Associates

Presentation

Operator

Good morning ladies and gentlemen. On behalf of Talbots, we would like to welcome you to the Talbots Inc. conference call covering its preliminary un-audited fiscal 2007 fourth quarter and full year earnings. 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 instruction 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. preliminary un-audited fourth quarter and full year earnings conference call. Today we have with us Trudy Sullivan, President and CEO, Phil Kowalczyk, Chief Operating Officer, Paula Bennett our new President of the J. Jill Brand and Ed Larsen, 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 projections and are subject to substantial risks and uncertainties. Actual results may differ materially. For further details and 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 the forward-looking cautionary statements. A replay will be available from approximately one hour after the conclusion of our call until the end of the day March 14, 2008. The webcast will also be available on the Investor Relations page of our website.

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

Trudy Sullivan

Thank you, Julie, and good morning everyone. In a moment I will discuss Talbots Inc. preliminary results for 13-week and 52-week period ending February 2^nd, 2008. Paula will then cover J. Jill’s performance. Ed will review our consolidated results and discuss our current thinking for fiscal 2008. Finally, I will make some closing remarks and we will be happy then to answer your questions. Please note as stated in our press release this morning that we have not yet completed the impairment testing of our J. Jill intangible assets. Therefore, we are reporting preliminary fourth quarter and full year results, which include an estimated non-cash impairment charge to the fourth quarter earnings of $144 million after tax.

This preliminary charge is greater than the initial estimate we provided on February 6th, due to a more conservative growth and earnings projections for the J. Jill brand, combined with the larger discount rate assigned to forward projections. We anticipate that the impairment testing will be completed in the coming weeks. So, with that let’s begin with the review of the business. This morning we announced a preliminary fourth quarter net loss of $171 million or $3.23 loss per share including $3.01 per share of one time charges as specified in our press release.

Excluding these charges the loss per share in the fourth quarter was $0.22 for the combined company, better than our previous guidance. Total company net sales for the fourth quarter were $587 million. By brand retail store sales for Talbots was $388 million and $86 million for J. Jill, direct marketing sales which include catalogue and internet of $113 million of the combined company essentially flat for last year.

As previously reported, our total company comp store sales for 13 week period declined 6%, by brand Talbots comp declined 6% and J. Jill comp declined 6.3%. We did see an improvement in the last month of the quarter with January comp for the combined company positive low single digit.

For the 52 week period ending February 2, 2008 total consolidated company net sales were $2.29 billion, we ended the year with a preliminary net loss of $189 million or $3.56 loss per share.

Our financial results for the fourth quarter and full year were clearly disappointing, while we recognize and have been addressing both merchandize and operational issues, we like many retailers have been operating in an unfavorable economic environment that seem to have severely impacted the women’s retail sector in particular.

So, in order to stay competitive throughout the fourth quarter, we were aggressive with our promotional strategy, contacting our customer more frequently to offer a variety of events and incentives. In addition, at the Talbots brand we moved to a regular monthly markdown cadence, a practice which will be standard going forward. Overall, we were very successful in clearing a majority of our excess fall holiday inventory and we entered the spring season with appropriately lean inventory levels, which Ed will comment on shortly.

There is no doubt that fiscal 2007 was a difficult year for our company, but we learned a lot and we took immediate action. Beginning in September, we defined and implemented a set of initiatives to reenergize our brands, elevate our brand image and most importantly restore profitable growth beginning in 2008. We have a clearly defined go-forward strategy and the team in place, both new and legacy, to make it happen.

Our core strategy to drive this turnaround across both brands is threefold. First, deliver highly desirable merchandise assortments. Second, significantly improve our inventory management, and, third, greatly reduce our cost structure. Let me briefly address both brands and then Paula will provide further details on J. Jill.

At the core Talbots brand with our key new, creative merchandize and inventory planning and analysis talent firmly in place, we are making excellent progress in developing our brand image and revitalizing our product assortments with the consumer in clear focus. Our overarching goal is to build a lifestyle brand that creates greater synergy between our refined and casual product mix.

We will create a cross functional end use through common color palettes and an elevated taste level, fabrications, styling and iconic details. We will also rework accessories and footwear to ensure that both categories work back to the core apparel offering with head to toe wardrobe being in mind. We will start rolling out a newly inspired modern classic merchandize assortment beginning with our August deliveries featuring a beautiful rich color palette with great fabrications and fun, yet sophisticated styles across all categories, at all times preserving our enviable position rooted in timeless classic clothing, providing great quality and classic style. And we have already made strong strides in our floor sets and catalog presentations for this spring and are enjoying favorable reactions from our customers.

At the J. Jill brand we are in a slightly different stage of evolution and anticipate a refreshed product assortment beginning with July deliveries. Last year, similar to the core Talbots brand, J. Jill migrated to a design driven product development process bringing in key creative talent to complement its merchandizing team. And we have now added Paula Bennett, an industry veteran with 35 years experience in relevantly new brands as our new brand President. We will be hearing from Paula later in the call.

We have a true competitive advantage with two distinct yet complementary brands that our research clearly indicates are not cannibalistic. In addition to our merchandized focus, operationally we have taken several steps to improve our business performance. Specifically, for the Talbots brand with leaner inventories, we will improve turn, drive strong regular price selling, minimize our markdown exposure and improve our initial markup. Our initial markup improvement will come from a combination of sourcing advantages including increased direct sourcing and more effective fabric strategies, as well as a well-defined retail pricing strategy focused on good, better, best assortments.

Additionally, tighter control of inventory levels will provide a more favorable mix of regular price to markdown sales. This will result in a higher average retail transaction value due to this mix. In fact, in the month of February we did see a significant improvement in the Talbots brand gross margins driven primarily by an improved ratio of full price selling to markdown sales resulting in strong gains in the average dollar transaction.

So, managing our inventories is absolutely critical to achieving our 2008 plan and I am pleased to say that we have the right people, processes and disciplines in place, and we are encouraged in recent improved overall performance. It is still early, but we are pleased to see positive momentum. Further, we are committed to streamlining our Company and we'll take $50 million out of our cost structure this year. We will be stronger and more agile in 2008 as we complete the rationalization of our assets and our entire organization.

Before Paula gives her update on J. Jill, let me share a few thoughts on this brand. It goes without saying we are disappointed in the impairment charge we have had to take on this asset. As highlighted in our release, we have completed the strategic review of our business including an in-depth look at J. Jill. Our research has validated the potential of this brand as a growth provider to our total enterprise. In fact, our research shows that this brand has the capacity to grow to approximately 450 stores in the US while continuing to grow its already successful direct business.

Our focus is on evolving the merchandize, increasing brand awareness and customer acquisition. We are encouraged by the more consistent performance we are seeing in J. Jill's direct business, which signals that the customer is there and she is responding. Unfortunately, in the retail channel, we have opened stores ahead of brand awareness.

But we are confident that we can create the awareness necessary to profitably grow the J. Jill brand and we'll be more aggressive in our prospecting and marketing in key target markets.

Now let me turn it over to Paula, and then I'll be back for some closing comments.

Paula Bennett

Thank you, Trudy. Good morning everyone. Let me begin by saying that it's great to be here. Talbots is a wonderful company with two vibrant brands, and I'm pleased to have the opportunity to take the J. Jill brand to the next level. By that I mean we will build on the strong foundation that's been put in place over the last 18 months to deliver a market improvement in our 2008, performance. But before I share more of our plans for 2008, let me step back and briefly address our fourth quarter and full year 2007, performance.

The fourth quarter was especially challenging with comparable stores sales down 6.3% like the Talbots brand, we were very promotional and moved our units through deeper discounting. While we were able to clear the majority of our excess fall and holiday goods so that we could be in a better position for spring our gross margin suffered.

From a product perspective, we experienced weakness in some key classifications particularly sweaters and pants and while we did see strength in accessories, knits and outerwear this was not enough to offset the miss in our major volume categories of sweaters and pants.

We believe the consumer has become increasingly more conservative in her spending habits in light of the difficult macroeconomic environment, which has had some impact on our performance. That said, we clearly have more work to do to bring our merchandize assortments inline with our customers needs which will be key focus in 2008.

Our direct business exceeded plan in the fourth quarter driven by a particularly strong December, As previously announced in the fall season we implemented a key initiative to improve the overall creative presentation of our catalog and beginning with September, we did see a solid pickup in demand in our direct business.

In terms of the full year 2007, our financial results were clearly disappointing, but we did make progress in executing against some key initiatives. Specifically, we are building a stronger direct business with a focus on prospecting and recruiting customers and developing web growth strategies.

We have created an integrated multi-channel operating model with consistent merchandise and marketing messages across all channels and thirdly we have gained real customer insight through intensive consumer research both quantitative and qualitative and including focus groups in Boston, San Francisco and Chicago.

The focus on these key initiatives throughout the year positions us nicely for 2008, however, we have work to do, with the foundation in place we are ready to shift the momentum and drive profitability in all channels. In 2008, we will build a compelling product offering guided by our unique selling proposition, or styles that reflect easy sophistication for every day. We'll build brand awareness and tackle the awareness deficits in key markets via a highly targeted direct mail effort to ramp up productivity and build brand awareness. We will increase customer response by optimizing our multi-channels through deep direct customer contact and prospecting, through improved productivity of our catalog, and through enhanced web functionality.

Looking at spring, we had a good early start with February gross margin results near plan driven by strength, again, in our direct channels. And as Trudy said, we are encouraged by the more consistent performance of our direct business and are working to build awareness in our retail channels. To support our merchandize, we have several marketing and promotional programs planned throughout the season to help drive increased customer traffic. I look forward to updating you on our progress as we focus on building a stronger J. Jill brand performance in 2008, and beyond.

Now let me turn it over to Ed who will review the Company's financial performance.

Ed Larsen

Thanks Paula. I will briefly review our fourth quarter and year end financial results and then move on to our financial outlook for fiscal 2008. Specifically for the fourth quarter cost of sales (indiscernible) and occupancy was 71.7% of net sales versus 68.8% of sales last year. This represents 290 basis point deterioration in gross margin due to increased markdowns and occupancy de-leverage. Selling, general and administrative expense in the fourth quarter this year was $188 million at 31.9% of net sales versus $189 million and 28.7% of net sales last year. This result reflects negative leverage from our comps decline, as well as executive compensation and consulting fees.

We ended the fourth quarter with a consolidated net loss of $171 million or $3.23 loss per share including a $2.71 loss per share due to the non-cash impairment charge related to the J. Jill intangible assets. While these results were better than our revised operational expectations, they are significantly below our original fourth quarter plan due principally to two factors, a sales shortfall of approximately $70 million versus the plan and the resulting effect of a much higher than planned markdowns.

Net interest expense for the quarter was $8.2 million versus $8.3 million last year reflecting both long and short-term interest cost as well $1.2 million interest expense for FIN 48. Income taxes for the quarter reflected 10.5% effective tax rate however, after adjusting for the. non-taxable portion of the impairment charge of $144 million dollars the effective tax rate for the quarter would be 34.9% Weighted average shares outstanding for the fourth quarter were approximately 53 million shares.

Now I’ll turn to the Company’s full year performance. Total consolidated net loss for the full year was $189 million dollars or $2.56 loss per share and includes $144 million after tax or $2.71 per share of impairment, excluding these and other one time charges the consolidated net loss per share was $0.13. Now turning to balance sheet, we ended the fourth quarter with total accounts receivable of $211 million the price comprised entirely of Talbots charged receivables.

Talbots charged connotation [ph] remains stable at 44% of Talbots charged sales and bad debts are running at very lower rates. Total consolidated merchandise inventories at the end of the quarter $329 million down 7% to last year at $353 million. We closed the year with notes payable to our banks at zero balance and long term debt including the current portion of $389 million. And we ended the year with cash of approximately $25 million compared to $36 million last year.

Moving to capital expenditures, our consolidated basis we spend a total of $85 million in fiscal 2007, which included $47 million for Talbots stores and $21 million for Jill stores with remainder for central projects. For 2007, we paid tax dividends of the amount of $0.52 per share. Turning out to 2008, our plan is conservative and based on reduced inventory receives in both the spring and fall seasons. On a consolidated basis, our spring commitment on average would be down high single digits and our fall commitments to an average would be down high single digits on a comparable basis.

Our consolidated 2008 capital plan is at $75 million in total expenditures, down from the $85 million in 2007 due primarily to a reduction in store expansion at both brands. And finally as stated in our press release this morning, we will be reporting the results of our Talbots Kids and Men's businesses as part of ongoing operations through the second quarter of fiscal 2008. Upon closing these businesses, which we believe will occur in the third quarter of fiscal 2008, these businesses will qualify as discontinued operations and their operating results will be reclassified accordingly to discontinued operations.

Given this, our outlook for 2008 earnings from continuing operations is in the range of $0.47 to $0.52 per diluted share, which compares to a loss on a non-GAAP basis on continued operations of $0.37 per share in 2007. Our outlook for a loss from discontinued operations is in the range of $0.59 to $0.64 in fiscal 2008, which compares to a $0.24 loss per share in 2007. This earnings outlook is based on slightly negative total Company comp store sales, the Talbots brand down 1%, the J. Jill brand up 1%.

If we achieve our financial plan for 2008 coupled with tighter management of inventory levels, we anticipate generating operating cash flows in the range of 165 million to 175 million. Finally, we are still in discussions with banks to increase our working capital and lines of credit. This process is taking longer than anticipated given the current conditions in the global credit markets. However, we hope to achieve a resolution of these discussions in the very near term.

Now let me turn it back over to Trudy for some closing comments.

Trudy Sullivan

Thanks Ed. So with 2007 officially behind us, we are committed to driving stronger performance this fiscal year and to restoring profitability. We have talked specifically about the several areas of operation improvement and now let me just touch on two investment areas. First, on the retail side, our plans include the opening of 46 total new stores and ending the year with 591 Talbot’s location and 285 J. Jill for total of 876 locations. Scaled back from prior year and we plan to close approximately 20 underperforming Talbot’s brand stores in addition to the 78 Kids and Men as previously announced.

We will continue to look for conversion opportunities as we exit the Kids and Men's businesses and we'll critically rationalize our store-based throughout this year. Second, we will invest in the growth of the direct channel through increased prospecting and enhanced web functionality and marketing. Further, we will increase the frequency of direct mail contact across our brands and invest in redesigning and maintaining a comparative website especially at the Talbot’s brand.

In summary, we have shared several elements of our 2008 plan, and we look forward to update you on our progress. As Ed stated earlier, our plans are conservative, especially in the first half of the year where we believe the difficult macro environment will continue to burden the consumer. But we are very focused on streamlining our operations controlling our cost and inventory, which will be beneficial both in the short and long terms.

In closing, I am extremely pleased with the results of our strategic review, which was just finalized and presented to our board. We look forward to sharing the details of our long range strategy with you at our upcoming investor meeting, which will be held on April 1st in Boston. We hope you will be able to join us. Thank you and now we will be happy to answer your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we will be opening up the call for question-and-answer sessions. (OPERATOR INSTRUCTIONS). Our first question is coming from Neely Tamminga with Piper Jaffray.

Neely Tamminga - Piper Jaffray

Great, good morning and thanks for the thorough presentation. Just wondering here on Jill specifically if we can get a little more color. It seems the direct business is doing better, retail is not quite there. To the lay person that would certainly suggest that the merchandise is right, but maybe the execution in-store isn’t right. I am just wondering is it the balance of the assortment, is it totally different product or you cannot further differentiated the direct versus the retail product and I am just wondering kind of what’s really going on in store that isn’t meeting your expectation?

Trudy Sullivan

Neely, as I said, we really completed the complete strategic review of both brands. The interesting find in the J. Jill brand is that the direct business, which is its heritage channel, is really quite consistent and doing well, and we found that that we've opened a number of stores and there are some key markets where the brand awareness is lagging the actual opening of a store. And the challenge for us there that we've identified is to go back and to certain really targeted markets and invest in additional prospecting and direct mail business to build the awareness of the total brand. Where we have good awareness in our retail markets, where we have good direct business, our retail stores performed better. So that’s the key … key initiative for us for 2008. We’ve identified the target markets. We are well underway of putting together a test of our prospecting approach which we will do in relatively shortly, I believe we have that test lines up for May. So, we are, you know, we are … we have some significant learning in that regard. As Paula said, we do have work to do on the product and it’s interesting to us when we evaluate the same product in the direct channel versus retail it tends to perform more strongly in direct, which gives us an indication, you know, we’re on the right track. But the real challenge here is to invest in building brand awareness for the retail stores.

Operator

Thank you. Our next question is coming from Lauren Levitan with Cowen & Company.

Lauren Levitan - Cowen & Company

Thanks. Good morning. Trudy, you’ve talked about the real estate plans, I am wondering if you could give us some sense as to where you think you stand in the core Talbot’s brand and the other Talbot’s retail concept in terms of the current portfolio of stores, where you see opportunities for further pruning, where you think there is actually growth potential and what time frame we should be expecting you to address those issues over? Thank you.

Trudy Sullivan

Lauren, I hope you can join us on April 1st because that is a big topic of that particular meeting. It's a very active process we have going on here really examining the footprint for Talbots as well as the footprints for Jill. We do have a big opportunities, we believe in certain what they call closing concepts for Talbots like our women’s business, our collection business, our accessories and shoes business. So we have some interesting conversions sequential, there is also, there is also opportunity as demographic change in certain markets for us to move with that demographic in terms of opening stores for Talbots. But it will be interesting part of our whole dialogue in April, with we would love to have you come, on the Jill side, as I said in my opening remarks, research shows we can have upward to 450 or more stores under that concept. We believe it's prudent now to invest in building awareness in some key markets where we already put stores in.

So, that's the reason we've kind of throttled back for 2008 for that no way changes our views in the long term of what Jill can provide to this enterprise. It's a very robust in term of discussion really, the portfolio management of the Talbots and Jill real estate, and we, frankly, have some terrific real estate and some very, we believe, good opportunities to increase the productivity in the real estate that we own.

Operator

Thank you. Our next question is coming from Richard Jaffe with Stifel Nicolaus.

Richard Jaffe – Stifel Nicolaus

Thanks very much guys and again thanks for the very informative call. I guess the …two questions, one is for Paul and wondering when we should look for her impact on the J. Jill business, obviously, a work in progress when she got there. Wondering when she thinks she will have her hand in both of products in the marketing efforts. And then, little bit more color if you would on both brands regarding what you have seen as little bit of improvement in February and wondering that’s related to simply the leaner inventories or if there's some indications of product mix giving you signs of hope?

Trudy Sullivan

I'll let Paula take your question first Richard since she's been here all of 50 days.

Paulo Bennett

I hope that you'll start to see my influence soon but, I've been spending my time reviewing what the team has put together and working to provide more soft focus and clarity to the assortments and the presentation near term, and I have been working closely with the merchandising and marketing teams to improve our product offering and our presentation going forward. I would say probably the second half of the year would be where I would start to be able to make any sort of significant contribution.

Trudy Sullivan

To your second question Richard, certainly our inventory management has a lot to do with what we are seeing recently in terms of our improvements. I mean we’ve seen really beginning in January through February continuing to March now a more favorable ratio of full price to markdowns. Our markdown inventory is very much under control. But we also have done what I believe to be some innovative things in terms of floor sets and catalog creative. So, we really punched that up with the delivery of spring catalog actually for both brands.

The product improvements that are being directed by this new team really start to show up in August, but we certainly haven't waited until August to make some stuff happen. And I don't know if you've seen our recent catalogs and floor sets, but we've gotten some very favorable comments in terms of our execution of the products that we own and we are encouraged. But as I've said in my opening remarks our management of our inventory on a conservative basis is really the key to our results.

Operator

Thank you. Our next question is coming from Betty Chen of Wedbush Morgan Securities.

Betty Chen - Wedbush Morgan Securities Increase

Thank you. Good morning. I was wondering if you can again remind us about the cost savings anticipated. I think you mentioned that it roughly $50 million that we should look for in 2008. Can you remind us what are the different areas where that cost savings could be coming from? I know, Trudy, you mentioned earlier that I think part of that could be $50 million of cost reduction from operating expenses anticipated. So, a little reminder and clarification on the sources of the cost savings would be very helpful? Thank you.

Ed Larsen

Betty, we have identified $50 million in ’08 and a total of $100 million or greater than that now through ’09. A big portion of that comes from inventory management. We will be operating on leaner inventories that would be less markdowns. We are implementing profit logic, the markdown optimization tool. We plan to have that up and running in both brands by the fall, and we have gone to monthly markdowns last November. This tool will better enable us to really maximize the performance of those monthly markdowns. So the majority of the savings is in cost of sales through inventory management and markdown optimization.

In addition, we have taken a very hard look at direct and indirect expenses. We have cut back on the national ads the TV, the national print media. We've taken about $80 million out of that the number for ’08. We have reinvested that back into the business in the form of investment in the Web, investment in prospecting. We think that's a help. We will be closing our Kids and Men's business that will be a benefit for us. That would be about $16 million annually going forward once those operations are closed.

And we have taken a tight look at staffing. We are doing a thorough review of our corporate structure here. We anticipate significant savings in that area and we are looking at our corporate assets to see how we can maximize utilization corporate assets. In every area, we have fine tuned it tightened and squeeze to take money out. We have project 360 team that is working on this. They have identified about 30 different initiatives all of them are not active at this point, but more than half of are more active even we are making very good progress on all fronts I would say.

Operator

Thank you. Our next question is coming from Barbara Wyckoff of Buckingham Research.

Barbara Wyckoff – Buckingham Research

Hi, I would like to ask a question about the focus on the direct consumer, can you talk about the capacity in your Hingham and New Hampshire warehouses? Is it enough for your projected needs? Is it too much and then could you remind me if you have consolidated a call centers and if not do you have plans to do so?

Phil Kowalczyk

Barbara, this is Phil Kowalczyk. A couple of key points and very good question. In terms of the growth that we are seeing in the direct channel both for the Talbots brand and J. Jill brand. The capacity exists within the existing facilities to be able to manage that and additional growth. Lots of opportunity frankly to be able to leverage those facilities and they are really first class facilities for being able to manage that. Your second question which relates to call centers, we are in the process of looking at our call centers, if you remember at the time of acquisition, we actually had 3 call centers, we consolidated that down to two. One dedicated to each brand and we are actually looking at leveraging some investment that we’ve made to have shared technology between those two centers to be able to gain even greater efficiencies. So I think we are in very good shape on that and the investment that were making indirect is going to help both brands and be great for our customers.

Barbara Wyckoff – Buckingham Research

Thank you.

Operator

Our next question is coming from Tracy Kogan of Credit Suisse.

Tracy Kogan – Credit Suisse

Thanks good morning. Trudy I was hoping you could reconcile for us the larger expected charge for J. Jill impairment with your confidence that I can be a 450 store chain and also wanted to know what you expected.. if you expected a loss this year or maybe a profit? Thanks.

Trudy Sullivan

Tracy, let me address the impairment. You can completely separate the impairment charge and future opportunities at Jill. This impairment charge is a one time thing that the coincidence of weaker than the expected performance versus our merger model for the last 21 months since we acquired Jill and just the confidence of the whole credit market and financial markets being lower. So we have reduced our expectation from our merger model. That has resulted in the impairment charge going up from where we initially anticipated to where it is now. So it's a combination of reducing our expectations from our merger model. It's a combination of using a higher discount rate on those forward projections, and it's working in more of the influences of the current financial markets into those numbers. Now we have been working with our consulting group. We have a very good plan, I think, going forward on the opportunities for Jill and certainly in the range of what Trudy mentioned, 450 stores is certainly capable there.

Julie Lorigan

Tracy, just let me add on. As I have said, we have completed a very comprehensive reexamination of J. Jill along with Talbots as part of our strategic review, and it is clear to us that this brand has some significant growth opportunities and will be a growth provider to the enterprise. It has a very attractive core consumer which was revalidated in our research. It has a very unique proposition to this consumer, really kind of relaxed sophistication but casual for every day. She actually loves the positioning of where the brand is. It really was very clear to us that we opened stores in some markets more rapidly than perhaps in hand sight we should have. We should have continued to build direct demand which is a key indicator of success of a retail store. So, we are very confident that we can go back in 2008, re-prospect in these key markets where we have stores to build brand awareness and we can get back on the growth track for Jill. I would tell you looking at competitive concepts, our number of 400 to 450 stores is probably a slightly conservative number. There is actually probably more opportunity there and certainly there's more opportunity in the direct channel for J. Jill. So, we really believe that over time we can get a high single digit growth out of the J. Jill brand and that's what we are planning to do.

Operator

Thank you. Our next question is coming from Janet Kloppenburg with JJK Research

Janet Kloppenburg – JJK Research

Hi, Trudy, hi Ed.

Trudy Sullivan

Hi.

Janet Kloppenburg – JJK Research

Trudy, I just I have sort of a conceptual question for you on the Talbots brand. As we know it today, do you think the way we look at the line and what it stands for, do you think that that is the vision you hold for the Talbots product or will we see an overhaul, will it become younger or more structured, more casual? I'm not sure. But when we look at it today, is it the way we'll see the brand in a year or so? And secondly, when you talk about business trends being better here in February and currently, I'm wondering if some of that has to do with the fact that you are just more competitive now because you're mocked out cadence is more comparable to your competitors in the mall?

Trudy Sullivan

Thank you, can I hope you can join us on April 1^st.

Janet Kloppenburg – JJK Research

I will be there.

Trudy Sullivan

We have a really comprehensive discussion of the merchandise evolution positioning and our key creative team is going to be there. A picture is worth a thousand words. But let me just say that we absolutely love the positioning of this brand. Our mantra here is honor the classics. We are known for classics we own that space in the universe and we have every intention of staying in that space.

That said, we know there is room for improvement in the execution of our product against the classics proposition and that's what our creative team is hard at work doing and we are very excited by the product that is coming up through August and the balance of the year forward. So you know we're the first ones to acknowledge that we needed to work on product.

What you see in the stores and catalog today is certainly not the fully evolved, reenergized, revitalized brand We do believe it is a step in the right direction from both our floor sets and creative presentation, and we are getting positive comments from our customer and quite frankly our strategy of taking monthly markdowns and keeping our inventories in check certainly is certainly is helping our short-term performance. There is no question. But you know we love Talbots, we love its positioning and we think we can do a lot more exciting products against the Talbots positioning. So we'll see you in April.

Operator

Thank you, our next question is coming from Crystal Kallik with D.A. Davidson.

Crystal Kallik – D.A. Davidson

Good Morning, Ed, I was hoping you could walk through … I know you all spent a lot of time putting together this press release and the details, and I'm just looking at the last chart on the press release and listening to the conference call and trying to reconcile full year 2009, guidance? Would you mind could you try walk us through as far as far as the non-GAAP piece, what that excludes? Does that exclude the finance charges or compensation? I don't see the discontinued operations listed for Kids and Men's so if you can walk through, that would be very helpful?

Ed Larsen

Here on the Reg G table, which compares fiscal '07 to fiscal '08, I assume? That's the one we'll go through. We have given guidance today. We expect earnings from continuing operations to be in the range of $0.47 to $0.52 positive this year, and you compare that to the ‘07 number on a comparable continuing operations basis, you have to go through this chart. So for the year, we had a loss of $3.56. You back out the impairment charge …you back out the impairment for Talbots and Jill stores. You back out the employee compensation and consulting fees of $0.18 excuse me, the impairment was.271. The Talbots and J. Jill stores were $0.06 and the employee compensation and consulting is $0.18 and then you need to back out the cost of the Kids and Men's business, which will be reported as discontinued when we restate our numbers for ’07, that’s $0.24 for ’07. That is a combination of an operating loss in Kids and Men's businesses, which are buried in our '07 numbers and the beginning of some of. the fourth quarter closing costs that we have identified separately. So, it's a total of $0.24. So adding those back, we have a comparable earnings from continuing operations of $0.37 in '07 and that's comparable to the $0.47 to $0.52 that we gave guidance to this morning. And then we will have discontinued operations in the range of $0.59 to $0.64 and that includes the operating loss of Kids and Men's through the closure date, and all the closing costs including severance, inventory markdowns, lease exposures and things of that nature and that is comparable to the $0.24 for discontinued operation loss in '07.

Operator

Thank you. Our next question is coming from Dana Telsey with Telsey Advisory Group

Dana Telsey - Telsey Advisory Group

Hello.

Ed Larsen

Hello.

Dana Telsey - Telsey Advisory Group

Hi, good morning everyone. Can you please talk a little bit about the processes that have changed with the new management team that has come in, how things are being done differently than how they were in the past? And also can you please touch upon the move to the promotional strategy? How it's impacting margins and any adjustments you plan to make to that over time? Thank you.

Trudy Sullivan

Dana, that’s a loaded question, we’ll have to live with it. I would say one of the fundamental changes is that we have evolved to a design driven fully vertical brand with a creation of a chief creative officer, the set up of true design, the commitment to a much different flow of product which also comprehends the change in our whole markdown cadence, which will be enabled with the price optimization tool when it goes into effect. So the bottom line is that we will have a much more dynamic brand that is truly designed, not functioning somewhat like a private label brand as it had in the in the past, so if fundamentally different. It’s no question that the markdown cadence has already had a favorable impact on our business, as well as the commitment to leaner inventories that are turning faster, which provides a much faster lower fashion to the customer who absolutely is incredibly loyal has high frequency visits to our store and .. the initially seeing is refining quite favorably to the pace of fashion change they were just starting to bring in to the store. So it is the fundamentally different product process from inception all the way through floor sets.

We’ve also determined that the brand impression that drop us our catalogue will be consistent with the brand impression that we have in our stores, so we have unified the marketing approach across all channels for this brand, similar frankly to the approach that J. Jill placing their brand. So it is a fundamentally different philosophy with different processes and a great team of new people, who have come in to join and already talented team, and everybody both employee and associates who has been here for a long time plus the new associates have really embraced this new methodologies that we are operating the business under. So you now, we have a lot of work to do or at the beginning stages, we certainly are far from claiming any victories. So we are encouraged by the more recent results in terms of the consumer response and the gains we are seeing in margin.

Dana Telsey - Telsey Advisory Group

Thank you.

Operator

Our next question is coming from Kimberly Greenberger with Citigroup.

Kimberly Greenberger - Citigroup

Great. Thank you. Good morning.

Trudy Sullivan

Hi, Kimberly.

Kimberly Greenberger - Citigroup

I had a question for Ed on liquidity, but I just wanted to get clarification at on something you said earlier. Gross margins down to 90, did you just give us the break up, between the merchandize margins decline and the occupancy to leverage. And also just remind us what finance charge revenue was in the fourth quarter this year and last year. On the liquidity question it looks to me like your inventories are in great shape down 7% year-over-year, but your accounts payable is up over 50%. Now it looks like may be you are not seeing your bills and I was hoping you could give us some reassurance that Talbots has sufficient liquidity to continue to fund its operation on its dividend and also fund its debt payment? Thanks.

Trudy Sullivan

Okay, finance charge revenue for the quarter finance charge revenue was $11 million versus last year which was 11.7 and given last year it was 14-week period, this year is the 13-week, for the year finance charge revenue is $41.8 million down from 42.4 last year and again last year we have an extra week. As far as liquidity, Kimberly, we have working capital lines of $140 million. We've been working with our banks to increase those lines. We have ongoing discussions for a couple of months. It is a very difficult credit market at this time, but I think we are making progress and I'm hopeful very soon we can reach a resolution to that. We did pass all of our covenants at the end of the fourth quarter. We wanted to make sure we passed our covenants and so in early January I reached out to our agents in Asia and to our major vendors in Asia and I asked them to postpone submitting documents for a letter of credit negotiation, i.e., that means they did not present documents for items shipped, so that is why the payable is higher. We picked quite a bit of cash float in that area and this was a precaution in case cash got tight.

We wanted to make sure that make sure there were no issues with liquidity. So our vendors were very supportive in this nature. All those documents were submitted the first week of February and everything was paid the first week of February. So, we are fine there. So we are looking at our cash very closely, but we think we have ample resources to get through the spring season which is the tightest portion. When we get to the fall things open up considerably.

Operator

Thank you. Our next question is coming from Marni Shapiro with The Retail Tracker.

Marni Shapiro – The Retail Tracker

Hey guys. Couple of quick questions. The first is a real estate question at the Talbots store that you are planning to open in ’08, how many are petites or women's stores and if you can just talk a little bit about your thoughts today on shoes and accessories? And then following on shoes and accessories in the spring product the stores have looked much better for spring, much more edited and a stronger point of view and most recently the shoes and accessories, the handbags have looked really very strong. So I was curious if you were able to change that sooner and what kind of impact you had on that for spring?

Trudy Sullivan

Marni, thank you for the comment on how the stores are looking. We are actually quite pleased with how the spring floor sets and the catalog creative have come together. We are huge believers in the potential of accessories and shoes for the Talbots brand. As we completed our strategic review, we did find some very interesting, what we call close-in concepts that can improve the productivity in our stores and certainly accessories falls under that. We have a very interesting penetration opportunity across the stores. For the most part, accessories only penetrate to be between 5% and 7% of our total sales and we think we have significant upside there. We were able to affect some accessories. Shoes is a bit longer time.

I would tell you we're a little self critical on the shoe side that we have room to be even more tightly edited there, but we see big potential for the core accessories category such as handbags, jewelry and belts and fashion accessories in our stores. As I've said in the opening remarks we are going to take a much more critical editor's eye, especially to the shoe assortment to make sure that they really are truly outfit and concept completers and that they just enhance the overall edited point of view on the floor set. But I believe that you will see our floor sets continuing to get sharper and sharper and more edited, and much more connectivity to how we are positioning the brand in the catalog as well. So let's answer your question on the actual stores.

Marni, on the store count on the Talbots side for '08 we are looking at we are looking at 27 new stores and right now that forecast will be 12 missy stores, 3 petite stores, and 12 women's stores for a total of 27.

Operator

Thank you. Our next question is coming from Jennifer Black of Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

And you certainly have made headway in the red, it looks really, really good. I have three questions

Trudy Sullivan

Wow.

Jennifer Black - Jennifer Black & Associates

It appears that you have increased your direct marketing via email. I wondered if you've seen a pick up in the traffic on your website? That's my first question

Phil Kowalczyk

I'm sorry, I didn't know if you were going to put all three out there and then we can pick and choose. In terms of the increase in Web traffic, actually a lot of intelligence has been gained in both brands in being able to invest appropriately in search and affiliate for acquiring new customers. But we've also been asking our customers the frequency with which they would like to receive the emails. So there's been a lot of intensity put around sending emails that are relevant to the customer, that are new news to her, and that announce when new things are happening at Talbots and/or J. Jill. And as a result, we have actually seen traffic pick up in the Internet and in fact in both brands we have seen an increased penetration of the Internet as a percent of total direct, which is really happy news for our guests and customers and very happy news for us.

Jennifer Black - Jennifer Black & Associates

Okay. Great. My second question, with your tighter inventories do you have any ability to chase sales? And I realize you can't build Rome in a day, but anything you can say?

Trudy Sullivan

No, and actually, Jennifer, we have gone back and certain, we are chasing certain key trends and are able to react for second quarter. So we do have that ability.

Jennifer Black - Jennifer Black & Associates

Okay.

Trudy Sullivan

And we are exercising it to the best of our ability. We are very, very, very focused on maintaining lean inventory. Believe me, that is a very rigorous process where we do go back, it's a proven entity.

Jennifer Black - Jennifer Black & Associates

Okay. Great. And then, lastly, I wondered what the size of your credit card file is and also your prospect base?

Ed Larsen

Well, the credit card file we have almost about $1.9 million names on our credit card file, usually about 600,000 are active in any given month. And we will be looking to the J. Jill credit card which is operated by a third party source. We have the opportunity to bring those credit cards on at the end of September and we look forward to doing that. We think we can offer much greater customer service and it's a strong financial charge revenue driver for us also.

Trudy Sullivan

So, Jennifer, can you clarify what you are trying to understand? Are you trying to understand our level of prospecting or are you understanding the size of our file? Jennifer?

Jennifer Black - Jennifer Black & Associates

Hello. Can you hear me?

Trudy Sullivan

Yeah.

Jennifer Black - Jennifer Black & Associates

Okay. Yes, I just wanted to understand how large your current audience is and then do you have a prospecting file ? I'm assuming you do and how large is that?

Ed Larsen

Well, there are a couple of different ways to address that. The audience is actually quite large, well in excess of 5 million, and that's a really important thing to keep in mind. It's very large and the opportunity to grow it is even more significant. Within that, obviously, there are different qualities. There are customers who buy from us every time we send something out and there are some that buy from us only selectively when we send something out. So when we look at the deeper file which is the 12-month buyer file, it's, obviously, a subset of that, but I would prefer not to get into those kind of specifics in a public forum if that's all right with you. The 5 million should give you a good ballpark.

Trudy Sullivan

Jennifer, just to reiterate, we've talked about this earlier. In both brands we are investing in additional prospecting circulation.

Ed Larsen

Absolutely.

Trudy Sullivan

And that is the key. We have seen very good results. As Ed said, we scaled back on national and TV advertising to the tune of around $18 million and we reinvested approximately half of that in increased prospecting and customer acquisition for both brands so which we think is spot-on strategy.

Jennifer Black - Jennifer Black & Associates

Can I ask one last question?

Trudy Sullivan

Sure.

Jennifer Black - Jennifer Black & Associates

I'm curious, Trudy, with your years of experience when economies are weak, is it your opinion that traditional can be better than fashion or anything that you can say about that?

Trudy Sullivan

No, I think it's always … I think the position as the cornerstone brand in a classic positioning is always a great place to be in a time like this. I think it’s a great place to be anyway and as I said earlier, we really do own this positioning and we love it and we have no intention of ever veering off of the cornerstone classic brand. We do think it’s, you know, there might be … I’d like to believe that at times like this some people might be a bit more conservative in their style selection that we would … we would somewhat gravitate to a brand like ours. It's not a total given. I think the bigger issue is in times like this is running your business in a very conservative fashion and keeping your inventories lean, and I think that is the most important thing you can do.

Jennifer Black - Jennifer Black & Associates

Okay, thanks so much and good luck.

Trudy Sullivan

Thank you, Jennifer.

Operator

Thank you. We have time for one final question coming from Neely Tamminga with Piper Jaffray.

Neely Tamminga - Piper Jaffray

Oh, great, thanks, just two housekeeping items here. One, just to confirm on this guidance that you’ve given of the 47% non-GAAP, is that include then losses tied from Men’s and Kids in Q1 and Q2 because its part of your entity, or does it assume that business never existed to your total core business throughout the balance of the year? I just want to make sure that we are really clear on this point?

Ed Larsen

Yes, Neely (inaudible). This does not include any losses for Men's and kids. So this assumes accounting for continuing operations and discontinued operations, all the close down costs, the operating costs in Kids and Men’s would be in that 59 to 40, 59 to (indiscernible) loss. So, this is continuing operations going forward.

Operator

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

Trudy Sullivan

Well again thank you so much for being with us this morning. As you can tell, we have a lot of work still ahead of us, but we have accomplished a great deal to get to this point. We have a very good strategic plan and we look forward to sharing with you on April 1st. We feel we are firmly grounded in what we have to do to achieve the plan and we have taken a conservative point of view, but I would remind you this is the first year of what we feel is the three-year project to turn around this brand and we have a very comprehensive details that we look forward to sharing with you on April 1st.

Its exiting time here, we are very committed and focused to succeed and we certainly appreciate your participation. So, thank you very much. Have a good day.

Operator

Thank you. This concludes the Talbot’s Inc. conference call. We will now proceed with full forward-looking statements. The foregoing may contain forward-looking statements, information without the meaning of the Private Securities Litigation Reform Act of 1995. These statements maybe identified by such forward-looking terminology as expect, achieve, return to, plan, look, believe, anticipate, outlook, will, would, target, guidance, or similar statements or variations of such terms. All of the outlook information including future profitability, 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 exit costs, timing, benefit, and impact of strategies being implemented, values of J. Jill intangible assets and our internal plan and budget for regular price selling and markdown selling for indicated forward period.

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 forward-looking information 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 the risk, strategic and other operating initiatives referred to above as well as other initiatives and actions taken as part of a revitalization plan or as a result of our strategic review may not favorably impact our operations.

The risk that the Company will not obtain an increase in its working capital credit facility, the risk that our assumptions and expectations and certain cash resources will not be met as a result of sales trends, timing of work, capital needs, tightening of consumer spending, or other economic concerns or changes, changing condition trends or other factors, productivity and profitability in the short term or long term, the risk of operational benefits expected to be realized from strategic and operating initiatives and actions, and from our exit plan will not be achieved or may take longer to achieve or result in greater cost or expense than expected or forecast.

The risk that a return to profitability or profitable growth may take longer to be realized than expected or forecast the risk that our Company may not at all times satisfy one or more of its financial covenants under its debt agreement and will be required to seek to obtain a waiver or amendment which cannot be assured of its debt agreement acceptance of Company fashion including its seasonal fashions, effectiveness of the Company's brand awareness and new promotional (inaudible) strategy, any different or any increased negative trends in its regular price or markdown selling.

Retail economic conditions include consumer spending trends, the current housing issues and uncertainty is the fiscal and credit market success of our expected markets events in driving store traffic and directing market sales, success of the catalogs in driving both our direct marketing sales and in driving store traffic, the Company's ability to anticipate successfully respond to constantly changing customers tastes and preferences and to produce the appropriate balance of merchandise offering. 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 state and forecast future full price and markdown selling for each of our brands. The success of our current executive level hires, the risk that the J. Jill business will not be successfully integrated, the risk that the cost savings operational efficiencies and other synergies from the J. Jill acquisition may not be fully realized or may take longer to realize than expected, the risk associated, the risk associated with integrating and operating profitability and success as a multi-brand chain. For the first time the reaction of Talbots and J. Jill customers and suppliers to the changes being made within the organization, in each case actual results may differ materially from such forward-looking statement information. Certain other factors that may cause actual results to differ from such forward-looking statements are included in the Company’s periodic report 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. This does conclude today's Talbots conference call. You may now disconnect.

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