Talbots, Inc. Q1 2008 Earnings Call Transcript

Jun. 3.08 | About: The Talbots, (TLB)

Talbots, Inc. (NYSE:TLB)

F1Q08 Earnings Call

May 21, 2008 10:00 am ET

Executives

Trudy F. Sullivan – President & Chief Executive Officer & Director

Paula Bennett - President of J. Jill Brand

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

Julie F. Lorigan – Vice President & Investor Relations

Philip H. Kowalcyzk – Chief Operating Officer

Analysts

Todd Slater - Lazard Capital Markets

Richard Jaffe - Stifel Nicolaus & Co.

Barbara Wyckoff - Buckingham Research Group

Janet Kloppenburg - JJK Research

Tracy Kogan - Credit Suisse

Kimberly Greenberger - Citigroup

Adrienne Tennant - Friedman, Billings, Ramsey

Betty Chen - Wedbush Morgan Securities

Jennifer Black - Jennifer Black and Associates

Lauren Cooks Levitan - SG Cowen Securities, Inc.

Dana Telsey - Telsey Advisory Group

Roxanne Meyer - Oppenheimer & Co.

Crystal Lanigan Kallik - D.A. Davidson

Operator

Good morning Ladies and Gentlemen. On behalf of Talbots we would like to welcome you to the Talbots, Inc. conference call covering its first quarter 2008 earnings results. Today's call is being recorded, and at this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. I would now like to turn the call over to Julie Lorigan, Vice President of Investor Relations.

Julie Lorigan

Good morning everyone and welcome to the Talbots, Inc. first quarter conference call. Today we have with us Trudy Sullivan, President & CEO, Phil Kowalcyzk, our Chief Operating Officer, Paula Bennett, President of the J. Jill Brand, and Ed Larsen, Talbots Chief Financial Officer. As a reminder certain statements made or contained in this presentation today are forward-looking. These are made on assumptions and expectations of future events which may not prove to be accurate. They involve substantial risks and uncertainties. Actual results may differ materially from those expected or implied. We direct you to the cautionary statement detailed at the end of this presentation today and in our notice yesterday of this webcast and in our press release being issued today in connection with this presentation as well as in our SEC filings, all of which are available on the investors relations web site at www.TheTalbotsInc.com. These forward-looking statements may be identified in today's presentation by such terms as will, except, believe, anticipate, outlook, target, plan, initiative, estimated, strategy, or similar terms or variations. All of our outlook financial expectations and financial plans discussed today constitute forward-looking statements. Actual results may differ materially. Please also refer to our full cautionary statement which will be read at the end of today's presentation. A replay will be available from approximately one hour after the conclusion of the call until end of day May 23, 2008. The web cast will also be available on the investor relations page of our web site.

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

Trudy F. Sullivan

Good morning everyone. In a moment I will discuss Talbots Inc. results for the 13-week period ending May 3, 2008. Paula will then cover J. Jill's performance and Ed will review our consolidated results. Finally I will make some closing remarks and then we will be happy to answer your questions. So with that, let's begin.

This morning we announced total company first quarter earnings per diluted share of $0.21 from ongoing core operations. This result exceeds last year's earnings of $0.14 per share on a comparable basis. On a GAAP or reported basis earnings per share were $0.03 compared to last year's $0.10 per share on a comparable basis. We believe that our first quarter results from ongoing core operations are a more meaningful measure of our performance versus GAAP which includes the results from non-core businesses of Talbots Kids, Mens, and the U.K. which we are closing, and restructuring charges associated with our strategic initiatives in our ongoing core operations.

Total company net sales for the first quarter were $542 million. By brand retail sales were $363 million for Talbots and $71 million for J. Jill. Consolidated direct marketing sales which include catalog and Internet were up 2% to last year to $108 million. Total company comparable store sales for the 13-week period declined 9.8%. By brand Talbots costs decreased 7.4% and J. Jill costs were down 20.2%. From the total company perspective our plan going into the quarter was to optimize our merchandise gross margins in order to drive margin expansion principally at the Talbots brand. We did not anniversary certain lower margin promotional events from the prior year. Instead we offered our customer more impactful and innovative incentives to drive traffic in regular price selling which were in addition to our recently implemented practice of taking monthly markdowns. Our inventories are lean and we were not in a position where we had to take deeper than planned discounts to move our product. So while our sales were softer than anticipated for the quarter, in part due to the difficult macroenvironment, we almost completely offset the sales shortfall with a 260 basis point improvement in merchandise gross margins. Having reported solid first quarter results we are encouraged by our progress. Our performance was driven by better inventory management, a lean inventory position, and tight expense controls reinforcing many elements of our strategic plan. As a result we feel well positioned as we look ahead to achieve our 2008 financial goals.

The change in the Talbots brand promotional strategy to monthly markdowns was the clear contributor to our improved merchandise margins validating a key assumption laid out in our strategic plan. In fact, our Talbots brand average unit retail on markdown sales in the quarter was up 33% compared to last year. And while the J. Jill retail business remains challenging, sales of its direct marketing business were better also delivering a marked improvement in merchandise gross margins. While margin improvement is core to our turnaround strategy this year, we continue to make good progress in several other areas including cost reduction and expense control. We have several concurrent initiatives in motion throughout the company that will get us to our goal of streamlining our organization and reducing our overall cost structure by $100 million by the end of fiscal 2009. Having established a dedicated project team and steering committee last fall to lead us in this effort, we are on our way to achieving at least $50 million in cost reduction in fiscal 2008. In addition to inventory optimizations specific projects include J. Jill headquarter relocation, field labor productivity improvements, and right sizing our organization. Further, with our focus on exiting our non-core businesses we were successful in closing 11 Talbots Kids and two Talbots Mens stores in the quarter. From a brand perspective in the quarter and beginning with Talbots, we did see a nice recovery in cost in April which were up positive mid-single digits. This increase was driven by a good customer response to our April product deliveries and a successful best customer event. We also began executing what we call brand moments during the quarter. This means full alignment of our merchandise deliveries, visual presentations, and marketing messages across all channels. We want to ensure that our customer has a consistent message no matter which channel she chooses to shop or when.

In terms of Talbots brand merchandise, as stated we had good success with our April deliveries driven by novelty and color in our casual assortment. Capris, knit tops and sweaters were the strongest categories. We did see some softness in our refined category based in linen which we believe was too bright and too item driven. Quarter performance of our Talbots Women concept was stronger than our core Missy and Petites. As previously stated, Talbots Women was identified as a key growth concept in our strategic review and we are in the process of developing plans to add more women's department to our existing Missy and Petite stores in addition to opening new stores.

Lastly, in terms of creative we are excited to be rolling out updated visual concepts reflecting a more modern look for our Talbots brand beginning with our June catalog which will be in customer hands in late May. Our reinvigorated Talbots brand image will be fully aligned across all marketing components and channels and will get stronger and more compelling as we move through the year. Turning to our J. Jill brand I will let Paula cover the details of the quarter. Let me just comment, however, that we do continue to feel strongly about the future potential of this brand and are rigorously focused on the key initiatives that will drive improved financial results beginning this year.

Now let me turn it over to Paula to provide additional commentary.

Paula Bennett

We had a very challenging first quarter at J. Jill with comps well off our expectations. That said, we did see a significantly better performance in our direct business with the market improvement in merchandise gross margins. Unfortunately our inventories were higher than we would like coming into the first quarter resulting in more aggressive and steeper markdowns during that period. However, we're working to take our inventories down and plan to be in a much leaner inventory position as we enter the fall season.

From a product perspective we experienced weakness in some of our key volume classifications and fabrications particularly in linen. We believe that our linen delivery was too early and too extensive and the color was not inspirational to our customer. In addition, some of our casual basics were soft as they were too similar to last year lacking newness. Most importantly, however, we are and will continue to be strongly focused on the four key initiatives that will drive more immediate financial improvement of our business and delivery optimal financial results ongoing. Specifically, first, we will change the look and feel of our stores to drive stronger regular price selling. This includes simplifying and modernizing our visual presentation and editing our product assortment for ease of shopping and taking weekly action to capitalize on what's working across channels. Second, we will manage our inventory to support regular price selling and most profitable flow of goods. We have adopted the Talbots brand inventory forecasting model to better manage our purchase plan and to take markdowns on an optimal basis, and we will work to liquidate excess spring and summer merchandise which we will support with the development of our online outlet strategy. Third, we will build a brand right product offering. We will design, develop and source brand right products with consistent design aesthetics. Further, we will identify business drivers earlier in the process to deliver maximum financial results and develop optimal assortments for each of our three channels. Fourth, we will optimize our customer base. We will drive three channel customer acquisition and conversion in high potential markets. A key element to this initiative will be the development of an operating model for customer acquisition particularly focused on key areas where we have under-performing stores.

For the second quarter we have several marketing and promotional programs planned and we look forward to introducing products developed under the direction of our new creative talent beginning with our July delivery. We have a lot of work to do but our team has come together and we're focused on the four initiatives that we believe will drive stronger short and long-term financial results. I look forward to updating you on our progress in the months ahead.

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

Edward L. Larsen

Let me review our first quarter financial performance in more detail. Please note that my comments this morning will focus on ongoing core operations which we feel is a more meaningful measure of our performance, as Trudy stated. Therefore, my comments will be on a non-GAAP basis. Attached to our press release issued this morning are reconciliation schedules of our GAAP and non-GAAP results for the first quarter with comparison to last year. Specifically the first quarter cost of sales, buying and occupancy was 61.2% of net sales versus 61.8% of sales last year. This represents a 60 basis point improvement in gross margins driven by a 260 basis point improvement in merchandise gross margins largely offset by a 150 basis point deterioration in occupancy deleverage. Selling, general and miscellaneous expenses the first quarter were $179.3 million at 34.4% of net sales versus $189 million at 34.4% of net sales last year. We tightly controlled expenses during the period and are making good progress in reducing the company's overall cost structure. Our real gains were partially offset by negative leverage from the first quarter comps declined.

The end of the first quarter with net income from ongoing core operations of $11 million or $0.21 per share which excludes the operating results and closing costs of Talbots Kids, Mens and UK businesses and restructuring charges related to ongoing core operations. This is a solid performance reflecting improved inventory management and tight expense control and is above last year's $0.14 on a comparable basis. On a GAAP or reported basis net income for the first quarter was $1.6 million or $0.03 per share and includes the Talbots Kids, Mens, and UK non-core businesses and restructuring charges related to ongoing core operations. This compares to net income of $5.2 million or $0.10 per share on a comparable basis last year. Net interest expense for the quarter was $5.7 million versus $9.3 million last year reflecting both long- and short-term interest costs. Average borrowing this year was $511 million versus $571 million last year and average interest rates were 3.8% this year versus 5.8% last year. Income taxes for the quarter were a benefit of $253,000 reflecting the reversal of tax accruals due to the positive resolution of state income tax uncertainties with several states. Weighted average shares outstanding for the first quarter were approximately $54 million.

And now I'd like to turn to the balance sheet. We ended the quarter with total accounts receivable of $227 million versus $220 million last year comprised entirely of Talbots charged receivables. Talbots charge penetration increased to 46.4% of sales and bad debts are running at very low rates. Total consolidated merchandise inventories at the end of the quarter were $319 million down 9% to last year's $352 million. On a per square foot basis inventories for the Talbots brand women's apparel stores were down 10.5% compared to last year and J. Jill brand were up 17% on average per square foot. We are quite comfortable with our Talbots brand returnables for the remainder of the spring and fall season and are aggressively working to bring down J. Jill's inventory levels. We ended the quarter with notes payable to our banks of $99 million and long-term debt including the current portion at $369 million. At the end of the quarter with cash we're approximately $32 million compared to $18 million last year.

Moving to capital expenditures, on a consolidated basis we spent a net of $13 million in the first quarter. Our consolidated 2008 capital plan is at $75 million. We opened stores at seven new locations in the quarter; two Talbots brand and five J. Jill brand. We closed Missy apparel stores at three locations; two Talbots brand and one J. Jill brand. And as Trudy stated we closed 13 stores from the non-core businesses we are exiting. At the end of the quarter we had stores in operation at 865 locations, 594 Talbots brand and 271 J. Jill brand. Note that we will be reporting our stores by location which means we will count the superstore or adjacent multiple concepts as one location. We feel this is a more appropriate representation of our company's real estate portfolio. And, during the quarter we paid a cash dividend of $0.13 per share.

In summary, our first quarter was a solid start to the year. Our initiatives are gaining traction as evidenced by our results particularly in the areas of closing down our non-core businesses and improving our core activity through strong inventory and expense management. Given this, our outlook for 2008 remains unchanged and as previously stated, our expectations for ongoing core operations are in the range of $0.47 to $0.52 per diluted share which compares to last year's $0.51 loss per share on a comparable basis. Our outlook for loss for non-core operations is in the range of $0.64 to $0.59 per share which compares to last year's $0.24 loss on a comparable basis. Finally, we are in discussions with banks to increase our working capital line of credit and we'll provide an update on our progress when appropriate. We are in compliance with all covenants of our acquisition term loan agreement for the first quarter of fiscal 2008.

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

Trudy F. Sullivan

Overall we are encouraged by our solid first quarter results and we are committed to driving stronger performance throughout the balance of the year. Our progress to date reinforces the key elements of our strategic plan which we believe will provide even greater benefit to our performance in the quarters ahead. There is no doubt that we have much to do, but with the positive indicators we are seeing this early in the year we believe we are on the right track. Our leadership team is extremely motivated and we are addressing all the key areas of our business that will deliver better results. As Ed stated we remain comfortable with our previously announced financial outlook for fiscal 2008 and we are pleased to see improving business fundamentals. This is particularly important as we await the full presentation of our refreshed and updated merchandise assortments across both brands. That said, we are realistic about the difficulties in the current macroenvironment. Although we are encouraged by our improving fundamentals we will need to closely monitor our customers' reaction to both the product and creative changes. We have an enthusiastic team and a solid plan but our customer will be the ultimate judge. We look forward to sharing more positive news with you in the future.

Thank you. And now we would be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Jaffe - Stifel Nicolaus & Co.

Richard Jaffe - Stifel Nicolaus & Co.

A couple of questions, you mentioned not anniversarying certain sales early in your presentation. I was wondering what the sales were? And, then if you could perhaps provide some color on April obviously with the calendar shift April is favorably distorted by the Easter shift and I wonder if you keep the Easter issue out of April? Also, if we could get some detail as to restructuring charges for the balance of the year, what you think they'll be and how you think they'll fall over the next three quarters? And lastly, what is your optimism given the results at J. Jill?

Trudy F. Sullivan

I'm sorry Richard we can't write down these seven questions fast enough. What was that last one?

Richard Jaffe - Stifel Nicolaus & Co.

The source of your optimism at J. Jill?

Trudy F. Sullivan

Let's start with the sales issue. Because our inventories were in really good shape in first quarter, we didn't really have to take the kind of aggressive markdowns cadence that the brand experienced the last year cleaning up from the semi-annual sales. So we were able to, as I said in my opening remarks, sell through our markdowns at a significantly improved AUR to the prior period and still get a very acceptable rate of sale on it. So that's what I was referring to in terms of we did not get aggressive going to second and third markdowns in the first quarter and so were able to liquidate clearance as well. In terms of April, really I would say that two things drove our April and it's not so much related to the Easter shift as it is we had a good delivery in April. The consumer liked what we put on the floor especially in our casual assortment and that has been a weak part of assortment in the prior period. We also had I believe a very well executed best customer event, the best customer event we've really had I think in the recent history of the brand and that really was helpful in driving April.

The sense of optimism on J. Jill, we certainly saw the J. Jill performance start to improve as we proceeded through the quarter. April was better than the prior two months and Paula has really corralled her team. With Paula's blessing they've adopted the Talbots inventory management model; we're starting to see some positive results there. We're very encouraged by the new creative that is coming out of this team. We're about to get into the period where this creative team product is actually hitting the floor as we get into July, and we've always believed that this brand is a great complement to our Talbots brand and we still believe that. We had talked about, in our strategic investor presentation, that one of the issues we were dealing with in the J. Jill brand was the lack of awareness and a base of stores that we were going to go back and do some testing to see if we could stimulate store traffic through the use of our catalog and it's very early to gauge but the preliminary results of these tests are very encouraging. So that's why we're encouraged. And I'll pass this to Ed for the final question.

Edward L. Larsen

Richard with respect to the restructuring charges, the guidance we gave on operations of a loss of $0.59 to $0.64 of course all inclusive of the operation loss of those concepts and the close down costs which include severance, asset write downs and lease cancellation fees, we think we should all have that behind us by the third quarter with the majority of those charges probably in the third quarter to get to the $0.59 to $0.64 range. Restructuring charges on ongoing operations in the first quarter the $0.07 related to a provision for severance and professional services from consultants on our strategic plan. Some of that we will have ongoing. We don't have a number for you for the total amount for the year. Mostly it should be behind us by the end of the third quarter but it is all inclusive in our $0.47 to $0.52 guidance overall on ongoing core operations.

Operator

Your next question comes from Todd Slater - Lazard Capital Markets.

Todd Slater - Lazard Capital Markets

First a clarification, does the first quarter of Talbots comp -7.4%, does that exclude Kids and Mens?

Edward L. Larsen

It does.

Trudy F. Sullivan

It does.

Todd Slater - Lazard Capital Markets

I'm not sure I got it from your last answer but are the April trends sort of on a normalized basis continuing, I mean the May trends continuing from April?

Trudy F. Sullivan

We are continuing to run the business exactly as we did in the first quarter and second quarter, and I would tell you that for the most part we're seeing kind of the macro trends continuing. It's early but we haven't changed our game plan here. We're closely monitoring the productivity on the clearance side of the ledger, looking at sell throughs and opportunities to maintain a higher AUR on that side. So we don’t see anything, it's early, early in the second quarter, but we're not seeing anything in our business that would indicate we couldn't hit our operating plans.

Todd Slater - Lazard Capital Markets

It sounds like given your inventory position, your gross margin trends are perhaps even a little better than you would have planned. I mean, is there some cushion in the model and could you achieve the numbers even if comps were perhaps a little bit more depressed than you had originally assumed, because I think the -1 to 1 guidance assumes quite an inflection point in the comp trend I would assume relatively soon?

Edward L. Larsen

Well Todd I would say we have some room there but it's a very difficult environment out there.

Trudy F. Sullivan

Our operating plans always assume a slightly negative comp trend, right, and an even more negative transaction trend. And we have been, in the first quarter we were able to manage our margin even more favorably than our operating plan accommodated. In other words, we were able to offset the weakness in the sales trend with margins and that's our game plan as we start to monitor second quarter as well.

Operator

Your next question comes from Barbara Wyckoff - Buckingham Research Group.

Barbara Wyckoff - Buckingham Research Group

I'd like to talk a little bit about the plus size Women's initiative. How does Women's petite fit into the picture? How many stores do you have plus sizes in now and just a little more detail on that business? Could you remind us what the best customer event was this year?

Trudy F. Sullivan

Let's talk about the Women's business first. Really the trend in Women's, as I said in my opening remarks, is slightly positive to our trends in Missy and Petite. We did mention at our Investor Day Barbara that we think over time we can double the size of our Women's business. We are in the process of opening both of what we call Women's boutiques, which are women’s departments, which are more square footage for Women's in existing stores as well as opening new stores. We have Women's today in, let me see, we have Women's departments in 53 Missy stores and we operated a total of 149 Women's stores at the end of the first quarter and we are in the process of planning to open at least I believe 10 to 11 more boutiques in the back half. In terms of Women's Petite that's a very important part of our offer for women. We have an extremely dedicated customer there. So all of our Women's boutiques offer Women's Petite as well.

The best customer event, which is typically held a couple of times a year, for the first time was a tiered offer. We believe we had improved circulation strategy against it, it was very well received from the customer, we actually had the highest response rate ever for a best customer event. So we were quite pleased with the approach which was multi-tiered and a multi-offer approach so we had kind of optimized our marketing expenditure based on the consumer value and the potential for return. We were quite pleased, and that was a key ingredient in April.

Operator

Your next question comes from Janet Kloppenburg - JJK Research.

Janet Kloppenburg - JJK Research

I wondered if you'd talk a little bit about the inventory levels at J. Jill? It sounds like they are higher than you would want them to be and where you might expect them to be coming out of the quarter? When you say that you have improving business fundamentals, I was wondering if you could give us a little more clarification on that, perhaps talk a little bit about each brand and exactly what you mean? In other words, do you feel like the merchandising to the plans is catching hold or is one ahead of the other? What refinements will you need going forward, etc., because I'm not sure if a lot of it isn't just because you have appropriately shifted your promotional team so that you're taking markdowns on a more current basis? And lastly, Ed if you could talk to us about the progress that's going on with the bank financing?

Trudy F. Sullivan

Janet let me talk about the fundamentals and then I'll pass it to Paula who will comment on the J. Jill inventory and then we'll pass it off to Ed. Really what we're referring to is very strong inventory management, keeping our inventory lean, our managing for margins for productivity off of the existing inventory, and very strict cost control. So I would say on the product creative side is also the instigation of what we refer to as these brand moments which is a much crisper presentations of both marketing and product across all of our channels, which is really just something that we started this spring. So we see all of those fundamentals in place and performing, certainly in the margin side, slightly better than we had planned, and we feel that is extremely important as we wrap around to the period of time where we're having improving fundamentals as well as improving product and creative. I'm going to pass it off to Paula who will talk about inventory.

Paula Bennett

The inventory story at J. Jill is that we came into the first quarter with inventory significantly over planned. Since then we have worked through that first of all by adopting the Talbots inventory forecasting model and managing our full-price and markdown averaging at retails more aggressively than we had in the past. We’ve worked through our inventories with the combination of focusing on our sale books, we've enhanced our web outlook to include size bucketing which gives people easier access to what's on the site, and we've also changed our markdown cadence to not automatically take markdowns based on a date but to look at what product is still moving and how we can get more full-priced selling out of it while still moving the units that we need to move. We also made significant purchase reductions for the third and fourth quarter that will bring our inventory levels into line for a very profitable flow of goods and we expect to end this quarter below plan in inventory.

Edward L. Larsen

Janet I'm going to broaden your question to not only talk about banks but a little bit about our cash flow and our liquidity and what we see for the rest of the year. The first point I'd like to make is our free cash flow in the first quarter was about $20 million better than our budget. That was based on better operating performances than we expected, improved working capital management, tight capital expenditures, and that's $20 million positive to budget despite the fact that we accelerated some of the restructuring charges on Kids and Mens into the first quarter. So we are comfortable with our cash position and our debt level right now. We have ongoing discussions with banks on our working capital lines to increase them. Many of the banks wanted to wait until our first quarter results were out to see what we performed and we will continue those discussions in the weeks to come.

Looking at our budget for the year, which we have shared our goals with you, we think those are very achievable, we are committed to making those numbers, and if we make those numbers we have sufficient cash flow to fund all of our working capital, all of our capital expenditures, all of our debt service needs, and to buy the J. Jill receivables in September for about $50 million, and have a comfortable margin on top of that. So with that being said, we are eager to discuss ongoing relationships with banks and increase our lines. This is a very tight credit market right now, the banks are being very tight, interest rates are extremely high on new money, and we want to do the best thing in the eyes of the shareholders, so we will be patient as we talk to these financial institutions.

Operator

Your next question comes from Tracy Kogan - Credit Suisse.

Tracy Kogan - Credit Suisse

I had a question on the J. Jill comp plan for this year, I think you guys were looking for a +1 and I was wondering if that had changed? And if so, I know Paula mentioned that inventory plans had come down for the third quarter and fourth quarter there, but I was just wondering what comp you are planning to?

Trudy F. Sullivan

We have obviously adjusted our comp view on the J. Jill top line but because we've also been able to manage the inventory with a different and I think a more productive inventory planning model, we really feel that we can be okay. So we've dropped sales expectations into the low single digits, a little more drastic than the initial operating plan. But our view on inventory as Paula just referred to, by the time we get out of second quarter we believe we'll be precisely where we need to be from an inventory perspective. We re-rationalized purchases for the back half and have a better flow, and we think that coupled with better creative will start to get the traction that we need on the brand as we wrap the back half of the year.

Operator

Your next question is from Kimberly Greenberger – Citigroup.

Kimberly Greenberger - Citigroup

I just had a couple of clarifications on the press release and then I'll ask my question. Of the $5.162 million restructuring charge, can you talk about how much of that is severance versus professional services and is there anything else in that bucket? Also, should we expect those charges to continue into the second and/or third quarter? On the $5.9 million restructuring charge related to Kids, and the UK businesses, how much of that is cash? And if you could just talk about what you're expecting for second and/or third quarter in that bucket as well. And then my question Ed is: have any of the vendors that you were using previously stopped accepting your purchase orders following the termination of your letter of credit line?

Edward L. Larsen

Kimberly, with respect to the restructuring charges of ongoing operations I would say about 60% of that is severance and 40% of that would be professional fees on our strategic plan. On the $5.9 million related to non-core businesses about $2 million of that, I take that back, most of that right now in the first quarter is non-cash but of the $5.9 million, $2 million is governance which will be paid out as we close down these stores. The balance of it is mostly accelerated depreciation.

With respect to the core operations I don't have a number for the second and third quarter charges. It will be less than the first quarter amount certainly. And again on the non-core businesses we gave guidance earlier that we expect the close down costs, the total costs for the non-core businesses pre-tax is about $52 million, so that we will get to during the second and third quarter. That translates into the $0.64 to $0.59 loss that we had. And with respect to vendors, all of our large vendors have agreed to open account 45 days. We do have some smaller vendors that felt they could not do open account so we have taken that business elsewhere. The large vendors combined with the small vendors that have gone open account are well over 95% of our business now. We are still dealing with some other vendors to try to get them to go open account. If we can't, we'll have to move that business. We're talking about the holiday season. Everything through fall is set.

Operator

Your next question comes from Adrienne Tennant - Friedman, Billings, Ramsey.

Adrienne Tennant - Friedman, Billings, Ramsey

A question on finance charge revenue, how much was that for the quarter and what impact does it have on the earnings for the quarter and the year?

Edward L. Larsen

The finance charge revenue for the first quarter was just under $10 million just pretty much level with last year. Our Talbots receivables are at 46% penetration, the highest ever, but we have found our [A2] has actually improved during the first quarter, and we expect on the Talbots charge side to have about $41 million of finance charge revenues for the year. We plan to bring the J. Jill receivables in-house effective September 30 and that should generate during the balance of the year another probably about $5 million in finance charge revenue, all of which is in the guidance that we have given.

Adrienne Tennant - Friedman, Billings, Ramsey

Can you just slow that down pretty much to the bottom line tax effective?

Edward L. Larsen

No.

Adrienne Tennant - Friedman, Billings, Ramsey

What are the costs associated with it?

Edward L. Larsen

We don’t give that information out.

Adrienne Tennant - Friedman, Billings, Ramsey

Okay. Did you give transaction metrics if you will?

Trudy F. Sullivan

Our charges or totally?-

Adrienne Tennant - Friedman, Billings, Ramsey

If you can, by division, UPT, AUR?

Trudy F. Sullivan

Transactions are pretty much down pretty much in the range that we thought they would be down. We're seeing, as I said in the Talbots rank, strong AUR driven by AUR on the markdown side of the world. So I can just tell you that our transactions for the first quarter were down slightly more than initially thought and we said transactions would be down greater than sales. I don't have J. Jill's here but it's basically in terms of average dollar per transaction that is up, our unit's per transaction is up quite nicely, and our average unit retail sold is up quite nicely. That's for Talbots with transactions down slightly more than we anticipated. And J. Jill our transactions are down around 10%, our UPTs are down slightly, and our average transaction value is also down slightly.

Operator

Your next questions is from Betty Chen - Wedbush Morgan Securities.

Betty Chen - Wedbush Morgan Securities

I was wondering if you can talk a little bit about the cadence for the second quarter. It sounds like you didn't have to anniversary a lot of the events in the first quarter. How should we think about that in the second quarter, and if you could remind us of the meaningful events you had last year? And then secondly, I know you mentioned that you were hoping for J. Jill to exit the second quarter with inventory down. Could you remind us what is the plan for Talbots and also for the second half as well?

Trudy F. Sullivan

The way I think it's most helpful for you to think about it is you can't really look at our historical patterns because historically Talbots brand would take their clearance four times a year. And so now we've gone into a monthly markdown cadence so it will be a smoother cadence than you have been historically used to. We talked about our second quarter promotional plans are pretty much anniversarying key customer events that we had last year. Our inventories are in good shape. You can assume that because our inventories are in good shape we won't have these significant and big events crashing the second and third markdowns, things that we really experienced in the first quarter. We are appropriately promotionally we're matching our calendar year-over-year but we're not doing anything that is significantly different from a promotional point of view with the exception of the markdown cadence which is the real change. Do you want to talk about Jill?

Paula Bennett

In terms of second quarter we have planned customer events during the second quarter that are intended to reach out to our best customers. More of our events are targeted to our best customers versus public events because we're seeing that we get a good response from our customers when we email them and send them invitations or call them. So we're focusing most of our promotional extra efforts on our best customers.

Edward L. Larsen

With respect to the inventory levels, the first quarter we finished at a consolidated basis down 9%. We will bring inventory down even further as we go through the year. Our plan is to end the year with inventory down 20% versus last year so to have considerable help to our cash flow. And part of our inventory management is really managing the flow of goods and that really takes effect when we start in our late summer and fall business, so they will continue to drop every quarter through the balance of the year and we'll be down 20% by the end of the year.

Operator

Your next questions is from Jennifer Black with Jennifer Black and Associates.

Jennifer Black - Jennifer Black and Associates

I wonder Trudy what are you doing to bring back old customers and attract new customers at the Talbots brand and J. Jill if there's anything else? And then any thoughts you have on refined as a category and I'm just talking straight across the board, not just at your company?

Trudy F. Sullivan

Jennifer we are very fortunate to have a very robust direct channel on both brands and a significant file of names both current and lapsed, and as we said in our Investor Day and when we talked about our strategic plan, we have funded much more aggressive outreach and prospecting contacts as we wrap around to the back half of the year and our new product and new marketing are firmly in place. So that will be our primary tool in terms of attracting customers back into the Talbots brand. I'm going to ask Phil Kowalcyzk to give you a little more color on that.

Philip H. Kowalcyzk

There are a number of different elements that relate to attracting customers and also retaining existing customers so I'm going to go through a couple of key things that the Talbot brand in particular has had as an asset and they're using them. Trudy referred to the direct marketing capabilities and so we're obviously making very significant spend in increasing circulation which is inclusive of prospecting, reactivation of past loyal Talbot customers who may have walked away and are now reinterested in the brand, and also our very best customer who we find when we contact her a second or third time buys yet again. In addition, to that we have a number of other assets like our loyalty program and our TC card program and we're finding significant opportunities by marketing through that and using incentives associated with that to take our most loyal customer and drive her to shop more often. So it's not just a new customer, it's an existing customer and can she shop more often. Then the third piece is some very exciting work that's being done in order to be able to drive more multi-channel shopping using the web as a vehicle for attracting new customers into the brand, then migrating them to the stores and vice versa, new customers to stores and driving them to our direct channel. So we really are approaching this on a multi-pronged approach to bringing new people in and to get the existing customers to really spend more with us.

Trudy F. Sullivan

As far as refined Jennifer, as I said in my remarks, refined was somewhat more challenging for us in April which we believe was due to, we have a major program in linen and this year we were somewhat disappointed by the performance of that program and that would influence refined sales. But just philosophically the Talbots customer wants us to offer both refined and casual. She wants a broad range of apparel choices. Refined is a very important category for us, tends to be more important in the first and third quarters than in the second and fourth quarters and I think we understand what we would have done differently with the April program and will put that into play.

Operator

Your next question is from Lauren Cooks Levitan - SG Cowen Securities, Inc.

Lauren Cooks Levitan - SG Cowen Securities, Inc.

Ed, I'm wondering if you're going to be providing us with historical financials that show us only the go forward businesses so that we can better model the business consistent with the way you're asking us to look at it? And then secondly, I want to revisit the question of the J. Jill inventories, does the fact that the inventories are still so much higher than you'd like them to be entering the second quarter suggest that the opportunity for total company merchandise margin improvement in the second quarter is below what you experienced in the first quarter?

Edward L. Larsen

Let me answer the receiving question first Lauren. We will provide restated financials but we will not do that until the third quarter when we think everything will be closed down. That's when we officially go into discontinued status. For instance, our UK operations will probably close down in the second quarter. They will go into discontinued status but we don't want to restate for those and then have to restate again when we close down Kids and Mens. So we will wait until the third quarter is completely behind us. We think there is big opportunity to get the J. Jill inventories down. We are, as Paula said, adopting the principals as to managing inventory that we have successfully in Talbots at the first quarter so we think we can really bring those inventories down. Realizing, the number sounds big but it's less than 20% of our total inventory so we can make very good progress on that.

Trudy F. Sullivan

We've also taken significant action on how we merchandise and assort the stores for the third and fourth quarters. Our purchase plan reflects that more focused approach. And as we go through the second quarter frankly we're in a better position in that inventory in the first, so to your question in terms of its impact on us in getting the kind of margin expansion in second quarter, we're actually in a better position in second quarter than we were in the first.

Operator

Your next question is from Dana Telsey - Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Can you talk a little bit about the AUR that you earned on the marked down merchandise this quarter was much higher than last year, do you see given the change in your markdown strategy that benefit continuing for the rest of the year? And then lastly, you've announced another addition to the merchant team I believe yesterday. What other holes are there to fill and how do you see the product process having changed in both brands?

Trudy F. Sullivan

To your first question, we absolutely see continuing opportunity as we go through the year on the AUR. It is very encouraging so we feel good about it. The position we announced yesterday is the FCP of women's design reporting to Michael Smaldone who is our Chief Creative Officer. He's an FCP of apparel design, excuse me, Chris Jackson. He has a great background in women's products. We're very excited to welcome him to the team. I would say that really the vast majority of our critical positions are now filled. We are still in the final stages of a supply chain search, the very final stages, and so we are feeling very good. The team has come together extremely well. We're also in the final stages of VP of Merchandising for the J. Jill brand so with those hires I think we are essentially hired and that feels great. We've done it in great time and we've put together a great team. So we're pleased about that.

Edward L. Larsen

Product process.

Trudy F. Sullivan

Oh, excuse me product process. We are in the I'd say straight in the kind of middle to end, almost to the late middle stages of revising our whole product process to be much more consistent with the vertical brand. I would tell you that the team that came in quickly got their hands around the August deliveries, the holiday line was done even more aligned to what I would call a vertical brand process, and as we get into spring and fall developments we really will have the process and the team fully defined and in place. So it is a very different process than historically has existed here. The creation of Michael Smaldone as the Chief Creative Officer, of Basha Cohen as the Executive Vice President of Merchandising, Jeannie Barsam as our Head of Inventory Planning and Allocation; they've really taken some great strides. We already have taken several weeks out of our calendar and we believe that that will only improve as we finish refining the process and we're quite excited by what we're seeing. Also on the merchandise side, Lizanne Kindler has brought a whole new level of execution on the merchandise side along with our existing store group that's just responded beautifully to the brand moments. We have a lot of good things happening in a short period of time.

Operator

Your question comes from Roxanne Meyer - Oppenheimer & Co.

Roxanne Meyer - Oppenheimer & Co.

First I just want to clarify your response to a question earlier on May performance so far. I mean, obviously it sounds like you're really encouraged by the reaction to the casual merchandise but that perhaps because of the macroenvironment perhaps those trends haven't really held so far this May but that it's still early in the quarter. Was that sort of your response?

Trudy F. Sullivan

It's early in the quarter and that was my response. We're really not commenting on month-to-month-to-month here. For the most part it's pleasing to us that we got a strong early reaction to our casual assortment in April. It's a good leading indicator of what casual could do in the second quarter when it's more dominant than refined, but we don’t see anything in the current performance of our business that would indicate that we couldn't hit these operating plans.

Operator

Your last question comes from Crystal Kallik – D.A. Davidson.

Crystal Kallik - D.A. Davidson

A couple of just quick clarifications, it sounds like you're certainly making great progress on the inventory control. I was under the impression that your markdown optimization has not yet kicked in. Is that true? What is the timing of the actual markdown optimization program?

Trudy F. Sullivan

That is true. The tool actually goes live I believe in October. We're in testing and planning now but we're able to use some of the principals of markdown optimization even before the actual tool goes live and that's really helped a lot in the results that we're talking about today.

Operator

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

Trudy F. Sullivan

Thank you so much for some great questions and for your participation this morning. We're feeling good about our improvements. We feel we've had a solid start to the year without any assumptions in our strategic plan that are playing out favorably. As Ed said our 08 plan is achievable and our ability to fund our business at this point is good, particularly as our fundamentals improve. While it's early we do look for continued success in Q2 and beyond and look forward to coming back and talking to you about that in the future. Thank you so much. Have a good day.

Operator

Thank you. This concludes the Talbots earnings conference call. We will now proceed with the full forward-looking statement.

The foregoing contains forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as expect, achieve, plan, look, believe, anticipate, outlook, will, would, guidance or similar statements or variations of such terms. All of the information concerning our financial outlook including future profitability, future comparable store sales, future earnings, and other future financial performance or operating measure, future credit facilities, future merchandise purchases, future cash needs, and other future financial performance or financial position constitutes forward-looking information. Our forward-looking statements are based on the series of expectations, assumptions, estimates and projections about our company which involve substantial risk and uncertainty including assumptions and projections concerning our internal plan including our budget for regular price and markdowns, selling and operating cash flow for forward periods. All of our forward-looking statements are of the date of this release only. The company can give no assurance that expectations or forward-looking statements will prove to be correct. Actual results may differ materially from our forward-looking statements. The company does not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances 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 disclosure by us following this release which modify or impact any of the forward-looking statements contained in or accompanying this release will be deemed to modify or supersede such 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 following risks: the impact of the continued deterioration in the US economic environment including continued negative impact on consumer discretionary spending, the disruption and significant tightening in the US credit and lending markets, recessionary and inflationary pressures, high energy prices, and declining value of the US dollar. Our ability to accurately estimate and forecast future regular price and markdowns, selling and operating cash flow achieving the company sales plan for the year for each of the Talbots and J. Jill brand achieving the company's cash flow plan for the year, continued ability to purchase merchandise on open account purchase terms at expected levels, ability to replace the company's letter of credit facilities for merchandise purchases from vendors who require such facilities, the company's ability to obtain any necessary increases in its credit facilities as may be needed from time to time to fund cash needs, the company's ability to reduce any cash spending if needed, successfully executing the company's strategic initiatives including anticipated lower inventory levels, expected operating expense and other cost reductions, the success of the new promotional cadence for the Talbots brand, reduced markdown exposure, and improved gross margins, the successful closing of the Talbots Kids and Talbots Mens business concepts and closing of other under-performing stores, and the company's ability to continue to satisfy its financial covenant under existing agreements. In each case, actual results may differ materially from such forward-looking information. Certain other factors that may cause actual results to differ from such forward-looking statements are included in the company's periodic reports filed with the Securities and Exchange Commission and are available on the Talbots web site at www.thetalbotsinc.com under Investor Relations and you are urged to carefully consider all such factors.

This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.

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