Talbots' Management Finally Puts Words Into Action

In October 2007, Citigroup upgraded Talbots (TLB) from sell to hold but reiterated its concern over the long term prospects of the retailer. At the time we thought Citigroup was just being overly cautious regarding TLB's U.K. operations and related closing costs. In addition, Talbot's average customer is very different both in loyalty and the socio economic class in comparison with several other hard pressed 'middle market' retailers. From TLB's chart it's obvious that investors were very confused.

As of 06/10/2008, we placed TLB on the CrossProfit homepage as it was definitely on our radar as a stock to focus on. The timing was just right. TLB's President and Chief Executive Trudy F. Sullivan confirmed on 06/11/2008 that 2008 earnings will be above analysts' estimates. Six weeks ago TLB stated that 2008 earnings would come in at $0.47/$0.52 per share. According to Thomson Financial, consensus was at $0.41 per share. Obviously the market heeded analysts' figures, disregarding the 'overly optimistic' company spiel.

What changed everything around this time was a $50M credit line. Now before you go and say 'so what's all the fuss about' it pays to read in between the lines. Management realized in April that analysts' were not taking TLB's forecast seriously. This was putting downward pressure on the stock and was beginning to fuel negative gossip in (possibly) various financial circles (we know of one hedge fund) as a 'short to death' target.

Sullivan put a stop to all of this by announcing two items confirming management's turnaround strategy. First, TLB would cut overhead by $100M through various cost-cutting initiatives including reducing the corporate headcount by over 120. Second, TLB's largest shareholder Aeon agreed to cough-up $50M in an unsecured loan thus showing the financial community that TLB can avoid the credit markets altogether and at the same time reassured shareholders that there is no dilution lurking around the corner.

This is the significance of the loan, not the amount but how it was done and by whom.

Disclosure: No conflicts.