The Talbots F2Q08 (Qtr End 8/2/08) Earnings Call Transcript

Aug.27.08 | About: The Talbots, (TLB)

The Talbots, Inc. (NYSE:TLB)

F2Q08 Earnings Call

August 27, 2008 10:00 am ET

Executives

Julie Lorigan - Senior Vice President, Investor and Media Relations

Trudy F. Sullivan - President, Chief Executive Officer, Director

Paula Bennett - President of J. Jill Brand

Edward L. Larsen - Chief Financial Officer, Treasurer

Analysts

Neely Tamminga - Piper Jaffray

Adrienne Tennant - Friedman, Billings, Ramsey

Marni Shapiro - The Retail Tracker

Tracy Kogan - Credit Suisse

Richard Jaffe - Stifel Nicolaus

Kimberly Greenberger - Citigroup

Janet Kloppenburg - JJK Research

Crystal Lanigan Kallik - D.A. Davidson

Barbara Wyckoff - Buckingham Research Group

Brian Tunick - J.P. Morgan

Betty Chen - Wedbush Morgan Securities

Analyst for Todd Slater - Lazard Capital Markets

Jennifer Black - Jennifer Black & Associates

Operator

Good morning, ladies and gentlemen. On behalf of Talbots, we would like to welcome you to the Talbots Inc. conference call covering its second 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 and Media Relations.

Julie Lorigan

Thank you. Good morning, everyone and welcome to the Talbots Inc. second quarter conference call. Today we have with us Trudy Sullivan, President and CEO; Paula Bennett, President of the J. Jill Brand; and Ed Larsen, Talbots' Chief Financial Officer.

As a reminder, certain statements to be made today are forward-looking. These are based 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. These forward-looking statements may be identified by such terms as will, expect, believe, anticipate, outlook, target, plan, initiative, estimated, strategy and similar terms or variations. All of our outlook and financial expectations and plans constitute forward-looking statements. We direct you to the cautionary statement being read at the end of this presentation and in our earnings release issued today, as well as in our recent SEC filings, all of which are available under the investor relations section of our website.

A replay will be available for approximately one hour after the conclusion of the call until end of day August 29, 2008. The webcast will also be available on the investor relations page of our website.

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

Trudy F. Sullivan

Thank you, Julie and good morning, everyone. In a moment, I will discuss Talbots Inc. results for the 13-week period ending August 2, 2008. Paula will then comment on J. Jill’s performance and Ed will review our financial results. Finally, I will be making 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 second quarter loss per share of $0.34 from ongoing core operations excluding restructuring charges. This compares to last year’s $0.18 loss per share on a comparable basis. On a GAAP or a reported basis, loss per share was $0.47 versus last year’s $0.25 loss per share on a comparable basis. Ed will review the financial details shortly, so let me cover the high level results.

This was a challenging quarter in light of the fact that we have changed our Talbots brand markdown cadence while at the same time we are dealing with a difficult macro environment and the customers’ cautious purchasing behavior. Our second quarter consolidated comp of negative 12% was driven in part by soft customer traffic as evidenced by a 14% decline in total company transactions. We had a weaker-than-anticipated response to our end-of-season clearance events at both brands. In addition, for the Talbots brand especially, with the change to monthly markdowns, our sale event was greatly impacted by much lower levels of clearance inventory compared to prior years.

Further, during the quarter, we made two key business decisions that although we expect to benefit from in the third quarter, negatively impacted our second quarter results. These included the shift in the start of our Talbots brand June end of season clearance event to one week later versus last year and the extension of sale through August, again reflecting our evolved approach to markdowns. Second, we took an aggressive discount posture at the J. Jill brand in order to liquidate excess inventory and start the fall season appropriately lean.

For margin, we realized a 380 basis point improvement in our ongoing core Talbots brand merchandise gross margin. This was partially offset by a 540 basis point decline in merchandise gross margin at the J. Jill brand, due to the aggressive discounting.

On a positive note, we ended the second quarter with total company merchandise gross margin for ongoing core operations up 190 basis points versus the prior year.

We continue to plan for and are achieving merchandise gross margin improvement in the back half, which will be accomplished through lean inventory, better IMU, timely markdowns aided by the implementation of Oracle Profit Logic, which has now gone live at the Talbots band, and a consistent flow of newly updated merchandise assortments from both brands across all channels.

While retail store sales in general were weak, we did see a sales increase in both brands direct business, which was up compared to both budget and last year, driven primarily by the strength of our Internet channel. E-commerce on a year-to-date basis represents approximately 59% of our total direct sales, a 10% increase in sales over last year.

More and more customers are taking advantage of online shopping and we want to facilitate use of this channel while increasing the number of customers that shop across all three channels. On average, our Talbots brand multi-channel customer spends seven times more than a single channel shopper.

We have greatly enhanced the creative in both our Talbots and J. Jill brand catalogs and are gratified to hear strong positive comments from our customers. Later this fall, we will have completely revamped our Talbots brand website as well, offering greater ease of use with expanded functionality. Together with our stores and the consistency with which we present merchandise across all brand channels, we look to drive increased multi-channel business.

We made progress in several other areas during the quarter, including cost reduction and expense control, which Ed will provide more details on shortly. Briefly though, in early June we streamlined our operations and reduced our corporate headcount by approximately 9%. This will result in annualized cost savings of approximately $14 million, keeping us on track with our goal to reduce our overall company cost structure by $50 million this year, totaling $100 million by the end of fiscal 2009.

Further, with our focus on exiting our non-core businesses, we were successful in closing 20 Talbots Kids, seven Talbots Men’s, and three U.K. stores in the quarter, or 30 stores altogether. To date, we have closed a total of 57 stores with only 21 stores remaining to exit. We will be completely out of these businesses by mid-September and will have accomplished this major initiative at a much lower cost than originally anticipated.

From a brand perspective during the quarter, and beginning with Talbots, we focused on staying competitive in this current environment, utilizing a variety of planned promotions to drive traffic and stimulate regular priced sales in addition to taking monthly markdowns. We were gratified to see a marked improvement in our ratio of full price to markdown selling during the second quarter and for that matter, the entire spring season.

Contributing to that improvement, we fine-tuned the execution of our brand moment. The full alignment of our merchandise deliveries, visual presentations, and marketing messages across all channels in preparation for the fall season and the rollout of our new product. Finally, we have learned a tremendous amount about our customer during the quarter and spring season through ongoing research and Communispace, our dynamic online panel of customers. We have approximately 450 members, including current customers, lapped customers, target and non-customers with which we dialog regularly.

Importantly, we have the ability to preview upcoming creative ideas as well as merchandise assortment. We continue to get high marks for customer service and we pride ourselves on offering a special environment for the ultimate shopping experience.

In addition, we have received significant positive response to the fresh new visual presentations in our August and September catalog, including an overall favorable opinion of our fall merchandise.

In late July, for the first time ever, we invited the fashion and business press to preview our upcoming 2008 holiday and gift assortment. We were delighted with the strong positive feedback on style, color, and silhouettes and we’ll be incorporating seasonal preview events such as these into our marketing strategy going forward.

From a merchandise perspective, given that second quarter is driven by clearance, I won’t go into wins and losses on particular items. We are looking ahead and while August is a small transitional delivery, we are seeing strong sell-throughs on a number of items, including our new version of twin sets, novelty cardigans, our must-have trench-coat and pant and leather tote bags, to name a few. Importantly, we are offering a good balance of casual and refined merchandise that through color and styling facilitate cross-shopping of categories to build outfits.

We believe we are moving in the right direction as we elevate our brand image and modernize our classic merchandise, contemporize our business practices, and have a fanatical focus on executing that which is in our control. We are encouraged by the positive feedback we are getting, validating our direction.

Now I’d like to turn it over to Paula to talk to you about the J. Jill brand.

Paula Bennett

Thank you, Trudy and good morning, everyone. We had a difficult second quarter at J. Jill and are delivering a disappointing result, with comps well off our expectations, primarily in May and June. Our results were driven by a lack of product focus and very high inventory levels coming into 2008, which resulted in aggressive markdowns.

From a product perspective, these deliveries did not resonate well with our customer. The assortment was heavily weighted in basics versus compelling fashion. This, coupled with a weak macro environment led to a decline in comps for the second quarter.

The J. Jill brand is at a critical point in our planned return to profitability. Over the past six months, we have been reengineering the brand on several fronts in order to shift the momentum. We are moving from being a promotionally driven commodity product provider to being a design driven fashion brand with a distinct point of view that provides wardrobing solutions for the woman who is looking to project a style of un-aged cool and sophisticated ease.

This transition required us to take some very difficult steps, including an aggressive yet calculated inventory liquidation plan designed to clear out less desirable commodity products and over-stock. This included adopting the Talbots' inventory forecasting model. This critical first step in our new inventory management strategy has set the stage for future business help. Our strategy offers the customer clear fashion choices through a solid merchandising and inventory plan that supports full priced selling. Rather than planning deeply discounted promotions designed to move units, we have begun to successfully market styles that have an elevated quality and price point.

In fact, since launching our brand platform of easy sophistication for every day in early July, we have had a number of positive customer reactions. In July, we delivered our first product line under the direction of our new creative team. We are seeing indications that our customer is responding to our new edited assortment and our new product offering. In fact, units sold for the July and August deliveries are up 19% to date versus last year, with 12% less units in inventory.

In today’s difficult economic environment, we are pleased that customers are recognizing the value in our elevated fabrics and yarns. In fact, our wash leather jacket, which is our highest priced item in the line, is our number one item in both direct and retail.

In addition to improved inventory management with leaner inventory commitments, a more balanced assortment, and a distinctive style aesthetic, we are revamping our store presentations to support regular priced selling, including simplifying our visual presentations and making it easier for the customer to shop. With the new deliveries, our store teams are excited to be selling full price versus constant promotional activity.

As we enter the back half of the year, we will continue our focus on building our customer base through a comprehensive customer acquisition plan, including prospecting and strategic partnerships to generate awareness in areas where we have under-performing stores.

We have strong customer focus marketing programs planned to support our new product. We are strongly encouraged by the recent response to the key initiatives we focused on and the changes we’ve made. Although it was a tough first half, we believe that we can deliver on the back half of the year. We continue to develop our leadership team with the expertise to earn our position in the marketplace and to deliver long-term sustainable growth and profit.

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

Edward L. Larsen

Thanks, Paula and good morning, everyone. Let me cover the details of our second quarter financial performance. Before I do that, attached to our press release issued this morning are reconciliation schedules of our GAAP and non-GAAP results for the second quarter with comparison to last year. In addition, on our company website under investor relations financial highlights, we have posted the GAAP and non-GAAP results for all quarters of 2007 to help you as you build your models for the second half of 2008.

So let’s begin -- on a GAAP basis, total company net sales for the second quarter were $528 million. By brand, retail sales were $352 million for Talbots and $74 million for J. Jill. Consolidated direct marketing sales, which include catalog and Internet, were $102 million compared to $100 million last year.

Total company comparable store sales for the 13-week period declined 12%. By brand, Talbots' comp decreased 11.7% and J. Jill comps were down 13.2%. Driving these negative comps were the following key metrics: for the Talbots brand retail stores, transactions were down 16% in the second quarter compared to last year, with units per transaction down 1% and dollars per transaction up 5%; average unit retail for the Talbots brand was up 6%, similar to the increase that we experienced in the first quarter.

For the J. Jill brand, we saw a 4% decrease in retail store transactions in the second quarter over the prior year, with units per transaction down 4% and dollars per transaction down 10%. Average unit retail for the J. Jill brand were down 6% versus this period last year.

The following comments relate to ongoing core operations, which can be seen on the reconciliation schedules attached to our press release. Second quarter cost of sales, [buying], and occupancy was 71% of net sales versus 70.4% last year. The improvement at Talbots brand merchandise gross margin was offset by the decline in J. Jill brand merchandise gross margin and a 190 basis point deterioration in occupancy costs due to negative comps.

Selling, general, and administrative expense in the second quarter were $170.7 million, at 33.6% of net sales, versus $168.7 million and 30.6% of net sales last year. This result also reflects negative leverage from our comp decline.

Net interest expense for the quarter was $4.9 million versus $8.2 million last year, reflecting both long-term and short-term interest costs, and income taxes for the quarter were a benefit at 36.6%.

We ended the second quarter with net loss from ongoing core operations of $18.3 million and a loss per share of $0.34, which excludes the operating results and closing costs of Talbots Kids, Men’s, and the U.K. businesses, and restructuring charges related to ongoing core operations.

On a GAAP reported basis, net loss for the second quarter was $25 million, or $0.47 per share, and includes the Talbots Kids, Men’s, and U.K. non-core businesses and restructuring charges relating to ongoing core operations. This compares to a net loss of $13.3 million, or a $0.25 loss per share on a comparable basis last year.

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

Turning to the balance sheet, we ended the second quarter with total accounts receivable of $200 million versus $192 million last year, comprised entirely of Talbots charged receivables. Talbots' charge penetration increased to 47% of sales year-to-date versus 43.5% last year year-to-date.

[inaudible] for the quarter increased to $11.3 million versus $10.6 million last year.

Net bad debts are running slightly above last year’s level, with an increase in write-offs of approximately $200,000 in the second quarter and $400,000 year-to-date.

The accounts receivable [inaudible] continues at excellent condition with only 2% of the portfolio over 30 days past due.

Total consolidated merchandise inventories at the end of the quarter were $260 million, down 22% to last year’s $332 million. On a per square foot basis, inventories for the Talbots brand women’s apparel stores were down 19% compared to last year and J. Jill brand down 22% on average per square foot. We are quite comfortable with both our Talbots and J. Jill brand inventory levels for the fall season, with our improved product flow enabling us to operate on much lower inventory levels versus last year.

We ended the quarter with notes payable to our banks of $34 million versus $12.8 million last year and at the end of the quarter, total outstanding debt was $383 million versus $442 million last year, a decrease of $59 million. And we are in compliance with all of our debt covenants at the end of the second quarter.

Moving to capital expenditures on a consolidated unit basis, we spent a total of $32 million year-to-date versus $37 million last year, and our consolidated 2008 capital plan is at $75 million.

We ended the quarter with 869 store locations, 592 Talbots brand, and 277 J. Jill brand, and we closed 30 stores from the non-core businesses. For a complete schedule of our store count and locations, please refer to our company’s website under investor relations, financial highlights.

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

In terms of our six-month operating performance, please review today’s press release for the financials.

Now I would like to update you on a few additional items. In July, we finalized a $50 million unsecured subordinated term loan credit facility with EON U.S.A., a wholly-owned subsidiary of EON Company Limited and our majority shareholder. This new $50 million credit facility, which matures in January 2012, supplements our existing working capital lines of credit of $165 million and increases our total working capital borrowing capacity to $215 million. While we continue to believe we have sufficient liquidity to fund the turnaround of our businesses, this new credit facility will provide us with an additional level of assurance and even greater flexibility to weather the current uncertainty in the credit markets.

Next, we have made the decision to postpone the purchase of the J. Jill receivables at this time. Instead, we are negotiating with Citibank, the current service provider, for an extension of our current service agreement, which will include the option to purchase the receivables in the future when we feel the timing is more appropriate.

In this extremely tight and unstable credit environment, we believe it is prudent to preserve our working capital line of credit and not invest in the J. Jill receivable portfolio at this time. We are focused on our turnaround and at the appropriate time in the future, we will reconsider the purchase of the J. Jill receivables.

Although we will not have the benefit [inaudible] charge revenue in 2009 from the J. Jill credit card, we still expect to exceed our stated cost savings goal of $100 million by the end of fiscal 2009.

Turning now to our full year earnings expectations, at this time we are reconfirming our previously announced outlook for earnings per share from ongoing core operations to be in the range of $0.47 to $0.52 per diluted share.

We are planning for a net loss from non-core operations in the range of $0.27 to $0.32 per share, for a total net income in the range of $0.15 to $0.25 per share, compared to the [$3.56] loss per share reported in 2007.

To help you with your models for the fall season, our current expectations are as follows: total company sales are planned to increase in the low-single-digit range; retail sales are planned to increase low-single-digits versus a year ago, with 31 planned store openings in the fall season; direct sales, including catalog and Internet, are planned to increase mid-single-digits compared to last year.

Our [inaudible] for the fall season includes consolidated comp store sales for the back half of the year to be flat to slightly negative, with Talbots brand approximately flat and the J. Jill brand down low to mid-single-digits.

If we achieve our comp plan, merchandise gross margin will improve significantly at both brands over the prior year. We are planning for a decline in transactions but with lean inventories, we will continue to see higher average unit retails on markdown and we expect to see a stronger rate of improvement in our full priced to markdown ratio in the second half compared to the spring season.

The total company reported gross margin for the fall is expected to improve by approximately 700 basis points over last year’s reported gross margins for the fall season, with the fourth quarter stronger than the third quarter. This improvement will primarily come from a combination of improved IMU and less markdowns. In fact, our August month-to-date merchandise gross margins across brands is trending significantly above last year.

With respect to total company SG&A for the fall season, our current estimate is for an approximate 150 basis point improvement compared to last year. This reflects execution of our cost savings initiatives to achieve $50 million of savings this year and $100 million by 2009.

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

Trudy F. Sullivan

Thanks, Ed. Completing the first half of the year represents we believe an inflection point for our company. We have made significant changes in the way we operate our brand, which frankly makes it difficult to compare performance on a year-over-year basis. That said, we are seeing many positive signs in our results despite the top line challenge, including expanding merchandise gross margins, stronger regular priced sell-through on new merchandise, higher average unit retails on markdowns, and an SG&A rate that is in decline. These metrics should improve as we move through the year and into 2009.

We are very aware of the challenging macro environment and echo many of the cautious comments articulated by our industry peers. But with improved product, lean inventories, and better inventory management, as well as continued tightening of expenses in those areas that are not customer-facing, we believe that we can achieve our back-half plan for improved earnings.

In fact, if you look at our brand performance over the last few years, our current outlook for earnings per share for the fall season is well below that which these brands have been able to deliver in their recent past. We are genuinely excited by the early reaction to improved product and marketing across both brands. Further, we are supporting our new fall merchandise deliveries with a comprehensive marketing campaign. At the Talbots brand especially, in September, we will roll out an impactful grassroots program contacting our customer more frequently and we will be prospecting for the first time in six years.

Our contact strategy utilizing direct mail, e-mail, and exciting in-store events is aimed at inviting our customer back to the brand she knows and loves. We will be closely monitoring our business and look forward to updating 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 is coming from Neely Tamminga from Piper Jaffray.

Neely Tamminga - Piper Jaffray

Good morning and congratulations to you guys on this guidance. I just want to get a sense here with respect to Q3 and Q4, as you are talking about more opportunity in gross margin for Q4, just wondering in the past, your balance of earnings has really come a little bit more in Q3 versus Q4. Just wondering how we should look at the two quarters as it relates to your opportunity from an earnings perspective. That would be helpful.

Edward L. Larsen

Well, I mentioned that we would have a strong improvement in gross margin for the fall season, around 700 basis points. We really see that improving even more than that in the fourth quarter. The breakout would be about 500 basis points in the third quarter and about 900 basis points in the fourth quarter. And by going to our monthly markdowns now, it spreads out those earnings. So the fourth quarter will be a stronger earnings performance than the third quarter.

Operator

Thank you. Your next question is coming from Adrienne Tennant with Friedman, Billings.

Adrienne Tennant - Friedman, Billings, Ramsey

So my question is on the line of credit, can you give us the same guidance that you had given at the end of the third quarter? I think you had thought that maybe it would be about $100 million, what that might be.

And then the next one is really just a clarifying question -- the $0.47 to $0.52, that is ongoing operations including restructuring, is that correct?

Edward L. Larsen

That’s correct. Could you repeat your first question? I wasn’t clear what that was.

Adrienne Tennant - Friedman, Billings, Ramsey

The line of credit at the end of the third quarter, but I just have a curious question on the Q2 -- should we be using for our models a loss of 39 rather than a loss of 34 to match the $0.47 to $0.52?

Edward L. Larsen

That’s correct, $0.39 would be consistent with the $0.47 to $0.52 guidance.

Adrienne Tennant - Friedman, Billings, Ramsey

And $0.14 in Q1?

Edward L. Larsen

That’s correct, yes.

Adrienne Tennant - Friedman, Billings, Ramsey

Okay, great. That’s perfect.

Edward L. Larsen

And our forecast for the third quarter outstanding debt would be around $75 million. That is lower than the prior guidance because we are not buying the J. Jill receivables, so we have plenty of room in our capacity, which is 215. And the third quarter should be our peak borrowing in the fall season.

Operator

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

Marni Shapiro - The Retail Tracker

Congratulations on what looks like the start of something good. Could you just put a little color around circulation for the two brands on the direct side, the catalogs, from the first half and then talk a little bit about your plans for the back half?

Edward L. Larsen

Sure. Talbots brand by quarter, the first quarter we were up 16%, second quarter down 10%, third quarter will be about flat, and the fourth quarter will be up 25%, with the full year up 12% at a total circulation of 54.1 million.

The J. Jill brand, the first quarter was down 19%, second quarter plus 4%, third quarter plus 7%, fourth quarter down 6%, full year down 5% for a total circulation of about 75 million.

Trudy F. Sullivan

Marni, I just want to add some color to the contact strategy. When we talk about contact strategy, it goes beyond just the circulation numbers for our catalogs. It also -- we really stepped up the contact through our Internet and so our e-mail contract strategy is significantly up in the back half of the year versus the first half and last year and we also, as I mentioned in my opening remarks, have a very aggressive, what we call a grassroots campaign in inviting customers back into our stores, especially at the time of our September floor set when we really have -- we are really full-blown in one of our biggest deliveries for the back half.

Operator

Thank you. Your next question is coming from Tracy Kogan with Credit Suisse.

Tracy Kogan - Credit Suisse

Thanks. Good morning. I was hoping you guys could talk about what you are seeing in the sourcing environment in terms of increased costs, and also what your ability is to offset those increases. And just related to that, I wanted to see whether you are still looking for a letter of credit facility or whether you feel comfortable that your vendors will remain [on open account]. Thanks.

Trudy F. Sullivan

You know, Tracy, obviously everyone is talking about some of the pressures on the supply chain, you know, foreign exchange, oil prices, trade policies, political uncertainty -- all of those things are certainly out there, raw material issues. But despite all of that, we at Talbots really have sizable upside in our ability to source our product. We’ve really just are at the tip of the iceberg in terms of rationalizing our countries where we are producing, our agent office structure, our vendor management, our DC network reconfiguration, our speed to market. You know, we’ve got a number of initiatives that we feel more than mitigate some of the macro factors that are out there.

Edward L. Larsen

With respect to the letter of credit, under one of our working capital lines we have the option of either borrowing money or using those funds [the capacity] for letters of credit and that is a $75 million line, so we have ample facilities for a letter of credit. And there’s only a small number of vendors that need letters of credit. I would say at this point, 98% of our volume is open account, so we are in good shape.

Operator

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

Richard Jaffe - Stifel Nicolaus

Thanks very much. Just a follow-on question regarding circulation and prospecting -- with circulation up, are you going deeper into your existing lists and finding that productive? Are you prospecting and finding that a positive? Historically or the last several years, prospecting has been unproductive for a lot of the direct players, the direct mail channel wasn’t as productive so I’m wondering how you are seeing that play out and obviously with circulation up, it implies that it’s working well for you. Could you take a second and talk about that?

Trudy F. Sullivan

You know, Richard, our number one target is our own lapsed customer. You know, over the last several years, the ratio of lapsed to core customer has not been going in a favorable direction. We feel we’ve got the product and the aesthetic right, based on our own customer research and certainly the feedback we are getting from Communispace, and so now we are actually penetrating into our own lapsed customer file. So fingers crossed -- so far, so good.

Paula Bennett

And at J. Jill, we’re adding -- we have an increase of 3.1 million prospecting books this year over last year, so we are looking to prospect.

Operator

Thank you. Your next question is coming from Kimberly Greenberger with Citigroup.

Kimberly Greenberger - Citigroup

Thank you. I just had one quick clarification question on the press release and then my regular question -- on the press release it said in here strong sell-through of new product in August, with July comparable store sales positive. Are comps still positive in August? Is that what that implies in the press release?

And then my question is it looks like in the second quarter, in July you had positive comps and in the first 10 days of June you had positive comp, so almost half of the second quarter you were actually posting positive comps. I guess the problem came when it was time to anniversary the sale in the last I guess two-thirds of June, where your comps were down in the 30s and 40s. So I’m wondering, how should we take -- how should we understand your approach to anniversarying the sale here in September? And do you have some strategies or do you expect that your comps will again be down in that sort of range but the rest of the quarter will be sufficiently positive that you will be able to deliver on your plan?

Edward L. Larsen

Kimberly, through last weekend, our comps in August at both brands, total company are down 3%. And you are correct -- the big shortfall in the second quarter was the third, fourth, and fifth week of June, which were down huge for both brands.

With respect to September, we have a lot of things going for September. We are actually moving the start of our mid-season sale up a week. Last year we started it in week four. This year we started it in week three. We have a big best customer promotion going on during September, so we are pretty excited about what we can do in September and we are planning on positive comps for the month of September.

Kimberly Greenberger - Citigroup

So Ed, do you have a plan for October? Since you are moving your sales forward, I would assume that that would benefit September to the deficit of October.

Edward L. Larsen

October is also planned about flat versus last year and we have a lot of marketing events planned for October.

Trudy F. Sullivan

First of all, the sale overlaps and we are actually able to get consistently much higher AUR in our markdown sale, so that helps mitigate some of the comp that we are going against. And we also have a very aggressive marketing calendar for October, so -- and a very different flow of product. I think one of the most significant things that will affect the October, November, and into December period is that we have a much higher penetration of fresh product delivering into those months than we did prior.

Edward L. Larsen

And we do have, of course, this third quarter monthly markdowns every month which we did not have last year. We only had the mid-season sale. Now we’ve had August monthly markdowns, we will have October monthly markdowns.

Trudy F. Sullivan

We go into the month of August with our comp store inventory in the Talbots brand down 19% and running a comp of negative 3 -- that’s pretty good productivity on that inventory.

Operator

(Operator Instructions) Thank you. Your next question is coming from Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Good morning, everyone. I just had a question following on Kimberly’s questions about the markdowns and the cadence. Could it be that at the beginning of the month you are benefiting, Trudy, because you have in-store clearance that you didn’t have last year? Could that be the case?

Trudy F. Sullivan

That is definitely a component of what’s happening in August, for sure.

Edward L. Larsen

It hurt second quarter, benefited third quarter.

Trudy F. Sullivan

The other thing I would, you know, just as an additional clarification, the quarterly sales events that we are comping against got considerably weaker in ’07 as we went through the year and so the sales, the numbers that we are up against in the fall, what we used to call semi-annual are less aggressive than what we were comping in the second quarter. But the benefit of monthly markdowns, there’s really several. One is it keeps our inventories clean because we are marking down on better time, we are able to sell more at the first markdown, which is significantly increasing our AUR on those markdown sales and that’s having a benefit to the total business and enabling us to flow merchandise on a much more frequent basis this year than we have historically done.

Operator

Thank you. Your next question is coming from Crystal Kallik with D.A. Davidson & Company.

Crystal Lanigan Kallik - D.A. Davidson

Good morning. Ed, I just wanted to clarify on the guidance you gave, which was very helpful, as far as gross margin and SG&A -- I’m assuming that that’s excluding the kid’s, men’s impact that is posted on the website?

And then also, I just wanted to have you walk us through the $50 million in cost savings that you are expecting this year -- how much of that actually hits the P&L?

Edward L. Larsen

Yes, you are correct, it is ongoing core operations. It excludes kid’s, men’s, and the U.K. And the $50 million, it all hits the P&L. I don’t know what the question was. It’s all -- a lot of it is cost of sales, a lot of it you will see in this huge gross margin improvement we are seeing in the third and fourth quarter. In addition, we have significant marketing savings in the back half. We have improvement from our reduction in corporate staffing that we executed in June, so it all hits the P&L. [inaudible] all cash, also.

Our operating cash flow for the full year is going to be over $230 million and with CapEx as I said of 75, our free cash flow is going to be over $150 million and our definite needs would be the $80 million repayment of the acquisition debt and about $28 million in dividends, so we have ample excess cash flow.

Operator

Thank you. Your next question is coming from Barbara Wyckoff with Buckingham Research.

Barbara Wyckoff - Buckingham Research Group

How should we think about divisional contribution in the $0.47 to $0.52 ’08 guidance?

Edward L. Larsen

How could you think about what?

Barbara Wyckoff - Buckingham Research Group

Divisional contribution or margins or just sort of -- Talbots would be the bigger contribution in terms of higher margin, higher APS, or how are you thinking about that?

Edward L. Larsen

Well, J. Jill represents about 20% of our sales. We do not disclose brand operating income but both brands have significant improvement in gross margin. Talbots' between 600 and 700 and J. Jill approaching 800 basis points, so a significant improvement in both brands.

Barbara Wyckoff - Buckingham Research Group

Okay, and then where are you in your hiring process I guess in the design, merchandising, and marketing world? Are you pretty much done now, Trudy?

Trudy F. Sullivan

Oh, yeah, we’ve assembled a great team and we are pretty much done. I mean, there’s always some hiring that’s going on below the senior levels but our senior leadership team in both product and marketing is really done in both brands.

Barbara Wyckoff - Buckingham Research Group

Okay. Good luck. Thanks.

Operator

Thank you. Your next question is coming from Brian Tunick with J.P. Morgan.

Brian Tunick - J.P. Morgan

Thanks. Good morning. I guess it sounds like the J. Jill business is masking some impressive improvement at the Talbots division and what you are doing there, Trudy, so I guess at what point do you make the tough decision or what are some of the things you are watching for? I mean, clearly I think the market would love you to make the tough decision on the J. Jill business, so can you maybe just talk through what is going on? When will you make that decision do you think, if things continue to be challenging at the J. Jill business?

Trudy F. Sullivan

You know, Brian, I think the message we are really trying to put out there is that things have been challenging but our recent trends are actually quite promising and we actually took -- you know, we made the tough decision to get this brand in great shape going into fall and we are quite pleased with what we are seeing in the customer response for the last several deliveries -- we’re not talking about a one-delivery trend here. We have a deeper trend going, and the direct business has been consistently well-maintained.

So as far as we are concerned, the rational for J. Jill being in our portfolio is as strong as it ever was. I have a lot of confidence in Paula and the team that she’s put together and they have done some significant turnaround in the last six months and they are starting fall in a very strong place.

Remember Paula’s opening comments that they are getting a 19% greater unit sell-through on virtually 20% less inventory. I mean, we are really starting to see it turn around. At the store level, I would encourage you to go into the stores. I think they look really strong for fall. It’s not predominantly a markdown story which in the last six months if you went in there, they had tremendous penetration of very cheap markdowns. That’s not the business that we are in there, so we are feeling better about J. Jill than we felt in quite some time.

Paula Bennett

And Brian, I’ll just add to that -- I mean, we started the year in February with a strategy to focus on four things: one was to change the look and feel of the full-priced stores to drive full-price selling which, as Trudy just asked you to do, I think you’d see if you went into the stores; secondly to manage our inventory flow and levels to support full-price selling; third was to build a brand right product offering, which we are well on our way to doing; and fourth is to optimize our customer base. And those are the four initiatives that our team is focusing on every day. They are all very important and we are making progress in each, so --

Trudy F. Sullivan

You know what, Brian? And I certainly understand where your question is coming from because we certainly haven’t had a consistent track record of delivering on this brand but you have to understand that it’s a new day there with a brand new leadership team. We’re starting to see some real light at the end of the tunnel and we know we have to show -- we have to show that we can do this in the next two quarters and we are committed to that.

Operator

Thank you. Your next question is coming from Betty Chen with Wedbush Morgan Securities.

Betty Chen - Wedbush Morgan Securities

Thank you. Good morning. I was wondering if you can talk a little bit about the marketing spend this year. It seems like overall there is some increase in circulation for Talbots, even though it is going to be down a little bit at J. Jill. So if you can talk to us about the marketing plans as a percentage of sales this year versus last year, that would be helpful.

And then secondly, following the postponement of the purchase of the J. Jill receivables, I was wondering, what is the impact on the full year guidance as a result of that? And is it being offset by the cost-savings? Thanks.

Trudy F. Sullivan

Ed will give you the actual raw numbers on the marketing spend, Betty, but I want you to understand that we actually kind of kept our powder dry in both brands for the back half where we really felt it would align with product improvement.

Edward L. Larsen

Betty, at the Talbots brand, our total marketing spend, which includes all marketing and which includes catalog, is down about $9 million. The actual media, which would be TV and print, is down about 17 and that’s offset by additional spending in web and catalog circ.

At J. Jill, the total marketing spend is down about $6 million, and that is a decreased catalog circulation, although prospecting is up, total circulation is down a little bit. So the total company spend is down about $15 million.

The J. Jill receivables, we did plan to purchase those effective the end of September. We did have some finance charge revenue in our guidance for that. We did have quite a bit of expense in there also, to start this business up. So that goes away. It was a net income of about $2 million, but that is more than offset by changes we made to the Talbots, terms of the Talbots card, which we changed effective August 1, and that will offset that shortfall so we are in good shape.

Operator

Thank you. Your next question is coming from Todd Slater with Lazard Capital Markets.

Analyst for Todd Slater - Lazard Capital Markets

It’s actually Jennifer for Todd. I have a couple of quick questions; first on the $50 million cost reduction that you expect to see in 2008, can you talk about how -- have you seen any of it in the first half or how much have you seen in the first half and how much do you expect to see in the second half?

Edward L. Larsen

Well, we’ve had good product gross margin improvements in the first half on the Talbots brand so we definitely have seen some of that in the first half. And marketing savings in the first half. The majority of it though will be in the back half. We’ve always said it’s a back half story, so --

Analyst for Todd Slater - Lazard Capital Markets

So is it about 30%-70%? Is that how we should think about it?

Edward L. Larsen

That’s about right, yeah.

Analyst for Todd Slater - Lazard Capital Markets

Okay, and then could you talk a little bit about maybe August trends in terms of merchandise margins? Are you seeing them up in the 500 basis point range like you expect for the third quarter?

Edward L. Larsen

We are, yes.

Analyst for Todd Slater - Lazard Capital Markets

Okay, great.

Edward L. Larsen

Or higher.

Analyst for Todd Slater - Lazard Capital Markets

Oh, okay. Thank you.

Operator

Thank you. We have time for one more question. Your last question comes from Jennifer Black with Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

Good morning and congratulations on making significant headway. I’ve got a question for Trudy, for Paula, and for Ed. Okay, I wanted to know first, Trudy, are you changing how you allocate the merchandise so the best stores get the merchandise? Because I am assuming that history isn’t necessarily -- historical figures may not apply if they weren’t in the past.

Trudy F. Sullivan

We are really undergoing significant changes in how we plan the allocation of products and so -- and you are right, we actually just cannot go on based on our historical allocation method, so we are trying very hard to make significant headways on allocation and slow back to sales really starting with the third quarter.

Jennifer Black - Jennifer Black & Associates

Okay, great. And Paula, can you tell us what kind of response you’ve gotten on your new boot cut jeans, but has the stretch?

Paula Bennett

The knit denim?

Jennifer Black - Jennifer Black & Associates

It’s --

Paula Bennett

We have a slim leg stretch jean that’s doing incredibly well. That slim leg silhouette has been wonderful for us.

Jennifer Black - Jennifer Black & Associates

Right.

Paula Bennett

Yeah, that’s been huge. We started it out as a catalog item and got really strong response and added it to our retail assortments and it’s been successful across the country. In fact, we are adding that same silhouette in a stretch cord in our next delivery in several colors and we expect that to be just as strong.

Operator

Thank you. We do not have time for anymore questions. Ms. Sullivan, please continue with any closing comments.

Trudy F. Sullivan

Well, thank you, everyone and thank you for your great questions. Let me conclude by saying that it has been especially gratifying for me to wrap up my first year with Talbots Inc. having the leadership team and our entire organization committed to change in order to get our company back on proper footing. Through their hard work and collaboration, we’ve accomplished a number of significant initiatives that we identified last February to get us to this inflection point in our business, so I want to thank each and every one of them for their endless drive and commitment as we enter the fall season prepared and well-poised for improvement.

We are cautiously optimistic and remain keenly focused on executing those things that are within our control. I truly believe that we will emerge as a stronger company as a result of everything we have put into action once the macro environment stabilizes and begins to improve.

So thank you all and have a great weekend.

Operator

This concludes the Talbots Inc. conference call. We will now proceed with the full forward-looking statements.

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 stores sales, future earnings and other future financial performance or operating measures, future credit facilities, future merchandise purchases, future cash needs, and future financial performance or financial position constitutes forward-looking information.

Our 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 our internal plan including our budget for regular-price and markdown selling and operating cash flow for forward periods.

All of our forward-looking statements are as of the date of this release only. The company can give no assurance that such 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 disclosures 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 U.S. economic environment, including continued negative impact on consumer discretionary spending, the disruption and significant tightening in the U.S. credit and lending markets, recessionary and inflationary pressures, high energy prices, and declining value of the U.S. dollar; our ability to accurately estimate and forecast future regular-price and markdown selling and operating cash flow; achieving the company's sales plan for the year for each of the Talbots and J. Jill brands; achieving the company's operating 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 margin; the successful closing of the Talbots Kids and Talbots Men’s business concepts and closing of other under-performing stores; and the company’s ability to continue to satisfy its financial covenants under its existing debt 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 available on the Talbots website at www.thetalbotsinc.com under Investor Relations and you are urged to carefully consider all such factors.

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