Talbots (TLB – $4.39) reports Q4 2010 earnings this week. The stock price today is a far cry from the $13.00+ per share level that was seen just prior to the acquisition of BPW (a SPAC) a year ago. How this management team remains employed is beyond us. In our view, the unveiling of aThree-Year Strategic Plan (October 2010) was nothing more than an attempt to “buy time” to stay employed for the next 12-24 months before investors recognized that the emperor had no clothes (literally).
We’ve written extensively about the poor management team at TLB and their uncanny ability to consistently disappoint investors:
Blog Entry 03.30.2010:
Today, investors now probably understand that the “full price sell-through” metric that TLB management loved to mention on quarterly conference calls meant nothing other than inventory levels had been better controlled.
TLB management unveiled a Three-Year Strategic Plan (October 2010). Clearly, TLB management was feeling the heat and needed to throw investors a ‘bone’ to suggest better times were just over the horizon. It was a classic “let’s buy some time” tactic by TLB management to stay employed for the next 1-2 years before investors fully recognize that the 12.0% EBIT margin goal was pie in the sky math that will never, in our view, come close to being realized.
In FY 2011, TLB will struggle to produce an EBIT margin north of 2.0%.
But we would be remiss if we did not at this time point out an email response from a traditional sell-side analyst that we chastised for his cheerleading on the Q2 2010 conference call in June 2010. His response to that blog post is a textbook example of how management teams utilize meaningless metrics that are supposed to imply an improved trend in the business. We’ll use his terms (see below). He bought the gibberish from TLB management HOOK, LINE, and SINKER.
Today, we’re curious what this particular analyst thinks he missed? How could he miss anything given his “merchant background” and the fact that his analysis of product indicated a high level of “traction it was getting from old as well as from some NEW customers?”
Below is an excerpt of his email to Retail Geeks on 06.10.2010:
In fact, you are the one who has been wrong. You scoffed at mgmt for suggesting they thought that a double digit EBIT rate was possible in the future, and wrote that “”The company is likely to generate, at best, a -3% to -4% EBIT margin this year (2009). “”
Good grief Charlie Brown, they generated a +0.9% EBIT in 2009, 4%-5% above your projection. But that’s OK. It wasn’t easy to see unless you had a merchant background and you were able to analyze the product and see the traction it was getting from old as well as from some NEW customers.
And in the first quarter, its EBIT rate was +9.9%. They produced a 2.4% comp on inventory down between 31% (at the beginning of the qtr) and down 17% (by the end). You try generating a positive comp with almost a third less inventory, it aint easy. I was a buyer for Macy’s in the 1990s, I let me tell you, it aint easy to sell what you don’t have in stock. And these comps would have been closer to +7.5% if you combine the sales with the direct channel, as ANN does. Incidentally, the company said that current 2Q comps are running +5%, double the 1Q rate (again, this does not include the direct channel as some other report it).
TLB is clearly a work in progress with a NEW mgmt team. The product looks great (overall) and people are buying it….hook, line, and sinker. And they are paying full price (full price sales +21% — to me, that is more indicative of an underlying comp trend). Sales of markdown inventory is down 31% (that is the comp they are giving up, and this is a good thing, a healthy, high quality way to manage a recovery).
Perhaps some of the upswing is helped by an improving missy customer (although tell that to Coldwater Creek), but you might want to give this team a little more credit. Are their stores too big? Maybe some of them are. But remember, they generated a 13% EBIT rate when the stores were as big or even bigger on average, and remember, that was when they had money-losing men’s, kids, and UK stores that did not make money and have since been closed. So, if you exclude the drag from those 3 businesses, the EBIT rate in the core TLB brand was probably higher than 13% historically.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.