The Talbots Inc. (TLB)
Q3 2008 Earnings Call Transcript
November 25, 2008; 10:00 a.m. ET

Executives

Julie Lorigan - Senior Vice President, Investor and Media Relations
Trudy Sullivan - President, Chief Executive Officer
Ed Larsen - Chief Financial Officer, Treasurer

Analysts

Jennifer Black - Jennifer Black & Associates
Janet Kloppenburg - JJK Research
Neely Tamminga - Piper Jaffray
Adrienne Tennant – Friedman Billings & Ramsey
Tracy Kogan - Credit Suisse
Kimberly Greenberger - Citigroup
Betty Chen - Wedbush Morgan
Barbara Wyckoff - Buckingham Research
Richard Jaffe - Stifel Nicolaus
Crystal Kallik - D. A. Davidson
Roxanne Meyer - UBS
Jennifer Cook - Lazard Capital Management
Marni Shapiro - The Retail Tracker
Chris Kim - J.P. Morgan
Tracy Kogan - Credit Suisse

Presentation

Operator

Good morning ladies and gentlemen and on behalf of Talbots, we would like to welcome you to the Talbots Inc. conference call covering its third 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, Senior Vice President of Investor and Media Relations.

Julie Lorigan – Senior Vice President of Investor Relations

Thank you and good morning and welcome to the Talbots Inc. third quarter conference call. Today we have with us Trudy Sullivan, President and CEO; 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 at our website at www.thetalbotsinc.com A replay will be available from approximately one hour after the conclusion of the call until end of day November 28, 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 Sullivan – President and Chief Executive Officer

Thank you Julie and good morning everyone. In a moment, I will discuss Talbots Inc. results for the 13th period ending November 1, 2008 and Ed will cover our financial performance. I will make some closing remarks and then we will be happy to take your questions. On November 6, we announced our intention to sell the J. Jill Brand. Therefore, our comments today and going forward will focus exclusively on the performance of the Talbots brands business. Operating results for the J. Jill Brand have been reclassified as discontinued operations for the third quarter of fiscal 2008 and all prior periods. In addition during the third quarter we completed the close down of our non-core Talbots men’s, kids and U.K. business and those operations have also been reclassified to discontinued operations from the third quarter and all prior periods. So with that, lets begin.

This was a difficult quarter for Talbot, as our industry continues to face unprecedented uncertainty and volatility. This morning we announced third quarter loss per share of $0.28 from continuing operations, which includes the Talbots Missy, petite, women’s collection and accessory and shoes segments. This compares to last year’s loss per share of $0.02 on a comparable basis. Third quarter loss per share from discontinued operations was $2.85 and includes Talbot’s men’s, kids, the U.K. and J. Jill Brand businesses. After a promising start to the quarter, the picture totally changed mid September as the fiscal crisis started. Over 85% of our top line miss to last year occurred after September 13. It has been increasingly more challenging to drive customer traffic and when she is shopping, she is cautious and thoughtful regarding her purchases.

Our Talbots brand comps declined 13.9% for the period driven by a 13% decrease in transaction. Average unit retail in stores was down slightly, offset by a slight increase in units per transaction. Our average transaction value in the quarter was about flat to last year. The good news is that when she does come through our doors we are converting her. Of course to stay competitive in this environment we were more promotional than originally planned and while this increased promotional activity along with the significant drop in top line sales versus last year impacted our reported gross margin in the quarter, we did realize an improvement in operating gross margin of approximately 100 basis points over last year. This was driven by effective inventory management including tight control of our inventory levels, timely markdown, improved IMU and a consistent flow of new merchandize across all channels. Further, we continue to be out in front of our expense control initiatives and are well ahead of our goal to streamline our company’s cost structure by over $50 million this year and $100 million by the end of 2009. Ed, will talk more about this shortly.

We are focusing on what is within our control to best manage the business during this most uncertain economic cycle and at the same time; we are staying the course and moving forward with the implementation of our strategic plan. While we are still on the early stages of implementation, given this is a three year turnaround plan, we’ve accomplished a great deal in redefining our business. Despite the environment the news is not all bad and we are seeing many positive and encouraging signs in our efforts to rebuild and strengthen our company. This is the first quarter under the direction of our new creative merchandising and marketing team. We delivered three new store sets complemented by two major redesigned catalogs. We gained momentum with each delivery, as sell-through of new merchandise improved outperforming historical sell through trend. October was our strongest delivery and this positive momentum has continued into November with our holiday and expanded gift assortment.

Also we have had a favorable customer response to our marketing strategy. This fall we increased total catalog circulation by 15% to strengthen relations with existing customers and drive reactivation of our last customer. We were pleased with our overall effort, particularly in the reactivation of lost customers where we had a solid increase in response rate. We are pleased to be welcoming this lost customer back to Talbots. The overall reaction to our redesigned catalog and to our enhanced website has been very favorable. We are contacting our customer with greater frequency and with a variety of innovative offering including the adoption of hostess events in stores across the country. During the quarter we tested approximately 70 of these events in key markets where our customer or influencer invited their personal friends to the store to shop. Refreshments were served and then many cases a celebrity, model or sportswomen presented tips on fashion and outfitting. We had on average over 100 customers in attendance at each event, significantly beating our expectations for sales and attendance. We will be rolling out our hostess events to 550 stores nationwide in early December.

In addition during the quarter we completed our Talbots brand, fall 2008 consumer purchase plan study and found that customer reaction to our new fall merchandise improved 10 percentage points over fall of 2007. This is the first time in four years that we have had positive customer sentiment regarding our product. We give that two thumbs up. From a merchandise perspective our customer is voting for novelty, newness and must have emotional pieces in her purchases and is less interested in basics and she loves the pace at which we are launching new floor sets. We believe that our impactful stories with increased novelty and color are answering her needs. Strongest categories were jackets across all end users including vests, dresses and accessories particularly scarves. With our November delivery, anything pleasing is in high demand, including cardigans, tunics, tops and blouses. Overall it is our casual business that is performing better than our refined. In terms of what did not work, we were disappointed in our customer’s response to social occasion. However, we believe it has more to do with the current environment than with our assortment. Overall we did not make a sizable investment in our social occasion package. Instead our emphasis this season is on gifts giving and we are seeing positive customer acceptance.