The Talbots Inc. (TLB)
Q1 2009 Earnings Call Transcript
June 9, 2009 10:00 a.m. ET

Executives

Julie Lorigan - Senior Vice President, Investor and Media Relations
Trudy F. Sullivan – President and Chief Executive Officer
Michael Scarpa - Chief Financial Officer and Chief Operating Officer
Greg Poole - Chief Supply Chain Officer

Analysts

Todd Slater – Lazard Capital Markets
Jennifer Black - Jennifer Black & Associates
Kimberley Greenberger -- Citigroup
Betty Chen - Wedbush Morgan
Richard Jaffe – Stifel Nicolaus
Stacy Pak - SP Research
Marni Shapiro - The Retail Tracker
Roxanne Meyer - UBS
Adrienne Tennant -- FBR

Presentation

Operator

Good morning ladies and gentlemen. On behalf of The Talbots, we would like to welcome you to the Talbots Incorporated conference call covering its first quarter 2009 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 hand the call over to Julie Lorigan, Senior Vice President of Investor and Media Relations.

Julie Lorigan – Vice President of Investor and Media Relations

Thank you and good morning everyone and welcome to the Talbots Inc. first quarter earnings conference call. Today we have with us Trudy Sullivan, President and CEO; and Michael Scarpa, Talbot’s Chief Operating Officer and 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 other 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 June 11, 2009. The webcast will also be available on the Investor Relations page of our website.

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

Trudy F. Sullivan – Chief Executive Officer

Thank you, Julie. Good morning everyone and thanks for joining us. In a moment I will discuss Talbots’ results for the quarter 13-week ending May 2, 2009. Mike will cover our financial performance, and then we will make some closing remarks and take your questions. Our most recent consumer studies indicate shopping patterns have not returned to normal. Our customer continues to be judicious in her spending and is prioritizing money to savings and children’s education. She plans to spend less, not as a shift to other retailers, just spend less. The reaction to our merchandise and our catalog presentation continues to be more positive than a year ago. We are encouraged by these data points, which reaffirms that we are headed in the right direction. Taking a longer-term view we are making solid progress in repositioning our business by divesting J Jill, launching the upscale outlook program and working through other strategic sourcing relationship with Li and Fung. A balanced product mix and a colorful key item strategy, better inventory management and relentless cost control will drive near term results. So, with that let’s begin.

Excluding the tax benefit that Mike will explain shortly, our first quarter results came in better than our previously announced expectations. We narrowed the loss from continuing operations, driven by improved merchandise gross margins compared to the fourth quarter and the early benefit of our cost reduction program implemented in February. As anticipated our top line sales remain difficult and are not to our satisfaction. With customer traffic down high teens our transactions decreased high teens as well with conversions essentially flat. Our units per transaction declined 6%. In addition we also see our customer shopping at the opening price points of our assortment and as a result the average transaction value has also declined. While these statistics are disappointing they do reflect our customer’s current shopping pattern with price a critical factor in her purchasing decisions. Let me explain. Our casual bottoms, mid top and cardigan sweaters performed very well during the quarter. These categories are driven by key items under $100 and reflect opening price points where customers are most engaged. Conversely the higher price sportswear underperformed and needed to be more aggressively promoted. This was the case with certain aspects of our February and March deliveries which also included some elements of color that did not resonate well with the customer. In order to clear this merchandise we were more promotional than originally planned. But we quickly incorporated our learnings and made adjustments to our merchandise mix. We saw improved selling trends in our April and May deliveries which were focused on a casual based key item strategy. We are gratified by the numerous acknowledgements of the perceptible improvements in our product content. Our product merchant and creative teams are beginning to hit their strides. And importantly overall in the quarter, we were tight on inventory to timely markdowns and improved our IMU. As we look ahead this summer, we are well positioned in our key item investments with attractive price points and correspondingly strong IMU. Our assortments have a season appropriate fashion attitude and include our favorite colors of pinks and blues, which are proven winners. We also offer strong mix of novelties featuring mechanical prints, multi colored florals and favorites.

Operationally we are out if front of our best control initiatives and hope that a substantial dollar decline in the SG&A this quarter versus a year ago. We are also firmly committed to right sizing the business and as such announced additional headcount reductions this morning. Our identified cost reduction goal for 2009 is significant. Currently at $125 million out of the $150 million expense reduction program we targeted in February. We are committed to realizing the full benefit of this program and will continue to rationalize all aspects of our business throughout the year. While it remains tough to get the first consumer in the door, we continue with rigorous outreach efforts to connect with her. In January we launched a three tier expanded loyalty program with great success. At the end of the first quarter we had nearly 2 million classic awards members, a 12% increase since the re-launch. Overall we have found that our classic award members tend to spend approximately 80% more than non members and shop twice as frequently. At the end of the quarter for the first time in our company’s history we had more than 50% of our sales generated through our Talbot’s charge. In other corporate initiatives we launched our Talbots upscale outlook concept in May, a key growth initiative outlined in the April 2008 strategic plan. We are on track with the store openings and have successfully opened our first eight of 12 upscale outlook stores across the country. In our upscale outlook concept we offer broad mix of casual sportswear and accessories across the midi, petite and women sizes with average opening price points, 30% to 40% below that of our core. The customer has responded well to all categories especially bottoms, including shorts, skirts and pants and knit tops where sales have exceeded our expectation. It is early in the roll out of this new concept and there is much to learn about the customer but we are very pleased with the initial response.

Also announced yesterday we just signed a definitive agreement to sell substantially all of the J Jill brand business to Jill acquisition LLC, an affiliate of Golden Gate Capital. This is another major step forward for our company enabling us to focus exclusively on the Talbots brand and return our company to profitable growth and deliver increased shareholder value over the long-term. We anticipate that the sale will close in the second quarter. With the close of this sale we will be able to focus our time, energy and full resources on the ongoing rejuvenation of our Talbots brand.

The final corporate initiative I’d like to update you on is our progress in forming a strategic relationship with Li & Fung. As previously disclosed we signed a non-binding letter on intent with Li & Fung to mutually explore a potential primary sourcing relationship. We’ve made solid progress in those discussions and are in mid stream in our due diligence efforts. We intend to maintain complete control of all product designs and ensure that our quality remains the very highest. A relationship such as this should improve our kind of market while further streamlining our cost structure. We anticipate that an agreement could be reached by September of 2009. So, we have stayed the course of our strategy. We are executing to our plan and making steady progress. We continue to believe that we will emerge a stronger and definitely more viable brand as our economy recovers. With that I’ll turn it over to Mike to review the financials and then I’ll be back with some closing comments.

Michael Scarpa - Chief Financial Officer and Chief Operating Officer

Thank you, Trudy. Turning to details of our first quarter sales remained difficult but in line with our expectations. Total sales from continuing operations were $306 million compared to $415 million last year. Retail sales were $256 million compared to $345 million last year. This decrease was driven by a 26.9% decline in consular sales in the 13 week period. Direct marketing sales in the first quarter which include catalog and Internet were $50 million compared to $70 million last year. First quarter cost of sales, buying and occupancy was 69% of net sales versus 59.5% last year. This deterioration was primarily due to a 420 basis point decline in merchandise gross margins resulting from increased markdowns and promotions taken to ensure our inventory was well positioned as we entered Q2.

Additionally there was a 410 basis point erosion, attributable to the de-leveraging of occupancy cost. Although gross margins were down year-over-year in the first quarter, we have seen a significant improvement in trend for the fourth quarter. Selling, general and administrative expenses in the first quarter were $111 million, at 36.2% of net sales versus $130 million at 31.4% of net sales last year. This decrease in dollars was largely due to the implementation of our expense reduction program.