Perhaps the most important element of Talbots’ comeback became public on Dec. 8 when Talbots unveiled a major ownership change.
Most of the shoppers who streamed into the Talbots outlet store in Wrentham this week were just looking for good deals on Christmas gifts. They didn’t realize the part they were playing in Talbots CEO Trudy Sullivan’s grand turnaround plan.
Opening upscale outlets such as the one in Wrentham was just one aspect of a multi-pronged approach Sullivan unveiled in April 2008 to restore the embattled apparel retailer’s fiscal health. The fruits of that effort could be seen in the most recent quarter when the Hingham company returned to profitability.
Perhaps the most important element of this comeback became public on Dec. 8 when Talbots unveiled a major ownership shift. A Stamford, Conn.-based investment firm plans to essentially buy out Talbots’ current majority shareholder, Japanese retailer Aeon Co., and take a controlling stake in Talbots. The move would unshackle Talbots – one of the largest retailers based in the state – from much of its debt.
The subsequent analysts’ reports gushed like movie critics fawning over an Oscar contender: FBR Capital Markets called the deal “highly attractive” and a “game changer,” Jennifer Black & Associates saw “tremendous opportunity ahead for Talbots,” and Lazard Capital Markets called it a “classic turnaround story.”
What a difference two years can make. When Sullivan was brought on board in 2007 to replace retiring chief executive Arnold Zetcher, Talbots’ finances were messier than an overcrowded closet. The company embarked on an ill-fated venture into men’s clothing and had taken on a wardrobe full of debt with the $517 million purchase of rival J. Jill – all while struggling with sales declines at its flagship chain’s stores. And, of course, the retail industry was about to plunge into its worst slide in decades.
Conditions didn’t seem to improve much during the Great Credit Crunch of 2008 – when Aeon had to step in to help its American sibling line up financing.
But by the time of Talbots’ latest quarterly report on Dec. 8, the company could boast of its first operating profit in 18 months. Even better: Aeon Co. and its related debt would be cashed out through a merger with BPW Acquisition Corp., a firm formed last year by investors with the express purpose of finding a company to buy.
So what happened? Sullivan’s turnaround plan, which was unveiled with much fanfare at Boston’s Westin Copley Place hotel in 2008, is finally paying off.
Sullivan, relying in part on advice from a consultancy that Talbots hired, promptly jettisoned the Talbots Mens, Kids and U.K. operations. She shuttered some of the least-profitable regular Talbots locations as the leases came up.
Talbots also launched a new kind of outlet store that focuses on clothing manufactured specifically for those stores, instead of on clearance racks. The items often are inspired by popular designs from the previous year and offered at about two-thirds of the original’s retail price with just a few tweaks. Bruce MacGregor, who oversees Talbots’ outlets, says sales have largely exceeded expectations at the 18 outlets that were opened so far this year, including the one at Wrentham Village. The company expects it could open 75 to 100 of them over time, with at least another 20 or so coming within the next two years.
Talbots also found a new owner for the Quincy-based J. Jill chain this year, selling it at a big loss for $67 million to a San Francisco private equity firm. The hoped-for synergies never really materialized, and Talbots stopped pouring money into the merger in an effort to make it work.
Talbots recently expanded its pants styles to give customers the option of picking a size based on where the pairs sit on their waists. The move was applauded by Jennifer Black & Associates, the Oregon-based research firm, because it will likely encourage women to buy multiple pairs and matching tops to go along with them.
Meanwhile, Sullivan put in place strict inventory controls, partly to limit the chain’s unprofitable markdowns. Total inventory at Talbots dropped by 44 percent in the past two years.
Unfortunately, restoring the company to profitability also required some fairly significant job cuts. The company reports about 9,660 employees including 585 at the Hingham headquarters, down from a workforce of about 11,875 – and 850 at the corporate office – a year ago.
Talbots still is seeing declines in sales at its stores: It reported a 15.9 percent year-over-year sales drop in stores that have been open at least a year in the quarter that just ended. But some of that can be traced to Talbots’ stringent new approach to managing inventory levels.
Jennifer Black, the president of the firm that bears her name, says the tight inventory provides plenty of room for Talbots to grow without needing to add new stores to its nearly 590 locations. For example, Black noticed that all of the stores near her quickly sold out of a specific popular cardigan sweater. The demand is there for Talbots’ most-desired products, Black says. The company just needs to provide more of them.
Black says the BPW merger, if approved by BPW shareholders early next year, would free up cash for Talbots and remove a distraction for its leadership team. Once Talbots’ debt issues are addressed, Black says the company can plow money into modernizing its window displays and other store remodeling projects.
So far, the company’s stock price has barely responded to the most recent news: The stock was only up 10 percent from its Dec. 7 level when the markets closed on Friday. Maybe investors are still waiting to see if the BPW deal goes through – or maybe they want more proof that sales will head in an upward direction soon. Given the company’s recent troubles, you can’t blame folks for being cautious.
However, Talbots’ financial makeover appears to be nearly complete. It’s probably only a matter of time before the company is back in fashion on Wall Street.
Jon Chesto is the business editor of The Patriot Ledger. He may be reached at email@example.com or massmarketblog.com.