Talbots Makes Good on Growth Promise

Talbots (TLB) remains true to its word.

When the company reported a decline in earnings earlier this year, management promised the drop would be "confined to the first quarter." On Wednesday, Talbots reported an 18% jump in second-quarter earnings, restoring a bit of luster to the stock.

Talbots was a rising star earlier this year before it struggled with poor fashion choices. But based on the latest quarter's results, the company doesn't appear to be following in the footsteps of the Gap (GPS), which has been in a funk for more than two years.

Sales did decline in the quarter, but the company reported better-than-expected sales of full-priced items. That indicates the company's fashion is hitting the mark.

"We were particularly pleased with our ability to effectively manage our inventory levels throughout the spring season," CEO Arnold Zetcher said in a statement. "This enabled us to minimize our markdown exposure and generate record gross margins in the second quarter."

When Talbots reported the disappointing first quarter, it blamed rampant discounting for the drop in earnings. At the time this contrasted with many rivals, such as Ann Taylor (ANN)and Abercrombie & Fitch (ANF), which reported solid earnings growth and kept markdowns to a minimum.

Hingham, Mass.-based Talbots reported net income of $20 million, or 33 cents per share, compared with $17.8 million and 28 cents a share in the year-ago period. On average, analysts had been expecting earnings of 32 cents a share, according to Thomson Financial/First Call.

Sales in the quarter, which the company reported earlier this month, were $370.4 million, down 4% from the year-ago period. Sales from retail stores fell 3%, while catalog sales fell 5%. Comparable-store sales, which measure activity in shops open at least a year, were down 10.2% in the quarter.

On a conference call, management said it was comfortable with the current consensus estimate for the third quarter of 70 cents per share. In last year's third quarter, the company earned 58 cents per share.

Talbots gave some more details about its bold move of launching a men's line. The company plans to ship a men's catalog in early October and begin opening men's retail stores next spring.

Talbots shares were up lately 30 cents at $32.61. They are off about 11% on the year.

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