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Talbots Reports Fourth Quarter And Fiscal Year 2011 Results

The Talbots, Inc. (NYSE:TLB) today reported results for the fourth quarter and fiscal year ended January 28, 2012.

Fourth quarter loss from continuing operations was $53.2 million, or $0.77 per share, compared to last year’s loss from continuing operations of $2.8 million, or $0.04 per share. Adjusted fourth quarter loss from continuing operations was $36.2 million, or $0.52 per share, excluding special items of $17.1 million, or $0.25 per share, compared to last year’s adjusted loss from continuing operations of $9.6 million, or $0.14 per share.

Fiscal year 2011 loss from continuing operations was $111.8 million, or $1.62 per share, compared to last year’s income from continuing operations of $7.6 million, or $0.11 per share. Adjusted full year 2011 loss from continuing operations was $81.8 million, or $1.19 per share, excluding special items of $30.0 million, or $0.43 per share, compared to last year’s adjusted income from continuing operations of $40.6 million, or $0.61 per share.

A full reconciliation of GAAP to non-GAAP (“adjusted”) items is included with this release.

Trudy F. Sullivan, Talbots President and Chief Executive Officer, said, “Our fourth quarter performance reflects an aggressive promotional and markdown strategy in a challenging retail environment. This resulted in a sequential improvement in both customer traffic and sales trends compared to the third quarter. We were able to clear through excess merchandise to better position ourselves for spring, ending the year with total inventories up approximately 4%. We remain focused on enhancing our product and executing our key strategic initiatives, as the Board continues its evaluation of a full range of strategic alternatives.”

Fourth Quarter 2011 Operating Results:

  • Operating loss was $53.6 million, compared to approximately break-even in the prior year.
  • Adjusted operating loss, excluding special items of $21.3 million, was $32.3 million, a decrease of $25.5 million, compared to prior year’s adjusted operating loss of $6.8 million.
  • Net sales decreased 1.1% to $289.4 million, compared to $292.6 million in the same period last year.
  • Consolidated comparable sales, which includes stores, Internet, catalog and red-line sales, were approximately flat compared to the prior year, with both December and January positive at 1.6% and 3.2%, respectively. Consolidated comparable sales exclude stores closed or scheduled to close under the Company’s store rationalization plan.
  • Store sales increased 1.5% to $244.3 million, compared to $240.8 million in the same period last year. Comparable store sales increased 1.9%, excluding stores closed or scheduled to close under the Company’s store rationalization plan.
  • Direct marketing sales, which include Internet, catalog and red-line sales, decreased 13.0% in the quarter to $45.1 million, compared to $51.8 million in the same period last year.
  • Cost of sales, buying and occupancy as a percent of net sales increased 510 basis points compared to last year. This increase was due to a 570 basis point deterioration in merchandise margin, resulting from higher levels of markdown and promotional activity, partially offset by a 60 basis point improvement in buying and occupancy costs as a percent of net sales.
  • Selling, general & administrative (SG&A) expenses as a percent of net sales increased 920 basis points from the prior year to 38.6%. On a dollar basis SG&A increased $25.8 million over the prior year period to $111.8 million. After adjusting for approximately $13 million in a one-time cumulative adjustment to gift card breakage income and the reversal of incentive compensation expense recorded in the fourth quarter last year, fourth quarter 2011 SG&A reflected higher planned marketing expense and was impacted by a total of $9.7 million in net expense obligations in connection with certain executive postemployment benefits and legal and advisory fees associated with the Company’s exploration of strategic alternatives, partially offset by tax-related penalty expense reversals.

Full Year 2011 Results:

  • Operating loss was $102.6 million, a decrease of $134.0 million, compared to the prior year’s operating income of $31.4 million.
  • Adjusted operating loss, excluding special items of $34.2 million, was $68.3 million, a decrease of $127.2 million, or 216.0%, compared to the prior year.
  • Net sales were $1,141.3 million for the fifty-two week period, compared to $1,213.1 million in the prior year.
  • Consolidated comparable sales decreased 5.6%, which includes stores, Internet, catalog and red-line sales. Consolidated comparable sales exclude stores closed or scheduled to close under the Company’s store rationalization plan.
  • Store sales were $942.9 million, compared to $991.4 million in the prior year. Comparable store sales declined 5.0%, excluding stores closed or scheduled to close under the Company’s store rationalization plan.
  • Direct marketing sales, which include Internet, catalog and red-line sales, decreased 10.5% to $198.4 million, compared to $221.7 million last year.
  • Cost of sales, buying and occupancy as a percent of net sales increased 850 basis points compared to last year, due to an 830 basis point deterioration in merchandise margin related to increased markdowns and promotional activity, and a 20 basis point increase in buying and occupancy expenses as a percent of net sales.
  • Selling, general & administrative (SG&A) expenses as a percent of net sales increased 380 basis points from the prior year to 36.2%. This increase was primarily due to planned incremental marketing expenses, certain executive postemployment benefits and legal and advisory fees associated with the Company’s exploration of strategic alternatives, partially offset by reductions in management incentive compensation and tax-related penalty expense reversals. Additionally, SG&A in fiscal 2010 reflects approximately $6.3 million in a one-time cumulative adjustment to gift card breakage income.
  • Total inventory increased 4.2% to $164.7 million, compared to $158.0 million at the end of fiscal 2011, in part due to timing of early receipts.
  • Total outstanding debt under our revolving credit facility was $116.5 million, an increase of $90.9 million, compared to $25.5 million at the end of last year.
  • Under the trade payables arrangement, entered into on September 1, 2011 with its exclusive sourcing agent, Li & Fung, the Company ended the year with $21.8 million in trade payables financing.
  • During 2011, the Company opened 18 Talbots upscale outlets, closed 69 Talbots stores and ended the year with 517 stores, comprised of 544 locations.

Key Initiatives Update

Financing On February 29, 2012, the Company and Li & Fung agreed to extend the trade payables arrangement established September 1, 2011, under its existing terms and conditions, to August 31, 2012, with an option to renew for an additional six month period upon the mutual agreement of the Company and Li & Fung. This arrangement continues to be subject to earlier termination as set forth under the terms of the original agreement. While this arrangement is in effect, the Company will have the ability to extend payment terms for an additional 30 days for merchandise purchases sourced by Li & Fung up to $50 million outstanding at any time. Li & Fung may also open letters of credit on behalf of Talbots for certain of its future merchandise purchases.

As announced on February 16, 2012, the Company also entered into a new $75 million secured term loan led by Wells Fargo Bank, National Association. In connection with this transaction, Talbots also amended its existing $200 million secured revolving credit facility with GE Capital Corporation. Both the term loan and the amended credit facility are scheduled to mature on February 16, 2017.

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