Talbots Takes Deep Discount on J.Jill

Talbots sells its flailing J.Jill concept for $75 million.
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In a move not unlike one of its in-store promotions,

Talbots

(TLB)

has been forced to take a deep discount to shed its J.Jill chain.

The women's apparel retailer announced on Monday that it has sold the suffering concept for about $75 million to private equity firm Golden Gate Capital.

The company has been searching for a buyer for sometime as it looks to focus its energy on turning around its core business.

Talbots originally purchased J. Jill, which caters to affluent older women, for about $517 million in February 2006.

Even then J.Jill was struggling, but Talbots thought it could be the company's knight in shining armor. Unfortunately, it could not take reign of its steed.

J. Jill operations hurt the company's 2008 earnings by $70 million and drained the company of more than $80 million in cash over the last three years, not including the original purchase price.

Golden Gate will receive all inventory and 204 of the company's 279 stores. Talbots will close the remaining 75 stores within the next 60 days.

But these leftovers could still be a substantial drag on the company. Talbots will have to negotiate lease settlements with landlords, which could be as costly, as the chain's average initial lease term is 10 years and the chain has a young store fleet, Stifel Nicolaus analyst Richard Jaffe said in a note on Monday.

"For example, if the rent expense for an average J. Jill store were $240,000 per year with the estimated average remaining lease term of five years, the present value of 75 locations would equal approximately $75 million dollars, the same as the purchase price," Jaffe wrote.

Talbots will also be responsible for the liquidation of inventory at these locations, with possibly additional cash charges.

Talk about a lousy deal. On top of this, if Golden Gate fails to turnaround J.Jill and is forced to declare bankruptcy, Talbots is responsible for the remaining leases. "With store leases averaging 10 years, this liability could remain with Talbots for 10 years," Jaffe wrote. "In addition, Talbots will record a pretax charge of $800,000 related to severance charges."

The deal is expected to close in the second quarter of the company's fiscal 2009 year.

Shares of Talbots jumped 5% in afternoon trading to $5.25.

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