Apparel retailer Talbots Inc. (TLB) announced Wednesday morning that its loss for the second quarter widened from last year, hurt by restructuring costs, a decline in quarterly sales and a double digit fall in comparable store sales at both its brand stores. The company raised its bottom-line guidance for fiscal 2008 as it expects lower than anticipated restructuring costs for the full-year. However, the company backed its adjusted earnings per share forecast for the full year, which is sharply above analysts' estimate. Following the announcement, the company's stock is trading up nearly 20%.
Second Quarter Results
The Hingham, Massachusetts-based company posted a wider GAAP net loss of $25.01 million or $0.47 per share than $13.32 million or $0.25 per share in the prior-year quarter.
Results for the latest quarter include a net loss of about $4.4 million or $0.08 per share related to the operations of Talbots Kids, Mens and U.K. non-core businesses, and about $2.3 million or $0.04 per share of restructuring charges associated with strategic initiatives.
Excluding special items, net loss from ongoing core operations for the quarter was $18.32 million or $0.34 per share, wider than $9.44 million or $0.18 per share in the year-ago quarter.
On average, ten analysts polled by First Call/Thomson Financial expected the company to report a loss of $0.34 per share for the second quarter.
Total consolidated sales for the quarter declined to $528.01 million from $572.33 million in the same quarter last year, and missed nine Wall Street analysts' consensus estimate of $532 million for the second quarter, with estimates ranging between $528 million and $564 million.
Total company comparable store sales declined 12% for the second quarter. Comparable store sales for Talbots brand fell 11.7%, while and J. Jill brand comparable store sales dropped 13.2%.
Apparel retailers are battening down the hatches, lowering inventory and cutting costs amid a difficult consumer environment. A weak economy, combined by rising food and gasoline prices, have put significant pressure on consumers.
According to a recent Standard & Poor's report, U.S. consumer products companies will face tougher tests in 2008 than expected due to reduced consumer buying power, tighter credit markets, and a weakened dollar.
Among others in the sector, Liz Claiborne Inc. (LIZ) this month reported a loss for the second quarter compared to a profit in the year-ago period, hurt by higher expenses related to the company's streamlining activities and a 7% decline in revenues.
Another peer, AnnTaylor Stores Corp. (ANN) reported lower profit for the second quarter hurt by restructuring costs and a decline in comparable store sales due to weak traffic across all divisions. Adjusted earnings per share beat analysts' as well as internal expectations. Quarterly net sales also declined.
Segmental Details
Talbots brand retail store sales decreased to $352 million for the quarter from $392 million reported in the prior-year quarter, while retail store sales for J. Jill brand also slipped to $74 million from $80 million in the year-ago quarter.
Talbots said that the timing of the Talbots brand June end of season clearance had an adverse effect on its second quarter sales, but is expected to benefit August sales.
Gross margin for the Talbots brand increased 380 basis points over the prior-year quarter, driven by a combination of lean inventories, a monthly markdown cadence and improved IMU. J. Jill brand gross margin recorded a steep decline of 540 basis points due to its aggressive markdown posture and partially offset the improvement at the Talbots brand.
Consolidated direct marketing sales, including catalog and Internet, for the quarter marginally increased to $102 million from $10 million in the corresponding quarter a year ago.
Other Metrics
Operating loss for the latest quarter widened to $34.55 million from $12.22 million in the prior-year quarter, while cost of sales, buying and occupancy was $378.01 million, down from $409.01 million in the year-ago quarter.
Selling, general and administrative expenses were nearly flat with last year at $175.01 million, but as a percentage of sales it increased. Total company's gross margin for the second quarter advanced 190 basis points from last year.
In a bid to control costs, the company closed down thirty Talbots Kids/Mens/U.K. stores, with remaining thirty-five to be closed by mid-September. The company also realigned and streamlined its internal functions and reduced corporate staff by about 9%, with annualized cost savings of about $14 million.
The company said it is aiming to reduce its cost structure by a minimum of $100 million by the end of fiscal 2009, with $50 million in fiscal 2008.
Talbots ended the second quarter with cash and cash equivalents of $16.03 million, compared to $8.16 million at the end of the prior-year quarter.
Commenting on the results, president and chief executive officer Trudy Sullivan said, "This was a challenging quarter to drive top line sales, predominantly due to the change in our Talbots brand annual June clearance strategy, coupled with a difficult macro environment. While a year-over-year shortfall in retail sales impacted the quarter, results were largely offset by the Talbots brand merchandise gross margin expansion."
Half-Yearly Highlights
For the first six-month period, the company posted a wider GAAP net loss of $23.37 million or $0.44 per share than $8.08 million or $0.15 per share in the prior-year period.
Net loss from ongoing core operations for the six months was $7.32 million or $0.14 per share, wider than $2.15 million or $0.04 per share in the year-ago period.
Total consolidated sales for the period declined to $1.07 billion from $1.15 billion in the same period last year.
Guidance
Talbots raised its fiscal 2008 bottom-line guidance to a profit range of $0.15 to $0.25 per share from the prior guidance of a loss in the range of $0.17 to $0.07 per share.
The company noted that it raised the outlook as it anticipates total close down costs of non-core businesses to be a net loss of $0.27 to $0.32 per share, compared to the company's original estimate for a net loss of $0.59 to $0.64 per share.
However, on a non-GAAP basis, the company said it is maintaining its previously announced outlook for the full-year 2008 earnings from ongoing core operations, excluding Talbots Kids, Mens and U.K. operating results and close down costs, in a range of $0.47 to $0.52 per share.
Street analysts currently expect the company to report earnings of $0.18 per share for fiscal 2008, with estimates ranging from a loss of $0.05 per share to earnings of $0.52 per share.
Analyst Comment
Last week, Friedman, Billings, Ramsey downgraded Talbots stock to "Market Perform" from "Outperform" and lowered its price target to $9 from $18. The brokerage reduced its 2008 EPS estimate to $0.23 from $0.28, and its 2009 estimate to $0.50 from $0.78.
Stock Quote
In Wednesday's regular trading session, TLB is trading at $11.98, up $1.98 or 19.80% on a volume of 1.37 million shares. In the past 52-week period, the stock has been trading in a range of $6.48 to $23.84.
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