Talbots Q2 Swings into Loss as Markdowns Mount

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Actress Julianne Moore will continue as the "face" of Talbots' new direction

Hingham, MA–Talbots Inc. posted today a bigger-than-expected second quarter loss due to increased promotions and markdowns as sales slid.

The women’s specialty retailer also ousted Michael Smaldone, its chief creative officer and it is looking for a replacement.

For the quarter ended July 30, Talbots posted a net loss of $37.3 million, or 54 cents a share, That compares with a profit of $941,000, or a penny a share, a year earlier.

Excluding items such as restructuring charges and a store-image initiative, the adjusted loss was 51 cents a share, compared with adjusted earnings of 14 cents.

Sales dropped 9.9% to $271.1 million from $300.7 million in the same quarter last year.

Ousts Chief Creative Officer

Comparable store sales fell 11.1% while consolidated comparable sales, including direct marketing, fell 10.4%.

While Talbots fell below analysts’ average estimate which expected a loss of 45 cents, its sales exceeded a prediction of $263 million.

Total inventory rose 26% to $163.9 million. The company’s total outstanding debt rose to $83.9 million from $37.4 million.

Talbots, which has been amid a turnaround plan as it attempted to broaden beyond its core consumer age 50 and above, had warned in June that it expected a sales drop and increased margin pressure. The store also plans to close 110 of its stores in the next two years.

“As expected, our second quarter results reflect high levels of promotional and markdown activity,” said Trudy Sullivan, president/ceo. “While we remain confident in our long-term strategic direction, in the near-term we are focused on delivering a more compelling, balanced merchandise assortment and driving improved top-line sales.”

As for its third quarter, the company said sales are down about 8% from a year ago, and it expects high levels of promotions and markdowns to continue throughout third quarter.

Referring to Smaldone’s departure, Trudy Sullivan, president/ceo, said, “While we have made progress in executing our brand vision and product design, customer acceptance needs to improve. Therefore, I have determined it is necessary for us to bring in new creative leadership.”

In the interim, Sullivan will be taking on Smaldone’s duties.

Talbots plans to spend about $3.5 million on advertising and marketing in the second half of the year, and is expanding its campaigns featuring actress Julianne Moore.

“We are absolutely refocusing on returning to the mission that we all started on day one, which is take care of our core and enhance and bring in a new customer,” Sullivan told analysts on a conference call today.

Besides its merchandising problems, Talbot also is facing a possible takeover attempt by private equity group Sycamore Partners LP which took a 9.9% stake in the retailer.

Talbots’ board of directors adopted a shareholder rights plan, or “poison-pill” strategy,soon after the Sycamore Partners made its intentions known.

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