Investors Put Talbots Back on the Rack


Pity the investors remaining in Talbots (NYS: TLB) . The most recent hope for the company has sailed away, after Sycamore Partners lost interest and withdrew its buyout offer. This leaves a struggling retailer chasing a younger demographic that's largely staying away. Talbots has hoped for a white knight for some time; could one still appear on the horizon?

Empty shopping cart
Talbots' messages about a buyout have been mixed from the beginning. When Sycamore made its first offer -- an unsolicited bid of $3 per share back in December -- the company rejected it almost instantly. It obviously liked the idea, though, as it subsequently admitted that it was "resolved to explore a full range of strategic alternatives." In other words, "we hope there's a better offer out there somewhere."

There wasn't. No one else stepped up to make a play for the retailer. After a few months passed, Sycamore upped its bid by $0.05 a share and twice extended its deadline for a decision from the company before it gave up and got on with its life.

Bailing out
To no one's surprise, Talbots stock dropped precipitously on the news of Sycamore's exit. The shares cratered by more than 40% to land at just over $1.50 a share, which not coincidentally is roughly the level they stood at before Sycamore made that first offer back in December.

That might not be the bottom for the stock. Since those fateful December days, the company's financials have worsened significantly. Its most recent quarter was ugly, with sales coming in at $272 million -- more than $10 million lower than analysts expected.

Many of Talbots' problems have to do with reinvention. For some time now, the company's tried to shift away from its traditional market of women over 35. By doing so, it's moved from a niche, albeit a crowded one, into a much wider and competitive market.

The younger demographic is a hot one and thus harder to capture. It seems to require a distinctive brand and store identity -- like the popular Anthropologie, a subsidiary of Urban Outfitters (NAS: URBN) , which, although it's seen slightly lower sales of late, still does a thriving business in some of America's best retail locations.

Younger women also seem to respond to the presence of big names in fashion. This is what's helped European retailer H&M grab those customers and boost its results. Its Designer Collaboration initiative with such fashion stars as Marni, Versace, and Karl Lagerfeld is one big reason the company's American sales grew 8% year on year in 2011, one of the firm's highest growth numbers among its major markets.

Talbots' move away from the more mature demographic seems to have led it astray from its core competencies. It's little wonder that the company's bottom line has been deep in the red the past four quarters, which saw three quarters of negative net income and only one marginally positive quarter.

Better sales elsewhere in the mall
So Talbots isn't all that attractive, even to a bargain investor or a potential acquirer on the prowl, even at this now-reduced stock price level. Yes, the company's market cap is now just barely over $100 million, but that still makes for pricey valuations. The company's book value per share is mighty low ($0.23), which results in a high price/book (6.65). Those figures for Urban Outfitters are $7.68 and 3.65.

Other competitors illustrate how rich Talbots' current levels are. ANN (NYS: ANN) , formerly Ann Taylor, targets a similar clientele, broadly speaking. Its book value per share is $7.60 and price/book is 3.72. Operationally speaking, ANN's most recent fiscal year saw a 12% gain in revenue on an annual basis, and an 18% improvement in the bottom line.

Moving slightly away from the specialty retailers, even a big, cost-heavy department-store chain like Macy's (NYS: M) beats Talbots in those respects. Its book value per share is a hefty $14.55, leading to a price/book of 2.61. Almost needless to say at this point, its financial results are much better than its troubled smaller rival, with a steady stream of positive net profit numbers.

The white knight rides away
White knights are funny creatures. Just when we think they'll never appear, they come galloping over the hill. One might yet arrive for Talbots, but this seems like a rapidly fading possibility. The company is really not very attractive as a buy. Not only that, it's still more expensive than it should be on a valuation basis, so it's more likely than not to trade down in the immediate future. Shoppers are best advised to look elsewhere in this sector for bargains.

It's a good thing, then, that we've found a great stock that happens to be in the retail sector. In fact, it's "The Motley Fool's Top Stock for 2012," and you can download our comprehensive report on it FREE by clicking this link.

At the time thisarticle was published Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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