Tough Times for Talbots

The credit crunch is hitting The Talbots hard. The Hingham, MA-based women’s apparel merchant last week disclosed in a Securities and Exchange Commission filing that two large lenders are cutting off its access to credit.

Talbots officials said The Hongkong and Shanghai Banking Corp. Ltd. (HSBC) won’t renew a $135 million letter-of-credit facility that the company had used to import merchandise. Also, Bank of America let lapse a $130 million letter-of-credit agreement that Talbots had mostly used for the same reason.

On the bright side, Talbots said an $18 million revolving credit agreement with Mizuho was extended through April 2010.

Talbots has renegotiated payment terms with vendors that supply about 75% of its foreign-made merchandise, and will seek improved terms with other vendors. The renegotiated terms, which give Talbots more time to make payments, are expected to add $40 million to operating cash flow this year, according to a release.

The extra cash is expected to boost 2008 cash flow to about $200 million. What’s more, Talbots is in talks with banks in hopes of securing a $50 million line of credit “in the next few weeks.”

President/CEO Trudy Sullivan said: “While the credit and financial markets are in a state of considerable flux, we have an alternate plan in place, and have revised most of our vendor relationships to maximize the company’s financial flexibility and greatly reduce our need for letters of credit.”

The company reported it had $35.9 million in cash or cash equivalents as of Feb. 3. Stuart Rose, managing director for Wellesley, MA-based investment back Tully & Holland, says Talbots should have enough working capital if the 2008 plan comes through.

“But that’s the rub. Is 2008 going to come through? It’s easy to blame this on the credit crunch–and I’m sure that’s part of it–but it is a vote of no confidence by several big lenders,” Rose says, “Right now, continuing positive cash flow will take on added importance for this struggling retailer.”

Talbots, which acquired women’s apparel brand J. Jill two years ago for $571 million, will have to cut down on capital expenditures, Rose says. “It’s not the end now, but if things turn sour over the next twelve months, this will be regarded as the beginning of the end.”

The company had said earlier this year that it is dropping its Kids and Mens lines, and last month it announced it would close 20 underperforming stores. Talbots recently unveiled its strategic plan for long-term growth that involved streamlining its operations, controlling costs and inventories, innovating its marketing programs, and implementing more efficient processes across all business functions.

It needs to do something—fast. Talbots reported a $171 million loss in the fourth quarter ended Feb. 2. For fiscal 2007, sales for the specialty retailer of women’s classic fashions increased 2.5%, to $2.29 billion, up from $2.23 billion in fiscal 2006.

Consolidated direct marketing sales for the quarter were $113 million compared to $114 million a year ago, though for the fiscal year direct sales were $428 million, up 11 % from $385 million last year. But same-store sales–sales in stores that have been open at least a year and a key economic indicator–fell 6% for the fourth quarter and 5.5% for fiscal 2007.

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