Talbot's Fourth Quarter Conference Call Notes

Talbot’s has reported fourth-quarter earnings of $0.13 a share, excluding $0.01 in restructuring charges and $0.15 in merger costs, The consensus stands at $0.02.

Earnings quality was ok. An unexpected tax benefit added about $0.04 to results. Meanwhile, the gross margin was 44 basis points better than the tear-sheet average and SG&A expenses came in 106 basis points lower as a percentage of sales than the tear-sheet average.

Revenues fell 3.7% year over year. Comparable-store sales declined 7.2% in the quarter, with January comps up high single digits.

Cost of sales, as a percent of net sales improved 2,070 basis points compared to last year. This improvement was due primarily to a substantial increase in pure merchandise margin of 1,900 basis points, resulting from strong IMU, improved full-price selling and a decrease in buying and occupancy costs of 170 basis points.

SG&A expense as a percent of sales decreased 1,180 basis points, reflecting a $42.4 million or 30% decline in SG&A expenses over the prior year.

For the first quarter, the company anticipates a top line sales increase in the range of 4% to 5% compared to the prior year period. Adjusted operating income, excluding restructuring, impairment and merger costs, is anticipated to be in the range of approximately 4.5% to 6% of sales.

For the full year, the company anticipates a top-line sales increase in the range of approximately 3% to 5% compared to the prior year period. Adjusted operating income, excluding restructuring, impairment and merger costs, is anticipated to be in the range of 5% to 6% of sales.

Sales & Comps:

Total sales in the fourth quarter were $316 million compared to $328 million last year. Source sales were $261 million compared to $279 million last year. Markdown selling declined 21% in the quarter and full priced sales increased 10%. Direct marketing sales in the fourth quarter, which include catalog and internet, were up 11% to $55 million compared to $49 million last year. The gain in the direct channel was due to store associates continuing to aggressively promote direct marketing sales, a stronger mix of full priced merchandise, and better fulfillment.

Transactions were down in the quarter. But, dollars per transaction increased 13%, reflecting strong full-priced selling. Customer traffic was also down in the fourth quarter but remained stable from the third quarter.

Comp store sales were -7.2% in the fourth quarter. However, comps have shown sequential improvements over the last four quarters.

Margins:

Fourth quarter cost of sales buying and occupancy improved to 64.7% of net sales, versus 85.4% last year. The more than 2000 basis point improvement was primarily due to a 1900 basis point increase in merchandise margins, driven by improved IMU and strong full price selling, and a 170 basis point improvement in buying and occupancy.

SG&A expenses in the fourth quarter were $98 million at 31.1% of sales versus $141 million at 42.9% of sales last year. The 1180 basis point improvement came from an ongoing expense reduction program. In early 2009, TLB established a goal of reducing annualized expenses by $150 million by the end of fiscal 2010. By the end of fiscal 2009, TLB reduced expenses by $120 million in SG&A and $27 million in buying and occupancy.

Balance Sheet:

TLB ended the fourth quarter with total accounts receivable of $164 million versus $169 million last year.

Total inventory at quarter end was $143 million, down 31% from $207 million last year.

Total debt outstanding was $486 million, compared to $477 million in the same period last year. TLB has paid off its debt to AEON.

Capital expenditures were $21 million last year, compared to $45 million in the prior year.

Cash flow from operating activities was $81 million last year.

Outlook:

For the full year:

Sales growth of 3% to 5% compared to last year.

Operating profit, excluding non-recurring items, of 5% to 6% of sales.

Capital expenditures of about $40 million.

For the First Quarter:

Sales growth of 4% to 5% compared to last year's first quarter.

Operating income, excluding non-operating items, of 4.5% to 6% of sales.

Early read on the first quarter:

Comps are currently trending positive, with positive comps in each of the last three months. March was the strongest, up 10% over last year.