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Why Talbots Needs to Cut its Losses and Close Up Shop

Talbots new lookThrough a recent investor trick that came with a copious cash infusion, Talbots has managed to go from destitute granny to flush debutante in a few short weeks. Not only did it report its second quarterly profit in a row today (after five consecutive quarters of losses), the company just completed a lucrative merger with BPW Acquisition Corp. (BPW) to add roughly $330 million to its coffers. That plus the increase in operating income of $105 million has Talbots' CEO Trudy Sullivan practically doing a victory dance on the balance sheet.

Of this "dream transaction" and dedicated spending cuts, Sullivan said that Talbots is "firmly positioned for future growth and profitability." It's a turning point for the retailer to be sure, but Sullivan and her high-waisted trousers brigade should refrain from popping open the champagne. There's still such a long way to go, and given the competition, it may be better if Talbots cut its losses and closed the red doors for good.

Since Sullivan arrived at Talbots in 2007, she's helmed the Hingham, Mass.-based retailer through the stormy seas of the recession while trying to turn the brand's image from staid to sharp. Unfortunately, the new silhouettes hit the racks at the same time the market tanked in fall 2008 -- turning fashionistas into bargain-hunting recessionistas in one season. Why buy Talbots' skinny jeans for $70 when you could get a similar pair for $30 at Target (TGT) to outfit your new, perhaps under-employed, lifestyle?

The results of the shift showed in the company's sharply declining profits which despite this latest deal continue to trend downward. Total sales from continuing operations decreased 3.7 percent last year. Store sales were $261.2 million versus $278.7 million. Comparable store sales declined 7.2 percent in the fourth quarter with markdown sales falling 21 percent.

Nevertheless, Talbots is forging ahead, trying hard to appeal to the 35+ woman who wants classic items with more modern silhouettes. But instead of providing a fresh collection to lure the faithful into spending more and attract the eye of a new shopper, all Talbots is doing is copycatting its more successful competitors J. Crew (JCG), Anthropologie (URBN) and heck, even LL Bean.

Take a look (items on the left are Talbots; on the right are J. Crew and LL Bean):

Finally, Talbots continues to cull sales from catalogs; its direct marketing operation circulated approximately 55 million catalogs worldwide in fiscal 2008. Direct marketing saw a slight increase last year but that also included online sales so how much longer can the company justify the expense of printing catalogs?

It will be interesting to see how long it will take until investors -- like customers -- get bored and move on.

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