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October 09, 2007 – Comments (0)

I keep reading stuff on the web about what a great value play Talbots, Inc. (NYSE: TLB) is. I have to tell you, I don’t see it.

What They Do

Certainly the company has a lot of retail space, how could they not with 1364 stores in 47 states, not to mention all of the catalogs they ship out, some 48 million of them in fiscal 2006. So yes, the company reaches a lot of people. Personally, I think the only one that makes out in the deal is the United States Postal Service!

By the way, the company is in the retail clothing and catalog business, selling women’s, children’s, and men’s clothing.

What They Did


I’m not going to go into a big thing here, I’m simply going to say that in fiscal 2006, Talbots bought The J.Jill Group, Inc., which explains how Talbots’ balance sheet got all fouled up, increasing the company’s debt levels by almost $415 million.

Think about that for a second. The company increased it’s debt levels by $415 million because management decided The J. Jill Group was a good fit, and while I don’t disagree that J.Jill is a good fit, I don’t think I would have prostituted one company to acquire another company.

In fiscal 2006, the company had $100 million in long-term debt, no short-term debt, and $103 million in cash.

Today, having acquired J. Jill, the company has $389.2 million in long-term debt, $125.5 million in short-term debt, and $35.9 million in cash. What struck me as I glanced at the numbers however, was not the increase in debt, not the decrease in cash, but that sales seemed to be at the same levels post J.Jill as pre J.Jill.

My Value Estimate

I have the stock on my watch list with a reasonable value estimate of $34, with a buy target of $17, a first sell target of $33, and a close target of $36.

How Mr. Market Sees It

The stock closed on 10.05.07 at $19.46, with first resistance at $20.43, second resistance at $22.78, and support at $16.65, which means that the gain potential outweighs the risk potential by about 2%.

My Opinion

Personally I don’t think that my $34 valuation is going to hold up. The reason I don’t is because I believe at the end of the day the company is going to fall short of prior years’ earnings.

Admittedly, things could turn around as the Christmas buying season approaches, but with all of the turmoil over housing/credit, with high energy prices, with the fighting in the middle east still going on, I just don’t think earnings are going to come in where analysts and management think they will.

Also, I think management is clueless. They have allowed the company to take on debt with no clear plan how to mitigate the increase in debt service, or least none that has shown up yet.

Synopsis

So coupled with an increase in debt, management that seems a bit out of their element, a value estimate that I think I going to fall, and what Mr. Market seems to be thinking, I’m going to rate this stock a MOVE, as in move to stock that will make you money because at the moment, this one won’t.

Wax

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