Talbots Aging Ungracefully Prompts Cheapest LBO Bid: Real M&A

Talbots Closings
Pedestrians pass in front of a Talbot Inc. store in this photo taken with a tilt-shift lens in New York, U.S., on Friday, June 10, 2011. Photographer: Chris Goodney/Bloomberg

Talbots Inc. is so cheap that the apparel retailer may now lure private-equity firms even after losing $763 million in the past four years.

The clothing chain is valued at 2.7 times earnings before interest, taxes, depreciation and amortization, the least expensive of any U.S. apparel seller worth more than $100 million, according to data compiled by Bloomberg. The Hingham, Massachusetts-based company plummeted 43 percent in two days after saying this week that sales will drop “significantly” in the quarter, pushing Talbots below the value of its net assets.

Talbots’s bargain price may help buyout firms overcome the risks of owning a cash-strapped retailer mired in the worst sales slump in two decades. The company lost more than 90 percent of its market value in the past 10 years as profit margins shrank and its acquisition of J. Jill failed. Talbots, which targets women older than 35, needs “new blood” in management and money to spend on a brand turnaround that may be easier out of the public eye, according to Nomura Holdings Inc.

“If I were a private-equity investor, I would certainly be looking at Talbots because it’s so cheap,” said David Abella, a money manager at Rochdale Investment Management LLC in New York, which oversees about $4 billion. “It’s really about as cheap as retail gets. This price could make sense for a private-equity buyer to come in with some sort of bid if there was turnaround potential in the brand.”

Talbots doesn’t comment on rumor or speculation, said Julie Lorigan, the company’s vice president of investor relations.

Cheapest Clothing Retailer

The retailer sparked a two-day stock slide when it said on June 7 that fiscal second-quarter sales will fall from a year ago and discounts to lure back shoppers will eat into profit margins after trendier styles confused its core clientele of older women. The value of Talbots’s debt and equity minus cash was sliced to 2.7 times Ebitda as of yesterday from 3.9 times, making it the cheapest U.S. clothing retailer with a market value higher than $100 million, data compiled by Bloomberg show.

“At these levels, you’re at some valuations that start to make sense for somebody who could come in and reorganize, wring out some costs and put some profits back in there,” said James Dunigan, chief investment officer in Philadelphia for PNC Wealth Management, which oversees $110 billion. “It’s a tough business.”

‘Very Bite-Size’

Talbots rebounded 7.5 percent yesterday to $2.72, giving it a market value of $192 million. The company has shrunk from a peak of $3.38 billion in February 2001 as debt topped $500 million in 2006 and profits turned to losses in the year ended in January 2008. Revenue has fallen for four straight years, the worst stretch in two decades, data compiled by Bloomberg show.

At the current price, Talbots would be the least expensive takeover in U.S. apparel history, data compiled by Bloomberg show. The low was set when Designs Inc. bought Casual Male Corp. out of bankruptcy in 2002 for 3.9 times Ebitda, or $170 million, the data show. At that multiple, Talbots’s equity would cost about $314 million in a takeover, or a 63 percent premium to yesterday’s closing price.

Today, shares of Talbots declined 1.1 percent to $2.69 as of 10:49 a.m. in New York.

“It’s very bite size. It’s certainly cheap, and I think that’s what might entice private equity at some point,” said Paul Lejuez, an analyst with Nomura in New York. Still, “it’s not a slam dunk,” he said.

The women’s retailer founded in 1947 is known for its traditional basics such as blazers, ballet flats and pearls. After spending dropped off during the U.S. recession, Talbots started targeting younger customers with trendier fashions. To clear out the racks after inventory per square foot reached the highest level in more than two years, Talbots says it’s now offering discounts that will cut into margins.

‘Kind of Schizophrenic’

“It’s been kind of schizophrenic,” said Jennifer Davis, an analyst at Lazard Capital Markets LLC in New York, who says Talbots should be focused on women aged 40 to 45. “They need to be consistent and pick a customer and stick with that.”

The shares closed as low as $2.53 this week, valuing the company on June 8 at a 4 percent discount to its book value, or assets minus liabilities, data compiled by Bloomberg show. That implies the company would be worth more if it fired management and sold all of its assets.

Talbots, which has tapped $86.8 million of a $200 million revolving bank loan, had only $8.6 million in cash and equivalents as of April.

J. Jill Purchase

Talbots purchased J. Jill Group Inc. in 2006 for about $517 million, saddling the company with $400 million in debt. It then sold most of J. Jill’s assets in 2009 to Golden Gate Capital Corp. for about $75 million.

“Strategic usually doesn’t work in retail” acquisitions, said Nomura’s Lejuez. “If there’s anyone who taught us that in this universe, it’s Talbots.”

While Talbots’s valuation is attractive, the balance sheet may deter a financial buyer, said Adrienne Tennant, an analyst with Janney Montgomery Scott LLC, who has a “sell” rating on the stock. A private-equity firm would need to lever up the balance sheet to reach requisite internal rates of return.

An acquirer must invest money in a new marketing campaign and may also need to bring in new management, Lejuez said.

“We need a new playbook,” he said. “If someone bought it they’d have to invest a lot of money. Their balance sheet is not strong enough for them to keep making mistakes as they try to implement this shift.”

Instead, Talbots should keep its management team, close some stores and market specifically to 40-year-olds, Janney’s Tennant said. The company could also consider selling its credit card business for cash to reinvest in marketing and store makeovers, said Betty Chen, an analyst with Wedbush Securities Inc. in San Francisco. Nomura estimates the credit-card receivables could fetch $160 million in a sale.

“The question is, is there a potential turnaround in the name and in the story?” Rochdale’s Abella said.

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