Losing, but in a good way
This is what passes for good news at Talbots Inc. these days: The bad news wasn't as bad as most people had feared.
Talbots, the women's clothing retailer from Hingham, told investors yesterday that it lost $171 million in the final quarter of its fiscal year, when sales fell nearly 8 percent. The company's stock climbed more than 11 percent, its best day in over a month.
Talbots only lost about $12 million from day-to-day operations in its most recent quarter. The rest of the red ink was spilled when the company accounted for some of its big mistakes from the recent past, including stores for men and children that it is in the process of closing. But the single largest expense was the cost of getting real about its disastrous 2006 acquisition of J. Jill Group, another women's clothing retailer that was headquartered in Braintree.
Talbots yesterday said it wrote down the value of goodwill associated with its J. Jill deal by about $150 million, or $144 million after taxes. That's accounting talk for a company conceding a business it bought for one price is now worth a lot less.
What does a big number like $150 million really mean? To start with, Talbots bought J. Jill for $518 million in May 2006. So the new value would be something like $380 million, or about 27 percent less.
That might be a rounding error for a giant company like Microsoft Corp. or General Electric Co. But Talbots' entire stock value stood at $489 million yesterday, so count J. Jill as one big misstep.
When Talbots bought J. Jill, it spent some of its own money but borrowed $400 million to make the deal happen. The acquisition loan had been reduced to $300 million by last summer, but it hurts when anyone borrows a pile of money to buy something that loses value. Ask anyone who bought a home with a big mortgage in the past year or two.
It's easy to see why J. Jill appealed to Talbots executives two years ago. J. Jill wasn't the greatest operator, going through one "repositioning" after another. But both companies sought the same kind of customer, mature women, with clothing lines that didn't really compete with each other.
"Jill certainly made a lot of sense from 30,000 feet," says retail analyst Richard Jaffe, of Stifel Nicolaus. "But I don't think people knew how troubled the business had become."
Shawn Kravetz, an investment manager at Esplanade Capital in Boston, thinks J. Jill had been on a predictable business descent well before Talbots bought the company. He sees a company that started with a successful catalog business, expanded into stores with initial success, thanks to ideal locations, but grew to compete against itself with escalating overhead expenses to pay.
"The catalogs that used to be profitable become very expensive marketing vehicles competing with stores," he says. "You wake up and everything is cannibalizing everything else."
Meanwhile, Talbots has had problems of its own. Same-store sales declined 5.7 percent at Talbots stores during the company's last fiscal year, ended Feb. 3. Talbots' stock has plunged 64 percent in the past 12 months.
To be fair, all women's clothing retailers have gotten clobbered in the last year. What was once a very profitable retail niche became overrun. Shares of Chico's FAS Inc., once a favorite on Wall Street, are down 65 percent in the past year. Coldwater Creek Inc. stock has plunged 74 percent in the past 12 months.
Talbots Inc., and J. Jill in particular, have a long way to climb back. A new executive in charge at J. Jill talked about the growth potential of the business on a conference call with investors yesterday.
But the big expense of writing down the value of the unit had increased from an estimate issued just a month earlier, due in part to "more conservative growth and earnings projections for the J. Jill brand."
It isn't easy to concede $150 million you spent two years ago went out the window. It's even harder to earn the money back.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
