Talbots sticking with plan

Stock falls nearly 30% as lenders cancel deals

Shares of Talbots Inc. tumbled almost 30 percent yesterday as nervous investors reacted to the disclosure that two lenders had canceled $265 million in letters of credit to the women's clothing retailer.

But officials at the Hingham company released a statement yesterday afternoon that says they are pursuing a turnaround plan unveiled early this month and have sufficient operating cash and working capital to meet their funding needs for the rest of the year.

Under the plan, the company will substantially reduce its credit needs this year, while closing men's and children's stores, paring inventory, and refocusing on its core business of women's clothing.

"We are solidly on the strategic plan that we outlined to investors," Trudy F. Sullivan, who took over as president and chief executive in August, contended in a phone interview.

Tightening credit and slumping consumer demand have devastated the retail industry, with eight mid-size retail chains filing for bankruptcy protection, including Sharper Image Corp., Wickes Furniture Co., and Lillian Vernon Corp.

Sullivan, however, said Talbots has no intention of following suit.

"Banks are not in love with this sector," Sullivan conceded. "This certainly is not just isolated to the Talbots situation."

Sullivan suggested the market overreacted yesterday, however, sending Talbots shares down $3.69, or 28.72 percent, to $9.16. "I'd say it's a good buying opportunity," she said.

In a filing with the Securities and Exchange Commission late Tuesday, Talbots indicated that both Hongkong and Shanghai Banking Corp. and Bank of America had said they no longer would extend financing to import merchandise.

When banks cut off credit, it means retailers have a harder time accessing capital, analysts said. That, in turn, could threaten their ability to receive inventory shipments and force them to close stores and lay off workers. But analysts said companies that react quickly and operate smartly can recover.

"This illustrates the tough credit environment businesses are facing today," said Todd Slater, of Lazard Capital Markets in New York. "But Talbots has the liquidity and resources to get through this. The turnaround may take longer than hoped. But if the company executes on its plan, good things will happen."

However, another analyst, Roxanne Meyer of Oppenheimer & Co. in New York, warned that new financing will not be easy or cheap for Talbots. "Bottom line is that Talbots is likely to see its operations hurt and/or financing more expensive," she wrote. "We would expect a hit to cash and earnings."

Talbots' statement said its loss of letters of credit has been offset by the company's plans to reduce inventory and by about $40 million in additional operating cash flow from new agreements with vendors that supply about three-quarters of its merchandise.

Under renegotiated deals, Talbots said, it extended its payment period to those vendors from 22 days to 45 days.

The retailer, which lost $171 million on a sales decline of 8 percent in the first quarter, also said it's negotiating with several financial institutions to provide new credit totaling about $50 million.

That would cover its purchases of inventory from remaining smaller vendors.

In addition, Talbots said it still has available working capital lines totaling $165 million, enough to fund its capital needs for the balance of the year if it follows its operating plan. Combined with its projected $40 million in additional cash flow, the company expects to have overall operating cash flow of about $200 million for 2008.

Economist Don Klepper-Smith, research director at DataCore Partners in New Haven and Martha's Vineyard, said retailers have been hurt more than any other industry by the decline in jobs, stock prices, and home values that have squeezed consumers.

"The retail sector is ground zero right now," Klepper-Smith said.

"If you were to point to one area that would be the focal point of this economic weakness, it would have to be the retail sector."

Robert Weisman can be reached at weisman@globe.com.