Talbots Rises 19 Percent on Strong Quarter

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Shares of Talbots Inc., a specialty retailer of women's apparel, rose 19.49 percent in November, largely because of strong third-quarter financials and healthy catalog sales.

Talbots said Nov. 21 that its net income for the quarter rose 5 percent to $36.6 million, or 58 cents per share, from $34.9 million, or 54 cents per share, a year ago. Analysts expected a profit of 57 cents per share, with estimates ranging from 57 to 59 cents, according to Thomson Financial/First Call.

However, Talbots' total sales for the quarter that ended Nov. 3 were disappointing, as they dropped 1 percent to $393.9 million. Retail store sales fell 2 percent to $325.7 million from $331.4 million in 2000, the company said. Comparable-store sales decreased 8.2 percent, after rising 21 percent last year.

One bright spot was catalog sales, which rose 4 percent in the third quarter to $68.2 million from $65.8 million last year.

The Hingham, MA, company opened 37 new stores in the quarter and now has 787. It hopes to have 800 by the end of 2001. The company said that it is on track to open 85 new stores next year.

The retailer's shares closed their first day of trading in November up 42 cents at $28.92. They continued to rise steadily during the month. When Talbots reported its earnings Nov. 21, its shares closed the next day at $34.80, up 60 cents. On Nov. 26, the retailer's shares closed at $35.49, up 69 cents.

Arnold Zetcher, Talbots' chairman, president and CEO, said the third quarter was challenging.

"This was a very difficult period, given the dramatically challenging retail environment, and although our comparable-store sales declined 8.2 percent in the third quarter, we were still able to achieve earnings-per-share growth through strong expense and inventory controls, balanced by customer traffic-generating programs," he said in a statement.

One way Talbots hopes to control costs is by advertising less this year, a plan that analysts worry could backfire. Though analysts generally were impressed by the company's third-quarter performance -- several have raised fourth-quarter expectations as a result -- they are nearly unanimous in voicing dismay that the retailer plans to discontinue television advertising and cut back on marketing in general for the fourth quarter.

Talbots plans to slash its fourth-quarter advertising budget, to $13 million from $20 million, analysts noted.

"For the year, advertising is expected to be $71 million, versus an original budget of $89 million and $79 million last year," said Stacy Pak, an analyst with Prudential Securities. "Last year, [Talbots] advertised on television throughout the holiday season, and direct marketing included 2 million more catalogs and a scarf given to the best 100,000 customers."

This year, she said, the retailer plans to offer 15 percent off to 250,000 customers and 15 percent off the first purchase with a Talbots' credit card.

Richard Jaffe at UBS Warburg thinks cutting out television advertising could exacerbate the retailer's weak sales performance.

"The Talbots classically styled assortment continues to be appealing to the consumer, although with a difficult comparison [in November], results will likely be negative," he said in a recent report. "The elimination of television advertising could also contribute to weak sales [in November] as well."

However, Merrill Lynch analyst Mark Friedman said Talbots' no-television policy and cautious marketing approach to the fourth quarter are smart.

"The catalog and the stores are to be the greatest marketing vehicles this season with no planned television," he said. "We believe this is prudent given the environment."

In other news, Divine Inc. (DVIN) acquired Open Market Inc.

Portfolio value: If $1,000 had been invested in each of the 100 companies in the DM News portfolio at the start of the year -- for newly public companies, when the stock first closed -- the value would be $129,795, up 29.79 percent.


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