Talbots renegotiates payment terms with vendors after losing bank funding

The Talbots Inc. is the latest multichannel merchant to become a victim of the financial industry’s growing wariness of funding retail operations. However, Talbots quickly responded, by renegotiating terms with its vendors and said these arrangements are expected to be sufficient to fund the company’s working capital needs under its 2008 operating plan.

In a filing with the Securities and Exchange Commission on April 15, Talbots reported that its existing $135 million letter of credit facility with HSBC would be reduced in increments and would not be renewed after August 8. In addition, another letter of credit for $130 million was not replaced. 

In response, Talbots has negotiated revised payment terms with its major vendors, extending the settlement period to 45 days from approximately 22 days on letter of credit purchases. By moving to the newly negotiated “open account” terms, Talbots expects the need for credit will be significantly reduced and to add approximately $40 million to the company’s operating cash flow. In recent years, the company had letter of credit facilities totaling approximately $300 million.

“While the credit and financial markets are in a state of considerable flux, we have an alternate plan in place, and have revised most of our vendor relationships to maximize the company’s financial flexibility and greatly reduce our need for letters of credit,” said Trudy Sullivan, president/CEO at Talbots, in a statement. “We are confident in the long-term benefits of these actions as we proceed with the execution of our strategic plan.”

As a result of these moves, the multichannel merchant believes its financing needs with respect to its remaining smaller vendors can be accommodated with a letter of credit line of approximately $50 million. Talbots is currently in discussion with several financial institutions to supply the $50 million letter of credit. The company also noted that its currently available working capital lines total $165 million, which it believes is sufficient to fund its working capital needs in 2008.

Lillian Vernon and RedEnvelope are just a couple of the other multichannel merchants to recently receive the cold shoulder from the financial industry.

Late last month, RedEnvelope said Wells Fargo Retail Finance LLC would no longer provide it with the ability to draw on its credit line. As a result, the nine-year-old gifts cataloger said it has insufficient funds to continue operations and is currently engaged in discussions with two potential acquirers.

Earlier this year, cataloger Lillian Vernon was informed by private investment firm and owner Sun Capital that it would no longer fund the company. Soon after, Lillian Vernon filed for Chapter 11 bankruptcy protection and was sold to Taylor Corp. at auction earlier this month.

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