Talbots Q3 Earnings Call Transcript

123jump.com Staff
22 Dec, 2008
New York City

The apparel retailer third quarter net loss from continuing operations of $14.8 million or 28 cents per share compared net loss of $0.9 million or 2 cents per share. Sales in the quarter declined 14% to $357 million. Comp store sales declined 14%.

The Talbots Inc. ((TLB))
Q3 2008 Earnings Call Transcript
November 25, 2008; 10:00 a.m. ET

Executives

Julie Lorigan - Senior Vice President, Investor and Media Relations
Trudy Sullivan - President, Chief Executive Officer
Ed Larsen - Chief Financial Officer, Treasurer

Analysts

Jennifer Black - Jennifer Black & Associates
Janet Kloppenburg - JJK Research
Neely Tamminga - Piper Jaffray
Adrienne Tennant – Friedman Billings & Ramsey
Tracy Kogan - Credit Suisse
Kimberly Greenberger - Citigroup
Betty Chen - Wedbush Morgan
Barbara Wyckoff - Buckingham Research
Richard Jaffe - Stifel Nicolaus
Crystal Kallik - D. A. Davidson
Roxanne Meyer - UBS
Jennifer Cook - Lazard Capital Management
Marni Shapiro - The Retail Tracker
Chris Kim - J.P. Morgan
Tracy Kogan - Credit Suisse

Presentation

Operator

Good morning ladies and gentlemen and on behalf of Talbots, we would like to welcome you to the Talbots Inc. conference call covering its third quarter 2008 earnings results. Today’s call is being recorded and at this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

I would now like to turn the call over to Julie Lorigan, Senior Vice President of Investor and Media Relations.

Julie Lorigan – Senior Vice President of Investor Relations

Thank you and good morning and welcome to the Talbots Inc. third quarter conference call. Today we have with us Trudy Sullivan, President and CEO; and Ed Larsen, Talbots Chief Financial Officer.

As a reminder, certain statements to be made today are forward-looking. These are based on assumptions and expectations of future events, which may not prove to be accurate. They involve substantial risks and uncertainties. Actual results may differ materially from those expected or implied. These forward-looking statements may be identified by such terms as, will, expect, believe, anticipate, outlook, target, plan, initiative, estimated, strategy and similar terms or variations. All of our outlook and financial expectations and plans constitute forward-looking statements. We direct you to the cautionary statement being read at the end of this presentation and in our earnings release issued today, as well as in our recent SEC filings, all of which are available under the Investor Relations section at our website at www.thetalbotsinc.com A replay will be available from approximately one hour after the conclusion of the call until end of day November 28, 2008. The webcast will also be available on the Investor Relations page of our website.

With that, I would like to now turn it over to Trudy.

Trudy Sullivan – President and Chief Executive Officer

Thank you Julie and good morning everyone. In a moment, I will discuss Talbots Inc. results for the 13th period ending November 1, 2008 and Ed will cover our financial performance. I will make some closing remarks and then we will be happy to take your questions. On November 6, we announced our intention to sell the J. Jill Brand. Therefore, our comments today and going forward will focus exclusively on the performance of the Talbots brands business. Operating results for the J. Jill Brand have been reclassified as discontinued operations for the third quarter of fiscal 2008 and all prior periods. In addition during the third quarter we completed the close down of our non-core Talbots men’s, kids and U.K. business and those operations have also been reclassified to discontinued operations from the third quarter and all prior periods. So with that, lets begin.

This was a difficult quarter for Talbot, as our industry continues to face unprecedented uncertainty and volatility. This morning we announced third quarter loss per share of $0.28 from continuing operations, which includes the Talbots Missy, petite, women’s collection and accessory and shoes segments. This compares to last year’s loss per share of $0.02 on a comparable basis. Third quarter loss per share from discontinued operations was $2.85 and includes Talbot’s men’s, kids, the U.K. and J. Jill Brand businesses. After a promising start to the quarter, the picture totally changed mid September as the fiscal crisis started. Over 85% of our top line miss to last year occurred after September 13. It has been increasingly more challenging to drive customer traffic and when she is shopping, she is cautious and thoughtful regarding her purchases.

Our Talbots brand comps declined 13.9% for the period driven by a 13% decrease in transaction. Average unit retail in stores was down slightly, offset by a slight increase in units per transaction. Our average transaction value in the quarter was about flat to last year. The good news is that when she does come through our doors we are converting her. Of course to stay competitive in this environment we were more promotional than originally planned and while this increased promotional activity along with the significant drop in top line sales versus last year impacted our reported gross margin in the quarter, we did realize an improvement in operating gross margin of approximately 100 basis points over last year. This was driven by effective inventory management including tight control of our inventory levels, timely markdown, improved IMU and a consistent flow of new merchandize across all channels. Further, we continue to be out in front of our expense control initiatives and are well ahead of our goal to streamline our company’s cost structure by over $50 million this year and $100 million by the end of 2009. Ed, will talk more about this shortly.

We are focusing on what is within our control to best manage the business during this most uncertain economic cycle and at the same time; we are staying the course and moving forward with the implementation of our strategic plan. While we are still on the early stages of implementation, given this is a three year turnaround plan, we’ve accomplished a great deal in redefining our business. Despite the environment the news is not all bad and we are seeing many positive and encouraging signs in our efforts to rebuild and strengthen our company. This is the first quarter under the direction of our new creative merchandising and marketing team. We delivered three new store sets complemented by two major redesigned catalogs. We gained momentum with each delivery, as sell-through of new merchandise improved outperforming historical sell through trend. October was our strongest delivery and this positive momentum has continued into November with our holiday and expanded gift assortment.

Also we have had a favorable customer response to our marketing strategy. This fall we increased total catalog circulation by 15% to strengthen relations with existing customers and drive reactivation of our last customer. We were pleased with our overall effort, particularly in the reactivation of lost customers where we had a solid increase in response rate. We are pleased to be welcoming this lost customer back to Talbots. The overall reaction to our redesigned catalog and to our enhanced website has been very favorable. We are contacting our customer with greater frequency and with a variety of innovative offering including the adoption of hostess events in stores across the country. During the quarter we tested approximately 70 of these events in key markets where our customer or influencer invited their personal friends to the store to shop. Refreshments were served and then many cases a celebrity, model or sportswomen presented tips on fashion and outfitting. We had on average over 100 customers in attendance at each event, significantly beating our expectations for sales and attendance. We will be rolling out our hostess events to 550 stores nationwide in early December.

In addition during the quarter we completed our Talbots brand, fall 2008 consumer purchase plan study and found that customer reaction to our new fall merchandise improved 10 percentage points over fall of 2007. This is the first time in four years that we have had positive customer sentiment regarding our product. We give that two thumbs up. From a merchandise perspective our customer is voting for novelty, newness and must have emotional pieces in her purchases and is less interested in basics and she loves the pace at which we are launching new floor sets. We believe that our impactful stories with increased novelty and color are answering her needs. Strongest categories were jackets across all end users including vests, dresses and accessories particularly scarves. With our November delivery, anything pleasing is in high demand, including cardigans, tunics, tops and blouses. Overall it is our casual business that is performing better than our refined. In terms of what did not work, we were disappointed in our customer’s response to social occasion. However, we believe it has more to do with the current environment than with our assortment. Overall we did not make a sizable investment in our social occasion package. Instead our emphasis this season is on gifts giving and we are seeing positive customer acceptance.

As I said this is the just the first quarter of our re-imagined products and creative, but we feel we are solidly moving in the right direction. Further as stated in our press release this morning, with the help of Aeon, our majority shareholder, we have been working closely with our lender banks to convert our uncommitted working capital lines of credit to committed working capital lines. Mizuho Hold Bank and Sumitomo Mitsui Banking Corporation SMBC, after review and endorsement of our strategic plan, including our decision to sell J. Jill have agreed to convert their existing uncommitted $75 million and $50 million working capital lines of credit to committed lines; subject to the completion of due diligence and documentation. We are currently engaged in similar discussions with other lender banks, who have indicated their support of this direction.

This is a significant step forward for our company, further validating our strategy and direction. We feel good about the progress we are making and appreciate the on going support that Aeon and our lenders are offering as we deal with our turnaround in the midst of these most challenging times. We have the strategy and we have the financing to see it through.

I will now turn it over to Ed to review the financials, and then I will be back with some closing comments.

Ed Larsen – Chief Financial Officer

Thanks Trudy. Let me give the details of our third quarter financial performance beginning with our results from continued operations, which include Talbots Misses, Petites, Women’s, Collection and Accessories & Shoes businesses. Total sales from continued operations for the third quarter were $357 million compared to $414 million last year on a comparable basis. Retail store sales were $303 million compared to $345 million last year. Comp store sales declined 13.9% for our 13 week period, driven primarily by a decline in transactions. Direct marketing sales, which include catalog and Internet were $54 million compared to $69 million last year. This decline was primarily due to a shift in our catalog mailing strategy, where we moved our key holiday/gift book out of the third quarter and into the fourth quarter.

Third quarter cost of sales, buying and occupancy was 68.4% of net sales versus 64.4% last year. Operating gross margin improved 100 basis points over last year, but it was fully offset by de-leverage of buying and occupancy cost with a negative 13.9% comp. Selling, general and administrative expenses of third quarter were $127 million and 35.6% of net sales versus $139 million and 33.5% of net sales last year, again reflecting de-leverage from negative comps of 13.9%. We’ve made excellent progress in our goal to streamline our cost structure with important improvements in markdown optimization, increased IMU, reduced and reallocated marketing spend, closure of our Men’s, Kids and U.K. organization and headcount reductions in both our corporate office and field operations.

Net interest expense for the quarter was $4.9 million versus $8.7 million last year reflecting both long-term and short-term interest cost. Our average borrowings for the quarter were reduced to $415 million down from $551 million last year and our average interest rate for the quarter was 3.8% versus 5.8% last year. Income taxes for the quarter were a benefit of $8.4 million at a rate of 36.4%. We ended the third quarter with a net loss from continuing core operations of $14.8 million or $0.28 per share.

Now, let me talk about our results from discontinued operations, which includes Talbots Kids, Men’s and U.K. operations and the J. Jill Brand. We are currently in the process of valuing J.Jill’s net assets, including preliminary numbers in today’s press release. The fair value of these net assets is shown in net assets held for sale and net liabilities held for sale on the balance sheet. Final numbers will be included in our third quarter 10-Q, which will be on file with the SEC by December 11, 2008. So, as reported in our press release this morning, we’ve recorded preliminary non-cash impairment charge related to the write-down of the J. Jill intangible and tangible assets of approximately $138 million after tax or approximately $2.57 per share. Preliminary third quarter net loss from discontinued operations was $152 million or $2.85 per share, compared to last years net loss of $0.16 per share on a comparable basis.

The breakdown of discontinued operations between Kids, Men’s U.K., Jill operations and Jill impairment was included in Exhibit I, which is attached to our press release and on our company’s website under Investor Relations, financial highlights. We will post today the reclassification schedules for continuing and discontinued operations to the third quarter of fiscal 2008 with comparisons to last year. In the third quarter, weighted average shares outstanding were approximately $53.5 million. Turning to the balance sheet; we ended the third quarter with total accounts receivable of $207 million versus $225 million last year, comprised entirely of Talbots charged receivables. Talbots charge penetration increased to 48% of sales this year versus 45% last year and finance charge revenue increased to $11.7 million in the third quarter, compared to $10.2 million last year or a gain of 15%. The performance of our credit card portfolio remained solid and stable with results significantly better than what we’ve seen reported throughout the industry. We believe this reflects the overall quality of our customer base. Our average customer piker store is at over 760, so the upper 10% of all U.S. consumers and while bad debts were up modestly year-to-date to $2.6 million versus $1.9 million last year, they’ve remained well contained.

Based on a year-to-date performance, write-off performance and account receivable at the end of third quarter, we expect total bad debts for the year to be approximately $3.6 million to $3.7 million. While our current portfolio remained strong, we continue to see growth in new accounts as well with increase of 8% year-to-date over last year. Total merchandise inventories for the Talbots brand at the end of the quarter were $226 million, down 23% compared to last year’s $294 million. This reflects strong inventory management, it consist of flow of new merchandise and timely markdowns. We ended the quarter with accounts payable to our vendors of $144 million versus $98 million last year, which is up 45% due to the shift in open account terms with our vendors.

At the end of the quarter, loans payable to banks were $106.5 billion versus $107.2 billion last year. This is against available working capital lines of credit of $215 million and we have a compliance with our debt covenants at the end of the third quarter. Moving to capital expenditures, we spent a total of $30 million year-to-date versus $43 billion last year and our 2008 capital plan is at $53 million for the Talbots brand, which excludes all J. Jill spending and during the period, we paid a quarterly cash dividend of $0.13 per share.

Before I turn it over to Trudy, let me comment on a few of the items beginning with a current status of our pension plan. The company does maintain a defined benefit pension plan, which was posed to new participants on January 1, 2008. We are making required periodic payments to our pension fund in fiscal 2008, which will total approximately $11.5 million. We anticipate that our required periodic payments to the pension plan for fiscal 2009 will be approximately $14 million to $15 million and finally, as we look ahead to fiscal 2009, we will conservative in our posture. We are in the early stages of our budgeting process. We will continue to operate on lean inventories and continued tight expense control. We’ll be scaling back on expenses for next year, with our target capital spending at less than $40 million.

Now, let me turn it back to Trudy for some closing comments.

Trudy Sullivan

Thanks, Ed. These are clearly challenging times we are all navigating through. That said, we will continue to manage the business by focusing on what is in our control and by preserving capital and liquidity. We have a brand with a tremendous future and the financial support to get us through to that future. We are very pleased to have the ongoing support of Aeon, a majority shareholder and believe that the commitment from those Mizuho bank and SMBC is a significant step forward for our company and we will continue to rigorously work with our other lender banks so that they may fall suit quickly. This action not only serves to validate our strategic direction, but gives us a greater stability during these difficult times, so we can focus on restructuring our business.

Finally, I want commend our associates who rise to the occasion everyday. Their response to managing in these times is mature, professional and forward thinking. Although, we expect the environment to be very challenging through the next year, we remain confident in the strength of our Talbots brand, our overall strategy and the steps we are taking to position our company for near and long-term improvement and profitable growth.

Thank you and now we would be very happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Ladies and gentlemen at this time we’ll open the call for the question-and-answer session. Please press”*1” on your push button phone if you’d like to ask a question. In order to allow time for everyone’s enquiry to be answered please limit your question to one and we’ll pause for just one moment please. Your first question comes from Jennifer Black with Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

Good morning and congratulations on making some great headway.

Trudy Sullivan

Thanks Jennifer.

Jennifer Black - Jennifer Black & Associates

I wondered if you could talk about your lapse customer returning and I wondered if she’s coming back multiple times and then also are you seeing your current customer not lapsed coming back more frequently as well. Thank you.

Trudy Sullivan

We know our current customer is an intense loyalist, so she shops very frequently with us. I mean, our own study shows she’s virtually in the store multiple times a month, but we are really encouraged by the lapsed customer and we’ve reached out to her through the catalog and the response rate on the catalog from the lapsed customers actually surprised us. I mean it’s almost as the same response rate that we would get in our current house file, so that’s really, really encouraging and we just started to reach to the lapsed customer with this fall. So her response enables us to mail her again, probably at least another book in this fall and also we’re getting them back in the store through these hostess events. So, it is encouraging and we will continue to redirect our prospecting to reactivation just to continue to support it.

Operator

Your next question comes from Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Let me add my congratulations on improving on these assortments. I think it looks so much better.

Trudy Sullivan

Thanks Janet.

Janet Kloppenburg - JJK Research

I’m a little bit confused about a statement that’s in your press release and that you reiterated on the call. We are hearing the business was very tough in November and you’re talking about an improved response to your assortments; so I’m confused. Is that for us to interpret that business has improved here in November from October or are you facing the same headwinds, just that the momentum in the new business or the new assortment is stronger than expected. If you could help me understand and interpret that for the go forward I would appreciate it. Thank you.

Trudy Sullivan

Janet, we are not giving you any hidden clues on November. November, with the changing calendar, it has pressures to it, but what we are talking about is the reaction to the new product that slowed in November. As I said in my remarks, we were a little disappointed in the reaction to social occasion, which is very small part of the buy, but actually the bigger November floor sets which is gift giving-driven, we’ve been pleased with and we’ve seen the same kind of sell-through rates, actually slightly better sell-through rates in the November floor set that we saw in October. So what we are really saying is October was better than September on sell through rates of new products and November appears to be even a little bit stronger than October, but we are still suffering like everybody else with the transaction decline and all of the macro pressure. Does that help?

Operator

Your next question comes from Neely Tamminga with Piper Jaffray

Neely Tamminga - Piper Jaffray

Great good morning, just a very specific question here for Ed; the 400 basis point decline we saw in gross margin, you mentioned through some of the components there, but how much of Q3’s gross margin decline actually counts for markdown accruals yet to be realized in Q4. Maybe said another way utilizing a retail method of accounting, have you adjusted some of the value of your flows of inventory because of the promotional environment etc in Q3 to anticipate trends in Q4.

Ed Larsen

Certainly, certainly.

Neely Tamminga - Piper Jaffray

Did you quantify that, though?

Ed Larsen

It’s just over 100 basis points probably.

Neely Tamminga - Piper Jaffray

Thank you.

Operator

Your next question comes from Adrienne Tennant with FBR.

Adrienne Tennant – Friedman Billings Ramsey

Good morning and my congratulations on the progress and the merchandize.

Trudy Sullivan

Thank you.

Adrienne Tennant – Friedman Billings Ramsey

My question is on the committed lines, so also congratulations on those; are there any changes in terms and then what are the expiration dates on those, and then just secondly if I could, to the extent that you have a dividend, why in this type of environment when we are looking at such intense cash preservation would you not consider cutting that or doing away with it altogether. Thanks.

Trudy Sullivan

Adrianne, we’re going to discuss the terms of the committed lines and your second point on the dividend, our board looks at that dividend every single quarter and takes the prudent decision at that time. So of course it will be among a number of things that the board would consider.

Operator

Your next question comes from Tracy Kogan with Credit Suisse.

Tracy Kogan - Credit Suisse

Thanks, just a quick follow-up on the last question; I assume that the new committed lines do you have covenants and can you just say are these covenants in terms of the leverage and coverage ratios the same as your other covenants and then can you give us the actual number that you would add at the end of the quarter. I know you said you’re in compliance, but if you could give us the number, that would be great. Thanks.

Ed Larsen

Tracy we are still in final discussions with the banks on the terms on the dates and on possible covenants, so we are not prepared to discuss that at this time.

Operator

Your next question comes from Kimberly Greenberger with Citigroup.

Kimberly Greenberger – Citigroup

Hi thank you good morning. I’m sorry I didn’t hear the answer to Tracy’s second question on your income plans at the end of the third quarter and if you could just give us what those metrics were, that would be helpful and then I’ll ask my question after that.

Ed Larsen

Sure, they moved on too fast. The only covenant we’ve ever had a problem with is the leverage covenant. Our threshold is 4 and we were at 3.5.

Kimberly Greenberger – Citigroup

Okay, and Ed could you comment on any vendors or factors that are cutting back on their ability to underwrite your receivables; any factors no longer proving orders or any vendors that you have on board with your open account terms at the beginning of the year pulling back?

Ed Larsen

I’m not aware of any vendors or factors that have reduced their commitments to Talbots. About 95% of our vendors or volume is on open account, a very limited amount is on LC’s and they are very well supporting us all the way through. They are eager to do business with us.

Operator

Your next question comes from Betty Chen with Wedbush Morgan.

Betty Chen - Wedbush Morgan

Thank you, good morning. Ed I was wondering if you can remind us; I think the vendor terms were valid for this year that you had mentioned they would be up for renegotiation. So, could you let us know maybe on the timing and the process and then also what is your anticipative free cash flow by the end of this year? Thank you.

Ed Larsen

Now, Betty we have communicated with our vendors that in this kind of credit environment we will not have LC’s available. So they are prepared to go open account 45 days throughout 2009. We have recast our cash flow financial statement, which reflects continued operations and we’ve consolidated all the discontinued down below and our free cash is an estimate right now, but it looks like our free cash flow would be about $20 million to $30 million mostly offsetting, at the end of the year would be approaching $80 million to $100 million.

Operator

Your next question comes from Barbara Wyckoff with Kempingham Research.

Barbara Wyckoff - Buckingham Research

Hi, Buckingham Research. Good job on streamlining efforts, improving products and execution.

Trudy Sullivan

Thank you, Barbara.

Barbara Wyckoff - Buckingham Research

Could you talk about your systems for running the business? I guess both in stores and direct-to-consumer do you think they are up to par and can you update us on how they stack up and then could you talk about the difference in performance. Was there any difference in the performance between the Missy business and the special size business? Thanks.

Trudy Sullivan

Well, I’ll let Ed comment on the systems, but I will tell you, our trend in our special size business both Petites and Women’s is pretty consistent with Missy. Maybe it’s just a little slightly stronger on the woman side, but they are all pretty consistent.

Ed Larsen

I would say we are very satisfied with our systems. If we started spending more money on systems, going back to Y2K would have made your upgrades to our financial systems; we’ve upgraded our PLS systems. We’ve always upgraded our merchandising systems; we’ve brought up ProfitLogic last year; our markdown optimization. So, we have key things on the slate for going forward; most of them in the area of sourcing and inventory management planning, but we are making good progress and we are satisfied. We have the tools to run the business where we think we need to run it.

Operator

Your next question comes from Richard Jaffe with Stifel Nicolaus.

Richard Jaffe - Stifel Nicolaus

Thanks very much guys. I guess I had just a quick book keeping question than a more substantial one. First, will you guys be providing restated numbers on a quarterly basis without men’s, kids, U.K. or J. Jill, so we can sort of have an apples-to-apples comparison going forward?

Ed Larsen

Yes, Richard. I mentioned in my script those will be on our website today. We are restating first quarter, second quarter, second quarter year-to-date and you’ll have third quarter, third quarter year-to-date and ’07. In fact Trudy just tells me they are already on our website; reclassifying kids, men’s, U.K. and J. Jill down to discontinued ops, so you can see that the pure Talbots brand going back.

Operator

Your next question comes from Crystal Kallik with D. A. Davidson.

Crystal Kallik - D. A. Davidson

Good morning Ed, my congratulations as far as the implementation of the merchandize which is very impressive. Ed, when I look at the Talbots only it looks like SG&A was down on a dollar basis about $11 million Q3 last year to this year. I’m just wondering your thoughts as you guys mentioned in a prior pres release about additional supply chain savings you just identified. I’m just trying to get handle on what we should be thinking about on a dollar basis for SG&A for Q4, pure Talbots?

Ed Larsen

Well, let me address that broadly. We have major initiatives in place for our cost structure, we realigned them. We talked about $50 million for ’08 and $100 million for ’09. Our current estimates internally have surpassed that. Much of that is coming at cost of sales through significant IMU improvement and significant markdown improvement with markdown optimization, but we’re really taking a real tough line on our expenses. It’s a $12 million drop here that is apples-to-apples. Some of that is headcounts, some of that is catalogs moving from the third quarter to the fourth quarter, but we expect tight express controls as we go through the rest of the year and 2009. We’re in the middle of our budgeting process; everyone is really fine tuning the pencils to try to get this number down.

Operator

Your next question comes from Roxanne Meyer with UBS.

Roxanne Meyer – UBS

Very good morning and Trudy you have my congratulations on much improving merchandize.

Trudy Sullivan

Thanks Roxanne.

Roxanne Meyer – UBS

Just two questions; one, I was wondering if you could elaborate on your CapEx plan for next year, which are a nice haircut there; just what you’re going to be focusing your spending on and maybe pushing back into the out years and then looking at your balance sheet. It looks like you’ve taken some impairment of store assets and I guess I’m wondering, I’m assuming that’s for the Talbots brand and if you could talk to that and what you’re seeing at the store level there? Thanks.

Ed Larsen

Roxanne, we’re going to be very tight on capital next year. First, we look at our expansion plan, we’re pushing everything out that we can out of 2009 into 2010, but we want to support our premium outlet strategy. We’re going to open 12 premium outlet stores next year. So that’s a lock and we have about eight other Talbots stores that we attributed to; we will keep those; that’s 20 on the Talbots brand and right now we have three Jill stores that we’re committed to, so we would open those. So, that is going to take us for capital and some renovation money, probably somewhere in the low to mid 20s and then we’re looking at the IT study we need to do and other kind of corporate things. So, we will be below $40 million, that’s kind of our goal at this point. Impairment we do have some store impairment from Talbot’s stores that is the $2 million you’ll see on P&L for impairment. That is all Talbots and $2.5 million year-to-date.

Operator

Your next question comes from Todd Slater with Lazard Capital Management.

Jennifer Cook - Lazard Capital Management

Hi, this is actually Jennifer for Todd. Let me add my congratulations. A couple of questions; first of all, I guess could you talk a little bit about the sale of J. Jill; when do you expect that to happen?

Trudy Sullivan

Jennifer, we’re not going to comment on the sale of J. Jill. We announced that with our sales release several weeks ago and when we have something to report, we’ll report it.

Operator

Your next question comes from Marni Shapiro with The Retail Tracker.

Marni Shapiro - The Retail Tracker

In 2008 the stores really look great.

Trudy Sullivan

Thanks Marni.

Marni Shapiro - The Retail Tracker

Can you talk a little bit about different trends and traffic between stores in malls versus non-malls, parts of the country and also your direct business versus the stores, traffic wise?

Trudy Sullivan

Yes, it’s really interesting. I would say, the traffic trends are pretty consistent across store types, with the exception that some of our stores that are in the most upscale malls are having the highest traffic issues and so it could be reflective of what’s happening in that class of trade, but its pretty consistent across the board. Interestingly stores that are non-mall, town center stores are having the least problem with the negative traffic trend. Also in terms of the catalog, as Ed and I both noted, our catalog business isn’t very good. Our Internet business is increasing as a percentage of our overall direct business. We did shift that book out of the third quarter and into the fourth quarter strategically; actually added pages and made it a big holiday book and as we said in our opening remarks, we think this will have a definite benefit to the direct business in the fourth quarter. So, we are seeing good and steady reaction to the book and the actual reaction to create it has been very good. As I said earlier, we invested in prospecting and reactivation in the book that were mailed in September, October, November and we’re quite pleased with the response on the reactivation mailings.

Operator

We have a follow up question from Kimberly Greenberger with Citigroup.

Kimberly Greenberger – Citigroup

Thanks. On the gross margin line we’ve seen total gross margin down 400 and the merchandise margin up 100, that’s 500 basis point differential. Is that all de-leveraging on occupancy and buying or is there something else in there?

Ed Larsen

It’s about 100 basis point improvement on operating gross margin, its 100 going the other way on marked down reserves and its 400 on de-leverage on buying and occupancy.

Operator

We also have a follow up question from Adrienne Tennant with FBR.

Adrienne Tennant – Friedman, Billings, Ramsey

Yes, I guess I have two house-keeping things. On the kids and men’s closures, what was the cash closure per store or either in dollars and also in number of months of rent, I mean if you can give that. My second just house-keeping; historically, can you tell us what the average merchandise margin was and what the peak merchandise margin was? Thank you.

Ed Larsen

Well the closures vary by store; each one is a case by case basis, but if you look at the overall average, I think we’ve closed the kids and men’s businesses with I believe about nine months rent, that’s our average I think.

Operator

Your next follow up question is from Richard Jaffe with Stifel Nicolaus.

Richard Jaffe - Stifel Nicolaus

Just a follow-up on the catalogue and the shift in the holiday book from 3Q to 4Q and obviously it’s hard for us to understand it. Could you just provide some color on the results of the October book; up to plan, below plan and then the outlook for the holiday book?

Trudy Sullivan

The October book and September book were both up to our plan and we moved the holiday book out of October into the beginning part of November, because we’re committed to have our floor set and our catalogue drop all at the same time. We feel it’s a much stronger impression on the brand and so what we’re looking at right now, it’s very favorable for fourth quarter. I mean, the way that the book is behaving right now, we’re very pleased with the response. So as we said, it’s very favorable to the fourth quarter direct business.

Operator

Your next follow up question comes from Todd Slater with Lazard Capital Management.

Jennifer Cook - Lazard Capital Management

Hi, it is Jennifer. I actually have a couple of follow-ups. Maybe rephrasing that last question, could you quantify the impacts of the shift on the third quarter and then before I get cut off again let me ask a couple of more.

Ed Larsen

Jennifer, what was that question?

Jennifer Cook - Lazard Capital Management

Could you quantify the impacts of that catalogue shift into November from October on the third quarter?

Trudy Sullivan

We have it actually in the opening comment…it’s actually in the press release Jennifer, the decline in sales in the third quarter direct business and we say it was strategically because of the shift in this book.

Jennifer Cook - Lazard Capital Management

Right, that was decline, I didn’t see it. Did you try to quantify an amount for that?

Trudy Sullivan

No. I mean as we said it is principally due to the shift in the book so.

Jennifer Cook - Lazard Capital Management

So, otherwise do you think that it would have been flat?

Ed Larsen

Very close.

Trudy Sullivan

Yes, very close.

Jennifer Cook - Lazard Capital Management

Okay and then are you going to restate fourth quarter ‘07?

Ed Larsen

Yes we will.

Jennifer Cook - Lazard Capital Management

Today?

Ed Larsen

Yes we will.

Jennifer Cook - Lazard Capital Management

Okay.

Ed Larsen

It might be up there already I don’t know.

Jennifer Cook - Lazard Capital Management

I didn’t see it. I saw Q1, 2 and 3.

Ed Larsen

Okay.

Jennifer Cook - Lazard Capital Management

And then could you talk a little bit about what kind of changes you’re seeing in softer rates as opposed to that age and are you still on an eight-week markdown schedule? Thanks.

Trudy Sullivan

Yes, we are pretty much on an eight week markdown schedule. I will say, when we took our first read on social occasion, we accelerated the markdown schedule. We really saw in a recommendation of the ProfitLogic tool on that, but generally we are sticking to the eight weeks markdown schedule. Our sell-through is, even when our brand moment as we call it goes to secondary position, we would naturally follow-up from its initial sell through, but its pretty much tracking as we hoped it would track and in both cases above what our historical sell-through trends have been.

Operator

Your next question comes from Chris Kim with J.P. Morgan.

Chris Kim - J.P. Morgan

I apologize if I missed on the call and you had to wait. What is the planned increase in the catalogue circulation in the fourth quarter?

Ed Larsen

It’s about 30%.

Chris Kim - J.P. Morgan

All right thank you.

Operator

Your next follow up question is from Tracy Kogan with Credit Suisse.

Tracy Kogan - Credit Suisse

Thanks, just a follow up on the earlier question about the cost of closing. The kids and men’s stores; given the state of the capital market, have you come up with a plan B for J. Jill? In other words have you talked with any of the landlords about the potential cost of closing some of those stores or would you maybe convert some of those to Talbots? Thanks.

Trudy Sullivan

So, first we are not going to comment on anything that has to do with the J. Jill transaction and then I will pass it to Ed for the men’s and kids answer.

Ed Larsen

Well, I think we covered the men’s and kids. It costs us about nine months rent to get out.

Operator

Your next question comes from Jennifer Black with Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

It seems as though that you have a huge opportunity in jewelry and I’m assuming that the margins are much higher in jewelry and so I wondered if you could speak to that and then also are there any accessory classifications that you are excited about and then I guess secondly will you be focusing less on the refined product because you spoke about the refined product not doing as well?

Trudy Sullivan

Jennifer, we have a significant opportunity in jewelry and we’re excited about it and your comment on margins is right on. Other categories that we are really doing extremely well within accessories right now, is the whole scarf category and as we tightly merchandise scarves to every single brand moment, we’ve seen really accelerated sell-through in every single delivery on the scarf business, so we are very excited there. We are excited about the handbag business and we are starting to get excited about reinventing our shoe business. We’ll have a new approach to that, but all-in-all, as we said, the accessory business could actually double in size for Talbots, that’s the opportunity we have in that category and we’re particularly focused on the jewelry and fashion accessory side of it. So, the second question?

Ed Larsen

Refined.

Trudy Sullivan

Oh refined sorry. We are a brand that always has to have a balance between casual and refined. Right now the casual side of the business is what is really, really driving our business with great strength in categories like jackets of all types, high novelty content. Where we don’t do well in refined is where it’s a literal suit, it’s a very conservative classic, very matched suit. So, our approach to refined is going to be more a refined sportswear approach as opposed to a refined suiting approach and of course we’ll continue to push casual. All of our research shows us that she loves casuals and she wants us to do even more and that’s the best where we are planning at.

Jennifer Black - Jennifer Black & Associates

Thank you.

Operator

Your next question comes from Barbara Wyckoff with Buckingham Research.

Barbara Wyckoff - Buckingham Research

Hi one more follow up. What’s the latest approach to collection? Do you need it and/or you’re using it as a testing ground; sort of where are you in the idea of collection?

Trudy Sullivan

Well, Barbara I would tell you we are still testing it. We believe there’s a room in our assortment, because we want to have the peak of the pyramid. We haven’t expanded it’s footprint at the store level, yet we’ve gone back. Our approach on collection is that it truly is 30% to 50% more expensive than core, but stylistically it relates to the core offer. So, it would allow our customer if she wanted to buy a component of collection and match it back to something that might be less expensive than core. We think there is room for it, but we are going to walk before we run. We are very pleased with how it looks as we go forward into spring summer and we’ll stay tuned. Once we think we have refined our approach, we believe we could double the number of collection stores, but we are not going to do that until we have some more proof of the approach that we are taking.

Operator

Your next question comes from Dana Telsey with Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Hi good morning everyone. Can you talk a little bit about sourcing; what you’re seeing in terms of sourcing costs; how that’s changed and also opportunities for IMU given the current assortment? Would the changes in ordering patterns and just the changes in the economy of the scale because the size you are busying; is there any adjustments? Thank you.

Trudy Sullivan

Well, we have significant sourcing opportunity and I would say that IMU is right up there. So, we’ve got some very aggressive objectives for IMU. For spring season alone we’re looking at greater than 300 basis points improvement in IMU over the last year as we just start to implement our supply chain strategy. We do have some significant opportunities from several areas. One is country migration, so that we are actually handling that in a much more effective way. One is that the whole competitive bidding and negotiation skill set that we’re frankly under leveraged it as a company and then thirdly, leveraging our vendors buying power with our mills and so, we see tremendous opportunity in our supply chain. We have a great new team there, led by an incredibly capable chief supply chain officer and we’ve laid some very significant tract for improvement in 2009 and 2010.

Operator

We don’t have time for anymore questions. Ms. Sullivan, please continue with any closing remarks.

Trudy Sullivan

Well thank you for joining us today. We are encouraged by the signs that we are seeing in our business, particularly in response to our merchandising and creative. We feel we are moving in the right direction. Thanks to our partnership with Aeon; we believe we have taken big step to improve the liquidity of the company and we’re managing through this very difficult time. We’re taking all the necessary steps to ensure that we have the financial support to see our way all the way through our three year turnaround plan. With that thank you and have a wonderful holiday.

Operator

This concludes the Talbots Inc. conference call. We will now proceed with the full forward-looking statement. The forward-looking contains forward-looking information within the meaning of The Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “achieve,” “plan,” “look,” “belief,” “anticipate,” “outlook,” “will,” “would,” “should,” “guidance” or similar statements or variations of such terms. All of the information concerning our financial outlook, including future profitability, future comparable store sales, future earnings and other future financial performance or operating measures, future credit facilities, future merchandise purchases, future cash needs and other future financial performance or financial position constitutes forward-looking information.

Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company; are not guarantees of future results or performance and involve substantial risks and uncertainty, including assumptions and projection concerning our internal plan including our budget for regular price and marked down selling and operating cash flow for forward periods. All of our forward-looking statements are as of the date of this release only. The company can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially from our forward-looking statements. The company does not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances occurring after the date of this release. Even in such result, changes or circumstances make it clear that any forward-looking information will not be realized.

Any public statements or disclosures by us following this release, which modify or impact any of the forward-looking statements contained in or accompanying this release will be deemed to modify or supersede such statements and/or accompanying this release. Our forward-looking statements involve substantial known and unknown risks and uncertainties as to future events, which may or may not occur, including the following risks. The companies decision concerning and the risks and uncertainties associated with the decision to pursue a sale or disposition of the J. Jill brand business including the timing, consideration, maybe received or other terms of any such sale or distribution.

The impact of the continued significant deterioration and the U.S. economic environment, including continued negative impact on consumer discretionary spending, the disruption and significant tightening in the U.S. credit and lending markets, recessionary pressures increasing and unemployment and fluctuation in energy lending markets, recessionary pressures including unemployment and fluctuations in energy, prices and the value of U.S. dollar, significant impact of the global financial crisis and the retail consumer industry, including bankruptcies and governmental actions, the success and customer acceptance of our new merchandise offerings including our winter and other seasonal fashion and merchandise offer.

Our ability to accurately estimate and forecast future regular price and markdown selling and operating cash flow, achieving the company’s sales plan for the balance of the year, achieving the company’s operating cash flow plan for the year, successfully executing the company’s strategic initiatives, including supply chain initiatives, anticipated lower inventory levels, expected operating expense and other cost reductions, the success of the new promotional cadence for the Talbots brand, reduce markdown exposure and improved gross margins.

The successful closing of underperforming stores, continued ability to purchase merchandise on open account purchase terms at expected levels, obtaining letter of credit facilities for merchandise purchases from vendors who require such facilities, the company’s credit facilities and its ability to have access on satisfactory terms to adequate credit and sources of liquidity necessary to fund its operations and to obtain any necessary increases in its credit facilities as maybe needed from time-to-time, the company’s ability to reduce spending as needed and the company’s ability to continue to satisfy its financial covenants under its existing debt agreements.

In each case, actual results may differ materially from such forward-looking information. Certain other factors that may cause actual results to differ from such forward-looking statements are included in the company’s periodic reports filed with the Securities and Exchange Commission and available on the Talbots website at www.thetalbotsinc.com under Investor Relation and you are urged to carefully consider all such factors.