UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended October 31, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from __________ to __________

Commission File Number: 1-12552

THE TALBOTS, INC.

(Exact name of registrant as specified in its charter)

Delaware		41-1111318
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Talbots Drive, Hingham, Massachusetts 02043

 

(Address of principal executive offices)

Registrant’s telephone number, including area code 781-749-7600

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

          Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Class			Outstanding as of December 09, 2009
	Common Stock, $0.01 par value			55,039,102

 

 

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations (unaudited) for the Thirteen and Thirty-Nine Weeks Ended October 31, 2009 and November 1, 2008			3
Condensed Consolidated Balance Sheets (unaudited) as of October 31, 2009, January 31, 2009, and November 1, 2008			4
Condensed Consolidated Statements of Cash Flows (unaudited) for the Thirty-Nine Weeks Ended October 31, 2009 and November 1, 2008			5
Notes to Condensed Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4. Controls and Procedures			37
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 6. Exhibits			40
Signatures			41
EX-2.1 Amendment No. 1 to Asset Purchase Agreement and Parent Disclosure Schedule, dated as of July 2, 2009
EX-2.2 Amendment No. 2 to Asset Purchase Agreement, dated as of September 30, 2009
EX-10.1 Offer Letter between The Talbots, Inc. and John Fiske, III, dated as of March 20, 2009, executed on September 20, 2009
EX-10.2 Severance Agreement between The Talbots, Inc. and John Fiske, III, dated as of March 20, 2009, executed on September 20, 2009
EX-10.3 Summary of The Talbots, Inc. Executive Medical Plan dated June 19, 2007
EX-31.1 Section 302 Certification of Chief Executive Officer
EX-31.2 Section 302 Certification of Chief Financial Officer
EX-32.1 Section 906 Certification of Chief Executive Officer and Chief Financial Officer

THE TALBOTS, INC. AND SUBSIDIARIES

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 31,				November 1,				October 31,				November 1,
		2009				2008				2009				2008
Net Sales		$	308,891			$	357,275			$	919,707			$	1,167,258
Costs and Expenses
Cost of sales, buying and occupancy			185,591				244,504				616,986				769,717
Selling, general and administrative			99,216				127,318				304,919				382,444
Restructuring charges			389				1,505				9,660				10,148
Impairment of store assets			1,320				2,223				1,351				2,576
Operating Income (Loss) from Continuing Operations			22,375				(18,275	)			(13,209	)			2,373
Interest
Interest expense			7,236				4,965				21,836				15,506
Interest income			34				61				253				246
Interest Expense — net			7,202				4,904				21,583				15,260
Income (Loss) Before Taxes from Continuing Operations			15,173				(23,179	)			(34,792	)			(12,887	)
Income Tax Benefit			(291	)			(8,416	)			(10,957	)			(4,679	)
Income (Loss) from Continuing Operations			15,464				(14,763	)			(23,835	)			(8,208	)
Loss from Discontinued Operations, net of taxes			(911	)			(155,996	)			(9,666	)			(185,918	)
Net Income (Loss)		$	14,553			$	(170,759	)		$	(33,501	)		$	(194,126	)
Basic Net Income (Loss) per share:
Continuing Operations		$	0.29			$	(0.28	)		$	(0.44	)		$	(0.15	)
Discontinued Operations			(0.02	)			(2.91	)			(0.18	)			(3.48	)
Net Income (Loss)		$	0.27			$	(3.19	)		$	(0.62	)		$	(3.62	)
Diluted Net Income (Loss) per share:
Continuing Operations		$	0.28			$	(0.28	)		$	(0.44	)		$	(0.15	)
Discontinued Operations			(0.02	)			(2.91	)			(0.18	)			(3.48	)
Net Income (Loss)		$	0.26			$	(3.19	)		$	(0.62	)		$	(3.62	)
Weighted Average Number of Shares of Common Stock Outstanding:
Basic			53,856				53,489				53,768				53,411
Diluted			55,081				53,489				53,768				53,411
Cash Dividends Paid Per Share		$	—			$	0.13			$	—			$	0.39

See notes to condensed consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

		October 31,				January 31,				November 1,
		2009				2009				2008
ASSETS
Current Assets:
Cash and cash equivalents		$	72,005			$	16,718			$	21,841
Customer accounts receivable — net			182,725				169,406				206,772
Merchandise inventories			165,892				206,593				226,343
Deferred catalog costs			7,751				4,795				10,192
Due from affiliates			1,789				376				279
Deferred income taxes			—				—				50,788
Income tax refundable			—				26,646				—
Prepaid and other current assets			49,579				35,277				50,761
Assets held for sale — current			—				109,966				256,150
Total current assets			479,741				569,777				823,126
Property and equipment — net			233,653				277,363				288,783
Goodwill			35,513				35,513				35,513
Trademarks			75,884				75,884				75,884
Deferred income taxes			—				—				53,695
Other assets			14,912				12,756				22,680
Total Assets		$	839,703			$	971,293			$	1,299,681
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current Liabilities:
Accounts payable		$	103,407			$	122,034			$	144,222
Accrued liabilities			150,674				148,356				132,445
Notes payable to banks			141,100				148,500				106,500
Current portion of long-term debt			80,000				70,377				116,542
Current portion of related party debt			8,506				—				—
Liabilities held for sale — current			—				94,190				95,070
Total current liabilities			483,687				583,457				594,779
Long-term debt less current portion			20,000				238,000				212,000
Related party debt less current portion			241,494				20,000				—
Deferred rent under lease commitments			124,126				115,282				118,838
Deferred income taxes			28,456				28,456				—
Other liabilities			132,501				164,195				136,891
Commitments
Stockholders’ (Deficit) Equity:
Common stock, $0.01 par value; 200,000,000 authorized; 81,473,215 shares, 81,125,526 shares, and 80,937,126 shares issued, respectively, and 55,068,373 shares, 55,376,371 shares, and 55,292,511 shares outstanding, respectively			815				811				809
Additional paid-in capital			497,311				492,932				493,363
Retained (deficit) earnings			(52,779	)			(19,278	)			343,105
Accumulated other comprehensive loss			(50,028	)			(67,079	)			(14,659	)
Treasury stock, at cost; 26,404,842 shares, 25,749,155 shares, and 25,644,615 shares, respectively			(585,880	)			(585,483	)			(585,445	)
Total stockholders’ (deficit) equity			(190,561	)			(178,097	)			237,173
Total Liabilities and Stockholders’ (Deficit) Equity		$	839,703			$	971,293			$	1,299,681

See notes to condensed consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Amounts in thousands

		Thirty-Nine Weeks Ended
		October 31,				November 1,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(33,501	)		$	(194,126	)
Loss from discontinued operations, net of tax			(9,666	)			(185,918	)
Net loss from continuing operations			(23,835	)			(8,208	)
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:
Depreciation and amortization			57,087				63,464
Impairment of store assets			1,351				2,576
Amortization of debt issuance costs			2,320				267
Deferred rent			(7,978	)			1,096
Compensation expense related to stock-based awards			4,277				6,826
Loss (gain) on disposal of property and equipment			76				(21	)
Deferred income taxes			(10,226	)			(12,193	)
Tax expense from options exercised			—				76
Excess tax benefit from options exercised			—				(122	)
Changes in assets and liabilities:
Customer accounts receivable			(13,176	)			3,733
Merchandise inventories			41,137				21,393
Deferred catalog costs			(2,956	)			(3,943	)
Due from affiliates			(1,413	)			2,761
Prepaid and other current assets			(12,887	)			(22,010	)
Income tax refundable			26,646				—
Accounts payable			(17,719	)			(971	)
Accrued income taxes			—				(3,445	)
Accrued liabilities			(16,179	)			(24,943	)
Other assets			(676	)			8,425
Other liabilities			(5,041	)			(5,548	)
Net cash provided by operating activities			20,808				29,213
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment			(17,106	)			(32,258	)
Proceeds from disposal of property and equipment			61				2,555
Net cash used in investing activities			(17,045	)			(29,703	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from working capital notes payable, net			—				106,500
Proceeds from working capital notes payable			8,000				—
Payments on working capital notes payable			(15,400	)			—
Proceeds from related party borrowings			230,000				—
Payments on long-term borrowings			(208,351	)			(60,374	)
Payment of debt issuance costs			(1,833	)			(827	)
Purchase of treasury stock			(397	)			(1,467	)
Proceeds from options exercised			—				887
Excess tax benefit from options exercised			—				122
Cash dividends			—				(21,562	)
Net cash provided by financing activities			12,019				23,279
EFFECT OF EXCHANGE RATE CHANGES ON CASH			537				(249	)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Operating activities			(26,103	)			(7,578	)
Investing activities			63,827				(18,541	)
Effect of exchange rate changes on cash			29				(61	)
			37,753				(26,180	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			54,072				(3,640	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			16,551				24,280
DECREASE IN CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS			1,382				1,201
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	72,005			$	21,841

See notes to condensed consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

     With respect to the unaudited condensed consolidated financial statements set forth herein, all adjustments, which consist only of normal recurring adjustments necessary to present a fair statement of the results for the interim periods, have been included. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the fiscal year ended January 31, 2009 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). All material intercompany accounts and transactions have been eliminated in consolidation. Subsequent events have been evaluated through December 10, 2009, the date of issuance of these condensed consolidated financial statements.

2. MANAGEMENT’S PLAN AND RECENT EVENTS

     The Company believes that the economic recession has had a significant impact on its business during 2008 and in 2009 to date, and anticipates that macroeconomic pressures will continue to impact consumer spending throughout the balance of 2009 and potentially beyond. Despite the challenging retail economic environment, the Company has achieved profitability in the third quarter 2009 following five consecutive quarters of operating losses.

     During 2008, the Company launched a comprehensive review of its entire business to develop a long-range strategy to strengthen the Company and to improve its operating performance. The Company’s primary objective was to reinvigorate its core Talbots brand and to streamline its operations. As a result, the Company made the decision to exit its Talbots Kids, Mens and U.K. operations. Beginning with the third quarter of 2008, the results of these businesses were reported as discontinued operations. These strategic initiatives have resulted in significant restructuring and impairment charges in 2008 and in 2009 to date. The Company’s restructuring charges primarily relate to activities intended to reduce costs.

     The implementation of the Company’s strategic plan began before the economic downturn that occurred in fall 2008. Earlier this year the Company made adjustments to its initiatives in response to the weakening economic environment, including actions designed to further streamline its organization, further reduce its cost structure and better optimize gross margin performance through stronger inventory management and improved initial mark-ups resulting from changes to its supply chain practices. Additionally, on July 2, 2009, it sold certain assets of its J. Jill business and exited activities associated with the J. Jill business, other than the remaining lease obligations for closed stores and corporate office space.

     A summary of the Company’s initiatives and actions taken to date intended to improve operating results, many of which the Company believes will continue to provide benefits into the fourth quarter 2009 and beyond are as follows:

	•		In 2008, the Company completed the closing of its Kids, Mens, and U.K. businesses.
	•		In October 2008, the Board of Directors approved a plan to sell the J. Jill business. On June 7, 2009, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”), with Jill Acquisition LLC (the “Purchaser”), an affiliate of Golden Gate Capital, pursuant to which, the Purchaser agreed to acquire and assume from the Company certain assets and liabilities relating to the J. Jill business. On July 2, 2009, the Company completed the sale (the “Transaction”). For additional details regarding the Transaction, see Note 4.

	•		Reduction in the Company’s corporate headcount. In June 2008 management reduced corporate headcount by approximately 9% across multiple locations at all levels. In February 2009 and in June 2009 management further reduced corporate headcount by approximately 17% and 20%, respectively.
	•		Reduction in hours worked in its stores, distribution center and call center.
	•		Elimination of matching contributions to its 401(k) plan for 2009, increased employee health care contributions for 2009, the elimination of merit increases for 2009 and the freezing of its defined benefit pension plans.
	•		Broad-based non-employee overhead actions resulting in cost savings, primarily in the areas of administration, marketing and store operations.
	•		In September 2009, the Company entered into a buying agency agreement with an affiliate of Li & Fung Limited, a Hong Kong-based global consumer goods exporter (“Li & Fung”), who effective September 2009, is acting as the exclusive global apparel sourcing agent for substantially all Talbots apparel. The exclusive agency does not cover certain other products (including swimwear, intimate apparel, sleepwear, footwear, fashion accessories, jewelry and handbags) as to which Li & Fung will act as Talbots non-exclusive buying agent at Talbots discretion. As a result of this agreement, the Company closed its Hong Kong and India sourcing offices and reduced its corporate sourcing headcount.
	•		In 2009, the Company expects to reduce gross capital expenditures (excluding construction allowances received from landlords) by approximately 51.5% from 2008 spend levels of $44.7 million, which represented a 22.4% reduction from 2007 levels.
	•		In February 2009, the Company’s Board of Directors approved the indefinite suspension of the Company’s quarterly cash dividend.

     As of October 31, 2009, the Company had a working capital deficit of $3.9 million and a stockholders’ deficit of $190.6 million. As of December 10, 2009, the Company has material debt obligations coming due in the next four months, with the majority of these maturities due in December 2009. The Company has undertaken several financing actions in 2008 and in 2009 to date to address the Company’s liquidity. These actions consisted of the following:

	•		In July 2008, the Company entered into a $50.0 million unsecured subordinated working capital term loan facility with AEON (U.S.A.). The facility is scheduled to mature in January 2012 and requires interest-only payments until maturity. As of October 31, 2009, the Company is fully borrowed under this facility.
	•		During the fourth quarter of 2008 and the first quarter of 2009, the Company converted all of its working capital lines of credit, amounting to $165.0 million in the aggregate, to committed lines with maturities in late December 2009.
	•		In February 2009, the Company entered into a $200.0 million term loan facility agreement with AEON which was used to repay all outstanding indebtedness under its acquisition debt agreement related to its 2006 acquisition of J. Jill. The acquisition debt agreement required quarterly principal payments of $20.0 million. The $200.0 million term loan from AEON is an interest-only loan and is renewable at the Company’s option every six months until the maturity date. The Company has exercised its option to extend this loan to February 2010, and intends to exercise its options for at least the next 12 months. This loan contains no financial covenants and, subject to the Company exercising each of its extension options, will mature in February 2012. See Note 14 concerning the agreements entered into by the Company on December 8, 2009 and under which, subject to satisfaction of all conditions to and consummation of such transactions, all of the Company’s outstanding AEON indebtedness and bank indebtedness would be satisfied.
	•		In February 2009, AEON guaranteed the Company’s outstanding debt under its existing working capital lines of credit totaling $165.0 million, its existing revolving credit facilities totaling $52.0 million, and its existing $48.0 million term loan facilities. In April 2009, AEON also agreed (i) that it would continue to provide a guaranty for a refinancing of any of that debt which matures on and before April 16, 2010 and (ii) if the lenders failed to agree to refinance that debt which matures on or before April 16, 2010, or if any other condition occurred that required AEON to make a payment under its existing guaranty, AEON would make a loan to the Company, due on or after April 16, 2010 and within the limits of AEON’s existing loan guaranty, to avoid any deficiency in the Company’s

			financial resources caused by any such failure to refinance that debt. The Company has outstanding short-term bank indebtedness of $221.1 million under credit facilities as of October 31, 2009 which terminate between late December 2009 and April 2010, which have not been extended or refinanced. The Company will rely on this AEON April 9, 2009 financial support commitment, in combination with using the Company’s existing $150.0 million AEON secured revolving credit facility, which has not been drawn on to date and which matures in April 2010, for the repayment of this short-term bank indebtedness. The Company is in discussions with AEON concerning the terms of this additional financing.
	•		In April 2009, AEON also agreed to support the Company’s working capital improvement initiatives for the Company’s merchandise payables management and that it will use commercially reasonable efforts to provide the Company with financial support through loans or guarantees up to $25.0 million only if, and to the extent that, it may possibly fall short in achieving its targeted cash flow improvement for fall 2009 merchandise payables. As of December 10, 2009, the Company did not require such loans or guarantees for its fall 2009 merchandise payables.
	•		In April 2009, the Company entered into a $150.0 million secured revolving loan facility with AEON. The facility matures upon the earlier of (i) April 17, 2010 or (ii) the consummation of one or more securitization programs or structured loans by the Company or its subsidiaries in an aggregate amount equivalent to the revolving loan commitment amount, approved in advance by AEON and in form and substance satisfactory to AEON. Subject to all borrowing conditions, amounts may be borrowed, repaid, and re-borrowed under the facility prior to its maturity date, and may be used for working capital and other general corporate purposes. As of December 10, 2009, the Company had not borrowed any funds under this facility.
	•		The Company has eliminated all financial covenants from its debt agreements.

     On December 8, 2009, the Company entered into agreements (collectively, the “BPW Transactions”) which, in the aggregate, and subject to satisfaction of all conditions to and consummation of these transactions, will substantially reduce its indebtedness and significantly delever its balance sheet, consisting of three related transactions: (i) an Agreement and Plan of Merger between Talbots and BPW Acquisition Corp. (“BPW”) pursuant to which a wholly-owned subsidiary of the Company will merge with and into BPW with BPW surviving as a wholly-owned subsidiary of the Company, in exchange for the Company’s issuance of Talbots common stock to BPW stockholders; (ii) the retirement of all Talbots common stock currently held by AEON (U.S.A.), Inc. (“AEON (U.S.A.)”), the Company’s majority shareholder and a wholly-owned subsidiary of AEON Co., Ltd. (“AEON”), and the repayment of all of the Company’s then outstanding AEON debt and outstanding bank debt; and (iii) a third party loan commitment for a new $200.0 million senior secured revolving credit facility. The consummation of the transactions are subject to a number of conditions and there can be no assurance all conditions will be satisfied. If for any reason the transactions are not consummated, the Company would be dependent on its ability to adequately address its short-term and longer term indebtedness or other liquidity needs. The Company would continue to review all alternatives to address its debt structure and cash needs. There can be no assurance that these alternatives, if needed, would be successfully implemented, in which case it could materially adversely affect the Company, its liquidity and results of operations. These transactions are described further in Note 14.

     As of December 10, 2009, the Company has material debt obligations coming due in the next four months, with the majority due in December 2009, and the Company’s revolving loan facility with AEON expires in April 2010. See Note 10 for further details and descriptions of the above financing actions. See Note 14 concerning the agreements entered into by the Company on December 8, 2009 related to repayment of the Company’s outstanding indebtedness.

3. SIGNIFICANT ACCOUNTING POLICIES

Recently Adopted Accounting Pronouncements

     In July 2009, the Company implemented the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) as the source of authoritative Generally Accepted Accounting Principles (“GAAP”) for nongovernmental entities. The ASC does not change GAAP but rather takes the numerous individual pronouncements that previously constituted GAAP and reorganizes them into accounting topics, and displays all topics using a consistent structure. The adoption of ASC did not have any effect on the Company’s consolidated financial statements.

     In May 2009, the Company adopted new guidance on subsequent events (included within ASC 855 Subsequent Events) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but prior to the issuance of the financial statements. In response to this guidance, management has evaluated subsequent events through December 10, 2009, which is the date that the Company’s consolidated financial statements were filed with the SEC.

     In April 2009, the FASB issued additional guidance on fair value measurements (included within ASC 825, Financial Instruments). The application of this guidance requires disclosures about fair value of financial instruments in interim as well as in annual financial statements. The adoption of this guidance on August 1, 2009 did not have a material impact on the Company’s consolidated financial statements.

     In June 2008, the FASB issued additional guidance on the earnings per share impact of unvested share-based awards with participation rights in distributed earnings (included within ASC 260, Earnings Per Share). The guidance clarifies that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method. Including these shares in the Company’s earnings per share calculation during periods of net income may have the effect of reducing both its basic and diluted earnings per

share amounts. However, in periods of net loss, no effect is given to the participating securities since they do not have an obligation to share in the losses of the Company. The application of this guidance is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The guidance also requires retroactive application to previously reported earnings per share amounts. The Company’s adoption of this guidance on February 1, 2009 did not impact the reported (loss) income per share for any of the periods included in this report.

     In February 2008, the FASB issued additional guidance on fair value measurements (included within ASC 820, Fair Value Measurements and Disclosures). The guidance delays the effective date of the application of the guidance to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized at fair value in the financial statements on a nonrecurring basis. The Company adopted the application of this guidance effective February 1, 2009. See Note 11, Fair Value Measurements, for additional disclosures required under the guidance for non-financial assets and liabilities recognized or disclosed at fair value in the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

     In June 2009, the FASB issued guidance on the transfer of financial assets. The guidance was issued to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets, the effects of such a transfer on its financial position, financial performance and cash flows, and provide information as to a transferor’s continuing involvement, if any, in transferred financial assets. The guidance is effective for the Company’s fiscal year beginning January 31, 2010. The Company is in the process of evaluating the impact, if any, the guidance will have on its consolidated financial statements.

     In December 2008, the FASB issued additional guidance on disclosure of the assets of a defined benefit pension or other postretirement plan (included within ASC 715, Compensation—Retirement Benefits). The guidance requires more detailed disclosures about the assets of a defined benefit pension or other postretirement plan and is effective for fiscal years ending after December 15, 2009. Since the guidance only requires enhanced disclosures the adoption of the application will not have an impact on the Company’s consolidated financial statements.

4. DISCONTINUED OPERATIONS

     The Company’s discontinued operations include the Talbots Kids, Mens, and U.K. businesses, all of which ceased operations in 2008, and the J. Jill business, which was sold on July 2, 2009. Their operating results have been classified as discontinued operations within the Company’s condensed consolidated statements of operations for all periods presented.

     On June 7, 2009, the Company entered into a Purchase Agreement with the Purchaser for the sale of the J. Jill business, pursuant to which the Purchaser agreed to acquire and assume from the Company certain assets and liabilities relating to the J. Jill business. On July 2, 2009, the Company completed the sale for a cash purchase price of $75.0 million less $8.1 million of adjustments based on estimated working capital at closing and other adjustments of $0.6 million as provided in the Purchase Agreement, resulting in cash received from the Purchaser of $66.3 million. This cash purchase price is subject to further post-closing adjustments, including final closing working capital, as provided in the Purchase Agreement. As part of the J. Jill assets sold to the Purchaser pursuant to the Purchase Agreement, the Purchaser also became entitled to $1.9 million of cash and cash equivalents, which were part of the transfer of the purchased assets, resulting in net cash proceeds of $64.4 million. The final working capital adjustment will likely be settled in the fourth quarter of 2009 and is not expected to have a material impact on the consolidated financial statements.

     Under the terms of the Purchase Agreement, the Purchaser is obligated for liabilities that arise after the closing under assumed contracts, which include leases for 205 J. Jill stores assigned to the Purchaser as part of the Transaction and a sublease through December 2014 of approximately 63,943 square feet of space at the Company’s 126,869 square foot leased office facility in Quincy, MA used for the J. Jill offices. Certain subsidiaries of the Company remain contingently liable for obligations and liabilities transferred to the Purchaser as part of the Transaction including those related to leases and other obligations transferred to and assumed by the Purchaser, as to which obligations and liabilities the Company now relies on the Purchaser’s creditworthiness as a counterparty. If any material defaults were to occur which the Purchaser does not satisfy or fully indemnify us against, it could have a material negative impact on the Company’s financial condition and results of operations. The Company has

accrued a guarantee liability for the estimated exposure related to these guarantees, which is subject to future adjustment and could vary materially from estimated amounts.

     Under the terms of the Company’s $200.0 million term loan agreement with AEON, the Company is subject to certain mandatory prepayment obligations including payment of net sale proceeds after selling costs and amounts for other costs to settle obligations and liabilities related to the sale and disposal of the J. Jill business. The final payment is subject to final working capital adjustments as well as the outcome of ongoing negotiations with landlords to settle J. Jill lease liabilities. The Company expects to finalize the net proceeds that will be used to pay down a portion of the $200.0 million term loan in accordance with the loan agreement in the fourth quarter 2009. It currently estimates this payment to be approximately $8.5 million.

     During the thirteen and thirty-nine weeks ended October 31, 2009, the Company recorded a $0.3 million and $6.0 million loss on the sale and disposal of the J. Jill business, respectively. The loss recorded in the third quarter 2009 is due to working capital adjustments and adjustments to the estimated lease liabilities recorded in connection with the sale and disposal of the J. Jill business relating to lease terminations of the J. Jill stores that were not sold, and Quincy office space that is not being subleased or used. Lease termination costs are recorded at the time a store is closed or existing space is vacated. Total cash expenditures to settle lease liabilities cannot yet be finally determined and will depend on the outcome of ongoing negotiations with third parties. As a result, such costs may vary materially from current estimates and management’s assumptions and projections may change materially. While the Company will endeavor to negotiate the amount of remaining lease obligations, there is no assurance it will reach acceptable negotiated lease settlements.

     The calculation of estimated lease liabilities includes the discounted effects of future minimum lease payments from the date of closure to the end of the remaining lease term, net of estimated sub-lease income that could be reasonably obtained for the properties or through lease termination settlements. The Company recorded estimated lease termination liabilities as of August 1, 2009 relating to exit activities associated with discontinued operations, including Quincy office space not being subleased or used, J. Jill stores not sold, and closed Kids and Mens stores, of $41.4 million. During the third quarter of 2009 the Company made cash payments of approximately $11.6 million, recorded charges of $4.5 million which include accretion of interest and increases in reserves, and recorded other income due to favorable settlements of estimated lease liabilities of $5.2 million, resulting in a total estimated liability of $29.1 million as of October 31, 2009. Of this liability, approximately $12.3 million is expected to be paid out within the next 12 months and is included within accrued liabilities in the Company’s consolidated financial statements as of October 31, 2009.

     Operating results of the J. Jill business for all periods presented have been classified as discontinued operations in the Company’s condensed consolidated financial statements. The assets and liabilities of the J. Jill business are stated at estimated fair value less estimated costs to sell and are classified in the Company’s condensed consolidated balance sheets as current assets and current liabilities held for sale for all prior periods presented.

     The operating results of the J. Jill business and the results of Talbots Kids, Mens and U.K. businesses, which have been presented as discontinued operations, are as follows:

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 31,				November 1,				October 31,				November 1,
		2009				2008				2009				2008
		(in thousands)
Net sales		$	1			$	109,020			$	178,297			$	369,489
Loss from discontinued operations before income taxes			(612	)			(211,145	)			(3,639	)			(259,494	)
Income tax benefit			—				(55,149	)			—				(73,576	)
Loss from discontinued operations			(612	)			(155,996	)			(3,639	)			(185,918	)
Loss on disposal			(299	)			—				(6,027	)			—
Loss from discontinued operations		$	(911	)		$	(155,996	)		$	(9,666	)		$	(185,918	)

Discontinued operations reported during the thirteen and thirty-nine weeks ended October 31, 2009 do not reflect an income tax benefit, as the Company recorded a valuation allowance for substantially all of its deferred

taxes and incurred losses in both continuing and discontinued operations. Income tax benefits allocated to discontinued operations during the thirteen and thirty-nine weeks ended November 1, 2008 represents the incremental effect of tax benefits attributable to these operations.

     Presented below is a summarized balance sheet for the J. Jill assets and liabilities held for sale.

		October 31,				January 31,				November 1,
		2009				2009				2008
						(in thousands)
Merchandise inventories		$	—			$	50,250			$	57,185
Other current assets			—				9,217				16,865
Property and equipment — net			—				15,899				117,400
Trademarks			—				30,200				32,100
Other intangible assets — net			—				4,400				32,600
Assets held for sale — current		$	—			$	109,966			$	256,150
Accounts payable		$	—			$	30,262			$	28,936
Accrued liabilities			—				26,890				31,329
Deferred rent under lease commitments			—				35,327				33,000
Other liabilities			—				1,711				1,805
Liabilities held for sale — current		$	—			$	94,190			$	95,070

5. RESTRUCTURING CHARGES

     As part of the Company’s strategic plan to strengthen the business, the Company has implemented several initiatives, including reducing headcount and employee benefit costs, shuttering non-core businesses, and reducing office space among others, during 2008 and 2009 to date. In February 2009, the Company reduced its corporate headcount by 17%, and in June 2009 the Company further reduced its corporate headcount by 20% including the elimination of open positions. In August 2009, the Company reorganized its global sourcing activities and entered into a buying agency agreement with Li & Fung, whereby effective September 2009, Li & Fung is acting as the exclusive global apparel sourcing agent for substantially all Talbots apparel. In connection with this reorganization, the Company closed its Hong Kong and India sourcing offices and reduced its corporate sourcing headcount.

     In connection with these initiatives, the Company incurred $0.4 million and $1.5 million of restructuring charges during the thirteen weeks ended October 31, 2009 and November 1, 2008, respectively, and $9.7 million and $10.1 million of restructuring charges during the thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively.

     Below is a roll-forward of the restructuring liabilities, which are included within accrued liabilities in the Company’s condensed consolidated balance sheets as of October 31, 2009 and November 1, 2008:

						Corporate - Wide
		Strategic Initiatives
						Lease				Non-cash
		Severance				Related				Charges (Income)				Total
						(in thousands)
Balance at January 31, 2009		$	10,882			$	—			$	—			$	10,882
Charges (income)			8,390				2,109				(839	)			9,660
Cash payments			(15,811	)			(543	)			—				(16,354	)
Non-cash items			—				(641	)			839				198
Balance at October 31, 2009		$	3,461			$	925			$	—			$	4,386

						Corporate - Wide
		Strategic Initiatives
										Non-cash
		Severance				Consulting				Charges (Income)				Total
		(in thousands)
Balance at February 2, 2008		$	678			$	1,532			$	—			$	2,210
Charges (income)			7,983				4,054				(1,889	)			10,148
Cash payments			(3,924	)			(5,586	)			—				(9,510	)
Non-cash items			—				—				1,889				1,889
Balance at November 1, 2008		$	4,737			$	—			$	—			$	4,737

     The non-cash items primarily consist of adjustments to stock-based compensation expense related to stock awards forfeited by terminated employees. Of the $4.4 million remaining balance of restructuring liabilities at October 31, 2009, $2.4 million is expected to be paid during 2009, $1.4 million is expected to be paid in 2010, and $0.6 million is expected to be paid in years 2011 through 2016.

6. INCOME TAXES

     The Company provides for income taxes during interim periods based on the estimated effective tax rate for the full year. Cumulative adjustments to the Company’s estimates are recorded in the interim period in which a change in the estimated annual effective tax rate is determined. Discrete tax events are accounted for in the period in which they occur.

     A valuation allowance was established during the fourth quarter of 2008 for substantially all deferred tax assets based on all available evidence including the Company’s recent history of losses. Forming a conclusion that a valuation allowance is not needed when cumulative losses exist requires a sufficient amount of positive evidence to support recovery of the deferred tax assets. As a result of the Company’s evaluation, the Company concluded that there was insufficient positive evidence to overcome the more objective negative evidence related to its cumulative losses to support recovery of its deferred tax assets. Accordingly, the Company continues to provide for a full valuation allowance.

     The tax benefit for the third quarter 2009 is due to adjustments to the liabilities for uncertain tax positions plus additional tax benefit on the other comprehensive income recognized during the quarter as discrete items. The tax benefit for year-to-date 2009 is primarily due to the Company, during the first quarter of 2009, allocating a tax benefit of approximately $10.6 million to continuing operations with a corresponding provision included within other comprehensive income recognized during the quarter. The Company remeasured its pension obligation as a result of the Company’s decision to freeze all future benefits under its Pension Plans during the first quarter of 2009. The remeasurement resulted in the Company recording a gain in its other comprehensive income and the tax provision on the other comprehensive income was recognized. There were no material adjustments to the Company’s recorded liability for unrecognized tax benefits in aggregate during the thirteen and thirty-nine weeks ended October 31, 2009.

7. COMPREHENSIVE INCOME (LOSS)

     The following is the Company’s comprehensive income (loss) for the thirteen and thirty-nine weeks ended October 31, 2009 and November 1, 2008:

		Thirteen Weeks Ended
		October 31,				November 1,
		2009				2008
		(in thousands)
Net income (loss)		$	14,553			$	(170,759	)
Other comprehensive loss:
Foreign currency translation adjustment, net of tax benefit of $0.6 million and $0.6 million, respectively			(371	)			(709	)
Change in pension and postretirement plan liabilities, net of tax expense of $0.0 million and $0.0 million, respectively			(175	)			(25	)
Comprehensive income (loss)		$	14,007			$	(171,493	)

		Thirty-Nine Weeks Ended
		October 31,				November 1,
		2009				2008
		(in thousands)
Net loss		$	(33,501	)		$	(194,126	)
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax (benefit) expense of $(0.6) million and $0.9 million, respectively			1,102				(1,540	)
Change in pension and postretirement plan liabilities, net of tax expense of $10.8 million and $0.3 million, respectively			15,949				355
Comprehensive loss		$	(16,450	)		$	(195,311	)

8. STOCK-BASED COMPENSATION

     The Company records stock compensation expense over the term of the award, net of estimated forfeitures. Adjustments to the estimated forfeiture rates are recorded when estimates are updated or conditions change. The condensed consolidated statements of operations for the thirteen and thirty-nine weeks ended October 31, 2009 and November 1, 2008 include the following stock-based compensation expense (income) related to stock option awards, nonvested stock awards, and restricted stock units (“RSUs”):

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 31,				November 1,				October 31,				November 1,
		2009				2008				2009				2008
						(in thousands)
Cost of sales, buying and occupancy		$	154			$	(349	)		$	572			$	(301	)
Selling, general and administrative			1,994				3,534				4,544				9,016
Restructuring charges			(27	)			(226	)			(839	)			(1,889	)
Compensation expense related to stock-based awards		$	2,121			$	2,959			$	4,277			$	6,826

     Due to greater than expected terminations that occurred during the thirty-nine weeks ended October 31, 2009 and November 1, 2008, the Company revised its estimate of expected forfeitures of stock based awards. During the thirty-nine weeks ended October 31, 2009 and November 1, 2008, the Company recognized $2.1 million and $2.7 million, respectively, as a reduction of compensation expense as a result of a change in forfeiture rates.

     When the termination is a direct result of the Company’s strategic business plan, the benefit is recorded within restructuring charges in the Company’s condensed consolidated statements of operations. During the thirty-nine weeks ended October 31, 2009 and November 1, 2008, the Company recorded a net benefit of $0.8 million and

$1.9 million, respectively, in restructuring charges to account for the revision in estimated forfeiture rates relating to its restructuring activities.

     Stock Options

     The Company measures the fair value of stock options on the date of grant by using the Black-Scholes option-pricing model. The estimated weighted average fair value of options granted during the thirty-nine weeks ended October 31, 2009 and November 1, 2008 was $1.73 and $3.26 per option, respectively. Key assumptions used to apply this pricing model were as follows:

		Thirty-Nine Weeks Ended
		October 31,				November 1,
		2009				2008
Weighted average risk free interest rate			2.0	%			2.7	%
Weighted average expected life of option grants		4.8 years				5.3 years
Weighted average expected volatility of underlying stock			83.8	%			47.6	%
Expected dividend rate			0.0	%			4.9	%

     A summary of stock option activity during the thirty-nine weeks ended October 31, 2009 is presented below:

						Weighted				Weighted
						Average				Average Remaining				Aggregate
		Number of				Exercise Price				Contractual Term				Intrinsic
		Shares				per share				(in years)				Value
														(in thousands)
Outstanding at January 31, 2009			9,410,953			$	27.24
Granted			1,775,050				2.63
Exercised			—				—
Forfeited			(342,130	)			12.78
Expired			(318,238	)			15.35
Outstanding at October 31, 2009			10,525,635			$	23.92				3.5			$	11,201
Excercisable at October 31, 2009			8,316,503			$	28.77				2.0			$	13

     Nonvested Stock Awards and RSUs

     A summary of nonvested stock award and RSU activity for the thirty-nine weeks ended October 31, 2009 is presented below:

						Weighted
						Average Grant
		Number of				Date Fair Value
		Shares				Per Share
Nonvested at January 31, 2009			2,003,660			$	16.28
Granted			369,689				3.04
Vested			(407,784	)			19.30
Forfeited			(526,900	)			15.05
Nonvested at October 31, 2009			1,438,665			$	12.47

9. NET INCOME (LOSS) PER SHARE

     The weighted average shares used in computing basic and diluted net income (loss) per share are presented below.

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 31,				November 1,				October 31,				November 1,
		2009				2008				2009				2008
		(in thousands)
Shares for computation of basic net income (loss) from continuing operations per share			53,856				53,489				53,768				53,411
Effect of stock compensation plans			1,225				—				—				—
Shares for computation of diluted net income (loss) from continuing operations per share			55,081				53,489				53,768				53,411

     The computation of diluted net income (loss) per share excludes the following awards since the net effect would be antidilutive:

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 31,				November 1,				October 31,				November 1,
		2009				2008				2009				2008
Stock Options			8,852,069				9,398,955				10,525,635				9,398,955
Nonvested stock and RSU awards			—				1,986,509				1,438,665				1,986,509
Total			8,852,069				11,385,464				11,964,300				11,385,464

10. DEBT

     A summary of outstanding debt is as follows:

		October 31,				January 31,				November 1,
		2009				2009				2008
		(in thousands)
Acquisition Debt		$	—			$	200,000			$	220,000
Revolving Credit Agreements			52,000				80,000				80,000
Term Loans			48,000				20,000				20,000
Related Party Debt			250,000				20,000				—
Working Capital Lines of Credit (Notes payable to banks)			141,100				148,500				106,500
Tilton Facility Loan			—				8,377				8,705
Total debt			491,100				476,877				435,205
Less current maturities			(229,606	)			(218,877	)			(223,205	)
Long term-debt, less current portion		$	261,494			$	258,000			$	212,000

     Acquisition Debt — In February 2006, the Company entered into a $400.0 million bridge loan agreement in connection with its acquisition of J. Jill. Pursuant to the Acquisition Debt agreement, the Company borrowed $400.0 million to be repaid no later than July 27, 2011. On July 27, 2006, the bridge loan was converted into a term loan (the “Acquisition Debt”). The Acquisition Debt was a senior unsecured obligation of the Company.

     In February 2009, the Company entered into a $200.0 million term loan facility agreement with AEON (“AEON Loan”). The funds received from the AEON Loan were used to repay all of the outstanding indebtedness under the Acquisition Debt agreement in February 2009.

     The AEON Loan is an interest-only loan until maturity. Interest on the AEON Loan is at a variable rate equal to LIBOR plus 6.00% (LIBOR is the six month London interbank offer rate expressed as a percentage rate per annum). At October 31, 2009, the interest rate was 6.77%. Interest on the AEON Loan is payable semi-annually in arrears. No loan facility fee is payable as part of the AEON Loan. The AEON Loan initially matured on August 31, 2009. During the continuing term of the loan, the Company has the option to extend the maturity for additional six month periods, up to the third anniversary of the loan closing date, which is February 27, 2012. The Company has extended the maturity date of this loan to February 26, 2010 and intends to extend the maturity for at least the next 12 months; therefore the debt is classified as non-current on the condensed consolidated balance sheet. The AEON Loan is subject to mandatory prepayment as follows: (a) 50% of excess cash flow (as defined in the agreement), (b) 100% of net cash proceeds of a sale of the J. Jill business and 75% of net cash proceeds on any other asset sales or dispositions, and (c) 100% of net cash proceeds of any non-related party debt issuances and 50% of net cash proceeds of any equity issuances (subject to such exceptions as to debt or equity issuances as the lender may agree to). The AEON Loan may be voluntarily prepaid, in whole or in part, at par plus accrued and unpaid interest and any break funding loss incurred upon not less than three business days’ prior written notice, at the option of the Company at any time. Upon any voluntary or mandatory prepayment, the Company will reimburse the lender for costs associated with early termination of any currency hedging arrangements related to the loan. The Company expects to finalize the net proceeds from the sale of the J. Jill business that will be used to pay down a portion of the $200.0 million term loan in accordance with the loan agreement in the fourth quarter 2009. It currently estimates this payment to be approximately $8.5 million. Under the terms of the AEON Loan agreement, the Company may not incur, assume, guarantee or otherwise become or remain liable with respect to any indebtedness other than permitted indebtedness as defined in the agreement. Written consent of the lender in its discretion will be required prior to incurrence of indebtedness, liens, fundamental changes including mergers and consolidations, dispositions of property including sales of stock of subsidiaries, dividends and other restricted payments, investments, transactions with affiliates and other related parties, sale leaseback transactions, swap agreements, changes in fiscal periods, negative pledge clauses, and clauses restricting subsidiary distributions, all on terms set forth in the agreement. The Company is also limited in its ability to purchase or make commitments for capital expenditures in excess of amounts approved by AEON as lender. The AEON Loan contains no financial covenants. See Note 14 concerning the agreements entered into by the Company on December 8, 2009 and under which, subject to satisfaction of all conditions to and consummation of such transactions, all of the Company’s outstanding AEON indebtedness and bank indebtedness would be satisfied.

     Revolving Credit Agreements — As of October 31, 2009, the Company had revolving credit agreements with two banks (the “Revolving Credit Agreements”) that provide for maximum available borrowings of $52.0 million. Interest on the revolving credit facilities are at variable rates of LIBOR plus 0.625% for two $18.0 million loans and Fed Funds plus 0.75% for a $16.0 million loan, and are set at the Company’s option, for periods of one, three, or six months payable in arrears. At October 31, 2009, the weighted average interest rate on the loans was 1.5%. Of the $52.0 million outstanding under the Revolving Credit Agreements as of October 31, 2009, $34.0 million is due in January 2010, and $18.0 million is due in April 2010. See Note 14 concerning the agreements entered into by the Company on December 8, 2009 related to the repayment of the Company’s outstanding indebtedness.

     Term Loans — As of October 31, 2009, the Company had $48.0 million in term loans outstanding with two banks: a $28.0 million loan which matures in December 2009 and a $20.0 million loan which matures in April 2012. Interest on the $28.0 million loan is payable monthly and the borrowing rate is set monthly at a rate determined by the lender to be its effective cost of funds plus 1%. At October 31, 2009 the borrowing rate was 1.3%. Interest on the $20.0 million term loan is due every six months and is fixed at 5.9% for the remaining interest periods through April 2012. See Note 14 concerning the agreements entered into by the Company on December 8, 2009 related to the repayment of the Company’s outstanding indebtedness.

     Related Party Term Loan with AEON (U.S.A.) — In July 2008, the Company entered into a $50.0 million unsecured subordinated working capital term loan credit facility with AEON (U.S.A.) (the “AEON Facility”). The AEON Facility is scheduled to mature and AEON (U.S.A.)’s commitment to provide borrowings under the AEON Facility would expire on January 28, 2012. Under the terms of the AEON Facility, the financing is the unsecured general obligation of the Company and is subordinated to the Company’s other financial institution indebtedness existing as of the closing date. The AEON Facility may be used by the Company and its subsidiaries for general working capital and other appropriate general corporate purposes. Interest on outstanding principal under the AEON Facility is at a rate equal to three-month LIBOR plus 5.0% (5.3% at October 31, 2009). The Company was required to pay an upfront commitment fee of 1.5% (or $0.8 million) to AEON (U.S.A.) at the time of execution and

closing of the loan credit facility agreement. The Company is required to pay a fee of 0.5% per annum on the undrawn portion of the commitment, payable quarterly in arrears. The AEON Facility had originally included covenants relating to the Company and its subsidiaries that were substantially the same in all material respects as under the Acquisition Debt. In March 2009, an amendment was executed between the Company and AEON (U.S.A.) to remove the financial covenants from the facility. As of October 31, 2009, the Company had $50.0 million in borrowings outstanding under the AEON Facility. See Note 14 concerning the agreements entered into by the Company on December 8, 2009 related to repayment of the Company’s outstanding indebtedness.

     Working Capital Lines of Credit (Notes payable to banks) — The Company has $165.0 million of working capital lines of credit with four banks as of October 31, 2009 and November 1, 2008. The lines are committed through late December 2009. Each borrowing bears interest for interest periods of six months or less as mutually established by the Company and the respective lenders, with such interest payable on the last day of each interest period or, in the event that the interest period exceeds three months, three months after the first day of the interest period. The interest rate is a rate determined by the respective lenders to be their effective cost of funds plus an amount not lower than 0.625% and not higher than 1.3%. At October 31, 2009 and November 1, 2008, the Company had $141.1 million and $106.5 million, respectively, outstanding on these facilities. The weighted average interest rate on the outstanding loans was 1.2% at October 31, 2009.

     Secured Revolving Loan Facility with AEON — In April 2009, the Company entered into a $150.0 million secured revolving loan facility with AEON. Interest under this facility is one month LIBOR plus 6.0%. The facility matures upon the earlier of (i) April 17, 2010 or (ii) the consummation of one or more securitization programs or structured loans by the Company or its subsidiaries in an aggregate amount equivalent to the revolving loan commitment amount, approved in advance by AEON and in form and substance satisfactory to AEON. Amounts may be borrowed, repaid, and re-borrowed under the facility prior to its maturity date, and may be used for working capital and other general corporate purposes, including vendor payments. The facility is secured by the Company’s Talbots charge card receivables, its corporate facility in Hingham, MA and its Lakeville, MA distribution facility. The Company has agreed to keep the mortgaged properties in good repair, reasonable wear and tear expected, and will ensure that at least $135.0 million of Talbots charge card receivables are owed to the Company and that at least 90% of such Talbots charge card receivables are eligible receivables as defined in the agreement, and arise in the ordinary course of business, and are owed free and clear of all liens, except permitted liens, measured as of the last day of any calendar month. The Company will need to obtain AEON’s written consent as lender prior to, among other things, incurring indebtedness, fundamental changes (including mergers, consolidation, etc.), disposing of property (including sales of stocks of subsidiaries), payments or investments, undertaking transactions with affiliates and other related parties, consummating sale leaseback transactions, swap agreements, negative pledges, and clauses restricting subsidiary distributions and lines of business, all set forth in the agreement. The facility requires payment of an upfront fee of 1.0% of the commitment prior to borrowing. The facility also provides for prepayment and loan maturity in the event the Company was to consummate certain qualified transactions, such as securitization or sale of its Talbots charge card portfolio or certain asset collateralizations. This facility has no financial covenants. The Company’s ability to draw on the facility is subject to various borrowing conditions set forth in the credit agreement including no events of default, the absence of any material adverse effect, solvency conditions, accuracy of all representations and warranties, compliance with covenants, and other borrowing conditions. As of December 10, 2009, the Company had not borrowed any funds under this facility. See Note 14 concerning the agreements entered into by the Company on December 8, 2009 related to repayment of the Company’s outstanding indebtedness.

AEON Guarantees — In February 2009, AEON guaranteed the Company’s outstanding debt under its existing working capital facilities totaling $165.0 million, and under its revolving credit and term loan facilities totaling $100.0 million. In April 2009, AEON also agreed (i) that it would agree to continue to provide a guaranty for a refinancing of any of that debt, which matures on and before April 16, 2010 and (ii) if the lender failed to agree to refinance that debt which matures on or before April 16, 2010, or if any other condition occurred that required AEON to make a payment under its existing guaranty, AEON would make a loan to the Company, due on or after April 16, 2010 and within the limits of AEON’s existing loan guaranty, to avoid any deficiency in the Company’s financial resources caused by such failure to refinance that debt. The Company has outstanding short-term bank indebtedness of $221.1 million under credit facilities as of October 31, 2009 which terminate between late December 2009 and April 2010, which have not been extended or refinanced. The Company will rely on this AEON April 9, 2009 financial support commitment, in combination with using the Company’s existing $150.0 million AEON secured revolving credit facility, which has not been drawn on to date and which matures in April 2010, for the repayment of this short-term bank indebtedness. The Company is in discussions with AEON concerning the terms of this additional financing.

     In April 2009, AEON also agreed to support the Company’s working capital improvement initiatives for the Company’s merchandise payables management and that it will use commercially reasonable efforts to provide the Company with financial support through loans or guarantees up to $25.0 million only if, and to the extent that, it may possibly fall short in achieving its targeted cash flow improvement for fall 2009 merchandise payables. As of December 10, 2009, the Company did not require such loans or guarantees for its fall 2009 merchandise payables.

     Tilton Loan Facility — As part of the J. Jill acquisition in 2006, the Company assumed a real estate loan (the “Tilton Facility Loan”). The Tilton Facility Loan was collateralized by a mortgage lien on the operations, fulfillment and distribution center in Tilton, New Hampshire. Payments of principal and interest on the Tilton Facility Loan, a 10-year loan, were due monthly, based on a 20-year amortization, with a balloon payment of the remaining balance payable on June 1, 2009. The interest rate on the Tilton Facility Loan was fixed at 7.3% per annum. The loan balance of approximately $8.2 million was paid in full on June 1, 2009.

     Letters of Credit —The Company’s letter of credit agreements of $265.0 million held at February 2, 2008, which were used primarily for the purchase of merchandise inventories, were canceled during 2008. In July 2008, the Company executed an addendum to its financing agreement with one bank, allowing the Company to utilize its existing $75.0 million short term working capital line of credit facility with the bank for letters of credit. The available capacity under this $75.0 million short term working capital line of credit facility, which matures in late December 2009, is reduced by any letters of credit outstanding. For periods following the term of this working capital facility, the Company will need to seek alternative letter of credit facilities, as needed, which cannot be assured. At October 31, 2009, January 31, 2009, and November 1, 2008 the Company held $13.8 million, $14.8 million, and $5.1 million, respectively, of outstanding letters of credit.

11. FAIR VALUE MEASUREMENTS

     The Company adopted guidance for fair value measurements (included within ASC 820, Fair Value Measurements and Disclosures) as of February 3, 2008, with the exception of the application of the guidance to nonrecurring nonfinancial assets and nonfinancial liabilities that was delayed. Nonrecurring nonfinancial assets and nonfinancial liabilities for which the Company has not applied the provisions of include those that were measured at fair value for the purpose of impairment testing for goodwill, indefinite lived intangible assets, and long-lived assets. On February 1, 2009, the Company adopted the application of the guidance for nonrecurring nonfinancial assets and nonfinancial liabilities that had been delayed.

     This guidance established a three-tier fair value hierarchy, which classifies fair value measurements based on the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company did not have any financial or nonfinancial assets or liabilities carried at fair value as of October 31, 2009 that are subject for disclosure within the three-tier hierarchy except as noted below.

     The following table summarizes assets measured at fair value on a nonrecurring basis subsequent to initial recognition:

						Fair Value Measurements Using
						Quoted Prices				Significant								Three months
						in Active				Other				Significant				ended
						Markets for				Observable				Unobservable				October 31,
						Identical Assets				Inputs				Inputs				2009
		31-Oct-09				(Level 1)				(Level 2)				(Level 3)				Total Losses
		in thousands
Long-lived assets		$	1,320			$	—			$	—			$	1,320			$	1,320
Total		$	1,320			$	—			$	—			$	1,320			$	1,320

     The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the

carrying amount. The amount of impairment loss is based upon the fair value of the long-lived asset compared to the carrying value.

          The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, notes payable, and long-term debt. The carrying value of cash, accounts receivable, and accounts payable approximates their fair market values due to their short-term nature. The estimated fair value of the Company’s debt could differ materially from its carrying value. The Company believes it is impracticable to determine the fair value of the debt as of October 31, 2009 due to the uncertainty surrounding the ultimate approval of the pending transactions (see Note 14) and the Company’s liquidity situation. The Company has recorded its investments in life insurance policies at their cash surrender value. The Company’s pension plan assets are disclosed in accordance with guidance in Note 15, Benefit Plans, of its 2008 Annual Report on Form 10-K.

12. SEGMENT INFORMATION

          The following is the Stores Segment and Direct Marketing Segment information for the Company for the thirteen and thirty-nine weeks ended October 31, 2009 and November 1, 2008:

		Thirteen Weeks Ended
		October 31, 2009												November 1, 2008
		(in thousands)
						Direct												Direct
		Stores				Marketing				Total				Stores				Marketing				Total
Net sales		$	255,429			$	53,462			$	308,891			$	303,475			$	53,800			$	357,275
Direct profit			31,629				16,984				48,613				14,776				5,974				20,750

		Thirty-Nine Weeks Ended
		October 31, 2009												November 1, 2008
										(in thousands)
						Direct												Direct
		Stores				Marketing				Total				Stores				Marketing				Total
Net sales		$	766,665			$	153,042			$	919,707			$	982,848			$	184,410			$	1,167,258
Direct profit			57,824				28,063				85,887				101,786				31,278				133,064

          The following reconciles direct profit to income (loss) from continuing operations for the thirteen and thirty-nine weeks ended October 31, 2009 and November 1, 2008:

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 31,				November 1,				October 31,				November 1,
		2009				2008				2009				2008
						(in thousands)
Total direct profit for reportable segments		$	48,613			$	20,750			$	85,887			$	133,064
Less: indirect expenses			26,238				39,025				99,096				130,691
Operating income (loss) from continuing operations			22,375				(18,275	)			(13,209	)			2,373
Interest expense, net			7,202				4,904				21,583				15,260
Income (loss) before taxes from continuing operations			15,173				(23,179	)			(34,792	)			(12,887	)
Income tax (benefit) expense			(291	)			(8,416	)			(10,957	)			(4,679	)
Income (loss) from continuing operations		$	15,464			$	(14,763	)		$	(23,835	)		$	(8,208	)

13. EMPLOYEE BENEFIT PLANS

          In February 2009, the Company announced its decision to discontinue future benefits being earned under the Pension Plan and Supplemental Executive Retirement Plan (“SERP”) effective May 1, 2009. As a result of the decision, the assets and liabilities under the plans were remeasured as of February 28, 2009. The remeasurement resulted in a decrease to other liabilities of $25.9 million and $1.1 million for the Pension Plan and SERP, respectively, and an increase to other comprehensive income of $15.5 million and $0.6 million, net of tax, for the Pension Plan and SERP, respectively.

          The components of the Pension Plan expense are as follows:

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 31,				November 1,				October 31,				November 1,
		2009				2008				2009				2008
						(in thousands)
Service expense earned during the period		$	—			$	2,388			$	—			$	7,106
Interest expense on projected benefit obligation			2,282				2,455				6,694				7,181
Expected return on plan assets			(1,840	)			(2,656	)			(5,668	)			(7,607	)
Curtailment loss			—				—				124				—
Prior service cost net amortization			1				17				5				51
Net amortization of loss			252				388				716				866
Net pension expense		$	695			$	2,592			$	1,871			$	7,597

          The components of the SERP expense are as follows:

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 31,				November 1,				October 31,				November 1,
		2009				2008				2009				2008
						(in thousands)
Service expense earned during the period		$	—			$	86			$	—			$	313
Interest expense on projected benefit obligation			292				323				874				947
Curtailment (gain) loss			—				—				(451	)			7
Prior service cost net amortization			—				5				—				19
Net amortization of loss			—				—				—				14
Net SERP expense		$	292			$	414			$	423			$	1,300

          The components of the Postretirement Medical Plan expense are as follows:

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 31,				November 1,				October 31,				November 1,
		2009				2008				2009				2008
						(in thousands)
Service expense earned during the period		$	—			$	(1	)		$	—			$	1
Interest expense on accumulated post- retirement benefit obligation			11				3				15				11
Curtailment gain			—				—				(442	)			—
Prior service cost net amortization			(383	)			(424	)			(1,133	)			(848	)
Net amortization of loss			137				119				357				(65	)
Net postretirement medical credit		$	(235	)		$	(303	)		$	(1,203	)		$	(901	)

          As a result of the decision to discontinue future benefits being earned under the Pension Plan and SERP, there is no service expense recorded for 2009.

          During the thirteen and thirty-nine weeks ended October 31, 2009, the Company was required to make contributions of $0.1 million and $3.8 million, respectively, to the Pension Plan. The Company expects to make required contributions of $0.3 million to the Pension Plan during the remainder of 2009. During the thirteen and thirty-nine weeks ended November 1, 2008, the Company was required to make contributions of $2.9 million and $8.4 million, respectively. The Company did not make any voluntary contributions to the Pension Plan during the thirteen and thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively. Included within other liabilities in the Company’s condensed consolidated balance sheets are net projected benefit obligations in excess of plan assets for the Pension Plan, SERP and Postretirement Medical Plan. The net benefit obligations in excess of plan assets for the Pension Plan are $59.8 million, $88.3 million, and $34.9 million at October 31, 2009, January 31, 2009 and November 1, 2008, respectively.

14. SUBSEQUENT EVENTS

          On December 8, 2009, the Company entered into agreements (collectively, the “BPW Transactions”) which, in the aggregate, and subject to satisfaction of all conditions to and the consummation of such BPW Transactions, will substantially reduce its level of outstanding indebtedness and significantly delever its balance sheet, consisting of three related transactions:

(i)

An Agreement and Plan of Merger between the Company and BPW, pursuant to which a wholly-owned subsidiary of the Company will merge with and into BPW with BPW surviving as a wholly-owned subsidiary of the Company, in exchange for the Company’s issuance of Talbots common stock to BPW stockholders. BPW is a publicly-traded special purpose acquisition company. The floating exchange ratio mechanism under the merger agreement provides that BPW shareholders will receive a range of 0.9000 to 1.3235 Talbots shares for each BPW share, determined by dividing $11.25 by the volume weighted average price per share of Talbots common stock for the 15 trading days ending 5 trading days prior to the BPW stockholder vote on approval of the transaction;

(ii)		The retirement of all Talbots common stock currently held by the Company’s majority stockholder, AEON (U.S.A.), and the repayment of all of the Company’s then outstanding AEON indebtedness and outstanding bank indebtedness. Following completion of the transaction, AEON will hold no Talbots debt or equity (other than one million warrants for Talbots common stock with an exercise price equal to the market price of such common stock at closing of the transactions);
(iii)		A third party loan commitment for up to a new $200.0 million senior secured revolving credit facility, the proceeds of which, subject to satisfaction of all conditions to and the consummation of such credit facility, will be used to fund the transactions and for the Company’s ongoing working capital needs.

          The Company’s transaction with BPW will be effected by means of an Agreement and Plan of Merger, pursuant to which, upon consummation, BPW will merge with, and into, a subsidiary of Talbots. Under the terms of the transaction:

	•		Talbots will receive gross cash proceeds sufficient to consummate the transactions contemplated by the Agreement and Plan of Merger.
	•		BPW common shares would be exchanged for the equivalent of $11.25 per BPW share in Talbots common stock through a floating exchange ratio of 0.9000 to 1.3235 Talbots shares for each BPW share.
	•		BPW public warrants will be exchanged for Talbots common stock, or new Talbots warrants with a 5 year term and a strike price equal to the product of 1.3 times the volume weighted average price per share of Talbots common stock for the 15 trading days ending 5 trading days prior to the BPW stockholder vote, subject to certain proration terms providing that 50% of such BPW public warrants are converted into Talbots warrants and 50% of BPW public warrants are converted into Talbots common stock; depending upon the Talbots common stock volume weighted average price per share during the relevant period, the BPW public warrants would be converted into a maximum of 2.3 million shares of Talbots common stock and 23.2 million Talbots warrants.

          In addition, the Company entered into an agreement with AEON pursuant to which, upon consummation, the Company will repay all AEON outstanding indebtedness and outstanding bank indebtedness guaranteed by AEON, totaling $491.1 million, and retire AEON’s 29.9 million shares of Talbots common stock, for total cash consideration of $491.1 million and one million Talbots warrants granted to AEON with an at market strike price determined at closing.

          BPW will call a special meeting of its stockholders to vote to approve the transaction and to vote to approve an extension of the term of BPW’s existence beyond its existing expiration date of February 26, 2010. If BPW stockholders approve the transaction and the extension, Talbots will commence an exchange offer for the exchange of BPW warrants for Talbots common stock or Talbots warrants as described above. AEON as the Company’s majority stockholder, has approved the issuance of Talbots common stock in the transaction and no further vote of the Company’s stockholders will be required to complete the transaction.

          The transaction is subject to customary closing conditions, including expiration or termination of any applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. In addition, the transaction is conditioned upon, among other conditions, the following:

	•		The approval of the transaction by BPW shareholders;
	•		Holders of at least 90% of BPW’s public warrant holders agreeing to exchange their warrants for Talbots common stock or Talbots warrants as described above;
	•		Consummation of the debt financing described above or alternative financing providing for net proceeds of no less than $200 million.

          The above BPW acquisition, AEON transaction and secured revolving credit facility are related and dependent on, and subject to, satisfaction of all conditions to closing and consummation concurrently of all of these transactions, as to which there can be no assurance. The foregoing is a general summary of the BPW Transactions and is subject in all respect to the terms and conditions of all of the applicable agreements for these transactions, which will be filed by the Company with the SEC on Current Report on Form 8-K.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere in this document, as well as our 2008 Annual Report on Form 10-K.

          We conform to the National Retail Federation’s fiscal calendar. The thirteen weeks ended October 31, 2009 and November 1, 2008 are referred to as the third quarter 2009 and 2008, respectively. The thirty-nine weeks ended October 31, 2009 and November 1, 2008 are referred to herein as year-to-date 2009 and 2008, respectively.

          Operating results discussed below are from continuing operations, which include our Talbots women’s apparel retail stores, surplus stores, upscale outlet stores and direct marketing sales channels. Results from our Talbots Kids, Mens, and U.K. businesses, which we closed in 2008, and the J. Jill business, which we sold in July 2009, have been classified as discontinued operations for all periods presented and are discussed separately below.

          Comparable stores are those that were open for at least one full fiscal year. When a significant amount of square footage is added adjacent to or in close proximity to an existing comparable Talbots retail store, that Talbots retail store is excluded from the computation of comparable store sales for a period of 13 months to preserve the comparability of sales results.

Recent Developments

          On December 8, 2009, we entered into agreements (collectively, the “BPW Transactions”) which, in the aggregate, and subject to satisfaction of all conditions to and consummation of these transactions, will substantially reduce our indebtedness and significantly delever our balance sheet, consisting of three related transactions: (i) an Agreement and Plan of Merger between Talbots and BPW Acquisition Corp. (“BPW”) pursuant to which a wholly-owned subsidiary of Talbots will merge with and into BPW with BPW surviving as a wholly-owned subsidiary of Talbots, in exchange for our issuance of Talbots common stock to BPW stockholders; (ii) the retirement of all Talbots common stock currently held by AEON (U.S.A.), Inc. (“AEON (U.S.A.)”) our majority shareholder and a wholly-owned subsidiary of AEON Co., Ltd. (“AEON”), and the repayment of all of our then outstanding AEON debt and outstanding bank debt; and (iii) a third party loan commitment for a new $200 million senior secured revolving credit facility. The consummation of the transactions are subject to a number of conditions and there can be no assurance all conditions will be satisfied. If for any reason the transactions are not consummated, we would be dependent on our ability to adequately address our short-term and longer term indebtedness or other liquidity needs. We would continue to review all alternatives to address our debt structure and cash needs. There can be no assurance that these alternatives, if needed, would be successfully implemented, in which case it could materially adversely affect our Company, our liquidity and results of operations. These transactions are described further in Note 14 to our condensed consolidated financial statements.

          We believe that the economic recession has had a significant impact on our business during 2008 and in 2009 to date, and anticipate that macroeconomic pressures will continue to impact consumer spending throughout the balance of 2009 and likely beyond. Despite the challenging retail economic environment, we have achieved profitability in the third quarter 2009 following five consecutive quarters of operating losses, reflecting significant progress in executing our strategic plan to improve operating performance. Key initiatives that drove this improvement were in the areas of improved merchandise, brand building, inventory management, expense control and sourcing practices.

          The implementation of our strategic plan began before the economic downturn occurred in fall 2008. Earlier this year we made adjustments to our initiatives in response to the weakening economic environment, including actions designed to further streamline our organization, further reduce our cost structure and better optimize gross margin performance through stronger inventory management and improved initial mark-ups, resulting from changes to our supply chain practices. We experienced significant benefits in our 2009 third quarter operating results from these actions.

          We have been measuring our progress by monitoring sequential improvements in our performance. For example, beginning with the first quarter 2008, we experienced a sharp downturn in sales that continued over the next four quarters. However, in the second quarter 2009, sales began to stabilize and we achieved a modest increase in sales in the third quarter 2009 compared to sales in the second quarter 2009.

          Throughout the year we also have steadily reduced our inventory levels, while shifting the mix of our inventory toward a stronger presentation of full price versus markdown product. This was a significant change in our inventory composition compared to the spring season and the prior year. Our goal in the third quarter 2009 was to be far less promotional compared to 2008 and to present the customer with a strong presentation of fresh, full-price merchandise. As a result, we experienced a healthy improvement in full price selling, particularly in September and October, which contributed to a stronger than anticipated gross margin in the third quarter 2009.

          We have also made significant improvements in our sourcing practices, which have resulted in ongoing improvement in initial mark-up (“IMU”) year-to-date. In the third quarter 2009, we improved gross margin by

$10.5 million compared to the prior year period, despite a $48.4 million decrease in net sales compared to the prior year. In August 2009, we entered into a buying agency agreement with an affiliate of Li & Fung Limited (“Li & Fung”), a Hong Kong-based global consumer goods exporter, which effective September 2009 is acting as our exclusive global apparel sourcing agent for substantially all Talbots apparel. The exclusive agency does not cover certain other products (including swimwear, intimate apparel, sleepwear, footwear, fashion accessories, jewelry and handbags) as to which Li & Fung will act as our non-exclusive buying agent at our discretion. As a result of this agreement, we reduced operating expenses in the third quarter 2009, as we have downsized our internal sourcing organization as well as closed our sourcing offices in Hong Kong and India. We anticipate it will further benefit IMU in 2010 when Li & Fung is fully engaged in the complete sourcing process.

          We established a goal of reducing annualized expenses by $150.0 million by the end of fiscal 2010. Approximately 80% of this reduction is expected to be realized in SG&A. We reduced SG&A by approximately $19.5 million in first quarter 2009, $30.0 million in the second quarter 2009, and another $28.1 million in third quarter 2009 resulting in total reductions in SG&A of $77.5 million in year-to-date 2009 as compared to the prior year. These reductions reflect significant progress toward achieving our $150.0 million annualized expense savings goal. As a result, by the end of fiscal 2009, we anticipate we will be close to achieving our fiscal 2010 goal of $150.0 million in annualized cost savings.

          Progress on all of these initiatives has produced a significant improvement in our third quarter 2009 operating results, resulting in income from continuing operations of $15.5 million for the third quarter 2009. These strategic improvements can be seen by our sequential improvement in narrowing operating losses from continuing operations. In the fourth quarter 2008 our operating loss from continuing operations declined $94.7 million compared to the fourth quarter 2007. We reduced that decline in operating loss from continuing operations to $54.5 million in the first quarter 2009 compared to first quarter 2008, and further reduced the decline to $1.7 million in the second quarter 2009 compared to the second quarter 2008. In the third quarter 2009 we experienced an improvement in operating income from continuing operations of $40.7 million compared to the third quarter 2008.

          A summary of our initiatives and actions taken to date to improve operating results, many of which we believe will continue into the fourth quarter 2009 and beyond are as follows:

	•		Reduction in our corporate headcount. In June 2008 we reduced corporate headcount by approximately 9% across multiple locations at all levels. In February 2009 and in June 2009 we further reduced corporate headcount by approximately 17% and 20%, respectively.
	•		Reduction in hours worked in our stores, distribution center and call center.
	•		Elimination of matching contributions to our 401(k) plan for 2009, increased employee health care contributions for 2009, the elimination of merit increases for 2009 and the freezing of our defined benefit pension plans.
	•		Broad-based non-employee overhead actions resulting in cost savings, primarily in the areas of administration, marketing and store operations.

          We anticipate that the initiatives outlined above will continue to benefit our operating results in the fourth quarter 2009. We currently anticipate sequential improvement in IMU and SG&A expenses, and a continuation of stabilized top line sales; however, due to significantly increased promotional activity and seasonality that historically occurs during our fourth quarter, as well as the continuing potential impact of economic factors, the expected improvement in gross margin and other benefits are expected to be reduced for the fourth quarter 2009 compared to the third quarter 2009.

          While we believe that all of these initiatives will continue to provide ongoing benefits, there can be no assurance that our actions will be sufficient to produce operating profits or positive operating cash flows. The current economic environment has been characterized by a significant decline in consumer discretionary spending and we expect these economic conditions to continue throughout 2009 and possibly beyond. We believe that continued improved operating results depend on our ability to access sufficient sources of liquidity to satisfy our debt, working capital needs and other cash requirements, continue to respond to a difficult economic environment, execute on our strategic initiatives and cost reduction programs, design and deliver customer-appropriate merchandise, and source our products on a competitive and cost efficient basis. Further discussion of our efforts to improve our cash flow position are included in the Liquidity and Capital Resources section below.

Results of Continuing Operations

          The following table sets forth the percentage relationship to net sales of certain items in our condensed consolidated statements of operations for the periods shown below:

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 31,				November 1,				October 31,				November 1,
		2009				2008				2009				2008
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales, buying and occupancy expenses			60.1	%			68.4	%			67.1	%			65.9	%
Selling, general and administrative expenses			32.1	%			35.6	%			33.2	%			32.8	%
Restructuring charges			0.1	%			0.4	%			1.1	%			0.9	%
Impairment of store assets			0.4	%			0.6	%			0.2	%			0.2	%
Operating (loss) income from continuing operations			7.3	%			-5.0	%			-1.6	%			0.2	%
Interest expense, net			2.3	%			1.4	%			2.3	%			1.3	%
Income (loss) before taxes from continuing operations			5.0	%			-6.4	%			-3.9	%			-1.1	%
Income tax benefit			-0.1	%			-2.3	%			-1.2	%			-0.4	%
Income (loss) from continuing operations			5.1	%			-4.1	%			-2.7	%			-0.7	%

Net Sales

          Net sales consist of store sales and direct marketing sales. Direct marketing sales include our catalog and Internet channels. The following table shows net store sales, net direct marketing sales, and comparable stores sales for the thirteen and thirty-nine weeks ended October 31, 2009 and November 1, 2008 (in millions):

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 31,				November 1,				October 31,				November 1,
		2009				2008				2009				2008
Net store sales		$	255.4			$	303.5			$	766.7			$	982.8
Net direct marketing sales			53.5				53.8				153.0				184.4
Total net sales		$	308.9			$	357.3			$	919.7			$	1,167.2
Comparable store sales			-15.9	%			-13.9	%			-22.8	%			-10.9	%