UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

 

Commission File Number 1-12552

 

THE TALBOTS, INC.

(Exact name of registrant as specified in its charter)

 

 

One Talbots Drive, Hingham, Massachusetts 02043

(Address of principal executive offices)

Registrant’s telephone number, including area code

781-749-7600

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ

 

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. Yes  þ     No o

 

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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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

 

The aggregate market value of the voting common stock held by non-affiliates as of the last business day of the registrant’s second fiscal quarter ended August 1, 2009 was $120.7 million.

 

As of April 8, 2010, 67,657,612 shares of the registrant’s common stock were outstanding.

 

Documents Incorporated by Reference

 

Portions of the registrant’s Proxy Statement to be filed in connection with the 2010 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

The Talbots, Inc.

 

Annual Report on Form 10-K for the Fiscal Year Ended January 30, 2010

 

 

 

General

 

The Talbots, Inc., a Delaware corporation, together with its wholly-owned subsidiaries (“we”, “us”, “our, “Talbots” or the “Company”), is a specialty retailer and direct marketer of women’s apparel, accessories and shoes. We operate stores in the United States and Canada. In addition, our customers may shop online or via our catalogs.

 

In late 2007, we initiated a comprehensive review of our entire business to develop a long-range strategy to strengthen the Company, improve our operating performance and deliver increased shareholder value. We began implementing the plan in 2008. Our primary objectives were to reinvigorate the core Talbots brand and streamline operations through a set of key initiatives. At the same time, we were acutely focused on actions to stabilize our liquidity and increase cash flow. Our main focus throughout 2009 was to execute against these critical initiatives, which are outlined below.

 

Despite the challenges of the economic recession, which we believe impacted our business throughout 2009, we made considerable progress in achieving our objectives. Beginning with product, we evolved our merchandise to be more relevant to today’s “baby-boomer and generation-X” consumer. In conjunction with this effort, we re-vamped our marketing and public relations strategy, offering new and innovative events designed to maintain the loyalty of the core customer, reactivate the lapsed customer and attract a new customer. We developed a new mantra to describe our updated brand image, “tradition transformed”, which is consistently communicated through creative and visual enhancements to our catalog, website and store windows.

 

Further, we re-engineered our business practices in 2009, particularly in the areas of inventory management, sourcing and supply chain, and store operations. We benchmarked against industry best-in-class practices and developed more modern, efficient and flexible methods of conducting business in a dynamic retail environment. We made adjustments to our initiatives throughout the year in response to the weak 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 also undertook a major cost cutting initiative beginning in early 2009, identifying a two-year goal to eliminate $150.0 million in annual expenses, in order to bring our cost structure in line with our revenue stream. We substantially achieved that goal in one year and continue to explore ways to reduce our operating costs.

 

Although faced with a challenging retail economic environment during this pivotal stage of orchestrating a turnaround, we achieved operating income in the third and fourth quarters of 2009, following five consecutive quarters of operating losses.

 

A summary of our strategic initiatives and actions taken to date intended to improve operating results, many of which we believe will continue to provide benefits in 2010 and beyond are as follows:

 

 

 

 

 

By leveraging Li & Fung’s position as a best-in-class sourcing agent, we expect to further simplify and centralize our sourcing activities, which we anticipate will further reduce our costs of goods sold and internal operating expenses, while improving time to market. Together with Li & Fung, we believe we can develop a single, world-class supply chain organization that is expected to strengthen our competitive position. Li & Fung will have assumed full responsibility for the sourcing and manufacturing of substantially all Talbots apparel beginning with our summer 2010 delivery.

 

 

 

We completed the BPW Transactions on April 7, 2010 and used the proceeds from the merger combined with a drawdown under the senior secured revolving credit facility to repay $488.2 million of our outstanding indebtedness at its principal value plus accrued interest and other costs. Immediately following the repayment on April 7, 2010, we had $125.0 million of total debt outstanding.

 

Description of Operations

 

Talbots brand.  The Talbots brand, which began operations in 1947 as a single store in Hingham, Massachusetts, offers a distinctive collection of classic sportswear, casual wear, dresses, coats, sweaters, accessories and shoes, consisting almost exclusively of Talbots own branded merchandise in misses, petites, woman and woman petite sizes.

 

Our merchandising strategy focuses on honoring the classics which emphasizes modern classic, relevant, and updated merchandise designed to appeal to today’s baby-boomer and generation-X consumer. “Tradition transformed” is our brand vision. Our merchandise is offered in an extensive array of sizes to fit almost every woman under the following business concepts: Misses, Petites, and Woman. Our stores, catalogs and website offer a variety of key basic and fashion items along with a complementary assortment of accessories and shoes which enable customers to assemble complete wardrobes. We believe that a majority of our customers are high-income, college-educated and employed primarily in professional and managerial occupations, and are attracted to the brand by our focused merchandising strategy, personalized customer service, and continual flow of high quality, reasonably priced updated classic merchandise.

 

As of January 30, 2010, we operated our business in two segments: Retail Stores and Direct Marketing.

 

Retail Stores.  Our retail stores are located in 46 states, the District of Columbia and Canada under the Talbots name. In 2009, our retail stores accounted for 83% of our total consolidated sales.

 

As of January 30, 2010, we operated a total of 580 stores under the Talbots name. We operate stores in various location types, including village, specialty centers, malls and urban centers each representing 25%, 43%, 30% and 2% of store location type, respectively. The unique range of our store portfolio, both in location type and square footage, allows us to offer product across a broad size range in order to better serve our customers’ individual needs.

 

 

 

Upscale Outlets.  In 2009, we entered the upscale outlet market, operating 18 upscale outlets as of January 30, 2010. This new sales channel allows the upscale outlet customer to experience the brand in her preferred shopping venue. Our value-driven offering is inspired by our core misses business, but offers her a unique assortment that is exclusively available at upscale outlet locations. We continue to operate our non-upscale outlets, selling end-of-season excess inventory from our core misses locations at special value prices. This enables us to bring new styles and offerings to our core retail customer each month.

 

Our store portfolio as of January 30, 2010 is as follows:

 

 

Approximately 75%-80% of the floor area of our stores is devoted to selling space (including fitting rooms), with the balance allocated to stockroom and other non-selling space.

 

We continuously seek to enhance store productivity by management of our real estate portfolio, aggressive expense management and identification of operational efficiencies.

 

Direct Marketing.  Our direct marketing segment includes our catalog and Internet channels.

 

Since 1948, we have used our direct marketing business to offer customers convenience in ordering Talbots merchandise. In 2009, our direct marketing business segment represented 17% of our total sales, with the Internet channel comprising 70% of our total direct marketing sales.

 

Our catalogs are designed to promote our brand image and drive customers to their preferred shopping channel, including stores, call centers and online. In 2009, we issued 19 separate Talbots catalogs across all business concepts with a circulation of approximately 36.6 million, a planned decrease of 33% in circulation from 2008. We believe our efforts, in early fall 2009, yielded a solid response rate, especially with our existing and lapsed customers.

 

We utilize computer applications which employ mathematical models to improve the efficiency of our catalog mailings through refinement of our customer list. A principal factor in improving customer response has been the development of our own list of active customers. We routinely monitor customer interest and update and refine this list. Our customer list also provides important demographic information and serves as an integral part of our store portfolio management strategy by helping to identify markets with the potential to support a new store or to identify where a store is no longer warranted. We follow the Direct Marketing Association’s recommendations on consumer privacy protection practices.

 

We strive to make catalog shopping as convenient as possible. We maintain toll-free numbers, accessible seven days a week (except Christmas Day), to accept requests for catalogs and to take customer orders. We maintain a call center in Knoxville, Tennessee designed to provide service to customers. Telephone calls are answered by knowledgeable call center sales associates who enter customer orders and retrieve information about merchandise and its availability. These sales associates also suggest and help to select merchandise and can provide detailed information regarding size, color, fit, and other merchandise features. We have achieved efficiencies in order entry and fulfillment, which permit the shipment of most orders the next business day.

Our Internet channel is a natural extension of our existing store and catalog channels, offering the same broad assortment of our store and catalog merchandise. We also utilize our Internet channel as an inventory clearance tool via our on-line outlet vehicle. In fall 2009, we made major enhancements to our Talbots website offering enhanced visuals and greater ease of functionality, as well as ensuring that our brand image is fully aligned and consistent with all of our channels.

 

Sales orders from our website are merged into the existing catalog fulfillment system, allowing efficient shipping of merchandise. Customers can check the availability of merchandise at the time of purchase and the website will provide examples of alternative merchandise if items are unavailable. Additionally, the website’s “online chat” feature allows customers to communicate with customer service representatives. Customers shopping online at www.talbots.com can also enjoy the benefit of our “find in a store” feature allowing a customer to select merchandise online and then reserve it at a store of her choice. As with the catalog, customer online purchases can be returned by mail or at our retail stores.

 

See Note 14, Segment and Geographic Information, to our consolidated financial statements included in Item 15 for more detailed information regarding stores and direct marketing sales.

 

Merchandising, Inventory Control and Distribution

 

Merchandising

 

Our evolved merchandising strategy focuses on honoring the classics, while infusing relevant and updated merchandise across all product classifications for our brand. We deliver new and compelling merchandise assortments with fresh floor sets on a monthly basis. Our stores, catalogs and website offer a variety of fashion and basic items, and a complementary assortment of accessories and shoes which enable customers to assemble complete outfits. Sales associates are trained to assist customers in merchandise selection and wardrobe coordination, helping them achieve the Talbots look from “head-to-toe.”

 

Branded Merchandise Design and Purchasing.  Our merchandise is designed and produced through the coordinated efforts of our creative, merchandising and sourcing teams in collaboration with our new exclusive global sourcing agent, Li & Fung. By conceptualizing and designing in-house, we have been able to realize higher average initial gross profit margins for our clothing and accessories, while at the same time provide value to our customers. Styles for our merchandise are developed based upon analysis of historical, current and anticipated future fashion trends that will appeal to our target customers

 

Sourcing.  We currently procure merchandise globally from a balanced and diversified manufacturing network. Our products are produced by independent manufacturers to our specifications and standards, primarily in the greater Asia-Pacific region. The balance of our merchandise is purchased from other sources based in the U.S. that may rely on their own offshore sources for manufactured goods.

 

In August 2009, we entered into a buying agency agreement with Li & Fung, 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 have reduced operating expenses, as we have downsized our internal sourcing organization as well as closed our sourcing offices in Hong Kong and India.

 

We frequently analyze our overall distribution of manufacturing to ensure that no particular vendor or countryis responsible for what we believe would be a disproportionate amount of our merchandise. With the appointment of Li & Fung as our exclusive buying agent for substantially all of our apparel product and the access we gained access to their vast global sourcing network, we expect to reduce the percentage of our product sourced from China in 2010.

The following is our sourcing activity by top-five countries for 2009:

 

 

We currently do not maintain any long-term or exclusive commitments or arrangements to purchase merchandise from any vendor. We take measures to monitor our vendors for compliance with the Fair Labor Standards Act, security procedures and rules mandated by the U.S. Customs and Border Patrol.

 

Customer Credit

 

We have extended credit to our Talbots customers through the use of our proprietary Talbots charge card. The Talbots charge card is managed through Talbots Classics National Bank, a national banking association organized under the laws of the United States with a main office and principal place of business in Rhode Island, and Talbots Classics Finance Company, a wholly-owned subsidiary. We believe that the offering of the Talbots charge card enhances customer loyalty, in addition to producing finance charge income and decreasing third-party bank card fees.

 

U.S. Talbots charge card holders are automatically enrolled in our customer loyalty program referred to as our Classic Awards program, which rewards U.S. Talbots customers with a twenty-five dollar appreciation award for every five hundred points earned. Prior to January 2009, one point was earned for every dollar of merchandise purchased on a Talbots charge card. Commencing in January 2009, we launched a new expanded program with three tiers: red, platinum, and black. The red tier is open to all customers, regardless of whether they hold a Talbots credit card, and accrues 0.5 points for every dollar of merchandise purchased with a non-Talbots charge payment. The platinum tier is the same as the prior program with one point being earned for every dollar of merchandise purchased on a Talbots charge card. The black tier is for Talbots credit card holders who spend more than $1,000 per calendar year on their Talbots charge card, and accrues 1.25 points for every dollar of merchandise purchased on their Talbots charge card. The awards can be redeemed against future purchases and expire one year from the date of issuance. The Classic Awards program has led to increased usage of the Talbots charge card, as customer usage increased from 28% of total sales in 2000 to 49.2% of total sales in 2009.

 

Management Information Systems

 

Our management information systems and electronic data processing systems are located at our systems center in Tampa, Florida, and at our corporate facilities in Hingham, Massachusetts. We also have a collections system at Talbots Classics Finance Company located in Lincoln, Rhode Island. Our systems consist of a full range of retail, catalog, e-commerce, financial and merchandising systems, including credit, inventory distribution and control, sales reporting, product design, budgeting and forecasting, financial reporting, merchandise reporting and distribution. We seek to protect company-sensitive information on our servers from unauthorized access using industry standard network security systems in addition to anti-virus and firewall protection. The website makes use of encryption technology to help protect sensitive customer information.

 

All of our stores have point-of-sale terminals that transmit information daily on sales by item, color and size. Our stores are equipped with bar code scanning programs for the recording of store sales, returns, inventories, price changes, receipts and transfers. We evaluate this information, together with weekly reports on trend analyses and merchandise statistics, prior to making merchandising decisions regarding allocation of merchandise and promotional activity.

Marketing

 

Our marketing initiatives have been focused on elevating brand awareness and increasing customer acquisition and retention. Our marketing programs consist of catalogs, customer mailing and Internet advertising, and other marketing campaigns such as direct promotional customer incentives. In an effort to maximize the return on our marketing initiatives, we decided to eliminate television and national print advertising in 2008 and 2009 and redirect a portion of our marketing budget to enhance customer outreach through reactivation, prospecting and web-based marketing. In 2009, we increased our email marketing initiatives and decreased our catalog distribution. We continue to pursue innovative new strategies to increase contact with current and potential customers, including Facebook, Twitter and other social networking sites.

 

Seasonality

 

Historically, our business has had two distinct selling seasons, spring and fall. The first and second quarters of the fiscal year made up the spring season and the third and fourth quarters of the fiscal year made up the fall season. Within the spring season, direct marketing sales were typically stronger in the first quarter, while store sales were slightly stronger in the second quarter. Within the fall season, both retail and direct marketing sales experienced holiday seasonality with retail and direct sales generally stronger in the fourth quarter. We have found that we have not experienced any significant seasonal fluctuations in our net sales in 2008 and 2009. We believe this is attributable to several factors, including but not limited to changes in our promotional strategy, changes to our merchandising and marketing strategies, and the effect of the economic environment and consumer spending.

 

Our operating results may fluctuate quarter to quarter as a result of the timing of holidays, weather, market acceptance of our products, product mix, pricing and presentation of the products offered and sold, the cost of goods sold, the incurrence of other operating costs and factors beyond our control, such as general economic conditions, and actions of competitors.

 

Competition

 

The retail apparel industry is highly competitive. We believe that the principal basis upon which we compete is fashion, quality, value and service in offering modern classic apparel to customers, through stores, catalogs and online.

 

We compete with national department stores, regional department store chains, specialty retailers and catalog companies. We believe that our focused apparel merchandise selection, consistently branded merchandise, superior customer service, store site selection resulting from the synergy between our stores and direct marketing operations, and the availability of our merchandise in multiple concepts, distinguish us from department stores and other specialty retailers.

 

Employees

 

As of January 30, 2010, we had approximately 9,100 employees of whom approximately 2,200 were full-time salaried employees, approximately 1,200 were full-time hourly employees, and approximately 5,700 were part-time hourly employees. In June 2008, as part of our strategic initiatives, we reduced our corporate headcount by approximately 9% across multiple locations and at all levels as part of our strategic long-range plan. In February 2009, we reduced our corporate headcount by approximately 370 positions, or approximately 17%. Additionally, in June 2009, we reduced our corporate headcount by approximately 330 positions, or approximately 20%. For a discussion regarding reductions in workforce due to our initiative to reduce costs and streamline our organization, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Overview.

Executive Officers of the Company

 

The following table sets forth certain information regarding our executive officers as of April 12, 2010:

 

 

Ms. Sullivan joined The Talbots, Inc. as President and Chief Executive Officer and as a director in August 2007. Prior to joining the Company, Ms. Sullivan served as President of Liz Claiborne, Inc. from January 2006 until July 2007. Ms. Sullivan joined Liz Claiborne, Inc. in 2001 as Group President of the company’s Casual, Collections, and Elisabeth businesses. She was named Executive Vice President in March 2002 with added responsibilities for all non-apparel business, all direct-to-consumer business (retail and outlet) and the International Alliances business at Liz Claiborne, Inc. She served in this position until she was named President of Liz Claiborne, Inc. in 2006. Prior to joining Liz Claiborne, Inc., Ms. Sullivan served as President of J. Crew Group, Inc. from 1997 until 2001.

 

Mr. Scarpa joined The Talbots, Inc. as Chief Operating Officer in December 2008 and was also named Chief Financial Officer and Treasurer in January 2009. Prior to joining the Company, Mr. Scarpa served as Chief Operating Officer of Liz Claiborne, Inc. from January 2007 until November 2008. Mr. Scarpa joined Liz Claiborne in 1983 and served in many senior leadership roles, including Senior Vice President, Chief Financial Officer from July 2002 until May 2005; and Senior Vice President, Finance and Distribution and Chief Financial Officer from May 2005 until January 2007.

 

Mr. Smaldone joined The Talbots, Inc. as Chief Creative Officer in December 2007. Prior to joining the Company, Mr. Smaldone served as Senior Vice President of Design for Ann Taylor Stores Corporation from September 2003 until December 2007. Mr. Smaldone also held senior leadership roles in design at Anne Klein where he served as Chief Design Officer from July 2001 to September 2003, and Elie Tahari from May 2000 to May 2001.

 

Ms. Casamento joined The Talbots, Inc. as Executive Vice President, Finance in April 2009. Prior to joining the Company, she spent nine years at Liz Claiborne, Inc., most recently as President of Liz Claiborne, Claiborne and Monet brands from July 2007 until October 2008. Prior to that, Ms. Casamento served in various other leadership roles within Liz Claiborne, including President of Ellen Tracy and Dana Buchman brands from January 2007 until July 2007, Vice President, Group Operating Director, Better & Moderate Apparel from January 2004 until January 2007, Vice President, Financial Planning and Analysis from November 2000 until January 2004, and prior to that she was Vice President, Group Financial Director, Retail & International Group. Ms. Casamento started her career at Saks Fifth Avenue where she held roles of increasing responsibility in accounting and finance, including Controller of OFF 5th, Saks Fifth Avenue Outlet and the Folio catalog division.

 

Mr. Fiske was promoted to Executive Vice President, Chief Stores Officer in March 2009. Prior to his promotion, Mr. Fiske served as Executive Vice President, Human Resources and Administration since June 2008 and previously as Senior Vice President, Human Resources since April 2007. Prior to that, Mr. Fiske served as Senior Vice President, Human Resources of the J. Jill Group, Inc. since 2005. Mr. Fiske was Vice President, Human Resources of Abercrombie & Fitch from 2002 to 2004. From 1999 to 2002, Mr. Fiske was Corporate Vice President,

Human Resources and Organizational Development at Kenneth Cole Productions. Mr. Fiske served in various Human Resource positions at The Timberland Company from 1995 to 1999. Mr. Fiske has also held positions in Human Resources at Nike, TJX Companies, May Department Stores, and Federated Department Stores.

 

Mr. O’Connell was appointed Executive Vice President, Real Estate, Legal, Store Planning & Construction, and Secretary in June 2008. Previously he served as Executive Vice President, Legal and Real Estate, and Secretary since November 2006. Mr. O’Connell joined The Talbots, Inc. in 1988 as Vice President, Legal and Real Estate, and Secretary, and became Senior Vice President, Legal and Real Estate, and Secretary in 1989. Prior to joining the Company, he served as Vice President, Group Counsel of the Specialty Retailing Group at General Mills, Inc.

 

Mr. Poole joined The Talbots, Inc. as Executive Vice President, Chief Supply Chain Officer in June 2008. Prior to joining the Company, he was Senior Vice President, Chief Procurement Officer for Ann Taylor Stores Corporation from June 2007. Mr. Poole held various leadership positions at The Gap, Inc. from 1993 through 2006, including Senior Vice President of Sourcing and Vendor Development from August 2004 to February 2006, Senior Vice President of Corporate Administration, Architecture & Construction from August 2001 to August 2004, and Senior Vice President of Corporate Architecture and Construction from July 2000 to August 2001. Mr. Poole has also held leadership positions in supply chain management at Esprit de Corp. and The North Face, Inc.

 

Ms. Wagner joined The Talbots, Inc. as Executive Vice President, Chief Marketing Officer in March 2008. Ms. Wagner previously held the position of Senior Vice President, Chief Marketing Officer at Cole Haan, a division of Nike, from 2006. Prior to joining Cole Haan, she served as Senior Vice President of Marketing for Kenneth Cole Productions from 2001 to 2006 and, before that, as Senior Vice President of Brand Marketing and Creative for J. Crew from 1991.

 

Ms. Kindler was promoted to Executive Vice President, General Merchandise Manager in March 2010. Prior to her promotion, Ms. Kindler served as Senior Vice President of Merchandising, General Merchandise Manager since joining the Company in January 2008. Prior to that, she served as Senior Vice President, General Merchandise Manager for the Loft brand, a division of Ann Taylor Stores Corporation.

 

Available Information

 

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to these reports filed or furnished pursuant to Section 13(a) of 15(d) of the Securities Exchange Act of 1934, are available free of charge on our website located at www.thetalbotsinc.com, as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission. These reports are also available at the Securities and Exchange Commission’s Internet website at www.sec.gov.

 

A copy of our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the charters of the Audit Committee, the Compensation Committee and the Corporate Governance and Nominating Committee are posted on our website, www.thetalbotsinc.com, under “Investor Relations,” and are available in print to any person who requests copies by contacting Talbots Investor Relations by calling (781) 741-4500, by writing to Investor Relations Department, The Talbots, Inc., One Talbots Drive, Hingham, Massachusetts, 02043, or by e-mail at investor.relations@talbots.com. Information contained on the website is not incorporated by reference or otherwise considered part of this document.

 

 

Careful consideration should be given to the risk factors discussed below and the other information set forth in this Report, any of which could materially affect our business, operations, financial position, liquidity and future results. The risks described in this Report are important to an understanding of the statements made in this Report, in our other filings with the SEC, and in any other discussion of our business. These risk factors, which contain forward-looking information, should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included in Item 15 of this Report. The risks described in this Report are not intended to be exhaustive and are not the only risks facing the Company.

The uncertain economic conditions could materially adversely impact our financial condition and results of operations.

 

The U.S. economy has weakened significantly as a result of the recent global economic crisis and may remain depressed for the foreseeable future. These economic conditions materially and adversely impact consumer confidence and consumer spending; our ability to forecast our continuing operations and operating results; our ability to execute and achieve our strategic, operational, restructuring and cost saving initiatives; our vendors and suppliers and the risk of any disruption in the supply of merchandise to us; our cash flows and other sources of funding of our continuing operations, strategic initiatives, restructure activities, debt service requirements, capital expenditures and the obligations arising in the operation of our business; and our ability to obtain additional or replacement financing at the times and in the amounts as may be needed. We are unable to predict the likely duration or ultimate severity of the U.S. economic conditions, and if the current and economic conditions further deteriorate, our business, continuing operations, financial results, liquidity and financial position could be increasingly materially and adversely impacted. Further, a sustained economic downturn would likely cause a number of the risks that we currently face to increase in likelihood and scope.

 

Our ability to continue to have the liquidity necessary through cash flows from operations combined with our new senior secured revolving credit facility may not be sufficient to support operations.

 

On April 7, 2010, we completed our merger with BPW Acquisition Corp., a special purpose acquisition corporation (“BPW”), which resulted in net cash proceeds of $333.1 million before our acquisition costs. We simultaneously closed a senior secured revolving credit facility with a third-party lender (the “Credit Facility”), which provides borrowing capacity up to $200.0 million, subject to satisfaction of all borrowing conditions.

 

As a specialty retailer dependent upon consumer discretionary spending, we have been adversely affected by recent economic conditions, which have impacted sales, margins, cash flows, liquidity, results of operations and financial condition. While the funding received through the merger with BPW and related Credit Facility eliminated approaching debt maturities and assisted in our recapitalization, it does not provide assurance that the current economic environment will stabilize or improve in the near future or that we will generate sufficient positive cash flows from operations. Our ability to operate profitably and to generate positive cash flows is dependent upon many factors, including stabilization or improvement in economic conditions and consumer spending and our ability to successfully execute our long-term financial plan and strategic initiatives. In the event cash flows are not sufficient to support operations, it is uncertain whether the Credit Facility will be able to provide levels of cash in the amounts or at the time needed. As such, the merger and refinancing does not provide assurance that our cash flows from operations will be sufficient to support our Company without additional financing or credit availability. There can be no assurance that alternatives, if needed, would be successfully implemented, in which case it could materially adversely affect our Company, its liquidity, financial condition and results of operations.

 

Our Credit Facility contains a borrowing base that is determined primarily by the level of our eligible accounts receivable and inventory. If we do not have a sufficient borrowing base at any given time, borrowing availability under our Credit Facility may not be sufficient to support our liquidity needs. Insufficient borrowing availability under our Credit Facility would likely have a material adverse effect on our business, financial condition, liquidity and results of operations.

 

Moreover, under the Credit Facility, we are subject to various covenants and requirements. Should we be unable to comply with any of the covenants and requirements in the Credit Facility, we would be unable to borrow under such Credit Facility, and any amounts outstanding would become immediately due and payable unless we were able to secure a waiver or an amendment under the Credit Agreement. Should we be unable to borrow under the Credit Facility we may likely not have the cash resources for our operations and if outstanding borrowings under the facility become immediately due and payable we likely would not have the cash resources to repay any such accelerated obligations, and in each case, our liquidity would be significantly impaired, which would have a material adverse effect on our business, financial condition and results of operations.

 

As a result, the sufficiency and availability of our sources of liquidity may be affected by a variety of factors, including, without limitation: (i) the level of our operating cash flows, which will be impacted by retailer and consumer acceptance of our merchandise, general economic conditions and the level of consumer discretionary

spending; and (ii) our ability to maintain required levels of borrowing availability and to comply with applicable covenants included in our Credit Facility.

 

We cannot assure the successful implementation and results of our long-term strategic initiatives and that we will continue to improve our operating results and return to long-term profitability.

 

Our ability to successfully implement our strategic initiatives and continue to improve our operating results depends upon a significant number of factors, many of which are beyond our control, including:

 

 

We cannot provide assurance that any of these or other factors, plans and initiatives will be resolved or occur in our favor and, if not, our business, financial results, liquidity, sales and results of operations could be materially and adversely impacted.

 

The success of our business will depend on our ability to develop merchandise offerings that resonate with our existing customers and attract new customers as well as our ability to continue to develop, evolve and promote our brand.

 

Our future success depends on our ability to consistently anticipate, gauge and respond to our customers’ demands and tastes in the design, pricing, style and production of our merchandise. Our failure to anticipate, identify or react appropriately and in a timely manner to changes in customer preferences and economic conditions could lead to lower sales, missed opportunities, excessive inventories and more frequent markdowns, which could have a material adverse impact on our business and our sales levels. Merchandise misjudgments could also negatively impact our margins and markdown exposure, as well as our image with our customers, and result in diminished brand loyalty.

 

Our future success also depends upon our ability to effectively define, evolve and promote our brand. The Talbots brand name and “tradition transformed” niche is integral to the success of our business. Maintaining, promoting and positioning our brand will depend largely on the success of the brand’s design, merchandising and marketing efforts, and the ability to provide a consistent, high quality customer experience. We need to continue to translate market trends into appropriate product offerings while minimizing excess inventory positions, and correctly balance the level of our merchandise commitments with actual customer orders.

 

Our 2010 operating plan is based on a number of material assumptions that may not occur.

 

Our fiscal 2010 operating plan is based on a number of significant assumptions which we developed based on our historical information, current and expected economic conditions, and expectations and perceptions of our near-term and longer-term sales, financial results and cost savings, as well as many other assumptions. We have forecasted substantial cost savings from the strategic initiatives we implemented in the past, which if achieved

would improve cash flows and liquidity. The current economic environment makes it difficult to project or forecast the costs of and results to be achieved from these initiatives. There can be no assurance that our assumptions or expectations will prove to be accurate and it is possible that actual events, actions taken and results actually achieved will be materially different, and could be more costly, than what we have assumed or forecasted, which could have a material adverse impact on our results of operations, liquidity and financial position.

 

There are risks associated with the recent appointment of and transition to a new exclusive global merchandise buying agent.

 

In August 2009, we reorganized our global sourcing activities and entered into a long-term buying agency agreement with an affiliate of Li & Fung Limited (“Li & Fung”) pursuant to which Li & Fung was appointed as exclusive global apparel sourcing agent for substantially all of our apparel effective September 2009. There can be no assurance that the anticipated benefits from this arrangement will be realized or within the time periods expected. Moreover, we cannot provide assurance that upon cessation of this relationship for any reason we would be able to successfully transition to an internal or other external sourcing function.

 

Our overseas merchandise purchasing strategy makes it vulnerable to certain risks and any disruption in our supply of merchandise would materially impact us.

 

All of our merchandise is manufactured to our specifications by third-party suppliers and intermediary vendors, most of whom are located outside the United States. Our arrangements with foreign suppliers and with our foreign buying agents are subject generally to the risks of doing business abroad, including:

 

 

Continued difficult macroeconomic conditions and uncertainties in the global credit markets could negatively impact our suppliers, which in turn, could have an adverse impact on our business, financial position, liquidity and results of operations. Moreover, there is a risk that our suppliers and vendors could respond to any decrease or concern with our liquidity or negative financial results by requiring or conditioning their sale of merchandise to us on stringent payment terms, such as requiring standby letters of credit, earlier or advance payment of invoices or payment upon delivery, or other assurances or credit support. There can be no assurance that one or more of our suppliers may not slow or cease shipments or require or condition their sale or shipment of merchandise on more stringent payment terms. If this was to occur and we did not or were not able to adequately respond, it could materially disrupt our supply of merchandise.

 

We cannot predict whether the foreign countries in which our apparel and accessories are currently manufactured, or any of the foreign countries in which our apparel and accessories may be manufactured in the future, will be subject to import restrictions by the U.S. government, including the likelihood, type or effect of any trade retaliation. Trade restrictions, including increased tariffs or more restrictive quotas, applicable to apparel items could affect the importation of apparel and, in that event, could increase the cost or reduce the supply of apparel available to us and adversely affect our operations. We have an extensive, formal program requiring all of our manufacturers to comply with applicable labor laws and acceptable labor practices. Any failure to comply with applicable labor laws and practices by any of these manufacturers could materially harm our reputation with our customers as well as disrupt our supply of merchandise.

If our goodwill or other intangible assets become impaired, we may need to record significant non-cash impairment charges.

 

We review the carrying value of our assets for potential impairment using a combination of a discounted cash flow approach and a market value approach. If an impairment charge is identified, the carrying value is compared to our estimated fair value and an impairment charge is recorded as appropriate. Impairment losses are significantly impacted by estimates of future operating cash flows and estimates of fair value. Our estimates of future operating cash flows are based upon our experience, knowledge and expectations; however, these estimates can be affected by such factors as our future operating results, future store profitability, and future economic conditions, all of which can be difficult to predict. The carrying value of our assets may also be impacted by such factors as declines in stock price and in market capitalization. The recent macro-economic conditions impacted our performance and our market capitalization and it is difficult to predict how long these economic conditions will continue, whether they will continue to deteriorate, and which aspects of our business may be adversely affected. These conditions and the continuation of these conditions could impact the fair value of our goodwill and other intangible assets and could result in future material impairment charges, which would adversely impact our results of operations.

 

The costs to close underperforming stores may be significant and may negatively impact our cash flows and our results of operations.

 

We regularly assess our portfolio of stores for profitability and we close certain underperforming stores when appropriate under the circumstances. Our strategic and realignment plans include closing underperforming stores in order to reduce operating losses and to achieve improved long-term profitability of our store base. Economic conditions may require us to close an increasing number of underperforming stores. Substantially all of our stores are leased, with lease terms continuing for up to ten years or more, and we have significant annual rent and other amounts due under each lease. While in closing underperforming stores we endeavor to negotiate with landlords the amount of remaining lease obligations, there is no assurance we will reach acceptable negotiated lease settlements, particularly in the current economic environment. As a result, costs to close underperforming stores may be significant and may negatively impact our cash flows and our results of operations. The estimated costs and charges associated with store closings are also based on management’s assumptions and projections and actual amounts may vary materially from our forecasts and expectations.

 

In connection with the sale in 2009 of the J. Jill business we remain contingently responsible for certain material risks and obligations.

 

In July 2009, we completed the sale of the J. Jill brand business. There can be no assurance that the anticipated benefits from the sale of the J. Jill brand business will be realized in the time or amounts anticipated. There also can be no assurance that the estimated or anticipated costs, charges and liabilities to settle and complete the transition and exit from the J. Jill brand business, including both retained obligations and contingent risk for assigned obligations, will not be materially differ from or be materially greater than anticipated. In connection with the sale of the J. Jill business to J.Jill Acquisition LLC (“Purchaser”), the Purchaser agreed to acquire and assume from us certain assets and liabilities relating to the J. Jill business. 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 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, Massachusetts. Certain of our subsidiaries remain contingently liable for obligations and liabilities transferred to the Purchaser, including those related to leases and other obligations transferred to and assumed by the Purchaser, as to which obligations and liabilities we now rely on the Purchaser’s creditworthiness as 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 our financial condition and results of operations. We have 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.

We are subject to credit risk and to potential increased defaults and delinquencies on our customer charge card account portfolio.

 

We extend credit to our customers for merchandise purchases through our proprietary charge card facilities. While we monitor our charge card account portfolio and we believe that our charge card account portfolio continues to be sound, the deteriorated economic environment and current high levels of unemployment may lead to higher customer delinquencies and defaults. There can be no assurance that our credit risk monitoring or our monitoring of our charge card account portfolio will guard against or enable us to adequately and timely respond to any increased risk of or actual increased customer delinquencies or defaults, which could materially and negatively impact the value of our charge card portfolio, our results of operations and liquidity, and our borrowing base under our Credit Facility.

 

Our Credit Facility contains provisions which may restrict our operations and proposed financing and strategic transactions.

 

Under the terms of our Credit Facility, we cannot create, assume or suffer to exist any lien securing indebtedness incurred after the closing date of the Facility subject to certain limited exceptions set forth in the Credit Facility. The Credit Facility contains negative covenants prohibiting the Company and its subsidiaries, with certain exceptions, from among other things, incurring indebtedness and contingent obligations, making investments, intercompany loans and capital contributions, and disposing of property or assets. The Credit Facility Agreement also contains customary representations, warranties and covenants relating to the Company and its subsidiaries. The agreement provides for events of default, including failure to repay principal and interest when due and failure to perform or violation of the provisions or covenants of the agreement.

 

Any of the above requirements or other restrictions and limitations under the Credit Facility could reduce our flexibility by limiting, without lender consent, our ability to borrow additional funds or enter into dispositions or collateralization transactions involving any of our assets or other significant transactions. Further, if we default under our Credit Facility, any amounts outstanding could become immediately due and payable prior to the maturity date, in which case absent replacement financing we would not have sufficient liquidity to satisfy this debt.

 

Our success also depends upon our ability to maintain proper inventory levels.

 

Our success depends upon our ability to manage proper inventory levels and respond quickly to shifts in consumer demand patterns. If we overestimate customer demand for our merchandise, this will likely result in inventory markdowns and movement of the excessive inventory to our outlet facilities to be sold at discount or closeout prices which would negatively impact operating results and could impair our brand image. If we underestimate customer demand for our merchandise, we may experience inventory shortages which may result in missed sales opportunities, negative impact on customer loyalty and loss of revenues. The inability to fill customer orders efficiently could lower customer satisfaction and could cause customers to go to an alternate source for the desired products. This lowered level of customer satisfaction and improper inventory levels could adversely affect our operations.

 

We may continue to experience fluctuations in operating results.

 

Our annual and quarterly operating results have fluctuated, and are expected to continue to fluctuate. Among the factors that may cause our operating results to fluctuate are timing of holidays, weather, market acceptance of our products, product mix, pricing and presentation of the products offered and sold, the timing of merchandise receipts, our cost of merchandise, unanticipated operating costs, and other factors, many of which are beyond our control, including the general economic conditions experienced over the past two years as well as actions of competitors. As a result, period-to-period comparisons of historical and future results will not necessarily be meaningful and should not be relied on as an indication of future performance.

 

Talented personnel are critical to our success.

 

Our success and ability to properly manage our growth and to further develop and promote our brand depends to a significant extent on both the performance of our current executive and senior management team and our ability to attract, hire, motivate, and retain qualified and talented management personnel in the future. In recent years, we

have added a significant number of key senior executives in the areas of brand leadership, creative, merchandising, marketing, finance and sourcing. There can be no assurance that we will be able to retain these senior executives and other key personnel or that these key hires will be successful in achieving or maintaining better sales and improved operating results or long-term profitability for us. Our operations could be adversely affected if we cannot attract qualified personnel to re-fill existing positions or build new positions and departments within the organization and retain all of our key personnel.

 

Our dependence on a single distribution facility.

 

We handle merchandise distribution for all of our stores from a single facility in Lakeville, Massachusetts. Independent third-party transportation companies deliver our merchandise to our stores and our clients. Any significant interruption in the operation of the distribution facility or the domestic transportation infrastructure due to natural disasters, accidents, inclement weather, epidemics, system failures, work stoppages, slowdowns or strikes by employees of the transportation companies, or other unforeseen causes could delay or impair our ability to distribute merchandise to our stores, which could result in lower sales, a loss of loyalty to our brands and excess inventory.

 

A major failure of our information systems could harm the business.

 

We depend on information systems to manage our operations. Our information systems consist of a full range of retail, financial, and merchandising systems, including credit, inventory distribution and control, sales reporting, accounts payable, budgeting and forecasting, financial reporting, merchandise reporting and distribution. We regularly make investments to upgrade, enhance or replace such systems and believe they meet industry standards. Any delays or difficulties in transitioning to these new systems, or in integrating these systems with our current systems, or any disruptions affecting our information systems, could have a material adverse impact on our operations.

 

The outcome of litigation and other claims is unpredictable.

 

On January 12, 2010, a purported Talbots common shareholder filed a putative class and derivative action captioned Campbell v. The Talbots, Inc., et al., C.A. No. 5199-VCS, in the Court of Chancery of the State of Delaware against Talbots, the Talbots board of directors, AEON (U.S.A.), Inc., BPW, and certain other parties. Among other things, the complaint asserts claims for breaches of fiduciary duties, aiding and abetting breaches of fiduciary duties, and violation of certain sections of the Delaware General Corporation Law (“DGCL”) and Talbots’ by-laws. The plaintiff originally sought injunctive, declaratory, and monetary relief, including an order enjoining the consummation of the proposed merger and related transactions.

 

On March 6, 2010, a Stipulation entered into by all parties to the litigation was filed in the Court of Chancery, pursuant to which plaintiff withdrew his motion for a preliminary injunction and, in exchange, Talbots agreed to implement and maintain certain corporate governance measures, subject to the terms and conditions specified in the Stipulation. The Stipulation does not constitute dismissal, settlement, or withdrawal of Plaintiff’s claims in the litigation, and there is no assurance the parties will finally settle and discharge such claims. The defendants have moved to dismiss the complaint and intend to defend against the claims vigorously.

 

We are also subject to other litigation and claims and administrative proceedings.

 

We cannot predict or determine the ultimate outcome of any legal or administrative proceedings to which we are now subject or may become subject in the future or to quantify the amount or potential financial impact. Because of the inherent difficulty of predicting the outcome of any legal claims and administrative proceedings, we cannot provide assurance as to the outcome of these or other pending or future matters, or if ultimately determined adversely to us, the loss, expense or other amounts attributable to any such matter. The resolution of such matter or matters, if unfavorable, could have a material adverse effect on our business, liquidity and results of operations.

 

The foregoing risk factors are not intended to be exhaustive. We cannot assure that we have identified and discussed all of the significant factors which might affect our operations, results of operations or financial condition. Investors are urged to review this entire Annual Report as well as all of our other public disclosures and our filings with the SEC, all of which may be found on our website at www.thetalbotsinc.com under “Investor Relations”.

 

None.

 

 

The table below presents certain information relating to our properties at January 30, 2010:

 

 

 

 

We believe that our operating facilities and sales offices are adequate and suitable for our current needs.

 

The leases typically provide for an initial term between 10 and 15 years, with renewal options permitting us to extend the term between five and 10 years thereafter. We generally have been successful in renewing our store leases as they expire. Under most leases, provisions include a fixed annual base rent plus a contingent rent (“percentage rent”) based on the store’s annual sales in excess of specified levels. In a majority of leases, we have a right to terminate earlier than the specified expiration date if certain sales levels are not achieved; such right is usually exercisable after five years of operation. Most leases also require us to pay real estate taxes, insurance and utilities and, in shopping center locations, to make contributions toward the shopping center’s common area operating costs and marketing programs. Most lease arrangements provide for an increase in annual fixed rental payments during the lease term.

 

At January 30, 2010, the current terms of our store leases (assuming solely for this purpose that we exercise all lease renewal options) were as follows:

 

 

 

 

 

On January 12, 2010, a purported Talbots common shareholder filed a putative class and derivative action captioned Campbell v. The Talbots, Inc., et al., C.A. No. 5199-VCS, in the Court of Chancery of the State of Delaware (the “Chancery Court”) against Talbots; Talbots’ board of directors; AEON (U.S.A.), Inc.; BPW Acquisition Corp. (“BPW”); Perella Weinberg Partners LP, a financial advisor to the audit committee of the Board of Directors of the Company and an affiliate of Perella Weinberg Partners Acquisition LP, one of the sponsors of BPW; and the Vice

Chairman, Chief Executive Officer, and Senior Vice President of BPW. Among other things, the complaint asserts claims for breaches of fiduciary duties, aiding and abetting breaches of fiduciary duties, and violations of certain sections of the DGCL and Talbots’ by-laws in connection with the negotiation and approval of the merger agreement between Talbots and BPW. The plaintiff originally sought injunctive, declaratory and monetary relief, including an order to enjoin the consummation of the merger and related transaction. On March 6, 2010, a Stipulation (the “Stipulation”) entered into by Talbots, the Talbots’ board of directors; AEON (U.S.A.), Inc.; BPW, Perella Weinberg Partners LP, the Vice Chairman, Chief Executive Officer, and Senior Vice President of BPW and John C. Campbell (“Plaintiff”) was filed in the Chancery Court with respect this action. Pursuant to the Stipulation, Plaintiff withdrew his motion for a preliminary injunction to enjoin consummation of the merger and related transactions between Talbots and BPW. In exchange, Talbots agreed to implement and maintain certain corporate governance measures, subject to the terms and conditions specified in the Stipulation. The Stipulation did not constitute dismissal, settlement or withdrawal of Plaintiff’s claims in the litigation, and there is no assurance the parties will finally settle and discharge such claims. Defendants have moved to dismiss the complaint and intend to continue to defend against the claims vigorously. Talbots cannot accurately predict the likelihood of a favorable or unfavorable outcome or quantify the amount or range of potential financial impact, if any.

 

Talbots is periodically named as a defendant in various lawsuits, claims and pending actions and is exposed to tax risks. If a potential loss arising from these lawsuits, claims and pending actions is probable and reasonably estimable, Talbots records the estimated liability based on circumstances and assumptions existing at the time. While Talbots believes the recorded liabilities are adequate, there are inherent limitations in projecting the outcome of these matters and in the estimation process whereby future actual liabilities may exceed projected liabilities, which could have a material adverse effect on the Talbots’ financial condition and results of operations.

 

Talbots is subject to tax in various domestic and international jurisdictions and, as a matter of course, is regularly audited by federal, state and foreign tax authorities. During the third quarter of 2009, the Massachusetts Appellate Tax Board rendered an adverse decision on certain tax matters of Talbots. We are actively appealing that decision. In order to pursue the appeal, we were required to make a payment to the Massachusetts Department of Revenue on the assessment rendered on those tax matters. This payment did not have a material impact on our third quarter 2009 earnings.

 

We are also subject to other litigation, claims and administrative proceedings.

 

It is difficult to predict or determine the ultimate outcome of any legal or administrative proceedings or to quantify the amount or range of potential financial impact. Because of the inherent difficulty of predicting the outcome of any legal claims and administrative proceeding or other matters, we cannot provide assurance as to the outcome of these or other pending or future matters, or if ultimately determined adversely to us, the loss, expense or other amounts attributable to any such matter. The resolution of such matter or matters, if unfavorable, could have a material adverse effect on our operating results.

 

 

 

Our common stock is traded on the New York Stock Exchange under the trading symbol “TLB.” Information regarding the high and low sales prices per share of common stock in 2009 and 2008 is set forth in Note 19, Unaudited Quarterly Results, to our consolidated financial statements included in Item 15.

 

The payment of dividends and the amount thereof is determined by the Board of Directors and depends upon, among other factors, our earnings, operations, financial condition, sufficient line of credit facilities, credit extended from merchandise vendors, availability of letter of credit facilities, capital and other cash requirements, and general business outlook at the time payment is considered. Our Credit Facility prohibits the payment of dividends without lender approval. In February 2009, our Board of Directors approved the indefinite suspension of our cash dividends. Information regarding our payment of dividends for 2008 is set forth in Note 19, Unaudited Quarterly Results, to our consolidated financial statements included in Item 15.

 

The number of holders of record of our common stock at April 8, 2010 was 8,385. Additional information concerning our equity compensation plans is set forth in Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

A summary of our repurchase activity under certain equity programs for the thirteen weeks ended January 30, 2010 is set forth below:

 

 

 

 

We did not have any shares available to be repurchased under any announced or approved repurchase program or authorization as of January 30, 2010.

Stock Performance Graph

 

The following graph compares the percentage change in the cumulative total shareholders’ return on our common stock on a year end basis, using the last day of trading prior to our fiscal year end, with the cumulative total return on the Standard & Poor’s 500 Stock Index (“S&P 500 Index”) and the Dow Jones U.S. General Retailers Index for the same period. Returns are indexed to a value of $100 and assume that all dividends were reinvested.

 

Comparison of Cumulative Five-Year Total Return of The Talbots, Inc.,
S&P 500 Index, and Dow Jones General Retailers Index

 

 

 

The Performance Graph in this Item 5 is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.

 

The following selected financial data has been derived from our consolidated financial statements. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 and with our consolidated financial statements and notes thereto included in Item 15.

 

 

 

 

 

 

 

 

The following discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America and should be read in conjunction with these statements and the notes thereto.

 

We follow the National Retail Federation’s fiscal calendar. Where reference is made to a particular year or years, it is a reference to our 52-week or 53-week fiscal year. References in this Annual Report to “2009”, “2008” and “2007” refer to the 52-week fiscal year ended January 30, 2010, January 31, 2009 and February 2, 2008, respectively.

 

Comparable stores are those that are open for at least 13 full months. When the square footage of a store is increased or decreased by at least 15%, the store is excluded from the computation of comparable store sales for a period of 13 full months.

 

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. The operating results of these businesses have been classified as discontinued operations for all periods presented.

 

Business Overview

 

On April 7, 2010, we completed the BPW Transactions. The acquisition resulted in net proceeds from BPW of $333.1 million. Simultaneously, we borrowed $125.0 million under our new Credit Facility and, combined with our cash on hand, we repaid all of our outstanding debt with our former majority shareholder. Immediately following the combined transactions, our debt was reduced by $361.5 million and our equity increased by approximately $330.0 million before our acquisition costs. We believe the completion of these transactions significantly strengthens our balance sheet and positions us for future growth.

 

The following is a summary of our 2009 highlights:

 

 

 

Despite the continued economic challenges during 2009, we achieved operating income in the third and fourth quarters of 2009 after five consecutive quarters of operating losses, reflecting significant progress in executing our strategic plan. In addition, during the fourth quarter our net sales increased for the second consecutive quarter.

 

Looking ahead to 2010 and beyond

 

We are very pleased with the improvement in our operating performance over the course of 2009 particularly in the second half of the year. We expect to carry this momentum from our operating initiatives into 2010 with continued progress in evolving our merchandise offering, inventory management and cost control. We expect to continue to invest in our key growth initiatives including upscale outlets, our merchandise categories including accessories, our direct channel Internet business and productivity improvements from store segmentation, as well as our other store based productivity initiatives.

 

Results of Operations

 

Cost of sales, buying and occupancy expenses are comprised primarily of the cost of product merchandise, including duties; inbound freight charges; shipping, handling and distribution costs associated with our catalog operations; salaries and expenses incurred by our merchandising and buying operations; and occupancy costs associated with our retail stores. Occupancy costs consist primarily of rent and associated depreciation, maintenance, property taxes and utilities.

 

Selling, general and administrative expenses are comprised primarily of the costs related to employee compensation and benefits in the selling and administrative support functions; catalog operation costs relating to catalog production and telemarketing; advertising and marketing costs; the cost of our customer loyalty program; costs related to management information systems and support; and the costs and income associated with our credit card operations. Additionally, costs associated with our warehouse operations are included in selling, general and administrative expenses and include costs of receiving, inspection, warehousing and store distribution. Warehouse operations costs for 2009, 2008 and 2007 were approximately $20.2 million, $27.6 million and $24.6 million, respectively.

 

Our gross margins may not be comparable to certain other companies, as there is diversity in practice as to which costs companies include in selling, general and administrative expenses and cost of sales, buying and occupancy expenses. Specifically, we include the majority of the costs associated with our warehousing operations in selling, general and administrative expenses, while other companies may include these costs in cost of sales, buying and occupancy expenses.

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

 

 

2009 Compared to 2008

 

Net Sales

 

The following is a comparison of net sales for 2009 and 2008.

 

 

Stores

 

Reflected in Talbots store sales was a $218.3 million, or 19.3%, decline in comparable store sales for 2009, which was generally in line with our expectations due to the lackluster customer shopping behaviors we experienced throughout the first half of the year. We believe this was a carryover from the latter part of 2008 as the difficult economic environment significantly influenced consumers discretionary spending. When our customer was shopping, key fashion items at entry level price points were the main driver of sales. We remained steadfast in managing on lean inventory while improving our flow of merchandise, optimizing our markdowns and presenting our customer with a stronger mix of full-price to markdown merchandise.

 

Sales metrics for 2009 were as follows: customer traffic declined 14.6% and the rate of converting traffic to transactions declined 3.2%, resulting in a 17.8% decline in the number of transactions. Additionally, units per transaction were down 3.8%, with a 1.6% increase in average unit retail, resulting in a 2.2% decline in dollars per transaction. We began to see improvement in our sales metrics beginning in the third quarter which continued through the end of the year. Although we experienced a decline in fourth quarter traffic and transactions, dollars per transaction increased 13% reflecting an improvement in full-price selling.

 

Despite a year over year decline in sales and certain other related metrics, we have reason to believe that customer perception of our merchandise continued to improve. Market research we conducted during the third quarter indicated that our best customers, those who spend the most money shopping with us, gave our merchandise its highest rating in recent years. Our lower spenders also rated our merchandise at its highest levels in recent years, although not as high as our best customers.

As of January 30, 2010, we operated a total of 580 stores with gross and selling square footage of approximately 4.1 million square feet and 3.2 million square feet. This represents a decrease of approximately 1.4% in gross and selling square footage, respectively, from January 31, 2009, when we operated 587 retail stores with gross and selling square footage of approximately 4.2 million square feet and 3.2 million square feet, respectively. The decrease in square footage is due to the opening of 11 upscale outlets and one retail store offset by the closing of 19 retail stores.

 

Direct Marketing Sales

 

We experienced an 11.1% decline in direct marketing sales in 2009 compared to 2008 while the percentage of our net sales derived from direct marketing increased to 16.8% in 2009 from 15.6% in 2008. The increase in the direct marketing as a percent of total sales is partially due to more aggressive selling and promoting of our direct marketing sales that originate in our stores via red-line phones, which are direct lines to our telemarketing center. Also contributing to the improvement, beginning in the fall season, we presented our customer with a stronger mix of full-price merchandise, achieved better fulfillment and experienced lower returns. Direct marketing sales in the third quarter were essentially flat compared to the prior year and we experienced an 11.0% increase in the fourth quarter on a year-over-year basis. Internet sales in 2009 represented 70.0% of our direct marketing sales compared to 68.0% in 2008. We believe our investment in our new Internet platform coupled with changing trends in consumer purchasing behavior, contributed to the increase in Internet sales as a percentage of direct marketing.

 

Cost of Sales, Buying, and Occupancy Expenses

 

The following is a comparison of cost of sales, buying and occupancy expense for 2009 and 2008.

 

 

The decrease in cost of sales, buying and occupancy expense represents a 370 basis point improvement from the prior year. The improvement includes a 620 basis point improvement in product gross margin as a percent of sales. The improvement in product gross margin was driven by changes to our sourcing practices, disciplined inventory management and strong full-price selling specifically in the second half of the year. The improvement in cost of sales is offset by a 200 basis point increase in occupancy costs and a 50 basis point increase in buying costs, both of which rose as a percent of sales despite reductions in actual costs. These increases as a percent of sales are attributable to negative leverage from the decline in sales for the year, as actual costs for occupancy and buying were reduced from the prior year.

 

Selling, General and Administrative Expenses

 

The following is a comparison of selling, general and administrative expenses for 2009 and 2008.

 

 

In early 2009, we established a goal of reducing annual expenses by $150.0 million by the end of fiscal 2010. Approximately 80% of this reduction was expected to be within selling, general and administrative expenses. By the end of fiscal 2009, we reduced expenses by $119.9 million, substantially achieving our two-year goal in one year. Our expense reductions were primarily realized in payroll and employee benefits and the balance in other corporate overhead expenses as we reduced our workforce by 32% during 2009.

Restructuring Charges

 

The following is a comparison of restructuring charges for 2009 and 2008.

 

 

The 2009 restructuring charges primarily relate to severance costs due to the corporate headcount reductions in February 2009 and June 2009, and costs to settle lease liabilities for a portion of our Tampa, Florida data center that is no longer being used. Additionally, we reorganized our global sourcing activities and entered into a buying agency agreement with Li & Fung effective September 2009. Li & Fung is now our exclusive global apparel sourcing agent for substantially all Talbots apparel.

 

Merger costs

 

In 2009, we incurred $8.2 million of merger costs in connection with our acquisition of BPW. These costs primarily consist of investment banking and professional services fees. Approximately $30.0 million of additional transaction-related costs including management and key employee incentive and retention expenses are expected to be incurred during 2010 and 2011.

 

Impairment of Store Assets

 

The following is a comparison of impairment charges for 2009 and 2008.

 

 

We closely monitor our store portfolio to identify stores that are underperforming and close stores when appropriate. When we determine that a store is underperforming or is to be closed, we reassess the expected future cash flows of the store, which in some cases results in an impairment charge. During the third quarter of 2009, we identified and recorded an impairment charge of $1.4 million related to underperforming stores.

 

Net Interest Expense

 

 

The increase in interest expense was primarily due to a higher average outstanding debt levels combined with a higher average interest rate on those borrowings. Interest expense in 2009 also includes $0.5 million of amortization of the $1.7 million loan fees paid to AEON in 2009 and $1.1 million of breakage fees resulting from our early repayment of the bank debt on December 29, 2009.

 

Income Tax (Benefit) Expense

 

The following is a comparison of income tax (benefit) expense for 2009 and 2008.

 

The income tax benefit in 2009 resulted primarily from the intraperiod tax allocation arising from other comprehensive income recognized from the remeasurement of our Pension Plan and SERP obligations due to our decision to freeze future benefits under the plans effective as of May 1, 2009. This resulted in a tax expense of approximately $10.5 million in other comprehensive income and an offsetting benefit in continuing operations. The income tax expense in 2008 is due to the establishment of a valuation allowance of $61.0 million for substantially all of our net deferred tax assets. During the fourth quarter of 2008, we concluded there was insufficient evidence that all of our deferred tax assets would be realized in the future.

 

2008 Compared to 2007

 

Net Sales

 

The following is a comparison of net sales for 2008 and 2007.

 

 

Retail Stores

 

Reflected in Talbots retail store sales was a $187.6 million, or 14.2%, decline in comparable store sales for the period, driven by a 13.2% decline in transactions. We believe that the negative sales results were impacted by a weak customer response to the brand’s spring merchandise and timing of promotional events earlier in the year, coupled with the effects from the economic crisis and pressures on consumer spending later in the year. We began to see a steep decline in customer traffic in mid-September as the financial crisis unfolded. Throughout the remainder of the year, it was more challenging to drive customer traffic as we believe that our customer was becoming more cautious and thoughtful regarding her discretionary spending given the substantial economic uncertainty. As a result, we were forced to become more promotional than originally planned which negatively impacted our margins. Despite the environment in the fall season, we did see a positive response to our reinvigorated merchandise and marketing efforts during that time. The third quarter marked the first deliveries under the direction of our new creative, merchandising and marketing teams. The new deliveries in the fall season were complemented with new floor sets and major redesigned catalogs. Although we believe our improvements to the brand were received well by our customers, our sales could not withstand the continued deterioration and uncertainty of the U.S. economy. For the fourth quarter of 2008, our comparable store sales declined 24.6%.

 

As of January 31, 2009, we operated a total of 587 retail stores with gross and selling square footage of approximately 4.2 million square feet and 3.2 million square feet, respectively. This represents a decrease of approximately 6% in gross and selling square footage from February 2, 2008, when we operated 590 retail stores with gross and selling square footage of approximately 4.5 million square feet and 3.5 million square feet, respectively.

 

Direct Marketing Sales

 

The decline in direct marketing sales was primarily due to the effects of the economic environment and a misjudgment in inventory commitments related to our Sale book that dropped in December. The catalog received a positive response and we were unable to fulfill approximately 39% of customer demand from the Sale book. Additionally, we shifted the mailing of our key holiday/gift catalog into November in 2008 versus October in the prior year. We expected this change to benefit our fourth quarter direct marketing sales. Because of the difficult economic environment, our fourth quarter results did not benefit from this change. Mainly because of these actions, we experienced a $17.2 million decline in net sales in the fourth quarter compared to the prior year.

In 2008, as part of our strategic initiatives, we increased circulation for the Talbots brand and developed innovative marketing strategies in order to strengthen relations with our existing customer, prospect new customers and drive reactivation of our existing lapsed customer in hopes to drive catalog and Internet channel sales. We believe our efforts yielded a solid increase in response rate, especially with our existing lapsed customers.

 

The Internet channel continued to be an important component of direct marketing sales, with Internet representing 68% of the direct business in 2008 in comparison to 61% in 2007. We have made enhancements to our website in 2008, offering enhanced visuals and greater ease of functionality and plan to create a fresh platform of our e-commerce site in 2009. The percentage of our net sales derived from direct marketing increased slightly from 15.4% in 2007 to 15.6% in 2008.

 

Cost of Sales, Buying, and Occupancy Expenses

 

The following is a comparison of cost of sales, buying and occupancy expense for 2008 and 2007.

 

 

We experienced a 330 basis point increase in cost of sales, buying and occupancy expenses as a percentage of net sales over the prior year with product gross margin decreasing by approximately 25 basis points. Despite the significant decline in sales, especially in the fourth quarter, our efforts in inventory management allowed us to maintain relatively flat product margins with the prior year. Our efforts included tighter control of inventory levels, improved initial mark-on, the change to a monthly markdown cadence and a consistent flow of new merchandise across channels.

 

Additionally, an approximate 235 basis point increase was driven by higher occupancy costs as a percentage of sales. As occupancy costs are primarily fixed costs, the basis point increase is fully attributable to the decline in sales for the period.

 

We also experienced an approximate 97 basis point increase in merchandising costs as a percentage of sales, which is attributable to the deleverage associated with the decline in store sales for the period.

 

Selling, General and Administrative Expenses

 

The following is a comparison of selling, general and administration expenses for 2008 and 2007.

 

 

We experienced a 440 basis point increase in selling, general and administrative expenses as a percentage of net sales over the prior year. While we believed that we made progress in executing our strategic initiatives, including streamlining the organization and reducing expenses for our overall cost structure in 2008, we had not yet begun to benefit from the implementations. In 2008, we spent approximately $20.1 million in business development costs, or approximately 130 basis points, relating to non-restructuring initiatives. The costs were primarily relating to professional services. Any savings that we were able to achieve in 2008 were offset by negative leverage from the decline in sales during the period. Our primary area of savings in 2008 was due to our decision to eliminate television and national print advertising. We spent $14.8 million less, or approximately 70 basis points, during 2008 for marketing programs in comparison to 2007. Additionally, we reduced our vacation accrual by $7.3 million in 2008 due to a change in our vacation policy that became effective on January 1, 2009.

Restructuring Charges

 

The following is a comparison of restructuring charges for 2008 and 2007.

 

 

We incurred $17.8 million and $3.7 million of expense relating to our strategic business plan in 2008 and 2007. The $17.8 million of restructuring charges in 2008 consisted of $15.9 million of severance, $4.0 million of professional services, offset by $2.2 million of non-cash credits related to stock awards that will not vest. The $3.7 million of restructuring charges in 2007 consisted of $2.7 million of professional services, $0.7 million of severance and $0.3 million of other non-cash charges.

 

Impairment of Store Assets

 

The following is a comparison of impairment charges for 2008 and 2007.

 

 

We closely monitor our store portfolio to identify stores that are underperforming and close stores when appropriate. When we determine that a store is underperforming or is to be closed, we reassess the expected future cash flows of the store, which in some cases results in an impairment charge.

 

Goodwill and Other Intangible Assets

 

Our policy is to evaluate goodwill and trademarks for impairment on an annual basis at the reporting unit level on the first day of each fiscal year, and more frequently, if events occur or circumstances change which suggest that the goodwill or trademarks should be evaluated. In the third quarter of 2008, our operating results were lower than expected. Based on this trend, we updated our forecasts during the third quarter and management performed an interim impairment test on our goodwill and trademarks. We determined that no impairment our goodwill or trademarks existed for the Talbots brand.

 

As a result of the significant decline in our stock price and market capitalization in the fourth quarter of 2008, we performed an additional interim test for impairment. In the fourth quarter, we finalized our 2009 budget and long term plan, evaluating current industry trends, and the impact that the uncertainty in the financial markets may have on our business and our impairment analysis. We determined that no impairment of our goodwill or trademarks existed for the Talbots brand. Our industry continues to be materially impacted by the deterioration of the U.S. economic environment and we believe that the effects will continue. As such, we may be required to perform additional tests of impairment on our goodwill and intangible assets which may result in significant charges.

 

Net Interest Expense

 

The following is a comparison of net interest expense for 2008 and 2007.

 

 

The decrease in net interest expense was due to lower average outstanding debt levels as well as lower average interest rates.

Income Tax Expense

 

The following is a comparison of income tax expense for 2008 and 2007.

 

 

The income tax expense in 2008 reflects the establishment of valuation allowances for substantially all of our net deferred tax assets. During the fourth quarter of 2008, we concluded there was insufficient evidence that all of our deferred tax assets would be realized in the future.

 

DISCONTINUED OPERATIONS

 

Our 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. The operating results of these businesses have been classified as discontinued operations for all periods presented.

 

On June 7, 2009, we entered into a Purchase Agreement with Jill Acquisition LLC (the “Purchaser”) for the sale of the J. Jill business, pursuant to which the Purchaser agreed to acquire and assume from us certain assets and liabilities relating to the J. Jill business. On July 2, 2009, we completed the sale for net proceeds of $64.3 million. The 75 J. Jill stores that were not sold were closed.

 

We recorded a $0.3 million loss on the sale and disposal of the J. Jill business in 2009. Gains and losses recorded in periods subsequent to the closing are due to working capital adjustments and to adjustments to the estimated lease liabilities relating to the 75 J. Jill stores that were not sold, and the Quincy office space that is not being subleased or used. As of January 30, 2010, we settled the lease liabilities of 69 of the 75 stores not acquired by Purchaser. Lease liabilities for four additional stores were settled subsequent to January 30, 2010. Lease termination costs are recorded at the time a store is closed or existing space is vacated. Total cash expenditures to settle the lease liabilities for the remaining two unsold stores 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 we will endeavor to negotiate the amount of remaining lease obligations, there is no assurance it will reach acceptable negotiated lease settlements. See Liquidity and Capital Resources below for further discussion of lease liabilities.

 

The $4.1 million loss from discontinued operations in 2009 also includes $3.8 million of operating losses, primarily due to adjustments to estimated lease liabilities relating to the Talbots Kids and Mens businesses, and losses incurred by the J. Jill business prior to ceasing operations in July 2009.

 

Liquidity and Capital Resources

 

As described above, we merged with BPW on April 7, 2010. We simultaneously closed a senior secured revolving credit facility with a third party lender, which provides borrowing capacity up to $200 million, subject to all borrowing conditions. The merger transaction and the related financing provided us with additional capital to strengthen our balance sheet, significantly reduce our outstanding indebtedness and restore positive stockholder equity.

 

We finance our working capital needs, operating costs, capital expenditures, strategic initiatives and restructurings, and debt and interest payment requirements through cash generated by operations, access to working capital and other credit facilities.

 

During 2008 and 2007, we incurred significant net losses attributable to operations, most of which related to operations being discontinued. Included in the losses from discontinued operations were significant charges related to impairments of intangible and tangible assets, the majority of which related to our J. Jill business. In late 2007, we initiated a comprehensive strategic review of our business including the following areas: brand positioning, productivity, store growth and store productivity, non-core concepts, distribution channels, the J. Jill business and other operating matters, including streamlining our organization and developing a plan to strengthen and grow the business. In connection with streamlining our organization, which was a major initiative of our strategic plan, we

recorded restructuring charges of $17.8 million and $3.7 million in 2008 and 2007, respectively. Our restructuring charges primarily related to restructuring activities intended to reduce costs.

 

The substantial deterioration in the U.S. economy and decline in consumer discretionary spending began to significantly impact our operations during 2008, especially during the fourth quarter of 2008 in which sales declined by 23% on a year over year basis. As of January 31, 2009, we were in violation of certain financial covenants on our Acquisition Debt and had substantial additional debt obligations coming due in the next twelve months.

 

In response to these short-term liquidity needs, we took the following actions during 2008 and 2009 in an effort to improve our liquidity:

 

 

The Amended Facility had a scheduled maturity date of the earlier to occur of (i) April 16, 2010 or (ii) the consummation of

 

the BPW Transactions, provided that the merger transaction together with any concurrent financing results in sufficient net cash proceeds to enable us to make full repayment of our AEON debt (including amounts owed under the Amended Facility).

 

 

In addition to the short-term liquidity actions described above, and with a focus on the Talbots brand, in late 2008, we began to implement a series of key initiatives designed to streamline our organization, reduce our cost structure and optimize our gross margin performance through stronger inventory management and improved initial mark-ups resulting from changes to our supply chain practices. We took the following actions as part of our continuing strategic initiatives in 2008 and 2009:

 

 

 

 

 

In connection with certain of the above activities, we recorded additional restructuring charges of $10.3 million in 2009.

 

Because economic conditions and discretionary consumer spending have not improved in the near term, we expect to continue to consider further realignment and rationalization initiatives and actions to further reduce and adjust our costs relative to our sales and operating results. We will also continue to review store performance and expect to continue to close underperforming stores when we believe appropriate under the circumstances.

 

As noted above, on July 2, 2009, we completed the sale of the J. Jill business, pursuant to which the Purchaser agreed to acquire and assume from us certain assets and liabilities relating to the J. Jill business. 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 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, Massachusetts. Certain of our subsidiaries remain contingently liable for obligations and liabilities transferred to the Purchaser, including those related to leases and other obligations transferred to and assumed by the Purchaser. 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 our financial condition and results of operations. We have 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.

 

The lease liabilities of three of the 75 stores not acquired by the Purchaser have not yet been settled. Lease termination costs are recorded at the time a store is closed or existing space is vacated. Total cash expenditures to settle the lease liabilities for the remaining three unsold stores 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.

 

All of our merchandise is manufactured to our specifications by third-party suppliers and intermediary vendors, most of whom are located outside the United States. Our merchandise purchases are procured through a variety of payment terms with our vendors. In order to more effectively manage our accounts payable and cash positions due to our sales trends and cash needs, during the second half of 2008 and into 2009, we extended many of our accounts payable terms from secured letters of credit to open account terms payable in approximately 60 days after shipment. This has improved our cash position and accounts payable management and we intend to seek to continue these accounts payable and cash management practices going forward.

Debt Facilities

 

At January 30, 2010, we had existing credit facilities providing an aggregate of $491.5 million of financing through the AEON Facility, AEON Loan and Amended Facility, all of which are with related parties. Our outstanding borrowings totaled $486.5 million at January 30, 2010, including $50.0 million, $191.5 million and $245.0 million outstanding under the AEON Facility, AEON Loan and Amended Facility, respectively. At January 30, 2010, we had $5.0 million available for future borrowing under the Amended Facility.

 

The AEON Facility was an interest-only loan (5.25% at January 30, 2010) which was to mature on January 28, 2012. The AEON Loan was an interest-only loan (6.77% at January 30, 2010) which was to mature on August 26, 2010, but provided us with the option to extend the maturity for additional six-month periods, up to the third anniversary of the loan closing date, which was February 27, 2012. The Amended Facility carried monthly interest payments (6.23% at January 30, 2010) and had a scheduled maturity date of the earlier to occur of (i) April 16, 2010 or (ii) the consummation of the BPW Transactions, provided that the merger transaction together with any concurrent financing results in sufficient net cash proceeds to enable us to make full repayment of our AEON debt. For a more detail description of these facilities, please see “Contractual Obligations — Debt” below.

 

In connection with the consummation and closing of the BPW Transactions, we repaid all outstanding indebtedness under our AEON and AEON (U.S.A.) credit facilities on April 7, 2010. As a result, all amounts due under these debt agreements have been classified as current liabilities as of January 30, 2010. See Note 20, Subsequent Events, for further information

 

BPW Transactions

 

On December 8, 2009, we entered into agreements for the proposed BPW Transactions which consist of three related transactions: (i) an Agreement and Plan of Merger between Talbots and BPW pursuant to which a wholly-owned subsidiary of ours would merge with and into BPW with BPW surviving as a wholly-owned subsidiary of ours, in exchange for our issuance of Talbots common stock to BPW stockholders; (ii) the retirement of all Talbots common stock held by AEON (U.S.A.), the issuance of warrants to purchase 1 million of our common shares by AEON (U.S.A.) and the repayment of all of our outstanding AEON debt and outstanding bank debt; and (iii) a third party loan commitment for a new senior secured revolving credit facility (“Credit Facility”).

 

We completed the BPW Transactions on April 7, 2010 and used the proceeds from the merger combined with a drawdown under the Credit Facility to repay in full our $488.2 million of outstanding indebtedness to AEON and AEON (U.S.A.) and accrued interest and other costs. Immediately following the repayment on April 7, 2010, we had $125.0 million of total debt outstanding. In addition, our stockholders’ equity increased by approximately $330.0 million, before our acquisition costs, as a result of issuing 41.5 million shares of Talbots common stock and 17.2 million warrants to purchase Talbots common stock in the merger, and one million warrants to purchase Talbots common stock to AEON (U.S.A.) to repurchase the 29.9 million shares of Talbots common stock held by AEON (U.S.A.). As a result of completing the BPW Transactions, AEON and AEON (U.S.A.) no longer own any shares of our common stock or are no longer a lender to us under any of our financing agreements.

 

The Credit Facility is an asset-based revolving credit facility (including a $25.0 million letter of credit sub-facility) that permits us to borrow up to the lesser of (a) $200.0 million and (b) the borrowing base, calculated as a percentage of the value of eligible credit card receivables and the net orderly liquidation value of eligible private label credit card receivables, the net orderly liquidation value of eligible inventory in the United States and the net orderly liquidation value of eligible in-transit inventory from international vendors (subject to certain caps and limitations), net of reserves as set forth in the agreement, minus the lesser of (x) $20 million and (y) 10% of the borrowing base. Loans made pursuant to the immediately preceding sentence carry interest, at our election, at either (a) the three-month LIBOR plus 4.00% to 4.50% depending on availability thresholds or (b) the base rate plus 3.00% to 3.50%, depending on certain availability thresholds. Interest on borrowings is payable monthly in arrears. We pay a fee on the unused portion of the commitment and outstanding letters of credit, if any, monthly in arrears in accordance with formulas set forth in the agreement.

 

Amounts borrowed are repaid on a daily basis through a control account arrangement. Cash received from customers is swept on a daily basis into a control account in the name of the agent for the lenders. We are permitted

to maintain a certain amount of cash in disbursement accounts, including such amounts necessary to satisfy our current liabilities incurred in the ordinary course of our business. Amounts may be borrowed and reborrowed from time to time, subject to the satisfaction or waiver of all borrowing conditions, including without limitation perfected liens on collateral, accuracy of all representations and warranties, the absence of a default or an event of default, and other borrowing conditions, all subject to certain exclusions as set forth in the agreement.

 

The agreement matures on October 7, 2013, subject to earlier termination as set forth in the agreement. The entire principal amount of loans under the facility and any outstanding letters of credit will be due on the maturity date. Loans may be voluntarily prepaid at any time at our option, in whole or in part, at par plus accrued and unpaid interest and any break funding loss incurred. Upon any voluntary or mandatory prepayment, we will reimburse the lenders for costs associated with early termination of any currency hedging arrangements related to such loan. Amounts voluntarily repaid prior to the maturity date may be reborrowed.

 

The Company and certain of our subsidiaries have executed a guaranty and security agreement pursuant to which all obligations under the Credit Facility are fully and unconditionally guaranteed on a joint and several basis. Additionally, pursuant to the security agreement, all obligations are secured by (i) a first priority perfected lien and security interest in substantially all of our assets and any guarantor from time to time and (ii) a first lien mortgage on our Hingham, Massachusetts headquarters facility and Lakeville, Massachusetts distribution facility. In connection with the lenders’ security interest in our proprietary Talbots charge card program, Talbots and certain of our subsidiaries have also executed an access and monitoring agreement that requires us to comply with certain monitoring and reporting obligations to the agent with respect to such program, subject to applicable law.

 

We may not create, assume or suffer to exist any lien securing indebtedness incurred after the closing date of the Credit Facility subject to certain limited exceptions set forth in the agreement. The Credit Facility contains negative covenants prohibiting us, with certain exceptions, from among other things, incurring indebtedness and contingent obligations, making investments, intercompany loans and capital contributions, and disposing of property or assets. We have agreed to keep the mortgaged properties in good repair, reasonable wear and tear excepted. The agreement contains customary representations, warranties and covenants relating to Talbots and its subsidiaries. The agreement also provides for events of default, including failure to repay principal and interest when due and failure to perform or violation of the provisions or covenants of the agreement. The agreement does not contain any financial covenant tests.

 

Upon the consummation and closing of the BPW Transactions, $125.0 million was outstanding under the Credit Facility.

 

Fiscal 2010

 

Our ability to obtain additional financing as needed depends upon many factors, including our financial projections and our prospects and creditworthiness, as well as external economic conditions and general liquidity in the credit markets.

 

Based on our current assumptions, our forecast and operating and cash flow plan for 2010, our borrowing availability under the new senior secured revolving credit agreement and the restructuring of the Company’s capital structure, we anticipate that the Company will have sufficient liquidity to finance anticipated working capital and other expected cash needs for at least the next twelve months. Our ability to meet our cash needs and satisfy our operating and other non-operating costs will depend upon, among other factors, our future operating performance as well as general economic conditions.

 

Cash Flows

 

During 2009, we generated net cash flows of $94.8 million, including $29.7 million from discontinued operations, versus a net use of cash of $7.5 million in 2008. The $29.7 million of net cash flow from discontinued operations in 2009 was due to the sale of our J. Jill business for net cash proceeds of $64.3 million in July 2009.

The following is a summary of our cash flows from continuing operations in 2009, 2008 and 2007 (in thousands):

 

 

Cash provided by operating activities

 

Cash provided by operating activities increased $64.9 million to $81.2 million in 2009 due to the lower operating loss and lower investment in working capital. The lower investment in working capital was due primarily to lower merchandise inventory levels and a $26.6 million refund of prior years’ tax payments. The lower operating loss, despite a 17% decline in revenues, and lower inventory levels were the result of actions taken by us over 2008 and 2009 to reduce operating costs, maintain leaner inventories and improve gross margins. We are comfortable with our merchandise inventory levels with our improved product flow enabling us to operate in 2009 on a lower inventory level compared to 2008.

 

Cash used in investing activities

 

Cash used in investing activities decreased $21.2 million to $20.9 million in 2009 due to our planned decline in spending on new store openings, store renovations, and information technology due to the uncertain economic environment. During 2009, we opened 11 new upscale outlet stores and converted seven existing stores into upscale outlet stores. In addition, we also opened one new Talbot’s store, and closed 19 others. The balance of our capital expenditures in 2009 was focused on a platform refresh of our e-commerce site and the renovation and refurbishment of certain of our existing stores. We expect to increase our capital spending to approximately $40.0 million in 2010 with capital outlays expected to be focused on opening additional upscale outlet stores and funding other growth initiatives.

 

Cash provided by (used in) financing activities

 

Cash provided by financing activities decreased $53.4 million to $4.3 million in 2009 from $57.8 million in 2008. Our financing activities in 2009 were focused on improving our debt maturity schedule and terms of our outstanding indebtedness. During 2009, we borrowed $483.0 million, including $475.0 million from AEON and AEON (U.S.A.), and repaid $473.4 million of outstanding debt, including $464.9 million of third-party bank indebtedness. In 2009, we paid AEON $8.5 million of the net proceeds from sale of the J. Jill business in accordance with the terms of the AEON Loan. Our outstanding debt totaled $486.5 million at January 30, 2010 as compared to $476.9 million at January 31, 2009.

 

Critical Accounting Policies

 

The preparation of the our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the balance sheets and the reported amounts of net sales and expenses during the reporting periods. On an on-going basis, we evaluate our estimates, including those related to inventories, product returns, customer programs and incentives, retirement plans, impairment of long-lived assets, impairment of goodwill and other intangible assets, income taxes and stock-based compensation. The estimates are based on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates if actual events or experience were different from their assumptions.

 

We believe the following critical accounting policies require the most significant judgments and estimates used in the preparation of our consolidated financial statements. However, there is no assurance that such judgments and estimates will reflect actual results or that such estimates or their underlying assumptions may not need to change materially in the future to reflect actual experience.

Inventory Markdown Reserve.  Merchandise inventory is a significant asset on our balance sheet, representing approximately 17.3% of our total assets at January 30, 2010. Historically, we managed our inventory levels by typically holding four major sale events per year in our stores and our catalog, consisting of two mid-season sales and two end-of-season clearance sales. These events served to liquidate remaining inventory at the end of each selling season after which remaining goods were transferred to our outlet stores. In November 2007, we changed our markdown cadence from our historical four clearance events per year to markdowns on a monthly basis.

 

Consistent with the retail inventory method, at the end of each reporting period, reductions in gross margin and inventory are recorded for estimated future markdowns necessary to liquidate remaining markdown past-season inventory.

 

The key factors influencing the reserve calculation are the overall level of past season inventory at the end of the reporting period and the expectation of future markdowns on this same merchandise. The future markdown rate is reviewed regularly by comparing actual markdowns taken against previous estimates. These results are then factored into future estimates. Historically, the difference between management’s estimates and actual markdowns has not been significant.

 

If market conditions were to further decline or customer acceptance of product was not favorable, we may have excess inventory on hand and may be required to mark down inventory at a greater rate than estimated, resulting in an incremental charge to earnings. We believe that at January 30, 2010 and January 31, 2009, the markdown reserve was appropriate based on current past season inventory levels, historical markdown trends, and forecasts of future sales of past season inventory. The markdown reserve rate of past season inventory was 62% and 58% at January 30, 2010 and January 31, 2009, respectively. A 100 basis point increase or decrease in this rate would impact pre-tax income by approximately $0.2 million and $0.3 million in 2009 and 2008, respectively.

 

Sales Return Reserve.  As part of the normal sales cycle, we receive customer merchandise returns through both of our catalog and store locations. To account for the financial impact of this process, management estimates future returns on previously sold merchandise. Reductions in sales and gross margin are recorded for estimated merchandise returns based on return history, current sales levels and projected future return levels. Our estimated sales returns are periodically compared to actual sales returns. Historically, the difference between the estimated sales returns and actual sales returns has not been significant.

 

If customer acceptance of the product was not favorable or the product quality were to deteriorate, future actual returns may increase, resulting in a higher return rate and increased charges to earnings. We believe that the reserve balances at January 30, 2010 and January 31, 2009, of $7.3 million and $4.7 million, respectively, were appropriate based on current sales return trends and reasonable return forecasts.

 

Customer Loyalty Program.  We maintain a customer loyalty program referred to as our Classic Awards Program in which Talbots U.S. customers receive “appreciation awards” based on reaching specified purchase levels. Our Classic Awards program was relaunched in January 2009 with the addition of non-charge based loyalty incentives and additional incentives for customers who spend more than $1,000 per year on their Talbots charge card. Prior to January 2009, our Classic Awards program was only available to our customers who used Talbots charge cards for their purchases and the incentives were the same for everyone, regardless of annual spend.

 

Our Classic Awards program has three defined tiers of participation, each of which enables our customers to earn points for every purchase made with us, whether in-store, online or via catalog. Once a customer earns 500 points, they receive a $25 appreciation award to be redeemed on a future merchandise purchase. Appreciation awards, by their terms, expire one year from the date of issuance. Other benefits of Classic Awards membership include birthday bonus percentage-off coupons and other special offers and promotions such as double points. The three tiers of our Classic Awards program include:

 

 

 

Customers who are Talbots charge card holders may enroll in Classic Awards Red if they wish to earn points on purchases that are not made using their Talbots charge card.

 

Appreciation award expense is recognized at the time of the initial customer purchase and is charged to selling, general and administrative expenses based on purchase levels, actual awards issued, and historical redemption rates. Each month, we perform an analysis of the accrual account balance for each of the three tiers and factor in the outstanding unredeemed awards, actual redemptions, and the level of award points earned, and based on that analysis, adjust the respective liability and expense as applicable by tier. We also perform a monthly analysis of issuances and redemptions to identify trends in the redemption rate. Several key statistics are monitored regularly, including expense as a percentage of sales, redemptions as a percentage of sales, and cumulative redemptions. Trends in these statistics are then factored into both the initial expense and the analysis of the liability account. Actual award grants and redemptions may vary from estimates used in our liability analysis based on actual customer responsiveness to the program and could result in additional expense.

 

We believe that the accrual balances at January 30, 2010 and January 31, 2009 were appropriate based on recent purchase levels and expected redemption levels. A 1% change in redemptions or issuances would have changed pre-tax income by approximately $0.1 million in 2009 and 2008, respectively.

 

Retirement Plans.  We sponsor a noncontributory defined benefit pension plan (“Pension Plan”) covering substantially all full-time Talbots brand and shared service employees hired on or before December 31, 2007; two non-qualified supplemental executive retirement plans (collectively, the “SERP”) for certain Talbots brand current and former key executives impacted by Internal Revenue Code limits; and we provide certain medical benefits for most Talbots brand retired employees under postretirement medical plans. In calculating our retirement plan obligations and related expense, we make various assumptions and estimates. The annual determination of expense involves calculating the estimated total benefit ultimately payable to our plan participants and allocating this cost to the periods in which services are expected to be rendered. Prior to 2008, the plans were valued annually as of December 31^st. In accordance with new accounting guidance, the measurement date was changed to our fiscal year end effective January 31, 2009. In February 2009, we announced our decision to freeze the Pension Plan and SERP effective May 1, 2009. As a result of the decision made in February 2009 to freeze the plans, a remeasurement occurred as of February 28, 2009. The remeasurement resulted in a decrease to other liabilities of $25.4 million and $2.0 million for the Pension Plan and SERP, respectively, and an increase to other comprehensive income of $15.2 million and $1.2 million, net of tax, for the Pension Plan and SERP, respectively.

 

Significant assumptions related to the calculation of our obligations include the discount rate used to calculate the actuarial present value of benefit obligations to be paid in the future, the expected long-term rate of return on assets held by the Pension Plan, the average rate of compensation increase by certain plan participants, and the assumed healthcare trend rates on the postretirement medical plans. These assumptions are reviewed annually based upon currently available information.

 

The assumed discount rate is based, in part, upon a discount rate modeling process that involves applying a methodology which matches the future benefit payment stream to a discount curve yield for the plan. The discount rate is used principally to calculate the actuarial present value of our obligation and periodic expense attributable to our employee benefits plans. At January 30, 2010 and January 31, 2009, the discount rate used for the Pension Plan was 6.5%. The discount rates used for the SERP were 6.5% and 6.25% at January 30, 2010 and January 31, 2009, respectively. To the extent that the discount rate increases or decreases, our obligations are decreased or increased accordingly. A 25 basis point change in the discount rates would have impacted our pre-tax income by approximately $0.2 million and $1.3 million in 2009 and 2008, respectively.

The expected long-term rate of return on assets is the weighted average rate of earnings expected on the funds invested or to be invested to provide for the pension obligation. The expected average long-term rate of return on assets is based on an analysis which considers actual net returns for the Pension Plan since inception, Ibbotson Associates historical investment returns data for the three major classes of investments in which we invest (debt, equity, and foreign securities) for the period since the Pension Plan’s inception and for the longer period commencing when the return data was first tracked, and expectations of future market returns from outside sources for the three major classes of investments in which we invest. This rate is used primarily in estimating the expected return on plan assets component of the annual pension expense. To the extent the actual rate of return on assets is less than or more than the assumed rate, that year’s annual pension expense is not affected. Rather, this loss or gain adjusts future pension expense over approximately five years. We used a rate of 8.5% and 9.0% as the expected long-term rate of return on plan assets at January 30, 2010 and January 31, 2009, respectively. A 25 basis point change in the expected long-term rate of return on plan assets would have impacted our pre-tax income by $0.2 million and $0.3 million in 2009 and 2008, respectively.

 

The assumed average rate of compensation increase is the average annual compensation increase expected over the remaining employment periods for the participating employees and is based on historical and expected compensation increases. We utilized a rate of 4.0% for both periods beginning February 1, 2009 and January 1, 2008. This rate is used principally to estimate the retirement obligation and annual expense. An increase in the assumed average rate of compensation increase from 4% to 5% would have decreased our pre-tax income by $0.1 million in 2009 and $2.1 million in 2008.

 

The assumed health care expense trend rates have a significant effect on the amounts reported for the postretirement medical plans. The healthcare cost escalation rate is used to determine the postretirement obligation and annual expense. At January 30, 2010 and January 31, 2009, we used 7.0% and 9.0%, respectively, as initial cost escalation rates that gradually trend down to 5.0%. To the extent that these rates increase or decrease, our obligation and associated expense are increased or decreased accordingly. A 1% increase in the assumed health care trend rate would have no material impact on our pre-tax income in 2009 or 2008.

 

We believe that the assumptions used in calculating the liabilities under our retirement plans and postretirement medical plan as of January 30, 2010 and January 31, 2009 were reasonable.

 

Long-lived Assets.  We periodically review the depreciation and amortization periods of long-lived assets to determine whether current circumstances indicate that the carrying value may not be recoverable. We monitor our assets for potential impairment by comparing the carrying value of the asset to its undiscounted future cash flows. If impairment is identified, a loss is recognized for the difference between the carrying value of the asset and its estimated fair value.

 

The calculation of an impairment loss is significantly impacted by estimates of future operating cash flows and estimates of fair value. Our estimates of future operating cash flows are based upon our experience, knowledge and expectations. However, these estimates can be affected by factors that can be difficult to predict, such as our future operating results, future store profitability and future economic conditions. While we believe that our estimates are reasonable, different assumptions regarding items such as future cash flows could affect our evaluations and result in impairment charges. Additionally, our initiative to continue to critically assess individual store profitability on an ongoing basis in an effort to restore profitability could result in an increased number of closed stores, resulting in larger impairment charges in future periods. We recorded impairment charges of $1.4 million, $2.8 million and $2.6 million relating to store assets during 2009, 2008 and 2007.

 

Goodwill and Other Intangible Assets.  We test our goodwill and trademarks for impairment at the reporting unit level on the first day of each fiscal year, and between annual tests if events occur or circumstances change which suggest that the goodwill or trademarks should be evaluated.

 

We use a two-step process for determining whether goodwill is impaired. In the first step, we compare the fair value of the reporting unit to its carrying value. If the carrying value of the reporting unit exceeds fair value, we perform a second step to calculate the goodwill impairment. In the second step, we determine the fair value of the individual assets and liabilities of the reporting unit and calculate the implied fair value of goodwill.

To determine fair value, we use a combination of the income approach, which is based on the cash flows that the reporting unit expects to generate in the future, and the market value approach. The income approach requires significant judgments and estimates to project future revenues and expenses, changes in gross margins, cash flows and estimates of future capital expenditures for the reporting unit over a multi-year period, as well as determine the weighted-average cost of capital to be used as a discount rate. We believe the discount rate we used is consistent with the risks inherent in our business and with the retail industry. We also use the market approach to estimate fair value of our reporting units by utilizing industry multiples of operating performance. The multiples are derived from comparable publicly traded companies with operating characteristics similar to the reporting units. Our evaluation of goodwill inherently involves judgments as to assumptions used to project these amounts and the impact of market conditions on those assumptions. Our estimates may differ from actual results due to, among other matters, economic conditions, changes to our business model, or changes in operating performance. Significant differences between these estimates and actual results could result in future impairment charges and could materially affect our future financial results.

 

We have performed a sensitivity analysis on our significant assumptions and determined that a negative change in our assumptions, namely a 1% increase in the discount rate, a 10% decrease in the market approach multiple or a 10% decrease in forecasted earnings, would not have resulted in a change in our conclusions in 2009 and 2008. The computed fair value of the stores reporting unit was in excess of its carrying value by a significant margin.

 

We compare the fair value of the trademarks to their carrying value to determine whether the asset is impaired. Fair value is determined based on the income approach using the relief-of-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of the asset. This approach is dependent on a number of factors, including estimates of future sales, royalty rates of intellectual property, discount rates and other variables. Significant differences between these estimates and actual results could result in future impairment charges and could materially affect our future financial results.

 

We performed a sensitivity analysis on our significant assumptions and determined that a negative change in our assumptions, as follows, would have resulted in the following additional impairment charges in 2009 and 2008:

 

 

See Note 3, Summary of Significant Accounting Policies, to our consolidated financial statements included in Item 15 for further discussion of goodwill and trademarks.

 

Income Taxes. — We record deferred income taxes to recognize the effect of temporary differences between tax and financial statement reporting. We calculate the deferred taxes using enacted tax rates expected to be in place when the temporary differences are realized. We record a valuation allowance to reduce deferred tax assets if it is determined that it is more likely than not that all or a portion of the deferred tax asset will not be realized. If it is subsequently determined that a deferred tax asset will more likely than not be realized, we record a credit to earnings to reduce the allowance. In determining the tax benefit resulting from a loss from continuing operations we consider all sources of income including discontinued operations, extraordinary items, other comprehensive income and other components of equity.

 

We consider many factors when assessing the likelihood of future realization of deferred tax assets, including recent earnings results, expectations of future taxable income, carry forward periods available, and other relevant factors. Changes in the required valuation allowance are recorded in the period that the determination is made. We determined in 2008 and 2009 that it is more likely than not that we will not realize the benefits from our deferred tax assets, and have recorded a valuation allowance for substantially all of our net deferred tax assets, after considering sources of taxable income from reversing deferred tax liabilities.

 

There is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax

benefit will be sustained, we record the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. Where applicable, the associated interest and penalties have also been recognized. We classify uncertain tax positions as non-current income tax liabilities unless expected to be resolved within one year. We classify interest on uncertain tax positions in interest expense, interest income from income tax refunds in interest income, and penalties in selling, general and administrative expenses.

 

We are routinely under audit by various domestic and foreign tax jurisdictions. There is significant judgment that is required in determining our provision for income taxes, such as our mix and level of earnings, changes in tax laws or rates, changes in the expected outcome of audits, the expiration of the statute of limitations on some tax positions, and obtaining new information about particular tax positions that may cause us to change our estimates. Changes in estimates may create volatility in our effective tax rate in future periods and may materially affect our results of operations. We believe that our accruals for income taxes are appropriate at January 30, 2010, January 31, 2009 and February 2, 2008.

 

Stock-Based Compensation.  We account for stock-based compensation based on the fair value of the equity awards at the date of grant. We recognize stock-based compensation expense, less estimated forfeitures, on a straight-line basis over the requisite service period of the awards. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeiture rates differ from those estimates. To determine the fair value of options, we use the Black-Scholes option-pricing model which requires us to make subjective assumptions, including estimates of the expected life of the option, estimates of the volatility of the our common stock price over the expected life, expected dividend rate, and the implied yield available on U.S. Treasury zero-coupon bond issues with a term approximately equal to the expected life of the options.

 

The expected life of the option represents the weighted average period of time that share-based awards are expected to be outstanding, giving consideration to vesting schedules, historical exercise patterns, and expectations of future exercise patterns. The expected volatility of our common stock price is based primarily upon historical volatilities of our stock from public data sources and also considers implied factors that may influence our volatility. The expected dividend yield is based on the anticipated annual payment of dividends. The risk free interest rate is based on data derived from public sources regarding U.S. Treasury zero-coupon bond issues. Our estimates of expected volatility and expected life have the greatest impact on determining the fair value of options granted. If the expected volatility or expected life were to increase, the fair value of the stock award would be higher resulting in increased compensation charges. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we utilized different assumptions, the recorded stock-based compensation expense could be materially different in the future.

 

The fair value of nonvested stock awards and restricted stock units is based on the closing stock price on the date of grant and the related stock-based compensation expense is recognized on a straight-line basis over the vesting period. The vesting period on awards granted as performance accelerated nonvested stock is a five-year period, but can be accelerated to three years after the grant date depending on the achievement of certain corporate financial goals. If we determine that the achievement of certain corporate financial goals is probable where we previously concluded that achievement of the goals would not occur, then the vesting period would be reduced at that time and the related expense amounts would increase. Certain shares of nonvested stock are time-vested generally between periods of two to four years. Restricted stock units generally vest over one year.

 

We estimate the forfeiture rate based on historical experience as well as expected future behavior. We compare actual forfeitures with estimates and revise our estimates if differences occur. If actual forfeitures rates are lower than our estimates, our compensation expense would increase. Conversely, if actual forfeitures are greater than our estimates, our compensation expense would decrease. Our results of operations will be impacted by differences between estimated and actual forfeitures. A 1% decrease in the assumed forfeiture rate would have decreased our pre-tax income by less than $0.1 million in 2009, $0.1 million in 2008 and $0.2 in 2007.

The impact of share-based compensation expense on our results of operations, including net income and earnings per diluted share, will depend on, among other factors, the number of equity awards granted, the market price of our shares at the date of grant and the various other assumptions used in valuing such awards.

 

Contractual Commitments.

 

The following summarizes our significant contractual commitments as of January 30, 2010:

 

 

 

 

Debt.  $250.0 Million Secured Revolving Loan Facility with AEON — On December 28, 2009, we executed an Amended and Restated Secured Revolving Loan Agreement with AEON (the “Amended Facility”), which amended and restated the $150.0 million secured revolving loan facility executed with AEON in April 2009. Under the terms of the Amended Facility, the principal amount of the earlier $150.0 million secured credit facility was increased to $250.0 million. We could use funds borrowed under the Amended Facility solely (i) to repay our outstanding third-party bank indebtedness plus interest and other costs, (ii) to fund working capital and other general corporate purposes up to $10.0 million subject to satisfaction of all borrowing conditions and availability under the Amended Facility, and (iii) to pay related fees and expenses associated with the Amended Facility. The Amended Facility was provided pursuant to AEON’s April 9, 2009 financial support commitments, which were satisfied and discharged in full upon the December 29, 2009 funding under this Amended Facility for the repayment of all of our outstanding third-party bank indebtedness as described below.

 

Borrowings under the Amended Facility carried interest 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). Interest was payable monthly in arrears. At January 30, 2010, the interest rate was 6.23%. The Amended Facility had a scheduled maturity date of the earlier to occur of (i) April 16, 2010 or (ii) the consummation of the previously announced merger of our acquisition subsidiary with and into BPW, the repurchase of AEON’s equity interest in us and repayment of all outstanding debt owed to AEON, provided that the merger transaction together with any concurrent financing results in sufficient net cash proceeds to enable us to make full repayment of our AEON debt (including under the Amended Facility).

 

Prior to being amended, the earlier facility was secured by (i) a first priority security interest in substantially all of our consumer credit/charge card receivables and (ii) a first lien mortgage on our Hingham, Massachusetts headquarters facility and Lakeville, Massachusetts distribution facility. The Amended Facility was secured by a lien on substantially all of our existing and after acquired assets and properties, including the above-mentioned

credit/charge card receivables and mortgaged properties. As under the earlier facility, obligations under the Amended Facility were unconditionally guaranteed on a joint and several basis by certain of our existing and future direct and indirect subsidiaries.

 

As of December 28, 2009, we had outstanding short-term indebtedness of approximately $221.0 million under third-party bank credit facilities which were scheduled to terminate between late December 2009 and April 2010, which had not been extended or refinanced, as well as $20.0 million of third party bank indebtedness due in 2012. Entry into this Amended Facility required the consent or waiver by each of the third party bank lenders under their outstanding bank indebtedness; because such bank lender consents or waivers were not provided, all of the facilities under which this outstanding bank indebtedness was provided have been terminated. On December 29, 2009, we borrowed $245.0 million under the Amended Facility which we used to repay this outstanding third-party bank indebtedness, related interest, and other costs and expenses.

 

Under the Amended Facility, a fee of $1.7 million was due and paid to AEON upon initial funding. Prior to being amended, the earlier facility had called for an upfront fee of $1.5 million upon any initial borrowing, which, because no amounts had been borrowed under that earlier facility, had not been previously paid.

 

In connection with the consummation and closing of the BPW Transactions, we paid all outstanding indebtedness under the Amended Facility on April 7, 2010. See Note 20, Subsequent Events, for further information.

 

$200.0 Million Term Loan Facility with AEON — In February 2009, we 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 our outstanding indebtedness under the Acquisition Debt agreement in February 2009.

 

The AEON Loan was an interest-only loan until maturity. Borrowings under the AEON Loan carried interest at a variable rate equal to LIBOR plus 6.00%. Interest was payable semi-annually in arrears. At January 30, 2010, the interest rate was 6.77%. No loan facility fee was payable as part of the AEON Loan. The AEON Loan initially matured on August 31, 2009. During the continuing term of the loan, we had the option to extend the maturity for additional six-month periods, up to the third anniversary of the loan closing date, which was February 27, 2012. The AEON Loan was 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). On December 14, 2009, we paid the $8.5 million of net proceeds from the sale of the J. Jill business to AEON in accordance with the AEON Loan. As of January 30, 2010, outstanding borrowings under the AEON Loan totaled $191.5 million. Upon any voluntary or mandatory prepayment, we were to reimburse the lender for costs associated with early termination of any currency hedging arrangements related to the loan. The AEON loan contained no financial covenants, but did contain certain restrictive covenants.

 

In connection with the consummation and closing of the BPW Transactions, we repaid all outstanding indebtedness under the AEON Loan on April 7, 2010. See Note 20, Subsequent Events, for further information.

 

Term Loan with AEON (U.S.A.) — In July 2008, we finalized the terms of a $50.0 million unsecured subordinated working capital term loan credit facility with AEON (U.S.A.) (the “AEON Facility”). The AEON Facility was to mature and AEON (U.S.A.)’s commitment to provide borrowings under the AEON Facility was to expire on January 28, 2012, unless terminated earlier under the loan terms. Under the terms of the AEON Facility, the financing was an unsecured general obligation of ours. The AEON Facility was available for use by us and our subsidiaries for general working capital and other appropriate general corporate purposes. Borrowings under the AEON Facility carried interest at a rate equal to three-month LIBOR plus 5.0%. At January 30, 2010, the interest rate was 5.25%. We paid 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 AEON Facility. We were required to pay a fee of 0.5% per annum on the undrawn portion of the commitment, payable quarterly in arrears. The AEON Facility originally included covenants relating to us and our subsidiaries that were substantially the same in all material respects as under the Acquisition Debt. In March 2009, an amendment was executed between us and AEON (U.S.A.) to remove the financial covenants in their entirety from the facility. As of January 30, 2010, we were fully borrowed under the AEON Facility.

In connection with the consummation and closing of the BPW Transactions, we repaid all outstanding indebtedness under the AEON Facility on April 7, 2010. See Note 20, Subsequent Events, for further information.

 

Operating Leases.  We conduct the major part of our operations in leased premises with lease terms expiring at various dates through fiscal 2023. Most store leases provide for base rentals plus contingent rentals which are a function of sales volume and also provide that we pay real estate taxes, maintenance and other operating expenses applicable to the leased premises. Most store leases also provide renewal options and contain rent escalation clauses. We also lease store computer and other corporate equipment with lease terms generally between three and five years.

 

Included in the table above are two executed leases relating to Talbots stores not yet opened at January 30, 2010. The table also includes the remaining lease payments for eight Talbots Kids and Mens stores, the Quincy facility and the former J. Jill stores not purchased by the Purchaser for which we have not yet reached lease settlements, whose terms expire at various dates through fiscal 2016.

 

In connection with our disposition of the J. Jill business and 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, Massachusetts. In connection with closing our U.K. stores in 2008, three store leases were assigned to a local retailer who assumed the primary lease obligations. We remain secondarily liable as a guarantor in the event the local retailer does not fulfill its lease obligations. At January 30, 2010, the future aggregate lease payments for which we remain contingently obligated, as transferor or sublessor, total $143.3 million extending to various dates in fiscal 2020. The table above excludes these contingent liabilities.

 

Merchandise Purchases.  We generally make merchandise purchase commitments up to six to nine months in advance of the selling season. We do not maintain any long-term or exclusive commitments or arrangements to purchase from any vendor.

 

Construction Contracts.  We enter into contracts to facilitate the build-out and renovation of our stores. The table above summarizes commitments as of January 30, 2010.

 

Other Contractual Commitments.  We routinely enter into contracts with vendors for products and services in the normal course of operation, including contracts for insurance, maintenance on equipment, services and advertising. These contracts vary in their terms but generally carry 30-day to three-year terms.

 

Long-Term Obligations.  We sponsor non-qualified retirement benefit plans for certain employees. This includes the SERP and a supplemental 401(k) plan for certain executives impacted by Internal Revenue Code limits on benefits and compensation. Additionally, we sponsor two deferred compensation plans that allow certain members of our management group to defer a portion of their compensation. We also provide post retirement medical plans to our Talbots brand employees. Included in this table are estimates of annual cash payments under these non-qualified retirement plans. In 2009, our Board of Directors decided to freeze accrual of future benefits under our Pension Plan and SERP, and accordingly, participants receive no further accruals attributable to earnings and service after April 30, 2009 under these plans.

 

Our defined benefit pension plan obligations historically have been excluded from the contractual obligation table above because we have had no current requirements under the Employee Retirement Security Act (“ERISA”) to contribute to the plan as we historically have prepaid our liability for the upcoming plan year. In 2010, however, we are required to contribute to the plan as we did not prepay our liability in 2009 for the 2010 plan year. We expect to make a contribution to the plan of approximately $4.6 million in 2010 and this amount is not reflected in the table above.

 

Unrecognized Tax Benefits.  As we are unable to reasonably predict the timing of settlement of our uncertain tax positions, the above table does not include $42.4 million of income tax, interest and penalties relating to unrecognized tax benefits that are recorded as noncurrent liabilities.

Inflation and Changing Prices

 

We believe that changes in revenues and net earnings that have resulted from inflation or deflation have not been material during the periods presented. There is no assurance, however, that inflation or deflation will not materially affect us in the future.

 

Exchange Rates

 

Most foreign purchase orders are denominated in U.S. dollars. As of January 30, 2010, we operated 22 Talbots stores in Canada which generate sales and incur expenses in local currency. However, the local currency is generally stable and these operations represent only a small portion of our total operations. Accordingly, we have not experienced any significant impact from changes in exchange rates.

 

New Accounting Pronouncements

 

New accounting guidance recently adopted and recently issued is discussed in Note 3, Summary of Significant Accounting Policies, to our consolidated financial statements included in Item 15.

 

Forward-looking Information

 

This Report 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,” “believe,” “anticipate,” “outlook,” “will,” “would,” “should,” “potential” or similar statements or variations of such terms. All of the information concerning our future liquidity, future financial performance and results, future credit facilities and availability, future cash flows and cash needs, and other future financial performance or financial position, as well as our assumptions underlying such information, constitute forward-looking information. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about the Company, are not guarantees of future results or performance, and involve substantial risks and uncertainty, including assumptions and projections concerning our liquidity, internal plan, regular-price and markdown selling, operating cash flows, and credit availability for all forward periods. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the following risks and uncertainties:

 

 

 

All of our forward-looking statements are as of the date of this Report only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of or any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this Report or included in our other public disclosures or our other periodic reports or other documents or filings filed or furnished with the SEC could materially and adversely affect our continuing operations and our future financial results, cash flows, prospects and liquidity. Except as required by law, we do 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 affecting such forward-looking statements occurring after the date of this Report, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Report which modify or impact any of the forward-looking statements contained in this Report will be deemed to modify or supersede such statements in this Report.

 

 

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. We do not enter into financial instruments for trading purposes.

As of January 30, 2010, we had outstanding variable-rate borrowings of $486.5 million under our $250.0 million senior secured revolving loan facility, $200.0 million term loan facility and our $50.0 million term loan. All of our outstanding debt at January 30, 2010 was related party debt with AEON. All of our interest rates were based on LIBOR (London interbank offering rate expressed as a percentage rate per annum) plus a fixed percentage. The impact of a hypothetical 10% adverse change in interest rates for this variable rate debt would have caused an additional pre-tax charge of $1.9 million for the year ended January 30, 2010.

 

We enter into certain purchase obligations outside the United States which are predominately settled in U.S. dollars and, therefore, we have only minimal exposure to foreign currency exchange risks. We do not hedge against foreign currency risks and believe that the foreign currency exchange risk is not material. In addition, we operated 21 stores in Canada as of January 30, 2010. We believe our foreign currency translation risk is minimal, as a hypothetical 10% strengthening or weakening of the U.S. dollar relative to the applicable foreign currency would not materially affect our results of operations or cash flow.

 

The information required by this item may be found on pages F-2 through F-48 as listed below, including the quarterly information required by this item.

 

INDEX

 

 

 

None.

 

 

Disclosure Controls and Procedures

 

We have established disclosure controls and procedures designed to ensure at the reasonable assurance level that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

 

In connection with the preparation of this Annual Report on Form 10-K, an evaluation was performed under the supervision, and with the participation of, our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of January 30, 2010. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of January 30, 2010.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management, with the participation of our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of its internal control over financial reporting as of January 30, 2010. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Management, with the participation of our principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of January 30, 2010 and concluded that it was effective as of that date.

 

Our independent registered public accounting firm, Deloitte & Touche LLP, issued a report on our internal control over financial reporting. Their report appears on page 47 of this Annual Report on Form 10-K.

 

Changes in Internal Controls over Financial Reporting

 

Except as discussed below, no changes in our internal control over financial reporting occurred during the quarter ended January 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009, management, with the participation of our principal executive officer and principal financial officer, concluded that our internal controls over financial reporting were not effective. The Company’s controls to ensure non-routine, complex transactions and events were properly accounted for in accordance with accounting principles generally accepted in the United States of America were not effective. This deficiency was a material weakness.

 

During the year ended January 30, 2010, the Company implemented the following measures to address this material weakness:

 

 

Management believes that these actions have addressed the material weakness identified above and concluded that such control changes were effective in the fourth quarter upon completion of management’s assessment of the effectiveness of these controls. Based on management’s testing of the enhancements to the controls relating to accounting for non-routine, complex transactions, management determined that, as of January 30, 2010, the Company had remediated the material weakness in internal control over financial reporting as disclosed in the Annual Report on Form 10-K for the year ended January 31, 2009.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

The Talbots, Inc.

Hingham, Massachusetts

 

We have audited the internal control over financial reporting of The Talbots, Inc. and subsidiaries (the “Company”) as of January 30, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 30, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 30, 2010 of the Company and our report dated April 15, 2010 expressed an unqualified opinion on those financial statements.

 

/s/ Deloitte & Touche llp

 

Boston, Massachusetts

April 15, 2010

 

In connection with our acquisition of BPW pursuant to the Agreement and Plan of Merger, dated as of December 8, 2009, by and among Talbots, Tailor Acquisition, Inc. and BPW, as amended effective February 16, 2010, approval of the issuance of our common stock by the holders of a majority of the outstanding shares of Talbots common stock was required by the rules of the New York Stock Exchange. On December 8, 2009, AEON (U.S.A.), our former majority shareholder, executed a written consent approving such issuance. On February 16, 2010, AEON (U.S.A.) executed a second written consent approving the First Amendment to the Agreement and Plan of Merger. On April 7, 2010, we completed the acquisition of BPW and related transactions.

 

 

The information concerning our directors and nominees under the captions “Election of Directors” and “Corporate Governance and Nominating Committee” and the information concerning the Audit Committee and the “audit committee financial expert” under the caption “Corporate Governance” in our Proxy Statement for the 2010 Annual Meeting of Shareholders, information concerning our executive officers set forth in Part I, Item 1 above under the caption “Executive Officers of the Company,” and the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for the 2010 Annual Meeting of Shareholders, are incorporated herein by reference.

 

We have adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to our chief executive officer, senior financial officers and all other employees, officers and Board members. The Code of Ethics is available on our website, www.thetalbotsinc.com, under “Investor Relations,” and is available in print to any person who requests a copy by contacting Talbots Investor Relations by calling (781) 741-4500, by writing to Investor Relations Department, The Talbots Inc., One Talbots Drive, Hingham, MA 02043, or by e-mail at investor.relations@talbots.com. Any substantive amendment to the Code of Ethics and any waiver in favor of a Board member or an executive officer may only be granted by the Board of Directors and will be publicly disclosed on our website, www.thetalbotsinc.com, under “Investor Relations.”

 

 

The information set forth under the caption “Executive Compensation,” the information concerning director compensation under the caption “Director Compensation,” the information concerning our compensation policies and practices as they relate to risk management under the caption “Compensation Risk Assessment” and the information under the caption “Corporate Governance-Compensation Committee Interlocks and Insider Participation” in our Proxy Statement for the 2010 Annual Meeting of Shareholders, are each incorporated herein by reference. The information included under “Compensation Committee Report” is incorporated herein by reference but shall be deemed “furnished” with this report and shall not be deemed “filed” with this report.

 

 

The information set forth under the caption “Beneficial Ownership of Common Stock” in our Proxy Statement for the 2010 Annual Meeting of Shareholders is incorporated herein by reference.

The following table sets forth certain information about our 2003 Executive Stock Based Incentive Plan, as amended and the Restated Directors Stock Plan as of January 30, 2010. These plans are our only equity compensation plans and were both previously approved by our shareholders.

 

Equity Compensation Plan Information

 

 

Additional information concerning our equity compensation plans is set forth in Note 7, Stock-Based Compensation, to our consolidated financial statements included in Item 15.

 

 

The information set forth under the caption “Transactions with Related Persons” and the information concerning director independence under the caption “Corporate Governance” in our Proxy Statement for the 2010 Annual Meeting of Shareholders is incorporated herein by reference.

 

 

The information regarding auditors fees and services and our pre-approval policies and procedures for audit and non-audit services to be provided by our independent registered public accounting firm set forth under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement for the 2010 Annual Meeting of Shareholders is incorporated herein by reference.

 

 

The following exhibits are filed herewith or incorporated by reference:

 

(a)(1) Financial Statements:  The following Report of Independent Registered Public Accounting Firm and Consolidated Financial Statements of Talbots are included in this Report:

 

Report of Independent Registered Public Accounting Firm

 

Consolidated Statements of Operations for the Years Ended January 30, 2010, January 31, 2009 and February 2, 2008

 

Consolidated Balance Sheets as of January 30, 2010 and January 31, 2009

 

Consolidated Statements of Cash Flows for the Years Ended January 30, 2010, January 31, 2009 and February 2, 2008

 

Consolidated Statements of Stockholders’ (Deficit) Equity for the Years Ended January 30, 2010, January 31, 2009 and February 2, 2008

 

Notes to Consolidated Financial Statements

 

(a)(2) Financial Statement Schedules:

 

All financial statement schedules have been omitted because the required information is either presented in the consolidated financial statements or the notes thereto or is not applicable or required.

 

(a)(3) Exhibits:

 

The following exhibits are filed herewith or incorporated by reference: