Taking Talbot's Off the Rack

On an otherwise down day for the market, shares of Talbots (NYSE:TLB) surged over 90% as the women’s clothing retailer agreed to by acquired by private equity firm Sycamore Partners for $369 million. Let’s drill down the details and figure out whether it’s worth buying into the hype.

Company Overview

With 65 years of experience in the fashion industry under its belt, Talbots is known for making classic women’s clothing, shoes and accessories. With a workforce of over 10,000, the company operates 500 retail locations across the U.S. and Canada. The company also regularly distributes catalogues to drum up more sales, reaching a worldwide circulation of over 36 million. Over the past few years the company’s total sales have been declining; in FY 2012 the company posted $1.14 billion in revenue.

Acquisition Buzz

After months of negotiations for better offers, Talbots agreed to be acquired by its largest stakeholder for $369 million. This deal, which works out to $2.75 per share, represents a 113% premium over yesterday’s closing price. The buyout will close sometime in the third quarter, and will officially take Talbots off the public markets. Even with today’s price spike, shares of TLB are still trading down 14% for the month and down 20% for the quarter. The company is currently troubled by declining sales and was forced to close eight locations in the first quarter, bringing the total to 90 in just over a year.

Industry Breakdown

Talbots is one of the smallest companies in the Apparel Stores industry, which is made up of 68 companies. The company also falls on the lower end in terms of Price/Earnings to Growth ratio (ranked at 51st), sales growth (63rd), long-term growth rate (49th), and return on equity (65th).

Talbots’ main competitors are Ann Inc. (NYSE:ANN), the parent company behind Ann Taylor and LOFT, as well as Macy’s (NYSE:M) and Chico’s (NYSE:CHS). Of these four companies, Talbots has the lowest sales growth, the lowest gross margin and the lowest operating margin.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. The past 12 months have not been good to this company; for the entirety of this year TLB has remained in sell territory. Over the past six months the company has improved slightly on the fundamentals side, thanks to better earnings momentum and analyst earnings revisions. However, when it comes to sales growth, operating margin growth, cash flow and return on equity, this company is definitely struggling. TLB receives a D for its fundamentals, as well as a D for its level of buying pressure.