By  on June 18, 2007

When it comes to major financial milestones in Talbots Inc.'s history, chief financial officer Ed Larsen has played a role in most of them.

Larsen's first Talbots task was, in fact, to sell the company.

It was 1985, and Larsen was a newly appointed vice president and group comptroller of General Mills Inc.'s specialty retail group, a division that included Talbots, Eddie Bauer and Pennsylvania House Furniture. The Minneapolis food giant was exiting the retail business and asked Larsen to oversee divestiture.

By 1988, Larsen had put forth the "black book" sale prospectus on Talbots, at the time operating 57 stores and generating $342 million in revenues. Out of six bidders, the Japanese conglomerate Aeon Co. Ltd. (then known as Jusco) was the highest, paying $326 million. Aeon still owns 55 percent of Talbots' stock.

Larsen thought he was finished with Talbots, but his involvement was just beginning.

In 1991, he joined the retailer full-time to take it public. On the first day of trading in 1993, Larsen recalled, shares closed at $23, giving the retailer a $750 million market value — more than double Aeon's initial investment.

Larsen also helped the company negotiate the company's first acquisition, of J. Jill Group Inc., a $517 million deal that closed in May 2006.

"We decided with the board we had done a lot with the Talbots brand and needed a growth vehicle," said Larsen, who expects the deal to add $36 million in operational cost-savings to the company by the end of 2007.

In an industry obsessed with comparable-store sales and buffeted by shifting fashion tastes, Talbots' financial history has been one of fiscal discipline and remarkable stability.

Until the J. Jill purchase, the Hingham, Mass.-based operator had historically not taken on much debt and had funded expansion, stock repurchases and dividends with cash generated from operations. The annual cash dividend, in recent years around 50 cents per share, is generous compared with its specialty store peers, according to Larsen's analysis.

However, Talbots is undeniably a company in transition.

It's struggling with declining profitability and weakness in its core Talbots misses' brand, which, together with petites, accounts for $1.3 billion, or 79 percent of Talbots' overall retail sales. Comparable sales for all Talbots retail concepts grew only 1.3 percent last year.J. Jill's comps have slid 4.4 percent since May of last year, a drop Talbots management believes is based on store merchandise that was not brand-appropriate.

Some financial analysts question how fast the management team can turn around J. Jill and what it will take to reenergize the Talbots brand, which has had a hard time balancing the need to attract younger and less loyal customers while still meeting the needs of its core shopper, who is in her 40s and older.

"We remain on the sidelines as we are skeptical TLB will be able to turn J. Jill profitable in 2007, a problem compounded by inconsistent performance and ongoing sales disappointments at the core Talbots brand," wrote Citigroup retail analyst Kimberly Greenberger in a May 3 research note to reiterate her "hold" on the stock.

The competitive landscape has become tougher, Larsen said, citing players like Coldwater Creek, Ann Taylor and Chico's. "They are all doing a pretty good job," he said.

To improve results in the second half of the year, Larsen said both the J. Jill and Talbots teams are working to improve merchandise. He said integrating the back office, sourcing and other functions of the two brands were proceeding ahead of schedule.

"We need to improve profitability, and mostly the issue has been with merchandise," he said. " There has been some inconsistency. We don't always get it right."

In the meantime, the company has scaled back fall commitments and is looking at expense reductions in combination with a merchandising strategy for modernized, more fashionable product.

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