Shares of The Talbots Inc. tumbled more than 40 percent Tuesday when its return to profitability in the first quarter was far overshadowed by large declines in sales and margins and a bleak outlook for the second quarter.

This story first appeared in the June 8, 2011 issue of WWD. Subscribe Today.

Trudy Sullivan, president and chief executive officer, said, “Our first-quarter performance reflects an inconsistent customer response to our merchandise assortments, a challenging competitive environment and high levels of promotional activity.” Without providing specific earnings guidance, the company said sales and traffic have continued to “trend negative” so far in the second quarter, when it expects continuing high levels of promotion and markdown activity. Quarter-to-date sales are down in the low teens, according to Michael Scarpa, chief financial officer and chief operating officer.

For the three months ended April 30, income was $739,000, or 1 cent a diluted share, versus a loss of $4.4 million, or 8 cents, last year. On an adjusted basis, first-quarter income from continuing operations was $900,000, or 1 cent a diluted share, 2 cents below analysts’ consensus estimate of 3 cents and against a year-ago loss of $7.1 million, or 12 cents.

Sales for the quarter fell 6 percent to $301.3 million from $320.7 million. Same-store sales fell 8.2 percent and comparable sales declined 7.7 percent. Comparable sales include revenues from the Internet, catalogues and red-line orders from inside stores.

Gross margin contracted 610 basis points to 37.5 percent of sales from 43.6 percent. Merchandise margin fell 880 basis points because of higher levels of markdowns and promotional activity.

Shares ended the day at $2.63, down $1.79, or 40.5 percent, with volume of 38.1 million, more than 11 times the daily average.

Emphasizing that second-quarter conditions “will continue to be challenging,” Sullivan outlined changes made to improve results starting with the fall. “Our sweater assortment has been modified to include new styles, adding more novelty and variety to the mix,” she told analysts on the company’s conference call. “In knits, we have increased the penetration of print, pattern and addressed fabric weights. And we have added breadth to some of our smaller categories including dresses, skirts, suiting and woven tops, where we have seen increased customer demand.”

In general, the merchandise mix for the second half of the year will have a “stronger balance of classic versus fashion-forward styles.” She also told analysts that the company plans to “increase customer contact through catalogue circulation, mailers and postcards, as well as testing new alternate forms of media as we continue with new customer acquisition efforts.”

The company previously revealed plans to close between 90 to 100 stores and consolidate or downsize 15 to 20 others.

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