Talbots downgraded by S&P as pandemic weighs on sales, cash flow

Dive Brief:

S&P Global downgraded Talbots deep into junk territory on Thursday as loan deadlines loom and its business faces persistent stress from the COVID-19 pandemic and ongoing troubles in the apparel sector.
The ratings agency downgraded Talbots to CCC-, indicating a high risk of default. S&P analysts said that the retailer's "operating performance remains weak and we believe there is an increased risk of a liquidity shortfall or debt restructuring in the next six months." Talbots did not immediately respond to a request for comment.
The analysts noted that Talbots has a $185 million asset-based loan and a $350 million term loan both maturing in fall 2022. The chances that Talbots can refinance those loans at their original value "appear increasingly dim given its current depressed sales performance amid the extended COVID-19 pandemic," the analysts said in an emailed press release.

Dive Insight:

Analysts have been worried about Talbots for years now as its debt load weighs on a company in a troubled sector.

The women's apparel seller was swept up in a buying spree by private equity in the retail industry during the early 2010s that, after years of distress and bankruptcies, has since slowed.

Sycamore Partners acquired the retailer in 2012, adding it to a stable of retail and apparel brands that today include Belk, Hot Topic and Staples. (It almost included Victoria's Secret as well, but Sycamore's deal with L Brands for a majority stake in the lingerie seller fell apart as the pandemic took hold of the industry.)

The mix of high debt loads — very often a feature of private equity buyouts — and apparel's ongoing retrenchment was a major source of financial distress in the industry well before the pandemic reached the U.S. Traffic at malls has declined for years due to a host of reasons including demographics, shifts to e-commerce, a declining middle class, and a shift to buying off-price, among other factors. Moreover, casualization, spending shifts and other trends have weighed on apparel specifically.

COVID-19 has exacerbated all of those problems. Consumers have avoided indoor malls out of safety concerns. Moreover, with much of the workforce working from home and consumers avoiding social outings, demand for apparel has been hit squarely by the pandemic.

That makes life difficult for any retailer. With its sales affected, Talbots has been facing a cash crunch. "The company has taken aggressive action to preserve cash since the beginning of the pandemic, including delaying payables, withholding rent, and slashing its payroll and other expenses," S&P analysts said. "Despite these steps, we expect its cash balance to dwindle in the near term."

Its cash problems make refinancing its loans all the more difficult, which in turn could heighten any liquidity issues.

Talbots' fate could hinge on how the pandemic and vaccine rollout play out over the coming months. S&P analysts noted that the retailer's core customers are women 55 and older, a demographic "generally more susceptible to COVID-19 related hospitalizations and serious long-term effects." That has created a "disproportionate decline in its sales," with revenue down 40% over the first three quarters of 2020, analysts said.