Talbots' shares plummeted 28.7 percent to close at $9.16 after a Securities and Exchange Commission filing revealed that Bank of America canceled its $130 million letter of credit effective April 8. HSBC reduced its letter of credit to $60 million from $135 million, and will phase out its financing by Aug. 8.
The developments "came as a surprise following the company's bullish analyst day two weeks ago and the company's confirmation of liquidity on the fourth-quarter earnings call," said Richard Jaffe, retail analyst at Stifel Nicolaus. "While we believe Talbots can work through this pressure on liquidity, the situation gives us cause for concern. These banks have access to more detailed financial data than is publicly available, and their vote of no confidence given their greater insight raises questions."
Talbots said it has obtained $18 million from Mizuho Bank, but this still only leaves the company with $78 million to fund inventory. However, the company said its current available lines of credit will be sufficient to pay for working capital needs under its 2008 operating plan.
In an attempt to offset the loss, Talbots has negotiated an "open account" arrangement with vendors, which will give the company 45 days instead of the usual 22 days to pay vendors. This provides an additional $40 million of cash flow, the company said.
"This strategy will work unless vendors begin to lose confidence in payment and then possibly restrict quantities and level of credit extended," Jaffe said.
The retailer operates 1,422 stores in 47 states, the District of Columbia, Canada and the U.K.
Even if Talbots finds new letters of credit, it would be at a much higher cost, said Roxanne Meyer, retail analyst at Oppenheimer. The company may also be forced to cut inventories to reduce working capital needs. She is expecting a hit to cash and earnings, and is concerned about the retailer's ability to access capital to finance future growth.
Should the company be unable to obtain new letters of credit, Talbots could sell its credit card receivables, which total $210 million; forgo a dividend payment in 2008; sell its J. Jill chain, or raise capital through an equity offering, Jaffe said.