Equity Research

May 11, 2010 United States of America

Retail
Talbots, Inc., (The) (TLB - US$ 16.45) 1-Overweight Retail Softlines
Initiation of Coverage Jeff Black
1.212.526.3385
Just Getting Going; 1-OW, $23 Target jeff.black@barcap.com
BCI, New York
Investment Conclusion
‰ We are initiating coverage with a 1-Overweight
EPS (US$) (FY Jan)
rating and a $23 PT. Missy sales are recovering
broadly and the TLB story is just getting started, in 2009 2010 2011 % Change
our view, with numerous initiatives to drive both Actual Old New St. Est. Old New St. Est. 2010 2011
top line and margins in 2010 and beyond. 1Q -0.43A N/A 0.20E 0.15E N/A N/A N/A 147% N/A
2Q -0.33A N/A 0.06E 0.06E N/A N/A N/A 118% N/A
3Q 0.31A N/A 0.35E 0.33E N/A N/A N/A 13% N/A
Summary 4Q 0.13A N/A 0.17E 0.18E N/A N/A N/A 31% N/A
‰ Comps are turning a bit later than ANN and CHS Year -0.10A N/A 0.77E 0.72E N/A 1.35E 1.02E 870% 75%
but we could see upside to our +4% est for 1Q10 -
P/E 21.4 12.2
and the fact that dormant customers are returning
to TLB is a vote of confidence for the product.
‰ The margin story is equally compelling, in our Market Data Financial Summary
view. TLB had generated double digit margins
prior to some missteps in 2006. Market Cap (Mil.) 1114 Revenue TTM (Mil.) 1247.6
‰ The new team got TLB back on track with a ~1% Dividend Yield N/A
operating margin in 2009, with cost reductions a 52 Week Range 16.45 - 1.86
major contributor.
‰ Yet significant initiatives in sourcing, markdown
optimization and store/product segmentation have
barely taken hold. We see 2010 as a year of major
earnings traction and believe there's significant
runway as the company builds on recent Stock Overview
momentum in the assortments. Reuters
Talb ot s, Inc., (The) - 0 5 / 1 0 / 2 0 1 0 TLB
‰ Consensus for 2010 and 2011 is conservative, in 18
Bloomberg TLB
our view. We see $1.75 in earnings in 2012 with ADR
14
the operating margin at the low end of mgt's goals.
That could be realized sooner. 10

Stock Rating Target Price 6

New: 1-Overweight New: US$ 23.00 2

Vol um e
Old: 0-Not Rated Old: N/A 15M

Sector View: 2-Neutral

5M

Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Ap r May
Source: Bar clays Capit al Live

Initiating with a 1-Overweight Rating; $23 Price Target

We are initiating coverage of TLB with a 1-Overweight rating and a $23 price target. TLB has a number of opportunities that should drive
both top line and margins in 2010 and beyond.

** The Earnings Story is Just Getting Started. TLB began to see real traction in 2009 on a plan that was set in motion in earnest in 2008,
paring its cost structure and improving its merchandise margins. Comps improved but were still negative to end the year; the gross margin
is 300bps below the long term average and the operating margin ended 2009 at ~1.0%. The merchandise started to resonate with a fully

Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 10 AND IMPORTANT DISCLOSURES BEGINNING

ON PAGE 11
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redesigned pant fit in 2H09 and comps have moved into positive territory to start 2010 – and we think there’s a long track of improvement as
TLB’s various margin and sales initiatives gain traction.

** The TLB demographic is broadening. A “modern” update to the brand’s traditional styling is enabling TLB to capture the 40 to 45 year-
old customer while still retaining its missy core (the average customer is in the 55 year old range). The assortments still revolve around
“classic” styling but the fits are more shaped and less boxy. In our view, that’s broadening the demographic rather than shifting the target
customer.

** Comps are Improving. TLB has seen improvements in all retail metrics but specifically transaction value on fewer markdowns; we
expect further improvements into summer and fall as management builds on the success of last fall’s pant initiative in addition to strength in
other categories. The focus in 2H10 will include a focus on a fit initiative in a new product category for fall and a denim program which will
feature new fits, washes and leg styles. The accessories category is an opportunity, as well, as the company builds on recent momentum;
the goal is to take this high margin category to 20% of sales from 9% to end 2009.

Figure 1: Average Missy Comp Performance versus the Softlines Group and Off-Pricers

25.0

20.0

15.0

10.0

5.0

0.0

-5.0

-10.0

-15.0

-20.0

-25.0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Missy Group Off-Price

Source: Company reports and Barclays Capital estimates

Figure 2: Quarterly Comps

2005 2006 2007 2008 2009 2010E
1Q 4 1 (4) (7) (27) 4
2Q 7 3 (5) (12) (25) 5
3Q (2) 4 (8) (14) (16) (2)
4Q 2 (3) (6) (25) (7) 0
Year 3 1 (6) (14) (19) 2
Source: Company reports and Barclays Capital estimates

** Margins Set to Ramp Significantly in 2010. The operating margin was slightly positive in 2009 following a sharp drop in 2008, and we
see 2010 as a year for major traction. The sourcing relationship with Li & Fung will benefit IMU going forward though an increase in “best”
product as a percentage of the mix could offset those efforts this year though boost AUR. The increase in “best” product is the result of
customer and store segmentation analysis that revealed that TLB can better serve higher end customers in certain markets. Meanwhile, a
more restrained markdown cadence should be a significant driver of improved profitability. More on all these below.

** Earnings Growth Above Par into 2012. 4Q09 was the most recent quarter that was reported and saw TLB’s operating margin rise to
4.2% following a significant loss in the prior year. EPS came in well ahead of the flat consensus, at $0.13. Gross margins improved 2,100
bps driven by more full priced selling and 170bps of buying and occupancy leverage, that on a (-7%) comp. Full price selling was up 10% in
the quarter, while markdown merchandise was 21% lower than the prior year’s levels. Strong categories included accessories, namely
jewelry, scarves and wraps, in addition to strength in tops. Sweaters performed well (that’s 20% of TLB’s 4Q mix) and the pant category has
built on momentum following the fall’s “fit initiative”.

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SG&A levered on the negative comp as well and was down 1,180bps as a percent of sales, that thanks to continued cost reduction efforts.
TLB had targeted $150 million in expense reductions over two years – that was completed a year ahead of plan, all in 2009. Inventory was
down 31% to end the year and on a unit basis down about 5%, so TLB is clearly achieving cost of good benefits as well.

Comps have started to respond this year. 1Q10 guidance calls for a 4% to 5% improvement in total sales, with 1Q comps in the +LSD
range. March comps were up 10%. Management also expects an operating margin of 4.5% to 6%. That’s based on a 700 to 800bps
improvement in gross margins and SG&A of $106 to $110 million. We’re at $0.20 for 1Q which is based on a 5% increase in sales, 820bps
of gross margin expansion and SG&A of $106 million.

For the full year, the company expects sales to increase 3% to 5% with an operating margin in the 5% to 6% range. That is based on flattish
SG&A on a dollar basis; higher marketing spend and incentive comp ($30 million combined) are expected to partially offset further cost
cutting efforts. We’re at $0.77 for the year – that’s based on a 3.5% increase in total sales, 400bps of gross margin expansion and 150bps
of SG&A leverage (down 1% on a dollar basis).

**$23 Price Target, 13x our 2012 EPS Estimate. We view the company’s goal of a low to mid teen operating margin over three years as
achievable. The company’s long term average operating margin is 5% with a peak level of 13% achieved in 2001 – and we see numerous
levers to rejuvenate profit. We see EPS of $1.35 in 2011 (which assumes a 20% tax rate and a 10.5% operating margin) and $1.75 in
earnings power in 2012 (which assumes a 35% tax rate and a 12% margin). We arrive at our $23 price target by applying a 13x multiple to
our 2012 estimate. TLB’s comp set, which includes ANN, CHS and CWTR, warrant similar multiples.

Figure 3: Valuation for the Missy Space

Average 5-
2010E 2011E P/E - P/E - Year
EPS EPS 2010 2011 Multiple
ANN $1.08 $1.50 21.7x 15.6x 23.6x
CBK $0.18 $0.31 53.0x 30.8x 31.3x
CHS $0.65 $0.97 22.5x 15.1x 25.4x
CWTR $0.08 $0.40 80.7x 16.9x 39.7x
TLB $0.75 $1.35 21.9x 12.2x 31.4x
Source: Factset and Barclays Capital estimates

2007- 2009: A New Team, New Initiatives and a Transformation of the Shareholder Base
TLB has been through quite a transformation in recent years, so a bit of history is warranted here.

Since August 2007, TLB has been led by CEO Trudy Sullivan. Ms. Sullivan joined Talbots from Liz Claiborne, where she had been
President since January 2006. Ms. Sullivan joined Liz in 2001 as Group President of the company’s Casual, Collections, and Elisabeth
businesses. Prior to joining Liz, Ms. Sullivan served as President of J. Crew from 1997 until 2001.

Michael Scarpa joined Talbots as COO in December 2008 and was named CFO and Treasurer in January 2009. Prior to joining the
company, Mr. Scarpa served as COO of Liz Claiborne from January 2007 until November 2008. Mr. Scarpa joined Liz Claiborne in 1983
and served in a number of leadership roles.

Michael Smaldone, Chief Creative Officer, joined as Chief Creative Officer in December 2007; he had been SVP of Design for Ann Taylor
from September 2003 until December 2007. Mr. Smaldone also held senior leadership roles in design at Anne Klein where he served as
Chief Design Officer from July 2001 to September 2003, and Elie Tahari from May 2000 to May 2001.

The team launched a strategic review in 2007 that resulted in, 1) the closure of the Kids, Mens and UK businesses in 2008; and, 2) the sale
of the J. Jill business in July 2009 to Golden Gate Capital, a private equity firm.

Costs have been reduced by $150 million through a 17% reduction in corporate headcount in February 2009 and an additional 20% in June
2009. The reductions also included cuts in store hours, at the call center and distribution center, the elimination of 401k matching for 2009,
increased employee health care contributions, the elimination of merit increases for 2009 and the freezing of the defined benefit pension
plans. In addition, the company implemented savings related to overhead costs in administration, marketing and store operations.

Sales and margin initiatives resulting from the review included the re-launch of the website, the expansion of the outlet concept, a sourcing
partnership with Li & Fung and the store segmentation initiative. We’ll get into each of these below.

First, we think it’s instructive to look at where TLB was in 2007, prior to the new team, and where the company ended 2009 – that’s outlined
in figures 4 through 7 below.

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In 2007, TLB operated 596 stores with total revenues of $1.7 billion. Sales per square foot were roughly $442 versus a long term average of
$330 and a peak of $449 in 2006. The gross margin was 33.1% versus the long term average of 36% and a peak of 41% in 2000. The
operating margin to end the year was 2.5%. That compares to the long term average of 5.5% and a peak of 13% reached in 2001. SG&A
per square foot was $124 in 2007 versus the long term average of $127 and the trough of $98 achieved in 2009.

Figure 4: Annual Sales per Square Foot Figure 5: Annual Gross Margins
40%
$500 The long term average The long term average
$441.7 sales per square foot is 38% gross margin is 36.1%
$450 $375
36%
$400
34% 33.5%
33.1%
$350
$299.8 32%
$300
$250.7 29.8%
30%
$250

$200
28%

$150 26%

$100 24%

$50 22%

$0 20%
2007 2008 2009 2007 2008 2009

Source: Company reports and Barclays Capital estimates

Figure 6: Annual Operating Margins Figure 7: Annual SG&A per Square Foot
6%
$160 The long term average
SG&A per square foot is
4% The long term average $126.85
$140
$124.2 $124.3
operating margin is
2.4% 5.4% $120
2%
0.9% $98.3
$100

0%
$80

-2% $60

$40
-4%
$20

-6% -5.2%
$0
2007 2008 2009 2007 2008 2009

Source: Company reports and Barclays Capital estimates

TLB ended 2009 in more profitable shape due largely to a 20% drop in operating expenses per square foot and the removal of
approximately $400 million to $500 million in revenue ($300 million to $400 million from the J Jill disposition in 3Q08, and $100 million from
the closure of the 66 kids’ and 12 men’s stores in 3Q08). The EPS impact from the closures was about $0.15 to $0.18 (or $13 million to $15
million). The store count ended 2009 at 580 with total revenues of $1.2 billion. Sales productivity took a sizeable hit, falling to $251 per
square foot and gross margins were roughly flat with 2007 levels at 33.5%.

While strides were made in 2009, the year provided a distraction for management as TLB’s major shareholder, Aeon, expressed its intention
to divest its interest and focus on its Japanese operations. That led to Talbots’ merger with BPW Acquisition Corp, a special purpose
acquisition company (SPAC) created in February 2008. BPW was acquired by TLB in December 2009. TLB issued 42 million additional
shares for the transaction, but the net dilution was about 12 million shares because Aeon agreed to retire its 30 million shares in exchange
for one million warrants. TLB absorbed BPW’s funds and used that cash of $330 million (after fees) to pay down its debt. The acquisition
also resulted in a $200 million line of credit from GE Capital – it has drawn down $125 million. The deal was completed on April 7, 2010.

2010-2012: Plenty of Evidence that Strategies are Taking Hold

We see 2010 as a significant transition on a path to fuller profitability. We expect sales to grow to $1.3 billion in 2010, up 3.5%, and believe
margins can benefit from the product realignment, fewer markdowns, the good/better/best targeted approach, the store segmentation
initiative and the sourcing arrangement.

The Revenue Path

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TLB operates 580 stores located across the U.S. and Canada (559 stores in the U.S. and 21 in Canada).

LSD Square Footage Growth

Square footage declined 2.6% in 2009 with 19 store closures offsetting 12 new store openings, consisting of 11 outlet stores and one retail
store. Looking towards 2010, our estimates assume a 1% decline in square footage for the year – that’s based on 10 new store openings
and about 14 store closures.

We see prospects for LSD square footage growth over the next few years with the majority of that driven by expansion of TLB’s outlet
stores, from 18 currently to 60 in 2012. The outlet stores, launched in May 2009, offer merchandize that is manufactured exclusively for the
channel at lower price points. TLB has achieved strong margins early in this business.

The average store size is 5,520 selling square feet (7,210 gross square feet) for the retail concept. The majority of stores are located in
specialty centers (43%) and malls (30%) with some in villages (25%) and a modest 2% in urban centers. In terms of product, TLB offers
petites sizes, womens sizes, as well as an accessories and a shoe offering in addition to missy apparel. Plus size apparel represents about
10% of sales, though offered in only 34% of the store base – which represents an opportunity. Petites make up about 30% of total sales, as
a point of comparison. In stores that offer a plus size selection, the segment makes up 20% of the store’s sales. Management sees an
opportunity to double the women’s segment to closer to 20% of total sales.

Comparable Store Sales: +LSD

We think a LSD comp is possible over the next few years – with near term prospects better than that.

2009 comps came in at (19%) though 2H comps showed a significant improvement in trends versus the first half of the year as weak traffic
trends moderated to end the year and transaction value was much improved due to better full priced selling.

2010 assortments are more compelling, in our view, and more fully incorporate the company’s “tradition transformed” approach. We are
forecasting a 2010 comp of +2% - that would be the first positive annual comp since 2006 when comps were up 1%. Our quarterly comp
breakout is as follows: +4%, +5%, (2%), and 0%, respectively. That implies fairly significant improvement in the two year trend throughout
the year. Compares across the first half of the year are easier at down (27%) and (25%) versus (16%) in 3Q and (7%) in 4Q.

In terms of compares, in 1Q09, transactions were down in the high teens while transaction value was down in the 10% range which made
up the (27%) comp for the quarter. Value declined as customers shopped more lower opening price points. As a result, higher price point
items needed to be marked down aggressively to clear product.

As the company moved into 2Q though, they were able to make adjustments to the merchandise mix. That is reflected in the gross margin,
which rebounded to a 180bps decline in 2Q09 after dropping 950bps in 1Q09. Transactions showed a modest improvement over 1Q, down
in the mid/high teens, and transaction value was down 5% - an improvement there as well. Better trends continued into 3Q with
improvements in traffic, and both AUR and UPT, reflecting a positive response to the new product. Better full priced selling continued in 4Q
(+10%) and improved in each month of the quarter. Transaction value increased 13% while transactions declined in the 20% range.

Figure 8: Quarterly Gross Margins and Comp Drivers (Total Transactions and Transaction Value)

45% 15

40% 10

5
35%

0
30%
(5)
25%
(10)

20%
(15)

15% (20)

10% (25)
1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

Gross Margin Rate Transaction Value Total Transactions

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Source: Company reports and Barclays Capital estimates

Looking towards 2010, in terms of comp drivers, we expect transaction value to continue to drive the comp due to better acceptance of the
new product – and that should result in more full priced selling. While traffic has moderated, we think it could still be challenging overall.

Looking longer term, drivers for comps include:

** Category expansion. Accessories offers the most exciting opportunity given its higher margins. TLB believes it can double the business to
$100 million by 2012 mainly through growth in jewelry, scarves and handbags. That would take accessories to 20% of total sales from 9%
currently, which seems reasonable, in our view.

** The plus size business. TLB currently offers a selection of women’s plus size apparel in 34% of its stores while petites is offered in all
stores. Plus size apparel represents about 10% of sales, though offered in only 34% of the store base – which represents an opportunity. In
stores that offer a plus size selection, the segment makes up 20% of the store’s sales. Management sees an opportunity to double the
women’s segment to closer to 20% of total sales.

** A store refresh program will begin this year with roughly 50 to 100 stores. Updates range from a fresh coat of paint to new fixtures and
chandeliers, for example. This is a benefit of the liquidity that has recently come available to the company. Capex is expected to be $40
million this year (from $20 million last year) – that includes roughly $15 million for store refurbishments.

** Marketing spend. TLB plans to ramp up marketing spend this year, though that has not been quantified specifically. It is included in the
$30 million in incremental SG&A costs this year. Plans include more web marketing and possibly a national print campaign. TV advertising
is not in consideration as management does not believe the return is acceptable.

** Leveraging the TLB card. TLB offers a customer credit card in the Talbots charge card. The average credit store for cardholders is high,
in the 760 range. Bad debt is minimal, as well. Talbots charge card holders are automatically enrolled in the company’s loyalty program.
According to the company, the card drives customer loyalty in addition to producing finance charge income and decreasing third-party bank
card fees. The loyalty program has resulted in increased usage of the charge card, as usage increased from 28% of sales in 2000 to 49.2%
of sales in 2009.

The Direct Channel

The Direct business, which includes catalog and internet, represents roughly 17% of total sales, in-line with the long term average of 15%.
70% of direct sales are completed via the website. The catalog is utilized as a marketing tool to drive awareness of the brand.

In 2009, 19 catalogs were issued with circulation of approximately 36.6 million, down 33% year over year, as planned. Circulation for 2010
is expected to be flat. The company does not expect circulation to return to historical levels – lists have been refined and efforts have been
centered on targeting the right customers. The higher margin nature of the business contributes nicely to the consolidated margins given a
relatively high level of penetration. Our estimates assume the penetration rate is relatively constant over the next few years.

Direct sales declined 11% in 2009 with greater declines across the first half of the year partially offset by flattish growth in 3Q and 11%
growth in 4Q.

“Modernizing” the Product Assortments

Talbots’ average customer is age 55 with a household income of ~$130,000; many of them are married. The company’s business model
revolves around a high level of customer service which has resulted in a loyal customer base. TLB claims to capture 50% of customer
spend from its loyal customers, which in turn account for 30% of its total sales. TLB also has the advantage of a private label credit card,
representing 50% of sales, which allows it to communicate to its loyal customers in a targeted manner.

The company tracks the purchases and level of activity of its most loyal customers through its proprietary credit card – and the good news is
that lapsed customers are returning – which in turn suggests that the new product alignment is working. In terms of competition, the
company believes that its lapsed customers turned to higher end department stores including Nordstrom and Lord & Taylor and those
stores continue to be competition for the brand in classic styling. There is some cross-over with Ann Taylor stores, as well, though that is
somewhat of a younger customer.

Since coming aboard, the TLB team has reoriented around a “sweet spot” with a slightly lower age range of 40-45 – but with apparel that is
classic in tone. Customer research revealed that customers TLB had lost over the years (some of them in the 65+ age group) thought the
brand was, “for an older demographic.” Current product initiatives are geared around a “Tradition Transformed” theme. This includes a more
“up to date offering” that maintains TLB’s traditional heritage.

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Figure 9: Demographic Data for Missy Retailers
Average Age Average Income Average Basket
Ann Stores 35 $125,000 $110.17
LOFT 32 $87,500 $56.83
Chico's 58 $99,000 $90.33
WHBM 44 $100,000 $101.17
Coldwater Creek 55 $75,000 $77.00
Talbots 55 $130,000 $99.83
Note: Average basket includes a sweater, pants, a skirt, a jacket, a top and a dress for each retailer
Source: Company reports and Barclays Capital estimates

The Pant Fit Initiative, launched in 2H09, was the first major rollout under the theme. Pants traditionally make up about 20% - 25% of the
business. TLB designed three new styles of pants for different shapes and sizes with the styles defined primarily by where the pants sit at
the waist. TLB sold 590,000 pairs of pants in 3Q09. 380,000 pairs of pants were sold at full price during the $5 try on promotional event. We
expect more fit initiatives in other categories for the fall of 2010.

Initiatives to Drive Margin Expansion

Looking forward, there are a number of opportunities to improve the operating margin.

On the gross margin side, drivers of expansion include: 1) increased penetration of the higher margin accessories category (noted above);
2) the company’s markdown optimization efforts; 3) a renewed focus on sourcing including the relationship with Li & Fung – though that is
expected to be offset by increased “best” product purchases this year; and 4) better inventory turn. TLB’s inventory turns to end 2009 were
4.7x versus an average of 5x and a peak of 6x achieved in 2003. That compares to turns of 5x at ANN to end 2009 and 5.5x at CHS.

TLB has also focused on segmenting the product within stores as well as the stores themselves.

Product Segmentation
The product focus follows the good, better, best strategy. All stores will carry a mixture of the good, better, and best merchandise – and we
think the initiative can drive improved store productivity in addition to gross margin expansion through faster inventory turns, and fewer
markdowns. AUR should also improve given the increase in penetration of the “best” category.

Store Segmentation
The store segmentation initiative was layered on in 4Q09, and is designed to tailor assortments geography and demographics. There are
two aspects of localization: customer lifestyle, based on how the customer shops and her fashion sense; and climate, based on geography
and local atmosphere. Benefits from this initiative should start to materialize in 2H10.

Stores are grouped into four categories:

** Flagship: TLB will operate two flagship stores, one in Boston and one in New York. The stores carry all merchandise and are also used to
test new products.

** Premium: TLB has earmarked 100 stores as premium stores that will carry more of the “best” part of the assortment.

** Classic: 300 Classic stores will offer a more balanced assortment; and

** Always: 150 stores that will carry more “good” styles as the customer is more value conscious.

TLB’s rent per square foot was roughly $30.1 to end 2009 – that compares to $37.4 for ANN and $62.2 for CHS, so the company is in good
shape in that regard. TLB closed 20 stores in 2009 and will likely close a similar number of stores in 2010. Roughly 10% of the store base
comes up for renewal every year. There aren’t significant opportunities to lower rent – the focus is on maintaining current levels.

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Figure 10: Annual Operating Margins and Estimates for 2010 and 2011

20.0%

14.3%
15.0% 13.0%
12.0% 12.3%
10.4% 10.5%
10.0% 8.4% 8.4%
6.3%

5.0% 3.4%
2.4%
0.9%
0.0%

-5.0%
-5.2%

-10.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E

Source: Company reports and Barclays Capital estimates

Inventory Turn
TLB has also re-worked its approach to markdowns and pricing in general. The company now has a more disciplined approach with sales
planned to be held monthly from the prior events held 4 to 6 times a year, which allows for faster inventory turns and fresher assortments.
New product will flow into stores monthly – it will spend 4 weeks in the front of stores, then 4 weeks in the middle of store, 4 weeks in the
back of the store with some markdowns. There will be a second markdown and then products will be moved to the outlets. This flow is
resulting in fewer and less deep markdowns. Full price selling is targeted at 65% to 70% of the mix versus 60% previously. In 2009, full
priced selling represented about 60% of the mix, as well.

Product Sourcing
TLB entered into a relationship with Li & Fung in late 2009, in which Li & Fung will be responsible for sourcing all of the company’s apparel.
Management expects to achieve greater quality, speed to market, cost savings and IMU improvement. Benefits should start to flow in the
summer of 2010, which will reflect the product delivery of first full season with Li & Fung. The agreement does not cover a number of non-
apparel categories including swimwear, lingerie, footwear, and accessories.

TLB entered into the agreement as it was not large enough to leverage its scale in buying goods and thought they could benefit from Li &
Fung’s buying power.

Over time, the agreement should allow TLB to reduce the percentage of its products that are produced in China (41% of production in
2009). TLB downsized its internal sourcing department in addition to its offices in Hong Kong and India though the reduction in operating
expenses has not been quantified.

The first delivery under the new relationship will be in stores in the summer of 2010 and will impact IMU beginning in 2H10. The benefit will
be somewhat offset in 2010 by an increase in “best” products from the segmentation strategy. But TLB estimates a 100bps to 150bps
positive impact, ultimately. And longer term, the company is targeting a 10% reduction in costs through the relationship. We think the
arrangement should yield TLB lower cost of goods into 2011 and even assuming a rise in raw material costs.

We see a path to a 12% operating margin in 2012 from 1% to end 2009 – that’s an average of 200%+ average growth in operating income
over three years, 600% in 2010, 81% in 2011 and 26% in 2012, based on our estimates. That implies EPS of $1.50 (fully taxed) from
($0.13) in 2009. That equates to 5% average growth in revenues over three years (a 3% average comp and 2% from new store openings
and the Direct business), an average increase of 270bps in gross margins, and an average of 180bps in SG&A leverage. A majority of that
growth is weighted towards 2010. Our estimates assume 550bps of operating margin expansion in 2010, 410bps in 2011 and 385bps in
2012. That’s consistent with management view that it’s possible to get back to a low to mid teen operating margin over time. The company
does not currently pay a dividend and has not meaningfully repurchased its shares since earlier in the decade.

Turning to costs, some of the initiatives were temporary and some will increase as the rate of sales improves. The company will add back
401k matching and will reinstitute merit increases. In addition, marketing spend is expected to ramp in 2010. In total, that will account for

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$30 million in SG&A – though on a net basis that is expected to be offset by incremental cost savings. We expect SG&A per sq foot to
decline 4% this year to $94.4 from $98.3 last year.

The long term average SG&A per square foot is roughly $127. We expect SG&A per square foot to fall 4% in 2010 to a record low of $94
per foot – that’s on top of a 21% decline in 2009 to $98 per square foot. Looking at it another way, operating expenses are down almost
15% from 2000 levels – square footage increased 40% during the same period.

The Tax Build

The company is forecasting a 12% tax rate for this year, which is lower than a normal tax rate given the utilization of net operating loss
carryforward, with a rate slightly lower than that in 1Q. As of 4Q09, the company had approximately $129.4 million of gross domestic net
operating loss carryforwards that will reduce future taxable income. The 2011 tax rate is expected to be lower than average, as well, for the
same reason though it should be above 2010’s level. A normalized tax rate of ~35% is expected in 2012.

Earnings Estimates and Price Target

Broadly speaking, we see a margin of 14% in 2012 with gross margin driving 200bps of that 385 improvement with the remaining 180bps
driven by SG&A leverage. In general over the next few years, we expect gross margin expansion to be a more significant driver to the
margin improvement versus SG&A leverage.

TLB ended 2009 with an operating margin of 0.9% – that compares to the company’s long term average closer to 5% and peak margins of
13% achieved in 2001. We see a path to a low teen margin over the next few years, which would result in significant earnings growth. That’s
consistent with management’s internal expectations for a return to a low to mid teen operating margin.

Our 2010 estimate of $0.77 is based on a 6.5% operating margin, up 545bps, and assumes an annual gross margin of 37.5%, up 400bps,
and SG&A leverage of 150bps. We estimate a 3.5% improvement in total sales for the year (+2% comp, +3.5% total retail sales and
+13.54% direct sales).

Our 2011 estimate of $1.35 is based on an operating margin of 10.5%, up 410bps – that assumes a 200bps improvement in the gross
margin and 215bps of SG&A leverage on better sales. We estimate total sales increase 6% for the year (+4% comp, +6% total retail sales,
and +5% direct sales).

We forecast of EPS of $1.75 in 2012 (that’s fully taxed) based on a 200bps improvement in gross margins and 180bps of SG&A leverage.
We forecast total sales for the year up 5% (+4% comp, 5% increase in total retail sales and direct up 5%).

Looking towards 2010, savings are expected to continue though at a more modest rate versus 2009 as some initiatives are being reversed
as the rate of sales has improved namely merit increases, 401K matching and such. SG&A is expected to be roughly flat for the year on a
dollar basis, as higher compensation costs and an increase in marketing are expected to offset incremental cost savings.

Balance Sheet and Cash Flow

Given the increase in cash, management now has the capital to refresh some of its stores. Specific plans have not been discussed yet as
the program is still in the early stages of a multi-year process. It will likely be three to four years before the results hit the store base. Some
concepts have been tested thus far and we expect to hear more about the company’s specific plans over the next couple of quarters.
Another investment the company is making in 2010 is in IT, specifically in the planning and allocation systems to support the store
segmentation initiative in addition to some investments in the website and back of the house systems including HR, finance and accounting.
Capex is expected to be $40 million this year from $21 million in 2009.

Figure 11: TLB Income Statement

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2007 2008 1Q09 2Q09 3Q09 4Q09 2009 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E

Total Sales $1,708.1 $1,495.2 $306.2 $304.6 $308.9 $315.9 $1,235.6 $322.2 $325.9 $307.6 $320.8 $1,276.6 $1,357.1
YoY Change -23.4% -12.5% -26.2% -22.9% -13.5% -3.7% -17.4% 5.2% 7.0% -0.4% 1.6% 3.3% 6.3%
Comp Store Sales -5.9 -14.4 -26.9 -24.9 -15.9 -7.0 -18.7 4.0 5.0 -2.0 0.0 1.8 4.0

COGS $1,143.3 $1,049.8 $211.2 $220.2 $185.6 $204.3 $821.3 $195.9 $221.3 $180.2 $200.5 $798.0 $821.7

Gross Profit $564.8 $445.4 $95.0 $84.4 $123.3 $111.6 $414.3 $126.3 $104.6 $127.3 $120.3 $478.6 $535.4
% of Sales 33.1% 29.8% 31.0% 27.7% 39.9% 35.3% 33.5% 39.2% 32.1% 41.4% 37.5% 37.5% 39.5%
YoY Change (bps) -102 -328 -949 -182 835 2,074 374 817 439 148 217 396 196

SG&A $523.3 $523.1 $110.8 $94.9 $99.2 $98.3 $403.2 $106.3 $95.8 $97.8 $97.4 $397.3 $393.5
% of Sales 30.6% 35.0% 36.2% 31.1% 32.1% 31.1% 32.6% 33.0% 29.4% 31.8% 30.4% 31.1% 29.0%
YoY Change (bps) -9 435 480 -46 -352 -1179 -236 -320 -174 -32 -76 -151 -213

Operating Income $41.5 ($77.8) ($15.8) ($10.5) $24.1 $13.3 $11.1 $20.0 $8.8 $29.5 $22.9 $81.2 $141.8
% of Sales 2.4% -5.2% -5.2% -3.4% 7.8% 4.2% 0.9% 6.2% 2.7% 9.6% 7.2% 6.4% 10.5%
YoY Change (bps) -93 -763 -1429 -137 1187 3254 610 1136 614 180 293 546 409

Interest Income ($34.1) ($20.3) ($7.2) ($7.2) ($7.2) ($6.5) ($28.1) ($8.0) ($4.0) ($4.0) ($4.0) ($20.0) ($20.0)

Pretax Income $7.4 ($98.0) ($23.0) ($17.7) $16.9 $6.8 ($17.0) $12.0 $4.8 $25.5 $18.9 $61.2 $121.8

Income Taxes $2.8 $25.8 ($10.6) ($0.1) ($0.3) ($0.5) ($11.4) $0.4 $0.7 $0.6 $7.0 $8.8 $24.4
Tax Rate 37.3% -26.4% 46.0% 0.4% -1.7% -6.7% 67.0% 3.5% 15.0% 2.5% 37.0% 14.3% 20.0%

Net Income $4.6 ($123.9) ($12.4) ($17.6) $17.2 $7.2 ($5.6) $11.6 $4.1 $24.9 $11.9 $52.5 $97.5

Avg Shares Outstanding 53.0 53.4 53.6 53.8 55.1 54.5 54.3 57.0 72.1 72.1 72.1 68.3 72.1

EPS $0.09 ($2.32) ($0.23) ($0.33) $0.31 $0.13 ($0.11) $0.20 $0.06 $0.35 $0.17 $0.77 $1.35
YoY Change -85.2% -2745.9% -151.4% 106.0% -251.1% -105.5% -95.1% -187.7% -117.3% 10.7% 24.7% -774.0% 76.0%

Ending Stores 596 587 586 588 589 580 580 578 577 576 576 576 596
YoY Change 2.1% -1.5% -1.5% -0.7% -0.8% -1.2% -1.2% -1.4% -1.9% -2.2% -0.7% -0.7% 3.5%

Ending Square Footage 4.21 4.21 4.20 4.21 4.22 4.10 4.10 4.09 4.08 4.07 4.07 4.04 4.18
YoY Change 2.5% -0.2% -0.3% -0.3% -1.3% -2.6% -2.6% -2.8% -3.1% -3.4% -0.7% -1.4% 3.5%

Source: Company Reports and Barclays Capital estimates

Analyst Certification:
I, Jeff Black, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the
subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly
related to the specific recommendations or views expressed in this research report.

Other Team Members:

Pollack, Shoshana (BCI, New York) 1.212.526.6180 shoshana.pollack@barcap.com

Company Description:
Talbots is a leading national specialty retailer and cataloger of women's classic apparel, shoes and accessories. The Company currently
operates 580 stores in the U.S. & Canada.

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On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investment
management businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.

Important Disclosures:
Talbots, Inc., (The) (TLB) US$ 16.45 (10-May-2010) 1-Overweight / 2-Neutral
Rating and Price Target Chart:
TALBOTS INC.
As of 25-Jul-2008
Currency = USD
38.00
36.00
34.00
32.00
30.00
28.00
26.00
24.00
22.00
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
7-05 10-05 1-06 4-06 7-06 10-06 1-07 4-07 7-07 10-07 1-08 4-08 7-08
Closing Price Price Target
Recommendation Change Drop Coverage
Source: FactSet
Currency=US$
Date Closing Price Rating Price Target
12-Jul-04 32.76 0.00
FOR EXPLANATIONS OF RATINGS REFER TO THE STOCK RATING KEYS LOCATED ON THE PAGE FOLLOWING THE LAST PRICE CHART.
Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Talbots, Inc., (The) in the past 12
months.
Barclays Bank PLC and/or an affiliate beneficially owns 1% or more of any class of common equity securities of Talbots, Inc., (The).
Barclays Bank PLC and/or an affiliate trades regularly in the shares of Talbots, Inc., (The).
Talbots, Inc., (The) is or during the past 12 months has been an investment banking client of Barclays Bank PLC and/or an affiliate.
Valuation Methodology: Our $23 price target is based on a 13x multiple and our 2012 estimate of $1.75.
Risks Which May Impede the Achievement of the Price Target: We believe the long-term risks are (1) the challenges associated with
managing complex operations, (2) the proficiency with which the company adapts its store formats to the various economic and cultural
environments, (3) the fashion risk associated with being a highly seasonal, highly cyclical, and fashion oriented business, (4) the challenges
associated with lowering inventory levels, and (5) the ability to improve the operations. Our earnings forecast and investment thesis are
subject to such factors as cost of goods, consumer spending and debt levels, interest rate fluctuations, store expansion plans, legal
proceedings, and variability in comparable store sales.

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 Equity Research
Important Disclosures Continued:
The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total
revenues, a portion of which is generated by investment banking activities.

Company Name Ticker Price Price Date Stock / Sector Rating

Talbots, Inc., (The) TLB US$ 16.45 10-May-2010 1-Overweight / 2-Neutral

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Abercrombie & Fitch Co. (ANF) Aeropostale Inc. (ARO)

American Eagle Outfitters (AEO) AnnTaylor Stores Corp. (ANN)
Chico's FAS, Inc. (CHS) Coldwater Creek Inc. (CWTR)
DSW Inc. (DSW) Gap Inc. (GPS)
Guess Inc. (GES) J. Crew Group, Inc. (JCG)
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 Equity Research
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