e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 29, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-12552

THE TALBOTS, INC.

(Exact name of registrant as specified in its charter)


Delaware		41-1111318

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

One Talbots Drive, Hingham, Massachusetts 02043

(Address of principal executive offices)

Registrant’s telephone number, including area code 781-749-7600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). þ Yes o No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding as of December 6, 2005

Common Stock, $0.01 par value		53,237,888

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

THE TALBOTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 29, 2005 AND OCTOBER 30, 2004

Amounts in thousands except per share data


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29,		October 30,		October 29,		October 30,
	2005		2004		2005		2004
			(as restated,				(as restated,
			see Note 3)				see Note 3)

Net Sales	$	426,330	$	413,384	$	1,322,438	$	1,227,118

Costs and Expenses
Cost of sales, buying and occupancy		264,459		259,806		827,298		765,266
Selling, general and administrative		128,963		116,695		375,462		345,131


Operating Income		32,908		36,883		119,678		116,721

Interest
Interest expense		1,207		728		3,170		1,705
Interest income		266		116		891		402


Interest Expense — net		941		612		2,279		1,303


Income Before Taxes		31,967		36,271		117,399		115,418

Income Taxes		11,988		9,100		44,025		35,432


Net Income	$	19,979	$	27,171	$	73,374	$	79,986


Net Income Per Share
Basic	$	0.38	$	0.50	$	1.38	$	1.44


Assuming Dilution	$	0.37	$	0.49	$	1.35	$	1.41


Weighted Average Number of Shares of Common Stock Outstanding
Basic		52,722		54,376		53,026		55,444


Diluted		53,936		55,364		54,270		56,780


Cash dividends declared per share	$	0.12	$	0.11	$	0.35	$	0.32

See notes to condensed consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

OCTOBER 29, 2005, JANUARY 29, 2005, AND OCTOBER 30, 2004

Dollar amounts in thousands except share data


	October 29,			January 29,			October 30,
	2005			2005			2004
							(as restated,
							see Note 3)
ASSETS
Current Assets:
Cash and cash equivalents	$	11,363		$	31,811		$	7,065
Customer accounts receivable — net		214,125			199,256			207,250
Merchandise inventories		266,023			238,544			263,351
Deferred catalog costs		7,002			5,118			6,661
Due from affiliates		8,513			9,073			9,589
Deferred income taxes		12,686			14,006			15,698
Prepaid and other current assets		35,052			29,589			50,895

Total current assets		554,764			527,397			560,509
Property and equipment — net		391,848			405,114			403,949
Deferred income taxes		387			—			—
Goodwill — net		35,513			35,513			35,513
Trademarks — net		75,884			75,884			75,884
Other assets		19,782			18,222			15,324

Total Assets	$	1,078,178		$	1,062,130		$	1,091,179


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable to banks	$	—		$	—		$	35,000
Accounts payable		50,600			65,070			61,774
Accrued income taxes		31,616			27,196			35,876
Accrued liabilities		116,130			110,372			108,695

Total current liabilities		198,346			202,638			241,345
Long-term debt		100,000			100,000			100,000
Deferred rent under lease commitments		112,656			109,946			110,059
Deferred income taxes		—			5,670			7,649
Other liabilities		58,776			55,288			46,752
Commitments
Stockholders’ Equity:
Common stock, $0.01 par value; 200,000,000 shares authorized; 77,739,460 shares, 76,940,134 shares and 76,934,499 shares issued, respectively, and 53,240,588 shares, 54,123,667 shares and 54,121,032 shares outstanding, respectively		777			769			769
Additional paid-in capital		452,956			432,912			432,796
Retained earnings		770,009			715,580			706,155
Accumulated other comprehensive loss		(17,509	)		(17,142	)		(9,271	)
Deferred compensation		(15,565	)		(11,821	)		(13,453	)
Treasury stock, at cost; 24,498,872 shares, 22,816,467 shares and 22,813,467 shares, respectively		(582,268	)		(531,710	)		(531,622	)

Total stockholders’ equity		608,400			588,588			585,374

Total Liabilities and Stockholders’ Equity	$	1,078,178		$	1,062,130		$	1,091,179

See notes to condensed consolidated financial statements.

THE TALBOTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 29, 2005 AND OCTOBER 30, 2004

Dollar amounts in thousands


	Thirty-Nine Weeks Ended
	October 29,			October 30,
	2005			2004
				(as restated,
				see Note 3)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	73,374		$	79,986
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		67,992			62,152
Deferred rent		2,574			7,180
Amortization of restricted stock awards and other stock transactions		6,331			3,324
Loss on disposal of property and equipment		584			1,275
Tax benefit from options exercised		3,253			2,459
Deferred income taxes		(4,757	)		2,622
Changes in other assets		(1,559	)		(1,900	)
Change in other liabilities		3,488			5,065
Changes in current assets and liabilities:
Customer accounts receivable		(14,799	)		(24,487	)
Merchandise inventories		(27,082	)		(91,018	)
Deferred catalog costs		(1,884	)		(2,212	)
Due from affiliates		560			457
Prepaid and other current assets		(6,250	)		(19,539	)
Accounts payable		(14,491	)		11,690
Income taxes payable		4,466			20,848
Accrued liabilities		5,724			7,508

Net cash provided by operating activities		97,524			65,410


CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(55,088	)		(68,797	)

Net cash used in investing activities		(55,088	)		(68,797	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under notes payable to banks		—			35,000
Proceeds from options exercised		6,155			7,252
Cash dividends		(18,945	)		(17,905	)
Purchase of treasury stock		(49,993	)		(99,986	)

Net cash used in financing activities		(62,783	)		(75,639	)


EFFECT OF EXCHANGE RATE CHANGES ON CASH		(101	)		436

NET DECREASE IN CASH AND CASH EQUIVALENTS		(20,448	)		(78,590	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		31,811			85,655


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	11,363		$	7,065

See notes to condensed consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Dollar amounts in thousands except share and per share data

1. BASIS OF PRESENTATION

With respect to the unaudited condensed consolidated financial statements set forth herein, all adjustments, which consist only of normal recurring adjustments necessary to present a fair statement of the results for the interim periods, have been included. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the fiscal year ended January 29, 2005, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. All material intercompany accounts and transactions have been eliminated in consolidation.

2. FEDERAL AND STATE INCOME TAXES

The Company has provided for income taxes based on the estimated annual effective rate method. The effective tax rate during the thirteen and thirty-nine weeks ended October 30, 2004 was impacted by an income tax benefit of $4.5 million and $7.8 million, respectively, from favorable resolutions with the Joint Committee on Taxation of certain income tax issues relating to fiscal years 1993 through 1997. The Company received all refunds from the Internal Revenue Service relating to these matters in November 2004. Additionally, the fiscal 1998 through 2001 federal tax years have been closed without adjustment.

3. RESTATEMENT OF FINANCIAL STATEMENTS

As disclosed in Note 3 to the Company’s consolidated financial statements included in its 2004 Annual Report on Form 10-K, during the Company’s fiscal 2004 closing process, the Company determined that it would be required to restate its previously reported financial statements to correct the manner in which it accounted for leases, specifically the accounting for construction allowances, amortization periods related to leasehold improvements, and rent holidays.

Prior to January 29, 2005, the Company’s previously reported financial statements reflected the unamortized portion of construction allowances as a reduction of property and equipment. The Company restated its previously reported financial statements to reflect the unamortized portion of construction allowances as a deferred lease credit rather than as a reduction to the cost of leasehold improvements. Also, these construction allowances were being amortized over the asset life rather than the lease term. Accordingly, the Company corrected this error such that its amortization of construction allowances matches the lease term.

Additionally, the Company determined that it should: (i) conform the depreciable lives for leasehold improvements to the shorter of the economic life of the asset or the lease term used for calculating straight-line rent expense and (ii) include option periods in the depreciable lives assigned to leasehold improvements and in the calculation of straight-line rent expense in instances in which the exercise of the option period can be reasonably assured and failure to exercise such options would result in an economic penalty. The Company corrected this error, which results in an acceleration of depreciation for certain leasehold improvements and the recording of additional rent expense.

Finally, the Company corrected the way in which it accounts for rent holidays on its store leases. Rent expense was restated such that it is recognized on a straight-line basis over a term that includes the store build-out period, which for the Company typically ranges from 90 to 120 days prior to the store opening. Previously, the Company calculated its straight-line rent expense over a term commencing typically on the day on which the store opened for business.

Following is a summary of the effects of these accounting corrections on the Company’s condensed consolidated statements of earnings for the thirteen and thirty-nine weeks ended October 30, 2004, the condensed consolidated balance sheet as of October 30, 2004, and the condensed consolidated statement of cash flows for the thirty-nine weeks ended October 30, 2004:

Condensed Consolidated Statement of Earnings


	Previously
Thirteen Weeks Ended October 30, 2004	Reported (1)		Adjustments			Restated
Cost of sales, buying and occupancy	$	259,081	$	725		$	259,806
Operating income		37,608		(725	)		36,883
Income before taxes		36,996		(725	)		36,271
Income taxes		9,390		(290	)		9,100
Net income	$	27,606	$	(435	)	$	27,171
Net income per share
Basic	$	0.51	$	(0.01	)	$	0.50
Diluted	$	0.50	$	(0.01	)	$	0.49

Condensed Consolidated Statement of Earnings


	Previously
Thirty-Nine Weeks Ended October 30, 2004	Reported (1)		Adjustments			Restated
Cost of sales, buying and occupancy	$	764,638	$	628		$	765,266
Operating income		117,349		(628	)		116,721
Income before taxes		116,046		(628	)		115,418
Income taxes		35,683		(251	)		35,432
Net income	$	80,363	$	(377	)	$	79,986
Net income per share Basic	$	1.45	$	(0.01	)	$	1.44
Diluted	$	1.42	$	(0.01	)	$	1.41


(1)		Previously reported numbers reflect the impact of the reclassification discussed within this Note 3 under the caption “Reclassification of Customer Loyalty Program.”

Condensed Consolidated Balance Sheet


	Previously
As of October 30, 2004	Reported		Adjustments			Restated
Property and equipment, net	$	338,864	$	65,085		$	403,949
Total assets		1,026,094		65,085			1,091,179
Deferred rent under lease commitments		25,652		84,407			110,059
Deferred income taxes		15,380		(7,731	)		7,649
Retained earnings		717,746		(11,591	)		706,155
Total stockholders’ equity		596,965		(11,591	)		585,374
Total liabilities and stockholders’ equity	$	1,026,094	$	65,085		$	1,091,179

Condensed Consolidated Statement of Cash Flows


	Previously
Thirty-Nine Weeks Ended October 30, 2004	Reported			Adjustments			Restated
Depreciation and amortization	$	53,564		$	8,588		$	62,152
Deferred rent		1,722			5,458			7,180
Deferred income taxes		2,873			(251	)		2,622
Net cash provided by operating activities		51,992			13,418			65,410
Additions to property and equipment		(55,379	)		(13,418	)		(68,797	)
Net cash used in investing activities	$	(55,379	)	$	(13,418	)	$	(68,797	)

Reclassification of Customer Loyalty Program - During the fourth quarter of 2004, the Company reclassified certain prior year amounts for redemptions under the Company’s customer loyalty program. The impact on the thirteen weeks ended October 30, 2004 was a reduction to revenues of $7.8 million, a reduction to cost of sales, buying and occupancy of $2.4 million and a reduction to selling, general and administrative expenses of $5.4 million. The impact on the thirty-nine weeks ended October 30, 2004 was a reduction to revenues of $22.4 million, a

reduction to cost of sales, buying and occupancy of $6.7 million, and a reduction to selling, general and administrative expenses of $15.7 million. The reclassification did not have any impact on operating income, net income, or net income per share. The cost of the award issued under the customer loyalty program is recognized at the time of the initial customer purchase and is included in selling, general, and administrative expense.

4. COMPREHENSIVE INCOME

The following is the Company’s comprehensive income for the thirteen weeks and thirty-nine weeks ended October 29, 2005 and October 30, 2004:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29,		October 30,		October 29,			October 30,
	2005		2004		2005			2004
Net income	$	19,979	$	27,171	$	73,374		$	79,986
Other comprehensive income:
Foreign currency translation adjustment		614		5,029		(367	)		5,330

Comprehensive income	$	20,593	$	32,200	$	73,007		$	85,316

5. STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Had the Company used the fair value method to value compensation, as set forth in Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company’s net income and net income per share would have been reported as follows:


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	October 29,			October 30,			October 29,			October 30,
	2005			2004			2005			2004
Net income, as reported	$	19,979		$	27,171		$	73,374		$	79,986
Add: stock-based compensation included in reported net income, net of related tax effects		1,360			773			3,943			2,078
Deduct: total stock-based compensation expense determined under fair value based method, net of related tax effects		(3,338	)		(3,217	)		(10,021	)		(9,315	)

Pro forma net income	$	18,001		$	24,727		$	67,296		$	72,749
Earnings per share:
Basic — as reported	$	0.38		$	0.50		$	1.38		$	1.44

Basic — pro forma	$	0.34		$	0.45		$	1.27		$	1.31

Diluted — as reported	$	0.37		$	0.49		$	1.35		$	1.41

Diluted — pro forma	$	0.33		$	0.45		$	1.24		$	1.28

During June of 2005 and June of 2004, the Company issued 28,000 and 32,000 restricted stock units (“RSUs”), respectively, with a total market value at date of grant of approximately $0.8 million and $1.1 million, respectively, to the non-management directors on the Company’s Board of Directors under the Company’s shareholder-approved Restated Directors Stock Plan. The fair value of the RSUs has been recorded as deferred compensation and is being amortized as compensation expense over the vesting period, which is one year. The RSUs may be mandatorily or electively deferred, in which case the RSUs will be issued as common stock to the holder upon retirement from the Board, but not prior to vesting. If the RSUs are not deferred, then the RSUs will be issued as common stock upon vesting. Holders of the RSUs are entitled to dividends equivalent to common stock dividends. Holders of RSUs do not have voting rights. For the thirteen weeks ended October 29, 2005 and October 30, 2004, the Company recorded $0.2 million and $0.3 million, respectively, of compensation expense related to these RSUs within its statement of earnings. For the thirty-nine weeks ended October 29, 2005 and October 30, 2004, the Company recorded $0.7 million and $0.5 million, respectively, of compensation expense related to these RSUs within its statement of earnings.

During March of 2005 and March of 2004, the Company issued 311,425 shares and 298,075 shares, respectively, of performance accelerated restricted stock, with a total market value at grant date of approximately

$9.8 million and $10.1 million, respectively, to key employees of the Company under the Company’s shareholder approved 2003 Executive Stock Based Incentive Plan. The fair values of these shares have been recorded as deferred compensation and are being amortized as compensation expense over the expected vesting period. The shares vest at the end of a five-year service period; however, all or a portion of the vesting may be accelerated to three years after the grant date depending on the achievement of certain corporate performance goals. For the thirteen weeks ended October 29, 2005 and October 30, 2004, the Company recorded $2.0 million and $1.0 million, respectively, of compensation expense related to these shares of performance accelerated restricted stock within its statement of earnings. For the thirty-nine weeks ended October 29, 2005 and October 30, 2004, the Company recorded $5.6 million and $2.9 million, respectively, of compensation expense related to these shares of performance accelerated restricted stock within its statement of earnings.

6. NET INCOME PER SHARE

The weighted average shares used in computing basic and diluted net income per share are presented below. Options to purchase 4,143,564 and 3,314,498 shares of common stock were outstanding during the thirteen weeks ended October 29, 2005 and October 30, 2004, respectively, and were not included in the computation of diluted net income per share. Options to purchase 4,141,564 and 3,213,898 shares of common stock were outstanding during the thirty-nine weeks ended October 29, 2005 and October 30, 2004, respectively, and were not included in the computation of diluted net income per share. Such options have been excluded because the options’ exercise prices were greater than the average market price of the common shares, and the effect of including these securities would have been antidilutive.


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29,		October 30,		October 29,		October 30,
	2005		2004		2005		2004
Shares for computation of basic net income per share		52,722		54,376		53,026		55,444
Effect of stock compensation plans		1,214		988		1,244		1,336

Shares for computation of diluted net income per share		53,936		55,364		54,270		56,780

7. SEGMENT INFORMATION

The Company has segmented its operations in a manner that reflects how its chief operating decision-maker reviews the results of the operating segments that make up the consolidated entity.

The Company has two reportable segments, its retail stores (the “Stores Segment”), which include the Company’s United States, Canada and United Kingdom retail store operations, and its catalog and Internet operations (the “Direct Marketing Segment”).

The Company’s reportable segments offer similar products; however, each segment requires different marketing and management strategies. The Stores Segment derives its revenues from the sale of women’s, children’s and men’s classic apparel, accessories & shoes through its retail stores, while the Direct Marketing Segment derives its revenues through its approximately 25 distinct catalog mailings per year and online at www.talbots.com.

The Company evaluates the operating performance of its identified segments based on a direct profit measure. The accounting policies of the segments are generally the same as those described in the summary of significant accounting policies in the Company’s 2004 Annual Report on Form 10-K, except as follows: direct profit is calculated as net sales less cost of goods sold and direct expenses, such as payroll, occupancy and other direct costs. Indirect expenses are not allocated on a segment basis; therefore, no measure of segment net income or loss is available. Indirect expenses consist of general and administrative expenses such as corporate costs and management information systems and support, finance charge income, merchandising costs, costs of oversight of the Company’s Talbots credit card operations, and certain general warehousing costs. Assets are not allocated between segments; therefore, no measure of segment assets is available.

The following is the Stores Segment and Direct Marketing Segment information for the thirteen and thirty-nine weeks ended October 29, 2005 and October 30, 2004:


	Thirteen Weeks Ended
	October 29, 2005						October 30, 2004
			Direct						Direct
	Stores		Marketing		Total		Stores		Marketing		Total
Net sales	$	362,602	$	63,728	$	426,330	$	355,990	$	57,394	$	413,384
Direct profit		51,910		15,608		67,518		56,662		12,379		69,041


	Thirty-Nine Weeks Ended
	October 29, 2005						October 30, 2004
			Direct						Direct
	Stores		Marketing		Total		Stores		Marketing		Total
Net sales	$	1,129,511	$	192,927	$	1,322,438	$	1,053,656	$	173,462	$	1,227,118
Direct profit		181,152		43,668		224,820		177,448		36,002		213,450

The following reconciles direct profit to consolidated net income for the thirteen and thirty-nine weeks ended October 29, 2005 and October 30, 2004:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29,		October 30,		October 29,		October 30,
	2005		2004		2005		2004
Total direct profit for reportable segments	$	67,518	$	69,041	$	224,820	$	213,450
Less: indirect expenses		34,610		32,158		105,142		96,729

Operating income		32,908		36,883		119,678		116,721
Interest expense, net		941		612		2,279		1,303

Income before taxes		31,967		36,271		117,399		115,418
Income taxes		11,988		9,100		44,025		35,432

Net income	$	19,979	$	27,171	$	73,374	$	79,986

8. EMPLOYEE BENEFIT PLANS

Net periodic benefit cost is comprised of the following components for the thirteen and thirty-nine weeks ended October 29, 2005 and October 30, 2004:

The components of the Company’s Pension Plan expense are as follows:


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	October 29,			October 30,			October 29,			October 30,
	2005			2004			2005			2004
Service cost	$	2,443		$	2,010		$	7,480		$	6,030
Interest cost		1,764			1,495			5,292			4,405
Expected return on plan assets		(1,805	)		(1,490	)		(5,300	)		(4,469	)
Net amortization and deferral		1,191			812			3,550			2,356

Net periodic benefit cost	$	3,593		$	2,827		$	11,022		$	8,322

The components of the Company’s SERP expense are as follows:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29,		October 30,		October 29,		October 30,
	2005		2004		2005		2004
Service cost	$	187	$	170	$	592	$	550
Interest cost		256		175		715		557
Net amortization and deferral		526		76		1,141		246

Net periodic benefit cost	$	969	$	421	$	2,448	$	1,353

The components of the Company’s Postretirement Medical Plan expense are as follows:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29,		October 30,		October 29,		October 30,
	2005		2004		2005		2004
Service cost	$	194	$	175	$	573	$	477
Interest cost		98		96		291		246
Net amortization and deferral		19		27		78		37

Net periodic benefit cost	$	311	$	298	$	942	$	760

When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes. During the thirteen and thirty-nine weeks ended October 29, 2005 and October 30, 2004, the Company was not required to make any contributions to the pension plan. The Company made voluntary contributions to the pension plan during the thirteen and thirty-nine weeks ended October 29, 2005 in the amounts of $13.0 million and $14.0 million, respectively. The Company does not currently anticipate making any other contributions during the remainder of 2005. The Company made a voluntary contribution to the pension plan during the thirteen and thirty-nine weeks ended October 30, 2004 in the amount of $8.0 million.

9. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2005, the Emerging Issues Task Force of the Financial Accounting Standards Board (“FASB”) reached a consensus on Issue No. 05-6 (“EITF 05-6”), Determining the Amortization Period for Leasehold Improvements Purchased After Lease Inception or Acquired in a Business Combination. The guidance requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. The guidance is effective for periods beginning after June 29, 2005. The adoption of EITF 05-6 did not have a material effect on the Company’s consolidated financial position or results of operations.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, Share-Based Payment. This standard is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS No. 123R will be effective for the Company commencing on January 29, 2006. The Company is currently evaluating the impact of the adoption of SFAS 123R on the consolidated financial position and results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements of the Company and the notes thereto appearing elsewhere in this document, as well as the Company’s 2004 Annual Report on Form 10-K.

The Company conforms to the National Retail Federation’s fiscal calendar. The thirteen weeks ended October 29, 2005 and October 30, 2004 are referred to herein as the third quarter of 2005 and 2004, and the thirty-nine weeks ended October 29, 2005 and October 30, 2004 are referred to herein as year-to-date 2005 and 2004.

Comparable stores are those that were open for at least one full fiscal year. When a new Talbots Petites store, Talbots Woman store or Talbots Accessories & Shoes store is opened adjacent to or in close proximity to an existing comparable Misses store, such Misses store is excluded from the computation of comparable store sales for a period of 13 months so that the performance of the full Misses assortment may be properly compared.

Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement and reclassification of the condensed consolidated financial statements discussed in Note 3 to the condensed consolidated financial statements.

Results of Operations

The following table sets forth the percentage relationship to net sales of certain items in the Company’s condensed consolidated statements of earnings for the fiscal periods shown below:


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	October 29,			October 30,			October 29,			October 30,
	2005			2004			2005			2004
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales, buying and occupancy expenses		62.0	%		62.8	%		62.6	%		62.4	%
Selling, general and administrative expenses		30.3	%		28.2	%		28.4	%		28.1	%
Operating income		7.7	%		9.0	%		9.0	%		9.5	%
Interest expense, net		0.2	%		0.2	%		0.2	%		0.1	%
Income before taxes		7.5	%		8.8	%		8.8	%		9.4	%
Income taxes		2.8	%		2.2	%		3.3	%		2.9	%
Net income		4.7	%		6.6	%		5.5	%		6.5	%

The Thirteen Weeks Ended October 29, 2005 Compared to the Thirteen Weeks Ended October 30, 2004 (Third Quarter)

Net sales in the third quarter of 2005 were $426.3 million compared to $413.4 million in the third quarter of 2004, an increase of $12.9 million or 3.1%. Operating income was $32.9 million in the third quarter of 2005 compared to $36.9 million in the third quarter of 2004, a decrease of $4.0 million or 10.8%.

Retail store sales in the third quarter of 2005 were $362.6 million compared to $356.0 million in the third quarter of 2004, an increase of $6.6 million or 1.9%. The increase in retail store sales was due to an increase in the number of stores, and partially offset by a 2.0% decline in comparable store sales. As of October 29, 2005, the Company operated a total of 1,081 stores with gross and selling square footage of approximately 4.3 million and 3.3 million square feet, respectively. This represents an increase of approximately 3% in gross and selling square footage from October 30, 2004, when the Company operated 1,034 stores with gross and selling square footage of approximately 4.2 million and 3.2 million square feet, respectively.

Reflected in retail stores sales was a decrease of $6.2 million or 2.0% in comparable store sales. The decrease in comparable store sales was primarily attributable to September’s sales results. The Company believes that September comparable store sales were significantly impacted by macro-environmental factors, including the broad impact from hurricanes Katrina and Rita. Sales trends significantly improved in the latter part of October which helped to offset the 5.1% decline in September’s comparable sales.

Direct marketing sales, which include the Company’s catalog and Internet channels, were $63.7 million in the third quarter of 2005 compared to $57.4 million in the third quarter of 2004, an increase of $6.3 million or 11.0%. Internet sales during the third quarter of 2005 represented 39% of the total direct marketing sales, compared to 32% during the third quarter of 2004. Growth in direct marketing sales during the third quarter of 2005 was driven by the continuing strength of the Company’s Internet business, especially within the Company’s Woman and Woman Petites concepts. The percentage of the Company’s net sales derived from direct marketing increased from 13.9% during the third quarter of 2004 to 14.9% during the third quarter of 2005.

Cost of sales, buying and occupancy expenses decreased slightly as a percentage of net sales to 62.0% in the third quarter of 2005 from 62.8% in the third quarter of 2004. This represents an 80 basis point improvement over the prior year and primarily reflects improved merchandise margins resulting from increased initial markups during the third quarter of 2005.

Selling, general and administrative expenses as a percentage of net sales increased to 30.3% in the third quarter of 2005, compared to 28.2% in the third quarter of 2004. This represents a 210 basis point increase over the prior year. The majority of the increase relates to expenditures for store support, including payroll, supplies and store maintenance, and funding for marketing initiatives and certain compensatory programs. Also during the third quarter of 2005, the Company recorded income of $1.1 million related to the Company’s portion of the recent Visa/MasterCard antitrust litigation settlement. Largely offsetting this income in the quarter was the Company’s $1.0 million contribution to The Talbots Charitable Foundation, Inc.

Net interest expense increased to $0.9 million in the third quarter of 2005 compared to $0.6 million in the third quarter of 2004. This increase was due to higher borrowing rates during the third quarter of 2005 compared to the third quarter of 2004. The average interest rate on short-term and long-term borrowings was 4.5% in third quarter of 2005 compared to 2.4% in the third quarter of 2004. The average level of outstanding debt, including short-term and long-term borrowings, was $107.9 million in the third quarter of 2005 compared to $121.0 million in the third quarter of 2004.

Income tax expense for the third quarter of 2005 was $12.0 million, compared to $9.1 million for the third quarter of 2004. The effective tax rate was 37.5% for the third quarter of 2005 and 25.1% for the third quarter of 2004. An income tax benefit of $4.5 million from a positive resolution with the Joint Committee on Taxation relating to certain fiscal 1995 through 1997 income tax issues favorably impacted the effective tax rate during the third quarter of 2004. Without the $4.5 million benefit, the effective tax rate for the third quarter of 2004 would have been 37.5%.

The Thirty-Nine Weeks Ended October 29, 2005 Compared to the Thirty-Nine Weeks Ended October 30, 2004 (Year-to-date)

Year-to-date 2005 net sales were $1,322.4 million compared to year-to-date 2004 net sales of $1,227.1 million, an increase of $95.3 million or 7.8%. Year-to-date 2005 operating income was $119.7 million compared to year-to-date 2004 operating income of $116.7 million, an increase of $3.0 million or 2.6%.

Year-to-date 2005 retail store sales were $1,129.5 million compared to year-to-date 2004 retail store sales of $1,053.7, an increase of $75.8 million or 7.2%. The increase in retail store sales was driven by two factors. First, the number of stores has increased from the prior year. Second, reflected in retail stores sales was a $28.6 million, or 3.0%, increase in comparable stores sales. Comparable store sales gains were positive in each of the first seven months of 2005, driven by a healthy sales performance particularly in the Company’s Misses, Petites and Woman concepts, and across all U.S. regions. The third quarter of 2005 yielded decreased comparable store sales primarily due to September’s sales results.

Year-to-date 2005 direct marketing sales, which include the Company’s catalog and Internet channels, were $192.9 million compared to year-to-date 2004 direct marketing sales of $173.5 million, an increase of $19.4 million or 11.2%. Internet sales for year-to-date 2005 represented 40% of the total direct marketing sales, compared to 34% for the same period of 2004. Direct marketing sales for year-to-date 2005 were driven by the continuing growth of the Company’s Internet business, especially within the Company’s Woman and Woman Petites concepts. The

percentage of the Company’s net sales derived from direct marketing increased from 14.1% for year-to-date 2004 to 14.6% for year-to-date 2005.

Cost of sales, buying and occupancy expenses increased as a percentage of net sales to 62.6% for year-to-date 2005 from 62.4% for year-to-date 2004. This represents a 20 basis point deterioration in the gross margin rate, with the pure product gross margin rate decreasing by approximately 60 basis points. The decline was due to heavier merchandise markdowns year-to-date 2005 offset by lower buying costs as a percentage of net sales throughout year-to-date 2005.

Selling, general and administrative expenses as a percentage of net sales increased to 28.4% for year-to-date 2005, compared to 28.1% for year-to-date 2004. This represents a 30 basis point deterioration and was primarily due to increased expenditures relating to store support, including payroll, supplies and store maintenance, and funding for other compensatory programs, offset by lower marketing spending year-to-date 2005 compared to the same period in 2004.

Year-to-date 2005 net interest expense increased to $2.3 million compared to year-to-date 2004 net interest expense of $1.3 million. This increase was due primarily to higher borrowing rates and slightly higher average borrowings. The average rate on short-term and long-term borrowings was 3.9% for year-to-date 2005 compared to 2.1% for year-to-date 2004. The average level of outstanding debt, including short-term and long-term borrowings, was $107.8 million year-to-date 2005 compared to $107.0 million year-to-date 2004.

Year-to-date 2005 income tax expense was $44.0 million, compared to year-to-date 2004 income tax expense of $35.4 million. The effective tax rate was 37.5% for year-to-date 2005 and 30.7% for year-to-date 2004. An income tax benefit of $7.8 million from a positive resolution with the Joint Committee on Taxation relating to certain fiscal 1993 through 1997 income tax issues favorably impacted the effective tax rate during year-to-date 2004. Without the $7.8 million benefit, the effective tax rate for year-to-date 2004 would have been 37.5%.

Liquidity and Capital Resources

The Company’s primary sources of capital are cash flows from operating activities and line-of-credit facilities from five banks, with maximum available short-term borrowings of $125.0 million. As of October 29, 2005 and October 30, 2004, the Company had $0 and $35.0 million outstanding under these facilities, respectively. The Company also has long-term revolving credit facilities with four banks totaling $100.0 million. At October 29, 2005 and October 30, 2004, the Company had $100.0 million outstanding under these facilities. Additionally, the Company has two letter-of-credit agreements totaling $200.0 million, which it uses primarily for the purchase of merchandise inventories. As of October 29, 2005 and October 30, 2004, the Company held $102.5 million and $114.4 million, respectively, in outstanding letters of credit for purchase commitments. The Company’s working capital needs are typically at their lowest in the spring and at their peak during the fall selling season.

Year-to-date 2005 cash and cash equivalents decreased $20.4 million compared to a decrease of $78.6 million for the same period in 2004.

Cash provided by operating activities was $97.5 million for year-to-date 2005 compared to $65.4 million for year-to-date 2004, an increase of $32.1 million. This increase was primarily due to changes in inventory levels year to year. Inventories as of October 29, 2005 were $266.0 million, an increase of $27.5 million from January 29, 2005 inventories of $238.5 million. Inventories as of October 30, 2004 were $263.4 million, an increase of $93.0 million from January 31, 2004 inventories of $170.4 million. The increased inventory purchases during fiscal 2004 were part of the Company’s plan to increase its overall inventory levels, which reflected the Company’s targeted outlook for improved customer demand. Inventory levels at January 29, 2005 were also elevated due to timing of receipts due to early shipments from vendors. For the remainder of fiscal 2005, the Company expects average inventory levels per square foot in the U.S. women’s apparel stores to be consistent with the same period in the prior year. The Company anticipates that inventories per square foot at the end of fiscal 2005 will be below the prior year in the low single digit percentage range. Also contributing to the change in cash provided by operating activities was the change in levels of accounts payable. Accounts payable as of October 29, 2005 was $50.6 million, a decrease of $14.5 million from the balance at January 29, 2005 of $65.1 million. The decrease in accounts payable was primarily due to the Company’s plan to reduce inventory levels. Accounts payable as of October 30, 2004 was

$61.8 million, an increase of $11.7 million from the balance at January 31, 2004 of $50.1 million. The higher accounts payable balance as of October 30, 2004 was primarily due to the funding of inventory purchases during 2004.

Cash used in investing activities was $55.1 million year-to-date 2005 compared to $68.8 million year-to-date 2004, consisting primarily of expenditures related to the opening of new stores and expanding and renovating existing stores. Year-to-date 2005, the Company opened 40 new stores, closed eight stores and spent approximately $48.9 million on new store openings and expansions and renovations of existing stores. Year-to-date 2004, the Company opened 59 new stores, closed two stores and spent approximately $60.8 million on new store openings and expansions and renovations of existing stores. The Company currently expects to open an additional 10 stores during the remainder of 2005, plans to close eight stores, and expects to spend approximately $30.0 million in capital expenditures during the remainder of 2005, the majority of which will relate to new store openings and expansions and renovations of existing stores. The remaining amount will be used for other capital needs in the normal course of business. The actual amount of such capital expenditures will depend on a number of factors, including the schedule of such activity during the remainder of 2005 and the number, type, and timing of stores being opened, expanded, renovated and relocated.

Cash used in financing activities year-to-date 2005 was $62.8 million compared to $75.6 million year-to-date 2004. The primary use of funds during 2005 was the Company’s repurchase of 1,682,405 shares of common stock at a cost of approximately $50.0 million in the aggregate. The majority of these repurchases were made under a stock repurchase program approved by the Company’s Board of Directors in April 2005 authorizing the Company to purchase $50.0 million in stock from public shareholders and proportionately from Talbots majority shareholder from time to time over a two-year period. As of October 30, 2005, the Company had completed its repurchases under this program. Also year-to-date 2005, the Company paid $18.9 million in dividends. The dividends were paid at a rate of $0.11 during the first quarter of 2005 and at a rate of $0.12 during the second and third quarters of 2005. On November 4, 2005, the Company announced that its Board of Directors had approved the payment of a quarterly dividend of $0.12 per share payable on or before December 19, 2005 to shareholders of record as of December 5, 2005. The payment and amount of future dividends, if any, will be determined by the Board of Directors and will depend on many factors, including earnings, operations, financial condition, capital requirements and the general business outlook.

The primary use of cash in financing activities year-to-date 2004 was the Company’s repurchase of 3,222,423 shares of common stock at a cost of approximately $100.0 million in the aggregate. Also during the period, the Company paid $17.9 million in dividends. Dividends were paid at a rate of $0.10 during the first quarter of 2004 and paid at a rate of $0.11 during the second and third quarters of 2004.

As of October 29, 2005 and October 30, 2004, the Company had $0 and $35.0 million in short-term borrowings outstanding, respectively. The Company from time to time borrows under its line of credit facility for working capital and similar general corporate needs and expects that borrowings will occur during the balance of 2005 from time to time. The Company expects that borrowings during the remainder of 2005 will be fairly consistent with the same period in 2004.

The Company’s primary ongoing cash requirements are currently expected to be for the financing of working capital buildups during peak selling seasons, capital expenditures for new stores and the expansion and renovation of existing stores and facilities, the purchase of treasury shares and the payment of any dividends that may be declared from time to time. For the next twelve to eighteen months, the Company believes its cash flows from operating activities and funds available under its credit facilities will be sufficient to meet its expected capital expenditures and working capital requirements, including debt service payments.

Recent Accounting Pronouncements

at the date of the business combination or purchase. The guidance is effective for periods beginning after June 29, 2005. The adoption of EITF 05-6 did not have a material effect on the Company’s consolidated financial position or results of operations.

Critical Accounting Policies

In the Company’s 2004 Annual Report on Form 10-K, the Company identified the critical accounting policies upon which the consolidated financial statements were prepared as those relating to the inventory markdown reserve, sales return reserve, customer loyalty program, retirement plans, allowance for doubtful accounts, and income taxes. The Company has reviewed its policies and determined that these remain the critical accounting policies for the quarter ended October 29, 2005. The Company did not make any significant changes to these policies during the quarter.

Forward-looking Information

This Report contains forward-looking information within the meaning of The Private Securities Litigation Reform Act of 1995. The statements may be identified by such forward-looking terminology as “expect,” “look,” “believe,” “anticipate,” “outlook,” “will,” “would,” or similar statements or variations of such terms. All information concerning future financial performance results or conditions constitutes forward-looking information. Our forward-looking statements are based on our current expectations, assumptions, estimates and projections about our Company. Our forward looking statements involve material known and unknown risks and uncertainties as to future events which may or may not occur, including store traffic, levels of store sales, effectiveness of the Company’s brand awareness and marketing programs, effectiveness and profitability of new concepts including the Mens concept, effectiveness of Internet sales, acceptance of Talbots fashions, the Company’s ability to anticipate and successfully respond to changing customer tastes and preferences and to produce the appropriate balance of merchandise offerings, the Company’s ability to sell its merchandise at regular prices as well as its ability to successfully execute its major sale events including the timing and levels of markdowns and appropriate balance of available markdown inventory, retail economic conditions including consumer spending, consumer confidence, impact on discretionary consumer spending of significantly higher gasoline and energy costs and a continued uncertain economy, the impact of a continued highly promotional retail environment, uncertainties associated with the expiration of trade quotas for member countries of the World Trade Organization, and the impact of stock option expensing which becomes effective during fiscal 2006. In each case, actual results may differ materially from such forward-looking information. Certain other factors that may cause actual results to differ from such forward-looking statements are included in periodic reports filed by the Company with the Securities and Exchange Commission and are available on the Talbots website under “Investor Relations”, and you are urged to carefully consider all such factors. In light of the substantial uncertainty inherent in such forward-looking statements, you should not consider their inclusion to be a guarantee or representation that such forward-looking matters will in fact be achieved. The Company does not undertake to update or revise any such forward-looking statements to reflect actual results, changes in assumptions, estimates or projections, or other circumstances affecting such forward-looking statements occurring after the date of this Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The market risk inherent in the Company’s financial instruments and in its financial position represents the potential loss arising from adverse changes in interest rates. The Company does not enter into financial instruments for trading purposes.

As of October 29, 2005, January 29, 2005 and October 30, 2004, the Company had $100.0 million, $100.0 million and $135.0 million, respectively, of variable rate borrowings outstanding under its revolving credit facilities, which approximate fair market value. The impact of a hypothetical 10% adverse change in interest rates for this variable rate debt would not materially affect the Company’s results of operations or cash flow.

The Company enters into certain purchase obligations outside the United States which are predominately settled in U.S. dollars and, therefore, the Company has only minimal exposure to foreign currency exchange risks. The Company does not hedge against foreign currency risks and believes that the foreign currency exchange risk is not material. In addition, the Company operated 27 stores in Canada and four stores in the United Kingdom as of October 29, 2005. The Company believes its foreign currency translation risk is minimal, as a hypothetical 10% strengthening or weakening of the U.S. dollar relative to the applicable foreign currency would not materially affect the Company’s results of operations or cash flow.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision, and with the participation of, the Company’s management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there have been no changes in the Company’s internal controls over financial reporting during the quarter ended October 29, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

A summary of the repurchase activity under current repurchase programs, as well as under certain other equity programs, for the thirteen weeks ended October 29, 2005 is below:


					Total Number		Approximate
					of Shares		Dollar Value of
					Purchased		Shares that
	Total				as Part of		May yet be
	Number				Publicly		Purchased
	of Shares		Average Price		Announced Plans		under the
Period	Purchased (1)		Paid per share		or Programs (1)		Programs (2)
July 31, 2005 through August 27, 2005		650	$	0.01		0	$	9,945,046
August 28, 2005 through October 1, 2005		0		0.00		0		9,945,046
October 2, 2005 through October 29, 2005		384,967		25.78		384,967		8,680

Total		385,617	$	25.78		384,967	$	8,680

1. On April 21, 2005, the Company announced that its Board of Directors had approved a stock repurchase program which authorized the Company to purchase $50.0 million of the Company’s common stock from public shareholders and proportionately from Talbots majority shareholder from time to time over a two-year period. During the third quarter of 2005, the Company repurchased 384,967 shares of common stock at a cost of approximately $9.9 million in the aggregate. The remaining 650 shares represent repurchases in connection with stock forfeited by employees prior to vesting under the Company’s equity compensation plans, at an acquisition price of $0.01 per share.

2. As of October 29, 2005, the Company had completed the repurchases under the $50.0 million approved stock repurchase program. Also, as of October 29, 2005, there were 868,000 shares of unvested restricted stock that were subject to buyback at $0.01 per share, or $8,680 in the aggregate, that the Company has the option to repurchase if the employee terminates prior to vesting.

Item 6. Exhibits.


10.1		The Talbots, Inc. Umbrella Supplemental Retirement Plan effective as of May 25, 2005 between the Talbots, Inc. and Arnold B. Zetcher.⁽¹⁾

10.2		Amendment No. 2, dated as of May 25, 2005, to the Employment Agreement dated October 22, 1993 and as amended May 11, 1994, by and between The Talbots, Inc. and Arnold B. Zetcher.⁽¹⁾

31.1		Certification of Arnold B. Zetcher, Chairman of the Board, President and Chief Executive Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).

31.2		Certification of Edward L. Larsen, Senior Vice President, Finance, Chief Financial Officer and Treasurer of the Company, pursuant to Securities Exchange Act Rule 13a- 14(a).

32.1		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, by Arnold B. Zetcher, Chairman of the Board, President and Chief Executive Officer of the Company and Edward L. Larsen, Senior Vice President, Finance, Chief Financial Officer and Treasurer of the Company.


(1)		Incorporated by reference to the Company’s Current Report on Form 8-K filed August 23, 2005.


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Condensed Consolidated Statements of Earnings (unaudited) for the Thirteen and Thirty-Nine Weeks Ended October 29, 2005 and October 30, 2004 (restated)			3

Condensed Consolidated Balance Sheets (unaudited) as of October 29, 2005, January 29, 2005 and October 30, 2004 (restated)			4

Condensed Consolidated Statements of Cash Flows (unaudited) for the Thirty-Nine Weeks Ended October 29, 2005 and October 30, 2004 (restated)			5

Notes to the Unaudited Condensed Consolidated Financial Statements			6-11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12-16

Item 3. Quantitative and Qualitative Disclosures About Market Risk			17

Item 4. Controls and Procedures			17

PART II — OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			18

Item 6. Exhibits			18

Signatures			19
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFO

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		THE TALBOTS, INC.

		By		/s/ Edward L. Larsen

				Edward L. Larsen
				Senior Vice President, Finance
				Chief Financial Officer and Treasurer
				(Principal Financial and Accounting Officer)