Friedman, Billings, Ramsey analyst Adrienne Tennant, recommended Talbots (TLB) today based on her assumption that business fundamentals are stabilizing and expectations of improvement going forward:

a. Talbots is a mall-based retailer and cataloger of women’s, children’s, and men’s classic apparel, accessories, and shoes. The company operated 867 locations in 47 states, the District of Columbia, Canada, and the U.K. Talbots was founded in 1947 and is headquartered in Hingham, Mass.

b. She thinks that “the likelihood of a liquidity crunch is not as probable as many short sellers of the stock might believe.” The company’s now $215 million short-term borrowing capacity and it has several sources of cash that could generate over $200 million of cash if needed.

c. The company is likely to generate a consistent free cash flow of over $100 million annually, sufficient to service its $80 million in annual term-debt principal payments.

d. Talbots has a very valuable asset that she believes investors may be overlooking: its charge card receivables portfolio. This asset could generate approximately 24 cents in fiscal 2008 EPS, nearly half of the company’s fiscal 2008 pro forma guidance of 47 cents to 52 cents.

e. She believes that Chief Executive Officer Trudy Sullivan and team are taking the right steps; merchandise is incrementally better and the combination of improved current merchandise and tight inventory control may be generating significant merchandise margin expansion.

f. At a recent conference, the company indicated that same-store sales comparisons were positive during the month of June.

g. Positive news will likely continue to cause a short squeeze.

CONCLUSION:

$16, 12-month price target

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