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Boston Capital

The Talbots roller coaster

By Steven Syre
Globe Columnist / October 13, 2009

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At this time a year ago, anyone who had the misfortune of owning stock in Talbots Inc. was about to watch that investment go into the kind of nose dive that usually ends with a fiery crash.

Shares of the Hingham-based retailer had already fallen from a peak above $15 to about $10 in less than a month. The plunge to come would drive Talbots stock to a low of $1.19 during Christmas shopping season in early December.

Of course, the entire stock market seemed to be in a free fall late last year. In the midst of the broad market plunge, shares of retailers that depend on a healthy economy were especially punished. Businesses that work in specialty retail niches were hit even harder. Companies that sell clothing to women were among the stock market’s least favored niche retailers, and absolutely no one loved Talbots shares, which traded near the bottom of a very deep barrel.

So what has happened since?

The retail industry, in general, has strung together 12 consecutive months of declining same-store sales. The economy shows statistical evidence of a recovery, but consumers don’t feel much better. Forecasts for better times are challenged by some economists and investors, who see a wobbly recovery and meager growth in 2010.

Here’s what has happened to Talbots stock: It has climbed nearly 900 percent off the dismal lows of last December and briefly touched a 52-week high of $11.77 yesterday before settling back to close at $11.58. Talbots shares are up 381 percent for the calendar year, roughly back to the same prices they commanded before last year’s steepest plunge.

The Talbots recovery is dramatic but not unique among the clobbered shares of retailers that sell women’s clothing. Chico’s FAS Inc. has bounced back from a low of $1.74, reached 11 months ago, to a close of $12.46 yesterday. Coldwater Creek has recovered from its low of $1.05 per share, climbing back to $8.24 yesterday.

“If you hung on over the past year, it’s been very difficult, but you’ve broken even,’’ says Shawn Kravetz, president of Esplanade Capital in Boston, which does not own shares of any of the women’s apparel retailers.

Those companies were among the worst performers in a plunging stock market - but some of the best climbers when the market bounced back this year. The worst-to-first recovery of individual stocks is a familiar story when markets fall and revive. But many specialty retailers seemed to be facing serious trouble when their shares hit bottom last year. It didn’t matter.

“The old [investment] playbook was simple,’’ Kravetz says. “You bought retailers into the teeth of the storm, and as business started to get better the stocks go crazy. All that happened times two, with unbelievable velocity. But this isn’t the typical recession.’’

He means this recession is more serious than most others, and the recovery is more uncertain. Kravetz and others wonder what will happen to retail stocks, particularly shares of specialty retailers, if the economy wheezes through the next year.

Women’s clothing retailers got clobbered last year because they had already bought Christmas-season inventories before the economic slump and were stuck with the consequences, says Maile Clark, a retail analyst at MFS Investment Management in Boston. She thinks stock prices today reflect the fact that those retailers have their inventories in line now, but cost controls will only take them so far.

“There’s no way this can go on forever without [consumer] demand,’’ she says. “At some point you need not less declining demand, you need positive demand.’’

Retail stocks that have bounced most dramatically are now expensive by most conventional measures. That would be normal in the early stages of a recovery, because retail profits can rebound quickly. But if the earnings don’t climb, the stocks aren’t expensive for a good reason. They’re just overpriced.

Analyst Richard Jaffe of Stifel Nicolaus in New York follows 18 specialty retail stocks, recommending that investors buy six of them and “hold’’ the other 12. Jaffe expects better business ahead, but believes many retail shares are expensive now. “A lot of good companies have been richly valued by [investors] anticipating nothing but good times from here to eternity,’’ he says.

Specialty retail stocks have roared back on cost-cutting, inventory control, and the hope for a better economy. But the rally won’t last if that economic recovery doesn’t show up on schedule.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.