April 12, 2010 / 7:13 PM / 8 years ago

Talbots' shorts could ease after deal; earnings eyed

NEW YORK, April 12 (Reuters) - Big bets against Talbots Inc TLB.N could decline in coming weeks after a successful deal by the retailer to reduce its debt, but many are still watching for potential surprises in its earnings out on Tuesday.

Short interest in Talbots has ticked up in recent months, rising to nearly 29 percent of shares outstanding as of April 7 compared to 20.5 percent in early January, according to data specialist Data Explorers.

Normally, that would be looked at as a huge short bet -- but some of that position stems from investor hedging against a deal that will see the company’s share float increase -- which will drive down overall short interest.

Last week, Talbots separated from Japan’s Aeon Ltd 8767.T as it purchased BPW Acquisition Corp, a shell organization that raises money from public investors to merge with another company. Talbots purchased BPW by exchanging Talbots shares and warrants for BPW warrants. For details, see [ID:nN07170500]

The deal was designed to improve liquidity, and it also will increase the company’s float because the company is repurchasing nearly 30 million shares from Aeon, the second-largest retailer in Japan.

As investors unwind their short positions and as more shares become part of the float, that should drive down both the total amount of short positions and the percentage of shares held short, said Adrienne Tennant, analyst at FBR Capital Markets in Arlington, Virginia.

“You could get a little move (in the share price) depending on what the split is between BPW investors who wanted to hedge versus people who really, truly wanted to be short Talbots,” said Tennant.

The deal will lower Talbots’ debt load and interest payments and free up its cash, allowing it to invest in its stores and new merchandise inventory as the company works toward refreshing its image, Tennant told Reuters last week.

Investors shorting the stock for more fundamental reasons will have an eye on fourth-quarter results due Tuesday.

Analysts on average expect Talbots, which caters to mature women, to report a small profit of 2 cents per share for its fourth fiscal quarter, according to Thomson Reuters I/B/E/S, a sharp improvement over the loss of $1.17 per share excluding charges a year earlier.

“The recent news is favorable in terms of where their restructuring plan is going. It looks like that should alleviate some of the pressure on their balance sheet,” said Brian Sozzi, equity research analyst at Wall Street Strategies in New York.

“Any alleviation on the balance sheet should free up their earnings by extension.”

Short investors seek to profit from a declining share price by borrowing the stock, selling it and buying it back at a lower price, pocketing the difference. If the price rises, shorts can be forced to buy it at the higher price, exacerbating the upward move in the stock.

Talbots said in February it expects a smaller sales decline for the fourth quarter as full-price selling helped its top line. The retailer said it expects sales from continuing operations to decline about 4 percent, better than a decline of 6 percent to 8 percent previously announced. (Reporting by Leah Schnurr, Editing by Chizu Nomiyama)

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