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

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

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 incorporation or organization)		(I.R.S. Employer Identification No.)

(Address of principal executive offices)

     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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o            No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     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

The number of shares outstanding of the registrant’s common stock as of September 1, 2010: 70,368,234 shares.

 

 

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Thirteen and Twenty-Six Weeks Ended July 31, 2010 and August 1, 2009			2
Condensed Consolidated Balance Sheets as of July 31, 2010, January 30, 2010 and August 1, 2009			3
Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended July 31, 2010 and August 1, 2009			4
Notes to Unaudited Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			33
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 6. Exhibits			35
Signatures			36
EX-31.1
EX-31.2
EX-32.1

THE TALBOTS, INC. AND SUBSIDIARIES

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 31,				August 1,				July 31,				August 1,
		2010				2009				2010				2009
Net sales		$	300,742			$	304,641			$	621,403			$	610,816
Costs and expenses
Cost of sales, buying and occupancy			195,777				220,239				376,622				431,395
Selling, general and administrative			93,075				94,880				201,214				205,703
Merger-related costs			3,050				—				26,863				—
Restructuring charges			112				2,875				5,071				9,271
Impairment of store assets			—				12				6				31
Operating income (loss)			8,728				(13,365	)			11,627				(35,584	)
Interest
Interest expense			6,370				7,245				14,805				14,600
Interest income			21				36				42				219
Interest expense, net			6,349				7,209				14,763				14,381
Income (loss) before taxes			2,379				(20,574	)			(3,136	)			(49,965	)
Income tax expense (benefit)			1,858				(93	)			3,439				(10,666	)
Income (loss) from continuing operations			521				(20,481	)			(6,575	)			(39,299	)
Income (loss) from discontinued operations, net of taxes			420				(4,004	)			3,148				(8,755	)
Net income (loss)		$	941			$	(24,485	)		$	(3,427	)		$	(48,054	)
Basic earnings (loss) per share:
Continuing operations		$	0.01			$	(0.38	)		$	(0.10	)		$	(0.73	)
Discontinued operations			—				(0.07	)			0.05				(0.16	)
Net earnings (loss)		$	0.01			$	(0.45	)		$	(0.05	)		$	(0.89	)
Diluted earnings (loss) per share:
Continuing operations		$	0.01			$	(0.38	)		$	(0.10	)		$	(0.73	)
Discontinued operations			—				(0.07	)			0.05				(0.16	)
Net earnings (loss)		$	0.01			$	(0.45	)		$	(0.05	)		$	(0.89	)
Weighted average shares outstanding:
Basic			68,338				53,827				63,105				53,724
Diluted			69,520				53,827				63,105				53,724

See notes to condensed consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

		July 31,				January 30,				August 1,
		2010				2010				2009
ASSETS
Current Assets:
Cash and cash equivalents		$	4,650			$	112,775			$	113,471
Customer accounts receivable, net			155,606				163,587				162,780
Merchandise inventories			130,344				142,696				145,494
Deferred catalog costs			3,352				6,685				2,977
Prepaid and other current assets			54,122				48,139				56,552
Due from related party			—				959				988
Income tax refundable			—				2,006				—
Total current assets			348,074				476,847				482,262
Property and equipment, net			195,004				220,404				250,907
Goodwill			35,513				35,513				35,513
Trademarks			75,884				75,884				75,884
Other assets			19,527				17,170				11,378
Total Assets		$	674,002			$	825,818			$	855,944
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable		$	80,153			$	104,118			$	105,658
Accrued liabilities			147,487				148,177				166,078
Revolving credit facility			37,365				—				—
Current portion of related party debt			—				486,494				8,506
Notes payable to banks			—				—				147,100
Current portion of long-term debt			—				—				80,000
Total current liabilities			265,005				738,789				507,342
Related party debt less current portion			—				—				241,494
Long-term debt less current portion			—				—				20,000
Deferred rent under lease commitments			103,588				111,137				135,951
Deferred income taxes			28,456				28,456				28,456
Other liabilities			112,810				133,072				129,358
Commitments and contingencies
Stockholders’ Equity (Deficit):
Common stock, $0.01 par value; 200,000,000 authorized; 97,056,412 shares, 81,473,215 shares, and 81,448,215 shares issued, respectively, and 70,371,464 shares, 55,000,142 shares, and 55,101,526 shares outstanding, respectively			971				815				814
Additional paid-in capital			854,211				499,457				495,190
Retained deficit			(52,117	)			(48,690	)			(67,332	)
Accumulated other comprehensive loss			(51,083	)			(51,179	)			(49,483	)
Treasury stock, at cost; 26,684,948 shares, 26,473,073 shares, and 26,346,689 shares, respectively			(587,839	)			(586,039	)			(585,846	)
Total stockholders’ equity (deficit)			164,143				(185,636	)			(206,657	)
Total Liabilities and Stockholders’ Equity (Deficit)		$	674,002			$	825,818			$	855,944

See notes to condensed consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

		Twenty-Six Weeks Ended
		July 31,				August 1,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(3,427	)		$	(48,054	)
Income (loss) from discontinued operations, net of tax			3,148				(8,755	)
Loss from continuing operations			(6,575	)			(39,299	)
Adjustments to reconcile loss from continuing operations to net cash provided by operating activities:
Depreciation and amortization			31,490				37,958
Stock-based compensation			7,755				2,156
Amortization of debt issuance costs			1,996				1,585
Impairment of store assets			6				31
Loss on disposal of property and equipment			646				71
Deferred rent			(3,844	)			(1,824	)
Deferred income taxes			—				(10,749	)
Changes in assets and liabilities:
Customer accounts receivable			8,013				6,756
Merchandise inventories			12,442				61,481
Deferred catalog costs			3,333				1,818
Prepaid and other current assets			(6,959	)			(14,024	)
Due from related party			959				(612	)
Income tax refundable			2,006				26,646
Accounts payable			(24,184	)			(16,189	)
Accrued liabilities			4,075				(9,851	)
Other assets			(66	)			3,593
Other liabilities			(20,528	)			(8,265	)
Net cash provided by operating activities			10,565				41,282
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment			(5,935	)			(13,243	)
Proceeds from disposal of property and equipment			15				—
Cash acquired in merger with BPW Acquisition Corp.			332,999				—
Net cash provided by (used in) investing activities			327,079				(13,243	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit facility			684,338				—
Payments on revolving credit facility			(646,973	)			—
Proceeds from related party borrowings			—				230,000
Payments on related party borrowings			(486,494	)			—
Proceeds from working capital notes payable			—				8,000
Payments on working capital notes payable			—				(9,400	)
Payments on long-term borrowings			—				(208,351	)
Payment of debt issuance costs			(5,993	)			(1,720	)
Payment of equity issuance costs			(3,594	)			—
Proceeds from warrants exercised			19,042				—
Proceeds from options exercised			414				—
Purchase of treasury stock			(1,800	)			(363	)
Net cash (used in) provided by financing activities			(441,060	)			18,166
EFFECT OF EXCHANGE RATE CHANGES ON CASH			333				694
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Operating activities			(5,042	)			(15,224	)
Investing activities			—				63,827
Effect of exchange rate changes on cash			—				32
			(5,042	)			48,635
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(108,125	)			95,534
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			112,775				16,551
INCREASE IN CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS			—				1,141
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	4,650			$	113,226

See notes to condensed consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

1. Basis of Presentation

The condensed consolidated financial statements of The Talbots, Inc. and its subsidiaries (“Talbots” or the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 30, 2010.

The unaudited condensed consolidated financial statements include the accounts of Talbots and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.

2. Summary of Significant Accounting Policies

There have been no material changes to the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

3. Merger with BPW Acquisition Corp. and Related Transactions

On April 7, 2010, the Company completed a series of transactions (collectively, the “BPW Transactions”) which, in the aggregate, substantially reduced its indebtedness and significantly deleveraged its balance sheet, consisting of three related transactions: (i) an Agreement and Plan of Merger between Talbots and BPW Acquisition Corp. (“BPW”) pursuant to which a wholly-owned subsidiary of the Company merged with and into BPW in exchange for the Company’s issuance of Talbots common stock and warrants to BPW stockholders; (ii) the repurchase and retirement of all Talbots common stock held by AEON (U.S.A.), Inc. (“AEON (U.S.A.)”), the Company’s then majority shareholder; the issuance of warrants to purchase one million shares of Talbots common stock and the repayment of all of the Company’s outstanding AEON Co., Ltd. (“AEON”) and AEON (U.S.A.) debt; and (iii) the execution of a new senior secured revolving credit facility.

BPW was a special purpose acquisition company with approximately $350.0 million in cash held in a trust account for the benefit of its shareholders to be used in connection with a business combination. Accordingly, the Company concluded that BPW was a business and acquisition accounting applied. The acquisition method of accounting requires the determination of the accounting acquirer. The Company considered the following principal facts and circumstances to determine the accounting acquirer:

•

the purpose of the merger was to assist the Company with the refinancing of its business and Talbots initiated the transaction;

•

the Company is the larger of the two combining entities and is the remaining operating company;

•

Talbots continuing Board of Directors retained a majority of the seats on the combined company’s Board of Directors;

•

BPW has no appointment rights after the initial consent to appoint three additional Board members;

•

the Company’s existing senior management team has continued as senior management of the combined company; and

•

the terms of the exchange provided BPW shareholders with a premium over the market price of BPW shares of common stock prior to the announcement of the merger.

Based on the above facts and other considerations, the Company determined that Talbots was the accounting acquirer.

BPW had no significant commercial operations and its only significant pre-combination assets were cash and cash equivalents which were already recognized at fair value. The Company recorded the shares of common stock and warrants issued in the merger at the fair value of BPW’s net monetary assets received on April 7, 2010. The net monetary assets received in the transaction, consisting solely of cash and cash equivalents, was $333.0 million, after payment of all prior BPW obligations. No goodwill or intangible assets were recorded in the transaction.

In connection with the merger, the Company issued 41.5 million shares of Talbots common stock and warrants to purchase 17.2 million shares of Talbots common stock (the “Talbots Warrants”) for 100% ownership of BPW. Approximately 3.5 million BPW warrants that did not participate in the warrant exchange offer (the “Non-Tendered Warrants”) remained outstanding at the closing of the merger. Pursuant to an agreement entered into during the merger process on December 8, 2009 (the “Sponsors’ Agreement”) between Talbots and the sponsors of BPW, Perella Weinberg Partners Acquisition LP and BPW BNYH Holdings LLC (together, the “Sponsors”), the Sponsors agreed not to transfer the shares of Talbots common stock held by them for 180 days after the completion of the merger, subject to certain exceptions and unless otherwise agreed to be waived by Talbots in whole or in part. Additionally, in connection with the merger, the Company repurchased and retired the 29.9 million shares held by AEON (U.S.A.), the former majority shareholder, in exchange for warrants to purchase one million shares of Talbots common stock (the “AEON Warrants”).

The following summarizes the changes to stockholders’ (deficit) equity including the impact of the BPW Transactions at July 31, 2010:

																		Accumulated
										Additional								Other								Total
		Common Stock								Paid-In				Retained				Comprehensive				Treasury				Stockholders'
(In thousands except share data)		Shares				$ Amount				Capital				Deficit				Loss				Stock				(Deficit) Equity
Balance at January 30, 2010			81,473,215			$	815			$	499,457			$	(48,690	)		$	(51,179	)		$	(586,039	)		$	(185,636	)
Merger and related BPW Transactions:
Issuance of common stock and warrants in merger with BPW			41,469,003				415				332,584				—				—				—				332,999
Issuance of warrants to repurchase and retire common stock held by AEON (U.S.A.)			(29,921,829	)			(299	)			299				—				—				—				—
Equity issuance costs			—				—				(3,594	)			—				—				—				(3,594	)
Extinguishment of related party debt			—				—				(1,706	)			—				—				—				(1,706	)
Total merger-related			11,547,174				116				327,583				—				—				—				327,699
Exercise of Non-Tendered Warrants			2,538,946				25				19,017				—				—								19,042
Exercise of stock options			111,227				1				413				—				—				—				414
Stock-based compensation			1,385,850				14				7,741				—				—				—				7,755
Purchase of 211,875 shares of vested and nonvested common stock awards			—				—				—				—				—				(1,800	)			(1,800	)
Net loss			—				—				—				(3,427	)			—				—				(3,427	)
Translation adjustment			—				—				—				—				361								361
Change in pension and postretirement liabilities, net of taxes			—				—				—				—				(265	)			—				(265	)
Balance at July 31, 2010			97,056,412			$	971			$	854,211			$	(52,117	)		$	(51,083	)		$	(587,839	)		$	164,143

The Talbots Warrants are immediately exercisable at $14.85 per warrant for one share of Talbots common stock, have a stated term of five years from the date of issuance, April 9, 2010, and beginning after April 9, 2011, are subject to accelerated expiration under certain conditions including, at the Company’s discretion, if the trading value of Talbots common stock

exceeds $19.98 per share for 20 of 30 consecutive trading days in a period ending not more than 15 days prior to notice of such acceleration. The warrants may be exercised on a cashless basis. These warrants began trading on NYSE Amex in April 2010. Approximately 17.2 million Talbots Warrants were outstanding at July 31, 2010.

The Non-Tendered Warrants have an exercise price of $7.50 per warrant for 0.9853 share of Talbots common stock. Approximately 2.6 million Non-Tendered Warrants were exercised for total cash proceeds of $19.0 million immediately following the transaction. The 0.9 million Non-Tendered Warrants that remained outstanding at July 31, 2010 are not exercisable for one year from the April 7, 2010 effective date of the merger, do not have anti-dilution rights, were de-listed from NYSE Amex concurrent with the merger and expire February 26, 2015.

The AEON Warrants are immediately exercisable at $13.21 per share for one share of Talbots common stock, have a stated term of five years from the date of issuance, April 7, 2010, and beginning after April 7, 2011, are subject to accelerated expiration under certain conditions including, at the Company’s discretion, if the trading value of Talbots common stock exceeds $23.12 per share for 20 of 30 consecutive trading days in a period ending not more than 15 days prior to notice of such acceleration. The warrants may be exercised on a cashless basis. One million AEON Warrants were outstanding at July 31, 2010.

With the consummation and closing of the BPW merger, the Company repaid all outstanding AEON and AEON (U.S.A.) indebtedness on April 7, 2010 at its principal value plus accrued interest and other costs for total cash consideration of $488.2 million. As the AEON and AEON (U.S.A.) debt extinguishment transaction was between related parties, the difference between the carrying value and the repayment price was recorded as an equity transaction. Accordingly, the Company recorded no gain or loss on the extinguishment and the difference between the repayment price and the net carrying value, consisting of $1.7 million of unamortized deferred financing costs, was recorded to additional paid-in capital.

Further in connection with the consummation and closing of the BPW merger, the Company executed a new senior secured revolving credit agreement with a third-party lender which provides borrowing capacity up to $200.0 million, subject to availability and satisfaction of all borrowing conditions. See Note 11, Debt, for further information including key terms of this credit agreement.

As a result of the BPW Transactions, the Company became subject to annual limitations on the use of its existing net operating losses (“NOL”) and created an uncertain tax position that reduced a substantial portion of the Company’s NOL. Accordingly, the Company recorded an increase in unrecognized tax benefits of approximately $20.0 million that will reduce net deferred tax assets before consideration of any valuation allowance.

Merger-related costs are those expenses incurred in order to effect the merger, including advisory, legal, accounting, valuation, and other professional or consulting fees as well as certain general and administrative costs incurred by the Company as a direct result of the closing of the merger, including an incentive award given to certain executives and members of management, contingent upon the successful closing of the BPW merger. The incentive portion of merger-related costs was awarded in restricted stock units and cash for efforts related to the closing of the BPW merger. The cash bonus awarded was paid in the first quarter of 2010 in connection with the consummation of the BPW merger. The restricted stock units awarded will cliff vest 12 months from the completion of the BPW merger. Other costs primarily include printing and mailing expenses related to proxy solicitation and incremental insurance expenses related to the transaction. The Company estimates total merger-related costs of approximately $37.5 million, of which $8.2 million and $26.9 million were expensed in fiscal 2009 and the twenty-six weeks ended July 31, 2010, respectively. Approximately $2.4 million of merger-related costs are estimated to be incurred in future periods related to the incentive award. In addition, the Company expects to continue to incur merger-related legal expenses as a result of the legal proceedings discussed in Note 13, Legal Proceedings. Approximately $7.6 million of costs incurred in connection with the new senior secured revolving credit facility were recorded as deferred financing costs and included in other assets on the condensed consolidated balance sheet. These costs are being amortized to interest expense over the three and one-half year life of the facility. Approximately $3.6 million of costs incurred in connection with the registration and issuance of the common stock and warrants were charged to additional paid-in capital.

Details of the merger-related costs recorded in the thirteen and twenty-six weeks ended July 31, 2010 are as follows:

		Thirteen				Twenty-Six
		Weeks Ended				Weeks Ended
		July 31, 2010				July 31, 2010
		(In thousands)
Investment banking		$	—			$	14,255
Accounting and legal			1,669				6,650
Financing incentive compensation			1,210				4,428
Other costs			171				1,530
Total		$	3,050			$	26,863

The following pro forma summary financial information presents the operating results of the combined company assuming the merger and related events, including the repurchase of common stock held by AEON (U.S.A.) and repayment of all outstanding indebtedness owed to AEON and AEON (U.S.A.) and the execution of the new senior secured revolving credit agreement, had been completed on February 1, 2009, the beginning of Talbots’ fiscal year ended January 30, 2010. The $2.4 million of estimated future merger-related costs are not reflected in the pro forma information in accordance with the rules for preparation of pro forma statement of operations data.

		Thirteen Weeks Ended
		July 31, 2010								August 1, 2009
		Actual				Pro Forma				Actual				Pro Forma
		(In thousands, except per share data)
Net sales		$	300,742			$	300,742			$	304,641			$	304,641
Operating income (loss)			8,728				8,728				(13,365	)			(13,522	)
Income (loss) from continuing operations			521				521				(20,481	)			(15,141	)
Earnings (loss) from continuing operations per share:
Basic		$	0.01			$	0.01			$	(0.38	)		$	(0.23	)
Diluted		$	0.01			$	0.01			$	(0.38	)		$	(0.23	)
Weighted average shares outstanding:
Basic			68,338				68,338				53,827				65,374
Diluted			69,520				69,520				53,827				65,374

		Twenty-Six Weeks Ended
		July 31, 2010								August 1, 2009
		Actual				Pro Forma				Actual				Pro Forma
		(In thousands, except per share data)
Net sales		$	621,403			$	621,403			$	610,816			$	610,816
Operating income (loss)			11,627				4,755				(35,584	)			(35,958	)
Loss from continuing operations			(6,575	)			(8,187	)			(39,299	)			(29,905	)
Loss from continuing operations per share:
Basic		$	(0.10	)		$	(0.12	)		$	(0.73	)		$	(0.46	)
Diluted		$	(0.10	)		$	(0.12	)		$	(0.73	)		$	(0.46	)
Weighted average shares outstanding:
Basic			63,105				67,293				53,724				65,271
Diluted			63,105				67,293				53,724				65,271

Based on the nature of the BPW entity, there was no revenue or earnings associated with BPW included in the consolidated statements of operations for the thirteen or twenty-six weeks ended July 31, 2010.

4. Restructuring

In late 2007, management developed a strategic business plan focused on the following areas: brand positioning, productivity, store growth and store productivity, non-core concepts, distribution channels, the J. Jill business and other operating matters. In response to declines in the U.S. and global economy in late 2008 and 2009, management prioritized its strategy on those areas which would reduce costs and streamline the organization, while continuing to redefine the brand and make product improvements. The actions taken during 2009 and 2010 included reducing headcount and employee benefit costs, shuttering or disposing of non-core businesses, and reducing office and retail space when determined to no longer coincide with the vision of the brand or the needs of the business, among other steps. Specifically, in February 2009, the Company reduced its corporate headcount by 17%. In June 2009, the Company reduced its corporate headcount by an additional 20% including the elimination of open positions. In August 2009, the Company reorganized its global sourcing activities and entered into a buying agency agreement with an affiliate of Li & Fung Limited, a Hong Kong-based global consumer goods exporter (“Li & Fung”), whereby effective September 2009, Li & Fung is acting as the exclusive global apparel sourcing agent for substantially all Talbots apparel. In connection with this reorganization, the Company closed its Hong Kong and India sourcing offices and reduced its corporate sourcing headcount. In March 2010, the Company focused its restructuring efforts on programs designed to reduce retail space no longer coinciding with the needs of the business and the purpose of certain flagship locations to the business.

In the twenty-six weeks ended July 31, 2010, the Company recorded $5.1 million of restructuring expense primarily related to the consolidation of the Company’s Madison Avenue, New York flagship location in which the Company reduced active leased floor space and wrote down certain assets and leasehold improvements no longer used in the redesigned lay-out. In the thirteen weeks ended August 1, 2009, the Company recorded $2.9 million of restructuring expense primarily related to estimated lease termination costs for the portion of the Company’s Tampa, Florida data center that ceased to be used in July 2009. In the first quarter of 2009, and included in restructuring charges for the twenty-six weeks ended August 1, 2009, the Company recorded $6.4 million of primarily severance expense due to corporate headcount reductions.

The following is a summary of the activity and liability balances related to restructuring for the twenty-six weeks ended July 31, 2010 and August 1, 2009:

		Corporate - Wide
		Strategic Initiatives
						Lease -
		Severance				Related				Total
		(In thousands)
Balance at January 30, 2010		$	3,089			$	784			$	3,873
Charges			1,041				4,030				5,071
Cash payments			(2,960	)			(579	)			(3,539	)
Non-cash items			—				(48	)			(48	)
Balance at July 31, 2010		$	1,170			$	4,187			$	5,357

		Corporate - Wide
		Strategic Initiatives
						Lease -
		Severance				Related				Total
		(In thousands)
Balance at January 31, 2009		$	10,882			$	—			$	10,882
Charges (income)			6,523				2,748				9,271
Cash payments			(10,939	)			(62	)			(11,001	)
Non-cash items			812				—				812
Balance at August 1, 2009		$	7,278			$	2,686			$	9,964

The non-cash items primarily consist of the write-off of certain leasehold improvements, lease adjustments and changes to stock-based compensation expense related to terminated employees. Of the $5.4 million in restructuring liabilities at July 31, 2010, $2.6 million, expected to be paid within the next twelve months, is included in accrued liabilities and the remaining $2.8 million, expected to be paid thereafter through 2014, is included in deferred rent under lease commitments.

5. Stock-Based Compensation

Total stock-based compensation expense related to stock options, nonvested stock awards and restricted stock units (“RSUs”) was $3.6 million and $1.4 million for the thirteen weeks ended July 31, 2010 and August 1, 2009, respectively, and $7.8 million and $2.2 million for the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively.

The compensation expense was classified in the consolidated statements of operations as follows:

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 31,				August 1,				July 31,				August 1,
		2010				2009				2010				2009
		(In thousands)
Cost of sales, buying and occupancy		$	245			$	259			$	384			$	418
Selling, general and administrative			2,148				1,277				5,283				2,550
Merger-related costs			1,210				—				2,088				—
Restructuring charges			—				(143	)			—				(812	)
Total		$	3,603			$	1,393			$	7,755			$	2,156

Stock Options

The weighted-average fair value of options granted during the twenty-six weeks ended July 31, 2010 and August 1, 2009, estimated as of the grant date using the Black-Scholes option pricing model, was $10.40 and $1.57 per option, respectively. Key assumptions used to apply this pricing model were as follows:

		Twenty-Six Weeks Ended
		July 31,				August 1,
		2010				2009
Risk-free interest rate			3.1	%			2.0	%
Expected life of options		6.8 years				4.8 years
Expected volatility of underlying stock			79.7	%			83.7	%
Expected dividend yield			0.0	%			0.0	%

The following is a summary of stock option activity for the twenty-six weeks ended July 31, 2010:

						Weighted				Weighted
						Average				Average Remaining				Aggregate
		Number of				Exercise Price				Contractual Term				Intrinsic
		Shares				per Share				(In Years)				Value
														(In thousands)
Outstanding at January 30, 2010			10,402,019			$	24.06
Granted			92,385				14.26
Exercised			(111,227	)			3.72
Forfeited or expired			(2,176,685	)			19.30
Outstanding at July 31, 2010			8,206,492			$	25.48				3.4			$	13,645
Exercisable at July 31, 2010			6,760,780			$	29.62				2.3			$	4,180

As of July 31, 2010, there was $1.8 million of unrecognized compensation cost related to stock options that are expected to vest.

Nonvested Stock Awards and RSUs

The following is a summary of nonvested stock awards and RSU activity for the twenty-six weeks ended July 31, 2010:

						Weighted
						Average Grant
		Number of				Date Fair Value
		Shares				per Share
Nonvested at January 30, 2010			1,330,890			$	12.62
Granted			1,727,551				11.68
Vested			(508,922	)			16.51
Forfeited			(69,379	)			10.33
Nonvested at July 31, 2010			2,480,140			$	11.23

As of July 31, 2010, there was $13.7 million of unrecognized compensation cost related to nonvested stock awards and RSUs that are expected to vest, excluding merger-related awards.

6. Income Taxes

The Company’s effective income tax rate, including discrete items, was (109.7%) and 21.3% for the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively. The effective income tax rate is based upon the estimated income or loss for the year, the estimated composition of the income or loss in different jurisdictions and discrete adjustments in the applicable quarterly periods for settlements of tax audits or assessments, the resolution or identification of tax position uncertainties and non-deductible costs associated with the merger. In the twenty-six weeks ended July 31, 2010, the Company recorded merger-related costs of $26.9 million, the majority of which do not receive any associated tax benefit, and limited the utilization of its net operating losses, contributing to a negative overall effective tax rate for the period. Income tax expense for this period is impacted primarily by changes in estimates related to previously existing uncertain tax positions based on new information.

Income taxes for the twenty-six weeks ended August 1, 2009 were primarily impacted by the intraperiod tax allocation arising from other comprehensive income recognized from the remeasurement of the Company’s Pension Plan and Supplemental Executive Retirement Plan obligations due to the Company’s decision to freeze future benefits under the plans effective as of May 1, 2009, which resulted in an allocated tax benefit of $10.6 million to continuing operations and an off-setting tax expense included in other comprehensive income.

The Company continues to provide a full valuation allowance against its net deferred tax assets, excluding deferred tax liabilities for non-amortizing intangibles, due to insufficient positive evidence that the deferred tax assets will be realized in the future.

The BPW Transactions, completed on April 7, 2010, subject the utilization of the Company’s net operating loss carryover to a limitation under U.S. tax laws. In addition, as a result of the closing of the BPW Transactions in April 2010, the Company’s gross unrecognized tax benefit increased by $20.0 million. This increase results in a reduction to net deferred tax assets before consideration of any valuation allowance.

7. Discontinued Operations

The Company’s discontinued operations include the Talbots Kids, Mens and U.K. businesses, all of which ceased operations in 2008, and the J. Jill business which was sold to Jill Acquisition LLC (the “Purchaser”) for net proceeds of $64.3 million on July 2, 2009. The operating results of these businesses have been classified as discontinued operations for all periods presented, and the cash flows from discontinued operations, including the proceeds from the sale, have been separately presented in the statements of cash flows.

The results of discontinued operations for the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009 are as follows:

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 31,				August 1,				July 31,				August 1,
		2010				2009				2010				2009
		(In thousands)								(In thousands)
Net sales		$	—			$	74,809			$	—			$	178,296
(Loss) income from operations			(21	)			1,724				(116	)			(3,027	)
Gain (loss) on disposal, net of taxes			441				(5,728	)			3,264				(5,728	)
Income (loss) from discontinued operations, net of taxes		$	420			$	(4,004	)		$	3,148			$	(8,755	)

The (loss) income from operations includes on-going liability adjustments related to the Talbots Kids and Mens businesses and, for the thirteen and twenty-six weeks ended August 1, 2009, the operating results of the J. Jill business prior to disposal. The gain on disposal for the thirteen weeks ended July 31, 2010 includes approximately $0.7 million of favorable adjustments to estimated lease liabilities, primarily due to the execution of an agreement to partially settle and terminate the lease for a portion of the Company’s unused Quincy, Massachusetts office space not assumed by the Purchaser in the J. Jill sale. This event reduced the Company’s recorded lease liability for this space, the previously recorded amount of which had not assumed a settlement option. The gain on disposal for the twenty-six weeks ended July 31, 2010 includes the Quincy lease settlement, approximately $1.7 million of additional favorable adjustments to other estimated lease liabilities, including the settlement of four J. Jill store leases not assumed by the Purchaser in the J. Jill sale during the first quarter of 2010 and approximately $0.9 million of favorable adjustments to other assets. The $5.7 million loss on disposal recorded in the thirteen and twenty-six weeks ended August 1, 2009 reflects the loss on disposal recorded at the closing of the J. Jill sale in the second quarter of 2009. The results for the thirteen and twenty six weeks ended July 31, 2010 reflect income tax expense of $0.2 million and $0.0 million, respectively. The results for the thirteen and twenty-six weeks ended August 1, 2009 reflect no income tax benefit as the Company recorded a valuation allowance for substantially all of its deferred taxes due to insufficient positive evidence that the deferred tax assets would be realized in the future.

Pursuant to the purchase and sale agreement, the Purchaser agreed to assume certain assets and liabilities relating to the J. Jill business. The 75 J. Jill stores that were not sold were closed. As of July 31, 2010, the Company had settled the lease liabilities of 73 of the 75 stores not acquired by the Purchaser. Lease termination costs were initially estimated and recorded at the time the stores were closed, or existing space vacated, and are adjusted subsequently, as necessary, when new information suggests that actual costs may vary from initial estimates. Income and loss recorded in the periods subsequent to disposal are due to working capital adjustments and modifications to the estimated lease liabilities relating to the stores that were not sold and the Quincy, Massachusetts office space that is not being subleased or used. Total cash expenditures to settle the lease liabilities for the remaining two unsold stores will depend on the outcome of negotiations with third parties. As a result, actual costs to terminate these leases may vary from current estimates and management’s assumptions and projections may change.

At January 30, 2010, the Company had remaining recorded lease-related liabilities from discontinued operations of $16.7 million. During the twenty-six weeks ended July 31, 2010, the Company made cash payments of approximately $5.2 million and recorded other income due to favorable settlements of estimated lease liabilities of $2.4 million, resulting in a total estimated recorded liability of $9.1 million as of July 31, 2010. Of these liabilities, approximately $5.5 million is expected to be paid out within the next 12 months and is included within accrued liabilities as of July 31, 2010.

8. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing income (loss) available for common stockholders by the weighted average number of common shares outstanding. During periods of income, participating securities are allocated a proportional share of income determined by dividing total weighted average participating securities by the sum of the total weighted average common shares and participating securities (the “two-class method”). The Company’s nonvested stock and director RSUs participate in any dividends declared by the Company and are therefore considered participating securities. Participating securities have the effect of diluting both basic and diluted earnings per share during periods of income. During periods of loss, no loss is allocated to participating securities since they have no contractual obligation to share in the losses of the Company. Diluted earnings per share is computed after giving consideration to the dilutive effect of warrants, stock options and management RSUs that are outstanding during the period, except where such common stock equivalents would be antidilutive.

Basic and diluted earnings (loss) per share from continuing operations were computed as follows (in thousands, except per share amounts):

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 31,				August 1,				July 31,				August 1,
		2010				2009				2010				2009
Basic earnings (loss) per share:
Income (loss) from continuing operations		$	521			$	(20,481	)		$	(6,575	)		$	(39,299	)
Less: income associated with participating securities			15				—				—				—
Income (loss) associated with common stockholders		$	506			$	(20,481	)		$	(6,575	)		$	(39,299	)
Weighted average shares outstanding			68,338				53,827				63,105				53,724
Basic earnings (loss) per share — continuing operations		$	0.01			$	(0.38	)		$	(0.10	)		$	(0.73	)

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 31,				August 1,				July 31,				August 1,
		2010				2009				2010				2009
Diluted earnings (loss) per share:
Income (loss) from continuing operations		$	521			$	(20,481	)		$	(6,575	)		$	(39,299	)
Less: income associated with participating securities			15				—				—				—
Income (loss) associated with common stockholders		$	506			$	(20,481	)		$	(6,575	)		$	(39,299	)
Weighted average shares outstanding			68,338				53,827				63,105				53,724
Effect of dilutive securities			1,182				—				—				—
Diluted weighted average shares outstanding			69,520				53,827				63,105				53,724
Diluted earnings (loss) per share — continuing operations		$	0.01			$	(0.38	)		$	(0.10	)		$	(0.73	)

The following common stock equivalents were excluded from the calculation of earnings (loss) per share because their inclusion would have been anti-dilutive for the thirteen and twenty-six week periods ended July 31, 2010 and August 1, 2009:

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 31,				August 1,				July 31,				August 1,
		2010				2009				2010				2009
Nonvested stock			2,012,818				1,350,514				2,012,818				1,350,514
Nonvested director RSUs			18,410				28,000				18,410				28,000
Stock options			6,435,171				10,566,370				8,206,492				10,566,370
Warrants			18,242,750				—				19,152,354				—
Nonvested management RSUs			—				—				402,912				—
			26,709,149				11,944,884				29,792,986				11,944,884

9. Comprehensive Income (Loss)

The following illustrates the Company’s total comprehensive income (loss) for the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009:

		Thirteen Weeks Ended
		July 31,				August 1,
		2010				2009
		(In thousands)
Net income (loss)		$	941			$	(24,485	)
Other comprehensive (loss) income:
Foreign currency translation adjustment			(231	)			1,323
Change in pension and postretirement plan liabilities			(97	)			(31	)
Total comprehensive income (loss)		$	613			$	(23,193	)

		Twenty-Six Weeks Ended
		July 31,				August 1,
		2010				2009
		(In thousands)
Net loss		$	(3,427	)		$	(48,054	)
Other comprehensive income (loss):
Foreign currency translation adjustment			361				1,473
Change in pension and postretirement plan liabilities			(265	)			16,124
Total comprehensive loss		$	(3,331	)		$	(30,457	)

The foreign currency translation adjustment for the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009 and the change in pension and postretirement plan liabilities for the thirteen and twenty-six weeks ended July 31, 2010 and thirteen weeks ended August 1, 2009 reflect no income tax expense (benefit) as the Company continues to maintain a valuation allowance for substantially all of its deferred taxes due to insufficient positive evidence that the deferred tax assets would be realized in the future. The change in pension and postretirement plan liabilities for the twenty-six weeks ended August 1, 2009 includes a recorded tax expense of $10.8 million related to the curtailment of the Company’s pension and postretirement plans in the first quarter of 2009.

10. Fair Value Measurements

The Company classifies fair value based measurements on a three-level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: Level 1, quoted market prices in active markets for identical assets or liabilities; Level 2, observable inputs other than quoted market prices included in Level 1 such as quoted market prices for markets that are not active or other inputs that are observable or can be corroborated by observable market data; and Level 3, unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company’s financial instruments at July 31, 2010 consist primarily of cash and cash equivalents, accounts receivable, investments in the Company’s irrevocable grantor’s trust (“Rabbi Trust”) that holds assets intended to fund benefit obligations under the Company’s Supplemental Retirement Savings Plan and Deferred Compensation Plan, accounts payable and debt. The Company believes the carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates their fair values due to their short-term nature. The money market investments in the Rabbi Trust are recorded at fair value based on quoted market prices in active markets for identical assets (Level 1 measurements) and are not significant to the total value of the Rabbi Trust. The investments in life insurance policies held in the Rabbi Trust are recorded at their cash surrender values, which is consistent with settlement value and is not a fair value measurement. The Company believes that the carrying value of debt approximates fair value at July 31, 2010 as the interest rates are market-based variable rates and were designated less than four months prior to quarter-end when the debt agreement was executed.

The Company monitors the performance and productivity of its store portfolio and closes stores when appropriate. When it is determined that a store is underperforming or is to be closed, the Company reassesses the expected future cash flows of the store, which in some cases results in an impairment charge. The value of non-financial assets measured at fair value on a non-recurring basis in performing these analyses was not significant for the periods ended July 31, 2010 and August 1, 2009.

11. Debt

A summary of outstanding debt at July 31, 2010 and January 30, 2010 is as follows:

		July 31,				January 30,
		2010				2010
		(In thousands)
Revolving credit facility		$	37,365			$	—
Related party debt			—				486,494
Total		$	37,365			$	486,494

Revolving Credit Facility

On April 7, 2010, in connection with the consummation and closing of the merger with BPW, the Company executed a senior secured revolving credit facility with a third-party lender (the “Credit Facility”). The Credit Facility is an asset-based revolving credit facility, including a $25.0 million letter of credit sub-facility, that permits the Company to borrow up to the lesser of (a) $200.0 million and (b) the borrowing base, calculated as a percentage of the value of eligible credit card receivables and the net orderly liquidation value of eligible private label credit card receivables, the net orderly liquidation value of eligible inventory in the United States and the net orderly liquidation value of eligible in-transit inventory from international vendors (subject to certain caps and limitations), as set forth in the agreement, minus the lesser of (x) $20.0 million and (y) 10% of the borrowing base. Through the end of the second quarter, loans made pursuant to the immediately preceding sentence carry interest, at the Company’s election, at either (a) the three-month LIBOR plus 4.0% to 4.5% depending on availability thresholds or (b) the base rate plus 3.0% to 3.5% depending on certain availability thresholds. Interest on borrowings is payable monthly in arrears. The Company pays a fee on the unused portion of the commitment and outstanding letters of credit, if any, monthly in arrears in accordance with the formulas set forth in the agreement. As of July 31, 2010, the Company’s effective interest rate under the Credit Facility was 5.1%, and the Company had additional borrowing availability of up to $111.6 million.

Under the Credit Facility, amounts are borrowed and repaid on a daily basis through a control account arrangement. Cash received from customers is swept on a daily basis into a control account in the name of the agent for the lenders. The Company is permitted to maintain a certain amount of cash in disbursement accounts, including such amounts necessary to satisfy current liabilities incurred in the ordinary course of business. Amounts may be borrowed and re-borrowed from time to time, subject to the satisfaction or waiver of all borrowing conditions, including without limitation perfected liens on collateral, accuracy of all representations and warranties, the absence of a default or an event of default, and other borrowing conditions, all subject to certain exclusions as set forth in the agreement.

The agreement matures on October 7, 2013, subject to earlier termination as set forth in the agreement. The entire principal amount of loans under the facility and any outstanding letters of credit will be due on the maturity date. Loans may be voluntarily prepaid at any time at the Company’s option, in whole or in part, at par plus accrued and unpaid interest and any break funding loss incurred. The Company is required to make mandatory repayments in the event of receipt of net proceeds from asset dispositions, receipt of net proceeds from the issuance of securities and to the extent that its outstanding indebtedness under the Credit Facility exceeds its maximum borrowing availability at any time. Upon any voluntary or mandatory prepayment of borrowings outstanding at the LIBOR rate on a day that is not the last day of the respective interest period, the Company will reimburse the lenders for any resulting loss or expense that the lender may incur. Amounts voluntarily repaid prior to the maturity date may be re-borrowed.

The Company and certain of its subsidiaries have executed a guaranty and security agreement pursuant to which all obligations under the Credit Facility are fully and unconditionally guaranteed on a joint and several basis. Additionally, pursuant to the security agreement, all obligations are secured by (i) a first priority perfected lien and security interest in substantially all assets of the Company and any guarantor from time to time and (ii) a first lien mortgage on the Company’s Hingham, Massachusetts headquarters facility and Lakeville, Massachusetts distribution facility. In connection with the lenders’ security interest in the proprietary Talbots charge card program, Talbots and certain of its subsidiaries have also executed an access and monitoring agreement that requires the Company to comply with certain monitoring and reporting obligations to the agent with respect to such program, subject to applicable law.

The Company may not create, assume or suffer to exist any lien securing indebtedness incurred after the closing date of the Credit Facility subject to certain limited exceptions set forth in the agreement. The Credit Facility contains negative covenants prohibiting the Company, with certain exceptions, from among other things, incurring indebtedness and contingent obligations, making investments, intercompany loans and capital contributions, declaring or making any dividend payment except for dividend payments or distributions payable solely in stock or stock equivalents, and disposing of property or assets. The Company has agreed to keep the mortgaged properties in good repair, reasonable wear and tear excepted. The agreement also provides for events of default, including failure to repay principal and interest when due and failure to perform or violation of the provisions or covenants of the agreement. The agreement does not contain any financial covenant tests.

The Credit Facility is the Company’s only outstanding debt agreement at July 31, 2010. Of the $125.0 million borrowed under the Credit Facility at its inception, approximately $37.4 million was outstanding at July 31, 2010. Borrowings under this Credit Facility have been classified as a current liability as the Credit Facility requires repayment of outstanding borrowings with

substantially all cash collected by the Company and contains a subjective acceleration clause. Such provisions do not affect the final maturity date of the Credit Facility.

The Company incurred approximately $7.6 million of costs in connection with the execution of the Credit Facility which were recorded as deferred financing costs in other assets on the condensed consolidated balance sheet. These costs are being amortized to interest expense over the three and one-half year life of the facility.

Subsequent to the end of the quarter, on August 31, 2010, the Company entered into a First Amendment to the Credit Agreement with the third-party lender (the “First Amendment”), which modified the following terms under the Credit Facility: (i) reduced the interest rates by one hundred basis points on loan amounts under the Credit Facility for loans provided by the lenders to either (a) three-month LIBOR plus 3.0% to 3.5%, or (b) the base rate plus 2.0% to 2.5%, in each case depending on certain availability thresholds; (ii) adjusted the fee structure on the unused portion of the commitment and reduced by one-half the rates applicable to documentary letters of credit; and (iii) extended the time period during which a prepayment premium will be assessed upon the reduction or termination of the revolving loan commitments from April 7, 2011 to April 7, 2012.

Concurrent with the execution of the First Amendment, the Company and the third-party lender entered into (a) a Master Agreement for Documentary Letters of Credit and (b) a Master Agreement for Standby Letters of Credit (each a “Master Agreement”), pursuant to which the lender will provide either documentary or standby letters of credit at the request of the Company to various beneficiaries on the terms set forth in the applicable Master Agreement, subject to any applicable limitations set forth in the Credit Facility.

Related Party Debt

The Company’s related party debt as of January 30, 2010 was comprised of the following:

•

$245.0 million outstanding on a $250.0 million secured revolving loan facility with AEON;

•

$191.5 million outstanding on a $200.0 million term loan facility with AEON; and

•

$50.0 million outstanding on a $50.0 million term loan with AEON (U.S.A.).

In connection with the consummation and closing of the merger with BPW and the execution of the Credit Facility, the Company repaid all outstanding related party indebtedness on April 7, 2010. Since the debt extinguishment was between related parties, the Company recorded no gain or loss on the extinguishment and the difference between the reacquisition price and the net carrying value of the debt, consisting of $1.7 million of unamortized deferred financing costs, was recorded as a capital transaction by a charge to additional paid-in capital.

Letters of Credit

At July 31, 2010, the Company had letter of credit availability of up to $25.0 million under a letter of credit sub-facility to its Credit Facility, subject to borrowing capacity restrictions described therein. The Company had no letters of credit outstanding at July 31, 2010 under the sub-facility to its Credit Facility or at January 30, 2010 under the Company’s prior credit facilities.

12. Benefit Plans

In February 2009, the Company announced its decision to discontinue future benefits being earned under its non-contributory defined benefit pension plan (“Pension Plan”) and Supplemental Executive Retirement Plan (“SERP”) effective May 1, 2009. As a result of the decision, the assets and liabilities under the plans were remeasured as of February 28, 2009. The remeasurement resulted in a decrease to other liabilities of $25.4 million and $2.0 million for the Pension Plan and SERP, respectively, and an increase to other comprehensive income of $15.2 million and $1.2 million, net of tax, for the Pension Plan and SERP, respectively.

The components of net pension expense for the Pension Plan for the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009 are as follows:

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 31,				August 1,				July 31,				August 1,
		2010				2009				2010				2009
						(In thousands)
Interest expense on projected benefit obligation		$	2,371			$	2,206			$	4,678			$	4,412
Expected return on plan assets			(2,394	)			(1,914	)			(4,800	)			(3,828	)
Curtailment loss			—				—				—				124
Prior service cost net amortization			—				1				—				3
Net amortization and deferral			139				233				244				465
Net pension expense		$	116			$	526			$	122			$	1,176

The components of net SERP expense for the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009 are as follows:

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 31,				August 1,				July 31,				August 1,
		2010				2009				2010				2009
						(In thousands)
Interest expense on projected benefit obligation		$	288			$	291			$	554			$	582
Curtailment gain			—				(58	)			—				(451	)
Net amortization and deferral			20				—				27				—
Net SERP expense		$	308			$	233			$	581			$	131

The components of net postretirement medical expense (credit) for the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009 are as follows:

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 31,				August 1,				July 31,				August 1,
		2010				2009				2010				2009
						(In thousands)
Interest expense on accumulated postretirement benefit obligation		$	17			$	2			$	35			$	4
Curtailment gain			—				—				—				(442	)
Prior service cost amortization			(380	)			(375	)			(760	)			(750	)
Net amortization and deferral			130				110				261				220
Net postretirement medical credit		$	(233	)		$	(263	)		$	(464	)		$	(968	)

The Company was required to make contributions to the Pension Plan of $1.0 million and $1.8 million during the thirteen weeks ended July 31, 2010 and August 1, 2009, respectively, and $2.0 million and $3.7 million during the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively. The Company expects to make required contributions of $2.6 million to the Pension Plan during the remainder of 2010. The Company did not make any voluntary contributions to the Pension Plan during the thirteen or twenty-six weeks ended July 31, 2010 and August 1, 2009.

13. Legal Proceedings

On January 12, 2010, a Talbots common shareholder filed a putative class and derivative action captioned Campbell v. The Talbots, Inc., et al., C.A. No. 5199-VCS, in the Court of Chancery of the State of Delaware (the “Chancery Court”) against Talbots; Talbots’ board of directors; AEON (U.S.A.), Inc.; BPW Acquisition Corp. (“BPW”); Perella Weinberg Partners LP, a financial advisor to the audit committee of the Board of Directors of the Company and an affiliate of Perella Weinberg Partners Acquisition LP, one of the sponsors of BPW; and the Vice Chairman, Chief Executive Officer, and Senior Vice President of BPW. Among other things, the complaint asserts claims for breaches of fiduciary duties, aiding and abetting breaches of fiduciary duties, and violations of certain sections of the Delaware General Corporation Law (“DGCL”) and Talbots’ by-laws in connection with the negotiation and approval of the merger agreement between Talbots and BPW. The complaint sought injunctive, declaratory and monetary relief, including an order to enjoin the consummation of the merger and related transactions. On March 6, 2010, a Stipulation (the “Stipulation”) entered into by the Company; the Company’s board of directors; AEON (U.S.A.), Inc.; BPW; Perella Weinberg Partners LP; the Vice Chairman, Chief Executive Officer and Senior Vice President of BPW and John C. Campbell (“Plaintiff”) was filed in the Chancery Court with respect to this action. Pursuant to the Stipulation, the Plaintiff withdrew its motion for a preliminary injunction to enjoin consummation of the merger and related transactions between the Company and BPW. In exchange, the Company agreed to implement and maintain certain corporate governance measures, subject to the terms and conditions specified in the Stipulation. The Stipulation did not constitute dismissal, settlement or withdrawal of Plaintiff’s claims in the litigation, and there is no assurance the parties will finally settle and discharge such claims. Defendants have moved to dismiss the complaint and intend to continue to defend against the claims vigorously. The Company cannot accurately predict the likelihood of a favorable or unfavorable outcome or quantify the amount or range of potential financial impact, if any.

14. Segment Information

The Company has two separately managed and reported business segments — Stores and Direct Marketing.

The following is certain segment information for the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009:

		Thirteen Weeks Ended
		July 31, 2010												August 1, 2009
						Direct												Direct
		Stores				Marketing				Total				Stores				Marketing				Total
										(In thousands)
Net sales		$	250,870			$	49,872			$	300,742			$	254,872			$	49,769			$	304,641
Direct profit			31,010				10,784			$	41,794				10,178				6,913			$	17,091

		Twenty-Six Weeks Ended
		July 31, 2010												August 1, 2009
						Direct												Direct
		Stores				Marketing				Total				Stores				Marketing				Total
										(In thousands)
Net sales		$	508,443			$	112,960			$	621,403			$	511,236			$	99,580			$	610,816
Direct profit			82,473				30,592			$	113,065				26,195				11,080			$	37,275