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Coldwater Creek Beats Estimates But Outlook Still Cloudy

Posted: Sep 05, 2008 15:49 PM by Eric Fox

Tickers in this Article: CWTR, JAS, TLB, CHS

Coldwater Creek (Nasdaq:CWTR) reported second quarter diluted earnings per share of 3 cents, slightly higher than expectations, but issued the familiar warning about macroeconomic conditions that has become a staple of earnings season. (For more on how these factors affect companies and their stocks, check out Macroeconomic Analysis.)

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Coldwater is a specialty retailer that focuses on the over-35 women market niche and operates 322 stores. Other retailers focusing on this segment include Talbots (NYSE:TLB) and Chico FAS (NYSE:CHS).

Comps And Gross Margin Decline
Although Coldwater beat expectations and raised its full-year guidance, the company saw comparable store sales decline 13.7% in Q2 versus Q2 of fiscal 2007. Gross margin for Q2 was 39.6%, compared with 43.5% for Q2 last year. The decline was due to "deleveraging of occupancy costs due to lower same-store sales", according to management.

Guidance for Q3 and Q4 remained the same as before, but full-year earnings guidance is now at 10 cents to minus 1 cent per share, and sales projections are at $1.1 billion to $1.15 billion.

Economic Environment Warning
During the conference call, management warned about the current economic environment.

Daniel Griesemer, president and CEO, said customer traffic remained "exceptionally challenging" during Q2, and looking forward the company is "facing strong headwinds with continued deterioration in the macro environment. Retail traffic is extraordinarily challenging, and we see no external stimulus to improve our customers' willingness to shop and spend in the short term."

Analysts questioned Griesemer on whether the challenging customer traffic trends continued through August, but he said the true test would be September, which he called Coldwater's "natural selling season". This is when its customer base typically purchases clothes for the fall. (For more on this sector and what to look for, read Analyzing Retail Stocks.)

Promotional Marketing Slowdown
A less-promotional environment helped results, and management indicated this was a strategic decision to return to its regular pricing strategy. Transactions carrying a promotional discount decreased to 15% of all transactions in Q2 2008 from 44% in Q2 2007.

Coldwater was not the only retailer to be less promotional. Jo-Ann Stores (NYSE:JAS), which is not a direct competitor to Coldwater, said it saw a less-promotional environment industry wide in the crafts market.

"If you look at the number of pages of advertising that were run in the second quarter, depending on the competitor, it was down between 25% and 40%," said Jo-Ann Stores' Chairman, President and CEO Darrell Webb during an August 27 conference call. "Each of the major craft competitors ran one fewer week of inserts during the second quarter."

Coldwater made significant strides in reducing its inventory to cope with the plunge in comparable store sales, recording a decrease in inventory per square foot of approximately 24% compared with Q2 2007. The goal for the full year, according to management, is to be down 50%. (Learn more about metrics such as this in The Industry Handbook: The Retailing Industry.)

Bottom Line
Investors may have cheered the latest quarter for Coldwater Creek, but the company still faces the obstacle of slowing consumer spending, which is reflected in its large decline in comparable same-store sales. September will be a critical month for the company as customers pass judgment on its new fall clothing line.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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