Coldwater Creek Runs Hot

Shares in the women's apparel retalier surged Wednesday after its quarterly results topped analyst forecasts

Coldwater Creek (CWTR) shares sailed higher on May 30 after the women's apparel retailer reported stronger-than-expected quarterly earnings.

Late May 29, the Sandpoint, Idaho-based company said first-quarter (ended May 5) profits rose 4% to $12 million, or 13 cents per share, a penny higher than a year earlier. That beat analysts' EPS forecast of 8 cents per share, and the company's projection of 7-9 cents. Same-store sales in the quarter were up 7.3%, and net sales jumped 31% from a year ago to $281.3 million.

"The net sales and earnings performance for the first quarter was a result of solid response to our spring merchandise in combination with effective cost-control measures," said CEO Dennis Pence in a press release. "We added new stores and gained additional market share during the period, despite the challenging traffic-related environment which continues to impact the women's specialty apparel sector."

The company added that it ended the quarter with retail inventory per-square-foot well below last year. However, gross profit margin in the quarter was 45.7% of sales, down from 46.7% a year ago, amid increased promotional activity. And expenses rose, driven by marketing, personnel and overhead costs associated with the company's retail expansion.

Coldwater shares jumped nearly 17% to close at $24.37 on heavy volume on the Nasdaq on May 30. The stock has now recovered from a fall in mid-January, after the retailer lowered its outlook for its fourth quarter, saying its customer traffic, and the categories of fashion-knit tops, moleskin pants, jewelry and accessories were especially weak. The stock hit a 52-week low of $16.77 on Mar. 14, down from its high of $31.25 reached on Nov. 21, 2006.

Coldwater started in 1984 as a catalog of accessories and Native American-influenced gifts, targeting women aged 35-60 years (see BusinessWeek, 12/12/05, "Coldwater Creek's Hot Run"). The company has expanded to 252 retail stores and has opened six spas where it has stores. The company is on track to open 65 stores in fiscal year 2008 (January), ending with about 300, said Standard & Poor's analyst Marie Driscoll in a note. Its competitors include Chico's FAS (CHS) and the classic styles from Talbot's (TLB).

A few Wall Street analysts were impressed with the company's better than expected first-quarter results. CL King analyst Mark Montagna upgraded the shares to strong buy from neutral, saying in a note that Coldwater appears to be back on track far more quickly than he expected and headed for an earnings per share increase in the first half of the year. He sees two key drivers of improved performance to the second through fourth quarters: quarterly inventory declines of 10%-12% and deeper merchandise buys.

Montagna noted that management said it expected to have quarter-ending inventory levels decline in low-double digits for each of the next three quarters, and that the company has also cut back or eliminated styles it no longer believes in as strongly. These actions, he says, should reduce markdown liabilities. In turn, he raised his fiscal year 2008 (ending January) EPS estimate from 59 cents to 74 cents. He has a $31 price target on the stock.

However, some analysts pointed out that the company's traffic -- the number of shoppers strolling around its stores -- is not so hot. "Store traffic was weak through the period and remains so," said S&P's Marie Driscoll in a note. While she lifted her earnings estimates and 12-month price target for the stock to $24 from $20, using her 3-year projected earnings growth rate of 25% as a p-e multiple on her 2009 EPS estimate of 95 cents, she kept her hold recommendation on the stock.

"It's got a high valuation and right now traffic isn't there," Driscoll said in an interview. "And we think that department stores are offering much more competitive merchandise." (S&P, like BusinessWeek, is owned by The McGraw-Hill Cos. [MHP].)

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