Coldwater Creek Inc. Q4 2005 Earnings Conference Call Transcript (CWTR)

| About: Coldwater Creek, (CWTR)

Coldwater Creek, Inc. (NASDAQ:CWTR)
Q4 2005 Earnings Conference Call
March 8, 2006, 3:45 p.m. CT

Operator: Good day everyone and welcome to Coldwater Creek's forth quarter earnings release conference call. Today's conference is being recorded.

With us today, we have Mr. Dennis Pence, Chairman and Chief Executive Officer, Ms. Georgia Shonk-Simmons, President and Chief Merchandising Officer, Mr. Mel Dick, Executive and Vice President and Chief Financial Officer, and Mr. David Gunter, Divisional Vice President Corporate Communications and Investor Relations.

At this time, I would like to turn the call over to Mr. Gunter. Please go ahead sir.

David Gunter:Thank you operator. Good afternoon and welcome to Coldwater Creek's fiscal 2005 fourth quarter earnings release conference call. If you have not received a copy of the release distributed this afternoon, please contact our office at 208-265-3977 and we will send one out to you immediately.

We will begin with a few formal comments from management and then open up the lines for your questions.

During the course of this conference call, we may make forward-looking statements regarding future events or performance of the company, including forward-looking statements and projections about our operating results, business initiatives, growth opportunities and prospects.

We want to emphasize that any projection involves judgment and that individual judgments may vary. Any projections we make today are based on information available to us now, which is subject to change as the quarter progresses. Actual results may differ substantially from what we say today, and no one should assume later in the quarter that the comments we provide today are still valid. Moreover, we are not undertaking any obligation to provide updates in the future.

The documents the company files from time to time with the Securities and Exchange Commission, including our most recent Form 10-K and Form 10-Q contain and identify important factors, including the risks and uncertainties described under "risk factors" that could cause actual results to differ materially from those contained in any forward-looking statements.

A replay of this conference call will be available immediately after the call today, until midnight on March 15th. The number to call for the replay is 719-457-0820 and the pass code is 1024178. The web cast of this call will also be available on the Investor Relations page of our Web site until March 15th, after which the transcript of this conference call will be posted. To access that information, visit and select "Investor Relations".

And now, I would like to introduce Dennis Pence.

Dennis Pence: Thank you, David and welcome back ladies and gentlemen. I am very pleased to report that compelling merchandise and the effectiveness of our Triple Channel marketing strategy resulted in strong, full priced selling and increased profitability for the fourth quarter. At the same time, our national magazine advertising campaign generated increased customer traffic and enhanced awareness of the brand.

The Successful execution of our retail store roll out continued in fiscal '05 as we opened a total of 60 stores for the year. We increased our store count by eleven stores in the fourth quarter, which brought us to our goal of having 174 locations in place for the holiday selling season.

The Coldwater Creek catalog; in concert with our national brand advertising continues to be an effective store traffic driver. As we have announced, we plan to further leverage both of these successful marketing tools to increase circulation of the Coldwater Creek catalog and additional investment in magazine advertising in '06.

Based on very favorable customer response, we expanded our advertising program to include inserts of up to eight pages during the holidays. Our advertising campaigns were featured in major women's magazines, such as "Oprah," "Good Housekeeping," "Better Homes and Gardens," "Country Living," and "Southern Living." We believe these national ads played an important role in helping up gain market share in this past quarter. In addition to driving sales traffic, these national ads continue to attract new customers to the brand. More than 18 percent of the customers coming to us through these advertising campaigns are first-time shoppers with Coldwater Creek.

We also saw positive growth in our pre-approved credit card program, adding more than 70,000 new cardholders in the fourth quarter and bringing the total number of Coldwater Creek cardholders to more than 150,000. Including the new names added during the recent quarter, we now have nearly 2.9 million active email addresses. Nearly 70 percent of the customers on our email list now live within 30 miles of a Coldwater Creek retail location.

Also in the fourth quarter, we broke ground for a 350 thousand square foot expansion to our West Virginia distribution center. With the addition of this new space, which is planned to go into service this fall, we believe we will have sufficient capacity to reach our retail build-up goal of 450 to 500 locations.

Turning now to a brief overview of our fourth quarter financial performance the data is as follows: Net Income increased 65.5 percent to 18.9 million dollars, resulting in earnings of 20 cents per share, compared with 12 cents last year. Operating margin for the quarter was 10.6 percent, improved merchandise margins and leveraging of our full line retail store occupancy cost resulted in a 370 basis point improvement in the gross profit rate. Net sales increased 41 percent; due to solid response to our holiday merchandise collection across all three selling channels. We ended the quarter with a cash position of 131 million dollars, working capital of 133 million and zero debt.

In regards to the retail segment, net sales from the retail segment increased more than 68 percent to 165.5 million in the fourth quarter. Retail stores represented nearly 58 percent of our total net sales for the period, compared with 48 percent a year ago.

In regards to the direct segment, our overall direct segment net sales increased nearly 16 percent due to favorable customer reception to our holiday merchandise coupled with strong response to our national advertising in both Internet and catalog.

Internet sales increased more than 18 percent in the fourth quarter compare with the prior year and represented more than 60 percent of our direct segment net sales for the period.

Catalog sales increased 12 percent in the fourth quarter and represent less than 40 percent of our direct segment net sales for the period.

In summary, strong full priced sales performance in all channels throughout the fourth delivered solid increases in net sales, earning per share, gross profits and operating margins. Going forward, we will maintain our focus on the execution of our retail store expansion strategy with plans for 65 new stores this year. With those locations in place, we will have a total of 239 stores supporting the brand in key national markets as we enter the '06 holiday selling season.

Our national magazine advertising strategy has proven to be an excellent way to drive traffic to this growing store base as well as to our Internet and catalog channels. Based on the success of these ads, we plan to increase the number of issues that feature our brand by more than 40 percent this year. This represents an increase in page count from last year's 743 million pages to more than one billion pages advertising Coldwater Creek in 2006.

We continue to believe the positive impact of an expanding national store base combined with an effective brand building initiatives, are increasing market share while taking another step closer to the goal of establishing Coldwater Creek one of the premiere specialty retailers in the United States. Now, I'd like to turn the call over to Mel for a more detailed review of fourth quarter financial results.

Mel Dick: Thank you, Dennis. Net income for the fourth quarter was 18.9 million or 20 cents per share. This represents an increase of 65.5 percent over the net income of 11.4 million or 12 cents per share we reported in the fourth quarter last year.

Our consolidated net sales for the fourth quarter increased 41 percent to 287.9 million from 204.1 million in the comparable period last year. This increase was the result of strong customer response to our holiday merchandise and an increase of 60 retail stores compared with the prior year.

Net sales from our retail segment increased 68.3 percent to 165.5 million for the fiscal 2004 - 2005 fourth quarter from 98.3 million in the prior year period.

Our retail segment net sales represented 57.5 percent of the company's total net sales in the most recent quarter, compared with 48.2 percent a year ago. With the addition of 11 retail locations that opened during the fourth quarter, we met our goal of having a total of 174 full line store in operation for the holiday season, compared with 114 full line stores in the prior year.

Net sales from our direct segment increased 15.7 percent to 122.4 million for the fourth quarter compared with 105.8 million in the 2004 period. Our direct segment net sales represented 42.5 percent of the company's total net sales in the most recent quarter compared with 51.8 percent in the prior year.

Internet net sales increased 18.3 percent to 73.7 million in the fourth quarter compared with 62.3 million last year. Internet net sales represented 60.2 percent of the company's direct segment net sales in the fourth quarter compared with 58.9 percent in the fiscal 2004 period.

Catalog net sales increased 12 percent to 48.7 million for the quarter compared with 43.5 million a year ago. Catalog net sales represented 39.8 percent of the direct segment net sales for the period compared with 41.1 percent in the prior year fourth quarter.

Gross profit for the fourth quarter was 132.4 million or 46 percent of net sales compared with 86.4 million or 42.3 percent of net sales for the same period last year. This 370 basis points increase in the gross profit rate was primarily due to strong full price selling across all channels and to a lesser extent, improved leveraging of the company's full line retail store occupancy cost.

Selling, general and administrative expenses for the fiscal 2005 fourth quarter were 101.9 million or 35.4 percent of net sales compared with 67.9 million or 33.3 percent of net sales for the fourth quarter of 2004. The increase in selling, general and administrative expenses expressed as a percentage of net sales was primarily due to increased national magazine advertising.

For the recent quarter, income from operations increased 12 million or 65 percent to 30.6 million or 10.6 percent of net sales. This compares with 18.5 million or 9.1 percent of net sales in the prior year period.

Turning to the balance sheet, we closed the quarter with 86.3 million in inventory an increase of 22.6 million compared with the end of the fourth quarter last year. This increase in inventory was primarily due to the addition of 60 retail stores since the fourth quarter of last year. The 35.4 percent increase in inventory came during a period when we had 52.6 percent increase in store count and a 37 percent in retail square footage compared to the fourth quarter of 2004.

At the end of the fourth quarter we had no short or long-term debt and a cash position of 131.9 million. At the same time, the company's working capital increased to 133.9 million at the end of the period from 116.5 million in the comparable period a year ago.

In regards to our Coldwater Creek Co. branded credit card program, we had activated approximately 72 thousand cards during the fourth quarter, which resulted in credit card revenues of more than 6.1 million for the period. As of the end of the fourth quarter, we had approximately 153 thousand activated Coldwater Creek credit cards.

Finally, as Dennis noted, we have begun construction on the 350 thousand square foot expansion to our existing West Virginia distribution center, which will bring our total space there to almost one million square feet. We plan to put the new space into service during the second half of fiscal 2006 and remain confident that the expanded facility will be able to fulfill up to 500 retail locations going forward.

In summary, our holiday merchandising and marketing initiatives generated positive customer response across all channels. Which resulted in increased net sales, net income, gross profit and operating margin for the quarter.

I will now turn the call over to Georgia for discussion of our merchandising results for the holidays and a look at what's in store for spring.

Georgia Shonk-Simmons: Thanks Mel. Good afternoon everyone. The positive performance for the fourth quarter was the result of very favorable customer response to our merchandise assortment at full price and in all three channels.

Our strategic approach to Christmas 2005 was based on improving upon the strong showing we had during the previous year's fourth quarter. We achieved that goal by giving her the festive, special spirit of the holidays on an emotional level through our merchandise, customer service as well as packaging and presentation. From a brand standpoint, we've returned to our roots with the distinct focus on traditional Christmas.

As discussed in the third quarter conference call, everything about our holiday collection was strategically designed and all categories this year emphasized multiple gifting. During the holidays, we continue to wardrobe our customer, but this is the time of the year when she also comes to Coldwater Creek as a gift-giving destination.

Our enhanced focus on gift items this year really set us apart from the competition while allowing us to capture the add-on sale.

Along with strong gift buying throughout the holidays, I'm happy to report that we saw a solid performance in all merchandise categories in the recent quarter. Some of our top sellers included, of course, our novelty jackets, which were unique, appropriately priced and found only at Coldwater Creek.

Versatility continued to drive this category and customers loved the fact that these jackets can just as easily be worn with jeans as they can with dressier separates. Velvet and stretch velvets also performed especially well. Again, offering versatility when worn with other novelty tops, tees, shirts and blouses. Our color palette of bright jewel colors was very well received for Christmas. And on a more casual side, our hotter bright sold very well. In sports wear, we had a great response to dressy key items and especially in our velvet gaucho pant business. One key to our success in maintaining full price selling has been the way we keep adding newness and color to the assortment.

In mid December, we began to flow some of our early spring merchandise, which was very well received. By the beginning of January, we had completed a full color change on the sales floor. Adding the nautical looks of navy, bright white, clear reds and yellows, which left no question that we had changed seasons from holiday to early spring.

Although January is traditionally a clearance period, our clearance activity was once again extremely effective. But we continued to attract her attention with the full price spring assortment. So, based on early results I'm encouraged by the response to our spring assortment. Some of our most popular items so far this season have been woven shirts, fashion tees, shirts and again our signature jacket program.

I believe we have additional opportunities in the accessory area through product development in our handbag business along with fashion belts, matching accessories, scarves and shawls. Just as we did successfully for the holidays, we will continue to pursue the growth in this category going forward.

Turning now to our marketing initiative, that Dennis mentioned, our Coldwater Creek catalog which features merchandise that can be found in our retail stores has been a real catalyst for driving store traffic, while also performing well in the direct segment. Based on these results, we are increasing our circulation for this book to a total of six mailings in 2006, up from five mailings last year.

Once again, our inventory position came in under plan for the recent quarter, even with the addition of 60 new stores compared to prior year. Continuing a favorable trend, our inventory remains more current than in the past. Retail inventory increased a 4.4 percent on a square footage basis to $48 per square foot compared with $46 per square foot the prior year, this inclusive of the distribution center. This increase was primarily associated with bringing in merchandise to support the on-going positive response to our national ad campaign.

Turning to our global sourcing initiative, we achieved our goal of having at least 15 percent of our volume direct source for 2005, which contributed to the increase in gross profit in the fourth quarter compared to a year ago. We are now working toward our goal of direct sourcing approximately 30 percent of our merchandise by the end of this current fiscal year. We successfully opened our office in Hong Kong in January, which is key to our direct importing strategy going forward. We also have people on the ground in India and Guatemala.

In closing, we are very pleased with the response to our merchandise at full price in Q4. We believe our focus on traditional Christmas look and feel resulted in strong sales across all categories. Our marketing strategy of using national magazine advertising and the Coldwater Creek catalog as traffic drivers continues to increase brand awareness, attract new customers and generate sales in all three channels.

Inventory levels were once again below plan at the end of the period and our inventory is more current than in the past. At the same time that we added 60 stores and increased retail square footage by 47 percent the same period last year. And while this season is just starting, response to our spring merchandise has been positive and we are enthusiastic about the rest of the season.

That concludes my formal remarks; I'd now like to turn the call back to Dennis. Dennis ...

Dennis Pence: Thank you very much, Georgia. Before we open up the lines for questions, I'd like to reiterate that the company provided guidance for fiscal 2006 in a press release distributed via the news wires on February 1st, accompanied by an 8-K filing on that same day.

We have not revised our guidance for fiscal 2006 and I refer our listeners to these filings for more detailed information. Thank You.

Mel Dick: We'll now open up for questions.

Question-and-Answer Session

Operator: Thank you. To ask a question, please press star one on your telephone. Also if you're listening on a speakerphone, you may want to disengage your mute button to allow your signal to reach our equipment. So once again that's star one for questions.

And we'll take our first question from Chris Kim from JP Morgan. Go ahead please...

Chris Kim: Hi, thanks. Congratulations on a great quarter.

Georgia Shonk-Simmons: Thank You.

Chris Kim: First, with regards to your catalog circulation, look like there was a slight decline in the fourth quarter, but revenues were up nicely at both catalog and Internet. Can we assume that the new retail catalog introductions really more than off set perhaps some of the declines in the other catalogs?

Georgia Shonk-Simmons: Oh, absolutely.

Chris Kim: OK and how should we be looking at that for the first quarter, sort of breaking down the circulation retail versus other...

Georgia Shonk-Simmons: Chris I can give you year, OK?

Chris Kim: OK. OK.

Georgia Shonk-Simmons: We are going to maintain circulation for catalog slack to 2005, which is, you know, in the area of 97 to 98 million.

Chris Kim: Yes.

Georgia Shonk-Simmons: And we will increase circulation in the Coldwater Creek retail book from approximately 11 to 12 million to - um - sorry to about 19 million. OK?

Chris Kim: OK and also for Mel, just related to the credit card revenues on the pre approved credit card side. I know that you've been reinvesting a lot of these dollars back into the business but how should we be looking at this as you begin to overlap it, I guess, in the second quarter? And also in the first quarter as well I guess.

Mel Dick: Well, we will continue to have credit card revenues in the - in '06. In the first quarter of '05 we did not have the program, so it will be a non-comp. As we move forward and as our customer base is offered the credit card, the new customers will basically - that receive the card or get offered the card and take it will be new to file customers as we expand the retail stores and other customers come into the brand. We will continue however, to invest in brand advertising, as Dennis mentioned, a significant increase in '06 and that would really be consistent with what we did in '05 where we reinvested those credit card revenues back into expanding the brand.

Chris Kim: And in terms of the tax rate, I know that it crept up a little bit here. What was the cause of that and, you know, in '06 what should we (use)?

Mel Dick: The tax rate for '06 I would - would be somewhere in the neighborhood of 39 to a little bit higher percentage, maybe 39 1⁄2, nothing significant in terms of the rate creeping up just a little bit. It was just true up to our tax rate for the year.

Chris Kim: OK. And Dennis, I was hoping that you could comment a little about the spa business. When's the first batch going to open, maybe if you could comment on the pricing strategy versus mom & pops in the malls? And are there any anticipated hiring's potentially that are going to be announced in the near future?

Dennis Pence: Right. I'll be happy to comment on that. The contractors have turned over the keys to the first spa location just outside of Portland, Oregon and we're now doing personnel training for the service providers as we speak there. The other five (step) spas are on time, as planned and I anticipate then all will be open by end of June. The next conference call, I think I'll be able to give you a flavor in terms of what we're seeing. We do feel that it's definitely an opportunity that no one has developed a days spa branded business nationwide and we think it ties in very, very strongly with the apparel brand, which I've mentioned before. But we will see.

As far as pricing strategy, we feel that given the quality and service, we can be very slightly over the average mom & pop day spa in the market and pricing will be market specific. In some markets, let's say Dallas, it'll be higher than, let's say, Portland.

Chris Kim: OK and can you remind us of what is the, sort of the market statistic, of how large the industry is overall?

Dennis Pence: Well, I'm not sure. I have heard 11to 12 billion dollars.

Chris Kim: OK.

Dennis Pence: And we can check that for you. I have heard that number and it's highly fragmented, to me that's the most interesting part of it.

Chris Kim: OK. Thanks very much and good luck with 2006.

Dennis Pence: Thank you.

Operator: We'll take our next question from Richard Jaffe with Steifel Nicholas. Go ahead please.

Richard Jaffe: Well thanks very much and congratulations on a remarkable quarter.

Georgia Shonk-Simmons: Thank You.

Richard Jaffe: A couple of - I guess quick questions. I guess first for Georgia, the gifting that occurred in the fourth quarter, could you talk about that and how it was apparel versus non-apparel? And then if I could just follow up on the gross margin improvement, if we could sort of tease that apart, occupancy leverage versus initial or maintained merchandise margin improvement there. And then if you would comment on the retail calendar and if you are a 53rd week company.

Georgia Shonk-Simmons: Well first of all, let's talk about gifting. I think that all categories basically performed as planned and it still really followed the 80/20 rule; 80 percent apparel, 20 percent other for the time of the year. So that percentage really didn't change but what did change is the sell through, by really being able to take, let's say, the sweater category, and taking the sweater category and taking it with accessories to, dye to match the scarves to match the sweaters with hats and gloves again, to produce multiple sales. Or in the handbag area, and our signature collections, not just doing handbags and brief cases but doing small leather goods proprietarily but again our add-on sales. So we looked at everything as being "socks with slippers".

There we looked for things that would be easy gift giving and be multiple. That makes sense?

Richard Jaffe: Sure, that's helpful and the margins?

Dennis Pence: In terms of the margins, if you look at the total basis, 370 basis point improvements. I would say, about 300 of that was made up of improvements in terms of merchandise margins and in more full price sales versus clearance sales, the remainder is due to leveraging our retail occupancy cost.

Richard Jaffe: And, was some of that merchandise benefit the initiative to source direct?

Dennis Pence: Yes.

Georgia Shonk-Simmons: Absolutely. If you recall, the goal was to hit the 15 percent and really, most of that going to come until the second half of '05. And we recognized that.

Richard Jaffe: Yes, and that obviously contributed here nicely.

Georgia Shonk-Simmons: Absolutely.

Richard Jaffe: I guess, just a follow on with the ad spend, given your success with ad spend is there an opportunity there to, particularly in the fourth quarter next year, or the second half next year, to step on the gas? To take advantage of your advertising success and to ramp up spending?

Georgia Shonk-Simmons: Well, we do have a plan to really increase the spending and Q4 certainly is a time of year to do it. Last year, we spent approximately 14 million dollars.

Richard Jaffe: Right.

Georgia Shonk-Simmons: And this year, we're planning on spending approximately 22 million. So, we do believe it really did give us leverage and bring in market share and traffic to all channels, primarily retail, but to all the channels.

Richard Jaffe: And the retail has been limited to print so far, are there other mediums that you need to be in, or would like to be in? Given the success?

Georgia Shonk-Simmons: ((inaudible))

Richard Jaffe: ... that you need to start experimenting in I guess?

Dennis Pence: Yes, obviously cable TV, I think for certain channels, lifestyle channels for our customers makes sense. We have to get in the major urban markets enough store density first, so that we're not wasting that spend. But, I think we should be starting to test it in '07.

Richard Jaffe: Would you consider direct selling on TV an infomercial of some sort given your direct access already or ...

Dennis Pence: No, direct heritage, but no I don't think I want to go there.

Richard Jaffe: OK.

Dennis Pence: OK. Thank you.

Richard Jaffe: Thank you.

Operator: Our next question comes from Roxanne Meyer with CIBC. Go ahead please...

Roxanne Meyer: Thanks and let me add my congratulations on a terrific quarter.

Dennis Pence: Thank you.

Georgia Shonk-Simmons: Thank you.

Roxanne Meyer: Just a couple of questions. Do you see there being additional gifting opportunities in other quarters besides the fourth quarter? And if so, what kinds of things do you have planned?

Georgia Shonk-Simmons: I actually think that's a very good question and absolutely, I do believe as we move into some of the other holiday spends, which is Valentines Day or Mother's Day. To really again continue a large focus on the coordination for the entire line which will include apparel, shoes, accessories and jewelry. And I think again that way; we can really enhance being a gift-giving source, not just at the holiday season. That being said, we know that the traffic is really driven by holiday but I think we absolutely had some great learning's from this holiday.

Roxanne Meyer: OK, great. Also it's larger stores, larger new stores this year. Is there a way that you can, I guess, provide more clarity and how you're differently going to use that space? Or is it just that you've got more room to spread things out?

Georgia Shonk-Simmons: Let me, let me address that by saying that we had definitely gone to and tried some smaller store strategy. Our larger store strategy this year is really not making our stores larger than we had from where we had begun, its just opening less tiny stores. And really, it gives our collection and our brand a place to show her how versatile it is and eclectic and show all our categories in the proper way, and take more dollars out of the market.

Dennis Pence: And we did see that the 4 thousand square foot store did not have a higher dollars per square foot number than the 5 thousand square foot store. So once you start seeing that data roll in, it's pretty obvious that the financially correct decision is to make them a little larger and its certainly not about spreading the merchandise out, it's about selecting more merchandise for those larger stores.

Roxanne Meyer: OK. So you think, if anything, it will have a more positive impact on store productivity?

Georgia Shonk-Simmons: Absolutely.

Roxanne Meyer: OK. I guess also, in terms of the catalog increase, that was really a surprise, the increase in sales. On a two-year basis, you've really for quarter over quarter, haven't had any declines there. So would you just attribute the increase in catalog sales despite your decline in circulation just to all of your national magazine efforts?

Georgia Shonk-Simmons: I think certainly, the national magazine advertising has not only driven traffic to the store, but has also driven traffic to catalog and Internet. I also believe the Coldwater Creek catalog, which we use to drive traffic to the stores, does get business, does bring business into the catalog and Internet also. So I think all of those efforts of increasing market share have been very positive in the catalog business.

Roxanne Meyer: OK, great. And then last, are there any plans at this point to create a loyalty program that doesn't involve the credit card?

Dennis Pence: Possibly, but we see such a really fertile field here in terms of coming up with ways to market to our cardholders to incent them to buy more, and we are seeing already that our cardholders have a higher spend in any given financial period than non card holders of the same type, so to further incent that and take advantage of that, I think it'll be our first initiative. Though, there's only the possibility perhaps for a few hundred thousand long term, the spend is so high that it really is healthy to focus on that right now.

Roxanne Meyer: Is it - would you be able to provide any kind of metric as to how much higher it is than a non credit card holder?

Dennis Pence: I'd rather wait till we have a year's sales under our belt with them and then we can give you some comps, but I think in a full year. But it is significant.

Roxanne Meyer: OK, great. Well good luck on first quarter.

Dennis Pence: Thank you.

Mel Dick: Thank you.

Operator: We'll now go to Crystal Lanigan with DA Davidson. Go ahead please...

Crystal Lanigan: Good afternoon and again, congratulations on a great quarter.

Georgia Shonk-Simmons: Thank you.

Crystal Lanigan: You know, I know Georgia, I guess there's a combination for everybody there but you had talked about the direct sourcing and I think you have been looking hopefully this year to get about 100 to 150 basis point benefit from the direct sourcing? Is that about what you would ...

Georgia Shonk-Simmons: We really looked to get about 50 to 100 basis points and in fact that was achieved.

Crystal Lanigan: OK, great. And then are you yet able to tell us what your looking for now that your goal is 30 percent for '06?

Georgia Shonk-Simmons: Well let me just say that, honestly by the time - the best way to look at this is that by the time we're at 70 percent direct imports, which should be in '08, we should be able to see a 300 to 500 basis point improvement.

Crystal Lanigan: OK. OK, great. And then I guess Georgia, sport and petite have been great opportunities for you and can you update us on how the trends are in those businesses?

Georgia Shonk-Simmons: Well we do know that our petite business continues to grow and but as does our large size business so I think our special size business is very, very healthy and we continue to grow that business. Sport, we knew in sport that it really is the sport sets and things that she can wear to really run her errands in and fly in and be comfortable more than true athletic wear.

Crystal Lanigan: OK, great. And then, are you looking for - what is your goal as far as inventory looking towards 2006? I know you've been having great business that you've been chasing a little bit but what would be kind of a goal inventory for you to have this coming year?

Georgia Shonk-Simmons: I think it really will be similar to what we saw in 2005 with the addition of the 65 new stores.

Crystal Lanigan: OK. OK, so about flatish then?

Georgia Shonk-Simmons: Yes. Absolutely.

Crystal Lanigan: OK. OK, and then just finally I know you started to talk about - started to talk about changing the store footprint and so this year was about a 55 hundred square foot store for the newer stores, is that correct?

Dennis Pence: This year's stores were a little bit over five thousand square foot, the average sized store though, however, is between 54 and 55 hundred square feet and the, ‘06 stores that we will build will be right around 55 hundred square feet ...

Crystal Lanigan: OK.

Dennis Pence: About the same as the average in the chain today.

Crystal Lanigan: Oh, great. And then just with the housekeeping, do you the year-end square footage? Exactly?

Dennis Pence: Yes, the year-end square footage for the full line stores was about 950 thousand square feet.

Crystal Lanigan: Great. And then just finally, new store performance, are you seeing any difference as far as stores your going into new markets versus more fill in markets or give us an idea of how that's trending for you.

Dennis Pence: Well our store economic model is based on five hundred dollars of sales per square foot in year three and I'm pleased to say that as we look at the chain as a whole, we're over five hundred dollars of sales per square foot for the chain as a whole for '05 so we clearly believe that we are meeting our store economic model and that would be across the entire company or country if you will in all markets.

Crystal Lanigan: Excellent. Thank you very much and congratulations again.

Dennis Pence: Thank you.

Georgia Shonk-Simmons: Thank you.

Operator: We'll take our next question from Lyn Walter with Wachovia Securities. Go ahead please.

Lyn Walter: Hi guys. Thanks and congratulations.

Dennis Pence: Thank you.

Georgia Shonk-Simmons: Thank you.

Lyn Walter: A couple questions. First, regarding the credit card revenues, can you just talk about how that flowed through to the bottom line in Q4?

Dennis Pence: Yes, I'll take that. As I mentioned in the second quarter and the third quarter we had about a 3-cent impact in those quarters and we we're at about 3 cents for the fourth quarter. Obviously the increase in the fourth quarter was as a result of the additional volume during the fourth quarter although, as you know, we have continued to invest those dollars back into our marketing efforts.

Lyn Walter: Right. Right, OK. And then, regarding your - earnings guide and through your - excuse me, your revenue guidance for Q1 and Q2, I'm having trouble getting to it, can you just walk us through how your thinking about the business in terms of catalog, Internet and retail during the first half, is there anything I'm missing here?

Dennis Pence: Well, in terms of the retail side of the business we are planning on opening up 10 stores during the first quarter. I believe Georgia mentioned in her comments on the catalog circulation that the catalog circulation is going to be approximately the same as last year. For the whole year, we haven't broken that out by quarter, but I don't think there's a significant change in the quarters and I don't know if you need - I mean that's really where we're at with it. In terms of store openings, catalog circulation, no real changes to the email circulation that I know of.

Lyn Walter: OK.

Georgia Shonk-Simmons: There will be an increase in circulation for the Coldwater Creek book in Q2.

Lyn Walter: Is that where the extra catalog falls?

Georgia Shonk-Simmons: Yes, it does.

Lyn Walter: And finally, are you still on track, getting leverage at the retail infrastructure with about 225 stores and are you assuming - is that assumed in your guidance?

Dennis Pence: Yes, it is. The 225 though, we hit that number in the fourth quarter of next year and so the majority of the leverage, I believe, will really come after 2006, it will be in 2007.

Lyn Walter: OK, great. Thanks and good luck.

Dennis Pence: Thank you.

Georgia Shonk-Simmons: Thank you.

Operator: We have a question from Holly Guthrie from Morgan Keegan. Go ahead please.

Holly Guthrie: Thank you and congratulations.

Georgia Shonk-Simmons: Thank you so much.

Holly Guthrie: Sure. I was hoping to get a little bit more clarification on the dollar increase in SG&A. How much came from additional advertising, how much was the store payroll, and I guess any other large chunks that you saw incremental increases year over year in.

Dennis Pence: Yes, the majority of it came in the advertising, I believe this year we spent approximately 6 million dollars during the fourth quarter and that was compared to less than a million dollars in the fourth quarter of last year, or during the holiday selling season. And then obviously I don't have the exact dollar amount but there is an increase in the retail field management staff because of the 60 new stores. The store managers we added for that as well as district and regional managers.

Holly Guthrie: OK. And then back to the national advertising, are you happy with all the magazines that you've been using over the past 9 months; I guess almost a year now? And are you - or are you looking at some other, at some other brands? Some other names of magazines?

Georgia Shonk-Simmons: We are always testing other magazines. I think the good news that we have is because we have an offer in the magazines, we know exactly which magazines work for us and which ones don't and the amount of pages that should be in those magazines. So, we monitor that very carefully and I think also the exciting news, because of our success last year, is it gives us an opportunity to test new titles.

Holly Guthrie: OK. And then on to a question about promotions, really in November and December seem significantly less in the store; seen some two-fors but significantly less percentages off once you buy a hundred dollars. Could you talk about how you think they worked for you? Was that something you were happy with or something you might repeat again and to talk a little bit about the dynamics of it - of those promotions?

Georgia Shonk-Simmons: Sure, actually we really mirrored our promotional activity from 2004 into 2005. So in November, we had a gift with purchase, which was actually more successful than the prior year, we also went into and did the 25 off of a hundred promotion, again, these were just anniversaries of the prior year and again, I think with the strength of the merchandise they worked extremely well. We, again, did not - we only go on sale, as you know, four times a year, so that was at the end of December through January and that was also very successful. So, the - we really didn't have a lot of new introductions in our promotional activity and we were very pleased with the results that we had. And I think - I think the focus on the strategy for the company for Christmas was really very positive on the focus of the merch. with the customers.

Holly Guthrie: OK. And then, just a little curious on your January commentary, it sounds like your full price selling was up in January pretty substantially versus last year?

Georgia Shonk-Simmons: Well, what I guess I would say is - well yes, the answer would be yes. The answer would also be that our mark down merchandise, obviously wrapping up the holiday season, also was very successful. I think having the newness in the store though, gives the customer again, the option to come in and see something new and fresh, something different than the holiday colors and while she's there again, only four times a year, she can buy something on sale also. So the introduction of new merchandise on a consistent basis is become very positive for us, and we'll continue to do that.

Holly Guthrie: OK, great. And then, I just - if I could ask if for maybe some further clarification on Q1 also, it looks like with you guidance, that you growth rates are down pretty substantially from the year and quarter you just finished. And, you know, you don't have an Easter shift issue because, you know, March and April are in your first quarter and I was just trying to understand if there's anything internally that would cause you to bring your growth rates down since the stores look very similar as they did into the fourth quarter. Don't see why it would slow, but there's the question.

Dennis Pence: Well, all I'd mention is that we had a very, very successful fourth quarter. The merchandise was extremely well received, you know, we are certainly hopeful that we could carry that through but at this point in time we feel we're comfortable with our guidance.

Holly Guthrie: OK, thank you.

Operator: Just a reminder, to ask a question please press star one. And we'll now go to Lauri Brunner with US Bank. Go ahead please.

Lauri Brunner: Hi, thanks. Great job Georgia and guys.

Georgia Shonk-Simmons: Thank you.

Dennis Pence: Thank you.

Lauri Brunner: Say I wanted to ask you about the national magazine ads, you guys have traffic counters in your store, I believe, and you‘ve talked about conversions in the past and how high your converting, those people that are walking through your doors. How did those numbers change at all with the national advertising campaign? Thanks.

Mel Dick: I'll take that one. Our conversion rates have increased year over year about 200 basis points. I don't know if we can count, you know, specifically you would say that was all by the national advertising, some certainly came from the Coldwater Creek catalog that we initiated last year which is a combination of the Coldwater Creek catalog and in the brand advertising, plus extremely compelling merchandise, that I believe increased our conversion rates.

Dennis Pence: Also, the - a lot of the traffic you can point to very much for the national magazine advertising and the increase in traffic, the conversion rate is also due partly to, I'd say, a real strong emphasis in the retail stores on associated selling, add-on orders and trying to get that first order from the customer and really learning how to handle multiple customers to increase that conversion rate. Yes, Mel is correct; it was up 2.4 percent of the prior November - December ((inaudible)).

Lauri Brunner: Fantastic work, thank you.

Operator: We'll now go to Marc Bettinger with the Stanford Group. Go ahead please. Just one moment. Your line is now open. Sorry.

Marc Bettinger: OK, congratulations everyone. Absolutely phenomenal.

Georgia Shonk-Simmons: Thank you.

Dennis Pence: Thank you.

Marc Bettinger: A couple of quick questions, Mel can you just give some color on receivables on the balance sheet?

Mel Dick: Yes, the receivables are up on the balance sheet, year over year. That's made up predominately of just regular business from the regular credit card receivables, which turn very quickly. From receivables from our credit card revenues coming from Chase, and the predominant increase is due to increased tenet allowance receivables for the stores that were completed during the third and fourth quarter and then some construction that began at the new stores that will open up in the first quarter.

Marc Bettinger: OK, so just remind me, the credit cards; you're not taking the risk though, right?

Mel Dick: We do not take the risk on the credit cards so the receivable I mentioned on the credit cards for the co-branded credit card, that will be the upfront payment that we receive once the cards are activated.

Marc Bettinger: OK, and as far as the advertising, with all the numbers floating around, did you give a total dollar number that was in '05 and what your going to do in '06?

Mel Dick: Yes, in our guidance, we provided in early '06; 14 million in total for '05 and about 22 million for '06.

Marc Bettinger: OK and that includes national advertising?

Mel Dick: That is for the national advertising.

Marc Bettinger: OK, so that's for everything?

Mel Dick: I'm ...

Marc Bettinger: All I know is that the national advertising is 14 to 22.

Mel Dick: Yes.

Marc Bettinger: OK, and of course that's separate from the catalogs?

Mel Dick: Separate from the catalogs. The catalog circulation as (George) had mentioned before, will be, I think total circulations 118 million and of that about 98 million - 117 million, of that, 98 million is regular catalogs and about 19 million or so of the Coldwater Creek catalogs. So the catalog circulation is approximately the same between years.

Marc Bettinger: OK, so the ones, the 118 will hold constant then?

Mel Dick: The 117, I am sorry Marc...

Marc Bettinger: 117.

Mel Dick: ... I said 118, I meant to say 117. That's up from 109 million last year.

Marc Bettinger: Right, but going forward the 117 will be constant?

Georgia Shonk-Simmons: Yes, Marc. What's going to happen is that really, if you take out the retail book the circulation per catalog will be about 98 million for '06, which again, will be flat with - will be the same as last year. We're increasing the Coldwater Creek catalog, which is the one that drives people to the stores for shopping. And that will go from 11 million to 19 million.

Marc Bettinger: OK. All right, and the other thing is on the real estate, are you seeing anything with, you know, different performance of the lifestyle centers versus the malls?

Mel Dick: Well, as we mentioned in the past we continue to see the lifestyle centers perform very well for us. It's much more of a destination shop for her and it's much easier for her to shop in the lifestyle center. In addition, the lifestyle centers are certainly better as well.

Marc Bettinger: OK. Great. Congratulations again. And thank you very much.

Georgia Shonk-Simmons: Thank you.

Mel Dick: Thank you.

Operator: Star one for questions please. And we'll now go to Ann Poole with Kevin Dan & Partners. Go ahead please.

Ann Poole: Hello. I just wanted to see if I could get a few more details on the spas, can you talk a little bit about what you see as kind of the sales or revenue break out between services and merchandise? And then also, address margins for both of those; are margins for the services typically higher or lower? First the services and then I guess, as far as the merchandise mix, will there be merchandise that's featured also in the Coldwater Creek stores that's seen in the spas or will it all be exclusive to the spas?

Dennis Pence: I'll take this Georgia. It's about 80 percent, will be services and about 20 percent will be merchandise, maybe at 85/15. And that - this is all really just Proforma data, of course, none are open.

Ann Poole: Right.

Dennis Pence: And we do see that, in terms of margins we're looking at given that there will be quite a bit of hard goods and this year we will no be doing our own proprietary line of spa products. Now, if we roll out of course, we will. So based on that, we're probably looking at initial mark up on the spa products of 55 to 60 percent. And then the hard goods, that we'll be selling, the normal about 55 percent. And then there will be some apparel, especially from the sport line and robes and towels and that would be pretty much your normal IMU's for apparel.

Services, we're going to take a different path, we're really not going to do, really revenue sharing with the spa service provider, rather we're going to pay them an hourly wage, give them benefits and give them guarantees on the hours worked and really change the entire paradigm from kind of free lanced gun slingers into more of a paradigm employee. And we think, based on what we're hearing so far, it's being met with enthusiasm in the markets where we're beginning to hire. It's a very difficult industry to make a living in as a service provider, there's no health care, there's very rarely, is there a group benefit so, this, if we can push this through, this is going to be a real chip in how service providers are compensated in the spa industry. And we think that will improve our margins, still unsure where they will end up though.

Ann Poole: OK. Thank you. And then Georgia have there been any shifts in your general merchandising strategy for spring? Is there a greater emphasis on core merchandise in the collection and then just wondering if you could give any more details on the early reactions of spring and kind of what we can expect to see from the upcoming deliveries? Will we continue to see a lot of color?

Georgia Shonk-Simmons: Oh, absolutely. Our customer loves color. And that's something that we always provide for her and actually summer will be even more colorful that it was last year and to me, far more exciting. I think the things that you can be prepared to see is that I do think it's the season of the skirt and our skirt business has done very well. And I think the exciting thing in the pant business really is all the different lengths that are offered. And we've offered that in a comfortable way for our customers, so we're excited about that for summer. And then again, all of our signature jackets, which again, become really a specialty for us that we are very excited about too. So, you're going to see color. You're going to see, again, an increase in skirts and in our direct business; you'll see an increase in dresses.

Ann Poole: OK. Thank you and then just one last question. Are you still planning on reporting your first sales quarterly comp next quarter?

Dennis Pence: We will report comps, as I mentioned before, once we have 100 stores in our comp base for a full quarter. Today, we have 97 stores in the comp base, so when we have our reporting on the second quarter of '06 is when we will report the comps to our sales. .

Ann Poole: OK. And then, will you give guidance on that? Or are you just going to report them or?

Dennis Pence: Right now we're planning on reporting them.

Ann Poole: OK. Thank you.

Operator: Star one for questions please. And we'll now go to Douglas Pratt with Mesa Capital Management. Go ahead please. Mr. Pratt, your line is open if you are on a speakerphone, you may want to check your mute button.

Douglas Pratt: Thanks. Just a follow up - or actually one question on one of the income item breakouts. What was the combination of the individual between pre-open cost and your list rental income for the quarter?

Dennis Pence: I'll take that one. In terms of the pre-opening cost, for the quarter, we had some pre-opening costs because we opened up; I believe 11 stores during the quarter, during the early part of the quarters. So some of that did flow in the quarter. Lease rental income, I don't have that detail, but it would not have been significantly different than in the prior years.

Douglas Pratt: So probably a total contribution of a million dollars or so for the quarter?

Dennis Pence: I believe that might be a little high.

Douglas Pratt: OK.

Dennis Pence: For the lease rental income.

Douglas Pratt: I see. And how about - excuse me. How about interest income and expense and other income? What would be a total on that?

Dennis Pence: Let me just check the press release here.

Douglas Pratt: If it's in there, then go ahead, I'll - I'm seeing the total as a million four fifty one.

Dennis Pence: Yes.

Douglas Pratt: The increase is about 800 thousand year over year, is that interest income, other income gains, anything in there ...

Dennis Pence: It's predominately interest income.

Douglas Pratt: OK. And then, beating that old dead horse, again about the credit card sales, you include that in gross margin, is that correct?

Dennis Pence: Credit card sales are in sales, yes.

Douglas Pratt: So that 370 basis point increase includes credit card sales?

Dennis Pence: Well, just for clarity, it doesn't - we're not talking about the bounty we receive from Chase. That's separate, in terms of gross margin calculation. The credit cards ((inaudible)) their payments and so, if someone buys something, whether its with our Visa card or anyone else's, it's in sales.

Douglas Pratt: No, I'm sorry. I meant the fee payment for opening the cards, the 6.1 million.

Dennis Pence: Yes, Now.

Mel Dick: Yes, that's in our gross sales.

Douglas Pratt: OK, so we should probably back that up to a comparison year over year to get the gross margin differential since it wasn't in last year? Is that correct?

Mel Dick: We did not have the credit card program in last year.

Douglas Pratt: OK, so still, I mean, still 260 basis point increase. And you said that you reinvested that in the business. I take that to mean that there was 6 million dollars in advertising you spent that you otherwise would not have spent?

Mel Dick: Well, we certainly would have spent some in advertising as we did last year. But it was less than a million dollars. This year we invested approximately 6 million dollars in addition to other investments that we made in the business.

Douglas Pratt: OK. And did that - that would have been, I assume in the SG&A line or would that include promotions or anything in the revenue line as well?

Mel Dick: That would be in the SG&A line, but there is also promotions in the revenue line as well. When a customer is offered the credit card and they activate the credit card at our stores or on the Internet or through the catalog, they did receive a discount during that activation. And that discount ranges, I believe, from 20 to 25 percent.

Douglas Pratt: And that's a one-time item correct?

Mel Dick: It's a one-time item, yes.

Douglas Pratt: OK. And then, last question. You mentioned advertising, you said it was 14 million in '05, and you estimated approximately 22 for next year. That's - what does that compare to the prior year? Is that compared, I think that you had an 8.4 million dollar advertising number? Have I got the comparisons correct?

Mel Dick: The prior year, as in '04, I think that sounds a little high but it would be probably in the ball park.

Douglas Pratt: OK. And in the annuals in the past you've given direct response advertising cost breakout as well, the 64 1⁄2 million last year. Do you have that number yet for the current - they year just ended?

Mel Dick: No, we don't have that number. It would be a little bit higher than that, because our catalog circulation in total was a little higher this year.

Douglas Pratt: OK. Great. Thank you very much, good quarter.

Mel Dick: Thank you.

Georgia Shonk-Simmons: Thank you.

Operator: We have a question from Deena Friedman with Brean Murray. Go ahead please.

Deena Friedman: Good afternoon, congratulations, very nice quarter.

Georgia Shonk-Simmons: Thank you.

Deena Friedman: Just a few questions for you Georgia, I know with holiday, there's better coordination among items for additional purchases, I was wondering if you could give me a sense of how the average units per transaction, how that looked verses last year? Given these changes?

Georgia Shonk-Simmons: The average unit per transaction was just up slightly from the prior year.

Deena Friedman: OK. Great. And then another question, you talk also about the opportunity with accessories, could you talk about where you're seeing it going in 2006? And beyond 2006 in terms of a percentage of sales that your targeting?

Georgia Shonk-Simmons: Well, I think that rather than talk about that, I still do believe that as the company grows, we will still be 80 percent apparel. I think that we can pick up a couple of percent in the accessory business as we move forward, which would be again, in that last 20 percent. That last 20 percent is broken up between accessories, jewelry, gifts and footwear.

Deena Friedman: Great. And then, one final question in terms of the gross margin, in terms of that improvement that we saw, what percent, what could be attributed to the direct sourcing changes?

Mel Dick: I believe that Georgia mentioned, somewhere between 50 and 100 basis points before.

Deena Friedman: Excellent. Thank you. Congratulations again, very nice quarter.

Mel Dick: Thank you.

Operator: We have one final question in the queue; it comes from Rob Wilson with Tiburon Research Group. Go ahead please.

Rob Wilson: Yes, thank you. I know you don't report comps sales, but my back of the envelope calculation with (Conjessa) was 25 to 30 percent? Is that close?

Mel Dick: Rob, as you said, we don't report comp store sales. So I can't comment on that.

Rob Wilson: OK. I just want to reiterate your commentary earlier, you said 70 basis points of leverage at the store level?

Mel Dick: Yes, approximately 70 or so basis points. The majority of the increase was due to merchandise margin improvements. Better selling at full price.

Rob Wilson: Would you be willing to give us a transaction count growth at your store level?

Mel Dick: I don't have that information, at my fingertips and I don't believe we've given that out in the past.

Rob Wilson: OK. Thank you.

Mel Dick: Thank you.

Georgia Shonk-Simmons: Thank you.

Operator: There are no further questions in the queue at this time. I'll turn the call back over to our speakers for any additional or closing remarks.

Mel Dick: Thank you, operator. Once again, we would like to thank you for your time, as you know we feel that it's very important and we appreciate you taking part in our call this evening. Have a very pleasant good evening.

Operator: Thank you. Again, that does conclude today's conference call. We appreciate your participation. You may now disconnect.

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