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Executives

Daniel Griesemer – President, Chief Executive Officer

Timothy Martin – Senior Vice President, Chief Financial Officer

Georgia Shonk-Simmons – President, Chief Merchandising Officer

Analysts

Christopher Kim – J.P. Morgan

Roxanne Meyer – UBS

Jeff Black – Barclays Capital

Lizabeth Dunn – Thomas Weisel Partners

Eric Beder – Brean Murphy

[Jennifer Lamon – Sterne, Agee]

Coldwater Creek, Inc. (CWTR) Q4 2008 Earnings Call March 4, 2009 4:45 PM ET

Operator

Welcome to the Coldwater Creek Incorporation fourth quarter and full year 2008 conference call. (Operator Instructions) It is now my pleasure to introduce your host, Ms. [Lynn Walder], VP of Investor Relations for Coldwater Creek.

[Lynn Walder]

Good afternoon everyone. With me on the call today are Daniel Griesemer, President and Chief Executive Officer, Georgia Shonk-Simmons, President and Chief Merchandising Officer, and Tim Martin, Senior Vice President and Chief Financial Officer.

I would like to remind everyone that the statements contained in this conference call that are not historical facts constitute forward-looking statements within the meaning of the Securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

These risks and uncertainties are described in today's press release and in the company's filing with the Securities and Exchange Commission. No one should assume later in the quarter that the comments we provide today are still valid. Moreover, we are not taking any obligation to provide updates in the future.

With that out of the way, I'd like to turn the call over to Dan.

Dan Griesemer

Good afternoon ladies and gentlemen and thank you for joining us as we discuss our results for the fourth quarter and fiscal year end January 31, 2009. Today, my remarks are going to focus on our 2008 results, the discipline we implemented throughout the year to manage our business through this volatile environment, the steps we have taken to strengthen our balance sheet and the initiatives we are implementing in 2009 to best position our company for the future.

Tim will give you additional detail on our operating and financial results and Georgia will then provide an update on our merchandising initiatives. Then I will make a few closing remarks before opening the call up for your questions.

In fiscal 2008 we achieved sales of $1 billion and a net loss of $0.29 per share. While we believe our financial performance reflects the challenging macro economic environment facing many retailers, we're clearly not satisfied with our fourth quarter and full year sales and earnings results.

Successful management of the controllable aspects of our business including our expenses, inventory and balance sheet was not enough to offset the overall macro environment, the challenging traffic and promotional nature of the holiday season.

We did end the year with a strong balance sheet, having taken a conservative approach to our business and the management of our expense and cash positions throughout the year. As a result, our liquidity position remains very solid and included $81 million in cash and no borrowings under our credit facility at the end of the year.

We also recently further strengthened our capital position by entering into an expanded credit facility with Wells Fargo which Tim will review in a moment.

Our sizeable cash position and the backing of strong liquidity position gives us the financial flexibility to navigate through a prolonged economic downturn while continuing to invest in our merchandise and customer experience.

Turning to our merchandise, our priorities during the year focused on providing customers with a more focused and cohesive assortment that retains the uniqueness and quality that Coldwater Creek is known for. We continue to make progress and during the quarter we were successful with our color expansion, our layering businesses and our key item focus.

We are also pleased with the performance of our sweater business and our selection of gift giving items. We found that in the current environment she is willing to spend on items that are high quality, unique and special and we will continue this emphasis going forward. We are working to add relevance and variety to our pant, outer wear and jacket categories which did not perform up to our expectations in the quarter. Georgia will provide more detail shortly regarding our initiatives there.

As we begin fiscal 2009, we will continue to apply conservative strategies, focusing on containing costs and preserving cash. At the same time, we are also focused on maximizing the opportunities we see in merchandising and for our brand. We realize that we are not going to cost cut our way to long term success, which is why it is essential that we continue to make strategic investments, take advantage of new opportunities and create new ways to drive profitable sales results.

Specifically, we've identified four key initiatives that are expected to allow us to achieve our results. First, we will maintain cost and inventory discipline. Second, we will improve our product assortment by offering the appropriate balance of fashion, fit and value for our customer. Third, we are positioned to better utilize our multi-channel business model to drive traffic and sales, and fourth, we will maintain our commitment to offer the high level of customer service and in store experience that she expects from us.

In terms of expense management for 2009, we are continuing to modify our strategy as we work through the current environment and remain focused on further reducing our cost structure and preserving our cash as business conditions warrant. These efforts include streamlining our operational structure and reducing expenses and managing our inventory, working capital and capital expenditures.

We have identified at least $30 million of additional SG&A savings across the company including executive salaries, select staff reductions, cut backs in travel, lower catalogue page counts and more cost effective advertising.

We also significantly reduced our planned capital expenditures to $25 million in 2009, down from approximately $81 million in 2008 which is based on opening no more than 10 new stores this year.

We re well on our way to right sizing our organization structure for the current environment and now are intensely focused on improving our product offering. Under Georgia's leadership in the fourth quarter we made some changes to our merchandising team and its structure. We believe that these changes will enable Georgia and her team to offer a fresh perspective as well as better clarity throughout the merchandising process which we believe will result in more compelling offerings for our customers and enhance efficiency.

We should begin to see the benefits to the organizational changes as we move through the year. Our merchandising team is intensely focused on ensuring that we offer relevant and compelling product in terms of both design and value.

We continue to fine tune our assortment in reaction to what we have learned from our customers. It is a process based on continued feedback from our customers and we are integrating our learning's into our collection. Our goal is to create a well balanced assortment of merchandise in terms of fashion, fit and price that is relevant to the entire range of our target customer base while maintaining a commitment to lean inventory management.

As you know, during the past year we have increased the frequency with which we communicate with our customer. She gives us insight to our catalogue, internet, and in store purchases and to our extensive customer research about her lifestyle priorities. We are reacting to the statistical and qualitative feedback and incorporating it as quickly as possible in our product assortments.

While we're actively managing our merchandise assortments, we are also working to create a consistent message across all our distribution channels to drive customers to our stores. We are developing traffic drivers through innovative email campaigns, retail mailers, newspaper ads, and compelling in store promotions as well as through our One Creek loyalty program and in store events that feature our Personal Shopper program.

We continue to test and refine these promotions to ensure that we are reaching the greatest number of customers in the most cost effective and efficient manner possible. We have found that our frequent email campaigns are working well and are looking for opportunities to increase catalogue circulation where appropriate.

And fourth, one of the aspects that sets us apart is our in store experience. We offer our customers and unique and special shopping experience which you cannot find anywhere else. Our customers continue to tell us they enjoy our store experiences as evidenced by our national recognition and awards for these efforts, and we are committed to maintaining this element of differentiation and improving upon it.

We believe that the unique and special customer experience that we have offered our customers is an important differentiator between Coldwater Creek and other specialty retailers. In regards to both our merchandise and in store experience, our conversations with our customers underpin our confidence in our brand direction.

While 2008 was a challenging year for our company, we believe that we have taken the necessary steps to best position Coldwater Creed to navigate the difficult environment. We have identified a number of opportunities for improvement in 2009 and are clearly focused on what we need to do and how we are going to do it in order to position the company and the business for long term growth. I am confident that we are taking the right steps to improve our performance.

With that, I'll now turn the call over to Tim who will discuss our quarterly and annual financials in more detail.

Timothy Martin

I'd like to begin today by providing an overview of some of our financial metrics, then review our fourth quarter and full year results. Throughout 2008 we focused on managing the aspects of our business within our control; expenses, inventory and our capital position.

We reduced SG&A by $55 million year over year curtailing premium retail inventory per square foot, including retail inventory in the distribution center down 12% on top of a 9% decline a year ago. Total inventory was down 3.3% despite a 15% increase in square footage. We ended the year with $81 million in cash and further enhanced our capital position by extending our credit facility with Wells Fargo to $70 million and eliminating certain covenants which provides us greater flexibility in this environment.

Looking at our fourth quarter results, net loss for the three month period ended January 31, 2009 was $18.6 million or $0.20 per share compared to a net loss of $17 million or $0.19 per share for the same period a year ago. The difference to our previous guidance is related to a change in our tax provision which reduced the loss per share by approximately $0.03.

Consolidated net sales in the fourth quarter decreased 18% to $283.2 million from $345.5 million in the fourth quarter of 2007. This was primarily a result in the decrease in the retail store traffic and lower direct channel sales.

Net sales in the retail segments which includes our premium retail stores, our outlet stores and day spa locations, were down 11.7% from the fourth quarter to $199.7 million compared to $226.3 million in the fourth quarter of 2007.

Retail segment net sales represented 70.5% of the company's total net sales in the fourth quarter compared to 65.5% in the fourth quarter of 2007. The company opened seven new retail stores during the quarter for a total of 348 premium retail stores in operation at the end of the period which compared to 306 premium retail stores at the end of the fourth quarter last year.

Comparable store sales decreased 21.4% for the fourth quarter compared with 19.2% decrease in the prior year period. Comp store traffic was down 17.8% while our premium comp store conversion rate was down approximately 60 basis points.

The direct segment net sales decreased 30% to $83.5 million in the fourth quarter from $119.3 million in the fourth quarter of 2007 due to reduction in catalogue circulation, lower marketing expenditures and less inventory clearance activity on the web. Direct segment net sales represented approximately 29.5% of the company's total net sales in the quarter compared to 34.5% in the fourth quarter of 2007.

Gross profit for the quarter was $76 million or 26.8% of net sales compared to $103.7 million or 30% of net sales for the fourth quarter 2007. The decrease in gross profit rate was primarily due to deleveraging of occupancy costs as a result of lower sales.

Selling, general and administrative expenses for the fourth quarter were $110.3 million or 38.9% of net sales compared to $133.8 million or 38.7% of net sales for the 2007 fourth quarter. The decrease in SG&A expenses of approximately $23.5 million was primarily driven by reduced marketing spend, lower employee costs and other cost savings initiatives.

Our operating loss for the fourth quarter was $34.3 million compared with an operating loss of $30.1 million in the fourth quarter of 2007.

Now turning, briefly to our full year results, net sales for fiscal 2008 was $1 billion versus $1.2 billion for the same period last year. Net loss of fiscal 2008 was $26 million or $0.29 per share compared with a net loss of $2.5 million or $0.03 per share for fiscal 2007.

Our 2008 results included a pre tax non cash impairment charge related to Coldwater Creek Spa of $1.5 million or $0.01 per share after tax.

I'd like to discuss our balance sheet, liquidity and capital cash flow now. To reiterate what I said in the past, we remain very confident with our liquidity position. We have a strong position as we ended the quarter with $81 million, up significantly from $62 million in 2007. In addition, we have further strengthened our capital position by entering into a new credit facility with Wells Fargo.

The secure three year revolving credit facility has increased an aggregate commitment from $60 million to $70 million subject to typical borrowing base limitations. This new facility has financial covenants related to capital expenditures, minimum inventory book value and other customary terms and conditions, but does not contain the financial covenants related to our minimum net work, fixed charge coverage ration that were included in our prior credit facility with Wells Fargo.

As we discussed in previous quarters, we remain very confident in our ability to fund both our operations and create a growth plan out of existing cash and cash flow without the need for any borrowings, but we believe having this facility in place gives us the extra safety cushion in the event of an extended prolonged recessionary environment.

We ended the year with premium retail inventory including retail inventory in the distribution centers down 11.6% per square foot. Total inventory decreased $135.4 million compared to $140 million at the end of the fiscal 2007. This decrease is significant given the addition of 42 premium retail stores, or 15.2 premium retail stores square foot growth over that same period.

It is also important to note that despite the challenging quarter, we generated $21.3 million of cash flow from operations in the fourth quarter.

Capital expenditures for fiscal 2008 totaled $81.2 million, primarily related to our new store construction and information and technology initiatives. Depreciation and amortization is always a large non cash expense for us and was $61.8 million for the full year.

As Dan said, our reduction in our store growth plans for 2009 to no more than 10 new stores will result in capital expenditures for the full year of approximately $25 million, down significantly from fiscal 2008. This will give us more cash and bolster our financial stability in this challenging macro environment.

Briefly on our outlook, because of the volatility in the macro economic environment, we are not providing sales or EPS guidance for 2009. We will continue to manage our business conservatively and focus on the levers we can control. We expect to reduce our SG&A expense by an additional $30 million in 2009 and we continue to maintain a conservative approach to inventory.

We expect to end the year with over $100 million in cash on hand. We remain very confident with our financial position going forward. And with that, I'll turn the call over to Georgia.

Georgia Shonk-Simmons

Good afternoon everyone. As you all know the holiday season was exceptionally challenging and disappointing. Though we ended the period we felt good about our collection and are receiving positive feed back from our customers on our new store layout.

But what we found in actuality was that she was very cautious and held back her spending. Due to this, we experienced some significant changes in our purchasing patterns. I'm going to discuss what we saw during holiday and our key take away's from the season and then I will go over our new merchandising initiatives that we've developed from our customer's feedback and what you can expect to see in our stores going forward.

Our holiday collection reflected many changes that we have made over the past 12 months to our merchandising strategy. Improving our product is a constant process and we are continually testing new ways to enhance our assortment. Some of these changes worked very well, but there are certainly still areas we need to continue to improve.

First, turning to our holiday successes, the season was largely about our top business. Our sweater assortment continued to resonate well with our customers, and as we said in our last call, we invested in our sweater business, particularly cardigans. She confirmed our belief that cardigans are a jacket alternative and can be an attractive, creative way to update her wardrobe, plus, they also make great gift items.

One sweater I'd like to highlight is our Princess turtleneck which we carry in numerous colors. We believe this item has many of the attributes that she is looking for when she shops; comfortable, versatile, a flattering silhouette that makes her look and feel great offered at a compelling price point.

Vests, vests either knit or woven and micro fleece tops were also more successful than we expected. We also continued to be successful with our layering tops and woven shirt businesses and we found that she was primarily updating her wardrobe this season with tops which are considerably less expensive than pants and jackets.

Moving to our accessory business, this business performed well during the holiday season, particularly in scarves. Our novelty scarves were value priced starting at $15.00 and our Anna Belle shell performed well at $29.50 and all of these sold out at full price.

Now there are areas of our business where our performance was weaker than we expected. Our pant business which historically has always been a strong category for us in the fourth quarter was disappointing this holiday season and did not follow the positive performance we experienced during summer and fall.

In previous years, November was a time when our core customer shops for herself and would update her wardrobe for the holiday season. However, in recent months, she has been challenging herself to make do with what she already has in her closet and was primarily updating her wardrobe with tops and accessories.

So to improve our pant business, we are working to provide more differentiation in our assortments going forward in order to entice customers to buy, as more than ever our customers need a reason to update her closet.

We have also experienced weaker than anticipated sales in our outer wear and jacket businesses which are higher priced categories. She simply was not inclined to spend on higher priced items this year.

And finally, as we said with our fall collection, we still have opportunities in our skirt business and will be making adjustments' to ensure that we capitalize on this in future collections.

Let me now turn to what you will see going forward. As Dan mentioned, we have recently made changes in our merchandising team streamlining the organization by changing how it is structured. Our changes have enabled us to tighten the leadership team so that we can provide a stronger, more balanced perspective on the brand.

We also expect to benefit from increased collaboration with our merchandising design and product development team as they work more closely together. Our goal is to increase our fashion relevance to the entire demographic shopping our stores by offering a strong, fresher perspective on the brand.

For instance, we know that one of the things she enjoys when she shops with us, is finding a surprise around every corner whether it's a great layering piece or unique home accessory, an item that she will not see anywhere else.

While we understand that it is of the utmost importance to continue to manage our inventory, we also need to focus on embracing more of a boutique aesthetic with unique items that gives our store a truly specialty feel. It is important to balance this with a mix of high quality and well priced key items that she expects from us.

Based on customer feedback, we believe there is an opportunity to appeal to the entire range of our target demographic by offering a more balanced assortment in terms of fashion, fit and value. We're working to expand our focus from a fashion perspective to being more relevant to the entire demographic. We believe that we will begin to see the evolution of this assortment by late summer, early fall.

In terms of fit, we are focused on offering a broader assortment of silhouettes that incorporates our findings from our customers' insights. When we asked her about fit, she told us that we had too many boxy silhouettes, and in response to her feedback, our upcoming collection will feature more diversity in shapes, silhouettes as well as fabrics and we will continue to offer great quality, meaningful price points and an expanded assortment of fashion.

So in summary, we are intensely focused on improving our product and are committed to creating a well balanced assortment that is fashion relevant. We believe that the changes that we have made to increase collaboration across the merchandising organization will enable us to offer a more cohesive assortment with a fresh perspective.

At the same time, we're working to bring back a more eclectic boutique look and feel to our stores that makes our shopping experience truly, truly unique. I look forward to updating you on our progress on the next call.

And with that, I'd like to turn the call back over to Dan.

Daniel Griesemer

In summary, we remain committed to creating a compelling product assortment and continuing to deliver an exceptional customer experience. By improving the balance of our assortment and investing in categories and fashion that resonate with our customers, we are making the necessary changes that will impact our business in a meaningful way.

We are getting to know our customer better and better and she is giving us insight and confirming that we are on the right track with our new product initiatives. We have taken the difficult yet necessary steps to reduce expenses and right size our organization. I want to take a moment to thank our employees across our entire organizations for their hard work, passion and engagement over the past year.

All of this hard work has enabled us to maintain a solid financial position and end the year with a healthy cash balance, clean inventory levels and a new credit facility, and we are now positioned to capitalize on the opportunities we have identified for 2009 regarding our product and customer experience, and we are confident that we are taking the right steps to position our company for long term growth and profitability.

With that, I'd like to now open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Christopher Kim – J.P. Morgan.

Christopher Kim – J.P. Morgan

Regarding the merchandise margins this quarter, it sounds like merch margins have stabilized somewhat. Am I reading that correctly?

Daniel Griesemer

Yes. That's correct.

Christopher Kim – J.P. Morgan

Could you break out what the buy in occupancy deleverage was versus the merch margin erosion in the quarter?

Timothy Martin

We're not going to break out that entirely, but the merch margins on a year over year basis were largely flat. The entire decrease you saw was a result of the negative deleverage on comp store sales.

Christopher Kim – J.P. Morgan

So what arguably the most promotional fourth quarter ever, it looks like merch margins are stabilizing so with inventories continuing to be down and the team, I guess what is the trend to date? Have you seen that inflect and is it in positive territory right now?

Timothy Martin

We're not going to give current trends primarily because February is only 25% of the first quarter and a really small month and not an indicator of how the whole season is going to unfold. So we're not going to be able to provide that. But it remains a challenging environment, but I think we've articulated that the very specific things that we're going to be doing to make it through this and position for improved performance going forward.

Christopher Kim – J.P. Morgan

It seems like the lack of couponing in the magazines etc. and advertising has helped that rate a little bit, but bigger picture, in the marketing and multi-channel component of your four prong strategy, how do you view marketing in 2009 and the spend and how to more effectively utilize that in driving traffic?

Timothy Martin

I want to clarify this is a very, very promotional environment and we are being appropriately aggressive in our attempts to engage our customer and drive traffic to this brand. So we are through emails and through catalogue, our catalogues and a variety of other marketing initiatives doing a tremendous amount to try to drive traffic.

There's really two levels of it. One is the very broad based, efficient execution that we have with catalogues and our email campaigns, and particularly the opportunity there for further segmentation, and event triggered emails. And we're looking for opportunities to increase circulation where appropriate as we see the collections and books come together.

So those are the very large things that we've been doing for quite some time, but at the same time, we're testing and implementing and going to test a variety of a whole host of other initiatives to drive traffic in this very challenging brand, all directed at if we understand our customer and we know what she wants from us, then we'll put together the things that will really entice her.

Perfect example of that is a campaign, an event that we've just launched that begins in all of our stores tomorrow, and it's a fresh look for you, fresh start for her. It's a helping women help themselves where you bring in a slightly worn jacket or pant item into our stores and get a discount on a replacement item.

Those are the kind of things that we'll do across the board and consistently to make sure that we're relevant to her and give her a reason to come shop with us.

Christopher Kim – J.P. Morgan

On the SG&A side, can you give us a little more color in terms of how that could flow by quarter and sort of what the bigger buckets are? It sounds like, it seems like the marketing component could be a bigger opportunity for first quarter, but then you have the 30% to 40% drop in catalogue circulation the rest of the year.

Timothy Martin

In looking at it, most of the initiatives are going to give rise to the $30 million savings that are already in place, so you're going to see a lot of saving starting from the first quarter on. The biggest buckets are a little bit of marketing expenditures, employee and employee related costs such as benefits.

For example we put the matching 401-K on hold and then just about every other line item including travel, just every line item we can look at we've been focused on, but you will see those savings manifest themselves in the firs quarter and the full year savings will be $30 million down from 2008 we expect.

Christopher Kim – J.P. Morgan

I know you have a tough environment so you can't really give guidance but as it relates to free cash flow, have you done a stress test scenario here assuming if comps don't materially better and perhaps you do see some stabilization in the merchandise margins, would you wholly expect to be free cash positive in 2009?

Timothy Martin

As I said in my prepared remarks, we expect to end 2009 with over $100 million cash, so we will add cash throughout the year and we feel quite confident with our cash flow projections for 2009.

Operator

Your next question comes from Roxanne Meyer – UBS.

Roxanne Meyer – UBS

I'm curious to get more details on what you can discuss. When you talk about increasing fashion relevance to the entire demographic, I guess I think about the demographic having so many different niches within it and different tastes. So I guess I just want to better understand when you say be relevant to the entire demographic what that means as it related to Coldwater Creek and how you plant to elevate the fashion or change the fashion.

Georgia Shonk-Simmons

First thing we need to look at, I still believe fashion is fully about attitude. So you have a demographic from 45 to 65. There will also be issues where we go and throw the baby out with the bathwater. So we will certainly service the customer that wants a more boxy look and is comfortable in that, but along with that we'll be using other silhouettes that are more shaped and fitted, fabrics that push the fashion envelope a little bit, along with the fact that we'll offer both.

For instance, if it's a pant that's blended from a care perspective for a customer that we would have always run to 100% cotton, and it may be a slimmer leg, it may be a higher waist. So it has to do with the look, the attitude and the fit around those types of garments so that we'll have a modern fit, and we'll also have the same fit we had.

So those things will hand tied. They will be in the same store. And we have a customer walking in the door now, she might be buying T-shirts all summer, but I want her to be buying pants and jackets from us too.

Roxanne Meyer – UBS

It sounds like its not that you're necessarily veering far from what Coldwater Creek stands for, you're just making it a little bit more modern.

Georgia Shonk-Simmons

We're making it more modern and fashion relevant which I think is a fair thing to say. And really, really working on her lifestyle.

Roxanne Meyer – UBS

Are your changes that you've made to your merchandise team more a reaction to the environment where if the environment changes you could see yourself going in another direction? Is it more permanent, and I guess is there anything more that you can elaborate about some of these changes and how it's going to help going forward?

Georgia Shonk-Simmons

I have placed three key executives to really run the different disciplines of merchandising in place and they're very focused and energetic. It really ties together product development, merchandising and design. This group is very focused and will absolutely again, take the initiatives and run with them.

I think to sum it up and make it simple to understand, I think prior to this we had too many cooks in the kitchen.

Roxanne Meyer – UBS

As it relates to your promotional strategy, I know you've always tended to do your clearance periods at the end of the quarter, end of the season, but in light of the continuing promotional environment, I was wondering if you were considering making any changes to that promotional strategy.

Daniel Griesemer

We're constantly looking at what's the most efficient way to manage our inventory and you know very well that we have a multi-channel approach that enables us to clear inventory during our sale periods in our outlets stores, in our outlet site of our web site and also in clearance catalogues as necessary.

One of the benefits of managing our inventory as tightly as we have and our inventory right now is cleaner and more current than it has every been at this stage at the end of the year. So one of the benefits of that is we're able to sustain a more full priced presence to the brand as we also try to do traffic drivers to try to generate interest in traffic in this really challenging environments.

So we're always looking at things and we're testing different things to see what's the most efficient way to do this, but at this point we have sale periods and we begin our spring sale and planning to as planned later this month, and I'm pleased at our company's ability and our teams' ability to keep our inventories clean.

Roxanne Meyer – UBS

How much more room do you have in 2009 to reduce inventory?

Georgia Shonk-Simmons

We're gong to be very conservative in 2009, and we're going to really work with the business. So we continue to look at inventory and keep it very lean in line with the business.

Operator

Your next question comes from Jeff Black – Barclays Capital.

Jeff Black – Barclays Capital

I guess do you feel like you are getting your fair share of traffic in this environment still which is highly promotional. In other words, do you need to add a little marketing spend? It seems like we're cutting back a lot and the traffic is suffering worse than some of the retailers. And secondly, on your pricing, is that where you want it to be? What is the value prop vis a vis your competitors that you're going out with now under the new, what your talking about today. Are either of those two elements do you think, do they require change to drive better traffic?

Daniel Griesemer

I continue to see and I hear anecdotally that we're as busy if not busier than any other of our peers and I see that all the time as I'm out in stores constantly. I feel like we are getting our fair share. I do recognize that I would suspect that a customer that is over 50 years old and considering retirement or has a large portion of their wealth tied up in their home or 401-K or stock investments is probably more adversely affected by the environment that we've experienced.

But I'm confident that we did not under mail the fourth quarter and I'm confident that we're being very prudent and efficient with those investments. What I am pleased about is that we're going to be opportunistic with the business and we're going to look for every opportunity where we see the slightest bit of running field room, we're going to go ahead and go for it and make the investments and spend the money where appropriate, which is why we're so actively engaged in a whole variety of traffic generating initiatives across the board.

So look for more color on that. Look for us to be very aggressive at driving traffic to the brand.

In regards to the value proposition, we're not going to share the full picture here, but I will tell you that we've clearly recognized that when she comes into our store, value represents itself in a lot of different ways in terms of the experience and what she's willing to spend her money on and what she's willing to do.

But in this environment, price and the price equation plays an even more important role, and so we recognize that. We're taking steps to address that, and we'll be integrating that into our execution going forward, and that gives me great confidence that we're doing the steps necessary to be competitive and to drive profitable results.

Jeff Black – Barclays Capital

And not to ready too much into it, but on the inventory, is the new schematic to change up the breadth and the depth either one of those so you might be able to be more promotional within season? Can you shed any color on that?

Daniel Griesemer

Well I don't know that I'd make any connection between being more promotional and season. Here's the way to take away from what the message is. It's about balance. It's the right balance between key items and items that are in color expansion and extremely well priced and things that she knows she's going to buy multiples of, and at the same time some of those great unique items that Coldwater Creek is known for.

It's a balance of those. It's a balance of fit where we have things that are more appropriate for maybe a slightly larger size or older customer, and at the same time have things that are more relevant to someone who is a slightly smaller size or a smaller younger part of our existing target customer and people that are coming in to our stores.

It's the word balance across the board is what I really want you to take away from this.

Operator

Your next question comes from Lizabeth Dunn – Thomas Weisel Partners.

Lizabeth Dunn – Thomas Weisel Partners

On inventory, down about 12% per foot, are you pleased with that positioning given that you've been down running 20 plus and how will you be managing it through the balance of the year down lower than that or is this sort of an optimal level? Also, can you provide an update on your SKU count reduction? Are you where you need to be? And then just an update on spa.

Timothy Martin

We are very pleased with where we are in inventory. You look at the downfall percent on a square foot basis that takes into consideration a whole number of different factors. For example, receipt timing on spring and summer merchandise versus prior years. It takes into consideration mix of inventory and pricing and margin.

But overall as Dan said earlier, we are as pleased as we could be with the age of the inventory and the cleanliness. We feel very, very good with where we are going into the first quarter and I'm actually quite comfortable with the downfall per square foot basis with where we are going forward.

Georgia Shonk-Simmons

I'm very comfortable where the SKU's are. They are down from prior years and to a number where it's very manageable. But now what we need to do is keep those SKU's, take those and then balance them out between the depth of color stores and color waves versus unique fashion items.

So it won't be about increasing SKU's, it will be about creating more balance. But the SKU's we have now, we're pleased with.

Daniel Griesemer

With regards to spa, we are so pleased that the great experience that the spa teams are creating for our customers. We keep getting tremendous feedback. In fact that business is performed counter-intuitively in that it has just done this long slow march to improvement, and while it was a loss in this year, we're looking at probably less that $0.01 a share in 2009, and in fact it will be cash flow positive on a full wall basis.

Lizabeth Dunn – Thomas Weisel Partners

What was the loss in 2008?

Timothy Martin

Right around $0.04 per share.

Operator

Your next question comes from Eric Beder – Brean Murphy.

Eric Beder – Brean Murphy

You talked a little bit about being more relevant to a wider, to all your customer base. I'm curious where do you feel that you have the best opportunity inside your customer base in terms of age demographic if you look at that as where you really haven't been hitting the right spots you want to hit.

Daniel Griesemer

We have spent the entire year, the last 12, 14 months actively investigating this, spending a lot of time talking to our customers, digging into statistical information, and we recognize that we have significant engagement with this baby boomer customer, but here is opportunity for increased engagement and relevance to the slightly younger part of that baby boomer demographic.

So it's not taking the brand younger. We have these customers coming into the store, but we recognize that we need more relevant assortment to attract the same level of engagement for them as we currently have for the broader base.

It's just a subtle shift, and we have stores that are large enough and we carry a broad range of sizes and a broad range of merchandise assortment that we have the ability to service this broad base of customers, and to do it well.

And so it's a very gradual, you won't walk into the store and say, oh my gosh, who is this? This isn't Coldwater Creek at all, but there are subtle things that will certainly make it more relevant to a slightly younger part of the existing target demographic.

Eric Beder – Brean Murphy

Have you thought about in terms of leases and refocusing on a resign and go back to that, have you thought about doing that as something you're looking at also?

Daniel Griesemer

Let's get a little bit more context in there. Our chain of stores, the average store is 3.3 years old. They have a very young fleet of stores positioned extremely well with extraordinarily advantageous economics. In fact, all of the FAS-142 difference that we have to implement to evaluate stores at risk for impairment, there were not stores that were deemed suitable for impairment.

We have a very young, very healthy fleet and it's very well positioned. We're not saddled with a lot of older stores that are not in good condition or in malls or in centers that are not appropriate or relevant anymore.

That being said, we also have in those deals a tremendous amount of protection in regards to co-tenancy and minimum tenancy requirements and kick out clauses, and we are looking at all of those and negotiating with the landlords and making the appropriate concessions where necessary, getting them to make the appropriate concessions where necessary and appropriate.

The big take away is, it's very young healthy fleet with incredibly advantageous economics.

Eric Beder – Brean Murphy

On prior conference calls you talked about getting rid of the discounting, trying to hold the higher price seller, and I'm trying to reconcile what has been going on. Do you think it makes more sense to have a lower average price point, or being more promotional? What's the thought process now in terms of discounting?

Daniel Griesemer

You're referencing stated desire to restore the regular price to the brand which is a cornerstone of our strategy for the long term. It's still an appropriate long term strategy, but that will look very different this year than it may have looked a year ago right now. We recognize this is a very challenging environment and that we have to be promotional in order to entice her to purchase.

Most importantly the product has got to be relevant, and then secondly it's got to be priced well to begin with. And so we recognize that piece, but at the same time we have to be giving her the incentives in this environment to come in and shop, and when she does then she gets the great experience in our stores that they deliver and finds a great product offering that Georgia has created.

So we have kind of put that no discounting or lower discounting on hold because we have to. We just wouldn't be competitive if we weren't.

Eric Beder – Brean Murphy

What tax rate should we look for 2009? I know it's moved around a lot this year.

Timothy Martin

Yeah, and that's going to happen in a year where you move from a break even into a loss position, but I think if you were to peg around a 39% rate for 2009, you'd be in the ball park.

Operator

Your next question comes from [Jennifer Lamon – Sterne, Agee]

[Jennifer Lamon – Sterne, Agee]

You talked a little bit about bringing back a more eclectic boutique look for the stores. If you could just elaborate on that a little bit. Is it something that you intend to do just by bringing more unique items in terms of the merchandise assortment, or is that something specific within the store environment or changes that you plan to make there?

Georgia Shonk-Simmons

What we will be doing is I think in our due diligence that we've done through 2008, we gave up some of the magic if you will of some of those special items. So while we still need to focus on the key items which we'll continue to do, I think we'll still see new and different types of home accessories.

You'll see more special items, those in apparel and accessories and across the store to give it a more boutique feel. So again it comes back to the word balance for us and so adding the second to again differentiate us.

One of the things that we've always had from the beginning is the boutique feel, which make the shopping experience very interesting. So we want to get back to that.

And while we know we have our key items and we think we have them nailed, it's these special items and increasing the store experience.

[Jennifer Lamon – Sterne, Agee]

That's related to the merchandise not to the core of the store or anything like that.

Georgia Shonk-Simmons

No, our customers love the store environment so although we'll continue improve our store environment as we add stores, but the truth of the matter is what we do inside the stores and how we merchandise inside the stores will be different.

[Jennifer Lamon – Sterne, Agee]

If you could talk a little bit more about your successes with accessories. I don't know if you can but maybe give us a sense of your current penetration or how you expect to see that category grow over time if at all.

Georgia Shonk-Simmons

With that category we actually think has opportunity to grow but its still a very small part of our business. Quite frankly between jewelry accessories and home accessories it represents approximately 15% to 10% in total of our volume.

[Jennifer Lamon – Sterne, Agee]

Anything on the sourcing side that you're seeing? Any opportunities there?

Georgia Shonk-Simmons

We ended last year with direct sourcing at what we had said we would do which was 60%, and we see a slight opportunity in increasing more direct penetration for the coming year, so we're feeling good about the opportunities there.

And really, we're really focusing there also on not just our negotiations but really the quality. So the quality for us has to be just stellar and those initiatives are in place now and we're moving towards them.

[Jennifer Lamon – Sterne, Agee]

Do you provide a breakout of internet versus catalogue sales?

Timothy Martin

We don't but I'll give you a total. We don't call it catalogue by the way. It's phone and mail versus the web and for the fourth quarter phone was approximately 20% of direct versus 26% the prior year.

Operator

There are no further questions. I'd like to turn the floor back over to management for closing comments.

Daniel Griesemer

Thank you very much for spending some time with us this afternoon and have a good evening.

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Source: Coldwater Creek, Inc. Q4 2008 Earnings Call Transcript
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