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Executives

Daniel Griesemer - President & Chief Executive Officer

Georgia Shonk-Simmons - President & Chief Merchandising Officer

Tim Martin - Chief Financial Officer

Lyn Walther - Investor Relations

Analysts

Neely Tamminga - Piper Jaffray

Chris Kim - JP Morgan

Liz Pierce - Roth Capital Partners

Liz Dunn - Thomas Weisel Partners

Roxanne Meyer - UBS

Richard Jaffe - Stifel Nicolaus

Coldwater Creek Inc. (CWTR) Q2 2009 Earnings Call August 26, 2009 4:30 PM ET

Operator

Greetings and welcome to the Coldwater Creek second quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host, Lyn Walther, Investor Relations for Coldwater Creek. Thank you, you may begin.

Lyn Walther

Good afternoon everyone and thank you for joining us. As we discuss our results for the second ended August 1, 2009. Participating in today’s call are Daniel Griesemer, President and Chief Executive Officer, who will provide an update on the progress we’ve made on our key initiatives for 2009, Georgia Shonk-Simmons, President and Chief Merchandising Officer, who will discuss our Merchandising initiative, and Tim Martin, Chief Financial Officer, who will discuss the company’s second quarter performance and outlook.

Before we begin 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 the company’s filings 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 undertaking any obligation to provide updates in the future.

Now, I’d like to turn the call over to Dan.

Daniel Griesemer

Thanks Lyn and good afternoon everyone. Over the past 18 months we’ve made substantial changes to our business and our performance is beginning to reflect the progress we are making on our key initiatives. While we are not satisfied to report a loss, we are encourage by the initial success of our merchandising strategy which led to a sequential improvement in our second quarter comp store sales trend and operating results as compare to the first quarter.

We expect to continue to improve our performance during the fall season when our initiatives in fashion set and value our fully reflected in our assortments. Although the environment remains challenging and promotional, initial response to our fall collection is encouraging and gets its confidence that we are on the right track.

In total for the second quarter net sales were $225 million. Same store sales declined 10.2%, but were a meaningful improvement in the trends from recent quarters. SG&A declined in approximately $6 million, driven by our expense reduction initiatives. Loss per share totaled $0.05 inline with our recent guidance of $0.05 to $0.07 per share loss and a sequential improvement from our first quarter results and we maintained the strong balance sheet including $85 million in cash and inventory down 8.1% on a per square foot basis.

Turing to review of our second quarter sales trends, as we began the quarter, we were pleased with our customers favorable response to our summer collection and value pricing initiative in April and May, with comp store sales improving to flat in May. As we’ve previously mentioned, we entered the second quarter with lean inventory levels, which were appropriate given the difficult consumer spending environment at the timing orders were purchased.

This limited our ability to generate sales during the latter part of the quarter, as we lack the inventory to drive our summer sale event, which negatively impacted our comps in June and July. We were able to react it favorable response to our summer collection and believe that our inventory is well position to capitalize on trends in a third quarter.

While it is still early, we’re pleased with the meaningful improvement in sales trends we have experienced in August, with consumers responding favorably to our better balance of fits, improved fashion and greater value across our assortment. However, our fall season is always determined by our post Labor Day performance. That said, we are cautiously optimistic encouraged by what we are seeing.

As we look towards the second half of the year. We are confident with our direction and belief that we are well position to generate improved results. Over the past 18 months, we’ve been intensely focused on executing our key initiatives to improve our product assortment and overall customer experience. Our fall collection was created following extensive testing of our merchandise and is it true representation of all our efforts working in concert across the organization.

Let me provide some additional color on each of our initiative. Our fall collection reflects that enhanced fashion sensibility and our research and customer feedback we know that our style is relaxed and naturally allegiant and she like pieces that are versatile. It is important to our customer to be current and relevant in regard to fashion and we have interpreted the current trends appropriately for her lifestyle.

We have worked to create an assortment that strikes the right balance of key items combined with special pieces that have unique design and tell a story. Georgia will discuss this specific passion trends and how we are interpreting these trends for our customers.

We had been intensely focused on improving our fits by offering more options to our customers in order to meet the various needs of our entire target demographic. Based on customers’ feedback, we have reengineered that fits with all of our top categories for fall. We now have the appropriate balance of classic and more shapes, silhouettes and our fits were now consistent across our brand.

Finally, we’ve recognized that in this environment, value is increasingly important to our customers. Based on success we had with our summer assortments, we have integrated a substantial value component to our fall collections. Value is not just about price, rather it’s about finding the right balance fit quality, fashion relevance and price.

We are very pleased with our fall presentation across all channels. We have worked hard to improve our products and taken the necessary steps to enhance efficiencies across our organization and are now focused on driving revenue and improving our gross margins.

Based on our confidence in these merchandizing initiatives, we are taking a more proactive approach to marketing. Our catalog has always been our most effective traffic driver and we believe it is the right time to connect with current customers and reintroduce the brand to those who have not recently shop with them. As a result, our third quarter catalog circulation is expected to increase by approximately 40% year-over-year.

We have also invested in national magazine advertising, something we had pulled back in on significantly over the past year and a half. In addition to driving traffic to our stores, our national and ad campaign will enable us to showcase the meaningful changes we’ve made to our collection. As well as reinforce a cohesive message across our entire brands. We have also recently redesigned our website with better functionality, ease of use and improved look and feel.

We remained focused on ensuring with all of our touch points ranging from our stores, websites, catalog and advertising as the same powerful brand message and experience. Because of our confidence in merchandise and marketing, we are also investing in the appropriate inventories for fall. While we will continue to tightly manage our inventories, we believe that after over two years of reducing inventory levels on a per square foot basis, we are now at the point to capitalize on the appropriate opportunities we see in our business.

In addition, we believe that we have an opportunity to improve our gross margins for the second half of the year, through improved offerings and lower sourcing costs somewhat offset by plant promotions. They are working with our vendors to ensure that our merchandise will continue to offer a great quality and attention to detail and is well priced. This will enable us to offer compelling value without compromising margin.

In summary we are confident we have taking the necessary steps to generate improved results. We have the compelling product assortment that is receiving a positive initial response. An importantly we know have the appropriate inventory levels and marketing activity to maximize our business.

With that I would now like to turn the call over Georgia to discuss our merchandise in more detail. Georgia.

Georgia Shonk-Simmons

Thanks Dan. Good afternoon everyone. We have very please with the progress we are making with out merchandising initiatives and how we are positioned as we enter the fall season. Over the past year and a half we have conducted extensive research to better understand our customer and have incorporated what we have learned into our fall collection.

We know that in this challenging economy our customer is being very cautious for this spending and we have working intelligently to create a strong value proposition for our brand. We have made meaningful changes to our merchandising assortments, based on our customers insights and have implemented a broader and more extensive testing process, which give us confidence that we are moving in the right direction.

The fall, we have developed a well balance assortment with an elevated fashion sensibility and significantly improved our fit all at a compelling value. Before I discuss within our stores now with our fall collection, I will briefly review the summer assortment. Our summer assortment was all about tees and crop pants should responded well to our expanded t-shirt assortment in both Prince and Charles and our crop pant business was very strong.

We had success in all our woven shirt which see layered as a shirt jacket with the tees. Our lightweight twill throw on jacket also performed well. In particularly please with these performance which demonstrate that enhances made to the jacket category are working.

Now turning to our fall collection, our fall assortment reflects the improvements we have made in our three product initiatives. Fashion sensibility, set and value the collection is based on three key trends short over long, feminine menswear and structured knit. Our first fall delivery arrives in stores on August 7 and our second deliver just arrived in our stores in preparation for September, our biggest sales month of the quarter.

Let me now provide some details on which on each of our initiative, first our fall collection has an improve fashion sensibility and include fashion that is relevant to a larger part of our exciting demographic. It is important to note that this does not imply that we are targeting a younger customer.

Fashion is about our attitude and lifestyle not for age. Our fall collection has a balance of key items and unique pieces that reflect your artful individuality. Our assortment offers more diversity and more options for our customers. We were mindful on our design process to create versatile pieces that can be warn a number of ways and conserve multiple purposes in her wardrobe.

Our second key product initiative was to improve the fits of our entire assortment. This is an initiative that we’ve been working on and refining to over a year and a fall collection truly embodies all of that hard work. We began to update our pant fits in the second half of 2008 and have an experienced improved sales positive customer feedback and a corresponding decline in return rates.

Our new expanded general assortment is a good example of our positive response to our improved fits. We’re offering our three new styles of jeans, the Slim leg, the City jean and the Low rise in addition to our classic and natural waste. We tested all these extensively and all three new styles are selling well.

It is important to note that we are not increasing the skews in this category, but rather focusing on the best styles in the category and offering a more diversity in fits, but we have more variety, we have refined our color and style offerings to those that responded most favorably to our testing and customer feedback.

This year we have also focused on improving the fits of our jackets, tops, blouses and t-shirts and have created two distinct fits. Our classic fit, which is an updated version of the styles we have carried in the past and our more shaped fit, which has silhouettes fit more closely to the body. We believe by offering more diversity in fits across the brand, we can become more relevant to a broader segment of our target demographic.

Our third product initiative is offering her compelling value. We tested value pricing for a spring rolled out with our summer collection and customer response was very positive. Based on what we’ve learned to the summer collection, we will continue to offer our customer a compelling value. While price does way heavily on our purchasing decision, our presumption of value was about the combination of quality, fashion, uniqueness, customer experience and the price.

In our fall collection, we have created an assortment that has a balance of different price points. For example, we have opening price point jacket in denim at 39.50 and we will continue to offer some special novelty jackets at 89 to 99.50 and customers are responding with favorably to both.

Value pricing will remain an important component of our merchandising strategy and we will continue to refine our price point as we move forward. We have very strong long standing relationships with our vendors and we are working with them and our design process to lower outsourcing cost without compromising our quality.

In summary our fall collection is accumulation of all three key merchandising initiatives. We have well balance and differentiated assortment that offers her compelling value the right fashion sensibility and a new selection of fits that provide to what the variety of waste to update her wardrobe for fall. We are cautiously optimistic by our initial response to our new collection and actually look forward to updating you on our progress on our next call.

With that, I would like to turn the call over Tim.

Tim Martin

Thanks Georgia. I’d like to begin today by review in our second quarter and detail and then I will briefly go over our year-to-date results. Next I will discuss our balance sheets and finally I will provide an outlook for the third quarter of 2009. Looking in our second quarter results, net loss for the three month period ended August 1, 2009 was $4.9 million or $0.05 per share, compared to a net profit of $3.1 million or $0.03 per share in the same period a year ago.

Consolidated net sales in the second quarter decreased 6.7% to $225.2 million from $241.4 million in the second quarter of 2008. This was primarily the result of an anticipated decline and direct channel sales and negative comparable store sales. Net sales in the retail segments, which include our premium retail stores, our outlet stores and day Spa locations, were down 3.1% to $183.4million compared to $189.4 million in the second quarter of 2008.

Retail segment net sales represented 81.4% of total net sales in the second quarter compared to 78.4% in the second quarter of last year. We opened four new premium retail stores during the quarter for a total of 355 premium retail stores in operation at the end of the period, which compared to 322 at the end of the second quarter last year.

Comparable store sales decreased 10.2% for the second quarter compared with 13.7% decline in the prior year period. Premium comp store traffic was down 11% while our premium comp store conversion rate increased approximately 270 basis points. Average unit retail in our premium stores were down approximately 7%.

The direct segment net sales decreased to 19.7% to $41.8 million in the second quarter from $52.1 million in the second quarter of 2008. While our catalog circulation was roughly flat for the quarter, as we anticipated our direct sales were negatively impacted by our low inventory levels and reduced overall marketing expenditures.

Direct segment net sales represented approximately 18.6% of total net sales in the quarter, compared with 21.6% in second quarter of 2008. Gross profit for the quarter was $75.7 million, or 33.6% of net sales compared to $95.6 million or 39.6% of net sales for the prior year period. The decrease in gross profit rate was primarily due to increased promotional activity and the deleveraging of occupancy was a result of lower sales.

While our value price initiative was well received it did have a negative impact on our margin rates in the second quarter. Going forward, we expect this to be less of an issue as our product has been sourced appropriately for our new pricing structure. We continue to tightly manage our selling, general and administrative expenses and our SG&A expenses for the quarter were $82.8 million, or 36.8% of net sales, compared with $88.5 million or 36.6% of net sales in the second quarter of 2008.

The decrease in selling, general and administrative expenses were approximately $5.7 million, as primarily related to lower employee expenses and other related costs. Our operating loss for the second quarter was $7 million, compared with operating income of $5.7 million in the second quarter of 2008.

Now, turning briefly to our six months results: Net sales for the first half of fiscal 2009 were $453.6 million versus $512.5 million in the same period last year; gross profit for first half of fiscal 2009 was $146.8 million or 32.4% of net sales compared with $188.4 million or 36.8% of net sales for the first half of fiscal 2008. Decline in gross profit rate was primarily due to lower merchandise margins resulting from increased commercial activity, as well as deleveraging of occupancy expenses.

Selling, general and administrative expenses for the first six months of 2009 were $165.5 million or 36.5% of net sales, compared to $196.3 million or 38.3% of net sales for the first half of fiscal 2008. The decrease in selling, general and administrative expenses of approximately $31 million is primarily related to lower employee cost and reduced marketing expenses as well as other costs.

Net loss for first six months was $12.5 million, or $0.14 per share compared with the net loss of $6.1 million or $0.07 per share in the first half of fiscal 2008. I would now like to discuss our balance sheet and liquidity. We maintained a strong balance sheet and liquidity in the second quarter and at quarter end, cash was $85.4 million. Premium retail inventory, including retail inventory in distribution center was down 8.1% per square foot compared to the second quarter of last year.

Total inventory increased 1.2% to a $141.3 million compared to $127.1 million at the end of second quarter of fiscal 2008. While retail square footage increased 11.3%. Working capital was $98.6 million, as compared to $110.1 million in the second quarter of the prior year.

In addition to the cash on our balance sheet, we have access to $70 million, three year revolving credit facility with Wells Fargo, although we do not expect to draw on this line. We remained confident and our ability to fund operations in current growth plans out of existing cash and cash flow without the need for any borrowings.

Capital expenditures for the second quarter totaled $5.6 million, as compared to $18 million a year ago, primarily related to opening four premium retail stores and technology initiatives. Today, we have opened nine of the 10 new stores planned in fiscal 2009.

Depreciation and amortization was $17.3 million for the second quarter of fiscal 2009 and for fiscal 2009, we continue to expect capital expenditures to approximately $30 million. This was down significantly for fiscal 2008 as a result of reduced new store growth plans and lower technology investments.

Now onto our outlook, we remain confident in our direction and we are encouraged by results in August, but the environment remains challenging and results are still not, where we want them to be. That said, we anticipate achieving a sequential improvement in our operating results in the third quarter. We also believe that we have an opportunity to improve our merchandise margins in the second half of 2009.

Somewhat offsets by plan promotions in the third quarter. Therefore, majority of our merchandise margin opportunity is in the fourth quarter. We continue to expect to reduce SG&A expense by $30 million for the full year, while we have been able to save approximately $31 million to date. We plan to invest in marketing in the back half of the year to drive traffic in sales. We expect to increase marketing expense in second half of the year.

With a majority of the year-over-year increased volume in the third quarter, correspondingly, we plan to increase our catalog circulation by approximately 40% in the third quarter fiscal 2009 as compared to the prior, as well as investing in national magazine advertising.

As we move in the third quarter given the normal seasonality of our business, we expect to build inventory to support our fall in holiday sales trends. Therefore we expect inventory to show an increase and for cash to research low point for the year when we report third quarter results in November similar to our historical patterns.

We continue to expect end the year with over $100 million of cash on hand and no borrowings on our credit facility and we remain very confident in our financial condition going forward.

With that I’ll turn the call back over to Dan.

Daniel Griesemer

Thanks Tim. In summary we’ve made meaningful improvements to our merchandise over the past year and half in terms of evaluating our fashion sensibility, improving our fits and incorporating a value component to assortment. All of our efforts come together for fall and we believe that our collection appropriately reflects our customers lifestyle needs.

Although the environment remains uncertain and challenging we believe that we’re well position for the second half of the year and expect to continue to show with sequential improvement in our results in the third quarter. We are confidence that we have made the necessary changes to our business which we believe will position the company for long term growth and profitability.

I’d like to now open up the call for your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Neely Tamminga - Piper Jaffray.

Neely Tamminga - Piper Jaffray

Just a couple of question here on your August business would you be willing to share maybe not specifically, but directionally how you’re feeling about your conversion rates.

In terms of the new product I mean obviously that the month of little bit mixed because the product didn’t set for the 10 or so, but just wondering if you could quantify or qualify the conversion rate performance on the new product and then related and looking ahead to Q3. Tim how would you characterize the inventory on per square foot basis by the end of Q3 are you looking for inventory to be up in total dollars or per square foot just order magnitude would probably be helpful looking ahead to that point. Thanks.

Tim Martin

As we look it where we think we are going to end the third quarter we do expect inventory to be up on per square foot basis in the single digits.

Daniel Griesemer

In regards to your question on conversation I think I’ll expand maybe the answer a little bit because I know there would be great interest in how are things doings in August we kind of pretty gave some indication about second quarter and this is all inline are slightly better than what we thought.

So, the fall season is off to an encouraging start, we’re getting the positive signs that we needed to. We’re seeing improvements in the trends of all aspects of the business including conversion. That’s what gives us the confidents that we’re on the right track and it gives us the tone that we have in this call, but it is really important to note that it’s very early in the quarter.

Our season is always determined by post Labor Day business and performance not by what goes on in August. So, we’re cautiously optimistic and we’re seeing improvement in all trends, average trends, conversion, our comp store sales trend, all headed in the right direction, but it is just way to early in season two.

Neely Tamminga - Piper Jaffray

Dan, related to that could you speak then on the, obviously your talking about catalog circulation increases in that, it’s nice to see that confident in the assortment. How is Q3 going to played out a little bit differently in terms of circulation? You mentioned total numbers, but I’m assuming that impressions in number of books might actually go as well. Could you maybe size that up a little bit?

Daniel Griesemer

The total circulation, we’ve said is going to be up about 40% that albeit on a very depressed number from historical term. So, you have to can keep that in perspective, but it does indicate that given the strength of what we saw happening in the summer assortment with value pricing and all the improvements we’ve made across the collections, that we now to have the confidence to begin being more proactive and adding drops and fine tuning page counts and fine tuning who gets it.

So it’s a combination, of course our best customers will get frequently communicated and we are getting back into try to reactivate some of the customers that have maybe not shop with us for a while. So it’s an overall approach that we feel is prudent given what we’re seeing in the business and all the improvements that have been made.

Operator

Your next question comes from Chris Kim - JP Morgan.

Chris Kim - JP Morgan

Tim, could you give us a little more color on the merchandise margins overall and perhaps by segment retail versus direct?

Tim Martin

The second quarter, the merchandise margins for both direct and retail were roughly inline as opposed to in the first quarter. As we sort of seeing that, sort of stabilize it self. Overall the decline in merchandise margin is roughly a little over half related to merchandise and then the remaining part was related to occupancy deleverage.

Chris Kim - JP Morgan

Dan, you kind of talked about expectations from merchandise margins and in the back half and how that could build? You also mentioned sourcing was going to be a big area of that improvement. I mean, is the markdown guidance would that not be a bigger potential driver for merchandise margin improve fills?

Daniel Griesemer

As you know, we have four sales periods a year that hasn’t really changed, but we recognized that in this environment and given the challenge as we had, we really need to be looking at everything we do. We are looking at that as well and are testing several different things going forward, but too early to be incorporating that into any of the key indication as that we really want to see much of that until October results, but you’re right, sale and how we manage sale is a big lever in this.

We have several things in works for our fall sale, but what I was referring to is the combination of an improved offering and sourcing that reflects both of stabilization in global prices and a retreat from some of the increases that we talked about a year, as well as working with our core vendor group, knowing how important the value pricing is and our ability to the back end and may increase some of our purchases based on what we’re seeing throughput on those value categories and items to improve the margin there.

We have planned promotion that is going to somewhat offset some of those in freezes. I think its important to understand all those, but you touched on a very good comment about clearance.

Operator

Your next question comes from Liz Pierce - Roth Capital Partners.

Liz Pierce - Roth Capital Partners

Follow-up, 40% was over which quarter last year, or sequential somewhat you’ve mailed out this last quarter?

Daniel Griesemer

Over last year.

Liz Pierce - Roth Capital Partners

Which was about $70 million, correct?

Daniel Griesemer

That’s correct.

Liz Pierce - Roth Capital Partners

So, it was down considerably from the year before…

Daniel Griesemer

Yes, that is correct.

Liz Pierce - Roth Capital Partners

I think, on your comments, marketing which is the biggest was in third quarter? How should we think about the fourth quarter on marketing?

Daniel Griesemer

We’re not really prepared to say what it is. Although recognize that we were treated largely in circulation in the fourth quarter, because of what was going on in the environment and challenging performance we hadn’t finalized those numbers we’re looking with every drop that we are currently seeing, we’re fine tuning and looking of opportunities.

I think it’s safe to say that, we will continue to be opportunistic in the fourth quarter as we are in the third quarter, looking for places and ways to grow and restore this business, revenue growth and profitability, so I’m not prepared to share specific numbers yet.

Liz Pierce - Roth Capital Partners

What about your thoughts on couponing? I mean, I realize you talk about what exhibit planned promotion is going to take a little bite of the merchandise margins, but what’s been your thought in terms of how much couponing on the catalogs etc.?

Daniel Griesemer

The thought is to have them, because the environment requires that. I mean, there’s no doubt that this environment remains challenging and promotional across the board. We watch it very, very carefully what we’ve have it short redemption windows and move to frequently different promotions in order to prompt a response combined with activity focus that are One Creek customers and all kinds of things.

So we have added them back in, plans to add them back in all along made that call at the end of last year and as we build our entire budgets for 2009 and our strategies for 2009. So it’s part of the plan, but where your getting trouble is the double dipping of multiple discounting or the combination of heavy clearance and promotional activity and we feel real good about where our inventory levels are and our promotional cadence.

Liz Pierce - Roth Capital Partners

Then you kind of lead me right to my next question on the One Creek customer. I presume that the metrics that you’re seeing apply to that core customer, but what about some of the newer customers? Are you hopeful that what’s going to happen, when you step up to the third you’ll do a little more prospecting?

Daniel Griesemer

It’s a combination of some prospecting, although you’ve got to be really careful about that. It’s also reactivation, there’s a very large universe of customers that have shopped the brand in the years past that we can tap back into, but also prospecting, but most of the new customers come into the brands through our stores. We’ve got over 350 stores very well positioned in current relevant centers and that’s were the majority of our new customers come from.

As soon as they entered our universe, then we begin communicating with them appropriately based on their channels and quickly start emailing them and sending catalogs to them and then watching what they do.

Liz Pierce - Roth Capital Partners

Then my final question us, just can you comment on spa like, what it costs and your current thoughts?

Daniel Griesemer

Spa, do you want to give some of the spa numbers. I can give some color, but…

Tim Martin

Spa continued on the trend we saw on the first quarter and was respectively breakeven on a cash flow basis for the six months ended this quarter.

Liz Pierce - Roth Capital Partners

Dan, any kind of thoughts on what you’re thinking strategically for the concept?

Daniel Griesemer

Yes, the story has been the same the last several times we’ve updated on it. Experience is exceptional, the customer feedback is very, very positive. We really love the way that spas are being operated and support the brand, and support the sister store in their market, but their investment curve seems to be very long.

They performed almost independent of the external environment and are on this just kind of slow track to improvement and the team operating has done some great job and reducing some of the operating costs to get us to the numbers that we have been talking about. It’s not a distraction, nor do we seat as a big opportunity.

Operator

Your next question comes from Liz Dunn - Thomas Weisel Partners.

Liz Dunn - Thomas Weisel Partners

I guess is there any quantification you can provide on how much marketing will be up in the third quarter? Did I understand you correctly that you’re expecting $30 million in savings for the year, but you can’t cut that pretty much in the first half, so back half will be about flat in terms of total SG&A savings? Is that the right way to think about it?

Tim Martin

I think that’s probably the best way to look at it. I think the easiest way to look at modeling though from a quarterly perspective as we do expect SG&A year-over-year to be up in the third quarter, roughly in the mid-single digits and then we’ll have the opportunity to leverage that back down in the fourth quarter to return to the full years savings of $30 million that we talked about.

Liz Dunn - Thomas Weisel Partners

Then as it relates to the pricing strategy, is the hope that your out the door retail will be similar to what it has been with the heavier promotions that you’ve experienced during this downturn or will prices be even lower than that? I’m just thinking about as it relates to potential drag on the comp?

Georgia Shonk-Simmons

I think, as you’ll find that it’s going to be very similar to what we saw in summer, and actually hoping to add more pieces to repurchase with the value pricing, but I think the more important thing to look at is the balance that’s on the floor.

So if we look at the balance of the products, what we’re looking at is, we’re seeing both opening price points sell, picking up accessories and then also again the more expensive thing. So I think it’s going to be very similar to where we’ve been.

Liz Dunn - Thomas Weisel Partners

You’ll be able to pretty immediately source into these lower price points or will it take time, will it be something that sort of has an impact on merchandise margins initially? Then you source into or what’s the margin impact going to be?

Georgia Shonk-Simmons

The margin impact again is really we’re looking strictly at this point. Gross margin dollars and we’re looking at the fact that, we actually have more leverage going into fall, based off of summer and based off of being able to do booster buys and we are well prepared with our inventory and have a comfort level what our opening price points and what we are.

Operator

Your next question comes from Roxanne Meyer - UBS.

Roxanne Meyer - UBS

First, I’m just wondering, if you could provide a little guidance on the direct business. I know, you said you feel good about trends so far in August, or that you’re seeing some improvement? I’m wondering, if that applies to the direct business as well?

How you think about, as your circulation begins to ramp up, how you think about that business stabilizing and what you think longer term, the direct can be as a portion of the total? What ideally you’d like it to be? Thanks.

Tim Martin

We do see this and I’ve always said a very vibrant direct business and of late. The direct business has been hampered by a reduction in catalog circulation and reduction in inventory. We’re now back to where we have confidence in the merchandise where we can begin reinvesting in marketing and reinvesting appropriately in the inventory and direct will definitely be a benefactor of that.

Catalog spend customers, do stores, the website and they and they pick the phone and call and we watch what they do across the board and it is our expectation that along with an improved product offering and a more cohesive brand messaging strategy and increased circulation that the direct business will begin to get back on a growth track, which is what it needs to do. We want to maintain that and see that is a nice opportunity.

We think it could be 20% to 25% of the business over the long term and I think that’s very appropriate and we’ve got a lot of initiatives on the website that continues to improve to look and feel and functionality and we’re testing a lot of things there, right now since to continue to capitalize on what we see as an opportunity, but the big ones are catalog circulation and inventory levels across the board and as those begin to more appropriately reflect the sales trends in potential that direct business will benefit from that.

Roxanne Meyer - UBS

Also I’m wondering if you’re able to share and I know it’s early, but what present of customers you’ve actually been able to reactivate so far based on the new product.

Daniel Griesemer

Too early, we don’t have those metrics at this point. We’ve only dropped were we had the second catalog drop was just the day before yesterday. The very first one was only two weeks prior to that. We’ve only just now set the fall to collection, which is what we showed in July in the Manhattan investor event, so too early to indicate that.

What I think we did talk about, that the customer filed; the acted file had stabilized in the second quarter and that’s a very positive sign and we look forward to updating more details about that in future calls.

Roxanne Meyer - UBS

Then just last, it looks like your new store productivity was very strong in 2Q. I was just wondering if there’s any detail you can provide there?

Daniel Griesemer

If the new stores did exceed our expectations and did perform in excess of the way new stores had been performing over the last couple of years and ahead of the chain, but there weren’t a whole lot of them, but enough to notice that, yes the new stores did have some good performance. No other color wasn’t regional, or venue type, or anything like that.

Operator

Your final question comes from Richard Jaffe - Stifel Nicolaus.

Richard Jaffe - Stifel Nicolaus

Just a quick follow-on, can you quantify that the change you’ve seen in average unit retail dollars per transaction and number of transactions both in 2Q and then I guess that the August to-date period?

Tim Martin

Richard, what we said a little bit ago was that, we’ve seen average unit retail down about 7% in the second quarter and we’re seeing roughly a same level early on in the third quarter, but it still extremely early.

Richard Jaffe - Stifel Nicolaus

The number of transactions and dollars per transaction?

Tim Martin

The decrease in average unit retail is roughly inline with what we’ve seen in average transaction and number of transactions, we haven’t disclosed communicated, but the offset of those is increases in traffic, increases in conversion and hopefully what we’ve talked about is improvement we expect in margin. So that’s the more complete picture and it’s way too early to be giving a full picture of the quarter, way too early.

Daniel Griesemer

Richard, our second quarter conversion was up approximately 270 basis points over the prior year, so solid improvement in that conversation rate.

Richard Jaffe - Stifel Nicolaus

One more question on ad expense. Obviously, 40% more catalogs is costly. Could you quantify either the total ad expense, or without the catalog, or catalog plus national magazine advertising, just give us a sense of how we should plug into our SG&A calculations this second half?

Tim Martin

Richard, we won’t really want to breakout the total ad expense, but what I will say is in the third quarter we do expect SG&A to go up, a year-over-year in the mid-single digits and that actually will be entirely due to the marketing advertising.

Daniel Griesemer

We haven’t finalized and we’re still fine tuning the balance of Q3 circulation. So we’re just not prepared to get that.

Richard Jaffe - Stifel Nicolaus

Just could you repeat, what you said on the spa, if it’s about breakeven and it’s not a distraction and correct me if I’m wrong, it’s not an opportunity or you don’t think if it such, did I hear that correctly?

Daniel Griesemer

That is what I said, that we don’t see it as a big opportunity that it is a great experience. The team is doing great job, the customer experience is exceptional. The investment horizon is fairly long and much longer than a normal apparel store and so it’s kind of what it is. There maybe small opportunities or may not be it’s just not something. We’re really all about the apparel business in 354 stores that we have and getting that business headed in the right direction.

Tim Martin

Richard, what I said was the spas on an EBITDA or basically a cash flow basis, there’s slightly better than breakeven.

Richard Jaffe - Stifel Nicolaus

One more question, prospecting versus your 12 month buyer list, if you’re increasing 40%, is it half prospecting and half digging back into your exciting buyer list?

Tim Martin

No, I won’t give you the specific, but it’s all about how deep actually file you go and then how far in the lifetime style you go. There’s a small amounts of prospecting, larger amount of reactivation or tapping into people outside the 12 months, but the majority reactivity is in the 12 months file is very large. We have over a 4 million between 4 million and 4.5 million person universe in the 12 months active file, so lots of opportunity there.

Richard Jaffe - Stifel Nicolaus

So going deeper into 12 month and maybe to 18 month or 24 if you need to…?

Daniel Griesemer

Yes something like that. That’s a good way to be thinking about it. We’ll give you more as it unfolds here, once it’s unfolded to give you more clarity as to how we approached it.

Operator

There are no questions in queue. I’d like to turn the call back over to Daniel Griesemer for closing remarks.

Daniel Griesemer

Okay, great. Thank you everyone for joining us. So appreciate you taking the time and we look forward updating you on our next call. Have a good evening.

Operator

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.

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Source: Coldwater Creek Inc. Q2 2009 Earnings Call Transcript
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