Coldwater Creek 2Q05 Conference Call Transcript (CWTR)

COLDWATER CREEK

Fiscal 2005 Second Quarter Conference Call Transcript
August 24, 2005

Operator:

Welcome to Coldwater Creek's second quarter earnings release conference call. Today's call is being recorded.

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

Mr. Gunter, please go ahead.

David Gunter:

Thank you, operator. Good afternoon and welcome to Coldwater Creek's fiscal 2005 second 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. I 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 contained 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 August 31st. The number to call for the replay is 719-457-0820 and the passcode is 7209747. The Webcast of this call will also be available on the investor relations page of our Web site until August 31st after which the transcript of this conference call will be posted. To access that information, visit www.coldwatercreek.com 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'm pleased to report that strong sales at full price, the continued success of our national retail store expansion, and growth in the Internet channel have resulted in the most profitable second quarter in the company's history.

Additionally, the combination of increased merchandising purchasing power related to retail store growth and continued leveraging of store occupancy expense resulted in higher net income, improved gross profit and increased operating margin compared with last year.

We opened 17 new retail stores during the second quarter on our way to adding approximately 60 new Coldwater Creek locations this fiscal year. We are pleased with the progress of our direct sourcing initiative and remain on track to achieve our goal of directly importing approximately 15 percent of our merchandise in fiscal '05. Georgia will have an update on this initiative in a few moments. We successfully introduced our co-branded credit card program in late May, resulting in more than 29,000 customers taking part in the new program at the end of the second quarter. We currently have more than 45,000 cardholders and believe that we are gaining considerable momentum as customers learn about this pre-approved Coldwater Creek card and the point space rewards program it offers.

The Internet showed especially strong growth of 49 percent in the second quarter offsetting the decline in catalog sales and resulting in an overall increase in direct segment net sales of 19 percent for the period. Including the new names added during the quarter, we now have approximately 2.5 million active e-mail addresses. Of this e-mail list more than 62 percent of the customers live within 30 miles of a Coldwater Creek retail location. We continue to leverage this increased access by using our e-mail list to drive store traffic and highlight special events. Continuing a very favorable trend, our Internet site traffic exceeded 8.4 million visits during the second quarter, up 46 percent compared with a year ago.

Turning now to a brief overview of our second quarter financial performance, data is as follows; the net income increased 109 percent to $7 million resulting in earnings of 11 cents per share compared with six cents last year. Operating margin for the quarter was 6.9 percent compared with 4.8 percent in the prior year period. Strong sales at full price and increased purchasing power related to our retail store expansion resulted in 170 basis point improvement in the gross profit rate. Meanwhile, net sales increased 39 percent due to excellent response to our summer merchandise. Inventory increased by 29 percent or $16.7 million in the recent quarter as we added another 47 retail stores compared with the prior period. We ended the quarter with the cash position of $93 million, working capital of $125.8 and no debt.

In regards to the retail segment, net sales from the retail segment increased 55 percent to $95.2 million in the second quarter. Once again, the strength of our full price selling coupled with improved merchandise purchasing power and leveraging store occupancy expense helped increase our gross profit range. Retail stores represented nearly 62 percent of our total net sales for the second quarter compared with approximately 55 percent a year ago.

In regards to the direct segment, our overall direct segment net sales increased 19 percent due to especially strong results from the Internet. Internet sales increased 49 percent in the second quarter compared with the prior year. Internet sales represented more than 65 percent of our direct segment net sales for the period. Catalog sales decreased 14 percent in the second quarter as we continued to use catalogs as our primary print advertising medium to shift more customers to the Internet and to our retail stores.

In summary, the synergies of our effective triple channel retailing strategy continued to deliver net sales growth, improved EPS performance, and higher operating margin. As we've discussed, the careful execution of our retail store expansion strategy remains our top priority. We have successfully opened 26 of the approximately 60 stores planned for this year and currently have a total of more than 140 stores supporting the brand in key national markets. As we enter new markets and expand our presence in existing ones, we believe Coldwater Creek continues to gain market share and is starting to take its place as one of the premiere specialty apparel brands in the United States.

Now, I'd like to turn the call over to Mel for a more detailed review of second quarter financial results.

Mel Dick:

Thank you, Dennis. Net income for the second quarter was $7 million or 11 cents per share. This represents an increase of 109 percent over the net income of $3.3 million or six cents per share we reported in the second quarter last year. Our consolidated net sales for the second quarter increased 39 percent to $154.6 million from $111.2 million in the comparable period last year. This increase was a result of strong customer response to our summer merchandise at full price and an increase of 47 retail stores compared with the prior year.

Net sales for our retail segment increased 55 percent to $95.2 million for the fiscal 2005 second quarter from $61.3 million in the prior year period. Our retail segment net sales represented 61.6 percent of the company's total net sales in the most recent quarter compared with 55.1 percent a year ago. We had 136 full line stores in operation at the end of the second quarter compared with 89 full line stores in the prior year period. Currently, we have 140 full line stores in operation with the addition of four locations that have opened so far in the third quarter.

Net sales from our direct segment increased 19 percent to $59.4 million for the second quarter compared with $49.9 million in the 2004 period. Our direct segment net sales represented 38.4 percent of the company's total net sales in the most recent quarter compared with 44.9 percent in the prior year. Internet sales increased 49 percent to $38.8 million in the second quarter compared with $26 million last year.

Internet represented 65.3 percent of the company's direct segment net sales in the second quarter compared with 52 percent in the fiscal 2004 period. Catalog sales decreased 14 percent to $20.6 million for the quarter compared with $24 million a year ago. This decrease was primarily attributable to catalog customers continuing to shift to our retail and Internet channels. Catalog net sales represented 34.7 percent of the direct segment net sales for the period compared with 48 percent in the prior year's second quarter.

Gross profit for the second quarter was $67.7 million or 43.8 percent of net sales compared with $46.8 million or 42.1 percent of net sales for the same period last year. This 170 basis point increase in the gross profit rate was primarily due to improved merchandise margins on sales in all channels and to a lesser extent improved leveraging of the companies full line retail store occupancy costs. Selling, general, and administrative expenses for the fiscal 2005 second quarter $57.1 million or 36.9 percent of net sales compared with $41.5 million or 37.3 percent of net sales for the second quarter of 2004. The decrease in selling, general, and administrative expenses expressed as a percent of net sales was primarily due to improved customer response to our marketing initiatives partially offset by increased personnel costs associated with our retail expansion.

For the recent quarter, income from operations increased $5.3 million or 100 percent to $10.7 million or 6.9 percent of net sales. This compares with $5.3 million or 4.8 percent of net sales in the prior year period. Turning to the balance sheet, we closed the quarter with $74.1 million in inventory, an increase of $16.7 million compared with the end of the second quarter last year. This increase in inventory was primarily due to the addition of 47 retail stores since the second quarter of last year.

The 29 percent increase in inventory came during a period when we had a 52.8 percent increase in store count and a 43.2 percent increase in the retail square footage compared to the second quarter of 2004. At the end of the second quarter, we had no short or long debt and a cash position of $93.2 million compared with $88.6 million in the prior year period. At the same time, the company's working capital increased to $25.8 million at the end of the period from $105.9 million in the comparable period a year ago.

In summary, we continue to be pleased with our positive customer response, driving our full price sales performance across all channels. These continued strong sales results coupled with improved merchandise margins in all channels and coupled with improved merchandise margins in all channels and increased leveraging of full line store occupancy costs contributed to an increase in net sales and net income for the quarter.

Now I will turn the call over to Georgia for a discussion of our merchandise results for the summer and a look at what's in store for the fall.

Georgia Shonk-Simmons:

Continuing a favorable trend of strong full price selling, our merchandise was very well received in the recent quarter as customers responded to our colorful and novel summer assortments. And even when the sale was under way, our non-sale merchandise proved very compelling and kept performing well at full price. We saw continued success and growth in our pant program during the season, propelled to a larger extent by our cropped pant length. Given the great response to cropped pants this summer, I no longer consider them a fashion length. It has now been established, itself, as a basic length. And although summer is not really the season for novelty jackets, our performance in this particular category was well over plan.

Our T-shirt business also exceeded plan, as did our woven and novelty tops. As we've discussed in previous calls, our accessory business continues to grow. Based on the way the customer embraced our expanded assortment this summer, we see further opportunities to build on this category. Based on the effectiveness of our new Coldwater Creek catalog that was circulated during the first quarter, we will mail another Coldwater Creek book during the last week of August. This new title features store specific merchandise from all of our catalogs and we believe this book is driving traffic to all of our retail locations.

In terms of the second quarter, our growing retail stores combined with our ongoing increases in Web sales really were the key drivers of our positive results. The Web showed that it's achieved an impressive traction during the recent quarter and held its fair share of the overall business. On that same note, our e-mail addresses ((inaudible)) keep growing as we introduced the brand into two new markets across the country. At the end of the quarter, we hold a total of 2.5 million active e-mail addresses.

Our inventory level at the end of the second quarter came in below plan at approximately $74 million. We continued to be very pleased with our ability to manage inventory levels while rolling out new stores and meeting increased customer demand for our merchandise. Retail inventory was almost seven percent lower than last year on a square footage basis at $51 versus $55 in the prior year. We remain confident in our ability to maintain a clean and current inventory as we further leverage the efficiencies of managing a single virtual inventory in our centralized distribution center.

On to fall, I have to say I am truly excited about what Coldwater Creek is offering our customers this season. Although it is very, very early, I would like to point to our expanded denim program for fall, a category that has been extremely productive along with additional emphasis on our moleskin bottoms. As always, one of the hallmarks of our brand is our unique treatment of novelties across the assortment. Expect to see more of that Coldwater Creek approach to both color and novelty this fall. I'm particularly happy with the novelty jackets we have added to the assortment and I also anticipate further growth in our T-shirt and woven tops business to compliment the jacket category.

Our sport assortment anniversary is this fall and we remain pleased with the results from this collection. One of the main things we've learned over the past year of offering sport is that this assortment, although functional, is also a fashion statement. Our customers gravitate to the sport merchandise for everything from running errands to traveling. She's looking for, we've learned, an attractive element of sportiff that takes her comfortably everywhere she needs to go throughout the day.

Now to our national brand campaign. Based on the effectiveness of our four page national magazine spreads this summer, we will continue to pursue this marketing direction for fall. These colorful spreads, which are appearing in national lifestyle magazines such as “Oprah,