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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,” “Better Homes and Gardens,” “More,” “Country Living” and “Good Housekeeping” to name a few give us the space to really represent the brand and portray our lifestyle approach for millions of readers. To drive even more traffic to our stores, we're also using the same campaign as a four page newspaper insert that will focus on 28 major markets this fall.

I also want to continue to highlight how proud we are to be a national sponsor for the Susan G. Komen Breast Cancer Foundation for ‘The Race to the Cure'. We're also partnering with ‘Better Homes and Gardens' to raise additional funds for Komen during National Breast Cancer Awareness month. In this venture, along with so many others, we are pleased to be working at the national level to help provide support for a cause that is critically important to us and our customers.

Turning to our global sourcing initiative, we are solidly on track to achieve our goal of having 15 percent of our volume direct sourced this year. We're also confident that we can meet or exceed our goal of a 50 to 100 point – basis point improvement in gross margin associated with this increased level of direct sourcing. Going forward, we plan to expand our sourcing and design groups in a measured fashion as we increase the percentage of merchandise we source directly.

I also want to credit the sourcing team for its impeccable handling of the sanctions that have affected production and product flows out of China. Guided by the input, we anticipated the possibility of such sanctions early in this year and have systematically shifted production to other countries. This has resulted in a seamless flow of merchandise with no major hiccups or surprise. I can report that all of our fall deliveries have arrived and that we have had no need to resort to more extensive air shipments to get our merchandise to our distribution center. As you probably are aware, there remains the prospect of additional sanctions on production from China. But the apparel categories are limited and we anticipate very minimal impact on styles offered to Coldwater Creek.

In closing, we are pleased with second quarter response to our full price merchandise, as well as the effective summer clearance activity, both of which brought inventory levels below plan at the end of the period. And as we've discussed, the four page and national magazine spreads have proven to be strong traffic drivers in all channels, especially retail. We look forward to watching the results of our fall magazine ads and newspaper inserts as we continue to explore opportunities that come with using this kind of marketing in combination with our effective Coldwater Creek catalog to promote the brand.

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

Dennis Pence:

Thank you, Georgia. And before we open the lines for your questions, I'd like to update you on our guidance for the remainder of fiscal '05. Based on positive performance in the first half of the year and what we see as potential upside for the holiday selling season, we are increasing our second half and full year net sales and EPS guidance. We are reiterating our third quarter guidance of net sales in the range of $100 to $175 million and earnings per share of 17 to 18 cents, keeping in mind that the majority of our new store openings are scheduled to fall within this period, along with their pre-opening costs.

We are, however, increasing our fourth quarter guidance to reflect the following; net sales in the range of $240 to $245 million and EPS of 23 to 24 cents. For the full year, we are increasing our guidance to reflect net sales in the range of $720 to $730 million and EPS of 65 to 67 cents.

This concludes our formal comments. We'll now open up the lines for your questions. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. At this time if you would like to ask a question, please do so by pressing the star followed by the digit one on your touch-tone phone. Once again to ask a question today, you may do so by pressing the star followed by the digit one on your touch-tone phone.

We'll go first to Rob Wilson with Tiburon Research Group. Go ahead, sir.

Rob Wilson:

Yes, thank you. Georgia, could you recap your mailer strategy and did you send out a mailer in Q2 to the retail channel?

Georgia Shonk-Simmons:

No, we did not. It really went out at the end of Q1.

Rob Wilson:

OK. So there was no retail channel mailer?

Georgia Shonk-Simmons:

In Q2, no.

Rob Wilson:

OK. So you're keeping with your forward guidance you had previously provided of one in Q3 and two in Q4?

Georgia Shonk-Simmons:

Correct.

Rob Wilson:

OK. Could you help me understand – I know that in the past you've talked to me about your fungible inventory strategy and can you help me understand why that might be different (in an) improved strategy versus other retailers that have the direct and retail channels?

Georgia Shonk-Simmons:

Yes. I think that the obvious thing for us is, is that the inventory that is inside the distribution center can be virtually moved on real time. So if there is an item that is sitting in the distribution center that is needed more in the direct channel, it can be moved immediately. And that often gives us time then to reorder for other channels also. So the ability to move that inventory around inside the DC is the reason that we have been able to be so successful with our inventory strategy. Is that clear?

Rob Wilson:

Yes, that's clear. And that differs versus what some of your competitors might do?

Georgia Shonk-Simmons:

Well, some of the models are that there is a direct inventory and there's a retail inventory and they don't meet, they're not always even in the same location.

Rob Wilson:

OK. Now that's helpful. And Mel, could you – I know you don't provide comp store sales, but is it safe to say that you guys hit double digits in comp store sales in the Q2?

Mel Dick:

Well, as you said, we don't provide that information. We do plan on providing that information at some point in the future and what we have said in the past and consistent with that is that once we hit 100 stores in the comp base, we would then provide information. We do plan on providing it on a quarterly basis, so it will be when we have the first full quarter of 100 stores in the comp base that will provide that. I anticipate that that – we will reach the 100 comp stores sometime in the first quarter of '06 and we would be providing that information then when we're releasing earnings for the second quarter.

Rob Wilson:

OK. And real quickly, Georgia, you mentioned something about $51 of inventory in the retail channel, $51 per square foot.

Georgia Shonk-Simmons:

Yes.

Rob Wilson:

Does that include just what's physically in the store or is that ...

Georgia Shonk-Simmons:

No, that also includes what's in the distribution center.

Rob Wilson:

OK. And maybe even in transit?

Georgia Shonk-Simmons:

Oh, yes. We include everything.

Rob Wilson:

OK. Thank you.

Operator:

We'll move next to Marc Bettinger with Stanford Group. Go ahead, sir.

Marc Bettinger:

Hi, everybody, congratulations on a dynamite quarter.

Georgia Shonk-Simmons:

Thank you.

Marc Bettinger:

I guess the question I have is, is there anything that's not going well? OK. I'll take your silence ((inaudible)) good news.

Dennis Pence:

I guess if that's a – really I – a compliment and that sounds like it is, Marc, thank you. I think things could always be better. I mean we obviously need to continue to show improvements in our operating margin, we've promised our investors. You're going to see growth – continued growth in market share; you're going to see aggressive continued growth in our retail segment.

We're going to opportunistically take advantage of this Internet opportunity that people are seeing, I think, throughout the sector and throughout other sectors in the economy with the Internet. And we need to give you better financial performance on the bottom line as we show traction. I think you're seeing it and I think you're seeing it on a sustained basis and it's certainly gratifying to all of us here, but can we do better? Absolutely. And I think we have to.

Marc Bettinger:

OK. Dennis, my question absolutely was meant as a compliment and the last thing is the margin – the operating margin gains in the second half, do you see them similar to the first half where it looks like you're pushing somewhere between 100 and 200 basis points above the year before?

Georgia Shonk-Simmons:

Yes, I think you will see that in the second half.

Marc Bettinger:

OK. Great. All right. That's everything. Congratulations, again.

Georgia Shonk-Simmons:

Thank you so much.

Operator:

We'll go next to Deena Friedman with Brean Murray. Go ahead, ma'am.

Deena Friedman:

Good afternoon and congratulations.

Georgia Shonk-Simmons:

Thank you.

Deena Friedman:

Question for you, Georgia. You talked about increased accessories; could you give me sense of what the magnitude of that plan?

Georgia Shonk-Simmons:

Yes. It's still very – it's a very small part of our business. Apparel is still more than 80 percent of our business. But in the mix we have jewelry, hard goods, accessories and footwear. And right now, especially on the retail part of the business, I think being more focused, we should be able to pick up a percent – 100 to 150 basis points of improvement in the accessories going into next year taking up more share.

Deena Friedman:

And is it fair to say that accessories, in general, provide higher gross margins?

Georgia Shonk-Simmons:

Yes, it actually is. That's very fair.

Deena Friedman:

Great. And then, one other question, with regards to inventory; yes, I look at the inventory increases year over year versus the sales increases. Were there any issues of having enough inventory, particularly in the outlet channel?

Georgia Shonk-Simmons:

No. Actually, what we have done is actually decreased pages in our clearance books and so merchandise has gone to the outlet channel, but really our most efficient way of clearing merchandise still in fact is the Internet. And so, actually – and we've been very conservative building outlet stores because of the success of the Internet.

Deena Friedman:

Excellent. Congratulations, again.

Georgia Shonk-Simmons:

Thank you.

Operator:

We'll move next to Richard Jaffe with Legg Mason. Go ahead, sir.

Richard Jaffe:

Oh, thanks very much. I guess following up on your point about using the direct business as a means to liquidate excess inventory. Should we anticipate that the outlet stores that you have now remain your only outlet stores? And that the future outlet business becomes the Web based business?

Dennis Pence:

No, I don't think that's really quite feasible to achieve that kind of perfection, Richard, but I do believe that the number of outlet stores relative to the number of full line stores, as we grow out our full line base, will not have to direct the same rate based on the ability to forecast the dogs, as we see them happening and very quickly, the remaining retail inventory that's in the distribution center moved to the Internet clearance which is our strategy.

That's working well. Obviously, to keep up with the store growth, we need keep up with an aggressive capture of e-mail addresses and make that desirable for the customer to give us their e-mail address. So there is some business requirements that we will have to execute long term to fulfill the strategy. But I think certainly you will see relatively fewer outlet stores for this brand than you've seen historically to a lot of apparel brands.

Richard Jaffe:

Very good. Just a question for Georgia about the retail mailer, the additional mailer she comment on. That was only in-store product that was – I'm not sure how she described it, if you could just ...

Georgia Shonk-Simmons:

Yes. I'd love to say it's mostly in-store specific, which also means it's indirect, but certainly we like to target the merchandise to – because we're going to drive traffic to retail stores. So what is in the retail stores? Because we have more styles, as you know, on the direct side of the business.

Richard Jaffe:

So it's just the in-store styles and then ...

Georgia Shonk-Simmons:

Yes, I would say about 95 percent.

Richard Jaffe:

And that's a full price mailer?

Georgia Shonk-Simmons:

Oh, absolutely.

Richard Jaffe:

That's great. I think that's it. Thank you very much and great quarter.

Georgia Shonk-Simmons:

Thank you.

Dennis Pence:

Thank you.

Operator:

We'll move next to Ann Poole with Monarch Research. Go ahead, ma'am.

Ann Poole:

Hi, Georgia, I was wondering can you give us any details on holiday. What you anticipate being the key drivers? What you are doing differently this year versus last year as far as the merchandise assortment, advertising and the catalog mailings, packaging, et cetera?

Georgia Shonk-Simmons:

Well, I think what I can say to you, fairly at this point, is we're always very in tuned to the holiday season and we're always very focused on it and our goal, every year, is to be the purveyor of gifts to this consumer. And I would say that we've put as much, if not more intention into that for this coming year. I'd like to save the rest I think to a little later day.

Ann Poole:

OK.

Georgia Shonk-Simmons:

Thank you.

Ann Poole:

And then, as far as direct sourcing, you said that it's on track for '05; can you comment where you see it going as far as for '06? And then, is it basically basics that are being sourced right now? And do you see this shifting into maybe some fashion as you source more going down the road? Or is it predominantly going to be basics that you ((inaudible))?

Georgia Shonk-Simmons:

No, I think that the first thing that you are saying is certainly some of our core product and that is in the first 15 percent, but it isn't all basics.

Ann Poole:

OK.

Georgia Shonk-Simmons:

We also have some fashion. And going forward for '06, we will absolutely increase that base and we'll be doing both fashion basics and our pure novelty ornamented pieces.

Ann Poole:

OK and then just one last question; could you give an update on how the petites are doing? I know you were testing petites and I just wondering how that's being received and if you see this as a business that you anticipate going after a little more aggressively?

Georgia Shonk-Simmons:

Our petite business has always been strong and remains strong, the main part of us testing more items and sizes, really we'll see that through this fall selling season. So it's too early for me to give you that heads up on the difference between what we've normally done and then, this fall. So probably at the end of this quarter, I'll be able to give you some insight.

Ann Poole:

OK. Great. Thank you.

Operator:

We'll move next to Crystal Lanigan with DA Davidson. Go ahead, ma'am.

Crystal Lanigan:

Good afternoon, I'll add my congratulations to on another wonderful quarter.

Georgia Shonk-Simmons:

Thank you.

Crystal Lanigan:

Georgia, I guess the first thing to look at inventory; you obviously ran a very lean machine. I'm sure turns are trending right there and how do we look at the inventory level? Or what are you comfortable with going into the second half?

Georgia Shonk-Simmons:

I think the second half you will see us obviously the end of Q3, we always peak our inventory getting ready for Christmas and just since last year, because of the China sanctions, we will bring in some more inventory to make sure that we have it in before we get to the holiday season. So that really will hit us in Q3. Also, we'll be opening all those new stores in Q3, but then we expect the inventory by the end of the year to be at a level similar to what we're talking about today. That's where we are.

Crystal Lanigan:

Up around 20ish or so?

Georgia Shonk-Simmons:

Yes.

Crystal Lanigan:

OK. OK. Great. And then, I guess just asking about the sourcing, has there really been – I know Ron's really on top of the political climate, has there been any surprises in the political arena, as far as you're concerned? Has it played out the way you have expected?

Georgia Shonk-Simmons:

I think the great news about Ron and the sourcing team is they're astute ((inaudible)) of what's going on politically and also they're proactiveness in getting us to make some changes as soon as we see things. I think he and his team have been on top of everything politically that has actually encouraged us to move goods, change our thinking and move things around so that, in fact, we can keep and maintain the inventory in a positive way and so, that has worked really well.

Crystal Lanigan:

OK. Wonderful. And then, could you talk a little bit about as you've mentioned sport now has been out for a year and really the evolution of that assortment and where you see it going?

Georgia Shonk-Simmons:

I think as I said in my prepared statements, I think that the evolution of it is, is that we always still need to continue to have functional fibers, but we also need to realize that it's a fashion business and it is trending. So probably the operative word is sportiff versus true workout clothes.

Crystal Lanigan:

OK. So it sounds like she's definitely more focused on the fashion statement.

Georgia Shonk-Simmons:

Absolutely.

Crystal Lanigan:

Perhaps more than originally thought.

Georgia Shonk-Simmons:

Exactly.

Crystal Lanigan:

OK. OK. Great. And then, could you give us some idea of where the catalog circulation looks like for the second half?

Georgia Shonk-Simmons:

Yes. When it comes to the direct circulation, what I'm looking at for Q3 and this is just direct, which is catalog, we'll be down about 17 percent.

Crystal Lanigan:

OK.

Georgia Shonk-Simmons:

And then going forward, we'll end down for the year in circulation somewhere around five to seven percent.

Crystal Lanigan:

OK. And now part of that is offset by the retail mailer, correct?

Georgia Shonk-Simmons:

No, I just gave you catalogs.

Crystal Lanigan:

OK.

Georgia Shonk-Simmons:

So I gave you apples to apples for catalog mailings for catalog circ without the retail mailer in it.

Crystal Lanigan:

OK.

Georgia Shonk-Simmons:

So I wouldn't cause any confusion.

Crystal Lanigan:

OK. And so I guess the question would be retail would offset how much ((inaudible)) also the entire five to seven percent decline in catalog only?

Georgia Shonk-Simmons:

Yes, what you would see, honestly, if I added the retail mailer in, by the end of the year, what you would see is circulation would be very similar to last year.

Crystal Lanigan:

OK.

Georgia Shonk-Simmons:

In total.

Crystal Lanigan:

OK. Wonderful. And then, just a final question for Mel; could you tell us where – do you have pretty good idea of where you think the store openings will fall between Q3 and Q4? It sounds like clearly the bulk of them in Q3, but are you able to give us a number or a range?

Mel Dick:

Yes. I think we're going to have somewhere in the neighborhood of about 27 in Q3 and then another 10 at the beginning of Q4 that will get us up to the 60 that we're anticipating.

Crystal Lanigan:

Wonderful. Thank you very much and congratulations, again.

Georgia Shonk-Simmons:

Thank you.

Dennis Pence:

Thank you.

Operator:

We'll move next to Roxanne Meyer with CIBC World Markets. Go ahead, ma'am.

Roxanne Meyer:

Great. Thank you. Let me add my congratulations.

Georgia Shonk-Simmons:

Thank you.

Roxanne Meyer:

First off, few questions related to the income statement. In terms of gross margin, can you break out the increase in terms of merchandise margin, the basis point increase attributed to purchasing power and then, leverage on buying in occupancy?

Mel Dick:

Yes. Let me address that. In terms of the merchandise gross margin, in total, it would have been approximately 100 basis points and the leverage and the occupancy cost was right around 100 basis points in total, as well. A couple of other things offsetting that to get the 170 basis points that was there. So it's about 50/50 between the merchandise margin and the occupancy leverage.

Roxanne Meyer:

OK. Great. And then, on the SG&A line, can you first break out the incremental costs related to personnel costs with the retail rollout? And second, comment on some kind of threshold that would be necessary to leverage the SG&A costs.

Mel Dick:

Yes, I don't have with me the personnel cost on the SG&A and as I've mentioned in the past, the leverage of SG&A will really depend on the number of stores that we have. Many of the analysts I've talked to think that you could start to leverage your store count or start to leverage your SG&A when you get to say 175 to 225 stores. I think for us, we're going to be closer to that 225 stores and that'll be a little over a year down the road.

Roxanne Meyer:

OK. Well, if that's the case, then in your prepared comments about you attributed the decrease in SG&A to your marketing efforts. Can you just explain that a little bit further?

Mel Dick:

Yes, I think that the marketing that Georgia referred to in terms of the Coldwater Creek catalog, the national brand advertising, the steps we've taken to drive traffic to the store has really – that coupled with the merchandise being very well received at full price has allowed us to really have that decrease of I think it was 60 basis points in our SG&A.

Roxanne Meyer:

OK. Great. And then in terms of your marketing efforts, I know that it's early with regards to the loyalty program, but from your initial feedback that you have, are there any metrics that you can talk to in terms of spending patterns?

Dennis Pence:

No. It is too early and I think we're very much interested in seeing how the customers respond then long term in terms of increased frequency of purchase average purchase and lifetime value. And certainly, we'll keep you informed as that goes on. So far, we've seen good enthusiasm for the card, we're signing up new card holders at a good rate. We are pleased with the technology that's been implemented and all in all, I am happy so far, but it's too early to say what the upside will be in that area.

Roxanne Meyer:

OK. And then, is there some way to quantify – obviously you have very successful marketing efforts with your ads. Do you track the impact of those ads to sales in terms of the incremental sales that were driven by the ads?

Dennis Pence:

You can. There is some noise when you get in to national magazine advertising, but we did coupon them and the coupon has a unique offer code, so for those customers who do mention the coupon offer code over the phone or bring in the coupon to the stores, then we can get a sense and then, extrapolate then potentially what's missing based on the relative performance of what's performed. But as we get in to more and more national media advertising, obviously it becomes a grayer area. But we do know that it has a positive impact on store traffic, whether the customer directly is referring to that offer or not and we believe that that is very, very helpful to our financial performance.

Roxanne Meyer:

OK. Great. And just one final question, the two million incremental catalogs that you mailed this year versus last year; can you just break down, was it increased prospecting? Or in terms of just the mailing mix, who received those catalogs?

Georgia Shonk-Simmons:

On prospecting, OK, giving which numbers you're speaking of.

Roxanne Meyer:

Just the total mailings – the total mailings for the quarter of 15.5 million versus 13.1 million last year.

Georgia Shonk-Simmons:

Yes. Basically, we actually felt that last year we had missed a slot in not mailing a catalog. So we mailed an extra catalog in Q2 this year. Again it was not really to prospecting. This is a tough time of the year to prospect, so usually Q2, our prospecting is a lot less than the rest of the year. And this is to our best customers.

Roxanne Meyer:

OK. Great. Well, thank you very much and congratulations again.

Georgia Shonk-Simmons:

Thank you.

Operator:

We'll move next to Lauri Brunner with US Bank. Go ahead, please.

Lauri Brunner:

Hi, good afternoon. Thanks. Couple of questions for you, Georgia. With regard to sport, wondering what you've learned over the last year in terms of price points; if you've moved around the price points at all on similar items and if you've seen any kind of price resistance yet with that offering.

Georgia Shonk-Simmons:

No. I would say, Lauri, that haven't really changed the price pointing since we started the book because from right out of the box, the first book last year was strong and we found that our price pointing in our sets and our T-shirts were very comparable, quite honestly, to our core business; except when we used technical fabrics because those fabrics, of course, cost more per yard and haven't found any resistance to the pricing or the fashion.

Lauri Brunner:

OK. That's great. And then, in terms of novelty jackets in the second quarter, what do you think the difference was? You mentioned how strong they were even relative to last year which is a great second quarter. Was there anything really different with the weights or the fabrications this year that made it stand out?

Georgia Shonk-Simmons:

I would say that going into the second quarter this year we were lighter weight.

Lauri Brunner:

OK.

Georgia Shonk-Simmons:

And we'll continue to do that. We were a little bit more ornamented also.

Lauri Brunner:

OK.

Georgia Shonk-Simmons:

And I think you'll see that continuation through the season.

Lauri Brunner:

OK. Great work, everybody. Thank you.

Georgia Shonk-Simmons:

Thank you.

Dennis Pence:

Thank you.

Operator:

Once again if you'd like to ask a question, please press star and one on your touch-tone phone. We have a follow up from Deena Friedman with Brean Murray. Go ahead, please.

Deena Friedman:

Hi, thank you. Just a couple of questions regarding the income statement. In terms of the co-branded credit card, was there any SG&A benefit? Or do you anticipate getting one in the future?

Mel Dick:

There is some marketing dollars that come with that program, but they really offset our costs associated with it. So I don't anticipate any real SG&A benefit at this point in time.

Deena Friedman:

OK. And then, in terms of the newspaper inserts; is that incremental marketing dollars that are going to be spent?

Mel Dick:

Absolutely. It was planned, the newspaper inserts. We did expand it a little as a test so there was some incremental costs, but most of it had been planned, but there was some incremental above and beyond.

Deena Friedman:

And then, my final question is I looked at receivables as a percentage of sales and noticed they were up. Can you give me a sense as to what's going on?

Mel Dick:

Yes. The major piece of the receivable component really relates to the receivables associated with our tenant allowance that we get from our landlords as we're building more stores. So that is the significant reason for that increase.

Deena Friedman:

OK. Great. Congratulations, again.

Georgia Shonk-Simmons:

Thank you.

Dennis Pence:

Thank you.

Mel Dick:

Thank you.

Operator:

And we'll go now to Rob Wilson with Tiburon Research Group.

Rob Wilson:

Yes. Mel, could you speak to the growth in receivables this year versus last year? And just help us understand that growth rate?

Mel Dick:

Yes. As I had mentioned, the major growth really relates to receivables from our landlords for our tenant allowance that we get in our store build out. We have a significant number of stores; I think there's 27 that would be opening up in the third quarter, so there's a fair amount of receivables that's been set up. We've not had any collection problems in the past nor would I consider that we'll have any in the future.

Rob Wilson:

And that's much more than last year at this time?

Mel Dick:

It is. Last year, our total store openings last year was 48, this year we are at – we're going to be approximately 60 and so, the majority of the increase in the receivables would be from that from the tenant allowance. I think that makes up probably 80 percent of the increase.

Rob Wilson:

OK.

Mel Dick:

The rest is just a number of things associated with credit card receivables that type of thing.

Rob Wilson:

OK. And Georgia, if we go back to the last quarter's conference call, you talked about how the competitive environment in the mall was really, in mid May, I think you had said that the prices were breaking out there and the markdowns were hitting. How did that play out in Q2? And what do you see early part of Q3?

Georgia Shonk-Simmons:

I think what I had said was the fact that I – in going in to Q2, we knew that the marketplace was going to be extremely competitive because we already seeing it. And we didn't, quite frankly, we held to our guns and went on planned sale as we had planned and expected and still saw full price selling even through the sale. So that we were very pleased with. I think again, I think this environment will continue to be competitive and I think again we just need to always watch our competitors. But Q2 was very positive for us and we hope for the same results.

Rob Wilson:

So do you see a similar sort of environment entering Q3?

Georgia Shonk-Simmons:

Right now, I think it's too early. I think it's too early for me to speculate just getting out the stores now. I think once we see August comp sales, I think we'll – the story will be told.

Rob Wilson:

OK. And one last question, Mel, in your Ks and Qs, you have a no disclosure, it talks about clearance rate each quarter and I think in the last few quarters, that's been going down. Do you have that number for the just ended Q2?

Mel Dick:

I don't at this point in time.

Rob Wilson:

And can you define what that number means? I've never seen a similar sort of disclosure for a retailer.

Mel Dick:

When you referred to clearance rate, if I heard you right.

Rob Wilson:

Yes. I mean I think last quarter you said your clearance rate in Q1 was 11 percent and versus Q1 of the prior year was a higher number like 12 or 14 percent.

Mel Dick:

Yes. I think that probably refers to the percentage of our overall sales that are sold through our disposition channels and we have been fortunate that our overall sale for the past several quarters have been high at our full price selling and therefore, we've had less of a percentage of disposition sales.

Rob Wilson:

And how do you define disposition?

Mel Dick:

Disposition sales would be those sales that clear through our outlet stores, that clear through our outlet on the Internet and our clearance catalogs that we have.

Rob Wilson:

OK. Thanks for clearing that up. Thank you.

Mel Dick:

Thank you.

Operator:

At this time, we have no further questions. I'd like to turn the conference back over to Mr. Gunter for any closing or additional remarks.

David Gunter:

Thank you, Operator. We'd simply like to thank you, as always, for your time on today's call and wish you a very pleasant good evening.

Mel Dick:

Thank you.

Related:

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Source: Coldwater Creek 2Q05 Conference Call Transcript (CWTR)
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