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COLDWATER CREEK

Fiscal 2005 First Quarter Conference Call Transcript

May 25, 2005

Operator

Good day and welcome everyone to the Coldwater Creek first 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 Merchandising Officer, Ms. Georgia Shonk-Simmons, Mr. Mel Dick, Executive Vice President and Chief Financial Officer, and Mr. David Gunter, Director of 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 first 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.

With us on the line this afternoon to review the results are Dennis Pence, Chairman and Chief Executive Officer, Georgia Shonk-Simmons, President and Chief Merchandising Officer, and Mel Dick, Executive Vice President and Chief Financial Officer.

We will begin with a few formal comments from management and then open up the lines for your questions. However, before we turn the call over to management, I would like to remind our listeners that any forward-looking statements in today's press release as well as in the conference call are, of course, subject to risks and uncertainties and actual results may differ materially as described in the company's filings with the SEC, in each of our financial releases and in today's earnings press release. We direct our listeners to those filings.

A replay of this conference call will be available immediately after the call today until midnight on June 1. The number to call for the replay is (719) 457-0820 and the pass code is 8191224. The Webcast of this call will also be available on the investor relations page of our Website until June 1, 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 the combination of strong, full-price sales in all channels increased merchandise purchasing power related to our retail store expansion and continued leveraging of store occupancy expense, delivered higher net sales, increased net income, and improved gross profit and operating margin compared with last year and resulted in our most profitable first quarter in the company's history.

As planned, we successfully opened five new retail stores during the first quarter on our way to adding approximately 60 new stores this fiscal year. We continue to move forward with our direct sourcing initiative and believe we are well on track to achieve our goal of directly importing approximately 15 percent of our merchandise in fiscal '05. That compares with less than five percent direct sourcing last year. Georgia will discuss this in greater detail in a few minutes.

We have a firm grasp on our triple-channel business model with retail stores now representing more than half of our business and Internet growing to become the largest part of our direct segment. At the same time, we continue to leverage the power of our catalogues as an affordable and effective print advertising medium to promote the brand across all of our sales channels.

Internet sales showed a strong increase for the first quarter, more than offsetting the planned decline in catalogue sales and resulting in an overall increase in direct segment net sales of approximately six percent for the first quarter. Including the new names added during the recent quarter, we now have approximately 2.4 million active e-mail addresses.

Meanwhile, more than 50 percent of the customers on our e-mail list now live within 30 miles of a Coldwater Creek retail store. To leverage this increased level of access to our customers we are using our e-mail list to send store related messages that highlight special events and store-specific information. We have also successfully tested more frequent e-mail contact with our customers which they have welcomed. These focused e-mail campaigns feature customized messaging based on the customer's shopping trends and prior purchase history. And we look forward to further exploring this opportunity going forward. Continuing a favorable trend, our Internet site traffic exceeded 8.3 million visits during the first quarter, up 45 percent compared with a year ago.

Turning now to a brief overview of our first quarter financial performance, the data is as follows. Net income increased $3.2 million or 60 percent, resulting in earnings of 14 cents per share compared with nine cents last year. Operating margin for the quarter was 8.6 percent compared with 7.1 percent in the prior year period. Strong sales at full price and increased purchasing power related to our store expansion resulted in a 330 basis point improvement in the gross profit rate.

Meanwhile, net sales increased 25 percent due to positive response to our spring merchandise. As planned, inventory increased by approximately 42 percent or $23.7 million in this recent quarter as we added another 48 retail stores compared with the prior year. We ended the quarter with a cash position of $116.5 million, working capital of 119.6, and zero debt.

In regards to the retail segment, net sales from the retail segment increased 48 percent to $83.8 million in the first quarter. Once again in this recent quarter, the strength of full-price selling decreased the need for clearance activity which coupled with improved merchandise purchasing power, helped increase our gross profit rate. Finally, retail stores represented nearly 54 percent of our total net sales for the first quarter compared with approximately 45 percent a year ago.

In regards to the direct segment, Internet sales increased 18 percent in the first quarter compared with the prior year. Internet sales represented more than 57 percent of our direct segment net sales for the first quarter. Catalogue sales decreased seven percent in the first quarter as we further leveraged the effectiveness of catalogues as our principle print advertising media to shift more customers to our Internet and retail channels.

In summary, we are now using our experience in triple-channel retailing to maximize sales potential across all channels – retail stores, Internet, and catalogues. Our stores are carrying the brand to key markets across the country. Internet growth remains strong as we continue to build our e-mail list and catalogues have evolved to become both a sales vehicle and a cost-effective way to drive traffic to all channels.

We remain firmly focused on the careful execution of our retail store expansion strategy and have already opened 12 of the approximately 60 stores planned for this year. We believe our well-tested and measured approach to retail expansion will allow us to gain market share as we continue to work to establish Coldwater Creek 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 first quarter financial results.

Mel Dick

Thank you Dennis. Net income for the first quarter was $8.5 million, or 14 cents per share. This represents an increase of 59.6 percent over the net income of $5.3 million, or nine cents per share, as we reported in the first quarter last year. Our consolidated net sales for the first quarter increased 25 percent to $155.6 million from $124.5 million in the comparable period last year. This increase was as a result of strong customer response to our spring merchandise at full price and an increase of 48 retail stores compared with the prior year.

Net sales from our retail segment increased 48.3 percent to $83.8 million for the fiscal 2005 first quarter from $56.5 million in the prior year period. Our retail segment net sales represented 53.8 percent of the company's total net sales in the most recent quarter compared with 45.4 percent a year ago.

We had 119 full-line stores in operation at the end of the first quarter compared with 71 full-line stores in the prior year period. Currently, we have 126 full-line stores in operation with the addition of seven locations that opened so far in the first quarter. Net sales from our direct segment increased 5.7 percent to $71.9 million for the first quarter compared with $68 million in the 2004 period. Our direct segment net sales represented 46.2 percent of the company's total net sales in the most recent quarter compared with 54.6 percent in the prior year.

Internet net sales increased 17.5 percent to $41.1 million in the first quarter compared with $34.9 million last year. Internet represented 57.1 percent of the company's direct segment net sales in the first quarter compared with 51.4 percent in the fiscal 2004 period. Catalogue net sales decreased 6.7 percent to $30.8 million for the quarter compared with $33 million a year ago. This decrease was primarily attributable to catalogue customers continuing to shift to our retail and Internet channels. Catalogue net sales represented 42.9 percent of the direct segment net sales for the period compared with 48.6 percent in the prior year first quarter.

Gross profit for the first quarter was $72.8 million, or 46.8 percent of net sales, compared with $54.2 million or 43.5 percent of net sales for the same period last year. This 330 basis point increase in the gross profit rate was primarily due to improved merchandise margins on sales in all channels, increased merchandise purchasing power related to our retail store expansion, and improved leveraging of our full-line store occupancy costs.

Selling, general, and administrative expenses for the first quarter were $59.5 million or 38.2 percent of net sales compared with $45.4 million or 36.5 percent of net sales for the first quarter of 2004. The increase in selling, general, and administrative expenses expressed as a percentage of net sales was primarily due to increased personnel costs associated with our retail expansion.

For the recent quarter, income from operations increased $4.6 million or 52.2 percent to $13.4 million or 8.6 percent of net sales. This compares with $8.8 million or 7.1 percent of net sales in the prior year period.

Turning to the balance sheet, we closed the quarter with $80.6 million in inventory, an increase of $23.7 million compared with the end of first quarter last year. This increase in inventory was primarily due to the addition of 48 stores since the first quarter of last year. The 41.7 percent increase in inventory came during a period when we had a 68 percent increase in store count and a 51 percent increase in retail square footage compared to the first quarter of 2004.

At the end of the first quarter we had no short or long-term debt and a cash position of $116.5 million compared to $54.6 million in the prior year period. At the same time, the company's working capital increased to $119.6 million from $58.3 million in the comparable period a year ago.

In summary, we continue to be pleased with our full-price sales performance and positive customer response to our merchandise across all channels. These strong sales results coupled with higher merchandise margins contribute to an increase in net sales and net income for the quarter.

Now I'd like to turn the call over to Georgia for a discussion of our merchandise results for the spring and an update on what's ahead.

Georgia Shonk-Simmons

Thanks Mel. Good afternoon. Once again, this past season customer response was positive for all our merchandise assortment across all categories. And as Dennis noted earlier, we saw very favorable response at full price which decreased our need for clearance activity and resulted in improved gross profit. In fact, the strength of our full-line selling meant we did not need to have our traditional spring promotion on the Internet.

Even with an early Easter, our dress business was strong for spring. The solid sales trends we discussed in our fourth quarter conference call continued throughout the first quarter as customers responded to both the spring assortment as well as the colorful summer merchandise that began arriving in stores two weeks after Easter.

The arrival of our summer assortment in mid-April marked the move from pastels in spring to (citrus brights) for summer. This gave us an entirely new look in the stores at a time when the customer was truly ready to jump in to color. Summer came out of the box with a completely new collection and continued to build and improve upon our successful mix and match versatility story.

The assortment is playful and fun and the combination of color and novelty definitely struck a positive note with customers in all our channels. We continue to experience strong sales in our novelty jackets, bottoms, knit tops, and tees. For summer we also tested some new styles and (silhouettes) that resulted in an even broader customer appeal.

Our inventory level at the end of the first quarter came in below plan at $8.3 million. As Mel mentioned, the increase over prior year was based on the addition of 48 stores which represented a 60 percent increase in store count and a 51 percent increase in the square footage compared to a year ago.

We remain confident in our ability to manage inventory at a very clean and current level as we continue to realize the efficiencies of maintaining a single virtual inventory in our centralized distribution center. Just as we did for spring, we are rolling into this new season with considerable enthusiasm and belief that our merchandise is solidly on target.

That said, the current retail climate leads us to believe that Q2 could prove to be once again a highly promotional period. And while we have been quite successful at full-price selling even in this kind of environment, we are keeping a close eye on the competitive landscape as the quarter progresses.

Now I'd like to draw attention to a couple of initiatives that have been successful for the company so far this fiscal year. We've been very happy with the results from our national magazine ad campaign for driving traffic to all of our selling channels. We have expanded our presence through a series of four-page advertising spreads that highlight the brand and tie directly to the lifestyles of our customers.

These attractive colorful spreads have been appearing in 17 national lifestyle magazines such as "Oprah," ("Better Homes & Gardens", "House Beautiful", "More"), just to name a few. The ads were very effective for spring and summer. And having seen the advertising spreads we have all ready to go for fall, I am confident this direction will continue to be positive for us, so much so that we've increased our national magazine advertising spend from approximately $3 million from last year to a planned $9 million this year.

This spring we tested a new concept through our retail traffic driver, a 68-page book that emphasized merchandise that we feature in our stores. Unlike our prior year retailer mailers of 12 pages, this was a full-size catalogue format featuring apparel, jewelry accessories, and gifts from all of our titles under one cover. And we are particularly pleased with the response at this first Coldwater Creek catalogue.

This catalogue was primarily designed to be a retail traffic driver and prove to be very successful in that capacity. We used a focused mailing strategy targeting zip codes around our current retail store locations. Based on this positive first outing we now plan to use a similar approach to the new Coldwater Creek catalogue mailing later this year.

In addition, we are truly excited about our role as a national sponsor for the Susan G. Komen Breast Cancer Foundation "Race For the Cure" series. We will be involved with a total of 76 race events across the country this year. Every store within a race area will be hosting a ("Fashion For the Cure") event. These two-hour events are wardrobe parties where we partner with a local race affiliate to bring customers into our stores. We, as a company, realize how important this issue is to our customers and we are very proud to be a partner with the Susan G. Komen Breast Cancer Foundation.

Moving forward, we are continuing to put the infrastructure in place to build our direct sourcing initiative. And we remain on track to hit our goal of having 15 percent of our volume direct source this year, mostly in the second-half. Based on our experience so far this year, we know we are on track to meet or exceed the goal of 50 to 100 basis point improvement in gross margin we announced in the fourth quarter conference call.

In terms of safeguards on imports for China, as expected (OTCPK:CEDA) on May 18 announced that it's imposing safeguards on some items including women's synthetic pants and knit tops. We anticipated this might occur and have been planning for this and some safeguards since early 2004. For that reason, we did not rush into China for production choosing instead to take a more cautious approach and prepare in advance to have our merchandise dual sourced in other Asian countries where safeguards would not be an issue.

Further, we think we have taken appropriate steps to avoid any disruption in production and product flow and that we are in a good position to react quickly in order to protect our deliveries and merchandise margins regardless of any sanctions imposed on China as an exporter of products.

In closing, we are pleased with the continuing favorable reception to our merchandise at full price which decreased our need for clearance. Early results for our summer assortment have been positive and we believe the color and novelty in this merchandise collection is capturing the customers' attention. And our four-page spreads in national magazines and the Coldwater Creek new catalogues have proven to be effective sales and traffic drivers in all channels.

That concludes my comments and now I'd like to turn the call back over to Dennis. Dennis?

Dennis Pence

Thank you Georgia. Before we open up the lines for your questions I'd like to reiterate our guidance for the remainder of fiscal '05. Please note that apart from accounting for the first quarter net sales and earnings increase over our previous expectations, our guidance remains the same. Repeating for Q2, net sales we're projecting in the range of 125 to $130 million resulting in a six to seven cent EPS. For Q3, 170 to $175 million resulting in 17 to 18 cent EPS. Q4 net sales of 235 to $240 million resulting in an EPS of 22 to 23 cents and totaling for the year net sales projections of 685 to $700 million resulting in a projected 59 to 62 cents EPS for the year over the actual of last year of 48 cents EPS. As I stated, these are the same guidance figures that we had given you earlier in the season.

We'd like to now open it up for questions.

Operator

Thank you. The question and answer session will be conducted electronically. And if you do wish to signal for a question, you may do so by pressing the star key followed by the digit one on your touch-tone phone. Once again, that is star one on your touch-tone phone to signal for any questions. And if you are using a speakerphone today, please make sure that your mute function is turned off to allow your signal to reach our equipment.

Our first question will come from Ann Poole, Monarch Research.

Ann Poole

Hello. You stated that in first quarter the direct segment sales breakout was roughly 57 percent Internet and 43 percent catalogue. I just was wondering what do you see as kind of your ideal or target breakout in the direct segment. Do you anticipate that the Internet sales will continue to become a larger part of this segment?

Dennis Pence

Well this is really a, I think, a very strategic question based on consumer patterns going forward. And I think if you look at it long-term we're seeing, as are some of you, the increase year-over-year in broadband penetration in the home having a very significant impact on consumer purchase behavior in the United States. And I anticipate this will continue. We're making the investments in this channel with that assumption in mind.

I do believe long-term, and we have previously stated this, that we will probably see something like a channel mix someday of about an 80 percent retail store, about 15 percent Internet, and about five percent catalogue. That said, because of our experience at (prag) media advertising via catalogue we think that catalogue will be for us a much more consequential vehicle than many of our competitors because we believe we have the ability to use catalogue to drive sales volume to the other two channels resulting in revenue to those channels but at a more cost effective way than some other advertising. So, that would be my long-term, I think, read on the industry there.

Ann Poole

OK. And Georgia, you discussed success of the retail mailer and the new format that went out in the first quarter. And I'm just wondering if you could talk a little bit more in detail about that as far as will another retail mailer go out in the second quarter? And then I also know that you monitor specific metrics in your store very closely and was wondering if you could – if you saw like a measurable difference in traffic that was generated around the time of those mailings.

Georgia Shonk-Simmons

First and foremost, we've been testing different types of media to send to drive traffic to the retail stores. And we have been doing 12 and 24-page retail mailers. But we have tested that against some of our traditional catalogue mailings and found that the more assortment that we give to the customer out there the more traffic it does drive to the stores.

So, the idea was again to put all of our core catalogue merchandise both (North Country), (Spirit), gifts and jewelry, along with some sports under a cover of Coldwater Creek, mail a 60-page – 68-page book which is you know, for us, actually one of our smaller books but still have more assortment in there for the customers to get their arms around. And we did see a noticeable difference in our traffic and a very positive result. So because of those results we will continue – we will have one in the third quarter to launch fall and two in the holiday season.

Ann Poole

OK and then just one more question for Georgia. I was just wondering could you talk a little bit just about the turquoise necklace (GWP) that started at the end of April. I just was wondering how this did compared to other (GWPs) in the past and was this actually (anniversaried) or something new for that – for this quarter? And then will there be a (GWP) in the second quarter?

Georgia Shonk-Simmons

OK. First and foremost, the event was (anniversaries).

Ann Poole

OK.

Georgia Shonk-Simmons

We had had one last year. This is the first time though that we've actually done a necklace and the success was very strong with it. We will not have a (GWP) in the second quarter. We do it at peak times for the stores and peak traffic seasons. So, we won't probably have one until Q3.

Ann Poole

OK, thank you.

Operator

And we'll take our – and we'll take our next question from Kevin Foll, (U.S. Bank). Actually, forgive me, Magnetar Capital. Your line is open Mr. Foll. Please go ahead.

Kevin Foll

Hi guys. Sorry about that. Congratulations on a great quarter. Just a couple of questions on the SG&A for the second quarter. What sort of run rate are you looking for in 2Q on a dollar basis versus 1Q? Are you still seeing some pressure from the retail personnel side?

Mel Dick

We'll continue to see that as we continue to build up field operations. And we're planning on adding probably 20 stores during the second quarter, approximately 20 stores. So we'll continue to see some growth there.

Dennis Pence

That actually was based on a discovery last year when we opened around 40 stores or so last year. And we did see some – as we continue to test and work through the best method to grow the chain, we did see some training issues for store managers. So this year we've set up a Coldwater Creek university for store managers in (Sand Point) for a full week of training there as well as two weeks of training at two different training stores throughout the United States for all these store managers and some assistants as well.

And this has resulted in bringing managers in three weeks earlier than last year. We think it makes sense. We're seeing the stores that are opening now getting off to a good start. Customer service is better. And simply we think it's a – it's a reasonable cost to ensure proper execution. And I do remind everyone that we've decided a 60 store run rate to pursue while I believe not (imprudent) a relatively aggressive run rate. And I think this is absolutely necessary to be sure that we do it well.

Kevin Foll

OK. And what sort of pre-opening costs would you anticipate per store in the second quarter?

Mel Dick

We haven't previously talked about specific costs. But they will be very comparable to what we've had. They're probably in the neighborhood of approximately 40 to $50,000 per store.

Kevin Foll

OK. And then could you just repeat what Georgia was talking about on the promotional environment expected for the second quarter? Can you just go in a little more detail about that? I missed some of that.

Georgia Shonk-Simmons

Well I think that – you know obviously June and July are always, for retail, extremely promotional times of year where everything goes on sale. I would say that we're seeing in the competitive climate out there though people are already starting to break price before Memorial Day which is quite unusual. And so again, I think that the summer will heat up and promotional activity is probably going to be with deeper markdowns and more of it.

Kevin Foll

OK. That's something that happened in the holiday too and you guys decided not to break price and it turned out to be a pretty successful strategy on your part. And I'm just wondering if you're anticipating the same type of strategy?

Georgia Shonk-Simmons

Well what we will do is we will stay at full price until we move into June. And by mid-June and July we will go on sale which is the same timing we do every year. So we're not changing our timing. We're just going to watch the promotional climate out there. Because again, as we're walking through the malls and watching our competitors diligently we know that activity is already happening now.

Kevin Foll

Great. They obviously don't have as many people in their stores. But, all right thanks.

Operator

And our next question will come from Mark Montagna with Wells Fargo.

Mark Montagna

Hi. A question on the direct sourcing. It sounds like you're ahead of schedule because I thought you were suppose to just have 10 percent of the merchandise this year direct source and 100 basis points of gross margin. Now I think you're saying 15 percent and the majority of that in the second half whereas before it was suppose to all be in the second-half. Is that – are you ahead of schedule or have you – had you updated that previously?

Georgia Shonk-Simmons

No, actually the goal has honestly always been 15 percent and the vast majority of it coming in the second half of the year.

Mark Montagna

OK. But the public comments before this, weren't they just 10 percent?

Georgia Shonk-Simmons

No, they weren't.

Mark Montagna

OK. Then what's the – for the first quarter, I was wondering what the average inventory level was per store during the quarter this year versus last year.

Male

The inventory in the store – I don't have it on a per store basis. But on a per square footage basis, it was $37 a square foot in the store last year and $37 again this year at the end of the first quarter.

Mark Montagna

Right. But that's at the end. Is there a way of calculating what it was say on average throughout the quarter, not just at the end of the quarter?

Male

I don't have that information. I believe I did comment in the fourth quarter call what it was on a per-square-foot basis at the end of the fourth quarter. And I can check that while we're answering some other questions.

Mark Montagna

All right. And then – so I guess you're going to open 20 stores in the second quarter. Can you tell us what the plan is for say the third quarter and if any in the fourth quarter?

Male

Yes, the plan is approximately 20 stores in the second quarter, 25 in the third quarter, and 10 at the beginning of the fourth quarter.

Mark Montagna

All right. And then just an update on the sport line, how that's doing, what the plans are, more catalogues – is there going to be more floor space devoted to this?

Georgia Shonk-Simmons

I think at this point we have put sport in a meaningful way in the stores. And we intend that – again, the square footage that it has today we're pleased with the results. And so we'll be maintaining that square footage.

Mark Montagna

OK. All right. That was all I needed.

Mel Dick

Mark, this is Mel. In regards to your question, at the end of the fourth quarter our inventory per square foot was about $32 a square foot compared to the $37 at the end of the first quarter. I will tell you that our inventory turn is essentially the same for the years.

Mark Montagna

OK. All right. Thank you.

Operator

And our next question comes from Lauri Brunner with U.S. Bank.

Lauri Brunner

Hi guys. Great work in the quarter.

Dennis Pence

Thank you.

Georgia Shonk-Simmons

Thank you.

Lauri Brunner

A couple questions. Mel, I think I'm going to start with you. This is from your 10K. If you – just looking at the (contributioner) segment data, your corporate expense in fiscal '04 went up 90 basis points. I'm assuming a major driver of that was for the sourcing initiative and getting that off the ground in the design office in New York. Can you tell me if I'm right on that assumption?

Mel Dick

That is correct.

Lauri Brunner

So, is fiscal '05 then another investment year with sourcing and then can we expect you guys to start leveraging that even more in '06?

Mel Dick

We will continue to invest in sourcing and at our design center we do have an increase in the design center planned. We will also continue to have some increases in all of our areas just associated with the growth as a result of the retail store expansion.

Lauri Brunner

Right. OK, great. Dennis and Georgia I'm wondering – you know Georgia you talked about the combined catalogue in the quarter and how well that went and trying some more of that later in the year. I'm wondering if you are – either of you are opposed to an eventual consolidation of all the catalogue brands into one. There could certainly be some savings that you guys could drive out of a mold like that eventually even if it's not overnight.

Dennis Pence

Well it seems like there would, on the surface, be a savings. But for the catalogue customer, that is the consumer that prefers to buy through that traditional channel, one can better target her by having merchandise that she's shown a past purchase history to buying only and then reducing the SG&A that goes to that customer. So targeted independent catalogues remain the food of choice for this particular consumer.

As long as the catalogue segment remains as large as it is, it would be (imprudent) and actually would be counterproductive to our operating profit margin to discontinue these vehicles. Now one could hypothetically say someday if cataloging is only five percent of our business would that represent maybe an intelligent thing to do with one catalogue? And hypothetically I'd answer yes but that's some days several years in the future.

Lauri Brunner

OK. Thanks for that insight Dennis. Georgia what were the new silhouettes that you tried in the quarter?

Georgia Shonk-Simmons

Well I think we actually – for our customer we tried cotton and ((inaudible)) again still with ease in the waist, new types of crop pants, and things that actually attracted a slightly younger customer to see again – or a slightly – I shouldn't say younger customer as much as I should say a slightly younger fashion attitude. We also did some cotton dresses in the store that actually did extraordinarily well. So we will continue to pursue testing in the stores that will help lead us down the path of fashion trends.

Lauri Brunner

OK, great. And then I was on your Website today not looking for a job but noticed that there are 38 job postings for jobs in (Sand Point). So, I'm wondering if you've just recently accelerated hiring. And Mel I'm assuming this is – you know if you place all these positions, this is included in guidance for the year. It seems like a big number. I know you've got a lot of growth in front of you. But I wondered how that kind of compared to your recent trend.

Mel Dick

We have been adding people, Lauri. So I think it is comparable to the recent trend. Our guidance for the year does anticipate those new positions being filled.

Lauri Brunner

OK, great. Last question Georgia, how are you managing your time these days as (Matt Dillon) has left? And are you replacing him or what are you doing? Are you splitting up that role and how is it going for you since he's gone?

Georgia Shonk-Simmons

Actually, I have a couple of divisional Vice Presidents who are doing extremely well and they have picked up some of the slack. So that has been positive. And of course, we will talk about replacing a similar position to that as we go down the road.

Lauri Brunner

OK, thank you very much.

Dennis Pence

You're welcome.

Georgia Shonk-Simmons

Thanks Lauri.

Operator

And we'll take our next question from Rob Wilson with Tiburon Research.

Rob Wilson

Yes, thank you. Real quick Mel, did you issue an 8K prior to the close of trading today?

Mel Dick

Well an 8K went out prior to the close inadvertently. We were informed by the outside service provider that we use which is a major financial services firm that they inadvertently sent out our 8K one hour ahead of time, or 59 minutes. They sent it out at Mountain Standard Time instead of Pacific Standard Time. Our plan going forward is that we would continue to follow our regular (kinks) that we've had in the past and it was just an unfortunate error on their part. They have indicated in writing to us that it was a mistake on their part.

Rob Wilson

Fair enough. And Georgia, can I – conceptually you have a limited promotional store. You only, I guess, have four events a year. Is that correct?

Georgia Shonk-Simmons

Correct.

Rob Wilson

And as your outlet store ratio increases – in other words you have more full-line stores compared to outlet stores going forward do, you see that changing?

Georgia Shonk-Simmons

No. Actually I don't. What we've stated in previous plans – I think the great news about having the virtual inventory and then the outlet site on the Internet has made it possible for us to cut back in our plans for opening outlet stores. And it is a great way for us to move overstocked inventory very effectively. And sell throughs are great and it's really extremely cost efficient. So this has been a great channel for us to clear up inventory. Our inventory has never, quite frankly, been cleaner or more current. So we know this works and we'll continue to, again, use the Internet for that purpose.

Rob Wilson

So you don't see – you don't see the increase in full-line stores versus outlet stores a risk to possibly having to change your business model?

Dennis Pence

No. and I have to say that we had previously, a couple of years ago, made a conscious decision to take advantage of some lease space in outlet malls very aggressively and get ahead, as their construction cost is very low, and get ahead of the curve in terms of the ratio of outlet stores to full-line stores. And we're really now catching up at this point.

Rob Wilson

OK. Is it – could you give us a sense for what percentage of sales in your Internet channel are at full price versus discount?

Georgia Shonk-Simmons

It's 80 percent. 80 percent full-line . . .

Dennis Pence

Full price.

Georgia Shonk-Simmons

Full price.

Rob Wilson

Full price?

Georgia Shonk-Simmons

Yes sir.

Rob Wilson

On the Internet?

Georgia Shonk-Simmons

Yes.

Rob Wilson

OK. And you guys didn't mention anything about a customer loyalty program. I know you have a private label credit card coming out soon. Could you speak to that?

Dennis Pence

Sure. I'd be happy to talk to that. That remains as planned. We're in final testing in regards to the credit card interfaces. We have a limited number of stores we're testing it in currently and continue to look with favor at that portion being rolled out as a subset of an overall loyalty program this summer.

Rob Wilson

OK. And the overall loyalty program might be rolled out when?

Dennis Pence

Well it will begin – it will begin this summer as well but with the credit card portion being a premiere part of it.

Rob Wilson

OK. So, that starts this summer. And final question, Mel did you say that you're going to keep the gross profit margin guidance for the full year at 50 to 100 basis points? Did I get that right?

Mel Dick

That's correct.

Rob Wilson

Given that you've crushed these Q1 numbers.

Dennis Pence

Well I think it's very important to recognize for those people who have been following us for several years that as we still have the infrastructure of a direct marketer we have this infrastructure in place through the summer selling season that is an enormous drag on profitability until it comes into play during the holiday season when it's very much needed.

This is one of the reasons that for the apparel business we see – and I think astute individuals see that retail is a better model. Now we have said in the past that as our retail store percentage of our business continues to grow this drag on Q2 performance will become less and less of an issue for all of the investors on this call. But it is something historically we have with a very large distribution center and the call centers. And so consequently we – while we are very comfortable with the guidance we've given you for Q2, under no circumstances do we feel that it is any way shape or form sand bagging.

Rob Wilson

OK. Fair enough. Thanks for taking my call.

Operator

And we'll take our next question from Marc Bettinger with Standford Group.

Marc Bettinger

Hi. Congratulations everybody on a super quarter. A lot of questions have been answered. But just quickly, Mel did you say that the square footage – the inventory per square foot was 37 last year and 37 this year?

Mel Dick

That's correct, at the end of the quarters.

Marc Bettinger

OK. And given the, I guess, promotional environment with the breaking of the price by some of the competitors have you cut back on receipts at all?

Georgia Shonk-Simmons

No, not at all. Actually again, we are still you know receiving on our term plans, on our inventory plans feeling – I mean we are really – the truth is though some of our receipts are over now anyway expect for some re-orders coming in. And so what we will do then is (trans) into next season which will start delivering in June.

Marc Bettinger

OK. And with really – with most of the questions answered, Mel you finished up with how many stores? Well you currently have how many stores now? 126?

Mel Dick

125 stores. I'm sorry. 126, you're correct.

Marc Bettinger

OK, 126 currently.

Mel Dick

Yes.

Marc Bettinger

OK, great. Congratulations again.

Dennis Pence

Thank you.

Operator

Deena Freedman, Brean Murray.

(Tara Benson)

Hi. This is (Tara Benson) for Deena Freedman. Why did receivables as a percentage of sales increase?

Mel Dick

The major increase that's in there – some of it is due to timing. It's credit card receipts which turn very quickly as well as we have a number of more stores being constructed this year and some (tenant) allowance receivables are included in there as well.

(Tara Benson)

OK, great. Thank you.

Operator

We'll go next to Hope Taidz with Glenhill.

Hope Taidz

Hi guys. Congratulations, a great quarter.

Georgia Shonk-Simmons

Thank you.

Hope Taidz

My question for you is Georgia in your introduction you talked about – I believe it was your introduction. You talked about last year running different promotions on the Internet in the first quarter versus this year. What were those promotions that you didn't anniversary from last year? And then if that's the case what was the – you talked about 80 percent of your business was full price on the Internet this year. What was it versus last year?

Georgia Shonk-Simmons

Let me take the first part of the question. Normally as we tell you that we have our sale four times a year. That's for retail stores and also direct on the Internet. And so usually in January and then again at the end of March, beginning of April, our Internet promotion would have been as our store promotion up to 50 percent off. This year we did not run that promotion at all.

And so that again was very positive. We still find for a total year that we're still getting 80 percent of our business on the Internet which has been pretty standard for us since we started, 80 percent at full price, and then 20 percent at off price.

Hope Taidz

OK. But again so last – the 80 percent was for the year but what would've it have been first quarter '04 – maybe Mel can answer this – versus first quarter '05.

Mel Dick

First quarter of '04 it would've been slightly higher because we did have a promotional sale. As Georgia mentioned, we didn't do that this year. I don't have the exact percentage. But it probably would've been somewhere in the neighborhood of about 25 percent on sale and 75 full price.

Hope Taidz

So it would've been about 75 percent versus 80 percent this year.

Mel Dick

That's correct.

Dennis Pence

That said, that's of course – that change is just for that one channel only.

Hope Taidz

Right I understand. I totally understand. And my next – I guess a follow-up. What percent of your business is full price in retail, again Q1 versus – last year versus this year?

Mel Dick

I'd say it would be roughly about the same.

Hope Taidz

So about 80 percent.

Mel Dick

Yes, our average ticket and our average items per order are about the same. So I'd say it's about the same.

Hope Taidz

OK. So 80 percent this year versus last year. Great. And Mel also in the guidance for the year, when you gave us the guidance at the year end call – I guess you gave 55 to 59 cents. In that what was the advertising expense? You've upped that from three to nine. What was embedded in that guidance at the time?

Mel Dick

I believe it was about $7.5 million.

Hope Taidz

OK. So how does it – it's increased about $1.5 million?

Mel Dick

That's correct.

Hope Taidz

And that's offset then by the better gross margin and more full-price sell through. Is that correct?

Mel Dick

That is correct.

Hope Taidz

OK, great. And then – I'm sorry. OK.

Male

We didn't say anything.

Hope Taidz

OK. And you've talked about you know in the inventory – Georgia perhaps you could help tell us what percent of your business today you describe as sort of fashion basic. So what percent of that inventory should we assume sort of – is fashion basic?

Georgia Shonk-Simmons

OK. I think – I hesitate to give this number because we don't actually talk about this number. Beside the fact I think depending on what segment of the market it is, everybody's point of view on what a fashion basic is very different. Ours quite frankly is the fact that – I think you have to look at ours as a whole package that because without the novelty – all (color) together and (drive) together almost more of an ensemble look. If you look at our average unit per transaction it's at almost 2.8 to three. So they're really buying ensembles and adding them together. So we don't really break it out that way.

Hope Taidz

So it wouldn't be fair to look at the inventory at all as sort of fashion basics or – you know or carry it – I mean is there inventory that would ever carry you know from year to year?

Georgia Shonk-Simmons

Yes. From year to year it's probably about 20 percent.

Hope Taidz

About 20 percent carries over. I mean sort of basic color tees . . .

Georgia Shonk-Simmons

Yes, exactly.

Hope Taidz

OK, thank you.

Georgia Shonk-Simmons

You're welcome.

Operator

And we'll take our next question from Jeff Halper, Retail Apparel Partners.

Jeff Halper

Yes, I was wondering if you could give us a little information on when you're going to start talking about (comp) store sales. You haven't discussed it at all. Is it something for the future?

Male

Good question Jeff. We have talked in the past about the fact that we do not release (comps) at this point in time. Our basic – we will release (comps) at the point in time when we have 100 stores in our (comp) base and retail sales represent at least 50 percent. We've hit the 50 percent. Currently we have about – currently we have 66 stores in our (comp) base. I anticipate that in the first quarter of 2006 we will hit 100 stores in the (comp) base at our present rate. And once we have a full quarter of 100 stores in the (comp) during 2006 we'll announce (comp) sales on a quarter basis.

Jeff Halper

Thank you and congratulations on a great quarter.

Georgia Shonk-Simmons

Thank you.

Dennis Pence

Thank you.

Operator

And as a reminder to our audience, that is star one on your touch-tone phone to signal for a question. Once again, that is star one to signal for any questions. And we will take a follow-up from Rob Wilson with Tiburon Research.

Rob Wilson

Yes, thank you. Do you guys – could you tell us your circulations plans for the catalogue for Q2? And also can I make sure that you include the retail channel mailers in that number or do you not?

Georgia Shonk-Simmons

Yes, Q2 – actually our circulation will be up about 15 percent over prior year. And the reason for that is that we actually had some better than expected results prior year on our main catalogue, especially our (North Country) catalogue. So we've increased our circulation on (North Country) for Q2.

Rob Wilson

And you don't even have any retail channel mailers in Q2 planned?

Georgia Shonk-Simmons

No we do not.

Rob Wilson

OK. And for Q1 did you include the retail channel mailers in the 28 million some number that you gave out?

Georgia Shonk-Simmons

Yes, actually. Let me – maybe I can give some clarity on that. Actually our core catalogues that we normally mail – so I'm going to make it apples to apples. (North Country) and (Spirit) in clearance, our circulation was down seven percent. So apples to apples for our catalogue circulation was down seven percent. But adding the retail mailers actually increased our circulation in the total to about five percent increase.

Rob Wilson

Good. That clarifies it. And Mel could you speak to the deferred catalogue cost and why those increased materially versus last year?

Mel Dick

Well as Georgia just mentioned we are going to have an increase in our (circ) during the second quarter in one of our core catalogues, (North Country). Those deferred costs are costs that are accumulated in the production process. And then once the catalogues are mailed we start amortizing those costs as the revenue comes in. So the increase would be due to the result of the increase in (circ) that Georgia commented on.

Dennis Pence

That, by the way, is a methodology that's been unchanged for many, many quarters – many, many years here and it's a very short amortization term.

Rob Wilson

I'm very familiar with that. But it did increase a bit larger than 15 percent. Is that correct Mel?

Mel Dick

I don't have that number in front of me. But predominantly the increase would be as a result of the expected (circ) increase.

Rob Wilson

OK.

Georgia Shonk-Simmons

Remember if you look at Q1 and you look at the (circ) increase of five percent and we're going to have a (circ) increase of 17 percent in Q2.

Rob Wilson

OK. 17 percent.

Georgia Shonk-Simmons

For Q2 with (North Country).

Rob Wilson

(North Country)? But 15 percent overall? Do I have that right?

Georgia Shonk-Simmons

The circulation increase for Q2 is 17 percent.

Rob Wilson

In total?

Georgia Shonk-Simmons

In total.

Rob Wilson

OK. And last question, do you guys have traffic counters in your stores and do you – do you measure that?

Dennis Pence

We do and we do.

Rob Wilson

And could you give us some sense for what happened in Q1?

Dennis Pence

Certainly. The traffic is something that we see really changing market to market and store by store. And we're seeing – initially for the first year the stores in business – the following year, the successive year, we see traffic down a little bit. That's very normal. And then it starts to equalize and go back up. And we're seeing that trend continue. We were very pleased with the trend in traffic towards the second half of the first quarter. We don't actually have apple to apple comparison quarter by quarter here. But we saw especially in the markets where we concentrated these retail catalogues, the Coldwater Creek catalogue, very good lift in traffic.

Rob Wilson

OK. One final follow-up. In Q2 and Q4 I notice in your business model that the gross profit margin declined. Is that simply because of clearance activity at the second half of the season?

Dennis Pence

Yes, those are the two big clearance periods, January and June. Georgia is nodding her head yes.

Georgia Shonk-Simmons

Yes, June and July and of course right after Christmas through January.

Rob Wilson

Thank you. Thanks.

Operator

And at this time we have no further questions standing by on our question roster. I'd like to turn the conference back to our speakers for any additional or closing comments.

David Gunter

I'd like to thank you for being on the call today and we wish you a very pleasant good evening.

Operator

Thank you for your participation in today's conference call. You may disconnect at this time.

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