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Coldwater Creek, Inc. (NASDAQ:CWTR)

Q3 2007 Earnings Call

November 28, 2007, 04:45 PM ET

Executives

Marie Hirsch - Director of IR

Daniel Griesemer - President and COO

Tim Martin - Sr. VP and CFO

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Analysts

Jeff Black - Lehman Brothers

Lizabeth Dunn - Thomas Weisel Partners

Mark Montagna - C.L. King & Associates, Inc.

Lyn Walther - Wachovia Capital Markets

Crystal Kallik - D. A. Davidson & Co.

Roxanne Meyer - CIBC World Markets

Elizabeth Pierce - Roth Capital Partners

Holly Guthrie - Janney Montgomery Scott LLC

Michelle Tan - UBS

Julie Bryan - Jennifer Black & Associates

Christopher Kim - J.P. Morgan

Presentation

Operator

Good day everyone and welcome to the Coldwater Creek's Third Quarter Conference Call. Today's call is being recorded. With us today, we have Mr. Dan Griesemer, President and (sic) Chief Executive Officer; Ms. Georgia Shonk-Simmons, President and Chief Merchandising Officer; Mr. Tim Martin, Senior Vice President and Chief Financial Officer; Mr. Mel Dick, Investor Relations; and Ms. Marie Hirsch, Director of Investor Relations.

At this time, I would like to turn the conference over to Ms. Hirsch. Please go ahead.

Marie Hirsch - Director of Investor Relations

Thank you Melanie. Good afternoon and welcome to Coldwater Creek's fiscal 2007 third quarter earnings release conference call. If you have not received a copy of the release distributed this afternoon, please contact our offices 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 operation results, business initiatives, growth opportunities, and prospects. We want to emphasize that any projections involve 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 that company files from time to time with the Securities & Exchange Commission, including our most recent Form 10-K and Form 10-Q contain 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. The call will be archived from approximately one hour after the conference call until 8 PM Eastern Time on Thursday, December 6th. The replay can be accessed by dialing 719-457-0820 and giving the pin number 7453475. A replay and transcript of the call will also be available in the Investor Relations section of the company's website.

And now, I'd like to introduce Daniel Griesemer, President and Chief Executive Officer (sic).

Daniel Griesemer - President and Chief Operating Officer

Thank you Marie [ph], and welcome ladies and gentlemen. As we discussed in early October and recapped during our investor event, lower traffic, highly promotional environment and challenging macroeconomic conditions have continued to impact our performance. It is no secret that a weakening housing market, rising energy prices, tightening credit market and unseasonably warmed fall weather across the country clearly resulted in a difficult retail environment, and we have seen no improvement in that environment as we enter the holiday season.

While we are disappointed with our third quarter results, we are pleased that we were able to exceed our previous guidance as a result of slighter higher than anticipated net sales and the effectiveness of our cost control measures. In addition, a tight focus on inventory management allows the company to end the quarter with the 10% reduction in retail inventory on a per square foot basis.

Turning to our third quarter results, we reported a net loss for the quarter of $6.2 million or $0.07 per share. This represents a decreased of $22.1 million from net income of $15.9 million or $0.17 a share for the prior year period.

Net sales for the third quarter increased nearly 6% to $271 million from $256 million in the third quarter of 2006. We added 34 stores in the third quarter giving us a total of 294 premium stores at the end of the period. And we were on track to have 306 stores open for this holiday season.

Same-store sales decreased 13.6% for the quarter compared to 9.9% increase a year ago. Same-store sales were negatively impacted by a high single-digit decline in traffic, and a highly promotional environment that has continued to negatively impact average transaction values. On a positive note, we experienced higher conversion rates during the quarter and our direct sourcing program continues to deliver higher initial margins.

Cash on hand decreased to $82 million at the end of the third quarter compared with $108 million at the end of third quarter last year. Decrease in cash is the result of taking advantage of early paid discounts offered by our merchandise suppliers and activity under the share repurchase program. Tim will provide more detail on the changes in our cash position during his comments.

Net sales in our retail stores increased more than 11% and represented approximately 69% of the total net sales for the third quarter of 2007. Direct segment overall net sales decreased approximately 5% in the third quarter.

On the merchandizing perspective, two of our key fall categories, jackets and sweaters did not meet our expectation. While we've always been reluctant to play the weather card, it is no secret that this fall has been one of the warmest on record, and the warmer weather clearly impacted our jackets and sweater business. That said customers did respond well to lighter weight woven shirts and T-shirts, which paired well with the launch of our new pant initiative. During her remarks, Georgia will provide additional comments about our fall merchandise in the holiday season.

Now I would like to turn the call over to Tim for a more detailed review over the third quarter financial results.

Tim Martin - Senior Vice President and Chief Financial Officer

Thank you, Dan. Looking at our third quarter financial results, we incurred a net loss for the three month period ended November 3, 2007 of $6.2 million or $0.07 per share. This represents a decrease of $22.1 million from the net income of $15.9 million or $0.17 per share for the three months period ended October 28, 2006.

Consolidated net sales in the third quarter increased nearly 6% to $171 million from $256 million in the third quarter of 2006. Net income for the nine month period ended November 3, 2007 decreased $24.9 million or 63.2% to approximately $14.5 million or $0.15 per diluted share, compared with net income of approximately $39.5 million or $0.42 per diluted share for the nine month period ended October 28, 2006.

Net sales from the retail segment, which includes the company's premium retail stores, outlet stores, and day spa test concept locations increased 11% to $186 million in the third quarter from $168 million in the third quarter of 2006. Retail segment net sales represented 69% of the company's total net sales in the third quarter, compared with 65% in the third quarter of 2006.

The company opened 34 retail stores during the quarter for a total of 294 premium retail stores in operation at the end of the period, compared with 225 premium retail stores at the same period last year. Comparable store sales decreased 13.6% for the third quarter, compared with 9.9% increase in the prior year period. Comp stores traffic was down in the high-single digit range, while our conversion rate was approximately up 200 basis points.

Direct segment net sales decreased nearly 5% to $85 million in the quarter from $89 million in the third quarter 2006. Direct segment net sales represented approximately 31% of the company's total net sales in the quarter compared with a nearly 35% in the third quarter of 2006. The Internet business increased more than 4% to $62 million in the quarter from $60 million in the third quarter of 2006. Internet net sales represented approximately 73% of the direct segment's net sales, compared with nearly 67% in the same period of 2006.

Internet net sales remained flat year-over-year at approximately 23% of the company's total net sales. Phone and mail net sales decreased nearly 23% to approximately $23 million in the quarter from $29 million in the third quarter of 2006. Phone and mail sales represented 27% of the direct sales segment's net sales in the quarter, compared with 33% in the same period in 2006. Phone and mail sales represented 8% of the total net sales for the quarter compared with 12% in the third quarter of 2006.

Gross profit for the quarter was $107.8 million or 39.8% of net sales, compared with $120.8 million or 47.1% of net sales for the third quarter of 2006. The decreasing gross profit rate was primarily due to the increase in promotional activities during the third quarter.

Selling, general and administrative expenses for the third quarter were $118 million or 43.6% of net sales, compared with $96 million or 37.6% of net sales for the third quarter 2006. The 600 basis point increase in SG&A expenses as a result of net sales were... was primarily driven by the decrease in comparable stores sales accompanied by the cost associated with our retail expansion.

We incurred a loss from operations for the third quarter of $10.3 million. This compares to income from operations of $24.3 million or 9.5% of net sales for the third quarter of 2006. At the end of the third quarter, the company had no short or long-term borrowings and a cash position of $82 million, compared to $108 million at the end of the third quarter of 2006.

The decrease in our cash position was a result of the strategic decision to take advantage of early payment discounts on approximately $28 million of inventory purchases that would otherwise have been paid for in the fourth quarter. In addition the cash balance represents approximately $8 million in common stock repurchase activity.

The company's working capital decreased to $157 million at the end of the third quarter from approximately $164 million at the end of third quarter of 2006. Once again, the effectiveness of our triple channel business model allowed us to end the quarter with premium retail inventory including retail inventory at the distribution centre down 10% per square foot compared that with the prior period.

Total inventory increased 16 million or 9% to $194 million at the end of the third quarter from $178 million at the end of third quarter of 2006. This increase was primarily attributable to the addition of 69 premium retail stores representing more than 30% increase in retail square footage since the end of the third quarter of 2006.

In summary, although we exceeded our revised guidance, we are disappointed with our third quarter results. We will continue to focus through the end of the year and into 2008 on cost saving initiatives. We will maintain a conservative approach to cash management and aggressively manage our inventory position.

Now I would like to turn the call over to Georgia for an overview of merchandise and the upcoming holiday season.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Thank you, Tim. Good afternoon everyone. As Dan and Tim have discussed the business environment has been challenging. Customer mindset continues to be influenced by the macro environment and there appears to be some distraction associated with the overall geopolitical climate and the upcoming elections. Along with the outside influences, there is a fashion dilemma in the Women's Specialty Apparel sector. Clothing plays such an important part in defining her identity and her lifestyle, it seems we retailers has missed the mark as far as providing the right fashion for this baby boomer customer.

Prior 2007 the brands in the sector all serve various specific niches. As the environment has changed over time, we've all become homogenized creating the perception that there is a lack of newness, excitement and therefore exclusivity in the products we offer. In our case we rely too heavily on what worked in the past and found ourselves in the middle of too much sameness. And have lost the emotional feel that this customer expects from us. In short for a brand that has been known for differentiating itself, we weren't standing out from the crowd as dramatically as we had done in the past.

As Dan mentioned our jackets and sweaters underperformed during the fall season. Our fabrics were too dark and appeared too heavy for the unseasonably warm weather we experienced. However, customers did respond to the successful launch of our new pants initiatives, featuring new silhouettes, fabrics and fits. She came [ph] with lighter weight woven shirts and T-shirts, which she layered and wore as little weight shirt jackets. These categories prove to be her new wardrobe essential.

Moving to holiday and I continue to say every year that the season comes later and later and it's certainly appears that this trend will continue. We also know she remains very conservative when it comes to spending money on herself. We are seeing that she is focused on comfortable, cozy apparel and leaning more towards a dressed up casual look for the season.

The pant business continues to be a relative highlight for us and sweaters are starting to pick up as we see cooler temperatures around the country. We launched our holiday gift assortment just prior to Thanksgiving with the seasons best gift ideas, highlight this year include jewelry, sweaters, pant sets, our new PJ shop and a wide array of specialty items for decorating her home.

Our Coldwater Creek catalogue featuring merchandise that can be found in the stores, now presents a new creative approach that is tied more directly to the retail locations and is more closely reflective of our customers' lifestyle. We successfully tested this new look in this catalogue in June and now it has been launched in November. I am pleased to announce that the retail inventory came in under plan at the end of the third quarter and premium store inventory decreased 10% on a square foot basis, compared to prior year including the inventory and the distribution center.

To summarize, with clothing playing such an important part in her identity and lifestyle, it is key for Coldwater Creek to offer compelling merchandise not found elsewhere by introducing fresh, new product, designed to keep the brand absolutely relevant to this customer. And as I mentioned during our recent investor day, we are working diligently on new strategic initiatives for the merchandising area. We have identified the opportunities and we are confident in our abilities to deliver compelling, differentiated and exciting merchandise to this customer.

That concludes my formal remarks. I'd like to turn the call back over to Dan.

Daniel Griesemer - President and Chief Operating Officer

Thanks Georgia. As I mentioned in my opening remarks, we believe the fourth quarter will continue to be challenging. Macroeconomic outlook remains weak and retail traffic is down on a year-over-year basis in a highly promotional environment. Therefore, we reiterate our expectations of breakeven results for fourth quarter.

We are not pleased to this level of performance, and we are looking at every aspect of the company to ensure that we do everything possible to control expenses while continuing to execute on our strategic initiatives. Before we go to questions, I would like to mention that we are in the midst of our 2008 budget process, and for that reason, we will not be going into detail of providing guidance for fiscal 2008 until early next year.

Now, we would like to open up the call for you questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. We'll take our first question from Jeff Black of Lehman Brothers.

Jeff Black - Lehman Brothers

Thank you. Good afternoon folks. Georgia, I guess at the meeting you had mention that you had identified over assortment as an issue in the mix. And I am just wondering where are we in the process of taking care of the over assortment? What categories are we really talking about? And how might that continue to impact the business into the spring of next year? Thanks.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Okay. First of all, early spring will be what it was planned to be as it obviously had already been received. I think as I mentioned at the Investor Day, you will start seeing an impact to the SKU and style reduction, really at the end of March and beginning of April of this summer. You will start seeing that impact and it will continue throughout the year. We are absolutely tearing apart every category, still wanting to keep a neglectic mix of what we do. So again, we are not going to turn the basics that isn't the point of view. The point of view is to look at every single category and decide how we will run this railroad, and really excited about the opportunities, so it really starts for early summer and we'll go all the way through the year.

Jeff Black - Lehman Brothers

And should we look at how this impacts your clearance level for Q4? I mean you ended with inventories lower than you thought, but is there still more in the way of clearance given what you are saying about changing up some of mix?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Well, again holiday and the holiday inventories were as we had talked about and that didn't change from our meeting. What we are saying now in our expectations for the end of Q4 is to have inventory down high single-digits per square foot.

Jeff Black - Lehman Brothers

Okay. Thanks, good luck.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Thank you.

Operator

We'll take our next question from Liz Dunn of Thomas Weisel.

Lizabeth Dunn - Thomas Weisel Partners

Hi, good afternoon. I guess my question relates to the AUR, that's my first question, does that imply that... I mean if traffic was down high single-digit and conversion was up 2%, so does that mean AUR was down high single-digits or what... and how much of that was mix versus promotion? And then as we look out at the fourth quarter, the results came in for the third quarter a little bit better on the gross margin line then you had initially predicted. I believe you initially told us that you were looking for gross margins down around 100,000 basis points. The fourth quarter we are looking... what should we be looking for to get to that flat guidance in terms of the composition of gross margin and SG&A deleverage? Thanks.

Daniel Griesemer - President and Chief Operating Officer

Liz I will take the AUR question and Tim will take the gross margin question. The average unit retail degradation that we saw in the third quarter, we are expecting to see a similar performance in the fourth quarter as a result of maintaining a commitment to clean inventories and ensuring we come out of this holiday season clean, as well as the promotional activities that was all set into motion really in the second quarter and third quarter that was all set into motion for the third and fourth quarter, so there is no real changes in what we are seeing and that's why we are reiterating our guidance.

Lizabeth Dunn - Thomas Weisel Partners

So that implies that the SG&A is going to be fairly well controlled still a little bit of deleverage, but not the magnitude that we saw in the third quarter. What are the areas that you're impacting there?

Daniel Griesemer - President and Chief Operating Officer

Well that's... we have build into when we gave guidance for fourth quarter. We had expected that a lot of the cost control measures that we had developed in the third quarter would be fully implemented by the fourth quarter. What we found is that some of the results, improved results as I mentioned in my initial comments were a result of the cost control measures actually taking effect earlier than we had anticipated or guided to in October. So they are really fully baked into our assumptions in terms of reduction for fourth quarter.

Lizabeth Dunn - Thomas Weisel Partners

Okay. And then on the AUR?

Daniel Griesemer - President and Chief Operating Officer

Well I think... I think I already answer that.

Lizabeth Dunn - Thomas Weisel Partners

Okay, did you? I'm sorry.

Daniel Griesemer - President and Chief Operating Officer

And then Tim will answer the question on gross margin.

Tim Martin - Senior Vice President and Chief Financial Officer

On our gross margin rate, I think what you should expect to look at is something comparable to Q3 or potentially a little bit lower than Q3 as we move into our post holiday clearance events. But I think generally in that ballpark would be a good place to tag.

Lizabeth Dunn - Thomas Weisel Partners

Okay. Thank you. And one last question, I think you opened one last spa store than we were anticipating. Is there anything going on there or was that just a shift in timing of the opening pattern?

Daniel Griesemer - President and Chief Operating Officer

It's just a shift in timing to the first week of November basically out of the fourth week of October.

Lizabeth Dunn - Thomas Weisel Partners

Okay, great. Thanks.

Daniel Griesemer - President and Chief Operating Officer

Thank you.

Operator

We'll take our next question from Mark Montagna from C.L. King.

Mark Montagna - C.L. King & Associates, Inc.

Hi, I just wanted to follow-up on that last question. Can you give us specifics as to some of the cost reduction initiatives that you were able to employ for the third quarter?

Daniel Griesemer - President and Chief Operating Officer

Yes, Mark, I'd mentioned it in the investor conference that we were looking at every aspect of the business and that is absolutely we are doing enterprise-wide. It includes suppliers. It includes resources, investments. It's everything we are doing, so it's across the board.

Mark Montagna - C.L. King & Associates, Inc.

All right. So would it be fair to assume that it was probably going to be more to come in the future for cost savings?

Daniel Griesemer - President and Chief Operating Officer

We have also said that we are developing our budget for '08 and in that process, we are looking at how... how are we going to continue to execute on our overall strategy and story, which by the way has not changed; the opportunity that exists for Coldwater Creek, the opportunity to continue to rollout stores to focus on this ever expanding demographic. That all still remains. What has changed is that we need to take into account a very difficult macro environment that we are saying is not going to improve with the change of the calendar to '08. We are assuming this is the environment in which we are going to have to operate and we are going to have to figure out a way to flourish in this new environment. So we are looking at absolutely everything. And so look forward to more detail about what it is that we are going to do to get this back on track in early '08.

Mark Montagna - C.L. King & Associates, Inc.

Okay. And then question about the SAP implementation that you are doing with core merchandising system. Curious if you can give us an update as to where you are in that process. What the go live date will be?

Daniel Griesemer - President and Chief Operating Officer

Yes, I don't know that we've ever communicated the go live date. We are looking at appropriate timing and sequencing of all of the SAP implementation as well as all other technology or capital projects as we develop the '08 budget. And I think I can probably give you a little bit more color on that in early '08 as we do communicate around the '08 guidance time period. But we are just... we have just implemented financing accounting and our HR systems and we are in the process of executing core merchandise. So that will take place throughout '08.

Mark Montagna - C.L. King & Associates, Inc.

Okay. And are you going to give your typical end of January, early February, update on guidance. Is that going to be the plan again?

Daniel Griesemer - President and Chief Operating Officer

No. We're going to do... we're going to combine fourth quarter and '08 guidance altogether in one call.

Mark Montagna - C.L. King & Associates, Inc.

Okay. Thanks.

Operator

Next we'll hear from Lyn Walther from Wachovia.

Lyn Walther - Wachovia Capital Markets

Hi. Thanks guys. Couple of questions. Georgia, you mentioned needing more colors for fall. How does your holiday assortment compare to fall? And you also talked about she is looking for more dressed up casual look, do you have enough of this, too much of this, is this harder to compare to what she is looking for?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Okay. And just of clarity, I believe that our fall looked very dark, and was received as being heavy because it was too dark. I think what we are seeing in early holidays is that fact that she is definitely moving more towards, again, the casual sector [ph], the jeans, the warm fuzzies sweaters and polar sleeves tops and also the pant sets, which are really comfy and cozy versus buying a lot of dressy this year. So we have plenty of inventory. So I am not concerned about the inventory position. I think that... but we are seeing... I'll be very conservative on what she spends for herself currently.

Lyn Walther - Wachovia Capital Markets

Okay, thanks. And then if you could break down the gross margin IMU improvements in the quarter that you saw versus markdowns?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Well, the IMU, I can give you... then I will turn the rest over to Tim. The IMU remains running at between 150 to 200 basis points improvement.

Tim Martin - Senior Vice President and Chief Financial Officer

The remaining part of the margin movement was largely due to a deleverage on comp store sales, but also on promotions and markdowns in the quarter.

Lyn Walther - Wachovia Capital Markets

Okay. Thanks.

Operator

Next we'll go to Crystal Kallik from D.A. Davidson.

Crystal Kallik - D. A. Davidson & Co.

Good afternoon everyone. Firstly, I just wanted to clarify your statement. You made it clear that the trends are continuing what you saw... really the Q3 guidance is continuing so far into Q4, but could you clarify, you did mention in the press release that your sales came in a little bit better than plan, but it sounds like cooler weather has also set it in and helped sales a little bit. Would you just clarify a little bit about what you think about how your sales are trending right now.

Daniel Griesemer - President and Chief Operating Officer

Yes, the sales are trending as they have been in the third quarter. We see no significant change in the overall environment or in our performance to October. The difference between what we guided is what we'd indicated was slightly higher net sales in the October sales period as we continue to clear the inventory as we remain committed to keeping our inventories clean. And that was really the largest part of that and we didn't have to take the additional discounting, but the overall conditions have not changed and that's why we are guiding to what we are for the fourth quarter.

Crystal Kallik - D. A. Davidson & Co.

Right, that's really helpful. And then Tim will you just talk a little bit on the spa impact in Q3, and then I guess we would assume a similar impact in Q4. Could you just give us a little bit of your thinking on where the negative impact of spa is over the second half?

Tim Martin - Senior Vice President and Chief Financial Officer

Yes, it's basically for both quarters about a penny to a penny and a half.

Crystal Kallik - D. A. Davidson & Co.

Okay.

Tim Martin - Senior Vice President and Chief Financial Officer

For each quarter.

Crystal Kallik - D. A. Davidson & Co.

Excellent, thank you. And then Georgia, I just wanted to ask you what is exciting in fashion for '08. There is obviously some hope out there and certainly we can tell that in a few quarters, you are pretty excited about what will be coming down the pipeline. I know you can't set your hand too much, but where is the hope for the missy sector right now?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

I think for us we have a competitive advantage over the fact of the size of our stores that we can... this is a very large demographic and we do not want to turn off our current customers, but we do certainly want to pick up some younger customers. So I think from a fashion perspective and a fashion attitude, we'll be able to cover both customers and really be focused on doing that, and that's about much as I can say right now.

Crystal Kallik - D. A. Davidson & Co.

Okay. So we should probably look for further evolution of how the stores are being set up then, if you are targeting broader demographics?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Yes, you should.

Crystal Kallik - D. A. Davidson & Co.

Okay, great. Thanks. Good luck in holiday.

Operator

: We'll take our next question from Roxanne Meyer of CIBC World Markets.

Roxanne Meyer - CIBC World Markets

Thanks, good afternoon. Just a follow-up on that. I was just wondering that what can we expect to see in terms of the balance of merchandise between modern and more traditional. Obviously, you don't want to turn off your core customer and gravitate away from the silhouettes that she likes while at the same time appealing to that new customer. Can you talk to what percentage of the mix might be going to maybe a more slimmer silhouette?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

No, I didn't say slimmer, okay. What I did say was there are... there is a lot of things going on out there as far as... there is definitely a fashion look that's more shaped that we will be certainly taking into consideration, and there is also more appropriate ways to do new funds silhouettes for a customer who wants to be modern, but doesn't want to be risky. And I think there are things that we haven't looked at that she doesn't have in her closet anymore or brand new things that a customer would be... would find appealing. So we will be able to bring both of those pieces in and have them both be... I always want to be modern, so even for the older customer, I mean, since I fall in that range I guess I would have to say I'm always looking to be modern, but appropriately. So I think we can take the fashion trends and I think we can move them forward in very interesting ways while we also add some fun newness that we can get her into also plus get the younger customer into.

Roxanne Meyer - CIBC World Markets

Okay. Thanks. That was helpful. Second, I just wanted to follow on your promotional strategy to get a sense for how the customer has been reacting to your weekend like three day sales of 25% off a category and whether you think that something that you may continue into the future into 2008 and whether you are considering any more of a regular clearance section in your stores versus your sales four times a year.

Daniel Griesemer - President and Chief Operating Officer

Yes, I will take that Roxanne. We have seen good success on those category promotions itself if you were out in stores over the Thanksgiving weekend, which I was. I think you could see that Coldwater Creek was taking more than its fair share of traffic that was in many centers and looking at all of our peers as well as ours. Those promotions did seem to work as well as the overall effectiveness of the teams and the energy that they were creating out there. We are looking at the opportunity of category, product promotions. We are looking at our overall promotional cadence. We're really looking at everything. The overall model doesn't change but some of the tactics of how we are going to maintain clean inventories still remain relevant and current and create a compelling experience. That's all going to be looked at. So I don't know... I don't want to give and can't give really any more specifics.

Roxanne Meyer - CIBC World Markets

Okay. No, that's helpful. And then last, just wondering your catalog costs are obviously a big part of your SG&A and something that makes your SG&A higher than some of your peers, but it's obviously a critical part of your business. But as your retail business grows and more sales gravitate towards online, are there any thoughts in pairing back some of your catalog circulations or just shifting around your direct strategy at all it relates to catalogs?

Daniel Griesemer - President and Chief Operating Officer

Yes, the catalog remains our single most effective tool to drive customers to the brand, so make no mistake about that. It is... it is and will continue to be a cornerstone of our messaging of this brand to our customers. It drives traffic to all channels, whether they pickup the phone or whether they go online or whether they go into our stores. So we have to continue to make sure that those... that vehicle, that channels remains as compelling as possible, so we will be doing that. But we are, as I said, as we are developing our strategy for '08, we are looking at the appropriate levels of all marketing investments and what's the most efficient and effective way to use a dollar. And so I would be looking for more detail, again as I said, we will be laying out more of that for you at the beginning of '08 when we give guidance. But that is certainly something that we are taking into consideration.

Roxanne Meyer - CIBC World Markets

Okay. Well, certainly looking forward to hearing more about your strategy outlook and best of luck managing through the holiday.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Thank you.

Operator

Next we'll go to Eliz Pierce of Roth Capital Partners.

Elizabeth Pierce - Roth Capital Partners

Folks, good afternoon. Thanks. Georgia, a question for you. You were talking about doing things differently, are you getting your inspirations from different places? Are you rethinking kind of the traditional way you have approached coming up with ideas, etcetera.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Well, actually I think that a very, very good question. I do believe that we are all seeing the same information all at the same time. So we... actually, I have made... already made a trip and done some new inspiration hunting for just that reason. So we intend to stay in front of this, and continue not to do the same old, same old even in our traveling and our inspiration gathering.

Elizabeth Pierce - Roth Capital Partners

Okay. And then just a couple of specific questions, as there are specific as you might want to be kind of what Dan said about the Thanksgiving weekend. Did you notice the difference in your transaction metrics and then secondarily what hampering with like the credit card holders to one Creek members, any differences in what you are seeing versus just the total company in terms of transaction traffic, etcetera?

Daniel Griesemer - President and Chief Operating Officer

No major significant differences in any of those three things that you just mentioned. What I would say and I want to clarify, we... I was pleased as I was out in the stores at that Thanksgiving weekend and I thought we were competitive with our promotional activity and our product offering and our pricing. And so that's really the nature of those comments. I was very, very pleased with that. Given that that's kind of an important fall weather weekend. Other than that there are no significant changes and we continue to monitor the one Creek program, which we think has positive potential, but it's very early in the launch of that program and you're looking at lifetime values of these customers that takes time to calculate and we'll be able to give you more information about that program as time progresses.

Elizabeth Pierce - Roth Capital Partners

Okay. And then finally do you have this fourth quarter catalog circulation and store openings?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Yes, I can give you the catalog circulation now, let me clarify. In Q4 we are down about approximately 5% in the circulation, but remember because of the timing difference in Q3, we were up about 9%. So what that really comes out to if you add the six months together, which is what I think is really important, you'll see that we come out about 7% up in circulation and that vast, vast majority of that comes out of the Coldwater Creek catalog as we added another mailing.

Elizabeth Pierce - Roth Capital Partners

Okay. And then store openings for the fourth quarter?

Tim Martin - Senior Vice President and Chief Financial Officer

12

Elizabeth Pierce - Roth Capital Partners

Hello.

Tim Martin - Senior Vice President and Chief Financial Officer

Yes, I'm sorry. In case you didn't hear me, 12.

Elizabeth Pierce - Roth Capital Partners

Oh, 12, I'm sorry. Thank you. Okay, all right, you guys thanks and good luck for holiday.

Tim Martin - Senior Vice President and Chief Financial Officer

Okay. Thanks very much.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Thank you.

Operator

We'll take our next question from Holly Guthrie of Janney Montgomery Scott.

Holly Guthrie - Janney Montgomery Scott LLC

Thank you. As far as the modest increase in traffic, I am sorry, a modest increase in sales that you saw that I think you indicated happened in October. Can you go through whether it was traffic, AUR or conversion that got just a little bit better?

Daniel Griesemer - President and Chief Operating Officer

It was largely conversion that drove it. We remain committed clean inventories. We knew in early October when we talked to you that the sale period had just begun, that's a critical three or four weeks there that followed where we managed our inventories and came out of the quarter very clean, and we saw that conversions helped drive a lot of that improvement.

Holly Guthrie - Janney Montgomery Scott LLC

Okay. And then inventories being slightly better shape that execute even obviously, was that... did that have to do with a slightly stronger sales or was it that a combination of a little bit better planning and controls in the quarter for flow product?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

No, that really had everything to do with again what you are seeing in this... in the better sales line.

Holly Guthrie - Janney Montgomery Scott LLC

Okay, great. And then as far as... so far as the mix in the fourth quarter, home goods versus apparel and accessories. It looks like the floor set up just a little bit differently with I guess a few less walls for holiday this year in the stores seems like the site lines are straight back to the store, maybe some house where you're [ph] set up a little bit differently. Do you anticipate the mix being any different with house interest set in the store this Q4 versus last Q4?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

No, absolutely not. I think that the vast majority of our sales truly come from apparel, and certainly apparel are... really represents the large percentage of the gifts that are given, and so we really look at it very much the same way as we did the prior year.

Holly Guthrie - Janney Montgomery Scott LLC

Right. Thank you and good luck.

Daniel Griesemer - President and Chief Operating Officer

Yes.

Operator

[Operator Instructions]. Next we'll go to Eric Beder from Brean Murray.

Unidentified Analyst

Hi. This is Alex Rosensale [ph] for Eric Beder. I just have very specific question. The spas and the outlets; what's the current number of each of those categories?

Daniel Griesemer - President and Chief Operating Officer

In spas we have a total of 9. We ended the quarter with 8. We now have a total of 9. And outlets, I think we are at 28 right now.

Unidentified Analyst

Okay. And just one last question. I know you probably talked about this already but in terms of expansions or expansion for next fall '08, are you giving any kind of number in terms of retail stores?

Daniel Griesemer - President and Chief Operating Officer

No, we have not indicated a specific number yet and we will be giving specifics or specific ranges when we talk about the '08 budget in our guidance. But as we have said, we have historically for the last two or three years been opening 60 to 65.

Unidentified Analyst

Okay. Thank you.

Operator

We'll take our next question from Michelle Tan with UBS. Ms. Tan, your line is open.

Michelle Tan - UBS

Great. Thank you. Just a couple of questions on the direct business. It seemed like it came in a little shy of expectations, I think it was only suppose to be down slightly. So I am just trying to clarify the trends that you saw there during the quarter? And then also any kind of detail you can give us on the percentage of clearance inventory relative to last year and the mix? And finally, how the lifestyle center stores performed versus the mall-based stores? Thank you.

Daniel Griesemer - President and Chief Operating Officer

Yes that's... let me take the last couple that the... no significant difference in store type, I guess, is the way to refer it, no significant difference in there. And I am sorry, the first question, I am little confused on that one.

Michelle Tan - UBS

Sorry, on the direct business being down 4.5%, I thought the guidance was for it to be down slightly. So I am just curious if that was a little worse than you expected and what kind of trends you saw there throughout the quarter?

Daniel Griesemer - President and Chief Operating Officer

It's about where we expected it. And I don't think there's significant differences. The real shortfall in this business has been comp store performance. That's the real shortfall. That's the story and that's what we got to make sure we get back on track, the retail traffic and the overall promotional activities that we have suffered as a result of trying to spur business and keep our inventories clean. That's really the story here.

Michelle Tan - UBS

Okay, great. And then the other question was any kind of detail on the mix of clearance inventory year-over-year as you come out of the quarter. I know the inventory is down significantly overall?

Daniel Griesemer - President and Chief Operating Officer

Yes, it's down, and it's... we are pleased with the components of it. We saw that sales were approximately 65%-ish, 60% to 65% regular price sales through the quarter. That's about as much clarity as I can give you.

Michelle Tan - UBS

Okay.

Operator

We'll take our next question from Julie Bryan of Jennifer Black & Associates.

Julie Bryan - Jennifer Black & Associates

I have just a quick question, follow-up on the direct sales. And I know that may not be the most important driver, but are there ways to use the Internet more effectively as all these stores open up and there are more catalogs out there. Are there other things that you can do to grow those sales faster because it seems like more people are starting to migrate to the Internet and that's including going into stores and then using the Internet to make... to purchase items?

Daniel Griesemer - President and Chief Operating Officer

The Internet business is up and was up on a year-over-year basis, and so relative to the overall performance for the quarter that is absolutely a highlight. We have seen also about 20% increase in the active e-mail file on a year-over-year basis. So you are talking about an absolutely relevant point here that we do see that as she gets accessed to the brand, she chooses to access this in whatever most convenient channel, and the Internet especially when talking about direct orders, the Internet continues to be her channel of preference rather than picking up the phone. We have kiosks in our stores, in all of our stores. We use them actively to advance the brand that meet merchandise requestor needs for products that isn't in the stores that she maybe looking at from the catalog that may have driven into the stores, and we e-mail our best customers quite frequently with very compelling messages. So you are talking about something that is core to our triple channel strategy.

Julie Bryan - Jennifer Black & Associates

Thank you.

Daniel Griesemer - President and Chief Operating Officer

Thank you.

Operator

We'll take our next question from Chris Kim of J.P. Morgan.

Christopher Kim - J.P. Morgan

Hi, thanks. Any change in your philosophy in terms of the marketing and the couponing that we're seeing in a lot of your national adds and on line, so how you are thinking about that. And whether or not this customer is kind of... you have given them sort of that heroin [ph] of coupons and they expect to see that consistently to sort of wean them off the couponing and full... and into full price?

Daniel Griesemer - President and Chief Operating Officer

Right. When it all comes down to it, it's... the difference here and the success has done is determined by products and service. Those are our two core competencies and we are going to continue to leverage those going forward. Talking about an interest and concern and I address this in our investor conference that the level of promotional activity we have seen is particularly in the back half of this year is not sustainable. We wouldn't like the brand that we would have created if this were allowed to continue, so as part of the strategy we've said overall what do we need to do in order to return the brand and the business to its historical level of performance, and ensure sustainability, so that we are around for another 23 years. So you are talking about something that has concerned me. It's in our crosshairs and we are developing the strategies to succeed going forward.

Christopher Kim - J.P. Morgan

Okay. And finally just on the spa business, any sort of thoughts or color metrics that you could give us or some sort of timeline where you kind of reach our tip here [ph] whether or not to pursue this?

Daniel Griesemer - President and Chief Operating Officer

Yes, we have indicated that we have now 9 spas opened. We open the 3 in the back half of this year that are side by side with pass-throughs. We continue to be very pleased with the experience that those spas are creating for our customers. We see the metrics and performance metrics of that business continue to improve. The question remains is it a genuinely investible proposition and that's what we are continuing to look at and we need these new 3.... these most recent 3 to be open for a while, so we can reap kind of the post holiday business, and we have indicated probably by middle of next year. We are going to give you an indication as to whether we are going to move forward with it or what we are going to do.

Christopher Kim - J.P. Morgan

Okay. But the side by side locations are performing better than the other type?

Daniel Griesemer - President and Chief Operating Officer

Yes, they are coming out of the box better than the original 6 did. So but all are improving at a relative rate, so we've got to watch it.

Christopher Kim - J.P. Morgan

Okay, great. Thanks so much, best of luck with holiday.

Daniel Griesemer - President and Chief Operating Officer

Thank you. Thanks, Chris.

Operator

We'll take a follow-up question from Michelle Tan with UBS.

Michelle Tan - UBS

Great, thanks. This is maybe kind of tagging on to something that was already asked. But, just looking at the amount of catalog, the increase in the catalog mailings quarter-over-quarter. I mean the catalog mailings were up 30% with the direct business down 4.5%. So I am just curious, going forward whether if it looks like you are not getting the incremental returns on the additional catalog mailings, whether you would consider significantly scaling that back? Thanks.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

First, I think we have to... this is always gets tricky. We need to kind of split our circulation quite honestly. For our core catalog, circulation is actually down. For the Coldwater Creek catalog that we truly use that new redesign to drive people to the retail stores, that is the one that is up significantly.

Michelle Tan - UBS

Okay.

Tim Martin - Senior Vice President and Chief Financial Officer

However though, Michelle, know that the numbers you're looking at are really a split in the... between quarters and when we may have mailed our largest holiday books moved actually within the time... within the quarters. So that's what's making the numbers look. You got to look at six months.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Yes, that's... sorry that is what I tried to say earlier, looking at the six months you will see that isn't... we are really looking at 7% increase.

Michelle Tan - UBS

Okay. So some of the catalogs were pulled forward, sorry, delayed into third quarter or are you saying pulled forward from fourth quarter in terms of the timing split?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

It's really the fiscal timing. So we run into this every so many years where our early holiday books sometimes show up in Q3 and in other years they show up in Q4, based on the fiscal timing.

Michelle Tan - UBS

Okay. Thank you.

Tim Martin - Senior Vice President and Chief Financial Officer

Thank you.

Operator

And it appears there are no further questions at this time. I would turn the conference back over to Dan Griesemer for any additional or closing remarks.

Daniel Griesemer - President and Chief Operating Officer

Okay. Thank you. The story at Coldwater Creek remains the same. It's the same story we have been operating to here for the last five years. The fundamental are strong. We have a strong debt free balance sheet. We continue to focus on our core competencies with compelling product and exceptional customer service. We keep targeting and servicing a growing demographic. We have the opportunity to expand our store base in an appropriate level. The direct sourcing and the margin associated with that remains on track. We have an opportunity to leverage our SG&A particularly as we get our inventories in line consistent with demand. Finally, everybody at Coldwater Creek is focused on the things we can control creating great relevant product and creating a great experience for her in our stores and managing the controllable, and we are completely committed to returning this great brand and company to its historical levels of performance. Thank you for joining us today.

Operator

Ladies and gentlemen, that does conclude today's conference call. We'd like to thank you all for your participation, and have a great day.

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Source: Coldwater Creek Q3 2007 Earnings Call Transcript
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