Up Coldwater Creek Without a Paddle

Not too long ago we saw a move upward with respect to retailers. This was based on the fact that most of the bad news had been baked into these stocks. This was shown as they reported earnings last quarter and no matter how bad the news, most of the stocks held their ground or moved upward. The oversold positioning of these stocks gave them additional support at their levels and continued to for some time.

I believe that this sector is headed downward in the short term. My basis for this argument is easy - oil. When the numbers were placed in these stocks last quarter, it was on the thesis that oil was "toppy" and would not move higher. Well, oil did and many of these stocks have not pulled back to their lows. I would stay away from any of the high end retailers, as oil does not affect people who buy $150 t-shirts, but it does affect the middle class and even into the upper middle class. Basically, anyone who has the ability to overextend themselves with homes or vehicles that they cannot afford. This keeping up with the Joneses is the area that I am focused on.

The reason I say this, is that when things get tight for a family, they still spend money on their children (don't want them to not be cool), and even the family dog, but not those nice items for the wife to add to her walk-in closet of expensive sweaters or slacks. Stores that fixate on this will be hit harder than others. They already have, as I have walked through Macy's (M) and seen tons of garments, such as Tommy and DKNY, that have already begun to hit the clearance racks. I am not just talking about winter hold over, but shorts and tanks already have 40%-50% off. The same is seen in Herberger's.

Most of these companies will continue to see o.k numbers as they have teens and other garments sections to fall back on. Coldwater Creek (CWTR) may be another story. This company pursues females over the age of 35. As gas has become more expensive, many of these women will scale back on their wants. Family vacations are still going to happen, although they will not be as far or extravagant, and these women will have to cut back on clothing costs to to finance their vacations. Another interesting aspect of this company is their spas. This is important as these treatments and other frilly wants are the first to go when the money isn't there.

The first thing I focus on with stocks is their trend. Before earnings, some stocks will trend down or up. This generally, but not always, says where the smart money is going. Coldwater Creek has experienced a bearish trend. On May 19th, this stock had a high of $5.76. On May 22nd, there was another move at this level and a quick double top occurred that day. The stock hit $5.83 twice on heavy volume and pulled back quickly. It found a level of resistance at $5.50 and rested there to end the week. Looking at the chart, the last high area of volume seems to be around $4. I believe the stock will pull back to these levels if numbers are as bad as I project.

Coldwater Creek was one of the darlings of the stock market for some time. This retail environment has changed things. They swung from profit to loss in 2007, and on April 21st stated that they would reduce its quarterly fixed charge to its $60 million, 5 year credit facility. The company also had to promise not to buy back stock until May of 2009. Their fourth quarter loss was blamed on reduced traffic and increased clearance sales. They still hit earnings estimates but missed revenue by 6%. Look for this trend to continue, although I do not believe they will hit earnings estimates.

I believe management is also making a mistake with reference to opening more stores, especially in malls around the country. This company looked much better as an internet only company. It opened 65 stores last year and 50 are expected to be opened this year. I would like to have seen their acknowledgment of difficulty and an opening freeze throughout the year. Their plan as of March 5th was to decrease inventory and to lower advertising 70% and lower catalog circulation by 20%. It may have been a better idea to lower openings and focus on the current stores that are having difficulty.

Current analyst estimates are eye-popping. This quarter earnings will plummet 233% year over year. Next quarter's decrease is 177% year over year. Full year is estimated to be down 366%. I still believe these numbers are far too low as this group of consumers are tightening their belts further and will for some time as energy prices continue to increase, not to mention food pricing. Look for Coldwater to get pummeled. It won't be long before they are looking for additional credit and announcing massive store closings. It would not be surprising if there is a delisting in the near future. This one can be shorted long term.

Disclosure: none

Comments

[mtp:]

agree that retail is not the space to be given current trends, but think you are overly bearish here with delisting, etc. they have a small store base so not as saturated as CHS... also the clients are likely older women close to retirement, so no kids to take care of so more $$ to spend on themselves, so may do better than some other retailers focused on younger families... regardless, i'd rather invest in brazil these days

2008 May 28 09:32 AM

[betsybug:]

I am 42 years old. I used to love Coldwater Creek's clothing a few years ago. I have noticed lately, however, that the quality of their clothing has deteriorated and they seem to be diverting away from classic styles and opting for more of a trendy look. And so, I have begun to shop instead at other similar retailers such as J. Jill and Eddie Bauer, which offer more classic styles and quality fabrics but at similar prices to Coldwater Creek. Just like Northern Reflections who chose the same self-destructive path several years ago, I think that CWTR's decision makers have made a big mistake by sacrificing quality and ignoring their original target audience of older women. This cannot bode well for the future success of Coldwater Creek. I can just imagine the conversations in the boardroom: "Just think how much we can increase our revenues by offering more selections that will appeal to more ages! We need to attract the 18-25's!" Well, that's what Northern Reflections did in the late 1990s, and they have long since disappeared. And so goes CWTR, losing their original focus and driving the company into the ground.

2008 May 28 10:04 AM

[brombonz:]

CWTR has never been an "internet only" company. They started with a mail-order catalog, and now have three so-called retailing "channels." The only internet-only public apparel retailer of which I'm aware is the loss-addicted BFLY, run by a one-time failed president of CHS, but backed by the deep pockets of George Soros.

2008 May 28 10:12 AM

[oldfolkdancer:]

Even though I still have money to spend on Coldwater Creek offerings, I won't. My closet is packed with Coldwater Creek purchases of years gone by. I am shopped out. Also I notice that their prices are higher for "staple" garments such as plain bouses, tees, etc. then other merchandisers. I've never shorted a stock but I'm tempted in this situation. It almost seems a no-brainer.

2008 May 28 10:13 AM

[whenthemusi...:]

Coldwater creek = Lands End = Sears Holding or other Department store consolidator such as Penneys. This will be their destiny...after they're market-share dives deeper.

2008 May 28 02:33 PM

[legmaker:]

brownsteve, sorry you didnt like my information. This company began in 1984 and was worked out of a home. They now have over 10,000 employees and have branched into a retail chain. I still dont know why you bothered no matter how they have started it would not change whether it is a good investment or not.

2008 May 30 01:11 AM