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Executives

Marie Hirsch – Director IR

Daniel Griesemer – President & CEO

Tim Martin – Senior VP & CFO

Georgia Shonk-Simmons – President & CMO

Analysts

Jeff Black - Lehman Brothers

Michelle Tan – Goldman Sachs

Roxanne Meyer - Oppenheimer & Co.

Nadine Francis – Roth Capital Partners

Holly Guthrie – Janney Montgomery Scott

Liz Dunn - Thomas Weisel Partners

Crystal Kallik – DA Davidson & Company

Coldwater Creek Inc. (CWTR) Q1 2008 Earnings Call May 28, 2008 4:45 PM ET

Operator

Welcome to the Coldwater Creek Investor conference call. Today's call is being recorded. With us today we have Mr. Daniel Griesemer, President and Chief Executive Officer; Ms. Georgia Shonk-Simmons, President and Chief Merchandising Officer; Mr. Tim Martin, Senior Vice President and Chief Financial Officer; 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

Good afternoon and welcome to Coldwater Creek's fiscal [2007] first quarter conference call. We'll 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 operational results, business initiatives, growth opportunities, and prospects. We want to emphasize that any projection involves judgment and that individual judgments may vary. Any projections we make today are based on information available to us now, which is subject to change as the quarter progresses. Actual results may differ substantially from what we say today and no one should assume later in the quarter that the comments we provide today are still valid. Moreover, we are not undertaking any obligations to provide updates in the future.

The documents the company files from time-to-time with the Securities and Exchange Commission, including our most recent Form 10-K 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 today will archived approximately one hour following the call and it will be archived until Thursday, June 5th. The replay can be accessed by dialing 719-457-0820 and giving the PIN number of 9236461. The replay and a 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.

Daniel Griesemer

Thank you Marie. Good afternoon everyone and thank you for joining us today as we discuss our results for the first quarter 2008. During today’s call I will give you an update on the progress we’ve made since our March 5th conference call when we provided our strategic initiatives and tactical plans to position Coldwater Creek on a path to sustainable and profitable growth.

Tim will then take you through a review of our first quarter financial metrics including an update on our store expansion, projected capital expenditures and our current cash position. Georgia will provide an update on our merchandising initiatives and I will conclude the prepared portion of the call with a few closing remarks before we take your questions.

The opportunity for Coldwater Creek remains large and lucrative and I’m confident that we’re on the right track to achieve both our short-term and long-term goals. Our entire organization is aligned around a common set of initiatives and we are taking a balanced approach that recognizes the current retail trends and their impact on our operations, while remaining highly focused and committed to the significant long-term opportunities of our business.

Although the challenging economic environment continues to affect our customers’ willingness to shop and spend we are encouraged by our progress with recent operational and strategic changes and pleased to be delivering results that are slightly ahead of expectations. In the first quarter sales were $271 million with a net loss of $0.10 per share; better than our guidance of a loss of $0.14 to $0.17 per share. Like most retailers our top line continues to be affected by the macro environment and soft consumer spending. As we anticipated we are experiencing traffic declines with customer traffic down 9.4% for the quarter, in line with our expectations.

These traffic declines coupled with lower average retail and average transaction values due to clearance activity resulted in a decline of 19% in first quarter same-store sales, marginally better then our previous issued guidance of down in the low 20s. We also believe that our business reflects the fact that our product is not yet where we need it to be, but we said before that spring would not be reflective of our new merchandise strategy. When looking at year-over-year comparisons for the first quarter it is worth noting that the first quarter 2007 was the best first quarter in our company’s history and that we will face easier comparisons going forward in 2008.

Last quarter I talked about our specific initiatives to get the company back on a path to sustainable and profitable growth and to ensure that our product and customer experience exceeds her expectations. I’m pleased to report that we are making significant progress in all areas of our plan and have seen very early indications of improvements in many areas. However, it is important to note that we still expect that the meaningful benefit from our strategic initiatives will not begin to be reflected in our financial results until later in the year with continued improvements in 2009.

I’d now like to spend a few minutes updating you on the progress of our specific initiatives. Our most significant initiative is to improve our product. It is crucial for us to consistently offer the customer the most compelling and appropriate assortments. We have accomplished a lot in just a few short months yet there is so much more going on behind the scenes in the way of innovation. Georgia is going to address later the emotional connection to the customer as an essential component of our design process. And having participated with Georgia in many of the new product development reviews, I’m pleased by the level of creativity, uniqueness and relevancy of our new product focus all of which we believe will capture our customers’ attention, create demand and improve traffic in our stores.

However due to product lead times, our first quarter does not reflect these improvements. Georgia will provide you with more details on our summer focus and what’s ahead for fall and holiday in a few minutes. In addition to the many significant changes in our future product assortment we have made solid progress in aligning inventories and style count with demand which we anticipate will significantly improve product margins.

In order to refine our offerings, we have focused on buying certain key items in more depth. As a result we will have a more cohesive product assortment that reflects the more focused presentation of the product and brand image, both of which we will expect will better resonate with our customer. First quarter reflects approximately a 12% reduction in styles and colors. However our summer deliveries will have even fewer styles putting us on track to reduce our style count by at least 20% in the back half of 2008.

We have already made great progress on our commitment to decrease our inventory this year as well. As we mentioned before, conservatively managing our inventory level to consumer demand is a critical component of improving margins and returning to full-price selling and I am pleased that we are on track with our goals in terms of inventory management. Despite the soft sales in the first quarter we diligently managed our inventory levels and ended the quarter with inventories per square foot down 16% year-over-year and down 12% since fiscal year-end.

We controlled our inventory through clearance activity in all available channels which is a strategic advantage of being a triple channel retailer. Despite adding approximately 29% more retail square footage, our total inventory decreased approximately 5% to $127 million compared to $134 million at the end of the first quarter of 2007. We believe this is a very meaningful and important reduction and reflects the significant discipline and focus throughout the organization we have put towards this effort.

As we indicated on our fourth quarter call, we have also been more strategic with regards to our promotional cadence by refining our promotional programs to feature fewer but more targeted campaigns and limiting the frequency, length and amount of our promotions, we are slowly restoring the regular price heritage to our brand. This is evidenced by the very meaningful reduction in transactions carrying a promotional discount as they decreased from 48% of transactions to 20% of transactions year-over-year and in line with our plan. Along with our intense focus on product innovation over the past few months, we have also taken a close look at all aspects of our business for ways to improve our operating efficiencies and manage the business in a way that is right for both our customers and adds value to our shareholders.

A good example of this is our catalogue business where we are refining our catalogue circulation to be more cost effective while driving our top line. As planned, an approximate 13% reduction in catalogue circulation in the quarter to 30 million from 34 million reflects our first steps towards achieving our commitment to reducing catalogue circulation to 93 million in 2008, from 128 million in 2007. We remain committed to shifting to a more point-of-sale, in-store focus and to better engage our best customers while still attracting new customers through selective and strategic advertising placement. National brand advertising expense was $3 million for the first quarter of 2008, reflecting a 77% decrease from $12 million in the first quarter of 2007 as we significantly reduced the number of magazine ads that carried a promotional discount.

As I mentioned earlier we are particularly pleased that we were able to clear inventory without increased promotional activity as this is necessary to return the Coldwater Creek brand to its full-price heritage. We continue to keep a tight control on expenses and despite a 25% increase in our store base; we delivered an approximate $3 million reduction in SG&A in the first quarter. This exceeds our expectations of flat year-over-year SG&A. We continue to anticipate $50 million

to $60 million in net savings for 2008 from all of our efforts to improve operational efficiencies and leverage our existing SG&A. While it is still very early in the year, we anticipate our style count reductions will have a cascading effect in continuing to improve expenses across the entire organization. Based on the improvements we have made to date, I am confident that we are taking the right steps to achieve our goals.

And finally we continue to carefully manage our capital. We have a strong balance sheet and healthy working capital and we believe a prudent use of our capital is to continue our store growth plans. However in light of the current environment we have tempered our growth plans and reduced our store opening base to a total of 40 to 45 premium stores this year. As I mentioned early in the year, this is not a quota we look to meet but rather what we think is best for maximizing the Coldwater Creek brand opportunity. Ultimately we continue to believe our chain target is somewhere between 500 and 550 stores and at the end of the quarter we had 315 stores.

Given our strong balance sheet we are able to fund our new store growth with our existing cash and free tax flow. On our last call we indicated our commitment to resolving our internal challenges and when I look back at the past several months I am pleased with the progress we have made on all of these initiatives. Although small improvements are reflected in our first quarter financial results, we have made significant progress with our internal operations and we believe that over the long-term we will return to sustained profitable growth.

We are very cognizant of the fact that we still have a great deal of work ahead, particularly with no imminent external stimulus to increase consumer spending, however we are well on our way and confident that we will achieve our goals.

Now I’d like to turn the call over to Tim Martin to provide more details on the financial results.

Tim Martin

Thanks Daniel. Looking at our first quarter results, we incurred a net loss for the three-month period ending May 3, 2008 of $9.2 million or a loss of $0.10 per share, compared with net income of $12 million or $0.13 per share for the same period a year ago. Consolidated net sales in the first quarter decreased 3.6% to $271.1 million from $281.3 million in the first quarter of 2007. Net sales from the retail segment which includes our premium retail stores, outlet stores and day spa test concept locations, were down 1.2% for their first quarter at $182.7 million, compared with $184.9 million in the first quarter of 2007.

Retail segment net sales represented 67.4% of the company’s total net sales in the first quarter compared with 65.7% in the first quarter of 2007. The company opened nine retail stores during the quarter for a total of 315 premium retail stores in operation at the end of the period, compared with 252 premium retail stores at the end of the first quarter last year. Comparable store sales decreased 19% for the first quarter compared with a 7.3% increase in the prior year period. Comp store traffic was down 9.4% while our comp store conversion rate was up approximately 150 basis points. Direct segment net sales decreased 8.3% to $88.4 million in the quarter from $96.4 million in the first quarter of 2007.

Direct segment net sales represented approximately 32.6% of the company’s total net sales in the quarter compared with nearly 34.3% in the first quarter of 2007. Gross profit for the quarter was $92.8 million or 34.2% of net sales compared with $128.5 million or 45.7% of net sales for the quarter of 2007. The decrease in gross profit rate was primarily due to markdowns related to inventory clearance activity. Selling, general and administrative expenses for the first quarter were $107.8 million or 39.8% of net sales, compared with $110.7 million or 39.4% of net sales for the first quarter of 2007. The reduction in SG&A expense of just under $3 million was due to leveraging our existing SG&A, improved operating efficiencies, reduced marketing spend and various other cost savings initiatives.

We incurred a loss from operations for the first quarter of $15 million. This compares to income from operations of $17.8 million in the first quarter of 2007. Once again the effectiveness of our triple channel business model allowed us to end the quarter with premium retail inventory including the distribution center down 16% per square foot from the first quarter of last year. This decrease is very significant given the addition of 63 premium retail stores or 29% retail square footage growth over the same period.

In addition since year-end, we have reduced our inventory by $13.4 million from $140 million to $126.6 million or 12% per square foot. CapEx for the quarter totaled $26.3 million primarily related to new store construction and information technology. Depreciation and amortization for the quarter was approximately $15 million. At the end of the quarter the company continues to have no borrowings on its bank facility and cash of $74.5 million, up from $62.5 million at the end of the fiscal year.

As we discussed last quarter we remain very confident about our liquidity position, ample cash balances and the company’s ability to fund both its operations and current growth plans without the need for any borrowings. As evidenced in the first quarter despite a loss of $9.2 million cash flow from operations was a positive $38 million in the quarter versus $29.6 million in the first quarter last year. In addition we are very confident in our ability to accumulate cash during the year and we expect to end the year with a higher cash balance then we began the year as we continue to prudently manage our capital and investments.

To that end we are revising our capital expenditure guidance for 2008 to $80 million. The $10 million reduction reflects the revised store build plan as well as some decreases in information technology investments and other corporate capital expenditures. Turning to guidance for the balance of the year, we are reiterating our guidance for the second, third and fourth quarter at this time. However we are incorporating the better than expected results for the first quarter to our full year guidance.

We now expect full year sales of $1.085 billion to $1.150 billion and a full year loss of $0.13 per share to earnings of $0.04 per share. And with that I’d like to turn the call over to Georgia for an overview of merchandise.

Georgia Shonk-Simmons

Thank you Tim. Good afternoon everyone. As we discussed on our last call we are intensely focused on our product, its design, development and the merchandising process to enhance the total brand experience. Over the past several months we have been and will continue to reach out to our customer, to meet with her and talk to her to better understand what she wants and expects based on her lifestyle needs.

This feedback allows her to have a voice and is a positive element in our ability to make appropriate adjustments to ensure that our product and overall shopping experience fosters the emotional connection with Coldwater Creek. The customer feedback we have received over the past few months gives us affirmation that we are making the right changes and the entire merchandising team continues to build on the key strategic initiative.

Before discussing the initiatives, let’s briefly touch on the first quarter results. As I spoke to you on the last call, our spring collection was not where we wanted it to be and did not reflect our new merchandising strategy. Where we did see some positive response to spring merchandise was in our woven tops and shirts, supporting or layering pieces and the continued success of the pants business. We are finding that our introduction of our ShapeMe jeans gives her both comfort and a flattering fit and are resonating with our customers. It is an opportunity to make her feel more comfortable and confident.

With this success we are exploring ways to incorporate other new technology into our product lines going forward. The areas of disappointment were certainly in our jacket and skirt business which we truly believe was due to lack of variety, fashion and less-than-inspiring prints. Our new strategy will help ensure that we don’t repeat this misstep in future collections.

Now speaking to our current summer collection which hit our stores in April, our product is all about bright and colorful crop pants, tops and flip flops. Building on our pants successes of previous seasons our crop pants have been a hit with our customers. We offer lengths ranging from above the knee, to right below the knee, to the ankle in different fabrics, novelties and prints. She continues to favor our selection of tops, especially our full-fashion knit tops, tee shirts, and feminine tanks for layering.

Coldwater Creek is known for our conic use of color and we are finding that she is increasingly using well chosen color pieces to leverage across her entire wardrobe. This is becoming especially relevant given that we know many customers are looking to cut back on their spending. Mixing and matching unique fabrics and accessories is an easy and relatively inexpensive way for her to update her wardrobe at a time when she may not be inclined to purchase an entire outfit.

We’re also finding that jewelry and accessory businesses are strong. We are seeing her stretch and trade-up to more expensive bags and accessories. To capitalize on this growing accessory opportunity we have expanded our leather and suede selection for fall and holiday. Turning to fall and beyond, I have mentioned key initiatives that we have taken within the design, sourcing and merchandising process to improve both the product and customer experience. And I cannot stress enough the importance of the emotional connection and our strong relationship with our customers.

The surveys and focus groups we have conducted and our preseason testing provides us the knowledge to fulfill our commitment to her. It’s through this relationship where we have significant opportunity to understand her and what she needs from us to complement her lifestyle. We know that she wants clothing to make her feel feminine, special, unique and she loves the friendly, carefree attitude about our clothes and customer experience.

With this in mind our key initiative has been to strengthen our point of view. Several months ago we began designing and planning complete collections by lifestyle. From our customer research we know that she often comes into our stores looking for our products to fill a certain role in her life, whether it’s for a smart casual wear, denim or must-have trend item. We are still into the key items focus business, but now when our merchandising team works on developing collections, we will ensure that our merchandise fills the needs for different lifestyle shops and reflects both our brand and seasonal trends.

We are confident that this change in our merchandising will create a more appropriate and cohesive collection that will truly resonate with all the different women who shop with us. Our fall merchandise will reflect the initial push of our new strategy with the full benefit showing from holiday and beyond. It has been this process of truly concentrating and connecting with our customer combined with our product talent and merchandising resources that have allowed us to accomplish a great deal despite the challenging environment.

We’ve made great strides in terms of better aligning our product assortment and managing our inventory to our customer demand. Our second major product initiative is to manage our inventories. As Daniel mentioned we made solid progress in this area and we are well positioned to continue to do so over the course of this year. First we’ve been working diligently on narrowing our product assortment and cutting back on the number of styles and colors which you began to see with our summer collection.

And second we’ve been cutting back on just the sheer volume of inventory so it is aligned with current business conditions. We have been and will continue to invest more heavily in the products and styles we truly believe in for the fall season. We will make certain that we have the appropriate depth in size and color in the best products. This will help us really refine our assortments and improve the overall quality, construction, fit, fabric selection and the details inside and out of our merchandise.

In short managing our inventories will not only improve our financial health, but it will also help us make the best decisions on the design front and ensure a stronger price value relationship for our customers. Our third major product initiative is changing how we merchandise our stores and creating destination shopping by our different lifestyle collections. Starting in fall we’ll be setting up lifestyle shops within our stores with complementary key items and fashion pieces in each section. Our customer feedback tells us that she has always found our stores to be fun and exciting but the new strategy will make it easier for her to find the products that best suit her lifestyle.

We know our customers like us to show her ways to wardrobe so the new merchandising presentation will also show her how to combine key items from the different shops to create a wardrobe that is unique, eclectic and distinctly her style and also will fit into all aspects of her life. Importantly this more organized shop concept creates an ease of shopping along with better customer experience. We know we have a lot of work ahead of us to maximize our brand potential however I am encouraged by the feedback we are receiving from our customer research. We will continue to bring our customers into our decision making process and believe that how she feels about our product is deeply intertwined with how she feels about the experience.

We are committed to ensuring that all brand touch points reiterate the essence of Coldwater Creek brand while being mindful of the external environment. In summary I’m encouraged about the merchandise initiatives we have taken and I’m extremely proud of our entire merchandising team and all of their hard work and efforts. I look forward to keeping you updated on our progress and sharing more detail on our fall assortment at our Analyst and Investor Day in July.

With that, I’ll turn the call back over to Daniel. Thank you.

Daniel Griesemer

Thanks Georgia. Let me once again emphasize that 2008 continues to be a year of transition. A year for us to reenergize and sharpen the focus of the brand and our business execution. We are excited about the opportunities ahead and confident in our organization’s ability to capitalize on them by continuing to focus on improving our product, improving our operational efficiencies and prudently managing our growth. It is also important to note that imbedded in our guidance for the balance of the year is an assumption that the macro environment does not change from its current malaise. Our entire strategy was developed with this in mind.

We cannot control the external environment, therefore we are intensely focused on the things we can control and it is this internal focus that will turn this great brand to sustained and profitable growth over the long-term. With that I’d like to open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jeff Black - Lehman Brothers

Jeff Black - Lehman Brothers

Dan could you just remind us as you look at things in a slower revenue picture what the status or fate of spa is going to be and then as you look at your store base and your fleet, are there any places or classes of stores, certain stores where you feel like they may not be generating the productivity levels that you need and where we could relocate and maybe even pare back some.

Daniel Griesemer

As we’ve indicated several times and really for probably the last three or four calls, it is our intention to give a more robust view of what our plans are for the spa business sometime in the middle of the year with probably the conclusion of the second quarter results. There is really no change in what we’ve said each time in that the experience remains exceptional—the experience being provided to our customers, the brand support that the spas provide. The question is, is it an investible proposition where we want to have more and that’s the piece that we’ll be letting you know sometime in the middle of the year.

With regards to the fleet, we’ve also indicated this before, there are no stores, no category of stores, age, size or venue type that really have any kind of deviant behavior to the total. We are really looking at the whole assortment of stores and none are in risk of impairment, all are profitable on a four-wall basis so there really isn’t anything significant there from a store type.

Operator

Your next question comes from the line of Michelle Tan – Goldman Sachs

Michelle Tan – Goldman Sachs

I was wondering if you could refresh our memory on how you’re planning the back half of the year versus how you planned the first half, it seemed like you came into the first quarter assuming a pretty dire case for the beginning of the year, and just trying to remember where the big opportunities are as you’re planning the back half of the year a little bit better, and then also just an update on the productivity of the new stores, how that’s going and relative to the kind of productivity levels you saw in your new stores a couple of years ago.

Daniel Griesemer

We really developed the plan for the entire year with the assumption that the environment we find ourselves in now is not going to change or not going to improve at any point throughout the year, so there’s an inherent conservatism in there that we’re not really looking for anything to change from a macroeconomic standpoint. We do know that we’ve been intensely focused on our product and getting our product more relevant and where we need it to be and that’s been a multi month initiative, lots of great work has been done behind the scenes and that product will hit the stores in the middle of August with the release of the fall collection. We’ve indicated that the majority of the changes and improvement in our merchandising strategies will be reflected at that point with further improvements in holiday and on into 2009.

What’s also imbedded in kind of the plans for the year is that we recognize we were up against really improved performance from a year-over-year comparative standpoint in the first half of the year and then obviously we’ve met up against our own challenging performance in the back half of 2007 and so that’s built into our plans as well.

With regards to new stores, their productivity is relative to the changes in productivity of the entire chain, if not even slightly less effected in that regards so there’s nothing that says that there’s anything wrong or this business—the results are not pointing to new stores or non-comp stores or any particular class, it really points again to the significant impact from a macro standpoint and our own execution issues around product and clearance activity.

Operator

Your next question comes from the line of Roxanne Meyer - Oppenheimer & Co.

Roxanne Meyer - Oppenheimer & Co.

From your interactions with customers was there anything you were surprised to learn about her or her clothing needs or what she comes to you for?

Georgia Shonk-Simmons

Well actually a couple of things and I—first of all she is looking to us for very unique special items along with our fashion basics. And that is something that we have to constantly stay in front of with the fashion. But she has also let us know that there’s only so many fashion trends she’s willing to relive again and I think that that is key while the fashion market has been out there again counting in the younger markets some fashion styles that we have seen ourselves in before and although she wants to be really fashionable and modern, there are certain trends she won’t do again.

Roxanne Meyer - Oppenheimer & Co.

Beginning in fall, what is your customer going to come to you for that maybe she couldn’t find in your stores before as you transition into more of a lifestyle set and what will she no longer be able to find at Coldwater as you reduce your SKU count?

Georgia Shonk-Simmons

Well I think the thing that she will no longer be able to see at Coldwater will certainly be an over assortment and again, some product has been redundant due to being over assorted. I think she’ll find a more organized shopping experience with a really major focus on casual and casual pants and a major focus on trends and must-haves and a major focus on denim and so as we create these shops, she’ll know where to go for these things.

Roxanne Meyer - Oppenheimer & Co.

In terms of the direct business, it came in a lot better than I had expected and I guess I’m just wondering are you finding that you’re just—perhaps sales were stronger because of your ability to just clear swiftly or is there anything you can speak to regarding some of your initiatives in the direct channel that is leading to some better sales there relative to retail.

Georgia Shonk-Simmons

I think honestly as we have stated in our scripting, we had every intention of really coming out of this with clean inventories and by taking those markdowns as we also know, a very efficient way to clear merchandise happens to be the internet site. While we did not again, it wasn’t really the catalogue focus unless it was the again, the Coldwater Creek book pushing customers to the stores. But again we’ve cut back circulation so it’s really the web.

Roxanne Meyer - Oppenheimer & Co.

Any preliminary thoughts on your 2009 square footage plans?

Daniel Griesemer

We haven’t really disclosed that, but I think we see that the environment is appropriate at approximately a 40 or 45 store run rate going out as we tap into the opportunity for the brand to 500 to 550 stores.

Operator

Your next question comes from the line of Nadine Francis – Roth Capital Partners

Nadine Francis – Roth Capital Partners

What are the breakout sales for the catalogue and the internet? Do you have that by any chance?

Tim Martin

Sure in the first quarter of 2008, internet was approximately 72% of direct sales while in the prior year same quarter it was approximately 68%.

Nadine Francis – Roth Capital Partners

In terms of the tax rate, what tax rate should we use modeling going forward? For the quarter I think it came at 36%, we were kind of looking for the back half of the year 39%?

Tim Martin

I think what you’re going to find as we flirt around breakeven for the year with our guidance, you’ll see that that tax rate gets a little bit harder to forecast, but I think if you were to utilize approximately a 39% rate, you should be okay.

Nadine Francis – Roth Capital Partners

In terms, what was the percentage for direct sourcing at the end of Q1? I think at the end of the fourth quarter it was around 60%, was that up at the end of the first quarter?

Georgia Shonk-Simmons

Actually the year ending 2007, we were at 50% direct sourcing and we are on our way to completing this year at 60% direct sourcing and we are seeing that as we move through the first quarter.

Nadine Francis - Roth Capital Partners

Do you have any update on the Onecreek Loyalty program; are you seeing an increase in the numbers of people signing, spending habits, anything there?

Daniel Griesemer

The Onecreek program we launched in the late summer of last year, we’ve been watching that very carefully and it’s strategized some important changes that are consistent with the overall strategic initiatives, better targeting and better focus on our best customers. We’ll be making some modifications to that plan. We’re pleased with what we see and want to move forward with it but make it even more relevant and we have some good information that our Onecreek customers have told us about what they’d like to see in the plan and consistent with our strategy, we’re injecting those things into it going forward.

Operator

Your next question comes from the line of Holly Guthrie – Janney Montgomery Scott

Holly Guthrie – Janney Montgomery Scott

I was wondering if you could talk about your plans for catalogue circulation in the second quarter and even the back half of the year. Are you continuing to expect circulation to be down and if so how much?

Georgia Shonk-Simmons

Actually what we’re looking at for Q2 is really being down somewhere in the effect of the high 20% low 30% in circulation and that is basically due to the fact that we probably over circulated last year in Q2 and we are narrowing that in considering again that’s usually a big part of that quarter is the markdown quarter and again you don’t have the traffic there. So what you will see then for the balance of the year basically I would say we will end the year somewhere between 22% and 25% down in our circulation.

Holly Guthrie – Janney Montgomery Scott

I’m trying to understand the balance of what drove the sales. I understand that you’re saying that you needed to be clean so there was a lot more sales that went through the e-commerce site, but then on the other hand you drew what seemed like a wonderful statistic out that only 28% of your transactions were driven by promotions versus 48% last year, are those just the store numbers, that’s not the overall transactions and I guess could you categorize just promotions overall.

Daniel Griesemer

So it’s important to understand the difference when we talk about clearance activity and promotional activity, so clearance activity was all of the sales permanent markdown kind of activity done to reduce our inventory. The promotional activities were those things that were temporary discounts or promotions to drive either traffic or customer activity and as we had indicated most of that change from 48% of transactions a year ago having a promotion associate with it, and that includes the $25 off a $100 coupon that goes with our national magazine advertising and employee discounts, and two-for’s in the stores and its really everything that has some sort of a temporary discount associated with it. Getting that down to 20% was an important strategic initiative to say we really need to clean up the business for long-term and sustainable growth and get it back to a historical level of promotional activity. So there are two different things; we successfully cleared the inventory but without the double-dipping of significant promotional discounting at the same time.

Holly Guthrie – Janney Montgomery Scott

Going back to leather and suede product, I think it was said it would be more important this holiday, were you talking about jackets in leather and suede or were you talking specifically about small leather goods, handbags and--?

Georgia Shonk-Simmons

In that comment I was really talking about the accessory business because we do know that in difficult environments that the business that we can rely on as far as driving some sales as it is again an easy way and relatively inexpensive way to update her wardrobe. So we know she’s trading up to better quality bags, and again we will expand that whole accessory business for the fall holiday time of year.

Holly Guthrie – Janney Montgomery Scott

And as you shift a little bit more towards direct sourcing have you—as you’ve gone into different new countries, have you found any even lower cost sourcing places then what you originally thought were out there a year or two ago?

Georgia Shonk-Simmons

No actually where we are today which is again in India and China and Vietnam, and also some Central America, we are still in the places that provide us the best cost and but we do know, that again costs are driving up based on fuel prices and piece goods and all those things that have an oil base in them so we’re watching that very carefully. But in the meantime our most important thing truly is giving the customer great new fabrics and quality and really updating those types of things so they’re—just like the leather handbags, there’s a price value relationship that makes it worth her spending at full price.

Operator

Your next question comes from the line of Liz Dunn - Thomas Weisel Partners

Liz Dunn - Thomas Weisel Partners

As I look at the sales number for the first quarter, I hear that you moved through quite a bit of product on the internet or through the internet, is that typically, is processing a sale unit through the internet more profitable then through your stores or is it just that you’d like to keep your stores clean and therefore you feel like it’s a better strategy or is it a little bit of both. I was also wondering about the improvement in conversion whether or not or what drove that improvement in conversion and then I guess, you reduced the square footage growth a little bit for the full year but you maintained sales guidance for the out quarter so could you just walk us through that.

Daniel Griesemer

First on the clearance strategy, one of the beauties of being multi channel is that we have the ability to look at where the best place is to liquidate a unit and in this particular environment we utilized all channels including our outlet stores that we had full line premium store sales that went—our normal spring sales period that was typical. We had our outlet stores that were also moving through product, we ran a sale catalogue late in the month of April and we used our web as we have normally done. The cost of processing a unit overall is generally the lowest on the web but the most profitable way to liquidate on a big picture, looking at the total year, the most profitable way to liquidate inventory is through our stores.

So it really is an art and a science to manage the residual inventory that is inherent in a fashion business and do it as profitably as you can and I think it speaks to the fact that we expected and knew that we needed to get rid of the overhang of inventory. The entire organization used all of the tools at its disposal to very effectively get this inventory overhang behind us and now let us focus on the things that are current and future initiatives to get the business back on profitable footing.

So I’m very, very pleased with that and it’s really a balance between all the channels and what’s the best use of the inventory. On conversion, I have to say we drove a lot of the conversion through the clearance activity; I can’t point to anything other then that. We’ve said we don’t believe that our product is where it needs to be. We know that. It really came from the heavy discounting and that was at the expense of the margins which led to the profit erosion.

Liz Dunn - Thomas Weisel Partners

Okay so no special incentives for sales people or anything like that?

Daniel Griesemer

Correct. And the store count, the change in store count was not significant enough and the timing of those, we know a lot of stores were planned as originally guided, were planned in the third and fourth quarter so they’re not full-year revenue streams and those are the ones its our anticipation and plan that those later in the year will move to 2009 or the projects may actually fall off if they’re unable to get the funding or whatever so it wasn’t significant enough to revise the top line guidance.

Liz Dunn - Thomas Weisel Partners

Can you just update us on what you’re free cash flow outlook is for the year with your new guidance?

Tim Martin

We’re going to reiterate the same guidance we gave at the beginning of the year which is we expect to end the year with more cash then we started the year. We’re not giving out specific numbers but it will really honestly depend on where we fall in the guidance range. It’s still a fairly wide earnings range at the end of the year. But we’re very confident we will end the year with more cash then we started the year. We’re very confident we will get there without having to borrow or use any other means to fund our business.

Operator

Your final question comes from the line of Crystal Kallik – DA Davidson & Company

Crystal Kallik – DA Davidson & Company

Could you talk about, I know you put in the press release, and you talked in the script about the SG&A rate and some of the larger benefits, but could you give us a little more detail as far as some of the operating efficiencies that you recognized, or some of the cost savings that occurred in the quarter?

Tim Martin

Sure, I honestly think we’ve looked at just about everything possible from marketing spend to our store payroll to bags, I mean literally everything, freight, how we look at our shipping model with zones and pricing models for that. Its every aspect of everything we do, we’re sort of continuing to look at paper costs, postage costs, just about anything and everything. In addition to that we’re looking at ocean freight versus airfreight and every aspect of bringing product into the building. There really isn’t anything that I can point to on any one item. For example, we’re travelling less then we have in the past. We’ve really locked down travel to be anything that’s specifically necessary and requires senior executive approval. It’s everything that is a discretionary and semi discretionary expenditure is something we’re looking at. We’ve been working on this for about nine months and we continue to meet on a regular basis to scrub what we have for both capital expenditures and our cost savings.

Crystal Kallik – DA Davidson & Company

So is it safe to say that the benefits that you received in Q1, probably a similar rate going forward for the next couple of quarters as far as the amount of savings?

Tim Martin

I think what we’ve said, and I’m going to stick to what we’ve said, is we expect the SG&A year-over-year will be approximately flat although for the full year will flow through the Q1 savings. I think what you saw in Q1 is we were able to get on top of some of these a little earlier then we anticipated. I wouldn’t say that we expect we’re going to find a whole lot more in the way of major needle movers in the cost of savings [avenue] but we’re going to continue to keep digging and turning over everything we can.

Crystal Kallik – DA Davidson & Company

You talk about the style count being down 20% in the back half, should we assume the inventory amount will be down a similar rate for the back half?

Georgia Shonk-Simmons

Yes, inventory and styles will both be down and I would say probably you’re looking at styles to be at the 20% mark and you’ll be continuing to see inventory somewhere between the low and mid teens being down.

Crystal Kallik – DA Davidson & Company

Could you also tell us the benefits that you received in the gross margin from direct sourcing this quarter?

Georgia Shonk-Simmons

No, I’m afraid we don’t breakout our gross margin that way.

Operator

That concludes our question and answer session; I’d like to turn the conference back to Daniel Griesemer for any closing remarks.

Daniel Griesemer

Thanks for joining us today and we certainly look forward to speaking with all of you some time in the near future. Thank you.

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Source: Coldwater Creek Inc. F1Q08 (Qtr End 05/03/08) Earnings Call Transcript
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