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Retail is a tough business. Without a niche, cost advantage, or highly differentiated product line (to jack up margins), you're as good as yesterday's newspaper. Just ask Coldwater Creek (CWTR). The specialty retailer's unique merchandise mix has resulted in a phenomenal top line and operating income growth story. It should come as no surprise, then, that CWTR's stock price is at a 52 week high.

Overview
Coldwater sells apparel, accessories, and jewelry to women between the ages of 35 and 65 -- a profitable customer segment indeed. This target demographic (essentially part of the Baby Boomer generation) pulls in approximately $75,000 a year in income and Coldwater's been preparing heavily to start vacuuming their dollar bills. Store expansion, managerial improvements, and improved product branding have taken Coldwater from Wall Street to Main Street. It's about time -- 2006 will be the first year CWTR hits a $1B in sales.

Today, CWTR is using all free cash flow [FCF] to build new stores. We view this as the appropriate strategy (it's the same one Home Depot (HD) and Starbucks (SBUX) used before they became giants) for the firm. To supplement this new store rollout, CWTR has started "direct sourcing" the production of its merchandise in order to create cost savings. The operating margin picture is already improving and should continue to improve as CWTR weeds out the middleman from its production process.

Don't forget that Mother's Day is approaching us -- Coldwater's revamped ad efforts could result in a seasonal boost for sales. This may explain why the shorts on this stock (15% of the float) have gotten their heads chopped off as of late. Their skepticism is warranted, but if CWTR sends out any more positive surprises, further short squeezes could lift the stock well towards the $40 range. The fact that insiders own 40% of the stock and the company's debt free with $131M in cash should relieve any worries you may have about the retailer.

Risks
CWTR competes with a plethora of other high-end retailers, such as Talbots Inc. (TLB) and Chico's FAS (CHS). These names are already entrenched in the consumer psyche and it'll take some miraculous advertising for Coldwater to scoop up market share. Catalog sales, which have accounted for most of Coldwater's past sales, are slowing down. With the Internet becoming the channel of choice, Coldwater's need to optimize customer service and product offerings for its bandwidth-oriented shoppers is integral to its overall growth story.

Summary
We believe Coldwater will continue to expand and capture market share over the next few years. CWTR's affluent customer segment is an attractive one and we think the company's positioning efforts are rapidly capturing the minds of its shoppers. As a result, CWTR is a business we'd like to own and we see the stock hitting $35 as early as next week.

Because CWTR competes with a plethora of other high-end retailers, we'd prefer a 15-20% margin of safety before picking up shares, but we understand that waiting around for a pullback could be disastrous. With ad spending projected to grow over 50% from last year's level, Coldwater's a name we'll definitely be seeing more of. At 60x earnings (above industry average, to be sure), shares of CWTR look expensive, but for the reasons mentioned above, this is a creek we're willing to jump into anyways.

CWTR 1-yr Chart


Source: Coldwater Creek Is Killing The Shorts (CWTR)