Thursday, July 1, 1999

Coldwater Creek Inc.
(Nasdaq: CWTR)
Phone: 208-263-2266
Website: www.coldwatercreek.com
Price (6/30/99): $19 1/2


Coldwater Creek is running hot! In a sea where money-losing mail order specialists like Lillian Vernon (NYSE: LVC) and Damark (Nasdaq: DMRK) are cascading down, Coldwater has been a bit of a salmon -- charging upstream with a profitable vengeance.

Just last year the company was mired in its own fundamental plunge. Earnings had dipped to $1.02 per share from $1.10 the year before. The company wasn't getting the productive firepower from its mailings that it had hoped for, and one of its four catalog lines was floundering.

With the threats of rising postal rates and state-to-state taxation posing blows to margins and the emergence of Internet commerce proposing obsolescence, it was not the best of times to be shipping out slick catalogs to prized mailing lists.

Coldwater swallowed its pride and ditched its Milepost Four line, with negotiations of its sale expected to close shortly. More importantly, it also decided to scale back its once ambitious mailings. While that translated into lower sales, the May quarter earnings actually more than doubled in the process due to increased efficiency.

Then we find that, last month, ColdwaterCreek.com has been revamped with more outlet bargains and other goodies coupled with real-time inventory. So, let the hard rain fall on the sector as a whole, with margins and online prospects rising it's only fitting that the shares of Coldwater remain buoyant as well.


Idaho-based Coldwater Creek now distributes three direct-mail catalogs. Northcountry serves as its flagship brand, selling apparel, gifts, jewelry, and home furnishings. Spirit of the West features women's clothing, while Bed & Bath, naturally, offers linens along with bed and bath accessories.

The company runs two brick-and-mortar stores in Wyoming and its home city of Sandpoint, Idaho. This month the company will also be opening its second distribution center.


Income Statement
12-month sales: $310.4 million
12-month income: $11.6 million
12-month EPS: $1.10
Profit Margin: 3.7%
Market Cap: $198.9 million

Balance Sheet
Cash: $4.4 million
Current Assets: $60.1 million
Current Liabilities: $33.1 million
Long-term Debt: N/A

Price-to-earnings: 17.7
Price-to-sales: 0.6


It's not easy living life at the mailbox's mercy. Just think of the number of costly catalogs you have received that went directly into the recycle bin unthumbed. However, it is a trade that lends itself quite capably to the expanding online universe. Since the fulfillment challenges have already been addressed, it's just a matter of taking orders from a website rather than via phone, fax, or post office box. Piece of cake? Hardly.

Sometimes you find a company like dELiA*s (Nasdaq: DLIA) that can etch out a great Internet niche, full of content, to draw folks into its retail offerings. However, if it wasn't for the proceeds dELiA*s received from spinning off its online iTurf (Nasdaq: TURF) subsidiary, the company would be yet another mail-order retailer reporting losses.

Coldwater has managed to stay ahead by stepping back. Scaling back its mailings last quarter to just 36.4 million rather than 50.2 million catalogs the year before was a 27.4% reduction that translated into a sales shortfall of just 18.5%. It meant more-effective targeting, which translated into higher sales per catalog shipped.

Yes, sometimes less can be more. After watching earnings fall last year as the company went breakneck into postal stuffings, the conservative approach should have been applauded. There is honor in retreat if it means a return to focus and efficiency. Yet, Coldwater wasn't retreating at all. ColdwaterCreek.com was gearing up to eventually offset the break in mailings. Its weakest line was about to get sold off. When the company announced May earnings, they more than doubled analyst projections that had expected earnings growth to hold steady.


Forget iTurf and its creative gURL power. Coldwater's online venture is like many of its offerings -- direct, practical, and easy on the eyes. Right now the company is offering about 600 outlet items at the site. Browsers are getting the online bargains they expect from the online experience, while the company is clearing dated inventory. It's a win-win situation.

In a few months the company expects to offer all three of its catalog lines online. It won't replace the mailings, but it will enhance the possibilities. A million-dollar marketing campaign will be rolled out in the fall to give the site more visibility before the holiday shopping season. While that sum won't gain the company much in penetration, it is the same conservative tact that has served the company well in recent months. The company will also tout the website in its catalogs -- which it does expect to ramp up as the holiday season approaches.

Wall Street is expecting the company to earn $1.21 per share this fiscal year and $1.38 next year. After the estimate-shattering May quarter, expect those numbers to be revised upward over the next few weeks. In the meantime, you have a stock that, despite doubling in share price, is still trading at values that are a throwback to the company's outlet offerings. There is value in Coldwater. Its debt-free balance sheet is as clean as its shallow signature creek -- and the cash is flowing quite nicely.

--Rick Aristotle Munarriz (tmfedible@aol.com)

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