Up Coldwater Creek Without a Paddle

Some of you might think I pick on Hot Topic (Nasdaq: HOTT  ) too much, especially since the company has had a supposed turnaround plan in place for years now. Well, I have good news for Hot Topic shareholders: You're no longer at the bottom of the pecking order, as long as Coldwater Creek (Nasdaq: CWTR  ) is around.

Coldwater creaked
The retailer of women's apparel and accessories dropped another rotten egg on shareholders last night, providing preliminary first-quarter guidance that fell well short of analysts' expectations. Coldwater Creek forecast revenue for the quarter to be $180 million versus a consensus figure of $219 million, with a loss of $0.32 to $0.34 per share compared to projections of $0.10-per-share loss. Ouch! Even worse, this loss reverses a $0.03 profit from the year-ago period.

Not to be outdone by its poor sales results, management also amended its revolving credit line. The company extended the maturity date out another three years, until 2016, and generated $15 million in cash from the sale of another note.

In simpler terms, the company continues to lose money, and it remains likely that unless it extends the maturity date on these loans even further, it won't have nearly enough cash to operate. It most certainly won't have enough to pay off its debt.

The only specific detail that management gave shareholders to explain why its retail sales have fallen off a cliff was a poor product mix. On ESPN, they have the play of the day; in finance, I'd refer to this as my "Duh!" moment of the day.

It's the inventory, stupid!
Coldwater Creek's real problem is its exceptionally high levels of inventory. Although the company is making strides in reducing this backlog, as evidenced by the high-single-digit decline it called for in today's preliminary report, it's doing so at the expense of its gross margin. The company continues to buy the wrong merchandise, and then must reduce its prices dramatically just to move it. Even then, that doesn't necessarily guarantee its clothes will sell.

I would also be willing to venture a guess that record high cotton prices and inclement weather also contributed toward keeping customers out of Coldwater Creek's stores. This seems like a plausible scenario, since fellow struggling retailer American Apparel (AMEX: APP  ) reported last week that it continues to be plagued by high cotton prices.

I've said it before, and I'll say it again: Retail is all about inventory control. Having the right product mix for customers, and not buying too heavily or too lightly, is the great secret to retail success. Somewhere along the line, Coldwater went up the creek without its paddles. Now finds itself in a heap of inventory woes. Without any near-term catalysts to grow its aching business, I'd consider staying far away from Coldwater Creek stock.

Would you take a gamble on Coldwater Creek at these levels? Share your thoughts on the company in the comments section below, and consider tracking Coldwater Creek's performance, as well as your own personalized portfolio of stocks with My Watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always on the mark.


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