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Gambling with penny stocks is, generally speaking, one of the riskiest ways to invest, but some speculative investors love the stocks with pocket-change price tags. Well, here's one stock trading under a buck to definitely avoid: Coldwater Creek (Nasdaq: CWTR ) . I'll outline three good reasons to steer clear.
Competition: It's a cold, cruel, competitive world in retail these days, and Coldwater Creek is vying against formidable and sometimes desperate competitors to attract a difficult demographic: older female shoppers.
This isn't just about nailing tricky fashion tastes, either. Baby Boomers have many reasons to want to keep their discretionary purchases subdued these days; think looming retirement, medical bills, and the fact that the net worth of most Americans has dwindled over recent years.
Coldwater Creek's beleaguered rival Talbots (NYSE: TLB ) recently received a miraculous salvation in the form of a buyout offer from Sycamore Partners, keeping it around as a private entity. Chico's (NYSE: CHS ) , on the other hand, has managed an admirable turnaround; in the past 12 months, it generated a 17.8% increase in sales and is solidly profitable. Ann Taylor's (NYSE: ANN ) also doing quite well, with a 10.9% revenue increase and solid earnings in the past 12 months as well.
Some companies have abandoned the baby boomer demographic altogether. Liz Claiborne recently rebranded itself as Fifth & Pacific and has shed the boomer-oriented brand that was its namesake for decades. J.C. Penney (NYSE: JCP ) purchased the Liz Claiborne brand.
The big chill: Coldwater Creek hasn't reported an annual profit since the year ended February 2007. Since the year ended January 2009, it has managed to increase annual sales only once, and that was by a scant 1.4%.
In its most recently completed fiscal year, Coldwater Creek's sales plunged by 21.2% to $773 million and its annual net loss widened to $99.7 million, or $0.99 per share. Given the aforementioned competition, and the baby boomer generation's reasons for fiscal conservatism, this isn't a trend I see reversing itself for Coldwater, especially when a turnaround has been lacking for so many years. Once a brand is tarnished long enough, it becomes close to impossible to get the shine back.
Balance-sheet sinkhole: Coldwater Creek faces another problem that makes survival far more difficult for struggling companies: It has a large debt load that shouldn't be overlooked. Although it does possess $23 million in cash, it owes $42 million. Its current and quick ratios of 1.2 and 0.2 are both red flags regarding the company's deteriorating financial position and possible difficulties making ends meet. A quick ratio beneath 1.0 can serve as a major warning flag, particularly if a company's sales and profit margins are suffering and its inventories may have to go on clearance sale. (Read up on these ratios in "How to Read a Balance Sheet: Current and Quick Ratios.")
Do you disagree? Sound off on Coldwater Creek in the comments box below, or add Coldwater Creek to your Watchlist.
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