Will Coldwater Creek Innovate or Die?

Running a business is all about innovation. Whether you're a biotechnology upstart, a cutting-edge technology company, or a large-scale retailer, innovation is paramount to a business' success. Without innovation, companies run the risk of complacency and getting passed by competitors, or, even worse, folding up shop altogether like Circuit City did a couple of years ago.

No company gets a "free pass" when it comes to adapting its business plan, so when push comes to shove we need to ask ourselves: Will this company innovate or die?

Today, let's take a closer look at Coldwater Creek (Nasdaq: CWTR  ) to determine if the company can adapt to rapidly changing consumer demands, or if it will be pushed into the background.

What's wrong with Coldwater Creek?
If everything were an acceptable answer, I'd consider leaving it at that.

Coldwater Creek has struggled mightily over the past five years to find the right assortment of merchandise for its customers while also struggling through five straight years of declining gross margins. Shareholders have suffered as well, with total equity having dropped five consecutive years. Management has not been lacking in the excuse department, with everything from high inventory levels to inclement weather being used as the reason for the latest company shortfall.

In Coldwater's defense it isn't just them, but multiple companies in the women's apparel sector that have felt the pinch. American Apparel (AMEX: APP  ) and Talbots (NYSE: TLB  ) are two such names that have been struggling to survive in light of fickle consumer demand and tightening gross margins. Coldwater's steady business decline has left investors wondering if the company's turnaround efforts will ever actually stick.

Getting Coldwater Creek back on track
I'm not the CEO of Coldwater Creek, but for a moment let's pretend I am. As I see it, there are three things the company needs to do to get itself back on track:

  • Increase its online presence: There is absolutely no excuse in today's highly Internet-oriented sales environment for the company's direct sales segment -- comprised of Internet, phone and mail orders -- to suffer a mind-boggling 33.6% drop in year-over-year revenue. The company absolutely has to do a better job of marketing itself online because rival Chico's (NYSE: CHS  ) is leaving Coldwater in the dust after reporting growth of 31% in the direct-to-consumer segment last quarter.
  • Improve its margins: Coldwater has to find a way to improve its five-year gross margin downtrend; it all starts with expenses. The company needs to pinch its pennies if it hopes to survive. Another way it can improve margins is by carrying merchandise the customer wants and one way to do that -- as I mentioned earlier in the week with Aeropostale (NYSE: ARO  ) -- is to go directly to consumers either in-store or on their website.
  • Close underperforming stores: In the past five years the company's total store count has ballooned from 239 to 371 in the latest quarter, while margins have fallen through the floor. The company appears to have over-extended itself and it needs to work more aggressively than closing just 8-12 stores in 2011 if it hopes to stay afloat.

What's the verdict?
It's really hard to argue against five straight years of gross margin declines. In 2009, Coldwater Creek brought back its co-founder, Dennis Pence, to lead the company again as CEO in the hope that the company's turnaround would take hold faster -- unfortunately for shareholders it hasn't. The company recently refinanced a portion of its debt, but its near-term cash struggles are too great to ignore. Without growth in its direct sales segment, I have very little faith in the company's ability to turn itself around successfully, and strongly suspect it may not be around in five years.

Have an opinion on Coldwater Creek? Share it with the community in the comments section below and consider adding Coldwater Creek to your watchlist to keep up on the latest news in the retail sector.

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. The Motley Fool owns shares of Aeropostale. 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 always carries an extra set of paddles, just in case.


Read/Post Comments (16) | Recommend This Article (14)

Comments from our Foolish Readers

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  • Report this Comment On July 08, 2011, at 4:46 PM, Oelde wrote:

    As a former employee at Coldwater Creek who was witness to part of this long term attempt at a "turnaround," I think I can accurately define the company's woes by pointing to a couple of fundamental faults. Firstly, there is a severe lack of a true vision on the part of senior management as to exactly what the brand should be, what it should say to the customer and what it should look like. Secondly, there exists an almost schizophrenic inability to stick to any direction for the brand long enough to possibly show any results. The company leaders are out of their depth and have no answers. The current management team seems ill-equipped professionally to make decisions that move the company forward. There is extreme negativity and backbiting, often demonstrated openly among the highest level officers of the company, that fosters an environment of disillusionment and lack of pride in general amongst the employees. I do not see how such a company can possibly succeed in the long term.

  • Report this Comment On July 08, 2011, at 6:22 PM, cwcbuddy wrote:

    As a long time business associate of CWC, it is heartbreaking to see what is happening to this company. The problems are clear to me:

    1. The trouble started when CWC decided that they would take over the design and manufacturing of the products. This 'strategy' has been a disaster and no one at CWC will step up and admit it. When the company used outside vendors to design and manufacture exclusive product for the company - the styles were more interesting, relevant and sale able. Now, everything is designed by committee, it is too 'like minded' and when the direction is wrong, the whole store suffers.

    2. Additionally, the cost of opening the NYC design office, HK office, India office etc. is just draining the cash out of the company. Yes, it is OK to do some basics yourself and try to gain a few more margin points - but to design 80% of the line in-house without clear direction has proven to be a complete disaster.

    3. Due to the 'built in discounting' the initial mark-ups are too high. The retail prices are out of line for the quality that the customer gets. And the customer knows this. They know the initial retail price is too high and they wait for the inevitable sale. CWC has trained it's customers not to buy but to wait.

    4. The plan: go back to the tried and true vendors that understand this customer and know how to dress her. Buy less units and sell it out at full price. Reduce the initial mark up to give the customer a better quality garment for the same price - sell it at full price and the money will start pouring in. Close the NYDO - stop spending money on designs that don't even get adopted!!

    5. Oh, and you're welcome!

  • Report this Comment On July 09, 2011, at 1:33 AM, whatthehail wrote:

    Dennis needs to go.

    Demographic doesn't like to use computers or the internet.

    Price vs Quality is lacking - Too high for low quality.

    VP of Stores (actual title) doesn't have the experience to lead through this dismal period.

    Visual Merchandizing lacks color and excitement.

    Store teams have lost excitement for the brand...no merit/col increases in 4 years.

    Golden Gate Capital should buy them and restructure like they are doing with Eddie Bauer.

  • Report this Comment On July 11, 2011, at 1:32 PM, SandpointID wrote:

    Dennis needs to go. Ego and hubris don't build a company it destroys it.

    Certain long term members of the BOD need to be replaced. They are outclassed and hapless in their ability to right this listing ship.

    BOD needs to represent the shareholders not be beholdent to the CEO.

  • Report this Comment On July 11, 2011, at 6:10 PM, oogybear wrote:

    CWC is way past its prime and has lost its panache. As a former loyal customer and disillusioned employee:

    1. CWC lost their captive audience after 2007. They had a perfect niche market in 45+ women and they decided to buck that group to go after their daughters. BIG MISTAKE!! Look at your competition!

    2. They then decided to re-invent their merchandise "on the cheap". Cheap fabric, poor quality, high prices (offset by ongoing coupons, sales and discounts). Customers are not stupid and any company who thinks they are deserves to fold.

    3. CWC failed to look to customers and employees for feedback. Employees have become poorly treated and good talent has been wasted. Customers cannot find what they want and are conditioned to ask "What coupons do you have now?"

    4. I would posit that the loss in online sales may be due to high return rate. Deep discounting and pretty pictures do not make up for lousy merchandise. Deduct those returns from store income and the stores would show even greater inability to make trend.

    5. Greed doesn't work. The company is top-heavy with incompetent people. I don't think anyone would even be so foolish as to buy the company with the brand as tainted as it is.

    Is it too late to get back to its roots? I say yes. My money is on them folding within the next 18 months.

  • Report this Comment On July 12, 2011, at 11:54 AM, simplythat6123 wrote:

    Cold Water,

    You people are failing because you are failing in style of clothes. Your stuck in the 80's of either western or frumpy looking clothes. I have not order from the company for sometime for that reason. I will not watch what I say because no one wants to here the truth. Also you clothes look ok on a manikin and hanger but when you go to put on the average joe person they look awful. Has anyone looked into doing a survey with people to find out why they are not buying??? quality sucks. style sucks. I always call them old ladies clothes, so do my friends. cure that and you will have a good item. usa people are built big and the age you attract are larger people who want style. the stylish one do not fit the majority of people who would by your clothes. you have hugh competition out there. Your online order people are great to work with. It is not that portion of the company that is awful. It is the design of clothes. They are frumpy looking. Not flattering at all. If they were you guys would be a hit because of the sales people are wonderful to work with.

  • Report this Comment On July 12, 2011, at 11:58 AM, simplythat6123 wrote:

    Oh by the way. Word gets out on how you treat your employees and people will boycott you big time. Ask Nordstroms. Ask computer companies.

  • Report this Comment On July 18, 2011, at 4:19 PM, Blondielovesjosh wrote:

    I love coldwater creek and am a one-creek member (part of the loyalty program), but I find the clothes are like all t-shirts now, not pretty clothes anymore - lack of color ranges, styles, frills, and quality materials. it's too bad, Chicos is not a rival though, it is outrageously expensive, but they have great designs and fabulous sales people too. I just could never afford to shop there.

    I just want my CWC to go back to what it was a few years ago. It was great. Almost all of my wardrobe is CWC. Hate to see them die, but i too think they will probably in 2 years or less unless they get it together. Get rid of the excuses...just do what the customers say they want...

  • Report this Comment On July 18, 2011, at 11:03 PM, pepdoggy wrote:

    CWC is a company that needs to bring back the shape to their clothes. Women of those demographics that CWC is targeting want to feel beautiful and sexy, yet classy. We are curvy and mature. Bring us the trends, but give us quality for what we are buying. Your profits will be more if you find the right fabrics, the right design and the best quality and really compete. So you will not make the big profits, but CWC will gain back the enthusiasm of the American woman and ultimately put the name back at the top. CWC will survive only if they look somewhere else other than China for the Asian influence in the clothes and homegoods, and their books and cut the clothes to fit us not them. You need to gather a committee of about 12 women from throughout the US and get their imput. We count.

  • Report this Comment On July 20, 2011, at 10:21 PM, Jeffsdate wrote:

    Two words: UGLY MERCHANDISE! For at least the last year, just about everything in the catalog has been weird, blurry, uneven floral patterns. I don't even know what the design term for them is, but they look like an amateurish printing or tie-dyeing job. None of their relentlessly advertised pant styles fit me. The only thing I've liked are their scarves, and as others have said, they're ridiculously overpriced, so you wait for a sale or a coupon. They used to have tons of cute, reasonably-priced jewelry (like wooden bead necklaces, faux turquoise, etc.) and now there's not much jewelry at all -- and what there is, is ugly.

  • Report this Comment On July 21, 2011, at 11:36 AM, Jeffsdate wrote:

    P.S. The stores are poorly organized and NEVER have my size (Misses 10 or 12) in anything! They should put the Petites in a separate section, as Talbots does. I hunt and hunt for the item I want, and then when I find the right rack, all of the garments are either petites or they're size 4 or 16.

  • Report this Comment On July 22, 2011, at 10:07 AM, sandboxmd wrote:

    Problems at CWC are far deeper than S. Williams understand:

    1. Dysfunctional internal power structure: Company is divided into 3 power silohs, Product Development, Design and Merchandising. Each of those silohs does whatever they want and in the end, Merchandising redisigns the product and issues orders. CWC apparel designers rarely recognize the product that delivers in their stores.

    2. Company buys in units and not dollars. Unit buys are based on visual minimums required to fill stores (and their stores are large) and not product performance. Product allocation doesn't take into account regional weather or lifestyle differences which leads to irrelevant product assortments and huge markdowns!

    3. Weak regional and store management teams and policies: Example, New York regional rarely spends time in the NYC store (largest sq. footage location); instead works out of location closest to her suburban home. This same woman shows-up to corporate meetings wearing head-to-toe Anne Taylor Loft because wearing CWC product is not a mandate amongst regional management, store management and sales teams. Hard to sell your product if nobody in your stores is wearing it!

    4. Catalogue biz corporate culture which translates into zero knowledge of top performing stores or regions amongst executive and design teams. If you don't know where she's shopping; do you really think you understand her lifestyle?

    5. Iron clad long-term store lease agreements which makes closing down non-productive locations virtually impossible.

  • Report this Comment On November 06, 2011, at 1:54 PM, pesp wrote:

    I tried and tried to buy something these past couple of months, but the clothes were unattractive and frumpy. Had a groupon coupon for $50 value at $25. I spent months looking at overpriced, poorly made merchandise. Ended up buying a watch on sale...that was the best I could do to use my coupon before the expiration date. The tee shirts are poorly sewn and the fabric is cheap. Bought some earings that fell apart the first time I wore them.

  • Report this Comment On November 18, 2011, at 2:02 PM, Nopricefool wrote:

    I went to the Tacoma, WA mall with a friend last night for "Girls Night Out" at CWC. We left without buying anything.

    1) Most of the clothes were UGLY

    2) All of the clothes were way over priced. $80 for a very thin t-shirt. Are you crazy? I can get better quality and a much lower cost at Lands End, or even Macy's. $80 for a cheap necklace I could make myself after a trip to Joanns?

    Four years ago, my sis and I would find beautiful skirts and handbags that were young enough for us (early to mid 30's). Even then, most of the clothes were "school marm" clothes, but there were some cute clothes for us.

    Now, they aren't school marm clothes, they're "60 year old high school art teacher" clothes. They're cheaply made, over priced and ugly.

  • Report this Comment On August 12, 2012, at 4:21 PM, elorac1945 wrote:

    As a long-time Coldwater Creek customer, I used to always find something I liked in the stores or catalogs. This is not the case anymore. The clothes are totally unattractive and downright ugly in some cases. I've seen better quality and nicer styles in JC Penney!! I don't know who is doing the buying but I cannot find ONE thing I would buy. I cannot imagine myself wearing any of their clothes now.

  • Report this Comment On March 06, 2014, at 2:56 PM, blonde wrote:

    As a resident of the NYC metro area, I am extremely fashion-conscious. I used to find the most beautiful and well-made clothing at Coldwater Creek. Now, it's worse than shopping at J.C. Penney. The catalogs used to be as creative as the stylish clothes. Now, they are more like those One Day Only Macy's Flyers that come in the mail. The new fashions, and I use the word loosely, smack of humdrum and even frumpy. My grandmother was one stylish woman well into her 90s, but she relied strongly on the very prettiest of Alfred Dunner. Coldwater, in many instances, has come up with a few Alfred Dunner looks that are not stylish and don't belong in the closet of hip, middle-aged women.

    Please, before it's too late, get back to business. Your old customers want to feel pretty, pampered and sexy again.

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