Coldwater Creek's (NASDAQ:CWTR) stock price sizzled in response to its first-quarter earnings report -- it ended yesterday's trading up nearly 17%. However, that movement may seem nothing short of ludicrous to many of us retail stock watchers.

Sure, Coldwater Creek's revenues increased by a very impressive 30.7%, and same-store sales increased by 7.3%, which is also an impressive number. However, its quarterly profit increased by only 4% as margins dipped across the board. (For the full details of the quarterly numbers, see our Fool by Numbers report on Coldwater Creek.)

For signs of strength, consider that Coldwater Creek's cash from operations increased 68.2% to $29.6 million, and it managed to generate $2.7 million in free cash flow, which is an improvement from the first quarter last year, when it didn't generate positive free cash flow.

It's true that Coldwater Creek was able to generate impressive sales in a tough spring season -- but let's not forget that gross margin did decrease as the company had to reduce the price on some merchandise. Then there's the competition for the older female shopper that Coldwater Creek caters to -- it faces formidable rivals such as Ann Taylor (NYSE:ANN), Talbots (NYSE:TLB), and Chico's (NYSE:CHS) -- and Chico's seems to me to be particularly hungry these days.

In Coldwater Creek's conference call, Chairman and CEO Dennis Pence made an interesting comment about the competitive landscape and Coldwater Creek's ability to serve the target customer. "Some potential large competitors have recently shown they simply do not have the capability to serve this customer, which led them to pull out of this arena because the barriers to entry proved too high." Of course, he was referring to Gap's (NYSE:GPS) decision to shutter Forth & Towne and focus its core concept's efforts on younger customers. True, Gap's retreat from the mature female demographic is good for the remaining retailers that cater to her, but Coldwater Creek will have to prove it can lure more and more customers from its rivals, since the retailer did admit that despite the sales increase, customer traffic is down.

There's a lot to like about Coldwater Creek, including its clean balance sheet, with plenty of cash and no debt. However, it seems pretty certain that investors bid up the shares because of an increase in company guidance for 2007 to a range of $1.26 billion to $1.28 billion in sales, with profit of $0.61 to $0.67 per share. (That's a substantial increase from previous guidance for sales of $1.24 billion to $1.27 billion and earnings of $0.55 per share to $0.63 per share.) Bear in mind, though: Coldwater Creek also said in the conference call that this is the last time it will provide quarterly guidance.

Granted, Coldwater Creek's management did discuss intentions to differentiate itself from rivals and build its business for the long term in the conference call, and those plans sound both reasonable and necessary. However, a glance at its double-digit P/E ratio (it's trading at 38 times expected earnings for this year, for example) and my lack of conviction that it's that well insulated from the competition make me think Coldwater Creek's stock is just too hot to handle at the moment.

Grab your paddle and get caught up with Coldwater Creek:

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Alyce Lomax does not own shares of any of the companies mentioned.