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
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
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
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.
Not all retailers are doomed. The Motley Fool's Top Stock for 2012 is probably a retailer you've probably never heard of. Follow the link to access your absolutely free report and uncover our chief investment officer's top pick today.
Alyce Lomax owns no shares of any of the companies mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.