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.

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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.