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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998 COMMISSION FILE NUMBER 0-26772
COLDWATER CREEK INC.
(Exact name of registrant as specified in its charter)
DELAWARE 82-0419266
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE COLDWATER CREEK DRIVE, SANDPOINT, IDAHO 83864 (208) 263-2266
(Address of principal executive offices) (Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ____
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Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in a definitive proxy or information statement
incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $66,370,525 as of May 22,
1998, based upon the closing price on the Nasdaq National Market reported for
such date. As of May 22, 1998, 10,130,793 shares of the Registrant's $.01 par
value common stock were outstanding. Shares of common stock held by each
executive officer and director and by each person who beneficially owns more
than 5% of the outstanding common stock have been excluded in that such person
may under certain circumstances be deemed to be affiliates. This determination
for executive officer or affiliate status is not necessarily a conclusive
determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or portions thereof) are incorporated by reference into
the Parts of this Form 10-K noted:
Part III incorporates by reference from the definitive proxy statement for the
registrant's 1998 Annual Meeting of Stockholders to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this Form.
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Coldwater Creek Inc.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998
Page
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PART 1
Item 1. Business..................................................................................................... 3
Item 2. Properties................................................................................................... 15
Item 3. Legal Proceedings............................................................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 18
Item 6. Selected Financial and Operating Data........................................................................ 20
Item 7. Management's Discussion and Analysis......................................................................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................... 27
Item 8. Financial Statements and Supplementary Data.................................................................. 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 47
PART III
Item 10. Directors and Executive Officers of the Registrant .......................................................... 47
Item 11. Executive Compensation....................................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 47
Item 13. Certain Relationships and Related Transactions............................................................... 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................. 48
PART I
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ITEM 1. BUSINESS
The following discussion may contain forward-looking statements within the
meaning of the federal securities laws which involve risks and uncertainties.
When used in this discussion, the words "anticipate," "believe," "estimate,"
"expect" and similar expressions as they relate to the Company or its management
are intended to identify such forward-looking statements. The Company's actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Factors that
could cause or contribute to such differences include, among others, the
following: general economic and business conditions; competition; success of
operating initiatives; development and operating costs; advertising and
promotional efforts; brand awareness; the existence or absence of adverse
publicity; availability, locations and terms of sites for store development;
changes in business strategy or development plans; quality of management;
availability, terms and deployment of capital; business abilities and judgment
of personnel; availability of qualified personnel; labor and employee benefit
costs; and construction costs; as well as those factors discussed in "Item 1 -
Business - Competition; Reliance on Catalog Operations; and Risks Associated
with Growth Strategy," "Item 7 - Management's Discussion and Analysis" and
elsewhere in this Form 10-K. References to a fiscal year refer to the calendar
year in which such fiscal year commences. The Company's fiscal year ends on the
Saturday closest to February 28. The fiscal year is generally 52 weeks, as is
the case with all periods presented except fiscal 1994 which consisted of 53
weeks.
OVERVIEW
Coldwater Creek Inc. (the "Company") is a specialty direct mail retailer of
apparel, gifts, jewelry and home furnishings. The Company markets its
merchandise primarily through four distinct catalogs. Northcountry, which was
introduced in 1985, is the Company's core catalog and features casual,
comfortable apparel, hard-to-find jewelry, distinctive artwork, gifts and items
for the home. The Company's premium catalog for women, Spirit of the West, was
introduced in the Fall of 1993 and features fashionable, upscale apparel and
hard-to-find jewelry and accessories. Created in the Spring of 1996, Milepost
Four features upscale, yet relaxed, natural-fiber men's clothing. In response to
customer demand for the selected, upscale bed and bath products periodically
featured in Northcountry and Spirit of the West, the Company introduced its Bed
& Bath catalog in August of 1997.
As part of the Company's brand building strategy, the Company also operates
catalog-themed retail stores in Sandpoint, Idaho and Jackson Hole, Wyoming.
Through its wholly-owned subsidiary, Coldwater Creek Outlet Stores Inc., the
Company additionally operates outlet stores in Seaside, Oregon; Lee,
Massachusetts; Kittery, Maine; and Birch Run, Michigan.
Coldwater Creek targets well-educated, middle-to-upper-income households and
seeks to differentiate itself from other retail and catalog operations by
offering exceptional value through superior customer service and a merchandise
assortment that reflects a casual, uniquely American spirit. The Company
believes that the successful execution of its marketing and merchandising
strategies, coupled with its high customer service standards and efficient order
entry and fulfillment operations, have allowed it to develop a unique brand
identity and strong relationships with its loyal customer base.
Coldwater Creek focuses on providing extraordinary customer service well above
industry standards. All aspects of the Company's operations are designed to
provide a superior catalog buying experience as well as to strengthen
relationships with existing and new customers. Coldwater Creek has strived to
make timely investments in its telephone and distribution infrastructure to
support its customer service-based strategy. During fiscal 1997, the Company
achieved faster telephone answer times, lower abandoned call rates and faster
order processing than the most recently published industry averages. The Company
plans to stimulate future growth through a variety of strategic initiatives
designed to increase catalog circulation, yield higher customer response rates
and expand merchandise offerings. In addition, the Company believes that
significant opportunities exist to expand its customer base by targeting new
members of existing customer households with additional merchandise offerings
and catalog titles.
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INDUSTRY OVERVIEW
The direct marketing industry has experienced substantial growth over the past
decade as many retail customers have migrated toward the convenience and service
offered by home shopping. According to statistics published by the Direct
Marketing Association, between 1991 and 1996, consumer catalog sales volume grew
at a compound annual growth rate of 7.9% to $46.0 billion in 1996. Additional
data published by the Direct Marketing Association estimates that consumer
catalog sales will grow to $62.8 billion by 2001. Between 1991 and 1996, catalog
sales growth outpaced the growth of traditional retail sales. The Company
believes that the catalog industry will continue to experience substantial
growth principally due to the convenience and security of shopping at home, the
increasing time constraints facing two-career families, the convenience and
availability of overnight delivery and favorable demographic trends.
The direct marketing industry is highly fragmented with over 7,000 catalog
titles currently in circulation, many of which generate limited revenue and
profitability. Many smaller catalog companies are facing substantial challenges
in the current environment, including declines in profitability due to
significant fluctuations in postage, paper and other operating costs and
insufficient capital necessary to provide for growth or to access
technologically advanced database and customer service systems required in an
increasingly competitive market. The Company believes that, as a result of its
having developed a large and loyal customer base and its recent investments in
infrastructure, it is well positioned to take advantage of emerging market and
distribution opportunities not available to smaller catalog companies.
HISTORY AND PHILOSOPHY OF COLDWATER CREEK
Coldwater Creek was founded on a shoestring budget in 1984 by Dennis and Ann
Pence. In its infancy, Coldwater Creek operated out of a small apartment in
Sandpoint, Idaho, had one phone line and, through the use of flyers and magazine
advertisements, sold approximately 15 items including binoculars and
birdfeeders. The Company's first customer database consisted of handwritten
customer information on 3x5 index cards. Since its inception, the Company has
remained committed to the vision of providing extraordinary customer service and
offering high value merchandise as the primary means to develop a loyal customer
base. Quick telephone answer speeds and rapid order fulfillment have also been
hallmarks of the Company since its founding. As the Company pursued its growth,
Dennis and Ann hired individuals who shared their commitment to offering
extraordinary customer service.
The Company believes it is more than just a purveyor of goods. The Company's
philosophy is closely aligned with the romance of wide open spaces and the
unhurried approach to living and familiarity found in small town settings.
Apparel and other merchandise is selected and displayed to promote the Company's
philosophy and enhance its image and is presented honestly without price
inflation in anticipation of planned sales. The merchandise offering has
evolved over time away from the Company's original emphasis on nature related
gifts to a broader range of merchandise focusing on a casual lifestyle and on
the needs of its growing customer base.
The Company believes that its location in a small town setting in the mountains
of Northern Idaho allows it to draw upon a dedicated, unique workforce that
excels in delivering an enjoyable shopping and catalog buying experience to its
customers. The Coldwater Creek philosophy is team-oriented, friendly, honest
and casual, with a commitment to building a loyal, actively purchasing customer
base within a rapidly growing, profitable enterprise.
BUSINESS STRATEGIES
Coldwater Creek's objective is to become the highest quality service provider in
the consumer catalog industry. The Company attributes its success primarily to
its ability to execute this customer service objective and to offer a unique
assortment of high quality merchandise that appeals to a large, targeted group
of existing and new customers. Each of the Company's catalog titles seeks to
convey a unique spirit and lifestyle orientation which the Company believes
attracts a distinct customer demographic and results in a larger overall
customer base. The key elements of the Company's business strategy are set
forth below:
Provide Superior Catalog Buying Experience Through Exceptional Customer Service.
Offering a superior catalog buying experience through exceptional customer
service has been the hallmark of the Coldwater Creek strategy since its
inception. The Company believes that consistently providing its customers with
prompt, knowledgeable and courteous service as well as rapid order fulfillment
increases the Company's ability to attract and retain customers, builds customer
loyalty and promotes the purchase of its merchandise
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by the customer household. The Company's employee training programs, customer
service call centers, telephone and management information systems, as well as
its order fulfillment and return policy, are all designed to carry out this
strategy through adherence to strict operating standards. For example, during
fiscal 1997, the Company achieved an average telephone answer speed of 3.9
seconds, an abandoned call rate of 0.45%, a distribution error rate of 0.11% and
shipped 95.9% of in-stock orders within one shipping day of order processing.
Offer a High Quality, Differentiated Merchandise Assortment. Coldwater Creek's
catalogs offer a broad assortment of high quality apparel, gifts, jewelry and
home furnishings which the Company believes is not commonly found in other
consumer catalogs. The Company believes that its customers buy into a relaxed
lifestyle, not just clothing and collectibles, and it seeks to differentiate its
catalogs through the extensive use of spirited merchandise narratives, thematic
and seasonal photographs, and unique yet practical merchandise displays and
layouts. The Company's merchandise mix is structured to reflect a uniquely
American, relaxed style. In addition, the Company attempts to provide its
customers with a dynamic merchandise assortment by regularly test marketing new
merchandise and merchandise concepts and updating its merchandise selection
frequently. For example, in recent years, the Company has shifted its
merchandise mix to include a greater percentage of apparel and home furnishings
and has introduced its own line of private label apparel offerings.
Promote Increased Household Purchasing. The Company attempts to promote purchase
relationships with different members of the target customer household and to
increase customer retention by increasing the frequency and variety of its
catalog mailings, by frequent merchandise turns and through the increased use of
its customer file and purchase analysis. In addition, the Company's marketing
efforts are designed to promote additional purchase relationships within each
customer household by selectively cross-mailing the Company's other catalog
titles to existing customer households based on past merchandise purchases and
demographic overlay data. The Company also maintains a Preferred Customer
Program which is designed to offer its best customers an enhanced level of
customer service including special purchasing and packaging services.
Continue Investment in Infrastructure. The Company is committed to ongoing
investment in infrastructure development in order to increase operating
efficiency, provide extraordinary customer service and maximize the Company's
growth potential. The Company believes that investing in infrastructure in
anticipation of customer and sales growth allows it to maintain operational
flexibility to capture strategic or market opportunities, including increased
sales volumes and shifts in consumer preferences. Between fiscal 1994 and
fiscal 1997, the Company hired key management personnel and invested $31.7
million in infrastructure improvements. These investments were made primarily
to expand the Company's distribution facilities, upgrade its telecommunications
systems and install and implement more sophisticated database technologies and
management information systems. The Company plans to continue to invest in
improving its management information systems, inventory controls and
distribution capabilities to support its growth.
Advance the Coldwater Creek Brand. In all aspects of its operations, from
catalog design to order fulfillment, the Company is committed to promoting
Coldwater Creek as a name that represents a superior catalog purchasing
experience. The Company seeks to promote this brand image through its high
level of customer service and strict operating standards as well as by offering
unique, high quality merchandise assortments in its catalogs. In addition,
the Company believes that increased efforts to develop its private label apparel
and expansion of its store-based operations will increase customer awareness of
the Coldwater Creek brand.
GROWTH STRATEGIES
Coldwater Creek believes that it has significant opportunities to attract and
retain new customers and increase sales through several strategic initiatives
which include the following:
Increase Catalog Circulation. Coldwater Creek pursues an aggressive mailing
strategy designed to attract new customers and to generate additional sales from
cross-mailings of the Company's catalogs to existing customer households. The
Company continues its name acquisition and market segmentation program,
including the rental of other catalog customer lists and use of the Company's
database technologies to more efficiently analyze existing and prospective
customer files in an effort to increase response rates to each mailing. In
addition, since the Company's Milepost Four and Bed & Bath catalog titles are at
the beginning of their respective life cycles, the Company believes that they
have significant opportunities for growth.
Expand Merchandise Selection; Increase Page Count of Catalogs. Coldwater Creek
believes that an important part of its overall growth strategy involves
expanding its merchandise selection and refining its existing assortment with
merchandise lines that can
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leverage the Company's purchase relationship with, and understanding of, the
target customer household. The Company regularly evaluates new merchandise in an
effort to increase the appeal of its merchandise offerings and expects to
increase catalog page counts to accommodate new merchandise in its catalogs. The
Company believes that a significant opportunity exists to generate additional
sales from existing customer households by expanding the merchandise selection
in its existing catalogs.
Introduce New Catalog Titles. Coldwater Creek intends to periodically offer new
catalog titles featuring complementary and new merchandise concepts that promote
the spirit of Coldwater Creek while allowing the Company to further penetrate
distinct segments of the market. The Company's goal is to create catalog titles
that leverage information gathered by the Company, including customer
characteristics and demographic information, purchase histories and merchandise
performance, to capture distinct and increasingly discrete segments of the
market. As part of this strategy, the Company introduced Bed & Bath, its home
furnishings catalog, in August of 1997. Based on favorable customer response to
this new catalog, the Company intends to expand the circulation of Bed & Bath
during fiscal 1998. The Company is currently evaluating other potential
merchandise categories that may be capable of supporting additional new catalog
introductions.
Expand International Sales. Coldwater Creek markets its merchandise to customers
in Canada and Japan. In fiscal 1997, such sales amounted to less than 5% of
total net sales. To accommodate its foreign customers, the Company employs sales
agents who are fluent in certain major foreign languages. The Company believes
that further opportunities exist to generate additional sales in international
markets and will pursue such opportunities, if and when, foreign market
conditions are favorable.
Expand Other Distribution Channels. Coldwater Creek is currently focusing on two
additional distribution channels for its merchandise: retail stores and the
Internet. The Company currently operates catalog-themed retail stores in
Sandpoint, Idaho and Jackson Hole, Wyoming. Management believes that the
building of a modest base of retail stores over time will provide a physical
presence that will help build Coldwater Creek's brand recognition with
existing and prospective customers. Although there are no current commitments
to do so, the Company will continue to consider the selective opening of retail
stores in high traffic areas, including "destination points" such as national
parks, when attractive. In addition, the Company has developed and posted a
"home-page" on the world-wide web through which potential customers can
receive and view general Company and merchandise information, make merchandise
inquiries and request a catalog. The Company believes its current order entry,
credit approval and distribution capabilities position it to take advantage of
on-line ordering of merchandise, if and when, such on-line commerce becomes
commercially viable for the Company.
THE COLDWATER CREEK CATALOGS
Coldwater Creek currently publishes four primary catalogs, each with a distinct
merchandise mix and each designed to appeal to a different segment of the target
customer household. The Company's family of catalogs include the following:
Northcountry. First introduced in 1985, Northcountry is the Company's most
established and highest volume catalog and features the broadest selection of
merchandise, including affordable natural fiber apparel, jewelry, art and gift
items, reflecting a uniquely American spirit and a casual and open lifestyle.
The Company believes that Northcountry has the broadest market appeal and
features merchandise that has demonstrated the most sustainable life cycles.
Most Northcountry items are priced between $15 and $100, generating an average
customer order of $123 during fiscal 1997.
Spirit of the West. First introduced in the Fall of 1993, Spirit of the West
features upscale women's apparel and jewelry, including dresses and coordinates,
blouses, shirts, jackets, pants and skirts, as well as high quality,
contemporary jewelry. The apparel is office-appropriate, can also serve as
weekend-wear, and is typically made of linens, silks and cottons. The quality
is typically higher than the women's apparel found in the Company's other
catalogs. Most items are priced between $30 and $200, generating an average
customer order of $204 during fiscal 1997.
Milepost Four. First introduced in the Spring of 1996, Milepost Four is the
Company's men's apparel and accessory catalog. Milepost Four is designed to
reinforce the household relationship by offering merchandise to the male members
of the target customer household. Milepost Four attempts to capitalize on
purchases of the men's clothing featured in Northcountry and the trend towards
"casual Friday" office attire. Coldwater Creek's Milepost Four catalog
features, among other things, traditional, natural fiber, casual yet office-
appropriate apparel, shoes and accessory items including shirts, shorts, pants,
jackets, caps, belts, ties, shoes, socks, watches
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and carrying items, such as shaving kits and brief bags, in varying earth tones
and muted but rich colors. Most items are priced between $15 and $250,
generating an average customer order of $145 during fiscal 1997.
Bed & Bath Catalog. In August of 1997, the Company introduced a new catalog
featuring bed and bath products as well as other housewares. The Company
believes that significant opportunities exist in this segment of the
marketplace. Merchandise offered in Bed & Bath, which currently has the highest
rate of sales growth among the Company's catalogs, includes bed and bath linens,
bath accessories, sleepwear and a variety of decorative accessories such as wall
decor, lamps, rugs and accessory furniture. Most items are priced between $15
and $200, generating an average customer order of $137 since its inception.
Ecosong. First introduced in the Fall of 1994, Ecosong featured merchandise
with environmental, nature and wildlife themes. The merchandise selection in
Ecosong included gifts, tee-shirts, sweatshirts and jewelry designed to appeal
to the Company's early target audience that was drawn to Northcountry's
original emphasis on nature related themes. Most Ecosong items were priced
between $10 and $50. During fiscal 1997, the Company decided to discontinue
Ecosong as a stand-alone catalog and to instead feature such merchandise items
within the Company's other catalogs.
Additionally, in connection with the holiday buying season, the Company offers a
"Gifts-to-Go" catalog to its customers. The "Gifts-to-Go" catalog, which is
mailed primarily to the Company's existing customers, consists of merchandise
selected from the Company's various catalogs and is not material to the
Company's annual sales. The Company regularly evaluates the performance of its
catalogs and catalog mailings and adjusts its mailings in response to
anticipated market demand.
Coldwater Creek catalogs include full color photographs displaying the
merchandise and pricing information and feature original artwork or photographs
on the cover designed to appeal to the targeted customer of each catalog. Each
catalog includes merchandise narratives describing the merchandise and their
specifications in a manner designed to stimulate the reader's interest, promote
purchasing decisions and convey the unique spirit of each item to the customer.
Apparel photographs often include the jewelry and accessories needed to complete
an outfit. In certain catalogs, photographs of outfits are often placed against
lifestyle backgrounds and scenes that include mountain ranges, streams or tree
covered hills, while in others, apparel is placed against a color-coordinated,
textured backdrop to accentuate the colors of an outfit. Merchandise narratives
are presented in a lyrical, thematic manner designed to deliver the Coldwater
Creek experience to each customer and to personalize the catalog shopping
experience. Further, Coldwater Creek was one of the first catalog companies to
show apparel items "off-figure," leaving the customer to decide if an item of
merchandise is right for him or her based on the item's inherent style and not
on how the item looks on a model.
All catalogs are created and designed by an in-house team of artists, copy
writers and editors. From conception to publication, the in-house team uses a
collaborative approach to design the catalog, make merchandise display and
placement decisions and monitor the overall look, feel and quality of each
catalog. The Company maintains its own in-house photographic studio but also
regularly contracts with independent photographers. These capabilities help the
Company to preserve each catalog's distinctive character and also allows the
Company greater control over the catalog production schedule, which the Company
believes reduces the lead time necessary to produce catalogs and reduces the
costs of preparing pages for printing. These capabilities also provide the
Company with greater flexibility and creativity in catalog production and in
selecting the merchandise to be included in its catalogs. The Company
continually strives to reduce the production time for its catalogs.
DEVELOPMENT OF CUSTOMER BASE AND MARKETING
As of February 28, 1998, Coldwater Creek had a proprietary mailing list of
approximately 5.4 million individuals. The Company believes that building a
large and loyal customer base is critical to its growth strategy. Coldwater
Creek's various marketing programs and catalog mailings are designed to
accomplish the following three goals with respect to the Company's customer
base: (i) attract new customers, (ii) generate additional sales from existing
customers and (iii) generate sales from additional members of the target
customer household. Attracting new customers is accomplished principally
through prospecting using targeted mailings to individuals identified through
rented mailing lists, outside marketing information services and the Company's
own market segmentation analysis. Generating sales from existing customers and
additional members of the target customer household involves the use of
selective, directed mailings of the Company's catalogs based on existing
customers' past purchase histories and household demographic and other data.
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The Coldwater Creek Customer. Coldwater Creek sells its merchandise primarily
to, and believes it has gained a unique understanding of, a set of actively
purchasing customers with distinct demographic characteristics. The typical
Coldwater Creek customer is a 35 to 65 year old college educated female and is
part of a dual income household with annual income above $50,000. This customer
has a strong interest in such areas as culture, the arts, gourmet cooking and
politics. The Company's analysis also indicates that the typical customer has
owned his or her home for at least five years. The Company believes that it can
leverage its current customer base by targeting other members of the existing
customer household with additional catalogs that extend the unique Coldwater
Creek experience to such new members and which offer other related merchandise
lines.
Customer Prospecting; Growth of Mailing List. Coldwater Creek attempts to
attract new customers and generate additional sales from existing customer
households through targeted direct mailings. During fiscal 1997, Coldwater
Creek mailed 113.7 million copies of four different catalog titles, of which
over 60% were mailed to prospective customers. The Company's catalog mailings
to prospective customers historically have made a positive contribution to
operating income. The Company believes that mailing additional catalog titles
to existing customer households produces higher revenue-per-catalog figures than
mailing to prospective customers who have no previous relationship with the
Company. Since fiscal 1993, the Company has added over 3.7 million individuals
to its proprietary mailing list.
The Company uses its Northcountry catalog as its primary prospecting catalog.
The merchandise selection in Northcountry is competitively priced and includes
merchandise styles and types reflective of the Company's other catalogs.
Customers generally receive additional catalog titles and other mailings based
on past purchases, a strategy designed to promote continued merchandise
purchases and enhance the Company's understanding of the buying patterns of each
customer. In addition, the Company regularly test-markets its catalogs to large
groups of prospective customers based on research conducted by third-party
marketing information services using criteria specified by the Company. The
following table sets forth certain information with respect to the Company's
customer base during the five fiscal years ended February 28, 1998:
FISCAL 1997 FISCAL 1996 FISCAL 1995 FISCAL 1994 FISCAL 1993
----------- ----------- ----------- ----------- -----------
Active Customers................ 1,614,000 1,100,000 747,000 494,000 383,000
Growth in Active Customers...... 47% 47% 51% 29% 55%
Average Order................... $ 149 $ 128 $ 97 $ 82 $ 73
Customer Database Management; Customer Segmentation. Coldwater Creek uses a
proprietary customer database which stores detailed information on each customer
in the Company's customer file, including personal information, demographic data
and purchase history. The customer database is updated regularly as new
transactions are recorded. The database also is supplemented with names of
prospective customers obtained through rented and exchanged mailing lists,
outside marketing information services and other sources. These lists include
other catalog and retail subscription lists and lists of compiled names from
businesses offering merchandise in the same broad categories as that of the
Company's merchandise. The use of these outside sources for names of additional
prospective customers has been and is expected to continue to be a key component
of the Company's efforts to attract new customers.
In fiscal 1996, the Company began using a marketing database system to allow its
marketing and merchandising personnel to use more sophisticated and efficient
methods of analysis to determine the performance of each catalog mailing. The
Company's marketing database system allows the Company to segment its customer
base according to many variables and analyze each segment's performance and
buying patterns. The resulting information is used to refine the frequency and
selectivity of Coldwater Creek's various catalog mailings to maximize the
productivity of its mailings. This analysis also enables the Company to
strengthen the merchandising of its catalogs through an analysis of product
profitability.
Customer Retention Program. Coldwater Creek offers customers who have met
certain purchase levels a unique customer service program called the "Preferred
Customer Program." Services provided under the Preferred Customer Program
include correspondence tailored to repeat purchasers, preferential status for
back-order items, free gift-wrapping, special packaging services and a single
shipping and handling charge for multiple shipments. The program also includes
personalized follow-up letters and telephone calls, and a preferred shopping
program that assists customers in locating and purchasing merchandise not found
in the Company's catalogs, including competitors' merchandise. The Company
believes the Preferred Customer Program has resulted in higher retention rates
and higher average orders per customer. During fiscal 1997, the Company
expanded its Preferred Customer Program to include
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multiple levels of customized service based on each customer's purchase history.
The Company believes that this program, coupled with the Company's other
customer service strategies, promotes greater customer loyalty and higher
retention rates.
Coldwater Creek Credit Card Program. Coldwater Creek previously offered a
proprietary credit card through a third-party administrator. The proprietary
card historically accounted for less than 8% of annual net sales. During the
Summer of 1997, the Company conducted an extensive review of the various
proprietary and third-party credit card programs available and elected to
convert its proprietary credit card to an affinity card offered by a major
credit card issuer. Credit cards issued under such program depict the Coldwater
Creek name and a nature-theme background.
MERCHANDISING
Coldwater Creek's merchandising strategy is to provide a differentiated
selection of high quality, casual merchandise which reflects a uniquely
American, relaxed lifestyle. The Company markets each of its catalogs with a
distinct merchandise mix and each catalog title seeks to convey a unique spirit
and lifestyle orientation which the Company believes attracts a distinct
customer demographic. All aspects of the Company's merchandising strategy are
designed to promote the Company's brand identity and make customers feel that
they are not just buying clothing and collectibles, but that they are buying
into a relaxed lifestyle. Through its family of four catalogs and retail store
operations, Coldwater Creek currently offers over 7,000 different merchandise
items with price points ranging from approximately $10 to $500.
Merchandise Mix. Coldwater Creek's merchandise offerings have both evolved and
expanded significantly in recent years. In the early 1990s, the Company's
offerings focused more heavily on jewelry and accessories than apparel. By
calendar 1995, the Company's apparel offering represented approximately 50% of
the Company's net sales with jewelry and accessories representing approximately
25% each. The Company has shifted its merchandise mix towards a greater
percentage of apparel as customer inquiries and the Company's market research
suggested that the Company's customers were willing to purchase apparel in the
styles, of the quality and at the price points selected and offered by the
Company. During fiscal 1996, Coldwater Creek introduced a Spring edition of its
Spirit of the West women's apparel catalog as well as Milepost Four, its men's
apparel catalog. In fiscal 1997, the Company introduced its newest catalog, Bed
& Bath. As a result of these new catalogs and the initial success that they
have achieved, the Company believes that its apparel and home furnishings
offering will continue to represent a greater percentage of the Company's total
net sales. The Company believes that it prices its apparel and home furnishings
competitively with that offered by other retailers. In addition, the Company
believes that, because its apparel and home furnishings merchandise provides a
counter cyclical source of revenue, it will become less reliant on sales
generated during the holiday buying season.
New Product Introduction. A critical element of the Company's merchandising
strategy is the dynamic nature of its product assortment. The Company seeks to
continually add new merchandise and to refine existing merchandise categories in
an effort to promote additional purchases from the target customer households
and increase retention rates by responding to customers' changing preferences.
The Company expects to increase the page counts of its catalogs to accommodate
the introduction of new, related or similar merchandise and merchandise
categories. The Company's merchandising personnel continually evaluate the
performance of the Company's existing products, make merchandise placement and
promotion decisions based on item quality, sales trends, customer demand,
performance histories, current inventory positions and the projected success of
each item and plan the introduction and testing of new items. Consequently, the
Company's merchandise mix continually is refined as new items are introduced and
tested and as items which do not meet the Company's performance standards are
replaced.
Private Label Merchandise. The Company maintains its own line of private label
apparel. Management believes that the Company's commitment to offering a line
of high quality, Company-developed apparel is an important element in
differentiating its merchandise from other retailers. The Company's design and
buying teams work closely together with selected vendors to choose color
schemes, materials and designs and to create an image consistent with the theme
for the Company's merchandise offerings. The Company generally is able to
exercise greater control of these aspects of the merchandise development process
with its private label merchandise than with third party-sourced merchandise.
Management plans to expand its private label offerings and believes that such
merchandise will represent a larger percentage of total net sales in the future.
Merchandise Sourcing and Vendor Relationships. The Company purchases its
merchandise from over 400 vendors. The Company's merchandise acquisition
strategy emphasizes relationships with domestic vendors which the Company
believes supports its inventory management processes, provides for greater
quality control and results in faster turnaround times for merchandise reorders.
In fiscal 1997, approximately two-thirds of the Company's merchandise was
manufactured in the United States. The Company's buyers work closely with its
suppliers to ensure high standards of merchandise quality.
In addition, Coldwater Creek seeks to offer unique merchandise which the Company
believes is not commonly found in other consumer catalogs. Approximately 70% of
the merchandise purchased from its vendors is acquired with exclusive rights to
the
7
Company's catalog distribution. The Company believes such exclusivity enhances
identity of the Coldwater Creek brand and reinforces the uniqueness of the
Company's offerings.
The Company believes it has an excellent relationship with its vendors. No
single vendor accounted for more than 4% of total merchandise purchases in
fiscal 1997. The Company does not have any long-term or exclusive commitments
with any of its vendors.
Alternative Distribution Strategies. The Company employs several alternative
distribution strategies to expeditiously liquidate slow moving, discontinued and
discounted catalog merchandise. These strategies include distributing a sale
flyer in shipped merchandise, selling such merchandise through the Company's
other catalogs, in some cases with price adjustments, and selling such
merchandise through the Company's retail and outlet stores. During fiscal 1997,
the Company opened stand-alone outlet stores in Seaside, Oregon; Lee,
Massachusetts; Kittery, Maine; and Birch Run, Michigan. The Company plans to
open additional outlet stores in the future commensurate with the Company's
growth.
CUSTOMER SERVICE AND OPERATIONS
Coldwater Creek believes that its emphasis on extraordinary customer service and
customer relations is critical to its ability to expand its customer base and
build brand recognition. This customer service focus can be found at every
level of operations, including the Company's call center operations, its order
entry and fulfillment processes, its employee and sales agent training programs
and its merchandise return policy. In addition, the Company's infrastructure
investments, such as its investment in telephone and management information
systems, have enabled the Company to continue to provide high levels of customer
service and adhere to strict operating standards throughout its development.
Customer Service Call Centers. The Company offers prompt, knowledgeable and
courteous order entry services through the use of its toll-free telephone
numbers which may be called 24 hours a day, seven days a week, to place orders,
request a catalog or make merchandise or catalog inquiries. During fiscal 1997,
approximately 90% of the Company's orders were received by telephone with the
remaining 10% received by mail and facsimile. During fiscal 1997, customer
calls were answered at an average rate of 3.9 seconds. The Company's abandoned
call rate was 0.45%, 0.43% and 0.37% during fiscal years 1997, 1996 and 1995,
respectively.
The Company's two customer service call centers are organized to provide prompt,
seamless response to customer calls. The Company's customer service call center
in Coeur d'Alene, Idaho is approximately 50 miles from the customer service call
center at the Company's headquarters in Sandpoint, Idaho. Backup systems and
rerouting capabilities allow the Coeur d'Alene customer service call center to
service the Company's entire inbound 1-800 traffic if required by a failure of
the Sandpoint system. As the Company grows, the Company expects the majority of
calls to be directed to the Coeur d'Alene customer service call center to take
advantage of its larger facilities and labor pool, and the facility's extensive
rerouting capabilities. The Company's two customer service call centers are
equipped with a total of 452 stations, 102 of which are located at the Sandpoint
customer service call center and 350 of which are located at the Company's Coeur
d'Alene customer service call center. The Company monitors and shifts calls
between the two customer service call centers if calls at either center become
backlogged. In the event that either center reaches capacity, an all-hands bell
sounds throughout the facility, alerting Company personnel, including middle and
senior level personnel, to answer any waiting incoming calls. During fiscal
1997, the Company handled approximately 3.6 million calls and received in excess
of 18,000 calls per day during peak sales periods.
Order Entry. The Company uses an integrated management information system which
allows telephone orders to be captured on-line and mail orders to be entered
efficiently. The Company's system is an on-line transaction processing system
which handles all order entry and fulfillment tasks. Specifically, this
includes the inputting of mail and telephone orders, credit authorization, order
processing and distribution and shipment. The Company's sales agents process
orders directly into the Company's on-line data processing system which
provides, among other things, customer history information, merchandise
availability information, merchandise specifications, available substitutes and
accessories, expected ship date and order number. The Company's sales agents
are knowledgeable in key merchandise specifications and features, and have ready
access to samples of the entire merchandise line, which enables the agents to
answer detailed merchandise inquiries from customers on-line. The Company
completes telephone orders in approximately four minutes depending upon the
nature of the order and whether the customer is a first-time buyer or a repeat
8
customer. Customers can pay with a major credit card, check or money order.
All credit charges are pre-authorized prior to shipping the order and credit
authorization occurs coincident with order processing.
Distribution and Order Fulfillment. The Company believes that delivery of
ordered merchandise promptly and in good condition promotes customer loyalty and
repeat buying. During fiscal 1997, approximately 95.9% of in-stock orders were
shipped within one shipping day of order processing. The Company has achieved
low distribution error rates of 0.11%, 0.17% and 0.22% during fiscal years 1997,
1996 and 1995, respectively. The Company's customers normally receive their
items within three to five business days after shipping, although customers may
request overnight delivery for an extra charge.
Once a customer's telephone order is completed, the Company's computer system
prints the order in the Company's distribution center, where it is proofread and
all necessary distribution and shipping documents, including customs forms for
international orders, are attached to expedite processing. Thereafter, the
orders are prepared, packed and shipped in batches three times a day during
normal operation, with extended distribution hours during peak periods. Shipped
orders are bar-coded and scanned and the merchandise, quantity and ship date are
entered automatically into the customer order file for access by sales agents.
The Company uses a semi-automated picking, packing and shipping system with
numerous packing and gift wrapping stations. Gift orders are gift wrapped and
handwritten notes accompany each gift as per the customer's instructions.
Employees process orders and generate warehouse selection tickets and packing
slips for order fulfillment operations. The Company adjusts the number of
employees and the processing system to meet variable demand levels, particularly
during the peak selling season. To meet increased order volume during the
Company's peak selling season, the Company has utilized temporary employees and
plans to continue this practice. During fiscal 1997, approximately 73% of all
shipments were sent via first class mail through the U.S. Postal Service.
Typically, each order is charged a shipping and handling fee which is based upon
the total order price. In fiscal 1997, the Company shipped approximately 3.2
million packages.
During fiscal 1996, the Company expanded its distribution facility and
capabilities to add approximately 48,000 square feet and a semi-automated system
for order processing. The Company's shipping capacity currently is estimated at
40,000 packages per day.
Employee and Sales Agent Training. The Company's training is designed to instill
in each employee a commitment to provide a consistently high level of prompt,
knowledgeable and personal service to each customer. The Company reinforces
this emphasis with internal programs, including posting customer comments and
operating statistics, which are designed to recognize and illustrate exceptional
service provided by the Company's personnel. The Company does not maintain a
separate customer service department. Instead, each sales agent receives
training to allow him/her to handle customer complaints and inquiries, ensuring
that a customer does not need to be transferred or placed on hold.
The Company seeks to create a supportive working environment. When possible, it
is the philosophy of the Company to empower line employees to make decisions,
reducing the need for several management levels. The Company encourages its
sales agents to seek out creative solutions to customer problems and concerns
and to remain responsive to each customer's needs. The vision and Company goals
emphasizing "customers first" are well communicated throughout the Company.
This vision drives the training programs for new and existing employees.
Ongoing employee training at Coldwater Creek addresses professional and personal
development. Training for all new employees, including temporary employees,
emphasizes serving the customer and seeks to instill in each employee the
commitment to deliver the Coldwater Creek experience. Supervisory and
management training programs begin at the time of promotion and continue
throughout the employee's career. Coldwater Creek provides opportunity for
advancement for each employee dependent on his/her skill level, personal effort
and future potential. New sales agents participate in a ten-day training
program, which includes merchandise and computer system training, mock telephone
orders and a mentor system for working with more experienced personnel. Sales
agents are monitored to review performance and are retrained periodically on an
as-needed basis.
Return Policy. The Company has an unconditional return policy for all of its
merchandise under which a customer can return an item for any reason at any time
at the Company's expense. The Company believes that its return policy builds
customer loyalty and helps overcome a customer's initial reluctance to purchase
merchandise from catalogs.
9
Investment in Infrastructure. The Company has historically invested in
infrastructure improvements designed to increase the efficiency of its
operations and the level of customer service provided to its customers. Between
fiscal 1994 and fiscal 1997, the Company invested $31.7 million in
infrastructure improvements. These improvements include expanded distribution
facilities and upgraded telecommunications and management information systems
which the Company believes increases the efficiency of its operations and
provides the Company with greater market analysis and segmentation capabilities.
As a result, the Company believes it can more efficiently offer catalogs and
merchandise to discrete market segments.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company has adopted a widely used catalog order processing system as the
cornerstone of its software strategy. This system is widely used by leading
companies in the direct marketing industry for all order entry and fulfillment
tasks, the inputting of mail and telephone orders, credit authorization, order
processing and distribution and shipment. In order to provide a key decision
support system, the Company maintains a marketing database system. This system
allows customer data to be searched and segmented according to different
variables and allows application of demographic overlays. The system is fully
compatible and interfaces with the Company's catalog system to perform monthly
batch downloads of ordering information into the database. The Company believes
these systems and technologies help Coldwater Creek improve customer retention
through more efficient market modeling and segmentation.
Coldwater Creek's main hardware platform is the Hewlett Packard 3000 series of
computers. The Company believes its investments in the HP/3000 processors and
the installation of a Northern Telecom telephone switch at each customer service
call center provide the Company with a scaleable platform to accommodate future
growth.
The Company's telecommunications system strategy is designed to reduce the risk
of telephone delays and capacity constraints. In the event either customer
service call center is unable to receive incoming calls due to factors such as
natural disasters, equipment or electrical problems or failures, calls are
routed to the other customer service call center in a process which is
transparent to the customer. If neither customer service call center can be
accessed, the Company has contracted with its long-distance carriers to redirect
incoming calls to sales agents' homes to help ensure that uninterrupted service
can be provided to its customers.
The Company's management information system strategy is designed to reduce the
risk of lost data and delays in the order entry or order fulfillment processes.
In 1996, the Company installed information systems processors in its Coeur
d'Alene customer service call center that are largely identical to those in the
Sandpoint headquarters. Software implemented in July 1996 renders the system
fully mirrored on a real-time basis such that customer orders as well as all
other operational data are entered simultaneously in each of the Sandpoint and
Coeur d'Alene customer service call centers. The Company believes this
redundancy reduces the risk of interruption of customer service or other
critical operations due to failure of its computing system.
Coldwater Creek remains engaged in an enterprise-wide Year 2000 project. The
project leader coordinates a team that includes representatives from every
department. A comprehensive project plan that defines each objective and task in
detail currently is being finalized and prospectively will guide the team in its
efforts.
The Company does not sell any products that must be brought into Year 2000
compliance. However, the Company does rely upon many vendors and suppliers for
their products and services. The Company will evaluate key vendor preparedness,
as well as its own, by conducting interviews, obtaining compliance
representation letters, and when deemed necessary, conducting comprehensive
tests. Such vendors will include, in addition to significant merchandise
vendors, providers of hardware and software computing products,
telecommunication systems and components, facilities and related systems, and
office equipment. Although most of the Company's major systems are supplied by
third-party vendors who bear the financial burden of bringing such systems into
compliance, the Company's project team will maintain an active dialog with these
vendors to ensure the adequacy and timeliness of required modifications.
The Company expects to complete the project and related evaluations, including
development of contingency plans to manage areas of high identified risk, by
April 1999. The Company currently is in the process of finalizing its estimate
of the total project cost but expects such amount to be immaterial to the
Company's financial position, results of operations and cash flows.
RETAIL STORES
Coldwater Creek maintains retail store operations as part of its brand building
strategy. In 1995, the Company leased the entire Cedar Street Bridge, a
beautifully renovated covered bridge spanning Sand Creek in Sandpoint, Idaho,
and created its first destination shopping environment for the Company's
customers. The Company's store at the Cedar Street Bridge is a two level
structure with approximately 14,000 feet of prime retail space. Over the course
of 1995 and subsequent thereto, the Company developed the Cedar Street Bridge
into a unique Coldwater Creek shopping experience, with separate stores for each
of the Northcountry, Spirit of the West, Milepost Four and Bed & Bath
merchandise lines as well as an outlet store. Each store at the Cedar Street
Bridge is designed and fixtured different from the others, with basic themes
consistent with each catalog's image and customer segmentation.
As a continuation of the Company's retail store strategy, the Company opened a
similar retail store with approximately 16,000 feet of prime retail space in
Jackson Hole, Wyoming during June of 1997. Jackson Hole is the gateway to Grand
Teton and Yellowstone National Parks and a major ski resort.
The Company's retail store operations, which accounted for approximately 3% of
net sales in fiscal 1997, leverage the success of the Company's catalog
operations by offering, in some circumstances, a greater selection of catalog-
based merchandise as well as non-catalog merchandise. The Company will continue
to consider the selective opening of retail stores in high traffic areas,
including "destination
10
locations" such as near major national parks or other resort areas, where the
Company believes there is the greatest potential for name brand identification.
The Company believes its retail stores provide an additional source of demand
for its catalogs as individuals visit the stores and become acquainted with the
Company's merchandise. In addition, the Company believes the peak selling cycle
for many of these stores to include the months of June, July, August and
September and, as a result, the Company's retail stores may provide counter
cyclical cash flow that may improve overall second quarter performance.
EMPLOYEES
As of February 28, 1998, the Company had 649 full-time employees and 641
temporary employees. During the peak selling season, which for the Company
includes the months of November and December, the Company utilizes a substantial
number of temporary employees, many of whom return year after year. None of
these employees currently are covered by collective bargaining agreements. The
Company considers its employee relations to be excellent.
TRADEMARKS
Coldwater Creek(R), Spirit of the West(R) and Milepost Four(R) are registered
trademarks of the Company. The Company believes that its registered and common
law trademarks have significant value and that all of its trademarks are
instrumental to its ability to create and sustain demand for and market its
merchandise.
COMPETITION
The markets for the Company's merchandise are highly competitive, and the recent
growth in these markets has encouraged the entry of many new competitors as well
as increased competition from established companies. Although the Company
believes that it does not compete directly with any single company with respect
to its entire range of merchandise, within each merchandise category the Company
has significant competitors and may face new competition from new entrants or
existing competitors who focus on market segments currently served by the
Company. These competitors include large retail operations, including some with
catalog operations, other catalog and direct marketing companies and
international competitors. In addition, since fiscal 1995, the Company has
offered an increasingly higher volume and percentage of apparel merchandise.
With respect to the apparel merchandise offered by the Company, the Company is
in direct competition with more established catalog operations, some with
substantially greater experience in selling apparel merchandise and which may
focus on prospective customers sharing some of the demographic characteristics
of the Company's customers. Any failure on the part of the Company to
successfully market its apparel merchandise or to compete effectively against
such competitors could have a material adverse affect on the Company's growth
and could adversely affect the Company's business, financial position, results
of operations and cash flows. Many of these competitors are larger and have
significantly greater financial, marketing and other resources than the Company.
Increased catalog mailings by the Company's competitors may adversely affect
response rates to the Company's own catalog mailings. In addition, because the
Company sources the majority of its merchandise from suppliers and manufacturers
located in the United States, where labor and production costs may be higher
than in foreign countries, there can be no assurance that the Company's
merchandise will or can be competitively priced when compared to merchandise
offered by other retailers. While the Company believes that it has been able to
compete successfully because of its brand recognition, the exclusivity and broad
range and quality of its merchandise, including its private label merchandise
offerings, and its customer service policies, there can be no assurance that the
Company will be able to maintain or increase its market share in the future. The
failure of the Company to compete successfully could materially and adversely
affect the Company's business, financial position, results of operations and
cash flows.
RELIANCE ON CATALOG OPERATIONS
The Company's success depends predominately on the success of its catalog
operations, which the Company believes is achieved through the efficient
targeting of its mailings, a high volume of prospect mailing, appropriate shifts
in the Company's merchandise mix and the Company's ability to achieve adequate
response rates to its mailings. Catalog mailings entail substantial paper,
postage, merchandise acquisition and human resource costs, including costs
associated with catalog development and increased inventories, virtually all of
which are incurred prior to the mailing of each catalog. As a result, the
Company is not able to adjust the costs being incurred in connection with a
particular mailing to reflect the actual performance of the catalog. If, for
any reason, the Company were to experience a significant shortfall in
anticipated revenue from a particular mailing, and thereby not recover the costs
associated with
11
that mailing, the Company's financial condition, results of operations and cash
flows could be adversely affected. In addition, response rates to the Company's
mailings and, as a result, revenues generated by each mailing, can be affected
by factors such as consumer preferences, economic conditions, the timing and mix
of catalog mailings and changes in the merchandise mix, several of which may be
outside the Company's control. Further, the Company historically has experienced
fluctuations in the response rates to its catalog mailings. Any inability of the
Company to accurately target the appropriate segment of the consumer catalog
market or to achieve adequate response rates could result in lower sales,
significant markdowns or write-offs of inventory, increased merchandise returns
and lower margins, which could have a material adverse effect on the Company's
business, financial position, results of operations and cash flows.
RISKS ASSOCIATED WITH GROWTH STRATEGY
The Company's growth strategy includes primarily the following components:
increasing catalog circulation, expanding the Company's customer base through
aggressive prospect mailings, introducing expanded catalog and merchandise
offerings, publishing new catalog titles, expanding international sales and
increasing the use of other marketing channels, such as retail stores and the
Internet. The Company's growth strategy involves various risks, including a
reliance on a high degree of prospect mailings, which may lead to less
predictable response rates. The failure of the Company to successfully implement
any or all of its growth strategies could have a material adverse effect on the
Company's business, financial position, results of operations and cash flows.
The Company believes its growth has been attributable in large part to the
Company's success in meeting the merchandise, timing and service demands of an
expanding customer base with certain demographic characteristics. There can be
no assurance that the Company will be able to continually identify and offer new
merchandise that appeals to its customer base or that the introduction of new
merchandise categories or new marketing or distribution strategies, such as the
sale of the Company's merchandise in retail stores or through new catalog
titles, will be successful or profitable, or that any such efforts will achieve
sustainable acceptance in the market. Any substantial inability on the part of
the Company to sustain the growth of its catalog operations and sales, to
maintain its current average order size and response rates, to leverage the
success of existing catalog titles to new merchandise lines, catalogs and retail
stores or to cross sell the Company's merchandise to different members of the
target customer household could have a material adverse effect on the Company's
business, financial position, results of operations and cash flows.
Management's long-term brand building strategy includes the selective opening of
highly visible retail stores in high traffic areas, including "destination
locations" such as locations near major national parks or other resort areas.
Consistent with such strategy, the Company opened a retail store complex in
Jackson Hole, Wyoming in June of 1997. Management will continue to consider the
opening of similarly situated retail stores in the future as prime locations
become available. To date, the Company has had limited experience operating
retail stores, particularly stores outside the vicinity of its headquarters.
The cost of opening a retail store varies dramatically depending on several
factors such as whether the Company purchases or leases the facilities in which
the store will be placed, the size of the store, the location of the store as
well as the attendant differences in the cost of real estate and the type and
range of merchandise to be offered at the store. In addition, retail store
operations entail substantial fixed costs, including costs associated with real
estate, inventory maintenance and staffing. Failure to successfully implement
this store-based strategy could result in significant write-offs of inventory
and fixtures and could have a material adverse effect on the Company's business,
financial position, results of operations and cash flows.
The Company may need to raise additional funds in order to support greater
expansion, develop enhanced services, respond to competitive pressures, acquire
complementary businesses or respond to unanticipated or seasonal requirements.
In addition, various elements of the Company's growth strategies, including its
aggressive mailing program, its plans to broaden existing merchandise lines,
including its private label offerings, and its plans to introduce new
merchandise, may require additional capital. There can be no assurance that
funds will be available to the Company on terms satisfactory to the Company when
needed.
12
ITEM 2. PROPERTIES
The principal executive and administrative offices of the Company are located at
One Coldwater Creek Drive, Sandpoint, Idaho 83864. The telephone number of the
Company's principal executive and administrative offices is (208) 263-2266. The
general location, use and approximate size of the Company's principal properties
are set forth below:
FACILITY ADDRESS OWNED / LEASED SIZE
- ------------------------------------------------------------------------------------------------------------------
Corporate Offices, including Sandpoint
Customer Service Call Center............... One Coldwater Creek Drive Owned 51,000 sq. ft.
Sandpoint, Idaho 83864
Catalog Distribution/Warehousing............. 3333 McGee Road Owned 150,000 sq. ft.
Sandpoint, Idaho 83864
Retail Distribution/Warehousing.............. 1402 North Boyer Avenue Leased 36,000 sq. ft.
Sandpoint, Idaho 83864
Coeur d'Alene Customer Service Call Center... 1201 Ironwood Drive Leased 24,000 sq. ft.
Coeur d'Alene, Idaho 83814
Sandpoint Retail Store....................... 334 North First Street Leased 14,000 sq. ft.
Sandpoint, Idaho 83864
Jackson Hole Retail Store.................... 10 East Broadway Leased 16,000 sq. ft.
Jackson, Wyoming 83001
Seaside Outlet Store......................... 1111 N. Roosevelt, Suite 100 Leased 4,000 sq. ft.
Seaside, Oregon 97139
Lee Outlet Store............................. 50 Water Street, Suite L670 Leased 4,000 sq. ft.
Lee, Massachusetts 01238
Kittery Outlet Store......................... Route 1, Wilson Road, Suite 102 Leased 4,000 sq. ft.
Kittery, Maine 03904
Birch Run Outlet Store....................... 12156 Beyer Road Leased 4,000 sq. ft.
Birch Run, Michigan 48415
Because the Company's Sandpoint distribution/warehousing facilities currently
are operating near capacity and the majority of the Company's revenues originate
from customers residing in the eastern United States, the Company currently is
negotiating the establishment of a planned second catalog
distribution/warehousing facility in Parkersburg, West Virginia. As a condition
to the transaction, the Company would be provided with a temporary catalog
distribution/warehousing facility from which to operate during construction of
the permanent facility. If consummated, it currently is estimated that the
Company will begin operating out of the temporary facility during the summer of
1998 and transition into the permanent facility beginning the summer of 1999.
The Company believes that the balance of its properties are adequate to meet its
needs in the reasonably foreseeable future. Refer to "Item 7 - Management's
Discussion and Analysis - Liquidity and Capital Resources" for further
information, including details regarding properties which may be purchased or
leased in connection with the Company's various growth initiatives.
13
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation and administrative proceedings primarily
arising in the normal course of its business. In the opinion of management, the
Company's recovery, if any, or the Company's liability, if any, under any
pending litigation or administrative proceedings is not likely to materially
affect its financial position, results of operations or cash flows.
The direct response business as conducted by the Company is subject to the
merchandise Mail Order Rule and related regulations promulgated by the Federal
Trade Commission. While the Company believes it is in material compliance with
such regulations, no assurance can be given that new laws or regulations will
not be enacted or adopted which might adversely affect the Company's operations.
The Company's direct mail business is based solely in the states of Idaho and
Wyoming, and accordingly, the Company only collects sales taxes from customers
residing in those states. Coldwater Creek Outlet Stores Inc., a wholly-owned
subsidiary of the Company, is engaged in the business of liquidating inventory
overstocks, owns and operates retail outlet stores in Oregon, Massachusetts,
Maine, and Michigan, and pays sales tax and applicable corporate income,
franchise and other taxes in those states. Various states have attempted to
collect back sales and use tax from direct marketers. The U.S. Supreme Court
has held that the various states, absent congressional legislation, may not
impose tax collection obligations on an out-of-state mail order company whose
only contacts with the taxing state are the distribution of catalogs and other
advertisement materials through the mail, and whose subsequent delivery of
purchased goods is by mail or interstate common carriers. The Company has not
received an assessment from any state. The Company anticipates that any
legislative changes if adopted, would be applied only on a prospective basis.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of the Company's stockholders in the fourth
quarter of the fiscal year ended February 28, 1998.
15
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Below is a table setting forth the name, age (as of the date of this filing)
and position of the Company's directors, executive officers and key employees:
Name Age POSITIONS HELD
---- --- ----------------------------------------------------------
Dennis Pence..................... [48] President, Chief Executive Officer, Vice Chairman of the
Board of Directors and Director
Ann Pence........................ [48] Creative Director, Chairman of the Board of Directors and
Director
Donald Robson.................... [52] Vice President of Finance and Administration, Chief
Financial Officer, Treasurer, Secretary and Director
Tony Saulino..................... [41] Vice President of Operations
Robin Sheldon (3)................ [53] Vice President of Merchandising
Mac Morgan....................... [43] Vice President of Advertising
Karen Reed....................... [34] Vice President of Catalog Marketing
Tom Scott........................ [42] Vice President and Chief Information Officer
Randy Long....................... [51] Vice President of Human Resources
Robert H. McCall, CPA(1)(2)...... [52] Director
James R. Alexander(1)............ [55] Director
Curt Hecker(2)................... [37] Director
Michelle Collins................. [38] Director
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Ms. Sheldon's employment with the Company terminated on April 15, 1998.
Dennis Pence co-founded the Company in 1984, and has served as President and
Chief Executive Officer and as a Director since its incorporation in 1988. Prior
to co-founding Coldwater Creek, Mr. Pence was employed by Sony Corp of America
from 1975 to 1983, where his final position was National Marketing Manager,
Consumer Video Products.
Ann Pence co-founded the Company in 1984, and has served as its Creative
Director. Since its incorporation in 1988, she also has served as a Director and
as the Chairman of the Board of Directors of the Company. Prior to co-founding
Coldwater Creek, Mrs. Pence had an eleven year career in retail advertising, and
was employed by Macy's California from 1974 to 1982 where her final position was
Copy Director.
Donald Robson has served as Vice President of Finance and Administration, Chief
Financial Officer, Secretary, Treasurer and as a Director of the Company since
January 1995. From 1992 to 1995, prior to joining the Company, Mr. Robson was a
Financial Executive Consultant. From 1978 to 1992, Mr. Robson held a number of
progressively responsible positions with, and ultimately served as Executive
Vice President and Chief Financial Officer for, Neiman Marcus Stores, a
nationally established high-end department store chain and cataloger. His
responsibilities ultimately included managing the Company's financial
operations, information services, merchandise distribution, investment
strategies, credit portfolio, central and store operations, and telemarketing
and distribution in the Direct Marketing Division.
Tony Saulino has served as Vice President of Operations of the Company since
March 1993. Mr. Saulino joined Coldwater Creek in September of 1992 as
Operations Manager. Prior to joining the Company, from 1991 to 1992, Mr. Saulino
was the Customer Service Director of Bear Creek Operations, Inc., servicing the
Harry & David and Jackson & Perkins catalogs where he managed a seasonal staff
of 75-250 employees. From 1988 to 1991, Mr. Saulino served as Customer Service
Manager of Current, Inc., a direct marketer of social expression and
personalized checks, where he managed a seasonal staff of 100-250 employees.
16
Robin Sheldon served as Vice President of Merchandising of the Company from June
1994 to April 1998. From 1989 to 1994, prior to joining the Company, Ms. Sheldon
served as Director of Catalogs and managed development and production of five
direct mail catalogs for the National Wildlife Federation where she also served
as Senior Merchant from 1988 to 1989. Prior to that, from 1983 to 1988, Ms.
Sheldon was President of Robin Clark Designs, Inc., an interior design firm. In
1979, Ms. Sheldon founded, developed and managed The Mixed Bag, an upscale gift
catalog business, where she served as President until 1983.
Mac Morgan has served as Vice President of Advertising of the Company since
September 1996 and, prior to that, as Senior Art Director beginning May 1992.
Mr. Morgan was Vice President of Production from 1991 to 1992 of Interlight
International, a producer of interactive CDR titles located in Florida. Prior to
1991, Mr. Morgan was Director of Marketing for VistaChrome, Inc./The Printing
House, a large separator/printer in Florida. From 1980 to 1988, Mr. Morgan
served as Senior Vice President of Operations of Homes & Land Publishing
Corporation, overseeing a graphics design operation of over 150 employees and
300 retail magazines monthly.
Karen Reed has served as Vice President of Catalog Marketing of the Company
since March 1997. From 1995 to 1997, Ms. Reed was the Director of Circulation
and from 1990 to 1995 she was the Company's Circulation Manager. Prior to
joining the Company, from 1988 to 1990, Ms. Reed served as a computer programmer
for Serac, a ski clothing manufacturer. Prior to that, she worked in the
accounting profession in various capacities.
Tom Scott has served as Vice President and Chief Information Officer of the
Company since his arrival in November 1997. Prior to joining the Company, Mr.
Scott was President of Gestalt Technologies, Inc., a developer of high
technology business systems. From May 1992 to January 1996, Mr. Scott served as
Vice President of Business Systems for VF Corporation, a multi-billion dollar
global apparel manufacturer. Prior thereto, from 1984 to 1992, Mr. Scott worked
in a variety of positions at Nordstrom, Inc., a multi-billion dollar apparel
retailer. From 1981 to 1984, he was a consultant for Arthur Andersen & Co.
Randy Long has served as Vice President of Human Resources since January 1998
and, prior to that, as Director of Human Resources since June 1997. From
September 1994 to June 1997, Mr. Long was Director of Human Resources for
Johnson Matthey Electronics, an international electronics company. From July
1992 to August 1994, Mr. Long was Director of Human Resources for the Federal
Way School District in Federal Way, Washington. Prior thereto, Mr. Long held a
number of human resource positions primarily in the energy industry.
Robert H. McCall, a Certified Public Accountant, has served as a Director since
1994 and since February 1995 has served as Chairman of the Audit Committee and
as a member of the Compensation Committee. Since 1981 he has been President of
McCall & Landwehr, P.A., an accounting firm based in Hayden Lake, Idaho, which
provided accounting, tax and auditing services to the Company from 1984 to 1993,
and has provided a limited amount of other services since that time.
James R. Alexander has served as a Director since 1994 and is Chairman of the
Compensation Committee. He has been an independent consultant for the past 18
years, serving a variety of mail order companies selling upscale apparel, home
decor and gift merchandise.
Curt Hecker has served as a Director since August 1995 and is a member of the
Audit Committee. Since August 1995, his principal occupation has been President
and Chief Executive Officer of Panhandle State Bank in Sandpoint, Idaho. Prior
to Mr. Hecker's employment with Panhandle, he served as Vice President of West
One Bank (now US Bank) with which the Company has had its primary banking
relationship.
Michelle Collins has served as a Director since September 1997. Since January
1998, she has served as Managing Director of Svoboda, Collins L.L.C. Previously
thereto, Ms. Collins was a principal in the corporate finance department of
William Blair & Company, L.L.C., overseeing the firm's specialty retail sector.
Ms. Collins joined William Blair & Company, L.L.C as an associate in 1986 after
obtaining a Masters in Business Administration from the Harvard Business School.
No executive officer or director of the Company bears any relation by blood,
marriage or adoption to any other executive officer or director, except for
Dennis and Ann Pence, who are married to each other.
17
PART II
- -------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been quoted on the NASDAQ under the symbol "CWTR"
since the Company's initial public offering on January 29, 1997. On February
28, 1998, the Company had 95 stockholders of record and 10,120,118 shares of
$.01 par value common stock outstanding.
The following table sets forth certain sales price and trading volume data for
the Company's common stock for the periods indicated:
High Low Close Average Volume
---- --- ----- --------------
Fiscal 1998:
First Quarter
(through May 22, 1998) $41 1/2 $17 3/8 $23 142,899
Fiscal 1997:
First Quarter $18 5/8 $10 $17 35,502
Second Quarter $30 3/4 $14 $23 1/2 45,794
Third Quarter $35 $24 1/2 $31 27,845
Fourth Quarter $41 5/8 $28 $41 1/2 27,718
Fiscal 1996:
Fourth Quarter
(commencing January 29, 1997) $21 7/8 $15 $18 3/8 148,068
18
DIVIDEND POLICY
The Company does not pay regular dividends and does not anticipate the
declaration of a cash dividend in the foreseeable future.
USE OF PROCEEDS
On January 27, 1997, a Registration Statement on Form S-1 (No. 333-16651 ) was
declared effective by the United States Securities and Exchange Commission,
pursuant to which 2,875,000 shares of the Company's common stock were offered
and sold for the account of the Company at a price of $15.00 per share,
generating gross offering proceeds of $43,125,000. The managing underwriters
were Montgomery Securities and William Blair & Company.
In connection with the offering, the Company incurred $3,019,000 in underwriting
discounts and commissions, and $1,330,000 in other related expenses. The net
proceeds of the offering, after deducting the foregoing expenses, were
$38,776,000.
The net proceeds from the offering were used as follows: (i) $18,429,000 in
earning distributions to the S-corporation shareholders, (ii) $7,645,000 to
repay outstanding indebtedness, (iii) $5,067,000 in short-term money market
investments and (iv) $7,655,000 as general working capital.
19
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The selected financial and operating data in the following table sets forth (i)
balance sheet data as of February 28, 1998 and March 1, 1997, and statement of
operations data for the fiscal years ended February 28, 1998, March 1, 1997 and
March 2, 1996, derived from the Company's consolidated financial statements
audited by Arthur Andersen LLP, independent public accountants, which are
included elsewhere in this Form 10-K Annual Report, (ii) balance sheet data as
of March 2, 1996, March 4, 1995 and February 26, 1994, and statement of
operations data for the fiscal years ended March 4, 1995 and February 26, 1994,
derived from the Company's consolidated financial statements audited by Arthur
Andersen LLP which are not presented herein, (iii) unaudited pro forma statement
of operations data, computed as indicated in the footnotes set forth below, and
(iv) selected operating data as of and for the periods indicated derived or
computed from the Company's circulation records or the statement of operations
data identified above. The information below should be read in conjunction with
"Item 7 -- Management's Discussion and Analysis" and "Item 8 Financial
Statements" included elsewhere.
SELECTED FINANCIAL AND OPERATING DATA
Fiscal Years Ended (1)
-------------------------------------------------------------------
February 28 March 1 March 2 March 4 February 26
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(in thousands, except per share and selected operating data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 246,697 $ 143,059 $ 75,905 $ 45,223 $ 31,763
Cost of sales 120,126 66,430 32,786 19,062 13,505
----------- ----------- ----------- ----------- -----------
Gross profit 126,571 76,629 43,119 26,161 18,258
Selling, general and administrative expenses 107,083 64,463 37,356 21,502 12,937
----------- ----------- ----------- ----------- -----------
Income from operations 19,488 12,166 5,763 4,659 5,321
Interest, net, and other 57 (153) (149) 98 31
----------- ----------- ----------- ----------- -----------
Income before provision for income taxes 19,545 12,013 5,614 4,757 5,352
Provision for income taxes (2) 7,857 1,197 -- -- --
----------- ----------- ----------- ----------- -----------
Net income $ 11,688 $ 10,816 $ 5,614 $ 4,757 $ 5,352
=========== =========== =========== =========== ===========
Net income per share - Basic (3) $ 1.15 $ 1.46 $ 0.77 $ 0.66 $ 0.74
=========== =========== =========== =========== ===========
Weighted average shares outstanding- Basic (3) 10,120,000 7,390,000 7,245,000 7,245,000 7,245,000
=========== =========== =========== =========== ===========
Net income per share - Diluted (3) $ 1.10 $ 1.41 $ 0.77 $ 0.66 $ 0.74
=========== =========== =========== =========== ===========
Weighted average shares outstanding - Diluted (3) 10,633,000 7,656,000 7,245,000 7,245,000 7,245,000
=========== =========== =========== =========== ===========
PRO FORMA STATEMENT OF OPERATIONS DATA:
Net income as reported above n/a $ 10,816 $ 5,614 $ 4,757 $ 5,352
Pro forma provision for income taxes (2) n/a 4,929 2,218 1,903 2,114
----------- ----------- ----------- -----------
Pro forma net income n/a $ 5,887 $ 3,396 $ 2,854 $ 3,238
=========== =========== =========== ===========
Pro forma net income per share - Basic (4) n/a $ 0.68 $ 0.41 $ 0.36 $ 0.42
=========== =========== =========== ===========
Pro forma weighted average shares
outstanding - Basic (4) n/a 8,617,000 8,208,000 7,981,000 7,755,000
=========== =========== =========== ===========
Pro forma net income per share - Diluted (4) n/a $ 0.66 $ 0.41 $ 0.36 $ 0.42
=========== =========== =========== ===========
Pro forma weighted average shares
outstanding - Diluted (4) n/a 8,883,000 8,208,000 7,981,000 7,755,000
=========== =========== =========== ===========
BALANCE SHEET DATA:
Working capital $ 13,949 $ 13,990 $ 2,169 $ 623 $ 4,095
Total assets 98,225 61,974 23,450 19,032 9,820
Long-term debt (net of current maturities) -- -- 100 248 408
Stockholders' equity 48,875 37,187 14,525 11,068 7,698
Selected Operating Data:
Net sales growth 72.4% 88.5% 67.8% 42.4% 69.1%
Total catalogs mailed 113,717,000 63,520,000 45,868,000 31,625,000 19,045,000
Total active customers (5) 1,614,000 1,100,000 747,000 494,000 383,000
Average order (6) $149.00 $128.00 $97.00 $82.00 $73.00
20
(1) References to a fiscal year refer to the calendar year in which such fiscal
year commences. The Company has a 52/53 week fiscal year that ends on the
Saturday closest to February 28. Fiscal 1994 is the only fiscal year
presented that consisted of 53 weeks.
(2) Prior to the Company's initial public offering on January 29, 1997, the
Company operated as an S-corporation and was not subject to federal and
certain state income taxes. Pro forma income taxes are depicted above at
an assumed 39.5% effective rate as if the Company had been a C-corporation,
rather than an S-corporation, for the pre-offering periods. Upon
terminating the Company's S-corporation status, the Company recognized a
non-recurring, non-cash charge to earnings to recognize deferred income
taxes in accordance with Statement of Financial Accounting Standard No.
109 ("SFAS No. 109"). See Notes 1, 7 and 13 of Notes to Consolidated
Financial Statements.
(3) In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". SFAS No. 128 supercedes Accounting Principles
Board Opinion No. 15. "Earnings Per Share," revises the computation and
presentation of earnings per share, and was adopted by the company as
required during the fourth quarter of fiscal 1997. Net income per share -
Basic, which replaces primary earnings per share, excludes dilution and is
computed by dividing net income by the weighted average number of common
shares outstanding for the period. Net income per share - Diluted, which
replaces fully diluted earnings per share, reflects the potential dilution
that could occur under the treasury stock method if securities or other
contracts to issue common stock (e.g., stock options) were exercised or
converted into common stock. As required, all previously reported amounts
have been restated.
(4) Pro forma net income per share - Basic is based on basic net income per
share, as computed above, but also gives pro forma effect to (i) income
taxes at an assumed 39.5% effective rate as if the Company had been a C-
corporation, rather than an S-corporation, for the pre-offering periods
and (ii) that number of initial public offering common shares whose net
proceeds were necessary to fund the distribution of the S-corporation
retained earnings balance. Pro forma net income per share - Diluted
additionally reflects the dilutive effect of common shares issuable under
stock options as computed using the treasury stock method.
(5) An "active customer" is defined as a customer who has purchased
merchandise from the Company within the twelve month period preceding the
end of the period indicated.
(6) An "order" is defined as the dollar amount of a processed customer
invoice or a pending order on file. The "average order" is calculated by
dividing the aggregate amount of all customer invoices and pending orders
processed in a period by the number of customer orders placed in such
period.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion may contain forward-looking statements within the
meaning of the federal securities laws which involve risks and uncertainties.
When used in this discussion, the words "anticipate," "believe," "estimate,"
"expect," and similar expressions as they relate to the Company or its
management are intended to identify such forward-looking statements. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences include, among
others, the following: general economic and business conditions; competition;
success of operating initiatives; development and operating costs; advertising
and promotional efforts; brand awareness; the existence or absence of adverse
publicity; availability, locations and terms of sites for store development;
changes in business strategy or development plans; quality of management;
availability, terms and deployment of capital; business abilities and judgment
of personnel; availability of qualified personnel; labor and employee benefit
costs; and construction costs; as well as those factors discussed below and
elsewhere in this Form 10-K.
References to a fiscal year refer to the calendar year in which such fiscal year
commences. The Company's fiscal year ends on the Saturday closest to February
28. The fiscal year is generally 52 weeks, as is the case with all periods
presented except fiscal 1994 which consisted of 53 weeks.
OVERVIEW
Coldwater Creek Inc. is a specialty direct mail retailer of apparel, gifts,
jewelry and home furnishings. The Company markets its merchandise primarily
through four distinct catalogs. Northcountry, which was introduced in 1985, is
the Company's core catalog and features casual, comfortable apparel, hard-to-
find jewelry, distinctive artwork, gifts and items for the home. The Company's
premium catalog for women, Spirit of the West, was introduced in the Fall of
1993 and features fashionable, upscale apparel and hard-to-find jewelry and
accessories. Created in the Spring of 1996, Milepost Four features upscale, yet
relaxed, natural-fiber men's clothing. In response to customer demand for the
selected, upscale bed and bath products periodically featured in Northcountry
and Spirit of the West, the Company introduced its Bed & Bath catalog in August
of 1997.
As part of the Company's brand building strategy, the Company also operates
catalog-themed retail stores in Sandpoint, Idaho and Jackson Hole, Wyoming.
Through its wholly-owned subsidiary, Coldwater Creek Outlet Stores Inc., the
Company additionally operates outlet stores in Seaside, Oregon; Lee,
Massachusetts; Kittery, Maine; and Birch Run, Michigan.
The Company targets well-educated, middle-to-upper income households and seeks
to differentiate itself from other retail and catalog operations by offering
exceptional value through superior customer service and a merchandise assortment
that reflects a casual, uniquely American spirit. The Company believes that the
successful execution of its marketing and merchandising strategies, coupled with
its high customer service standards and efficient order entry and fulfillment
operations, have allowed it to develop a unique brand identity and strong
relationships with its loyal customer base. As a result, the Company's average
customer order increased to $149 during fiscal 1997 as compared to $128 and $97
during fiscal 1996 and 1995, respectively.
A key element of the Company's overall marketing strategy has been to pursue an
aggressive circulation strategy. During fiscal years 1997, 1996 and 1995, the
Company mailed 113.7 million, 63.5 million and 45.9 million catalogs,
respectively. The Company's proprietary mailing list stood at 5.4 million names
at February 28, 1998, up significantly from the 3.7 million and 2.5 million
names at March 1, 1997 and March 2, 1996, respectively. Similarly, the
Company's active customer file grew to 1.6 million names at February 28, 1998 as
compared to 1.1 million and 0.7 million names at March 1, 1997 and March 2,
1996, respectively.
The Company focuses on providing extraordinary customer service well above
industry standards. All aspects of the Company's operations are designed to
provide a superior catalog buying experience and to strengthen relationships
with existing and new customers. To that end, the Company has strived to make
timely investments in its telephone and distribution infrastructure to
support its customer service-based strategy. During fiscal 1997, the Company
continued to achieve faster telephone answer times, lower abandoned call rates,
and faster order processing than the most recently published industry averages.
The Company plans to stimulate future growth through a variety of strategic
initiatives designed to increase catalog circulation, yield higher customer
response rates and expand merchandise offerings. In addition, the Company
believes that significant opportunities exist to expand its customer base by
targeting new members of existing customer households with additional
merchandise offerings and catalog titles.
22
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth certain information regarding the Company's costs
and expenses expressed as a percentage of net sales:
Fiscal
--------------------------------------------
1997 1996 1995
--------- ---------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of sales 48.7 46.4 43.2
--------- ---------- -----------
Gross profit 51.3 53.6 56.8
Selling, general and administrative expenses 43.4 45.1 49.2
--------- ---------- -----------
Income from operations 7.9 8.5 7.6
Interest, net, and other - (0.1) (0.2)
--------- ---------- -----------
Income before provision for income taxes 7.9 8.4 7.4
Provision for income taxes 3.2 0.8 -
--------- ---------- -----------
Net income 4.7% 7.6% 7.4%
========= ========== ===========
Pro forma provision for income taxes - 3.5 2.9
--------- ---------- -----------
Pro forma net income - 4.1% 4.5%
========= ========== ===========
FISCAL 1997 COMPARED TO FISCAL 1996
- -----------------------------------
Net sales increased by $103.6 million, or 72.4%, to $246.7 million during fiscal
1997 from $143.1 million during fiscal 1996. This increase primarily is
attributable to increased circulation of and order volume and average dollars
from the Company's Northcountry and Spirit of the West catalogs, and to a lesser
extent, the Company's Milepost Four and Bed & Bath catalogs. While the overall
growth in net sales remained strong throughout fiscal 1997, a softening of
demand for the upscale fashion apparel featured in the Spirit of the West
catalog was noted during the fourth quarter. Management believes that the
historical rate of growth for this catalog will moderate for the foreseeable
future, and the previous high growth rates achieved by this catalog will not
continue. Nevertheless, management believes that Spirit of the West will
continue to represent a substantial portion of the Company's overall profit.
Gross profit consists of net sales minus cost of sales, which primarily consists
of merchandise acquisition costs, freight in and storage costs. Gross profit
increased $49.9 million, or 65.2%, to $126.6 million during fiscal 1997 from
$76.6 million during fiscal 1996. Gross profit decreased as a percentage of net
sales to 51.3% for fiscal 1997 from 53.6% for fiscal 1996. The decrease in gross
profit percentage primarily is attributable to increased sales of marked down
merchandise associated with a greater percentage of apparel and management's
decision, in light of the continued growth in the Company's overall merchandise
offering, to more aggressively liquidate slow-moving or excess merchandise.
Additionally, the higher gross margins traditionally realized in the fourth
quarter as a result of increased gift and accessories sales associated with the
holiday season were offset substantially by increased writedowns of Spirit of
the West excess stock.
Selling, general and administrative expenses primarily consist of marketing,
distribution and general and administrative expenses. Marketing expenses
primarily consist of catalog production and postage costs. Production costs
primarily consist of paper, printing, computer services and list rental costs
(net of list rental revenue). Selling, general and administrative expenses
increased by $42.6 million, or 66.1%, to $107.1 million during fiscal 1997 from
$64.5 million in fiscal 1996. Selling, general and administrative expenses
decreased as a percentage of net sales to 43.4% during fiscal 1997 from 45.1%
during fiscal 1996. The increase in selling, general and administrative
expenses primarily is attributable to the circulation costs incurred in
connection with increased catalog mailings and various infrastructure
investments considered necessary to support the Company's anticipated growth.
The decrease in selling, general and administrative expenses as a percentage of
net sales primarily is attributable to the growth in net sales and the
leveraging of certain fixed and semi-fixed infrastructure costs.
As a result of the foregoing, operating income increased by $7.3 million, or
60.2%, to $19.5 million for fiscal 1997 from $12.2 million for fiscal 1996. As
a percentage of net sales, operating income was 7.9% in fiscal 1997 as compared
to 8.5% in fiscal 1996.
Net income increased by $872,000 to $11.7 million for fiscal 1997 from $10.8
million for fiscal 1996. Net income per basic and diluted share was $1.15 and
$1.10, respectively, for fiscal 1997, versus net income per basic and diluted
share of $1.46 and $1.41, respectively, for fiscal 1996. However, after applying
a pro forma combined effective federal and state income tax rate of 39.5% to
fiscal 1996 when the Company operated as an S-corporation for a substantial
portion of the year, the Company realized pro forma net income of $5.9 million
for fiscal 1996. This equates to pro forma net income per basic and diluted
share of $0.68 and $0.66, respectively, for fiscal 1996.
23
FISCAL 1996 COMPARED TO FISCAL 1995
- -----------------------------------
Net sales increased by $67.2 million, or 88.5%, to $143.1 million during fiscal
1996 from $75.9 million during fiscal 1995. This increase primarily was
attributable to unusually strong response rates to and higher average orders
realized from the Company's Spirit of the West catalog and to certain new
merchandise offerings in the Company's Northcountry catalog. To a lesser
extent, the Company realized additional net sales from the introduction of its
Milepost Four catalog in the spring of 1996.
Gross profit increased $33.5 million, or 77.7%, to $76.6 million during fiscal
1996 from $43.1 million during fiscal 1995. Gross profit decreased as a
percentage of net sales to 53.6% for fiscal 1996 from 56.8% in fiscal 1995. The
decrease in gross profit percentage primarily was attributable to increased
merchandise markdowns associated with offering a greater percentage of apparel
merchandise versus higher net margin jewelry and gifts. As part of the Company's
marketing strategy, the Company also reduced prices on selected items in its
catalogs during fiscal 1996.
Selling, general and administrative expenses increased by $27.1 million to $64.5
million during fiscal 1996 from $37.4 million during fiscal 1995. Selling,
general and administrative expenses decreased as a percentage of net sales to
45.1% during fiscal 1996 from 49.2% during fiscal 1995. The increase in
selling, general and administrative expenses primarily was attributable to the
circulation costs incurred in connection with increased catalog mailings and
various infrastructure investments considered necessary to support the Company's
anticipated growth. The decrease in selling, general and administrative
expenses as a percentage of net sales primarily was attributable to the
leveraging of certain fixed and semi-fixed infrastructure costs coupled with
favorable paper prices in catalog production.
As a result of the foregoing, operating income increased by $6.4 million, or
111.1%, to $12.2 million for fiscal 1996 from $5.8 million for fiscal 1995. As
a percentage of net sales, operating income increased to 8.5% in fiscal 1996 as
compared to 7.6% in fiscal 1995.
In fiscal 1996, the Company recognized a $1.4 million non-recurring, non-cash
charge in connection with the termination of its S-corporation status. This
charge, along with the recognition of a $0.2 million tax benefit, resulted in a
net income tax provision of $1.2 million.
Net income increased by $5.2 million to $10.8 million for fiscal 1996 from $5.6
million for fiscal 1995. Net income per basic and diluted share was $1.46 and
$1.41, respectively, for fiscal 1996, versus net income per basic and diluted
share of $0.77 and $0.77, respectively, for fiscal 1995. However, after
applying a pro forma combined effective federal and state income tax rate of
39.5% to fiscal 1996 and 1995 when the Company operated as an S-corporation, the
Company realized pro forma net income of $5.9 million for fiscal 1996 versus pro
forma net income of $3.4 million for fiscal 1995. This equates to pro forma net
income per basic and diluted share of $0.68 and $0.66, respectively, for fiscal
1996, versus basic and diluted pro forma net income per share of $0.41 and
$0.41, respectively, for fiscal 1995.
QUARTERLY AND SEASONAL FLUCTUATIONS
- -----------------------------------
The Company's revenues and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of a number
of factors including, among other things, the timing of new merchandise and
catalog offerings, recognition of costs or net sales contributed by new
merchandise and catalog offerings, fluctuations in response rates, fluctuations
in paper, production and postage costs and expenses, merchandise returns,
adverse weather conditions that affect distribution or shipping, shifts in the
timing of holidays and changes in the Company's merchandise mix.
24
The Company defers the recognition of the costs of catalog development and
production and records them as sales are recognized. Consequently, quarter to
quarter revenue and expense comparisons will be impacted by the timing of the
mailing of the Company's catalogs. Mailings may occur in different quarters
from year to year depending on the performance of third party couriers, the day
of the week on which certain holidays fall and the Company's assessment of
prevailing market opportunities. Approximately three-quarters of the revenue
generated by each mailing is recognized within 30 to 45 days after such mailing.
A portion of the revenue from a catalog mailing may also be recognized in the
quarter after the quarter in which the catalog was mailed and the revenue from a
particular catalog offering may be recognized in a quarter different from the
quarter in which the revenue from the offering was recognized in the previous
year.
The Company has experienced, and may continue to experience, seasonal
fluctuations in its sales and operating results, which are typical of many
specialty retailers. In past fiscal years, the Company's net sales and profits
have been heavily reliant on the November and December holiday season. The
Company believes that in the future this seasonality will continue, although to
a diminished degree due to the increased representation of apparel and home
furnishings in the Company's overall merchandise mix. In anticipation of
increased sales activity during November and December, the Company incurs
significant additional expenses, including the hiring of a substantial number of
temporary employees to supplement its permanent, full-time staff. In addition,
due to the larger percentage of gifts and accessories offered in the second half
of the fiscal year related to holiday gift-giving, the Company normally expects
higher gross margins in the second half of the fiscal year than in the first
half. If, for any reason, the Company's sales were to fall below its
expectations during November and December, the Company's financial position
results of operations and cash flows could be materially adversely affected.
The following table contains selected unaudited quarterly financial data for
fiscal 1997 and fiscal 1996. The disproportionally lower results of operations
realized during the second fiscal quarters are due to lower sales volumes
realized in such quarters due to seasonal trends. In the opinion of management,
this unaudited information has been prepared on the same basis as the audited
information and includes all adjustments, solely of a normal recurring nature,
necessary to present fairly, in all material respects, the information set forth
therein.
FISCAL 1997
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- --------- ---------
(in thousands, except per share data)
Net sales......................................... $51,002 $36,389 $77,242 $82,064
Gross profit...................................... 26,665 18,237 39,544 42,125
Selling, general and administrative expenses...... 23,374 17,495 32,397 33,817
Income from operations............................ 3,291 742 7,147 8,308
Net income........................................ $ 2,073 $ 415 $ 4,340 $ 4,860
Net income per share - Basic...................... $ 0.20 $ 0.04 $ 0.43 $ 0.48
Net income per share - Diluted.................... $ 0.20 $ 0.04 $ 0.41 $ 0.45
FISCAL 1996
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ----------- --------- ---------
(in thousands, except per share data)
Net sales.......................................... $23,604 $15,781 $45,325 $58,349
Gross profit....................................... 12,091 8,262 25,049 31,227
Selling, general and administrative expenses....... 10,540 8,488 20,211 25,224
Income (loss) from operations...................... 1,551 (226) 4,838 6,003
Net income (loss).................................. $ 1,528 $ (258) $ 4,690 $ 4,853
Net income (l