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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 March 2, 2002
Commission File Number 0-26772
COLDWATER CREEK INC.
(Exact name of registrant as
specified in its charter)
| Delaware |
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82-0419266 |
| (State of other jurisdiction of |
|
(I.R.S. Employer Identification No.) |
| incorporation or organization) |
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One Coldwater Creek Drive, Sandpoint, Idaho 83864
(Address of principal executive offices)
(208) 263-2266
(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 ¨
Indicate by check mark if disclosure of delinquent filers 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. x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately
$110,200,000 as of May 2, 2002, based upon the closing price on the Nasdaq National Market reported for such date. As of May 2, 2002, 10,603,874 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 2002 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.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 2, 2002
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PART I
The following discussion contains
various statements regarding our current strategies, financial position, results of operations, cash flows, operating and financial trends and uncertainties, as well as certain forward-looking statements regarding our future expectations. When used
in this discussion, words such as “anticipate,” “believe,” “estimate,” “expect,” “plan,” and similar expressions are intended to identify such forward-looking statements. Our forward-looking
statements are based on our current expectations and are subject to numerous risks and uncertainties. As such, our actual future results, performance or achievements may differ materially from the results expressed in, or implied by, our
forward-looking statements. These risks and uncertainties include, but are not limited to, the prolonged weakness and uncertainty in the U.S. economy, and it’s pronounced effect on the apparel industry; the various risks inherent in offering
apparel and other merchandise, such as long lead times, difficult to forecast inventory requirements, merchandise returns, and shipping costs; the various risks associated with the expansion of our business into retail, an area in which we have
relatively limited experience, and the possibility that the expansion may strain our financial and management resources, as well as our administrative, reporting and internal control infrastructure; the difficulties inherent in forecasting
unpredictable, and often volatile, customer tastes and buying trends, particularly in light of the current state of the U.S. economy; the difficulties inherent in successful catalog management, including timing, mailing and postal delivery delays,
as well as uncertainties associated with effective targeting of customers, and the high costs associated with prospect mailings; fluctuations in paper, postage and telecommunication costs; difficulties inherent in sizing and merchandising; potential
problems correlating inventory to customer demand, especially in connection with clearance activities; uncertainties related to our shift to a multi-channel model, in particular, the effects of shifting patterns of e-commerce or retail purchases
versus catalog purchases, and our potential failure to generate significantly increased sales; the possibility that either lower sales or higher than anticipated costs could effect our liquidity (including compliance with our debt covenants) and,
therefore, the pace of our retail expansion; the possibility of a material disruption or slowdown in operations at our distribution center in Mineral Wells, West Virginia, at which our merchandise is stored and shipped for all of our sales channels;
our potential inability to continue to locate, and negotiate on acceptable terms, leases of sites for store development; potential cost overruns and delays associated with site acquisition, build-out and launch of multiple retail stores;
substantial, and increasing, competition in the women’s apparel industry; uncertainty of demand for our products, which may require us to significantly increase promotional costs to increase sales; the potential that if demand for our product
is less than anticipated, the mix of our sales will be weighted more toward clearance merchandise than to full price merchandise, which may result in lower average order dollars; the possibility that we may not be able to achieve targeted cost
reductions, or that significant cost reductions may impair customer service; our potential difficulty in filling key personnel vacancies in a timely manner, particularly the position of Chief Financial Officer, and the potential negative impact on
our ability to execute upon our business plan if those key positions remain vacant for an extended period; our ability to hire and retain qualified personnel, especially considering the strain on our personnel resources caused by the expansion of
our business, the changes in our business model, and our company-wide cost cutting efforts; potential system interruptions associated with our e-commerce business; as well as other factors discussed elsewhere in this Form 10-K. We assume no future
obligation to update our forward-looking statements or to provide periodic updates or guidance.
References to a fiscal year refer
to the calendar year in which such fiscal year commences. Our fiscal year ends on the Saturday immediately preceding or following February 28th, whichever is chronologically closer. Our floating fiscal year-end typically results in a fifty-two week
fiscal year but will
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occasionally give rise to an additional week resulting in a fifty-three week fiscal year. Our most recently completed fiscal year ended March 2, 2002 (“fiscal 2001”) consisted of
fifty-two (52) weeks whereas our preceding fiscal years ended March 3, 2001 (“fiscal 2000”) and February 26, 2000 (“fiscal 1999”) consisted of fifty-three (53) and fifty-two (52) weeks, respectively.
Coldwater Creek Profile
Coldwater Creek is a triple-sales channel,
two-operating segment retailer of women’s apparel, jewelry, footwear, gift items and home merchandise. Our Direct Segment encompasses our traditional catalog business and Internet-based, e-commerce business, as well as our merchandise clearance
outlet stores, whereas our Retail Segment encompasses our expanding base of full-line retail stores throughout the United States (“U.S.”). Our long-standing mission has been to differentiate our company from other retailers by offering
exceptional value through superior customer service and a merchandise assortment that reflects a truly relaxed and casual lifestyle. We endeavor to continually offer unique assortments of merchandise primarily targeted to our core customer
demographic of women between the ages of 35 to 55 with household incomes in excess of $50,000.
Our long-established catalog business
consists of regular targeted mailings of our four catalog titles and merchandise lines, Northcountry, Spirit of the West, Natural Elements and Home, as well as periodic targeted mailings of specialty and seasonal catalogs such as our Gifts-To-Go
holiday catalog. Our catalogs remain our most efficient and effective medium for building Coldwater Creek brand recognition and deploying our various sales growth and merchandising initiatives. Accordingly, each of our catalogs is carefully designed
by our staff to promote our triple-sales channel structure and to encourage each customer to place her order utilizing whichever sales channel she deems most convenient and
pleasurable.
Our e-commerce business continues to be our most
profitable business as our catalog business provides an existing marketing platform from which to broadly promote our www.coldwatercreek.com web site to existing catalog customers with minimal incremental marketing costs. Our web site
features our entire full-priced, first-line merchandise line and also serves as our most effective and efficient promotional vehicle for the disposition of excess inventory. As approximately one in seven individuals currently patronizing our web
site have no previous purchasing history with us and our established web site customers tend to be, on average, our most frequent purchasers, we continue to devote substantial effort towards attracting both new customers and our existing catalog and
retail store customers to this convenient, secure and most cost effective shopping medium.
Our full-line retail store business currently is, and for the foreseeable future is expected to remain, our fastest growing sales channel on a percentage basis. Three years ago, we embarked on a
long-term program of establishing full-line retail stores in major metropolitan areas throughout the U.S. We did so based on our continuing belief that the ability to occasionally “touch and feel” merchandise will remain a coveted aspect
of the American woman’s shopping experience. We view our retail stores not only as revenue centers, but as geographically dispersed marketing vehicles by which to build further brand recognition and introduce both current and prospective
customers to our catalogs and e-commerce web site.
In summary, our primary corporate strategy continues to be to use the competitive
advantages provided by our well-established catalog infrastructure, a resource not currently available to or as fully established by many competing retailers, to generate sales across all three channels, target new customers and introduce new
merchandise concepts. Although there can be no assurance of such, we believe that over time this strategy will build broad brand recognition and capture increased market share.
The Company was incorporated in Idaho in 1988 and became a Delaware Corporation in 1996.
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Our History and Philosophy
Our Company was founded on a shoestring budget in 1984 by Dennis and Ann Pence. Operating out of a small apartment in Sandpoint, Idaho equipped with a single telephone line, Dennis and Ann initially sold a small number of
nature-related items, such as binoculars and birdfeeders, through sales flyers and magazine advertisements. Their initial customer database consisted of handwritten customer information on 3x5 index cards.
Since our inception, we have remained committed to Dennis and Ann’s vision of building a loyal customer base through extraordinary customer service and
quality merchandise. In that regard, our customer service has always emphasized, among other things, quick telephone answer speeds and rapid order fulfillment. As we grew, Dennis and Ann sought employees who shared their unwavering commitment to
providing extraordinary customer service.
We have always believed that we are more than just a purveyor of goods. Our corporate
philosophy is closely aligned with the romance of wide open spaces and the casual, unhurried approach to living and familiarity found in small town settings. Our apparel and other merchandise is selected and displayed to promote our corporate
philosophy and to enhance our brand image. Our overall merchandise offering has significantly evolved over the subsequent eighteen years away from our original emphasis on nature-related products and gifts to providing a broader range of apparel,
footwear, jewelry, gifts and soft home accessories which meet the ongoing needs of our growing customer base.
By maintaining our
operations in small town settings such as Sandpoint, Idaho and Mineral Wells, West Virginia, we believe that we are able to draw upon unique workforces that excel in delivering an enjoyable shopping and buying experience to our customers. Our
corporate philosophy is team-oriented, friendly, honest and casual, with a commitment to building a loyal, actively purchasing customer base within a growing, profitable enterprise.
Direct and Retail Segments
During our fiscal 2001 fourth quarter, with the most recent phase of our retail
store expansion in place and certain new enabling management information systems operational, our executive management no longer viewed and managed the Company collectively but instead as two distinct operating segments, Direct and Retail. The
Direct operating segment encompasses our traditional catalog business, Internet-based e-commerce business and merchandise clearance outlet stores whereas the Retail operating segment encompasses our expanding base of full-line retail stores.
Although continuing to offer customers substantially similar merchandise, our Direct and Retail operating segments now have distinct management, marketing, operating and inventory management strategies and processes.
Our products are principally marketed to individuals within the United States. Net sales realized from other geographic markets, primarily Canada and Japan, have
collectively been less than 5% of consolidated net sales in each reported period. No single customer accounts for ten percent or more of consolidated net sales. Apparel sales have constituted approximately three-quarters of our consolidated net
sales during fiscal 2001, 2000 and 1999, with sales of jewelry, footwear, gift items and home merchandise constituting the respective balances. Please specifically refer to Note 15—“Segment Reporting” of our consolidated
financial statements for further details.
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Our Current Merchandise Lines
We currently feature the following four primary merchandise lines:
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Northcountry. First introduced in 1985, Northcountry is our most established and popular merchandise line. Northcountry offers the broadest selection of merchandise,
including affordable apparel, footwear, jewelry, art and gift items, reflecting a casual and relaxed lifestyle. Our Northcountry line continues to appear to have the broadest market appeal with its merchandise having the most sustainable life
cycles. Most items are priced between $20 and $120. |
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Spirit of the West. First introduced in 1993, Spirit of the West is our second most established and popular merchandise line. Spirit of the West offers a broad and
more upscale assortment of women’s apparel, including dresses and sportswear, blouses, shirts, jackets, pants and skirts, as well as footwear and distinctive, and contemporary jewelry. The apparel is office-appropriate, but can also serve as
weekend-wear, and is typically made of linens, silks and micro-fibers. Spirit of the West’s apparel is generally of a higher quality than Northcountry with superior construction details, novel accessories and garments that are fully-lined and
its price points are generally higher as well. Most items are priced between $35 and $200. |
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Natural Elements. First introduced in February 2000, our Natural Elements line primarily features complementary mix and match, versatile, casual separates, key items and
footwear in a vast array of colors and extended sizes. Most recently, we added swimwear to which our customers are responding well. Our Natural Elements line attempts to fulfill what we believe to be an underserved niche of the women’s apparel
market. Most items are priced between $20 and $150. |
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Home. A fiscal 1999 extension of our previously successful Bed & Bath line first introduced in 1997, Home features bed and bath linens and complementary
accessories, sleepwear and a variety of decorative accessories for other rooms of the home such as wall decor, lamps, rugs and accessory furniture. During fiscal 2000, we expanded our Home line to also include lounge and intimate wear. Most items
are priced between $25 and $300. In January 2002, we decided to eliminate our stand-alone “Home” catalog and merchandise line by the fall of 2002 and, instead, incorporate its more popular product categories into our remaining catalog
titles and merchandise lines. |
Additionally, in order to serve the gift-giving needs of our customers and generate
incremental sales during the important Christmas shopping season, each year we assemble a ‘‘Gifts-to-Go’’ merchandise line which is featured in a spirited holiday catalog and on our primary e-commerce web site,
www.coldwatercreek.com. Among other items, Gifts-to-Go generally features a varied assortment of the most popular items featured in our primary merchandise lines described above. Gifts-to-Go has not been material to the annual sales of any
fiscal year reported herein.
Our Primary Business Strategies
Our continuing primary business strategies are as follows:
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Provide An Unsurpassed Shopping Experience Through Exceptional Customer Service. Consistently providing each of our customers with unsurpassed shopping experiences
through exceptional customer service has been, and will continue to be, our foremost competitive business strategy at Coldwater Creek. We believe that it has been our top-down, company-wide focus on meeting this objective each and every day which
has contributed more than anything else to the success we have achieved to date. As our customer information database indicates that the majority of our customers likely lead hurried and demanding urban lives yet yearn for simpler times, we strive
to convey a more relaxed and casual lifestyle in our catalogs, web sites
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and retail stores. We seek to differentiate Coldwater Creek from other less personal and inattentive retailers through the extensive use of spirited merchandise narratives, thematic and seasonal
photographs, and unique yet practical merchandise displays and layouts. By continuing to consistently provide each customer with prompt, knowledgeable and courteous service, we believe that over the longer term we will be able to attract and retain
a growing base of customers as well as build brand loyalty.
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Offer a High Quality, Differentiated Merchandise Assortment. We endeavor to offer our customers a broad and unique assortment of high quality apparel, footwear, jewelry,
gifts and soft home accessories not commonly offered by competing retailers. So as to maintain our historically high rate of customer retention and cultivate increased sales from our proprietary customer file, we proactively analyze our extensive
customer information database on an ongoing basis to timely identify any changes in the merchandise preferences and buying patterns of our customers and adjust our merchandise offerings accordingly. With our Northcountry and Spirit of the West
merchandise lines, we attempt to appeal to somewhat different spirit and lifestyle orientations within our overall core demographic of customers. By doing so, we believe that we have been, and will continue to be, better able to grow our overall
customer base over the longer term. |
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Advance the Coldwater Creek Brand. In all aspects of our daily operations, from catalog, web site and store design to customer order fulfillment, we strive to make
the Coldwater Creek name synonymous with an extraordinary shopping experience. We seek to promote our brand image by maintaining customer service and order fulfillment performance standards among the highest in the industry as well as by continually
offering unique, high quality merchandise assortments. We also seek product exclusivity arrangements with our vendors, when possible, and emphasize in-house development of our private label offerings. Additionally, we view our retail stores not only
as revenue centers, but as geographically dispersed marketing vehicles by which to build further brand recognition and introduce both current and prospective customers to our catalogs and e-commerce web site. |
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Continued Investment in Technology and Infrastructure. We remain committed to an ongoing program of investment in technology and infrastructure in order to maintain our
high customer service standards, further increase our operating efficiencies, and maximize our overall growth and profit potential. We believe that by regularly investing in technology and infrastructure in advance of customer and sales growth we
are empowered with the operational flexibility necessary to timely capture emerging strategic or market opportunities. |
Our Primary Growth
Initiatives
Our current primary growth initiatives are as follows:
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Further Develop Our Direct Segment. Our Direct Segment encompasses our traditional catalog business and Internet-based, e-commerce business as well as our merchandise
clearance outlet stores. Our long-established catalog business consists of regular targeted mailings of our four catalog titles and merchandise lines, Northcountry, Spirit of the West, Natural Elements and Home, as well as periodic targeted mailings
of specialty and seasonal catalogs such as our Gifts-To-Go holiday catalog. Our catalogs remain our most efficient and effective medium for building Coldwater Creek brand recognition and deploying our various sales growth and merchandising
initiatives. Accordingly, each of our catalogs is carefully designed by our staff to promote our triple-sales channel structure and to encourage each customer to place her order utilizing whichever sales channel she deems most convenient and
pleasurable. Our e-commerce business continues to be our most profitable business as our catalog business provides an existing marketing platform from which to broadly promote our www.coldwatercreek.com web site to existing catalog customers
with minimal incremental
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marketing costs. Our web site features our entire full-priced, first-line merchandise line and also serves as our most effective and efficient promotional vehicle for the disposition of excess
inventory. As approximately one in seven individuals currently patronizing our web site have no previous purchasing history with us and our established web site customers tend to be, on average, our most frequent purchasers, we continue to devote
substantial effort towards attracting both new customers and our existing catalog and retail store customers to this convenient, secure and most cost effective shopping medium. In this regard, we embarked on an important initiative during fiscal
2001 to make our e-commerce business more self-sufficient with respect to new customer prospecting, thereby reducing its historical dependence on our catalogs and stores. Most significantly, we began participating in a net sales commission-based
program whereby numerous popular Internet search engines and consumer and charitable web sites promote the Coldwater Creek brand to their visitors and provide convenient hotlink access to our www.coldwatercreek.com web site. These
“affiliate” web sites, which currently number in excess of 3,100, accounted for $6.3 million in net sales during fiscal 2001, with approximately one-third of the buyers being new to our house file. Our participation in this program
complements our promotional e-mailings to our 1.5 million customer e-mail address database and our advertising in national publications popular with our targeted demographic.
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Further Develop Our Retail Segment. Our Retail Segment encompasses our expanding base of full-line retail stores throughout the United States (“U.S.”). Our
full-line retail store business currently is, and for the foreseeable future is expected to remain, our fastest growing sales channel on a percentage basis. Three years ago, we embarked on a long-term program of establishing full-line retail stores
in major metropolitan areas throughout the U.S. We did so based on our continuing belief that the ability to occasionally “touch and feel” merchandise will remain a coveted aspect of the American woman’s shopping experience. We view
our retail stores not only as revenue centers, but as geographically dispersed marketing vehicles by which to build further brand recognition and introduce both current and prospective customers to our catalogs and e-commerce web site. We opened 19
new full-line retail stores during fiscal 2001, all prior to the holiday shopping season. While doing so, we closely studied the performance of all of our retail stores in pursuit of identifying further refinements to the store model initially
adopted by us in fiscal 1999. Shortly after our fiscal 2001 year-end, we opened our 30th retail store utilizing our refined store model which features a slightly smaller footprint and what we believe to be significant improvements in construction
processes, materials and fixtures, thereby allowing us to reduce our initial capital investment per store by approximately one-fourth. We believe that our revised store model will allow us to ultimately access many attractive middle-market areas in
addition to the 80 major metropolitan markets identified by us in fiscal 1999 as having significant existing Coldwater Creek brand awareness. We currently plan to open 14 additional full-line retail stores during fiscal 2002, all in time for the
holiday shopping season. Further retail store openings will ultimately be influenced primarily by, among other factors, the prevailing economic environment, our available working capital, and if necessary, external financing, and our ability to
timely procure optimum locations within attractive metropolitan malls and lifestyle centers. |
Our Current Marketing Initiatives
Our current marketing initiatives, which are designed to achieve our ongoing goals of attracting new customers and generating
incremental sales from existing customers, are as follows.
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Existing Customer Sales Cultivation. We endeavor to generate continuing and incremental sales from existing customers across all of our sales channels primarily through
targeted catalog and mail solicitations, including e-mail, based on past purchase histories, customer and household demographics and other data. Catalog mailings to our actively buying existing customers generally produce higher response rates and
contribute more profitable sales than
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less responsive catalog mailings to prospective customers. We expand and contract the number of catalogs mailed to existing customers, as well as adjust the timing thereof, based on our
perception of current market conditions. During fiscal year 2001, we mailed a total of 161.0 million catalogs containing 12.5 billion pages of women’s apparel, footwear, jewelry, gifts and home merchandise, with approximately three-quarters of
these catalogs being mailed to customers with a previous purchasing history with us. At March 2, 2002, our proprietary catalog mailing list consisted of 12.5 million customer names, including 2.6 million “active” customers being customers
who have made a purchase from us through any of our sales channels during the preceding twelve months. Within each of our catalogs as well as on our store stationary and shopping bags, we prominently display the address of our
www.coldwatercreek.com e-commerce web site in order to encourage customer migration to and patronizing of this most efficient and cost effective virtual shopping medium. We also prominently disclose within our catalogs the locations of our
expanding base of full-line retail stores. Each of our retail store openings is highly publicized in advance utilizing cover wraps on local catalog mailings, announcement mailings and various local advertising media. Once inside a store, customers
will find kiosks introducing them to our user-friendly, e-commerce web sites. Each computer-equipped kiosk is linked to our web sites thereby encouraging our customers to take a moment and explore our web sites, and if they prefer, actually place
their order over the Internet. We actively encourage the patronage of all of our sales channels as we have found, consistent with our initial belief some time ago, that our multi-channel customers generally tend to be more frequent purchasers,
spending more over time, than our single-channel customers.
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New Customer Sales Prospecting. Traditionally, we have attempted to attract sales from new customers primarily through targeted catalog and mail solicitations to
individuals identified through rented lists, outside marketing information services and our own market segmentation analysis. In this regard, a key element of our overall marketing strategy has also been to pursue an aggressive catalog circulation
strategy when market conditions permit. Approximately one-third of our 161.0 million catalog mailings in fiscal 2001 were to prospective customers having no previous purchasing history with us. We continue to use our core Northcountry catalog as our
primary prospecting catalog as its merchandise selection is competitively priced and includes merchandise types and styles reflective of our other catalogs. In addition, we regularly test market our catalogs to large groups of prospective customers
based on research conducted by third-party marketing information services using criteria we specify. Although prospective catalog mailings generally have lower response rates and generate incremental, yet less profitable, sales in the aggregate than
catalog mailings to our existing customers, we believe that this ongoing marketing investment is critical to growing our base of actively buying customers over the longer term. Reflecting this ongoing investment in future customer growth, our
proprietary mailing list increased to 12.5 million names at March 2, 2002 as compared to 10.8 million and 8.9 million names at March 3, 2001 and February 26, 2000, respectively. |
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Customer Information Database Analysis. We maintain an extensive proprietary database system to continuously accumulate and update detailed information on each of
our customers, including personal information, demographic data, purchasing history by sales channel and their physical proximity to our existing and planned retail stores. The technological capabilities of this system allow our marketing personnel
to timely and efficiently analyze the performance of each of our marketing initiatives, whether it be a catalog mailing, e-mail offer, retail store opening or other solicitation. The system also allows us to segment our customer base according to
many variables and analyze each segment’s performance and buying patterns. We use the resulting information to prospectively adjust the frequency, timing and content of our various solicitations to maximize their productivity. We also utilize
our database to track sales by geographic region thereby identifying metropolitan markets with significant Coldwater Creek brand awareness for potential retail store openings. |
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Customer Presentation. The merchandise presentations within our catalogs and e-commerce web sites feature full color photographs, graphics and artwork designed to appeal to
our targeted customer. Each product display is accompanied by pricing information and a detailed narrative describing the merchandise and its 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 footwear, jewelry and accessories needed to complete an outfit. 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 shopping experience. We were one of the first retailers to present our apparel ‘‘off-figure,’’ leaving the customer to decide if an item
of merchandise is right for her based on the item’s inherent style and not on how the item looks on a model. All catalog and web site pages 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 pages, make merchandise display and placement decisions and monitor the overall look, feel and quality. We have increasingly internalized our photographic work while
continuing to occasionally outsource certain work to independent photographers. These capabilities help us preserve each marketing vehicle’s distinctive character and also allow us greater control over the production schedule, which we believe
reduces lead times and costs. These capabilities also provide us with greater flexibility and creativity in production and in selecting the merchandise to be included. Similarly, our full-line retail stores, despite being predominantly in major
metropolitan settings, are designed to deliver the ambience of the Coldwater Creek brand through the extensive use of soft woods, natural lighting and soothing effects. During fiscal 2002, we will also be increasingly incorporating a
“lifestyle” orientation into our customer presentations whereby we will collectively present ensembles intended to fulfill each of our customers’ daily apparel needs, starting with office-appropriate day wear, transitioning into
late-afternoon or early-evening casual or lounge wear, and finishing with late-evening intimate or sleep wear. |
Our Current Merchandising
Initiatives
Our current merchandising initiatives, aimed at providing a differentiated selection of high quality, casual merchandise
that reflects a uniquely relaxed and casual lifestyle, are as follows:
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Merchandise Lines. Our two largest and most established merchandise lines, Northcountry and Spirit of the West, each feature distinctly different merchandise mixes so as to
appeal to somewhat different spirit and lifestyle orientations within our overall targeted core demographic of women between the ages of 35 and 55 with household annual incomes in excess of $50,000. Northcountry offers a broad selection of generally
lower-priced merchandise, including apparel, footwear, jewelry, art and gift items, reflecting a casual and open lifestyle. In contrast, Spirit of the West offers a broad, more upscale and generally higher priced assortment of women’s apparel,
including dresses and coordinates, blouses, shirts, jackets, pants and skirts, as well as fashionable footwear and distinctive, contemporary jewelry. Spirit of the West apparel is office-appropriate, but can also serve as weekend-wear, and is
typically made of linens, silks and micro-fibers. By featuring two differentiated primary merchandise lines, we believe that we have been, and will continue to be, better able to align our merchandise offerings to the fashion preferences of each
distinct customer segment within our targeted core demographic and more successfully grow our overall customer base over the longer term. We currently offer over 3,400 different items and 23,000 SKUs with most price points ranging from $20 to $200.
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Merchandise Mix. We have significantly evolved and expanded our overall merchandise offering in recent years. In the early 1990s, our overall merchandise offering
focused more heavily on jewelry and accessories than apparel. However, responding to customer inquiries and market research indicating that our customers were increasingly willing to purchase apparel in the styles, of the quality and at the price
points offered by us, we embarked on a program to significantly increase our apparel offerings. By fiscal 1995, our apparel offering represented approximately one-half of our consolidated net sales with jewelry and accessories each representing
approximately one-fourth. Reflecting the 1996 introduction and subsequent growth of our Spirit of the West apparel line, as well as the February 2000 introduction of our Natural Elements apparel line, our overall apparel representation accounted for
approximately three-fourths of our consolidated net sales in fiscal 2001. We believe that the sales contribution of our apparel offerings may continue to increase, although likely at a diminishing rate, for the foreseeable future.
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New Product Introduction. We strive to continually add new merchandise and refine existing merchandise categories in our effort to promote additional purchases from
our customers and to increase our customer retention rates by responding to their changing preferences. We periodically increase our catalog and web site page counts to accommodate the introduction of new, related or similar merchandise and
merchandise categories. Our merchandising personnel continually evaluate the performance of our 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, our merchandise mix is continually refined as new items are introduced and tested and as items which do not meet
our performance standards are replaced. |
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Proprietary Branding. All aspects of our marketing and merchandising strategies are designed to promote the Coldwater Creek brand and make customers feel that they
are not merely making a purchase but buying into a relaxed and casual lifestyle. We continue to develop and increasingly emphasize our proprietary line of private label apparel. We believe that our commitment to offering a line of high quality,
internally developed apparel is an important element in differentiating our merchandise from that of our competitors. Our design and buying teams work closely together with selected vendors to derive product designs, choose materials and color
schemes, and create an overall image consistent with the Coldwater Creek theme. We are generally able to exercise greater control over the merchandise development process with our private label merchandise than with third party-sourced merchandise.
We plan to continue to expand our private label offerings over time and believe that such merchandise will continue to represent a growing percentage of total consolidated net sales in the future. |
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Merchandise Sourcing and Vendor Relationships. In our attempt to offer unique merchandise which we believe is not commonly offered by competing retailers, we
maintain relationships with over 1,200 merchandise vendors and seek exclusive distribution rights, when possible, in order to enhance the uniqueness of the Coldwater Creek brand. Our merchandise acquisition strategy generally emphasizes
relationships with domestic vendors, when possible, which we believe supports our inventory management efforts, provides for greater quality control and results in faster turnaround times for merchandise reorders. Our buyers and quality assurance
inspectors work closely with our suppliers to ensure high standards of merchandise quality. We consider our vendor relations, on average, to be satisfactory. No single vendor accounted for more than 7% of our total merchandise purchases in fiscal
2001, although our top five vendors collectively accounted for approximately 21% of our total merchandise purchases. We do not have any long-term purchase commitments with any of our vendors. |
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Clearance Item Strategies. We employ several strategies to expeditiously clear slow moving, discontinued and discounted merchandise. Since fiscal 1999, our most effective
and efficient
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merchandise clearance vehicle has been our www.coldwatercreek.com e-commerce web site. To a lesser extent, we utilize our nine outlet stores, sale catalogs and flyers distributed in
shipped merchandise, and product inclusion within our other catalogs.
Our Customer Service and Order Fulfillment Operations
We believe that our focus on providing extraordinary customer service and maintaining excellent customer relations is critical to our longer term
ability to expand our customer base and build brand recognition. Our focus on customer service is evident at every level of our operations, including our customer service call center operations, our e-commerce web site operations, our order entry
and fulfillment processes, our employee training programs and our merchandise return policy. In addition, our continuing infrastructure investments, such as our investments in telephone and web site technologies and management information systems,
have enabled us to continue to provide high levels of customer service and adhere to strict operating standards. Our efforts, in this regard, are described in greater detail below:
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Sales Agent/Customer Service Representative and Store Associate Training. Our vision and goals emphasizing ‘‘customers first’’ are well
communicated throughout the entire organization. Through our permanent and temporary employee orientation and training programs, we emphasize the critical importance of providing each and every customer with a consistently high level of prompt,
knowledgeable and personal service. So as to maintain this customer service focus foremost in each employee’s mind and to illustrate exceptional service provided by our personnel, we prominently post customer comments and operating statistics
throughout the common areas of our facilities. When possible, it is our philosophy to empower line employees to make customer service decisions. As such, we do not maintain a separate customer service department. Instead, each sales agent/customer
service representative or store associate receives training to allow him or her to handle customer complaints and inquiries, ensuring that a customer does not need to be delayed, transferred or placed on hold. We encourage our sales agents/customer
service representatives and store associates to seek out creative solutions to customer problems and concerns and to remain responsive to each customer’s needs. All of our newly-hired sales agents/customer service representatives and store
associates participate in extensive training programs over several days. During these training programs, each trainee receives extensive insight into our Coldwater Creek customer service culture and philosophies, a hands-on orientation to our
merchandise and extensive computer system training. Depending on the particular customer service position to be filled, each trainee additionally receives appropriately tailored training in order processing, sales floor layout, presentation and
management, etc. Newly hired supervisors and managers receive additional, hands-on training, as appropriate, at our corporate headquarters, customer service call centers or retail stores. All of our sales agents/customer service representatives and
store associates are subsequently monitored to review performance and are retrained periodically on an as-needed basis. We provide opportunity for advancement for each employee dependent upon his or her skill level, personal effort and future
potential. |
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Customer Service Call Centers. We offer prompt, knowledgeable and courteous order entry services through the use of our toll-free telephone numbers and Internet web
sites which may be accessed 21 hours a day, seven days a week, to place orders, request a catalog or make merchandise, catalog, web site or store location inquiries. We currently operate customer service call centers in Mineral Wells, West Virginia
and Coeur d’Alene, Idaho. Backup systems and rerouting capabilities allow our Mineral Wells and Coeur d’Alene customer service call centers to individually service our entire inbound 1-800 traffic if required by a system failure at either
center. Our customer service call centers are currently equipped with over 500 sales agent stations, approximately one-third in the Mineral Wells center and approximately two-thirds in the Coeur d’Alene center. So as to provide the fastest
possible telephone answer speeds,
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customer calls are automatically routed between the two customer service call centers based on which center has the most capacity at the time of the call. In the unlikely event that both centers
were to reach capacity, an all-hands bell sounds throughout our administrative facilities alerting our personnel, including middle and senior level personnel, to answer any waiting incoming calls. During fiscal 2001, our two call centers
collectively handled approximately 4.5 million calls, including peak volume of more than 36,000 calls in a single day, while achieving an average telephone answer speed of approximately ten seconds and an abandoned call rate of 1.7%.
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Customer Order Entry. We use an integrated on-line transaction processing system for all Direct Segment order entry and fulfillment tasks. These tasks include the
inputting of telephone, Internet and mail orders, credit authorization, order processing and distribution. Our sales agents/customer service representatives process orders directly into the system which provides, among other things, customer history
information, merchandise availability information, merchandise specifications, available substitutes and accessories, expected ship date and order number. Our sales agents/customer service representatives are trained to be knowledgeable in key
merchandise specifications and features and they have ready access to physical samples of the entire merchandise line which enables our agents to readily answer detailed merchandise inquiries from customers. We complete telephone orders in
approximately four minutes, on average, depending upon the nature of the order and whether the customer is a first-time buyer or a repeat customer. Customers can pay with a major credit card, debit card, check or money order. All credit charges are
pre-authorized prior to shipping the order and credit authorization occurs coincident with order processing. During fiscal 2001, Direct Segment customer orders were received as follows: 65% by telephone, 30% by Internet and 5% by mail or facsimile.
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Customer Order Fulfillment. We believe that delivery of ordered merchandise promptly and in good condition promotes customer loyalty and repeat buying. All of our Direct
Segment’s customer order fulfillment functions, as well as all of our Retail Segment’s inventory servicing requirements, are now conducted out of our leased 600,000 square foot distribution center in Mineral Wells, West Virginia, utilizing
semi-automated picking, packing and shipping systems. Customer orders are processed and shipped in continuous waves throughout the day during normal operations with special attention being given to expedited orders. Once a customer’s order has
been fully entered by our sales agents/customer service representatives into the aforementioned on-line transaction processing system, the order is printed and all necessary distribution and shipping documents, including customs forms for
international orders, are attached. Thereafter, the order is prepared and packaged at one of our many packing stations. The order is bar-coded and scanned with the merchandise, quantity and ship date entered automatically into the customer order
file for subsequent access by our sales agents/customer service representatives. Gift orders are gift wrapped with accompanying handwritten notes as per the customer’s instructions. During fiscal 2001, approximately three-quarters of our
shipments were sent via first class and priority mail through the U.S. Postal Service with the balance being sent via other carriers. Typically, each order is charged a shipping and handling fee which is based upon the total order price. Our
customers normally receive their items within three to five business days after shipping, although customers may request expedited delivery for an extra charge. |
During fiscal 2001, we shipped over five million packages with approximately 92% of in-stock orders being shipped within one shipping day of order processing. Despite this volume, we achieved a
distribution error rate of only 0.13%. We adjust our employee headcount, processing system and distribution hours to meet variable demand levels, particularly during the peak November/December holiday selling season. To meet increased order volume,
we utilize temporary employees and plan to continue this practice in the future. Our consolidated shipping capacity is approximately 70,000 packages per day.
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Return Policy. We have an unconditional return policy for all of our merchandise under which a customer can return an item for any reason at any time through any
channel. We believe that our return policy builds customer loyalty and helps overcome any reluctance a customer may have to purchasing merchandise from catalogs or via the Internet. |
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Investment in Items of a Capital Nature. Consistent with our ongoing commitment to optimizing the level of service provided to our customers, the efficiency and
effectiveness of our operations, the continued deployment of our triple-sales channel marketing strategy and our future sales growth and profit potential, we invested $77.8 million in items of a capital nature during the last three fiscal years.
These capital expenditures primarily consisted of leasehold improvements for our growing base of full-line, metropolitan retail stores and technology infrastructure principally related to expanded and upgraded distribution and customer service
facilities, expanded and upgraded telecommunication and management information systems and development and implementation of, and technological enhancements to, our e-commerce web sites. The single largest investment during the above period
consisted of various technologies and material handling equipment for our 600,000 square foot East Coast Operations Center in Mineral Wells, West Virginia which we began leasing in July 1999. Our East Coast Operations Center primarily consists of a
distribution center and a customer service call center. |
Our Technology
Our primary hardware and software systems are as follows:
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Our Mainframe Computer Platform. Our mainframe computer platforms are the Hewlett Packard 3000 series (“HP/3000”) and the IBM AS 400 series.
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Our Telecommunications Platform. We maintain Northern Telecom telephone switches at each of our customer service call centers which provides us with a scaleable platform to
accommodate future growth. Our system is designed to reduce the risk of telephone delays and capacity constraints. Our internal private network is converged to allow the simultaneous delivery of data, video or voice over the same network to our two
geographically distant customer service call centers. This capability allows us to operate our two customer service call centers as a single “virtual customer service call center” as calls coming into one location are automatically routed
to the other location if the load is too high. In the event either customer service call center is unable to receive incoming calls due to factors such as natural disasters, power failures or system problems, calls are routed to the other customer
service call center in a process which is transparent to the customer. In the unlikely event that both of our call centers were to become inaccessible, or either or both of our call centers were unable to handle incoming call demand, our corporate
headquarters facility in Sandpoint, Idaho is also designed and configured to act as a backup call center. |
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Our Primary Business Software Platform. We have adopted a widely used catalog order processing software system (“Ecometry”) as the management information and
customer service cornerstones of our business operation. This software system, which is platformed on our HP/3000, is used by us, as it is by many leading companies in the direct marketing industry, for many order entry and fulfillment tasks, the
inputting of telephone, Internet and mail orders, credit authorization, order processing, distribution and shipment. Our system is designed to reduce the risk of lost data and delays in the order entry or order fulfillment processes. The system is
fully mirrored on a real-time basis such that customer orders as well as all other operational data are entered simultaneously in each of our two customer service call centers. We believe this redundancy reduces the risk of interruption of customer
service or other critical operations. |
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Our Marketing Database Software Platform. We maintain a marketing database software system which allows customer data to be accumulated, searched and segmented according to
different variables and allows application of demographic overlays. This software system is fully compatible and interfaces with our Ecometry business platform to perform monthly batch downloads of ordering information into the database.
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Our Merchandising/Inventory Planning Platform. We utilize a merchandising, planning and control software system (“MPCS”) that enables us to perform detailed
analysis of the historical performance of individual merchandise items by color and size, product category and offering vehicle. This capability allows us to realize increased accuracy in our product performance forecasting, and as such, better
manage our inventory, increase order fill rates and decrease product overstocks. |
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Our Warehouse Management Hardware and Software Platform. Customer order routing, store fulfillment and certain other warehouse management functions are performed by a
software system (“PKMS”) from Manhatten and Associates. This system runs on an IBM AS/400. |
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Our E-Commerce Hardware Platform. We have installed physically and geographically diverse and redundant web server farms to serve our growing e-commerce business. These web
server farms are based on the NT operating system and are tightly integrated into our HP/3000. We have also installed network and server load balancing devices from F5 that allow customer orders received on our e-commerce web sites to be routed to
the least busy server farm and the least busy server in that farm. |
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Our Retail Platform. We utilize a client/server platform (“Trade Winds”) as the point-of-sale system for our growing base of full-line retail stores. Trade Winds
is based on the Windows NT operating system and utilizes SQL database schema. The system enables each of our stores to operate independent of our corporate mainframe computer platform thereby helping to ensure data recovery and redundancy. Despite
such autonomy, the system is fully integrated into and interfaces with our Ecometry business platform thereby accommodating daily batch downloads of customer sales information into our corporate database. |
During fiscal 2001, we installed a dedicated retail inventory planning software (“Island Pacific”) that enable us to better perform detailed analysis of
the historical performance of store merchandise items by store as well as by item attribute. This capability should allow us to realize increased accuracy in our product performance forecasting, and as such, better manage our retail inventory,
reduce product overstocks and backorders, and realize additional distribution efficiencies.
Employees
As of March 2, 2002, we had 1,304 full-time employees and 1,107 part-time or temporary employees. During the peak retail selling season, which for us includes the months of November and
December, we utilize a substantial number of temporary employees, many of whom return year after year. None of our employees currently are covered by collective bargaining agreements. We consider our employee relations to be satisfactory.
Trademarks
Coldwater Creek® and Spirit of the West® are
registered trademarks of the Company. We believe that our registered and common law trademarks have significant value and that our Coldwater Creek® and Spirit of the West® trademarks are instrumental to our ability to create and sustain demand for and
market our merchandise.
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Risk Factors
Continuing Economic Weakness and Uncertainty
Our business, financial condition, results of operations and cash flows were
negatively impacted in fiscal 2001 by soft consumer demand for women’s apparel stemming from generally weak economic conditions. Although we have experienced a modest improvement in consumer demand in calendar 2002 our business has continued to
be negatively impacted by the overall sluggishness of the U.S. economy, which has been evidenced in our business by lower-than-expected customer response rates and average order dollars, as well as lower-than-expected customer traffic in our retail
stores. If demand for our products is less than anticipated, the mix of our sales will be weighted more toward clearance merchandise than to full price merchandise, which would have a negative impact on our gross margins. We currently do not
anticipate realizing any significant and sustained improvement in consumer demand, particularly for full-priced, first-line merchandise, prior to early fall of 2002, if then. In response to lower demand, we have maintained conservative inventory
levels, which we believe will make us less vulnerable to sales shortfalls. However, low inventory levels also carry the risk that, if demand is stronger than we anticipate, we will be forced to backorder merchandise, which may result in lost sales
and low customer satisfaction. Also, during fiscal 2002 we have implemented various cost control measures to reduce operating expenses, including general salary freezes, reductions in work force and the closure of our Sandpoint, Idaho distribution
center. There can be no assurance that these cost reduction measures will have a significant positive impact on overall expense structure. Moreover, our cost-cutting measures may have a negative effect on customer service and employee morale. Should
the U.S. economy not recover in a timely manner, or should we not sufficiently participate in any such recovery, our overall business, financial condition, results of operations and cash flows would be materially adversely impacted. Further, lower
than anticipated sales or higher than anticipated costs could adversely affect our liquidity (including compliance with our debt covenants) and, therefore, the pace of our retail expansion.
Our Dependence on Key Personnel
Our future success depends largely on the
efforts of our executive management team, which consists of Georgia Shonk-Simmons, President and Chief Executive Officer; Tom Scott, Executive Vice-President and Chief Operations Officer; and Dennis Pence, Chairman, and the loss of any of these
individuals could have a material adverse effect on our business. The position of Executive Vice-President and Chief Financial Officer is currently vacant. In the interim, Dennis Pence has directly supervised the financial and accounting functions
of the Company. Filling the position of Chief Financial Officer in a timely manner and continuing to attract and retain well-qualified key personnel is crucial to our successful continued operations and expansion. If we are unable to fill the
position of Chief Financial Officer for an extended period, it could negatively impact our ability to execute upon our expansion plans, and could have adverse consequences on our financial accounting, internal controls and reporting functions, as
well as cause disruptions in workflow and stresses upon our remaining personnel. In addition, our location may make it more difficult to replace key employees who leave us, or to add the employees required to manage our further growth. Further, if
we experience vacancies in other key roles, it could have a material adverse impact upon of our ability to properly conduct our business operations and pursue our growth initiatives, and as a result, could have a material adverse impact on our
overall business, financial condition, results of operations and cash flows.
Risks Associated with Our Relatively New Retail Store
Business and Its Continued Expansion
During fiscal years
1999, 2000 and 2001, we opened two, six and nineteen new full-line retail stores, respectively. We currently plan to open fourteen new stores during fiscal 2002, all in time for the November/December holiday shopping season. Opening each new store
involves several steps, including site selection, lease negotiation and build-out, and each of these steps presents new risks.
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Competition remains high for premium retail space in many areas and we may encounter difficulty in identifying acceptable sites for our stores, which could delay our expansion. We are also
subject to possible delays in negotiating leases and to construction delays and cost overruns associated with the build-out of our stores.
Additionally, our expansion continues to add significant costs, not only with respect to leasehold costs and capital improvements, but also with respect to management and administrative resources, which must keep pace with our expansion. To
be successful, we must therefore leverage our new cost structure with sufficient incremental sales. There can be no assurance that our retail expansion will be successful or that we will be able to address the risks and challenges associated with
this relatively new and rapidly expanding business. As such, any investment in our Company must consider the fact that our efforts in this relatively new business remain largely unproven to date, and that our retail model continues to evolve. We
recently refined our store model to incorporate a slightly smaller footprint and what we believe to be significant improvements in construction processes, materials and fixtures, and our retail model may undergo further refinements as we gain
experience owning and operating more stores. Additionally, you should consider that, although certain members of our management team have brought significant retail store experience to our Company, as a Company we have relatively limited experience
with planning, opening and managing geographically dispersed retail stores, and in designing, implementing and maintaining the necessary operational, administrative and financial infrastructure, human resources and internal controls. Any
miscalculations in our retail strategies, shortcomings in our planning, implementation, management and control, or our inability to sufficiently leverage incremental costs, as in fiscal 2001, will likely have a material adverse impact on our overall
business, financial condition, results of operations and cash flows.
Risks Associated with Our Catalog Sales Business
Our overall success as a Company for the foreseeable future will remain dependent on the success of our well-established catalog
sales business. We also continue to primarily rely on our catalogs to promote our www.coldwatercreek.com e-commerce web site and full-line retail stores. We believe that the future success of our catalog sales business will continue to be
predicated upon the effective targeting of our catalog mailings, a high volume of prospect catalog mailings, when market conditions permit, appropriate shifts in our merchandise mix and our ability to achieve adequate response rates to our mailings.
Catalog mailings entail substantial paper, postage, merchandise acquisition and human resource costs, including costs associated with catalog development, production and circulation and increased inventories, virtually all of which are incurred
prior to the mailing of each catalog. As a result, we are not able to adjust the costs being incurred in connection with a particular catalog mailing to reflect the actual subsequent performance of the catalog. If, for any reason, we were to
experience a significant shortfall in anticipated net sales from a particular catalog mailing, as with many of our fiscal 2001 mailings, our overall business, financial condition, results of operations and cash flows would likely be materially
adversely affected. In addition, response rates to our catalog mailings and, as a result, the net sales generated by each catalog mailing, can be affected, by factors beyond our control such as weak economic conditions and uncertainty and
unseasonable weather in key demographic markets. Other influencing factors may include, but not be limited to, unpredictable and changing consumer preferences, the timing and mix of catalog mailings and changes in our merchandise mix. Any one or
more of these factors could, as they did in fiscal 2001, result in lower-than-expected full-priced, first-line sales and higher-than-expected clearance sales at substantially reduced margins. These factors could also result in increased merchandise
returns, slower turning or obsolete inventories, inventory write-downs and working capital constraints. Any performance shortcomings experienced by our catalog business would likely have a material adverse effect on our overall business, financial
condition, results of operations and cash flows.
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Risks Associated with Our Growth Strategy
Our growth strategy primarily includes the following components: (i) further development of our catalog, e-commerce and retail store businesses, (ii) the possible introduction of new
merchandise lines, (iii) expansion of our existing merchandise lines, and (iv) increased catalog/e-mail circulation and response rates. Our growth strategy involves various risks, including a reliance on a high degree of prospect mailings, when
market conditions permit, which may lead to less predictable response rates. Any failure on our part to successfully implement any or all of our growth strategies would likely have a material adverse effect on our financial condition, results of
operations and cash flows. We believe our past growth has been attributable in large part to our success in meeting the merchandise, timing and service demands of an expanding customer base with certain demographic characteristics. There can be no
assurance that we will be able to continually identify and offer new merchandise that appeals to our customer base or that the introduction of new merchandise categories or new marketing or distribution strategies, such as the sale of our
merchandise in retail stores or through new catalog titles, will be successful or profitable, or that any such efforts will achieve sustained acceptance in the marketplace. Any substantial inability on our part to further develop and grow our
catalog, e-commerce and retail store businesses, to maintain our historical average order size and response rates, and to leverage the success of existing catalog titles to new merchandise lines, catalogs, web sites and retail stores would likely
have a material adverse effect on our financial condition, results of operations and cash flows.
We initially identified through the use
of our Direct Channel’s extensive customer database a total of 80 potential “metropolitan” retail store sites in 29 states where a prerequisite level of Coldwater Creek brand awareness exists. Recently, we revised our store model to
reduce our initial capital investment per store by approximately one-fourth. We believe that our revised store model will allow us to ultimately access many attractive middle-market areas in addition to the 80 major metropolitan markets, although
there can be no assurance of such. In any case, we remain fully committed at this time to further growing our Retail Channel. Our current schedule contemplates the opening of approximately 14 additional full-line “metropolitan” retail
stores during fiscal year 2002. We have had limited experience operating geographically dispersed retail stores. In addition, retail store operations entail substantial fixed costs, including costs associated with real estate leases, inventory
maintenance, staffing, leasehold improvements and fixture additions. There can be no assurance that these stores will be opened, will be opened in a timely manner, or, if opened, that these stores will be profitable. Failure to successfully
implement this store-based strategy, or the implementation of this strategy during a prolonged economic downturn, could result in significant write-offs of inventory and fixtures and would likely have a material adverse effect on our financial
condition, results of operations and cash flows. We 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. There can be no assurance that additional debt or equity capital will be available to us to meet these needs on acceptable terms, or at all. In addition, various elements of our growth strategies, including our aggressive
catalog-mailing program, our aggressive e-commerce growth strategy, our plans to introduce new merchandise and our plans to broaden existing merchandise lines, may require additional capital. There can be no assurance that funds will be available to
us on terms satisfactory to us when needed.
Ability to Manage Expanding Operations
Our growth has resulted in an increased demand on our managerial, operational and administrative resources. In order to manage currently anticipated levels of
future demand, we will be required to continue, among other things, to (i) improve and integrate our management information systems and controls, including inventory management, (ii) adjust our distribution capabilities and (iii) attract and
retain qualified personnel, including middle and upper management. In addition, there
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can be no assurance that any upgrades, improvements and expansions in our overall infrastructure and operations will increase the productivity or efficiency of our operations or that the same
will be adequate to meet our present or future needs. Continued growth could result in a strain on our management, financial, merchandising, marketing, distribution and other resources and we may experience operating difficulties, including
difficulties in training and managing an increasing number of employees, difficulties in obtaining sufficient materials and manufacturing capacity from vendors to produce our merchandise, problems in upgrading our management information systems and
delays in production and shipments. There can be no assurance that we will be able to manage future growth effectively and any failure to manage growth effectively could have a material adverse effect on our financial condition, results of
operations and cash flows.
Merchandise Returns
As part of our customer service commitment, we maintain a liberal merchandise return policy that allows customers to return any merchandise, virtually at any time and for any reason, and
regardless of merchantable condition. We make allowances in our financial statements for anticipated merchandise returns based on historical return rates and our future expectations. While we believe our allowances are adequate, there can be no
assurance that actual merchandise returns will not exceed our allowances. In addition, there can be no assurance that the introduction of new merchandise through our sales channels, changes in the merchandise mix, consumer confidence or other
factors will not cause actual returns to exceed return allowances. Any significant increase in merchandise returns or merchandise returns that exceed our allowances could materially adversely affect our financial condition, results of operations and
cash flows.
Quarterly Results of Operations and Seasonal Influences
As with many apparel retailers, our net sales, operating results, liquidity and cash flows have fluctuated, and will continue to fluctuate, on a quarterly basis, as well as an annual basis, as a
result of a number of factors, including, but not limited to, the following: the composition, magnitude and timing of our various merchandise offerings, including our recognition of related sales and costs; the number and timing of our full-line
retail store openings; customer responsiveness, including the impact of economic and weather-related influences; merchandise return rates, including the impact of actual or perceived service and quality issues; market price fluctuations in critical
materials and services, including paper, production, postage and telecommunications costs; the timing of merchandise receiving and shipping, including any delays resulting from adverse weather conditions or national security measures; and
chronological shifts in the timing of important holiday selling seasons, including Valentine’s Day, Easter, Mother’s Day, and Christmas. We alter the composition, magnitude and timing of our merchandise offerings based upon our then
understanding of prevailing consumer demand, preferences and trends. The timing of our merchandise offerings may be further impacted by, among other factors, the performance of various third parties to which we are dependent and the day of the week
on which certain important holidays fall. Additionally, the net sales we realize from a particular merchandise offering may transcend fiscal quarters and years and the amount and pattern of the sales realization may differ from that realized by a
similar merchandise offering in a prior fiscal quarter or year. The majority of net sales from a merchandise offering generally is realized within the first several weeks after its introduction with an expected significant decline in customer orders
thereafter.
Particularly notable is our continuing material dependency on sales and profits from the November and December holiday
shopping season. In anticipation of traditionally increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce.
Additionally, as gift items and accessories are more prominently represented in our November and December holiday season merchandise offerings, we typically expect, absent offsetting factors, to realize higher consolidated gross margins in
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the second half of our fiscal year. If, for any reason, we were to realize significantly lower-than-expected sales or profits during the November and December holiday selling season, as we did
during fiscal 2001, our overall financial condition, results of operations, including related gross margins, and cash flows for the entire fiscal year will be materially adversely affected.
Changing Consumer Preferences
Although we believe that our business has
historically benefited from increased consumer interest in merchandise that reflects a casual and relaxed lifestyle, there can be no assurance that this belief is correct or that, if correct, such trend will continue. Any change in this trend could
have a material adverse effect on our overall financial condition, results of operations and cash flows. In addition, although we believe that the sale of our merchandise historically has not been primarily driven by fashion trends, all of our
merchandise is subject to changing consumer preferences. A shift in consumer preferences away from the merchandise that we offer could have a material adverse effect on our overall financial condition, results of operations and cash flows. Our
future success depends largely on our ability to anticipate and respond to changes in consumer preferences and there can be no assurance that we will respond in a timely or commercially appropriate manner to such changes. Failure to anticipate and
respond to changing consumer preferences could lead to, among other things, lower sales of our products, significant markdowns or write-offs of inventory, increased merchandise returns, and lower margins, which would likely have a material adverse
effect on our overall financial condition, results of operations and cash flows.
Competition
The markets for our merchandise are highly competitive, and the perceived growth opportunities within these markets has encouraged the entry of many new
competitors as well as increased competition from established companies. Although we believe that we do not compete directly with any single company with respect to our entire range of merchandise, within each merchandise category we have
significant competitors and may face additional competition from new entrants or existing competitors who focus on market segments currently served by us. These domestic, as well as international, competitors range from large multi-sales channel
retailers with catalog, e-commerce and retail store operations and more substantial financial, marketing and other resources than us to small single-sales channel catalog, e-commerce and retail store companies. With respect to the women’s
apparel merchandise offered by us, we are in direct competition with certain more established catalog, e-commerce and retail store operations, many with substantially greater experience in selling women’s apparel merchandise. Some of these
competitors seek to attract customers that share one or more of the demographic characteristics common to both our existing and prospective customers. In addition, because we continue to source a significant percentage of our merchandise from
suppliers and manufacturers located in the United States and Canada, where labor and production costs, on average, tend to be higher, there can be no assurance that our merchandise will or can be competitively priced when compared with merchandise
offered by competing retailers. While we believe that we have been able to compete successfully because of our brand recognition, the exclusivity and broad range and quality of our merchandise, including our private label merchandise offerings, and
our superior customer service policies, there can be no assurance that we will be able to compete successfully in the future. Any failure on our part to sufficiently compete in the future would likely have a material adverse effect on our overall
customer retention, customer prospecting, future sales growth and market share, and as a consequence, could adversely affect our overall financial condition, results of operations and cash flows.
Risks Affecting Our Ability to Fulfill Orders
Our ability to provide
superior customer service, effectively and efficiently target our merchandise offerings, and fulfill customer orders depends, to a large degree, on the efficient and uninterrupted
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operation of our two customer service call centers, distribution center, management information systems and on the timely performance of third parties such as shipping companies and the U.S.
Postal and Customs Services. Although we believe we have built redundancy into our telephone, Internet and management information systems and maintain relationships with several different shipping companies, any material disruption or slowdown in
our order processing or fulfillment resulting from the recently increased security measures implemented by U.S. Customs, or by strikes or labor disputes, telephone or Internet down times, electrical outages, mechanical problems, human error or
accidents, fire, natural disasters or comparable events could cause delays in our ability to receive and distribute orders and may cause orders to be lost or to be shipped or delivered late. As a result, customers may cancel or refuse to receive
orders due to late shipments that would result in a reduction of net sales and could result in increased administrative and shipping costs. Excess order volume could result in telephone or Internet answer delays and delays in placing orders. There
can be no assurance that volumes will not exceed present telephone or Internet system capacities and that, as a result, answer delays and delays in placing orders will not occur. Additionally, merchandise is stored and shipped for all or our
channels from our sole distribution center in Parkersburg, West Virginia. We believe that our success to date has been based in part on our reputation for superior customer service, and any impairment of our customer service reputation could have a
material adverse effect on our overall business. Any material disruption in or destruction of part or all of our call centers or distribution center caused by strike, fire or natural disaster would likely have a material adverse effect on our
ability to provide the timely delivery of merchandise and on our overall financial condition, results of operations and cash flows.
Risks Associated with System Disruptions
Our ability to attract and retain users and customers to our e-commerce web
sites depends on the performance, reliability and availability of our web sites and network infrastructure. We have periodically experienced service interruptions caused by temporary problems in our own systems or software or in the systems or
software of third parties. While we continue to implement procedures to improve the reliability of our systems, these interruptions may continue to occur from time to time. Third parties may not be liable to us for any damage or loss they may cause
to our business, and we may be unable to seek reimbursement from them for losses that they cause. Our users also depend on third party Internet service providers for access to our web sites. These entities have experienced significant outages in the
past, and could experience outages, delays and other difficulties due to system failures in the future that are unrelated to our systems, but which could nonetheless adversely affect our business.
Potential Continuing Business Interruptions Due To Increased Security Measures In Response To Terrorism.
In response to recent terrorist attacks and continuing threats thereof, many of the primary service components underlying the U.S. system of free and open
commerce have been adversely impacted and fundamentally altered, resulting in periodic service delays and stoppages and certain incremental operating costs. These service components would include, among others, transportation, freight, mail, U.S.
Customs, and financial services. As our business remains dependent upon the free flow of products and services through the channels of commerce, further service delays or stoppages or incremental operating costs, could have a material adverse effect
on our overall business, financial condition, results of operations and cash flows.
Potential Business-Related Liabilities and
Expenses
As a result of doing business through our catalogs, e-commerce web sites and retail stores, we may be exposed to legal risks
and uncertainties, including potential liabilities to consumers of such
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products. These legal risks and uncertainties may include, among others, product liability or other tort claims relating to goods; claims of consumer fraud and false or deceptive advertising or
sales practices; breach of contract claims relating to merchant transactions; and claims relating to any failure to appropriately collect and remit sales or other taxes arising from electronic commerce transactions. Even to the extent that such
claims do not result in material liability, investigating and defending such claims could have a material adverse effect on our overall business, financial condition, results of operations and cash flows.
Possible Volatility of Our Stock Price
The
market price for our common stock has been and will continue to be significantly affected by, among other factors, our quarterly operating results, changes in any earnings estimates publicly announced by us or by analysts, announcements of new
merchandise offerings by us or our competitors, seasonal effects on sales and various factors affecting the economy in general. In addition, the Nasdaq National Market has experienced a high level of price and volume volatility and market prices for
the stock of many companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies.