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INDEX TO FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission File Number 0-21915

COLDWATER CREEK INC.
(Exact name of registrant as specified in its charter)

        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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

INDEX TO FORM 10-Q

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PART I.    FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

COLDWATER CREEK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except for share data)

ASSETS

The accompanying notes are an integral part of these financial statements.

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COLDWATER CREEK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except for per share data)

The accompanying notes are an integral part of these financial statements.

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COLDWATER CREEK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

The accompanying notes are an integral part of these financial statements.

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COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.     Nature of Business and Organizational Structure

        Coldwater Creek Inc., together with its wholly-owned subsidiaries (the "Company"), a Delaware corporation headquartered in Sandpoint, Idaho, is a multi-channel specialty retailer of women's apparel, accessories, jewelry, and gift items. The Company operates in two reportable operating segments: Retail and Direct. The Company's Retail Segment consists of its full-line retail stores, resort stores and outlet stores. The Company's Direct Segment consists of its catalog and Internet-based e-commerce businesses.

        The Company has three wholly-owned subsidiaries. Two of these subsidiaries currently have no substantive assets, liabilities, revenues or expenses. The third subsidiary, Aspenwood Advertising, Inc., produces, designs and distributes catalogs and other advertising materials used in Coldwater Creek's business.

2.     Significant Accounting Policies

Principals of Consolidation

        The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.

Fiscal Periods

        References to a fiscal year refer to the calendar year in which such fiscal year commences. On December 16, 2002, the Company's board of directors approved a change in the Company's fiscal year end from the Saturday nearest February 28^th to the Saturday nearest January 31^st, effective in 2003. The Company made this decision to align its reporting schedule with the majority of other national retail companies.

        The Company's floating fiscal year-end typically results in 13-week fiscal quarters and a 52-week fiscal year, but will occasionally give rise to an additional week resulting in a 14-week fiscal fourth quarter and a 53-week fiscal year. References to three-month periods, or fiscal quarters, refer to the 13 weeks ended on the date indicated.

Preparation of Interim Consolidated Financial Statements

        The Company's interim consolidated financial statements have been prepared by the management of Coldwater Creek pursuant to the rules and regulations of the Securities and Exchange Commission. These consolidated financial statements have not been audited. In the opinion of management, these consolidated financial statements contain all adjustments necessary to fairly present the Company's consolidated financial position, results of operations and cash flows for the periods presented. The adjustments consist solely of normal recurring adjustments. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These statements should be read in conjunction with the audited consolidated financial statements, and related notes, included in the Company's most recent Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

        The Company's consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the financial position, results of operations or cash flows to be realized in future periods.

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        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and timing of the recognition of revenue and expenses, the recognition of reported amounts and classification of assets and liabilities, and the disclosure of contingent assets and liabilities. Examples of these estimates and assumptions are embodied in our sales returns accrual and our inventory obsolescence calculation. These estimates and assumptions are based on the Company's historical results as well as management's future expectations. The Company's actual results could vary from its estimates and assumptions.

Reclassifications

        Certain amounts in the consolidated financial statements for the prior fiscal year's interim period have been reclassified to be consistent with the current fiscal year's interim presentation.

Inventories

        Inventories primarily consist of merchandise purchased for resale. Inventory in the Company's distribution center is stated at the lower of first-in, first-out cost or market. Inventory in the Company's full-line retail stores, resort stores and outlet stores is stated at the lower of weighted average cost or market.

Prepaid and Deferred Catalog Costs

        Catalog costs include all direct costs associated with the development, production and circulation of direct mail catalogs and are accumulated as prepaid catalog costs until such time as the related catalog is mailed. Once mailed, these costs are reclassified as deferred catalog costs and are amortized into selling, general and administrative expenses over the expected sales realization cycle, typically several weeks.

Store Pre-Opening Costs

        The Company incurs certain preparation and training costs prior to the opening of a retail store. These pre-opening costs are expensed as incurred and are included in selling, general and administrative expenses. Pre-opening costs were approximately $0.4 million and $0.1 million during the first quarters of fiscal 2004 and fiscal 2003, respectively.

List rental income (expense)

        Customer list rental income is netted against selling, general and administrative expenses. An accrual for rental income and rental expense, as applicable, is established at the time the related catalog is mailed to the names contained in the rented lists. The amounts of income netted against selling, general and administrative expense are as follows:

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Interest, net, and other

        Interest, net, and other consists of the following:

Net Income Per Share

        Basic earnings per share ("EPS") is calculated by dividing income applicable to common shareholders by the weighted average number of shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), outstanding for the year. Diluted EPS reflects the potential dilution that could occur under the treasury stock method if potentially dilutive securities, such as stock options, were exercised or converted into Common Stock. Should the Company incur a net loss, potentially dilutive securities are excluded from the calculation of diluted EPS as they would be antidilutive.

        On December 19, 2002, and on August 4, 2003, the Company's Board of Directors declared two 50% stock dividends having the cumulative effect of a 2.25-for-1 stock split on its issued Common Stock. The Common Stock outstanding, retained earnings and net income per share amounts for all periods presented reflect these stock dividends.

Accounting for Stock Based Compensation

        As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") the Company has retained the compensation measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25"), and its related interpretations, for stock options. Under APB No. 25, compensation expense is recognized based upon the difference, if any, at the measurement date between the market value of the stock and the option exercise price. The measurement date is the date at which both the number of options and the exercise price for each option are known.

        The following table presents a reconciliation of the Company's actual net income to its pro forma net income had compensation expense for the Company's 1996 Stock Option/Stock Issuance Plan been

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determined using the compensation measurement principles of SFAS No. 123 (in thousands except for per share data):

        The above effects of applying SFAS No. 123 are not indicative of future amounts. Additional awards may be made in future years.

        In calculating the preceding, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions:

Recently Adopted Accounting Standards

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. In fiscal 2002, the Company adopted the disclosure requirements of SFAS No. 148. However, at this time, the Company does not intend to change to the fair value based method of accounting for stock-based employee compensation.

        In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). In December 2003, the FASB issued a revised Interpretation No. 46 ("FIN 46R"). The primary objectives of FIN 46R are to provide guidance on the identification of, and financial reporting for, entities for which control is achieved through means other than through voting rights; such entities are known as variable-interest entities ("VIEs"). The Company currently has no VIEs and the adoption of FIN 46R had no impact.

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3.     Receivables

        Receivables consist of the following:

        The Company evaluates the credit risk associated with its receivables. At May 1, 2004 and January 31, 2004 no reserve was recorded.

4.     Accrued Liabilities

        Accrued liabilities consist of the following:

5.     Executive Loan Program

        Prior to the enactment of the Sarbanes-Oxley Act ("the Act"), the Company maintained an Executive Loan Program under which the Company made, at its sole discretion and with prior approvals from the Chief Executive Officer and the Board of Directors' Compensation Committee, secured long-term loans to key executives other than the Company's founders, Dennis Pence and Ann Pence. The Company's Chief Executive Officer, President and Chief Financial Officer do not have loans under this program. Each loan is secured by the executive's personal net assets, inclusive of all vested stock options in the Company, bears interest at three percent per annum, and becomes due and payable on the earlier of (i) the date ten days before the date on which the vested stock options serving as partial security expire or (ii) ninety days from the date on which the executive's employment with the Company terminates for any reason. Outstanding loans were $0.3 million at both May 1, 2004 and January 31, 2004, respectively. None of the loans outstanding prior to enactment of the Act have had any of their terms modified.

6.     Deferred Compensation Program

        During fiscal 2001, 2002 and 2003, the Compensation Committee of the Company's Board of Directors authorized compensation bonus pools that, in aggregate, currently total $4.0 million. These bonus pools serve as additional incentives to retain certain key employees. The Company is accruing the related compensation expense to each employee on a straight-line basis over the retention periods

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as it is currently anticipated that the performance criteria specified in the agreements will be met. The total compensation and dates to be paid are summarized as follows:

(1)

The amounts will be paid contingent upon the employee and the Company achieving the performance criteria specified in the agreements.

7.     Arrangements with Principal Shareholders

        Dennis Pence and Ann Pence personally participate in a jet timeshare program through two entities they own. For flights by them and other corporate executives made exclusively for official corporate purposes, the Company reimburses these entities for:

•

a usage based pro rata portion of the actual financing costs of the jet timeshare rights;



•

a usage based pro rata portion of the actual monthly maintenance fees; and



•

actual hourly usage fees.

        Aggregate expense reimbursements totaled approximately $49,000 and $178,000 for the first quarters of fiscal 2004 and fiscal 2003, respectively.

        On June 14, 2003, the Company's Board of Directors approved a charitable contribution of $100,000 to the Morning Light Foundation, Inc, a not-for-profit chartible organization. Dennis Pence, the Company's Chairman and Chief Executive Officer is the founder and a Board member of the Morning Light Foundation, Inc.

8.     Revolving Line of Credit

        On March 5, 2003, the Company entered into a credit agreement (the "Agreement") with a consortium of banks that provides it with a $60.0 million unsecured revolving line of credit. This line of credit has a $20.0 million limit for letters of credit, a $5.0 million limit for same day advances and a term standby letter of credit of $0.6 million. The interest rate under the Agreement is the London InterBank Offered Rate and is adjusted based on the Company's leverage ratio.

        The Agreement provides that the Company must satisfy certain specified EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), EBITDAR (i.e., EBITDA before rental/lease expenses), fixed charge coverage ratio, leverage ratio, current ratio and minimum net worth requirements, as defined in the Agreement. The Agreement also places restrictions on the Company's ability to, among other things, sell assets, participate in mergers, incur debt, pay dividends, and make investments or guarantees. The Agreement has a maturity date of March 5, 2006. During the fiscal

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2003 first quarter, the Company paid $0.5 million in financing costs associated with obtaining its new credit facility, which is being amortized over the life of the Agreement.

        The Company had $1.2 million and $0.3 million in outstanding letters of credit at May 1, 2004 and January 31, 2004, respectively.

9.     Net Income Per Share

        The following is a reconciliation of net income and the number of shares of Common Stock used in the computations of net income per basic and diluted share (in thousands except for per share data):

(1)

The number of anti-dilutive stock options excluded from the above computations were 19 and 1,172 for the three months ended May 1, 2004 and May 3, 2003, respectively.

(2)

The shares of Common Stock outstanding and dilutive and anti-dilutive share amounts for all periods presented reflect two 50% stock dividends, each having the effect of a 3-for-2 stock split, declared by the Board of Directors on December 19, 2002 and August 4, 2003.

10.   Commitments

        The Company leases its East Coast Distribution Center, Coeur d'Alene, Idaho Call Center, retail and outlet store space as well as certain other property and equipment under operating leases. Certain lease agreements are noncancellable with aggregate minimum lease payment requirements, contain escalation clauses and renewal options, and set forth incremental rental payments based on store sales above specified minimums ("contingent rental payments"). The Company incurred aggregate rent expense under its operating leases of $5,706,000 and $4,740,000 including contingent rent expense of $62,000 and $0 for the first quarters of fiscal 2004 and fiscal 2003, respectively.

        As of May 1, 2004 the Company's minimum lease payment requirements, excluding contingent rental payments, are as follows (in thousands):

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        Subsequent to May 1, 2004 the Company entered into additional retail leases with minimum lease payment requirements,excluding contingent rental payments, as follows (in thousands):

        Additionally, the Company had inventory purchase commitments of approximately $115.2 million and $100.2 million at May 1, 2004 and May 3, 2003, respectively.

11.   Contingencies

        The Company and its subsidiaries are periodically involved in litigation and administrative proceedings primarily arising in the normal course of its business. In addition, from time to time the Company has received claims that its products and/or the manner in which it conducts its business infringes on the intellectual property rights of third parties. In the opinion of management, the Company's gross liability, if any, and without any consideration given to the availability of insurance or other indemnification, under any pending litigation or administrative proceedings would not materially affect its consolidated financial position, results of operations or cash flows.

        In fiscal 2003, the Company accrued $1.0 million for expected tax liabilities resulting from an error in its Canadian tax returns related to refunds of the Canadian Goods and Services Tax, known as GST. The Company believes that it has accrued an appropriate amount for the expected Canadian tax liabilities. However, the Canadian taxing authorities have not completed their review of the Company's GST returns and may determine that the Company owes additional tax, in which case the Company may incur additional expenses.

        The Company collects sales taxes from customers transacting purchases in states in which the Company has physically based some portion of its business. The Company also pays applicable corporate income, franchise and other taxes, to states in which retail or outlet stores are physically located. Upon entering a new state, the Company accrues and remits the applicable taxes. The Company has accrued for these taxes based on its current interpretation of the tax code as written. Failure to properly determine or to timely remit these taxes may result in interest and related penalties being assessed.

12.   Segment Reporting

        The Company's executive management, being its chief operating decision makers, work together to allocate resources and assess the performance of the Company's business. The Company's executive management manages the Company as two distinct operating segments, Direct and Retail. Although offering customers substantially similar merchandise, the Company's Direct and Retail operating segments have distinct management, marketing and operating strategies and processes.

        The Company's executive management assesses the performance of each operating segment based on an "operating contribution" measure, which is defined as net sales less the cost of merchandise and related acquisition costs and certain directly identifiable and allocable operating costs, as described below. For the Direct Segment, these operating costs primarily consist of catalog development, production, and circulation costs, e-commerce advertising costs and order processing costs. For the Retail Segment, these operating costs primarily consist of store selling and occupancy costs. Operating

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contribution less corporate and other expenses is equal to income before interest and taxes. Corporate and other expenses consist of unallocated shared-service costs and general and administrative expenses. Unallocated shared-service costs include merchandising, inventory planning and quality assurance costs as well as corporate occupancy costs. General and administrative expenses include costs associated with general corporate management and shared departmental services (e.g., finance, accounting, data processing and human resources).

        Operating segment assets are those directly used in or clearly allocable to an operating segment's operations. For the Direct Segment, these assets primarily include inventory and prepaid and deferred catalog costs. For the Retail Segment, these assets primarily include inventory, fixtures and leasehold improvements. Corporate and other assets include corporate headquarters, merchandise distribution and shared technology infrastructure as well as corporate cash and cash equivalents and prepaid expenses. Operating segment depreciation and amortization and capital expenditures are correspondingly allocated to each operating segment. Corporate and other depreciation and amortization and capital expenditures are related to corporate headquarters, merchandise distribution, and technology infrastructure.

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        The following tables provide certain financial data for the Company's Direct and Retail Segments as well as reconciliations to the Company's consolidated financial statements. The accounting policies of the operating segments are the same as those described in Note 2—"Significant Accounting Policies".