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Coldwater Creek Inc. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 29, 2005
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended January 29, 2005 |
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Commission File Number 0-21915
COLDWATER CREEK INC.
(Exact name of registrant as specified in its charter)
| DELAWARE (State of other jurisdiction of incorporation or organization) |
82-0419266 (I.R.S. Employer Identification No.) |
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 ý No o
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 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
At July 31, 2004, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $442,572,000 based upon the closing price on the Nasdaq National Market reported for such date. Shares of Common Stock held by each executive officer and director have been excluded in that such person may be deemed to be an affiliate. This determination for executive officer is not necessarily a conclusive determination for other purposes. As of March 31, 2005, 60,678,497 shares of the Registrant's $.01 par value Common Stock were outstanding.
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 information from the definitive proxy statement for the registrant's 2005 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.
Coldwater Creek Inc.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 29, 2005
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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," "could," "may," "will," "should," "plan," "predict," "potential," 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. Please refer to our "Risk Factors" in this Annual Report on Form 10-K. We assume no future obligation to update our forward-looking statements or to provide periodic updates or guidance.
We maintain an internet web site at http://www.coldwatercreek.com. (This web site address is for information only and is not intended to be an active link or to incorporate any web site information into this document.) We make available, free of charge, through our website our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with the SEC.
Coldwater Creek Profile
Coldwater Creek is a specialty retailer of women's apparel, accessories, jewelry and gift items. Founded in 1984 as a catalog company, today we are a multi-channel retailer generating $590.3 million in net sales in fiscal 2004. We have established a differentiated brand by offering exceptional value through a unique, proprietary merchandise assortment that reflects a sophisticated yet relaxed and casual lifestyle, coupled with superior customer service. Our target customers are women between the ages of 35 and 60, with household incomes in excess of $75,000. According to NPD Group, Inc., women 35 and older spent in excess of $45.8 billion on apparel in 2004.
We reach our customers through our rapidly expanding base of retail stores and our direct segment, which encompasses our catalog and e-commerce businesses. We believe this multi-channel approach allows us to cross-promote the Coldwater Creek brand and meet our customers' apparel and accessory needs by providing them convenient access to our merchandise lines regardless of the preferred shopping channel.
Several years ago we began our evolution from a direct marketer to a multi-channel specialty retailer. Along the way we have tested various scaleable retail store models, strengthened our retail management team, refined our merchandise assortment and integrated our retail and direct merchandise planning and inventory management functions. We intend to continue to build our infrastructure in the coming years to support the planned growth of our retail business.
Our retail segment is the key driver in our growth strategy and, in fiscal 2004, accounted for $296.2 million in net sales, or 50.2% of total net sales. As of January 29, 2005, we operated 114 full-line retail stores, 48 of which were opened in fiscal 2004, as well as two resort stores and 19 merchandise clearance outlet stores in 102 markets. When used in this context, the term market refers to the Office of Management and Budget's metropolitan and micropolitan statistical area definitions as revised in June of 2003.
Our catalog business accounted for $131.9 in net sales, or 22.3% of total net sales and is an effective marketing platform to cross-promote our website and stores. In fiscal 2004, we mailed 107.6 million catalogs. Our full-scale e-commerce website, www.coldwatercreek.com, allows us to cost-effectively expand our customer base and provide another convenient shopping alternative for our
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customers. Our e-commerce business accounted for $162.2 in net sales, or 27.5% of total net sales and we now have approximately 2.4 million e-mail addresses to which we regularly send customized e-mails.
Business Strategies
We believe our success and future growth will be the result of consistent execution of the following business strategies:
Target a highly desirable, underserved customer. Generally, our target customers are women between the ages of 35 and 60. According to a projection from the 2005 U.S. census data, women in this age bracket are expected to represent approximately 42% of the female population in 2005. Additionally, according to NPD Group, Inc., women 35 and older spent over $45.8 billion on apparel in 2004. Within this population, our core customer generally has higher than average levels of disposable income, with median household incomes in excess of $75,000. While teens and younger adult female consumers have a relatively broad range of specialty retail brands from which to choose, we believe our core customer has more limited options that cater specifically to her tastes and needs. Furthermore, we believe our customer, who has traditionally shopped at department stores, is migrating away from them, as their product selection and customer service have become less appealing to her over time. For these reasons, we believe that by continuing to make our brand relevant and accessible to this core customer, we will be able to increase our share of the apparel market over time.
Offer a differentiated brand with broad appeal. We believe the Coldwater Creek brand is synonymous with a sophisticated yet relaxed and casual lifestyle that appeals to a broad range of women who lead busy, active lives. We design our merchandise, retail stores, catalogs and website to embody the warmth of this aspirational lifestyle and attitude and to promote the Coldwater Creek brand image. We deliver quality, consistency, convenience and easy care through our merchandise offerings. Our styles and cuts are fashion right, while, at the same time, our colors, novelty designs and textures provide our customer's wardrobe with flare that she cannot easily find elsewhere.
Deliver the brand through an integrated multi-channel model. Our strategy of offering merchandise across three channels enables us to enhance visibility of our brand, accessibility to our merchandise and, consequently, customer loyalty. We integrate our three channels in a number of ways, which allows us to maximize sales and provide superior customer service. These include offering in-store web kiosks to allow customers to purchase items through our website that may not be in stock at stores, accepting returns through any channel regardless of the point of purchase, systematically reallocating inventory between channels, utilizing the data provided by our direct segment to identify new store locations and prominently displaying our catalogs for customers in our retail stores. We continue to identify new ways to develop our multi-channel model to further optimize our business.
Provide an outstanding shopping experience through exceptional customer service. We believe our company-wide focus on exceptional customer service has been integral to our success and has enabled us to build a loyal customer base. In our retail stores, we seek to hire our customers to provide better knowledge and understanding of our customers' needs. We continually monitor service metrics, such as secret shopper scores, telephone answer rates, order fulfillment rates and conversion rates, which we believe are indicative of customer service levels. We have also invested in management information systems that provide our associates with easy access to information, including customer purchasing histories, merchandise availability, product specifications, available substitutes and accessories, and expected shipment dates. By promoting a culture of prompt, knowledgeable and courteous service, no matter how our customers choose to shop, we believe we will continue to attract a growing customer base and build brand loyalty.
Effectively use and leverage extensive business data across all our channels. Through our heritage as a direct marketer, we have the systems and discipline to collect customer data across all of our
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channels. We have formed a dedicated business intelligence group whose mission is to improve decision making by performing a variety of functions, including data warehousing, reporting and analysis, sales forecasting, statistical modeling and geographic analysis. We use these analyses to determine where to place stores and to more effectively select and allocate merchandise for our stores. We also use this data to personalize our marketing efforts through directed customer communications, including targeted mailings when we open new stores and regular, customized e-mails. Our executive management team meets daily to review and discuss key business metrics produced by this group in order to continually assess performance of the business across channels and merchandise assortments. We believe our access to this information and our effective use of it will allow us to continue to optimize productivity of all our channels.
Execute our growth strategy with an experienced management team. Over the past four years we have built our senior management team with individuals who have extensive retail, merchandising, brand-building, real estate, information technology and finance experience from a variety of retail, direct marketing and apparel companies, including Gap Inc., Newport News, Spiegel, Federated Department Stores, Limited, Williams-Sonoma, J. Crew, Toys "R" Us.com, Finish Line and Tuesday Morning. We believe our management team is well-rounded in all areas and provides us with a competitive advantage.
Growth Strategy
Over the last five years, we have continually refined our retail store model and operating strategy. We believe we will continue to realize the benefits of our multi-channel strategy with our retail channel being the primary source of our future growth. Our management team is committed to executing the following key growth strategies:
Expand our retail channel. We believe there is an opportunity for us to grow to 450 to 500 stores in up to 300 identified markets nationwide over the next five to seven years. As of January 29, 2005, we had 114 full-line retail stores, 48 of which were opened in fiscal 2004. We currently plan to open a total of approximately 60 new stores in fiscal 2005, including four stores we opened in the fiscal 2005 first quarter. We either have signed, fully executed leases or are currently in lease agreement negotiations for the majority of the stores we plan to open in fiscal 2005. The pace, scope and size of our retail store expansion will be influenced by the economic environment, available working capital, our ability to obtain favorable terms on suitable locations for our stores and, if necessary, external financing. Our current store model focuses on a core store averaging 5,000 square feet although we anticipate our stores will range between approximately 4,000 to 6,000 square feet. Please see the discussion below under the caption "Retail Segment Operations, Store Format and Atmosphere" for further details.
Further strengthen our brand and build customer loyalty. We continue to identify means of leveraging our brand and building customer loyalty. Our multi-channel initiatives include the introduction of a multi-channel gift card that is redeemable through any of our channels, wrapping our catalogs with promotional offers to direct customers in the vicinity of new store openings, mailing customized catalogs to our retail customers, offering in-store web kiosks to drive improved customer conversion rates and to increase familiarity with our direct channel, and accepting direct returns in our retail stores. These initiatives allow us to introduce our direct customers to our retail channel and give us the opportunity to convert a return to an exchange or an incremental purchase.
As we grow the retail portion of our business, we believe we will continue to identify new and effective ways to improve our brand visibility and build customer loyalty. For example, we plan to introduce a co-branded credit card program during the first half of 2005, under which our customers can earn and redeem points through any of our channels. In order to earn points a participant in the program would have to qualify for, accept and make purchases with the credit card. A customer would
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earn points on purchases made with the credit card from any retailer but would earn more points purchasing from us than from any other retailer.
Improve Profitability. As we grow our business and open new stores, we intend to improve our operating income. Key elements of our profitability improvement strategy include:
Merchandising
Our merchandising philosophy reflects a casual, unhurried approach to living. We offer our customers colorful, proprietary designs and novelty items that reflect different aspects of their lifestyles, including casual weekend wear, soft career and special occasion. The products we offer are current but not trendy and address our customers' needs for ease and simplicity. Our "buy-now, wear-now" strategy puts merchandise in front of our customers when it is seasonally appropriate and offers versatile fabrics she can wear across multiple seasons. Our "easy care" fabrics and comfortable styles are designed to facilitate product care, thereby making her life easier.
All of our apparel is designed, developed and sold under the Coldwater Creek label. We differentiate merchandise lines under separate catalog titles to appeal to different areas of our customers' wardrobes. Our entire collection of merchandise is available through our website. Merchandise for our retail stores is carefully selected to include the best and most popular items, historically about one-third of what is offered in our direct segment.
Product Design and Development. Our in-house design and product development team is responsible for conceptualizing and directing the design of all Coldwater Creek apparel. We believe our in-house team of designers and buyers allows us to exercise significant control over the merchandise development process and the quality of our product to create an overall merchandise assortment that is consistent with the Coldwater Creek brand.
Our design team travels to Europe twice a year to capture key themes that will appear in our collections throughout the upcoming seasons. Working in tandem with outside vendors and fabric designers, our design team creates an overall vision for each season's assortment that is then translated into collections for the season. We believe this approach allows us to introduce fresh products into our catalogs and retail locations every season and to supplement these selections with new items or styles throughout the year.
In the second quarter of fiscal 2004, we opened a design studio in New York with a dedicated team creating novel prints, patterns and working on new fabric initiatives. This studio, while still in its early development, has enabled us to create and market new and distinctive designs more quickly. We anticipate that our design studio will allow us to bring innovative, fashion right merchandise to our customers on a timely basis.
Planning and Allocation. We employ an integrated inventory planning team for our retail and direct sales channels. This group is responsible for conducting top-down and bottom-up planning and
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allocation across channels, seasons, collections and promotional events in order to maximize retail store, catalog and website productivity.
Initial planning and allocation decisions are made by assessing historical sales, individual item, store and catalog performance, and anticipated economic outlook. Equipped with distribution center and inventory management systems that allow us to allocate and re-allocate merchandise by channel, our inventory planning group is able to assess sales trends, customer demand and current inventory positions and to allocate items to enhance sales. We track sales at the item level on a daily basis and adjust our reorder and markdown strategies accordingly. Working together with our design and product development team, our inventory planning team has allowed us to optimize our overall number of styles and items of merchandise.
Sourcing and Distribution. In the past three years, we have focused on reducing our total number of outside vendors and have concentrated our production with selected vendors who we believe consistently adhere to our quality standards and production demands. We maintain relationships with approximately 400 vendors and, during fiscal 2004, sourced approximately 72% of our apparel from our top 20 vendors. During fiscal 2004, approximately 67% of our merchandise was manufactured overseas, most of which we purchase from domestic suppliers. As retail becomes a more important part of our business we anticipate that more of our merchandise will be sourced directly from overseas manufacturers. In the second quarter of fiscal 2004, we created a global sourcing department, which, in addition to our experienced direct sourcing personnel at our headquarters in Sandpoint, Idaho, includes employees in Hong Kong and India who perform compliance inspections in factories in those countries. We anticipate this strategy will provide an opportunity to increase our margins through the direct importing of our proprietary designs. We believe this new development will allow us to improve economies of scale as we leverage the combined impact of merchandising our retail and direct segments. During fiscal 2005 we anticipate that we will be the importer of record on approximately 15% of our total merchandise purchases.
We hold our vendors to strict quality standards, testing products for flammability, care instructions, sizing and durability. Each shipment is checked against a certified sample upon delivery and can be returned if it does not meet our standards. Additionally, we issue monthly vendor "report cards" to our top 75 vendors to provide them with important feedback and evaluation of their performance.
We operate a 600,000 square foot distribution center in Mineral Wells, West Virginia where we receive all of our merchandise. We process all of our retail store replenishment and direct order shipments from this facility. During fiscal 2004 our distribution center was able to ship more than 98% of all in-stock items within 24 hours of an order placement and process more than 96% of all merchandise returns within a 24-hour period. At its current size, we estimate that the distribution center can service up to 300 stores. We have increased our prior capacity estimate of 130 stores as a result of changes in our receiving and distribution processes. At our current expansion rate, we expect to have opened in excess of 300 stores by fiscal 2007 or fiscal 2008. Therefore, we expect to begin expanding our distribution center in fiscal 2006 with a fiscal 2007 in-service date.
Disposition. Relying on ongoing analysis of product performance, we maintain a disciplined approach to promotional selling of our merchandise. We conduct four key seasonal sales events per year in our retail stores, catalog and website. Additionally, items with higher-than-expected inventory counts are cleared through our website or one of our 19 outlet locations. Unlike many other retailers that produce items for sale through their outlet locations, we use our outlets exclusively to manage overstocked premium merchandise. We believe this approach to disposition of our merchandise conditions our customer to expect to pay full price for our items, effectively managing the margin impact of off-price selling. Additionally, we have the ability to choose the most efficient channel to use for liquidation at any given time.
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Retail Segment Operations
Building on our success in the direct channel, we opened our first full-line store in November 1999, and from 1999 to the spring of 2002 we opened 34 additional full-line stores, methodically testing and refining our store format and reducing capital expenditures required for build-out. As of January 29, 2005, we operated 114 full-line retail stores, two resort stores and 19 outlet stores in 102 markets. We plan to open a total of approximately 60 new full-line retail stores in fiscal 2005, including four full-line retail stores opened in the fiscal 2005 first quarter. In fiscal 2004, retail sales amounted to $296.2 million and represented 50.2% of total net sales. We expect our retail segment to continue as our primary growth vehicle, as over 90% of women's apparel in the U.S. is purchased in retail stores, according to NPD Group Inc.
Store Format and Atmosphere
In the second half of 2002, we introduced our core model of 5,000 to 6,000 square foot stores and have further revised our store model as discussed below for stores we intend to open in fiscal 2005. In fiscal 2004, our 66 stores that had been open at least 13 months averaged approximately 6,400 square feet in size and $487 per square foot in net sales. Most of these stores have been open for one to two years. We have continually improved our construction processes, materials and fixtures, merchandise layout and store design to minimize our initial capital investment per store, while maintaining an overall atmosphere that is comfortable and relevant to our core customers.
Our retail stores are designed to highlight our key items which are our customer's seasonal favorites and reflect the brand's focus on casual comfort, as well as to highlight merchandise being featured across all channels. Our wide, windowed storefront and forest green logo above a soft archway provide an inviting first impression to our customers. Our store interiors combine an appealing mix of cherry wood, slate and soft, neutral colored carpeting and typically offer a seating area for others who may be accompanying our shoppers.
Our retail stores showcase our apparel assortment and encourage browsing by displaying jewelry, accessories and gifts in a manner that provides the customer with a sense of discovery and an encouragement to purchase multiple items per transaction. We display apparel according to occasion, separating weekend and casual wear from soft career and special occasion wear. We locate our accessories section next to the dressing rooms, which allows our sales associates to encourage incremental purchases as customers try on clothes.
Over the past several years we have tested various retail store models and we continue to do so. Prior to fiscal 2005 we had two store models. Our core store model, which we introduced at the beginning of fiscal 2002, was 5,000 to 6,000 square feet and, in the beginning of fiscal 2003, we introduced a smaller store format of approximately 3,000 to 4,000 square feet.
We have now identified our appropriate store size to be in the range of 4,000 to 6,000 square feet. Therefore, in fiscal 2005, our core store model will average 5,000 square feet and we expect that it will contribute net sales per square foot of approximately $500 in the third year of operations.
Outlet Stores and Resort Stores
In addition to our full-line retail stores, we operated 19 outlet stores at January 29, 2005, where we sell excess inventory. We currently plan to open three outlet stores in fiscal 2005 including one outlet store opened in the fiscal 2005 first quarter. We generally locate the outlets within clusters of our retail stores to efficiently manage our inventory clearance activities, but far enough away to avoid significantly diminishing our full-line store sales. Unlike many other apparel retailers that produce merchandise directly for their outlet stores, merchandise sold through our outlets is limited to overstocked premium items from our full-line retail stores. We believe this use of our outlet stores enables us to effectively
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manage our inventory and clearance activities. We also operate resort stores in Sandpoint, Idaho and Jackson Hole, Wyoming.
Store Management and Training
We organize our stores into regions and districts, which are overseen by district and regional managers who report to our executive vice president, sales and marketing. Each district manager oversees between six and ten store managers. On average, our store managers have 11 years of experience as retail managers. Approximately 25% of our managers have district manager-level experience with major brands in the retail sector.
Store Locations
The following map indicates our full-line retail stores by location as of January 29, 2005:
Real Estate Strategy
We locate our new stores primarily in regional shopping malls and lifestyle centers across the entire U.S. Lifestyle centers offer unique amenities in an open-air environment and are typically located in affluent suburban areas and town centers. Lifestyle centers also tend to be mixed-use developments that attract a complementary group of well-known specialty retailers, including bookstores, gourmet grocers, home goods retailers, other apparel retailers and full service restaurants. As of January 29, 2005, approximately 52% of our full-line stores are located in traditional malls, 40% in lifestyle centers and 8% in street locations.
We utilize a disciplined, fact-based site selection process to determine our store locations. We believe we possess a competitive advantage versus other traditional retailers as we systematically collect key data regarding the location and preferences of our customers through our direct segment. This data, combined with additional demographic research, helps us to develop methodologies for
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prioritizing markets and identifying potential locations based on geographic clustering of both direct and retail segment customers.
Direct Segment Operations
Since the first mailing of our Northcountry catalog in 1985, we have grown our direct segment to include both our catalog and e-commerce businesses. Our catalogs and e-commerce website are designed to create a distinctive and easy shopping experience. Merchandise presentations feature full color photographs, graphics and artwork designed to appeal to our target customer. We 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 design. All catalog and website pages are created and designed by an in-house team of artists, copywriters and editors to ensure a consistent presentation of the Coldwater Creek brand.
Our direct channel represented 49.8% of our total net sales in fiscal 2004. As we continue to rollout our retail stores, we expect our direct segment to decrease as a percentage of net sales over time. It will continue to be a core component of our brand identity and our operations, contributing sales and earnings, serving as a valuable source of marketing information, helping promote each of our channels and providing cash flow to support our retail store expansion.
Our Catalogs
In fiscal 2004, our catalog business generated $131.9 million in net sales, or 22.3% of total net sales. Historically, we have used three catalog titles, Northcountry, Spirit and Elements, to feature our entire full-price line of merchandise using different assortments for each title to target separate sub-groups of our core demographic. In January 2004, we combined our two smaller catalogs, Spirit and Elements, and re-introduced the combined catalog under the Spirit title. The new Spirit catalog combines the sophistication of Spirit and the mix-and-match versatility of Elements in a format that focuses on the customer's lifestyle. We believe this initiative allows us to better meet the needs of our Spirit and Elements customers by assembling "head-to-toe" assortments and offering merchandise for a wider range of occasions by combining soft career wear with sportswear and separates.
Our two current core catalog titles are each devoted to slightly different lifestyles within our core customer base:
Northcountry features a casual clothing assortment with an emphasis on comfort and color. The merchandise often includes novel detailing, such as embroidery, fabric piecework and design ornamentation. The clothing in this assortment has its focus on complete outfits, generally offering tops and bottoms displayed as a complete ensemble. Northcountry represents the broadest product assortment, mixing apparel with jewelry, fashion accessories, gift items and home-related hardgoods.
The Spirit product assortment is differentiated by an accent on finer fabrics and upscale detailing, such as fully lined jackets at higher price points. Along with apparel offered in sophisticated fabrics like linen and matte jersey, the Spirit assortment also features merchandise designed for easy care travel, including items in knit and cotton twills. This apparel is merchandised with versatility in mind, making it simple for the customer to mix and match items to create a personal look.
Additionally, to serve the gift-giving needs of our customers and generate incremental sales during the important holiday shopping season, each year we assemble selected merchandise, which is featured in a festive Gifts-to-Go catalog and on our e-commerce website. Gifts-to-Go generally features a varied assortment of the most popular items featured in our primary merchandise lines described above.
In August 2004, we began offering a new line of active-wear apparel merchandise under the Sport catalog title. We believe this line of merchandise is a natural extension of our core strength of offering casual apparel for every aspect of our customers' lifestyle. Currently, Sport represents a small fraction
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of our overall merchandise mix and we plan to gradually explore its potential in both our retail and direct segments.
Since 2000, in an effort to increase the productivity of our direct business and reduce costs, we have reduced our catalog circulation and have been actively promoting the migration of our customers from our catalogs to our e-commerce website and to our retail stores. We have also focused on decreasing our number of prospect mailings because they have increasingly produced lower response rates and contributed fewer sales than catalog mailings to our existing customers. In fiscal 2004, we mailed 107.6 million catalogs, down 41.4% from our peak mailings of 183.6 million catalogs in 2000.
During fiscal 2004, we used a variety of print media advertising to promote sales in retail stores, over the internet and through catalogs, while, at the same time, promoting heightened awareness of the Coldwater Creek brand. Our print media consisted of three primary vehicles: national magazine advertising, traditional catalogs and "retail mailers." National magazine advertisements were placed in high-circulation publications such as Oprah, Good Housekeeping, Better Homes & Gardens, Country Living, Southern Living and Cooking Light. These advertisements were designed to drive customer traffic to our three selling channels, as well as to increase brand awareness. Our traditional catalog mailings were designed to generate sales through our Direct Segment and were circulated under the titles Northcountry, Spirit and Sport. Retail mailers were catalogs that included an assortment of items from all three catalog titles, featuring merchandise that can be found in our retail stores. These retail mailers were designed and produced to drive retail store traffic and, accordingly, were primarily mailed into markets where we had an existing store.
During fiscal 2005, our print media advertising strategy will further emphasize the use of retail mailers as a key vehicle for driving retail store traffic. While circulation for our traditional catalogs is planned to decrease slightly, growth in our retail store base is expected to provide additional opportunities for circulating retail mailers in a larger number of store markets, compared with fiscal 2004. Consequently, we anticipate that the combined number of pages circulated through our traditional catalogs and retail mailers in fiscal 2005 will show a slight increase over the prior year. Additionally, we plan to increase the number of pages dedicated to national magazine advertising to further promote brand awareness and drive customer traffic in all channels.
Our E-commerce Website
As part of our effort to provide our customers with new channels of accessibility, we launched our full-scale e-commerce website, www.coldwatercreek.com, in July of 1999. Our e-commerce website is designed to offer a convenient, user-friendly and secure online shopping option for our customers. The website features our entire full-price merchandise offering found in our catalogs and retail stores. It also serves as an efficient vehicle for the disposition of excess inventory.
In fiscal 2004, online sales amounted to $162.2 million and represented 27.5% of total net sales. We have approximately 2.4 million opt-in e-mail addresses to which we regularly send promotional e-mails. Our promotional e-mails are customized to meet subscribers' shopping preferences and merchandise tastes.
We continue to participate in a net sales commission-based program whereby popular Internet search engines and consumer and charitable websites promote the Coldwater Creek brand to their visitors. These noncompetitive "affiliate" merchants provide convenient hotlink access to our website, which also serves as an effective tool in prospecting for new customers.
Customer Service
Over the past 20 years, we have built a reputation and company-wide culture of providing superior customer service. We view customer service as a critical aspect of our business that can be consistently
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improved upon. Accordingly, we monitor service metrics for our call center operations, retail stores and distribution center on a daily basis.
A central feature of our commitment to customer service is our unconditional return policy for all of our merchandise. A customer can return an item for any reason at any time through any channel, regardless of the point of purchase. We believe this policy builds customer loyalty and helps overcome any reluctance a customer may have to purchasing merchandise from catalogs or via the Internet.
We have invested in management information systems that provide our associates with easy access to information, including customer purchasing histories, merchandise availability, product specifications, available substitutes and accessories and expected shipment dates, which allows our call center and retail sales associates to answer questions and deal with customer complaints directly.
We have also established the following practices to provide consistently high levels of customer service through our direct channel:
We have implemented several measures to ensure that we maintain our tradition of superior customer service in our retail stores:
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Marketing and Promotion
Our marketing and promotion initiatives focus on reinforcing our brand message and retaining our existing customers and attracting new customers. As we grow our business and broaden our retail footprint, we intend to increase our mass marketing initiatives to enhance national visibility of the brand. For example, in early fiscal 2005, in an effort to drive customers to our retail stores, we introduced multiple page magazine advertisements in national and regional publications that will display the current season's merchandise assortment.
During fiscal 2004, we used a variety of print media advertising to promote sales in retail stores, over the internet and through catalogs, while, at the same time, promoting heightened awareness of the Coldwater Creek brand. Our print media consisted of three primary vehicles: national magazine advertising, traditional catalogs and "retail mailers." National magazine advertisements were placed in high-circulation publications such as Oprah, Good Housekeeping, Better Homes & Gardens, Country Living, Southern Living and Cooking Light. These advertisements were designed to drive customer traffic to our three selling channels, as well as to increase brand awareness. Our traditional catalog mailings are designed to generate sales through our Direct Segment and are circulated under the titles Northcountry, Spirit and Sport. Retail mailers were catalogs that included an assortment of items from all three catalog titles, featuring merchandise that can be found in our retail stores. These retail mailers were designed and produced to drive retail store traffic and, accordingly, were primarily mailed into markets where we had an existing store.
We believe our ability to effectively design and run each of our marketing and promotional programs is enhanced by our proprietary database of customer information, which includes demographic data, purchasing history by sales channel and their physical proximity to our existing and planned retail stores. This system allows us to segment our customer base according to many variables to analyze each segment's performance and buying patterns. We use the resulting information to adjust the frequency, timing and content of our various programs and promotions to maximize the productivity of each one.
As we have moved to a multi-channel strategy we have implemented the following marketing and promotional initiatives to maximize purchases by our existing customers in all three of our channels, reinforce the Coldwater Creek brand, and encourage customer loyalty:
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As part of our e-commerce marketing initiatives, we participate in an affiliate website program. We select popular Internet search engines, consumer and charitable websites to promote the Coldwater Creek brand to their visitors and provide convenient hotlink access to our website in exchange for a commission based on net sales from referred customers.
We also conduct a national magazine advertising campaign to reinforce awareness of Coldwater Creek as we open stores in new markets, draw the attention of potential direct customers and establish national visibility for our brand. We run multi-page, color advertisements to promote our three channels in lifestyle and shelter publications consistent with the Coldwater Creek brand, including Oprah, Good Housekeeping, Better Homes and Gardens, Sunset, Country Living, Southern Living and Cooking Light.
Information Technology
We are committed to investing in our information systems to increase operating efficiency, provide superior customer service and support our anticipated growth. Our management information systems consist of a full range of selling channel solutions, including retail point-of-sale, catalog and e-commerce systems, financial and merchandising systems, including inventory planning, distribution and control, sales reporting, credit, accounts payable, merchandise reporting and logistics.
Our systems allow us to monitor hourly and daily performance metrics in our direct and retail channels. These systems enable us to analyze the historical performance of individual merchandise items by various categories and have allowed us to realize increased accuracy in our product performance forecasting, and, as such, better manage our retail inventory, reduce product overstocks and backorders, increase our in-stock levels and realize additional logistic efficiencies.
Our technical infrastructure provides for geographic diversity and redundant computing complexes to serve our growing and expanding multi-channel business. We have data centers located in three of our corporate facilities that provide for instant backup in the event of a telecommunications or systems failure. Our call center telecommunication system is designed to reduce the risk of telephone delays and capacity constraints and allows us to operate our call centers as a single "virtual call center". Calls coming into one location are automatically routed to the other locations if the load is too high or if a call center is unable to receive incoming calls due to factors such as natural disasters, power failures or systems problems. Additionally, we have call center capabilities in our Sandpoint, Idaho facility that we use to capture overflow traffic.
We have also installed network and server load balancing devices that allow customer orders received on our e-commerce website to be routed to the least busy server farm and the least busy server in that farm. We use encryption technology to protect sensitive customer information transmitted
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on our website. We protect company sensitive information on our servers from unauthorized access using industry standard network security systems in addition to anti-virus and firewall protection.
We expect to continue to make significant investments in our systems and infrastructure to support our retail store expansion, inventory management, merchandising, order taking and customer service, order fulfillment, marketing, product development and financial reporting and forecasting.
Competition
The women's retail apparel market is highly competitive. Our competitors range from specialty apparel retailers, such as Chico's, Talbots and J. Jill, to small single-sales channel catalog, e-commerce and retail store companies. We also compete with national department stores, such as Bloomingdale's, Macy's, JC Penney, Dillards and Nordstrom, and with discount retailers that offer women's apparel and accessories, such as Kohl's and Target.
We believe that we compete principally on the basis of the distinctive merchandise selection and superior customer service associated with the Coldwater Creek brand, as well as our commitment to understanding and providing merchandise that is relevant to our targeted customer base, is fashion right and is of high quality. With over 90% of women's apparel being purchased in retail stores in 2004, we believe that our retail store expansion will allow us to compete more effectively in the women's apparel market by providing this important aspect of the shopping experience to more of our customers. We also believe that our integrated, multi-channel strategy enhances our ability to compete by allowing our customers to choose the most convenient sales channel and allowing us to reach a broader audience in existing and in new markets and to continue to build Coldwater Creek into a nationally recognized brand.
Employees
As of January 29, 2005, we had 1,859 full-time employees and 3,543 part-time employees. During our peak selling season, which includes the months of November and December, we utilize a substantial number of temporary employees. None of our employees are covered by collective bargaining agreements. We consider our employee relations to be good.
Trademarks
Our registered trademarks include Coldwater Creek®, Coldwater Creek Spirit® and the stylized Coldwater Creek logo. We believe that our registered and common law trademarks have significant value and are instrumental to our ability to create and sustain demand for and market our merchandise.
Available Information
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and therefore file periodic reports and other information with the Securities and Exchange Commission ("SEC"). These reports may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street NW, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website at www.sec.gov that contains reports, proxy information statements and other information regarding issuers that file electronically.
Our filings under the Exchange Act (including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports) are also available free of charge on the investor relations portion of our website at www.coldwatercreek.com. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The reference to our website address does not constitute incorporation by
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reference of the information contained on the website, and the information contained on the website is not part of this document.
Risk Factors
We may be unable to successfully implement our retail store rollout strategy, which could result in significantly lower revenue growth.
The key driver of our growth strategy is our retail store expansion. At January 29, 2005, we operated 114 stores and we have since opened an additional four stores in the fiscal 2005 first quarter for a total of 118 stores currently in operation. We currently plan to open a total of approximately 60 new stores in fiscal 2005. We believe we have the potential to open 450 to 500 retail stores over the next five to seven years. However, 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. Our ability to open our planned retail stores depends on our ability to successfully:
Any miscalculations or shortcomings in the planning and control of our retail growth strategy could materially impact our results of operations and our financial condition.
We may continue to refine our retail store model, which could delay our planned retail store rollout and result in slower revenue growth.
We have made numerous refinements in our retail store format since opening our first full-line store in 1999, including our most recent revision to our store model in fiscal 2005. Our retail model may undergo further refinements as we gain experience operating more stores. If we determine to make further refinements to our store model, it may delay the progress of our retail store roll-out, which could slow our anticipated revenue growth. We are required to make long-term financial commitments when leasing retail store locations, which would make it more costly for us to close or relocate stores that do not prove to be successful. Furthermore, retail store operations entail substantial fixed costs, including costs associated with maintaining inventory levels, leasehold improvements, fixtures, store design and information and management systems, and we must continue to make these investments to maintain our current and future stores.
We may not select optimal locations for our retail stores, which could affect our net sales.
The success of individual retail stores will depend to a great extent on locating them in desirable shopping venues in markets that include our target demographic. The success of individual stores may depend on the success of the shopping malls or lifestyle centers in which they are located. In addition, the demographic and other marketing data we rely on in determining the location of our stores cannot predict future consumer preferences and buying trends with complete accuracy. As a result, retail stores we open may not be profitable or may be less successful than we anticipate.
We may be unable to manage significant increases in the costs associated with our catalog business, which could affect our results of operations.
We incur substantial costs associated with our catalog mailings, including paper, postage, merchandise acquisition and human resource costs associated with catalog layout and design, production and circulation and increased inventories. Most of these costs are incurred prior to mailing.
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As a result, we are not able to adjust the costs of a particular catalog mailing to reflect the actual subsequent performance of the catalog. Significant increases in U.S. Postal Service rates and the cost of telecommunications services, paper and catalog production could significantly increase our catalog production costs and result in lower profits for our catalog business to the extent we are unable to pass these costs onto our customers or implement more cost effective printing, mailing or distribution systems. Because our catalog business accounts for a significant portion of total net sales, 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.
Response rates to our catalogs could decline, which would negatively impact our net sales and results of operations.
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 changing consumer preferences, willingness to purchase goods through catalogs, weak economic conditions and uncertainty, and unseasonable weather in key geographic markets. In addition, a portion of our catalog mailings are to prospective customers. These mailings involve risks not present in mailings to our existing customers, including lower and less predictable response rates. Additionally, it has become more difficult for us and other direct retailers to obtain quality prospecting mailing lists, which may limit our ability to maintain the size of our active catalog customer list. Lower response rates could result in lower-than-expected full-price sales and higher-than-expected clearance sales at substantially reduced margins.
Consumers concerns about purchasing items via the Internet as well as external or internal infrastructure system failures could negatively impact our e-commerce sales or cause us to incur additional costs.
Our e-commerce business is vulnerable to consumer privacy concerns relating to purchasing items over the Internet, security breaches, and failures of internet infrastructure and communications systems. If consumer confidence in making purchases over the Internet declines as a result of privacy or other concerns, our e-commerce net sales could decline. We may be required to incur increased costs to address or remedy any system failures or security breaches.
We may be unable to manage expanding operations and the complexities of our multi-channel strategy, which could harm our results of operations.
During the past few years, with the implementation of our multi-channel business model, our overall business has become substantially more complex. This increasing complexity has resulted and is expected to continue to result in increased demands on our managerial, operational and administrative resources and has forced us to develop new expertise. In order to manage our complex multi-channel strategy, we will be required to continue, among other things, to:
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We may be unable to anticipate changing customer preferences and to respond in a timely manner by adjusting our merchandise offerings, which could result in lower sales.
Our future success will depend largely on our ability to continually select the right merchandise assortment, maintain appropriate inventory levels and creatively present merchandise in a way that is appealing to our customers. Consumer preferences cannot be predicted with certainty, as they continually change and vary from region to region. On average, we begin the design process for our apparel nine to ten months before merchandise is available to our customers, and we typically begin to make purchase commitments four to six months in advance. These lead times make it difficult for us to respond quickly to changing consumer preferences and amplify the consequences of any misjudgments we might make in anticipating customer preferences. Consequently, if we misjudge our customers' merchandise preferences or purchasing habits, our sales may decline significantly, and we may be required to mark down certain products to significantly lower prices to sell excess inventory, which would result in lower margins.
We depend on key vendors for timely and effective sourcing and delivery of our merchandise. If these vendors are unable to timely fill orders or meet our quality standards, we may lose customer sales and our reputation may suffer.
Our direct business depends largely on our ability to fulfill orders on a timely basis, and our direct and retail businesses depend largely on our ability to keep appropriate levels of inventory in our distribution center and our stores. As we grow our retail business, we may experience difficulties in obtaining sufficient manufacturing capacity from vendors to produce our merchandise. We generally maintain non-exclusive relationships with multiple vendors that manufacture our merchandise. However, we have no contractual assurances of continued supply, pricing or access to new products, and any vendor could discontinue selling to us at any time. If we were required to change vendors or if a key vendor were unable to supply desired merchandise in sufficient quantities on acceptable terms, particularly in light of our recent trend toward consolidating more of our merchandise purchases with fewer vendors, we may experience delays in filling customer orders or delivering inventory to our stores until alternative supply arrangements are secured, which could result in lost sales and a decline in customer satisfaction.
Our increasing reliance on foreign vendors will subject us to uncertainties that could impact our cost to source merchandise and delay or prevent merchandise shipments.
As we expand our retail stores and our merchandise volume requirements increase, we expect to source merchandise directly from foreign vendors, particularly those located in Asia. During fiscal 2005 we anticipate that we will be the importer of record on approximately 15% of our total merchandise purchases. This will expose us to new and greater risks and uncertainties, the occurrence of which could substantially impact our ability to source merchandise through foreign vendors and to realize any perceived cost savings. We will be subject to, among other things:
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On December 31, 2004, quota restrictions on the importing of apparel into the United States from foreign countries which are members of the World Trade Organization expired. The effect this quota expiration will have on global sourcing patterns is uncertain but is likely to continue the retail price deflation. Our sourcing strategy is designed to allow us to adjust to potential shifts in availability of apparel following the expiration of these quotas. However, our sourcing operations may be adversely affected by trade limits or political and financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies and/or other trade disruptions.
We may be unable to fill customer orders efficiently, which could harm customer satisfaction.
If we are unable to efficiently process and fill customer orders, customers may cancel or refuse to accept orders, and customer satisfaction could be harmed. We are subject to, among other things:
We have a liberal merchandise return policy, and we may experience a greater number of returns than we anticipate.
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 condition. We make allowances in our financial statements for anticipated merchandise returns based on historical return rates and our future expectations. These allowances may be exceeded, however, by actual merchandise returns as a result of many factors, including changes in the merchandise mix, size and fit, actual or perceived quality, differences between the actual product and its presentation in our catalogs or on our website, timeliness of delivery, competitive offerings and consumer preferences or confidence. Any significant increase in merchandise returns or merchandise returns that exceed our allowances would result in adjustments to our sales return accrual and to cost of sales and could materially adversely affect our financial condition, results of operations and cash flows.
Our quarterly results of operations fluctuate and may be negatively impacted by a failure to predict sales trends and by seasonal influences.
Our net sales, operating results, liquidity and cash flows have fluctuated, and will continue to fluctuate, on a quarterly basis, as well as on an annual basis, as a result of a number of factors, including, but not limited to, the following:
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Our results continue to depend materially 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. If, for any reason, we were to realize lower-than-expected sales or profits during the November and December holiday selling season, our financial condition, results of operations, including related gross margins, and cash flows for the entire fiscal year would be materially adversely affected.
We face substantial competition from discount retailers in the women's apparel industry.
We believe our customers are willing to pay slightly higher prices for our unique merchandise and superior customer service. However, we face substantial competition from discount retailers, such as Kohl's and Target, for basic elements in our merchandise lines, and our net sales may decline or grow more slowly if we are unable to differentiate our merchandise and shopping experience from these discount retailers. In addition, the retail apparel industry has experienced significant price deflation over the past several years largely due to the downward pressure on retail prices caused by discount retailers. We expect this price deflation to continue as a result of the expiration of quota restrictions on the importing of apparel into the United States from foreign countries that are members of the World Trade Organization. This price deflation may make it more difficult for us to maintain our gross margins and to compete with retailers that have greater purchasing power than we have. Furthermore, because we currently source a significant percentage of our merchandise through intermediaries and from suppliers and manufacturers located in the United States and Canada, where labor and production costs, on average, tend to be higher, our gross margins may be lower than those of competing retailers.
Our success is dependent upon our senior management team.
Our future success depends largely on the efforts of Dennis Pence, Chairman and Chief Executive Officer; Georgia Shonk-Simmons, President and Chief Merchandising Officer; Melvin Dick, Executive Vice President and Chief Financial Officer; and Dan Griesemer, Executive Vice President, Sales and Marketing. The loss of any of these individuals or other key personnel could have a material adverse effect on our business. Furthermore, the location of our corporate headquarters in Sandpoint, Idaho may make it more difficult to replace key employees who leave us, or to add qualified employees we will need to manage our further growth.
Prior to joining our company, Melvin Dick, our Executive Vice President and Chief Financial Officer, served as the lead engagement partner for Arthur Andersen's audit of WorldCom's consolidated financial statements for the fiscal year ended December 31, 2001, and its subsequent review of WorldCom's condensed consolidated financial statements for the fiscal quarter ended March 31, 2002. The ongoing investigation of the WorldCom matter may require Mr. Dick's attention, which may impair his ability to devote his full time and attention to our company. Further, Mr. Dick's association with the WorldCom matter may adversely affect customers' or investors' perception of our company.
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Lower demand for our merchandise could reduce our gross margins and cause us to slow our retail expansion.
Our merchandise is comprised primarily of discretionary items, and demand for our merchandise is affected by a number of factors that influence consumer spending. Lower demand may cause us to move more full-price merchandise to clearance, which would reduce our gross margins, and could adversely affect our liquidity (including compliance with our debt covenants) and, therefore, slow the pace of our retail expansion. We have maintained conservative inventory levels, which we believe will make us less vulnerable to sales shortfalls. Conversely, if we elect to carry relatively low levels of inventory in anticipation of lower demand but demand is stronger than we anticipated, we may be forced to backorder merchandise, which may result in lost sales and lower customer satisfaction.
Our tax collection policy may expose us to the risk that we may be assessed for unpaid taxes.
Many states have attempted to require that out-of-state direct marketers and e-commerce retailers whose only contact with the taxing state are solicitations and delivery of purchased products through the mail or the Internet collect sales taxes on sales of products shipped to their residents. The U.S. Supreme Court has held that these states, absent congressional legislation, may not impose tax collection obligations on an out-of-state mail order or Internet company. Although we believe that we have collected sales tax where we are required to do so under existing law, state and local tax authorities may disagree, and we could be subject to assessments for uncollected sales taxes, as well as penalties and interest and demands for prospective collection of such taxes. Furthermore, if Congress enacts legislation permitting states to impose sales tax collection obligations on out-of-state catalog or e-commerce businesses, or if we are otherwise required to collect additional sales taxes, such tax collection obligations may negatively affect customer response and could have a material adverse effect on our financial position, results of operations and cash flows. In addition, as we open more retail stores, our tax collection obligations will increase significantly and complying with the greater number of state and local tax regulations to which we will be subject may strain our resources.
Any determination that we have a material weakness in our internal control over financial reporting could have a negative impact on our stock price.
We are applying significant management and financial resources to document, test, monitor and enhance our internal control over financial reporting in order to meet the requirements of the Sarbanes-Oxley Act of 2002. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. For example, our management concluded that our internal control over financial reporting was not effective for fiscal 2004 as a result of a restatement of certain of our financial statements to correct an error relating to the recognition of rental expense, as described in Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K. Further, because of changes in conditions, the effectiveness of internal control may vary over time. We cannot be certain that our internal control systems will be adequate or effective in preventing fraud or human error. Any failure in the effectiveness of our internal control over financial reporting could have a material effect on our financial reporting or cause us to fail to meet reporting obligations, which upon disclosure, could negatively impact the market price of our common stock.
Our stock price has fluctuated and may continue to fluctuate widely.
The market price for our common stock has fluctuated and 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, customer response to our merchandise offerings, the size of our catalog mailings, the timing of our retail store openings or of important holiday seasons
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relative to our fiscal periods, seasonal effects on sales and various factors affecting the economy in general. The reported high and low closing sale prices of our common stock were $5.05 per share and $2.39 per share, respectively, during the fiscal year ended February 1, 2003, and were $6.54 per share and $2.60 per share, respectively, during the fiscal year ended January 31, 2004. The reported high and low closing sale prices of our common stock were $20.58 per share and $6.63 per share, respectively, during the fiscal year ended January 29, 2005. 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.
Our largest stockholders may exert influence over our business regardless of the opposition of other stockholders or the desire of other stockholders to pursue an alternate course of action.
Dennis Pence, our Chairman and Chief Executive Officer, and Ann Pence, our former Vice Chairman, have informed the company that they have an informal arrangement pursuant to which they have agreed to vote their shares together and, when selling shares, doing so in equal amounts. This arrangement is not in writing, and can be terminated at any time, and there is no assurance that Dennis Pence and Ann Pence will continue to act together with respect to their shares. Because of their informal arrangement, Dennis Pence and Ann Pence together may be deemed to beneficially own, directly and indirectly, approximately 40.2% of our outstanding common stock as of December 31, 2004. Dennis Pence and Ann Pence acting together, or either of them acting independently, could have significant influence over any matters submitted to our stockholders, including the election of our directors and approval of business combinations, and could delay, deter or prevent a change of control of our company, which may adversely affect the market price of our common stock. The interests of Dennis Pence and Ann Pence may not always coincide with the interests of our other stockholders.
Provisions in our charter documents and Delaware law may inhibit a takeover and discourage, delay or prevent our stockholders from replacing or removing our current directors or management.
Provisions in our Certificate of Incorporation and Bylaws may have the effect of delaying or preventing a merger with or acquisition of us, even where the stockholders may consider it to be favorable. These provisions could also prevent or hinder an attempt by our stockholders to replace our current directors and include:
Because our Board of Directors appoints management, any inability to effect a change in our Board of Directors may also result in the entrenchment of management.
We are also subject to Section 203 of the Delaware General Corporation Law, which, subject to exceptions, prohibits a Delaware corporation from engaging in any business combination with an interested stockholder for a period of three years following the date that the stockholder became an interested stockholder. The preceding provisions of our Certificate of Incorporation and Bylaws, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management.
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Our principal executive and administrative offices are located at One Coldwater Creek Drive, Sandpoint, Idaho 83864. Our telephone number is (208) 263-2266. The general location, use and approximate size of our principal properties as of January 29, 2005 are set forth below:
| Facility |
Address |
Owned/Leased |
Approximate Size |
|||
|---|---|---|---|---|---|---|
| Corporate Offices(a) | One Coldwater Creek Drive Sandpoint, Idaho |
Owned | 231,000 sq. ft. | |||
East Coast Operations Center, including Distribution and Call Center |
100 Coldwater Creek Drive Mineral Wells, W. Virginia |
Leased |
600,000 sq. ft. |
|||
Coeur d'Alene, Idaho Call Center |
751 West Hanley Avenue Coeur d'Alene, Idaho |
Leased |
60,000 sq. ft. |
|||
114 Full-Line Retail Stores(b) |
Various U.S. Locations |
Leased |
648,000 sq. ft. |
|||
19 Outlet Stores(c) |
Various U.S. Locations |
Leased |
123,000 sq. ft. |
|||
2 Resort Stores(d) |
Sandpoint, ID and Jackson, WY |
Leased |
34,000 sq. ft. |
We believe that our corporate offices, distribution center and call centers will meet our operational needs for the foreseeable future. Our distribution center was designed to allow us to expand up to an aggregate of 930,000 square feet, as needed. We intend to begin expanding capacity in our distribution center in fiscal 2006 to the full 930,000 square feet with a fiscal 2007 completion date to support our expanding retail store base.
Legal Proceedings
We are, from time to time, involved in various legal proceedings incidental to the conduct of our business. In addition, from time to time we have received claims that our products and/or the manner in which we conduct our business infringe on the intellectual property rights of third parties. For example, in fiscal 2004, a lawsuit was filed that claimed we infringed on various intellectual property patents relating to our e-commerce website. During the fiscal 2004 fourth quarter, we settled the lawsuit and obtained a 12-year license to use certain intellectual property patents for an immaterial
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amount. In the opinion of management, our 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 our consolidated financial position, results of operations or cash flows.
Government Regulation
Our direct business is subject to the Merchandise Mail Order Rule and related regulations promulgated by the Federal Trade Commission. While we believe we are in material compliance with these regulations, no assurance can be given that new laws or regulations will not be enacted or adopted which might adversely affect our operations.
We collect sales taxes from customers transacting purchases in states in which we have physically based some portion of our retailing business. We also pay applicable corporate income, franchise and other taxes, to states in which retail or outlet stores are physically located. Upon entering a new state, we accrue and remit the applicable taxes. As we open more retail stores, we will be subject to an increasing number of state and local taxing jurisdictions. In addition, we accrue use taxes on catalogs used in our stores or at our corporate headquarters or sent to customers with shipments from our distribution center. Although we believe we have properly accrued for these taxes based on our current interpretation of the tax code, state taxing authorities may challenge our interpretation. Failure to properly determine or to timely remit these taxes may result in additional interest and related penalties being assessed.
Various states have attempted to collect back sales and use taxes from direct marketers whose only contacts with the taxing state are solicitations through the mail or the Internet, and whose subsequent delivery of purchased goods is by mail or interstate common carriers, and we may be subject to these attempts in states in which we have no physical presence. However, the U.S. Supreme Court has held that these states, absent congressional legislation, may not impose tax collection obligations on an out-of-state mail order or Internet company. We anticipate that any legislative changes regarding direct marketers, if adopted, would be applied only on a prospective basis.
Many of our products are manufactured outside the United States and are subject to existing or potential duties, tariffs or quotas that may limit the quantity of products we are allowed to import or increase the cost of such products. To date, we have not been restricted by quotas in the operation of our business, and customs duties have not comprised a material portion of the total cost of most of our products. As we expand our retail operations and begin to source more merchandise overseas, however, our business may be impacted by quotas and the imposition of customs duties or tariffs. We are also subject to foreign governmental regulation and trade restrictions, including U.S. retaliation against certain prohibited foreign activities, with respect to our product sourcing.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Special Meeting of Stockholders of Coldwater Creek Inc. was held on December 8, 2004. At this meeting, the following proposal was voted upon and approved:
Proposal: To approve an amendment to the Company's Amended and Restated Certificate of Incorporation that will increase the number of authorized shares of the Company's Common Stock from 60,000,000 to 150,000,000 shares.
| For |
Against |
Abstain |
||
|---|---|---|---|---|
| 52,428,705 | 6,555,801 | 11,007 |
The share amounts voted For, Against and Abstain have been adjusted to reflect our most recent stock dividend, which had the effect of a 3-for-2 stock split, declared by the Board of Directors on February 12, 2005.
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DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth the name, current age and current position of our directors and executive officers as of April 1, 2005:
| Name |
Age |
Positions held |
||
|---|---|---|---|---|
| Dennis C. Pence(a) | 55 | Chairman of the Board of Directors, Secretary and Chief Executive Officer | ||
| Georgia Shonk-Simmons | 53 | President, Chief Merchandising Officer and Director | ||
| Melvin Dick | 51 | Executive Vice President and Chief Financial Officer | ||
| Dan Griesemer | 45 | Executive Vice President of Sales and Marketing | ||
| Gerard El Chaar |