<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Quarter Ended November 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26772
COLDWATER CREEK INC.
(Exact name of registrant as specified in its charter)
DELAWARE 82-0419266
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE COLDWATER CREEK DRIVE, SANDPOINT, IDAHO 83864
(Address of principal executive offices)
(208) 263-2266
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Shares outstanding as of November 27, 1999
- ----------------------------- ----------------------------------------------
Common Stock ($.01 par value) 10,270,076
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<PAGE>
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at November 27, 1999 and
February 27, 1999.......................................................... 4
Consolidated Statements of Operations for the three and
nine month periods ended November 27, 1999 and
November 28, 1998.......................................................... 5
Consolidated Statements of Cash Flows for the nine month periods ended
November 27, 1999 and November 28, 1998.................................... 6
Notes to the Consolidated Financial Statements.............................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 22
Item 2. Changes in Securities and Use of Proceeds.......................... 22
Item 3. Defaults Upon Senior Securities.................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................ 22
Item 5. Other Information.................................................. 22
Item 6. Exhibits and Reports on Form 8-K................................... 22
This report may contain forward-looking statements that involve risks and
uncertainties. When used in this discussion, the words "anticipate," "believe,"
"estimate," "expect," and similar expressions as they relate to the Company or
its management are intended to identify such forward-looking statements. The
Company's actual results could differ materially from the results anticipated in
these forward-looking statements as a result of certain factors set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors" and elsewhere in this report.
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
<TABLE>
<CAPTION>
November 27, February 27,
1999 1999
------------ ------------
<S> <C> <C>
ASETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,092 $ 149
Receivables 9,069 2,683
Inventories 60,771 56,474
Prepaid expenses 1,239 1,234
Prepaid catalog costs 838 4,274
-------- --------
Total current assets 92,009 64,814
Deferred catalog costs 14,895 3,195
Property and equipment, net of accumulated depreciation 40,615 31,236
Executive loans 1,276 1,376
-------- --------
Total assets $148,795 $100,621
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ - $ 9,938
Accounts payable 60,004 17,086
Accrued liabilities 16,863 7,668
Income taxes payable 2,420 4,445
Deferred income taxes - 1,080
-------- --------
Total current liabilities 79,287 40,217
Deferred income taxes 208 298
-------- --------
Total liabilities 79,495 40,515
-------- --------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued and outstanding - -
Common stock, $.01 par value, 15,000,000 shares
authorized, 10,270,076 and 10,183,117 issued and
outstanding, respectively 103 102
Additional paid-in capital 40,278 39,287
Retained earnings 28,919 20,717
-------- --------
Total stockholders' equity 69,300 60,106
-------- --------
Total liabilities and stockholders' equity $148,795 $100,621
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net sales $101,190 $94,730 $226,115 $235,618
Cost of sales 48,045 45,747 108,841 114,839
-------- ------- -------- --------
Gross profit 53,145 48,983 117,274 120,779
Selling, general and administrative expenses 44,895 41,094 105,045 110,260
-------- ------- -------- --------
Income from operations 8,250 7,889 12,229 10,519
Interest, net, and other 339 (343) 541 (868)
Gain on sale of Milepost Four assets - - 826 -
-------- ------- -------- --------
Income before provision for income taxes 8,589 7,546 13,596 9,651
Provision for income taxes 3,401 3,033 5,394 3,879
-------- ------- -------- --------
Net income $ 5,188 $ 4,513 $ 8,202 $ 5,772
======== ======= ======== ========
Net income per share - Basic $ 0.51 $ 0.44 $ 0.80 $ 0.57
======== ======= ======== ========
Net income per share - Diluted $ 0.49 $ 0.43 $ 0.78 $ 0.55
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
November 27, November 28,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,202 $ 5,772
--------- --------
Non cash items:
Depreciation and amortization 5,118 4,054
Deferred income tax (benefit) provision (90) 76
Gain on sale of Milepost Four assets (826) -
Gain on sale of marketable securities (155) -
Net change in current assets and liabilities:
Receivables (6,386) (1,873)
Inventories (5,017) (9,011)
Prepaid expenses (5) 1,751
Prepaid catalog costs 3,436 1,873
Accounts payable 42,918 5,807
Accrued liabilities 9,195 652
Current and deferred income tax liabilities (3,105) 2,294
Increase in deferred catalog costs (11,700) (6,661)
--------- --------
Net cash provided by operating activities $ 41,585 $ 4,734
--------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment $ (14,497) $(9,884)
Repayments of loans to executives 100 -
Purchase of marketable securities (620) -
Proceeds from sale of marketable securities 775 -
Proceeds from sale of Milepost Four assets 1,546 -
--------- --------
Net cash used in investing activities $ (12,696) $ (9,884)
--------- --------
FINANCING ACTIVITIES:
Net (repayments of) advances under revolving line of credit $ (9,938) $ 4,822
Net proceeds from exercise of stock options 992 540
--------- --------
Net cash (used in ) provided by financing activities $ (8,946) $ 5,362
--------- --------
Net increase in cash and cash equivalents 19,943 212
Cash and cash equivalents, beginning 149 331
--------- --------
Cash and cash equivalents, ending $ 20,092 $ 543
========= ========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid for interest $ 47 $ 742
Cash paid for income taxes 8,589 595
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by Coldwater Creek Inc. (the "Company"), without audit, pursuant to the
rules and regulations of the United States Securities and Exchange Commission,
and in the opinion of management, contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the Company's
financial position, results of operations and cash flows for the periods
presented. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. The results of operations for the
interim periods disclosed within this report are not necessarily indicative of
future financial results. These consolidated financial statements are condensed
and should be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's latest Annual Report on Form 10-K,
which includes consolidated financial statements for the fiscal year ended
February 27, 1999.
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses at the date of the condensed consolidated
financial statements. Actual results could differ from those estimates.
References to a fiscal year refer to the calendar year in which such fiscal year
commenced. The Company's fiscal year ends on the Saturday closest to February
28. References to three and nine month periods refer to the respective thirteen
and thirty-nine weeks ended on the date indicated.
2. RECLASSIFICATIONS
Certain amounts in the prior period condensed consolidated financial statements
have been reclassified to be consistent with the current period presentation.
3. RECENTLY ADOPTED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). Under the
provisions of SOP 98-1, software development is divided into three phases: the
preliminary project stage, which includes conceptual formulation and selection
of alternatives; the application development stage, which includes design of
chosen path, coding, installation of hardware and testing; and the post-
implementation/operation stage, which includes training and application
maintenance. Generally, only internal and external costs incurred during the
second phase, the application development stage, are capitalizable with the
exception of data conversion and training costs, which, when incurred during
this phase are to be expensed. SOP 98-1 was effective for the Company's fiscal
1999 financial statements. The adoption of SOP 98-1 did not have a material
impact on the Company's consolidated financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 requires that the costs of
start-up activities, including organizational costs, be expensed as incurred and
was effective for the Company's fiscal 1999 financial statements. The adoption
of SOP 98-5 did not have a material impact on the Company's consolidated
financial statements.
7
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. In June 1999, the FASB issued Statement
of Financial Accounting Standard No. 137 delaying the effective date of SFAS No.
133. SFAS No. 133, as amended, is effective for the Company's fiscal 2001
financial statements. As the Company currently is not a party to any derivative
financial instruments and does not anticipate becoming a party to any derivative
instruments, management does not currently expect the adoption of SFAS No. 133
to have a material impact on the Company's consolidated financial statements.
5. EXECUTIVE LOAN PROGRAM
Effective June 30, 1997, the Company established an Executive Loan Program under
which the Company may make, 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. 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.
6. EARNINGS PER SHARE
The following is a reconciliation of the number of common shares used in the
computations of net income per basic and diluted share. Net income per basic
common share is computed by dividing net income by the weighted average number
of common shares outstanding for the period. Net income per diluted common
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock (e.g., stock options) were exercised or
converted into common stock. (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- -------------------------------
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
---------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Net income $ 5,188 $ 4,513 $ 8,202 $ 5,772
================ =============== ============ ============
Average shares outstanding used to
determine net income per basic common
share 10,234 10,183 10,215 10,161
Net effect of dilutive stock options
based on the treasury stock method
using average market price (1) 443 199 341 379
---------------- --------------- ------------- ------------
Average shares used to determine net
income per diluted common share 10,677 10,382 10,556 10,540
================ =============== ============ ============
</TABLE>
(1) Anti-dilutive stock options excluded from the above computations for the
three months ended November 27, 1999 and November 28, 1998 were 227,286 and
757,861, respectively. Anti-dilutive stock options excluded from the above
computations for the nine months ended November 27, 1999 and November 28,
1998 were 280,252 and 327,833, respectively.
8
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. CONTINGENCIES
The Company is involved in litigation and administrative proceedings primarily
arising in the normal course of its business. In the opinion of management, the
Company's recovery, if any, or the Company's liability, if any, under any
pending litigation or administrative proceedings would not materially affect its
financial position, results of operations or cash flows.
The Company's retailing business is currently based solely in the states of
Idaho, Washington, Missouri, Wyoming and West Virginia, and accordingly, the
Company only collects sales taxes from customers residing in those states. The
Company's wholly-owned subsidiary, Coldwater Creek Outlet Stores Inc., owns and
operates outlet stores throughout the United States and pays sales tax and
applicable corporate income, franchise and other taxes to the states in which
outlets are located. Various states have attempted to collect back sales and
use tax from direct marketers. The U.S. Supreme Court has held that the various
states, absent congressional legislation, may not impose tax collection
obligations on an out-of-state mail order company whose only contacts with the
taxing state are the distribution of catalogs and other advertisement materials
through the mail, and whose subsequent delivery of purchased goods is by mail or
interstate common carriers. The Company has not received an assessment from any
state. The Company anticipates that any legislative changes, if adopted, would
be applied only on a prospective basis.
8. SALE OF MILEPOST FOUR CATALOG
In late June of 1999, the Company completed the sale of substantially all the
assets underlying its Milepost Four men's apparel catalog. The purchase price
of $2.25 million resulting in a net pre-tax, non-operating gain of $826,000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion may contain forward-looking statements, including
statements regarding the Company's strategy, sales trends and operations, within
the meaning of the federal securities laws which involve risks and
uncertainties. When used in this discussion, the words "anticipate," "believe,"
"estimate," "expect," and similar expressions as they relate to the Company or
its management are intended to identify such forward-looking statements. These
statements are based on management's current expectations and the Company's
actual results, performance or achievements could differ materially from the
results expressed in, or implied by, these forward-looking statements. Factors
that could cause or contribute to such differences include, among others, the
following: those associated with offering apparel merchandise such as long lead
times, increased inventory requirements, merchandise returns, and high shipping
costs; general economic and business conditions and other factors outside the
Company's control such as customer response rates, consumer preferences, and
fluctuations in paper and postage costs; competition; success of operating
initiatives; development and operating costs; advertising and promotional
efforts; brand awareness; the existence or absence of adverse publicity;
availability, locations and terms of sites for store development; changes in
business strategy or development plans; quality of management; availability,
terms and deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs; and
construction costs; as well as those factors discussed below and elsewhere in
this Form 10-Q Quarterly Report. References to a fiscal year refer to the
calendar year in which such fiscal year commences. The Company's fiscal year
ends on the Saturday closest to February 28. References to three and nine month
periods refer to the thirteen and thirty-nine weeks ended on the date indicated.
Overview
- ---------
Coldwater Creek Inc. (the "Company") is a national, multi-channel retailer of
apparel, gifts, jewelry and home furnishings. The Company currently markets its
merchandise primarily through three distinct direct mail catalogs, an
interactive Internet web site (www.coldwatercreek.com) and four full-line retail
stores in Sandpoint, Idaho, Seattle, Washington, Kansas City, Missouri and
Jackson Hole, Wyoming. Northcountry, which was introduced in 1985, is the
Company's core catalog and features casual, comfortable apparel, hard-to-find
jewelry, distinctive artwork, gifts and items for the home. The Company's
premium catalog for women, Spirit of the West, was introduced in 1993 and
features fashionable, upscale apparel and hard-to-find jewelry and accessories.
Responding to customer demand for the selected, upscale bed and bath products
periodically featured in Northcountry and Spirit of the West, the Company
introduced its Bed & Bath catalog in August of 1997. With the objective of
further cultivating the success Bed & Bath achieved, the Company recently
retitled this catalog as "Home" and expanded its merchandise offerings to
include furnishings for every room of the house. Market receptiveness to the
recently debuted Home, as well as to two more recently launched pilot catalogs
for jewelry and apparel basics, are continuing to be evaluated by management
with ongoing refinements being made to their theme and composition.
In recognition of the rapidly increasing level of customer activity being
experienced on its web site, the Company accelerated a number of related
initiatives during fiscal 1999. In June of 1999, the Company significantly
increased the number of clearance items available for viewing and purchase on
its web site from approximately 70 items to more than 600 items. In July of
1999, the Company made its entire spectrum of catalog merchandise, consisting of
over 15,000 items, available for viewing and purchase on its web site. More
recently, the Company enhanced the usability and informational content of its
web site by adding a number of search and inquiry capabilities, including
detailed product specifications. In order to further increase the web site's
appeal to shoppers during the recently completed holiday season, the Company
added technology that enabled a customer at the click of a button to
instantaneously communicate with a customer service representative via a live,
text-based chat session.
Through its wholly-owned subsidiary, Coldwater Creek Outlet Stores Inc., the
Company currently operates thirteen outlet stores throughout the United States.
These outlet stores, as well as periodic clearance catalogs and the web site,
serve as the Company's primary promotional vehicles for the disposition of
excess merchandise inventory.
The Company targets middle-to-upper income households and seeks to differentiate
itself from other catalog, e-commerce and retail operations by offering
exceptional value through superior customer service and a merchandise assortment
that reflects a casual, uniquely American spirit. The Company believes that the
successful execution of its marketing and merchandising strategies coupled with
its high customer service standards and efficient order entry and fulfillment
operations have allowed it to develop a unique
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Overview (continued)
- --------------------
brand identity and strong relationships with its loyal customer base. The
Company plans to continue to stimulate future long-term growth through a variety
of strategic initiatives designed to promote customer use of the Company's web
site, expand merchandise offerings, yield higher customer response rates and
increase catalog circulation.
A key element of the Company's overall marketing strategy has been to pursue an
aggressive catalog circulation strategy when market conditions permit. As a
result of this ongoing marketing investment in current and future customer
growth, the costs of which constitute the substantial majority of each fiscal
period's selling, general and administrative expenses, the Company's proprietary
mailing list increased to 8.5 million names at November 27, 1999 as compared to
7.4 million names and 6.8 million names at February 27, 1999 and November 28,
1998, respectively. The Company's active customer file, defined as customers
who have made a purchase during the preceding twelve months, consisted of 2.1
million customers at November 27, 1999 as compared to 2.0 million customers and
1.9 million customers at February 27, 1999 and November 28, 1998, respectively.
In analyzing the Company's financial position, results of operations and cash
flows, it should be noted that the Company has experienced, and will continue to
experience, seasonal fluctuations in its sales and operating results as is
typical for many retailers. In past fiscal years, as well with the current
fiscal year, the Company's net sales and profits have been heavily reliant on
the November and December holiday season. Management believes that this
seasonality will continue in the future although to a lesser degree as a result
of the increased representation of apparel and home furnishings within the
Company's overall merchandise mix.
In anticipation of the increased sales activity expected during November and
December, the Company incurs certain significant additional expenses, including
the hiring of a substantial number of temporary employees to supplement its
permanent, full time staff. In addition, due to the larger percentage of gifts
and accessories traditionally offered in the second half of the fiscal year
related to holiday gift giving, the Company generally expects higher gross
margins in the second half of the fiscal year than in the first half. If, for
any reason, the Company's net sales were to fall below its expectations during
November and December, the Company's financial condition, results of operations
and cash flows would be adversely affected. The Company does not believe its
historical results of operations will necessarily be indicative of future
results.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Results of Operations
- ---------------------
The following table sets forth certain information regarding the Company's costs
and expenses expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
November 27, November 28, November 27, November 28,
(as a percentage of net sales) 1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0 % 100.0% 100.0 %
Cost of sales 47.5 48.3 48.1 48.7
------------- ------------- ------------- -------------
Gross profit 52.5 51.7 51.9 51.3
Selling, general and
administrative expenses 44.4 43.4 46.5 46.8
------------- ------------- ------------- -------------
Income from operations 8.2 8.3 5.4 4.5
Interest, net, and other 0.3 (0.3) 0.2 (0.4)
Gain on sale of Milepost Four assets 0.0 0.0 0.4 0.0
------------- ------------- ------------- -------------
Income before provision for
income taxes 8.5 8.0 6.0 4.1
Provision for income taxes 3.4 3.2 2.4 1.6
------------- ------------- ------------- -------------
Net income 5.1% 4.8% 3.6% 2.5 %
============= ============= ============= =============
</TABLE>
Note: Certain of the above sub-totals and totals may vary arithmetically due to
the effects of rounding.
The Company realized net sales of $101.2 million from the mailing of 55.6
million catalogs during the three months ended November 27, 1999 ("the fiscal
1999 quarter") versus net sales of $94.7 million from the mailing of 51.1
million catalogs during the three months ended November 28, 1998 ("the fiscal
1998 quarter"). For the nine months ended November 27, 1999 ("the first nine
months of fiscal 1999"), the Company realized net sales of $226.1 million from
the mailing of 116.6 million catalogs as compared to net sales of $235.6 million
from the mailing of 128.2 million catalogs during the nine months ended November
28, 1998 ("the first nine months of fiscal 1998"). The Company's previously
discontinued Milepost Four men's apparel catalog, which was sold during the
fiscal 1999 second quarter, contributed $6.1 million of net sales from the
mailing of 6.5 million catalogs and $12.4 million of net sales from the mailing
of 13.3 million catalogs during the fiscal 1998 quarter and nine months,
respectively.
Consistent with the planned mailing strategy disclosed in the Company's most
recent Form 10-K Annual Report, the Company maintained a conservative posture
towards prospective catalog mailings during the first half of fiscal 1999.
However, in anticipation of the holiday shopping season, the Company began more
aggressively prospecting during the fiscal 1999 third quarter. This contrasts
with the first nine months of fiscal 1998 during which the Company continuously
maintained an aggressive prospecting campaign. Although generally resulting in
incremental net sales, customer prospecting traditionally provides a
significantly lower return on the Company's marketing investment.
Excluding the effects of Milepost Four and reflecting the decreased return
realized on its marketing investment from increased prospecting, the Company's
net sales for the fiscal 1999 quarter increased by $12.6 million, or 14.2%, from
the mailing of 11.0 million, or 24.7%, more catalogs. Evidencing the
traditionally higher marketing return realized by the Company from cultivating
of its active customer file and the conservative posture it maintained towards
prospecting during the first and second quarters of fiscal 1999, net sales for
the first nine months of fiscal 1999 increased by 1.3%, or $2.9 million, from
the mailing of 1.5%, or 1.7 million, more catalogs.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Results of Operations (continued)
- ---------------------------------
The Company's e-commerce sales have continued to grow at a rapid rate during the
first nine months of fiscal 1999, realizing milestones of one million dollars
and two million dollars in online net sales during the calendar months of August
and September 1999, respectively. Reflecting, in part, the onset of the recently
completed holiday shopping season, e-commerce sales accounted for $9.9 million,
or nearly 10%, of the Company's consolidated net sales for the fiscal quarter
ended November 27, 1999. This compares to an insignificant $81,000 in e-commerce
net sales during the corresponding fiscal 1998 quarter. On average, the Company
has found that approximately one-fifth of the customers patronizing the web site
have had no previous history with the Company whereas the balance constitutes
customers who have previously patronized the Company's catalogs and retail
stores. Although there can be no assurance of such, management believes that
with increased promotion of the Company's web site e-commerce sales will
continue to rapidly grow and constitute an increasing percentage of the
Company's consolidated net sales.
Gross profit for the fiscal 1999 quarter increased $4.2 million, or 8.5%, to
$53.1 million from $49.0 million for the fiscal 1998 quarter. Gross profit for
the first nine months of fiscal 1999 decreased $3.5 million, or 2.9%, to $117.3
million from $120.8 million for the first nine months of fiscal 1998. The
Company's gross profit percentages increased to 52.5% and 51.9% for the three
and nine months ended November 27, 1999, respectively, from 51.7% and 51.3% for
the corresponding fiscal 1998 periods. The increased gross profit realized
during the fiscal 1999 quarter primarily is attributable to higher net sales
whereas the increased gross margin primarily is attributable to the
traditionally higher margins realized on the Company's holiday gift offerings as
previously outlined. The lower gross profit realized during the first nine
months of fiscal 1999 primarily is attributable to the planned reduction in net
sales from contributing, yet less profitable, prospective catalog mailings
during the first and second quarters of fiscal 1999. The improved gross margin
realized during the first nine months of fiscal 1999 primarily is the result of
increased profit realization on excess merchandise inventories sold through more
cost effective disposition channels, primarily the Company's outlet stores and
web site, the traditionally higher margins realized on the Company's holiday
gift offerings and improved pricing obtained from vendors.
Selling, general and administrative expenses ("SG&A") increased by $3.8 million,
or 9.2%, to $44.9 million during the fiscal 1999 quarter from $41.1 million in
the comparable fiscal 1998 quarter. However, during the first nine months of
fiscal 1999, SG&A expenses decreased by $5.2 million, or 4.7%, to $105.0 million
compared to $110.3 million during the first nine months of fiscal 1998. SG&A
expenses increased as a percentage of net sales to 44.4% during the fiscal 1999
quarter from 43.4% during the fiscal 1998 quarter primarily as a result of the
catalog related costs incurred in connection with more aggressive customer
prospecting and certain labor inefficiencies realized from the hiring of a
substantial number of inexperienced temporary employees for the holiday season
at the Company's recently opened permanent East Coast Operations Center. In
contrast, SG&A expenses decreased to 46.5% of net sales for the first nine
months of fiscal 1999 from 46.8% for the first nine months of fiscal 1998
primarily as a result of the decreased catalog circulation costs incurred in
connection with the aforementioned planned contraction in prospective catalog
mailings during the first six months of fiscal 1999.
As a result of the foregoing, operating income increased by $0.4 million, or
4.6%, to $8.3 million for the fiscal 1999 quarter from $7.9 million for the
fiscal 1998 quarter. Operating income for the first nine months of fiscal 1999
increased by $1.7 million, or 16.3%, to $12.2 million from $10.5 million during
the first nine months of fiscal 1998. Expressed as a percentage of net sales,
operating income was 8.2% and 5.4% for the fiscal 1999 quarter and nine months,
respectively, versus 8.3% and 4.5% for the comparative fiscal 1998 periods.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Results of Operations (continued)
- ---------------------------------
During the fiscal 1999 quarter, the Company realized $0.3 million in net
interest income as compared to $0.3 million in net interest expense during the
comparable fiscal 1998 quarter. Similarly, for the first nine months of fiscal
1999, the Company realized $0.5 million in net interest income as compared to
$0.9 million in net interest expense during the first nine months of fiscal
1998. These favorable reversals are substantially attributable to the Company's
significantly improved operating cash flows which in turn enabled it to fully
repay its preceding year-end line of credit balance and to accumulate a
significant cash balance. The Company also realized a non-recurring, pre-tax
gain of $0.8 million from the aforementioned sale of its Milepost Four catalog
during the fiscal 1999 second quarter.
The Company reported net income for the fiscal 1999 quarter of $5.2 million, an
increase of 15.0% from $4.5 million for the fiscal 1998 quarter. Basic and
diluted net income per share was $0.51 and $0.49, respectively, for the fiscal
1999 quarter versus basic and diluted net income per share of $0.44 and $0.43,
respectively, for the fiscal 1998 quarter. Net income for the first nine months
of fiscal 1999 was $8.2 million as compared to net income of $5.8 million for
the first nine months of fiscal 1998. Basic and diluted net income per share was
$0.80 and $0.78 for the first nine months of fiscal 1999, respectively, versus
basic and diluted net income per share of $0.57 and $0.55, respectively, for the
first nine months of fiscal 1998.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
- -------------------------------
Coldwater Creek has historically funded its growth through a combination of
funds generated from operations, trade credit arrangements and short-term bank
credit facilities. Working capital requirements generally precede the
realization of sales. The Company typically draws on its working capital lines
to produce catalogs and increase inventory levels in anticipation of future
sales realization. Standard trade credit arrangements typically require the net
amount due to be paid within sixty days of receipt of the inventory or services.
The Company has an agreement with First Security Bank, N.A., a major Northwest
commercial bank, providing for $50.0 million in credit facilities, consisting of
an unsecured revolving line of credit of $47.4 million (with a sub-limit of $7.0
million for letters of credit) and a term standby letter of credit of $2.6
million. At the option of the Company, the interest rate is the bank's Prime
Rate or Adjusted LIBOR [i.e., rate per annum equal to the quotient of the London
Interbank Offered Rate divided by one (1) minus the Eurocurrency Reserve
Requirement for the applicable Interest Period, rounded upward, if necessary, to
the nearest one-sixteenth of one percent], increased or decreased by a margin
based upon the Company's then EBITDA Coverage Ratio, as defined. The agreement
provides that the Company must satisfy certain specified EBITDA, leverage and
current ratio requirements and 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 credit facility has a
maturity date of June 30, 2001.
Operating activities generated $41.6 million of positive cash flow during the
first nine months of fiscal 1999 as compared to $4.7 million during the first
nine months of fiscal 1998. On a comparative basis, the first nine months of
fiscal 1999 primarily reflect the Company's higher net income complimented by
the positive cash flow effects of increased accounts payable and accrued
liabilities. These positive cash flows were partially offset primarily by the
reversal of the non-operating gain on the sale of Milepost Four and the negative
cash flow effects of increased receivables, inventories, deferred catalog costs
and a decrease in income tax liabilities. The net positive operating cash flow,
as well as $1.5 million in net investing proceeds from the sale of Milepost Four
assets and $1.0 million in net proceeds from the exercise of employee stock
options, were primarily utilized to fund $14.5 million of capital equipment
expenditures, to fully pay-off the Company's $9.9 million revolving line of
credit balance and to increase the Company's cash and cash equivalents balance
by $19.9 million.
Investing activities consumed $12.7 million and $9.9 million of cash during the
fiscal 1999 and 1998 periods, respectively, with cash outlays consisting
principally of capital expenditures. The fiscal 1999 capital expenditures
primarily reflect the cost of material handling, telecommunication and
information systems for the permanent East Coast Operations Center discussed
below, and to a lesser degree, hardware and software additions and upgrades to
corporate systems, including the e-commerce web site, and leasehold improvements
related to the recently opened Seattle and Kansas City retail stores. Capital
expenditures directly attributable to the Company's Year 2000 were immaterial.
Financing activities during the first nine months of fiscal 1999 primarily
consisted of the repayment of the Company's previous $9.9 million revolving line
of credit balance whereas the fiscal 1998 quarter primarily consisted of $4.8
million in line of credit advances. The Company also realized $1.0 million and
$0.5 million from the exercising of employee stock options during the fiscal
1999 and 1998 periods, respectively. At November 27, 1999, the Company had no
short or long-term debt as compared to outstanding revolving line of credit
balances of $9.9 million and $15.1 million at February 27, 1999 and November 28,
1998, respectively.
As a result of the foregoing, the Company had $12.7 million in working capital
at November 27, 1999 as compared to $24.6 million and $7.8 million at February
27, 1999 and November 28, 1998, respectively. The Company's current ratio was
1.2 at November 27, 1999 as compared to 1.6 at February 27, 1999 and 1.1 at
November 28, 1998.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
On June 12, 1998, the Company executed a definitive operating lease agreement
with the Wood County Development Authority to establish an East Coast Operations
Center near Parkersburg, West Virginia. This agreement primarily was entered
into in order to alleviate certain capacity constraints which were being
experienced at the Company's distribution center in Sandpoint, Idaho and to
reduce the costs incurred in shipping certain merchandise orders to the majority
of the Company's customers which are located in the eastern United States. The
new East Coast Operations Center, which opened in July 1999, approximates
600,000 square feet and is situated on approximately 60 acres, allowing for
future expansion.
In exchange for the Company's willingness to establish a long-term presence near
Parkersburg, the State of West Virginia made available to the Company, at a
nominal annual lease cost, a temporary 120,000 square foot facility from which
the Company conducted certain order fulfillment operations while the permanent
facility was under construction. The establishment of the interim East Coast
operations allowed the Company's management to implement new technologies and
train new employees on a reduced but increasing scale pending completion of the
permanent operations center.
The addition of the permanent East Coast Operations Center, supported by a new
information technology platform, provides the Company with a consolidated base
of operations capable of processing 120,000 customer orders a day thereby
enabling the Company to continue its historical commitment to providing the
highest possible standard of customer service. In addition, the new facility
enables the Company to rapidly expand its Internet sales channel, immediately
build upon the success of its Bed & Bath line by increasing the current offering
of home furnishings in the Company's recently debuted "Home" catalog and
potentially expand other merchandise category offerings. The Company also
recently transitioned the operations of its Parkersburg customer service call
center, which previously resided in other leased premises, into the new
operations center.
The Company will incur annual lease expense for the permanent East Coast
Operations Center of approximately $2.2 million over the twenty year lease term.
The lease allows the Company, at its option, to (i) purchase the underlying land
and facility at a then determined fair market value or (ii) exercise up to four
successive five-year extensions.
Management's long-term brand building strategy includes the selective opening of
highly visible retail stores in high traffic areas, including major urban areas
and "destination" locations near major national parks or other resort areas.
The Company currently operates four full-line retail stores in Sandpoint, Idaho,
Seattle Washington, Kansas City, Missouri and Jackson Hole, Wyoming. The
Seattle and Kansas City stores opened during November 1999. Management is
actively considering the opening of retail stores in the future as prime
locations become available. The Company does not currently plan to open any
additional stores during the balance of fiscal 1999 but is evaluating the
possibility of establishing four to six additional full-line retail stores
during fiscal 2000. It is contemplated that each such retail store would be
leased with an average initial cash investment per store being limited to
leasehold improvements and inventory in the approximate range of $2 million to
$4 million.
During the balance of fiscal 1999, the Company plans to make between $1 million
and $2 million in additional capital expenditures to support its anticipated
continued growth. The majority of these capital expenditures will constitute
additional technological upgrades for the Company's interactive commerce web
site and labor performance measurement technology for the Company's two
distribution centers. With respect to fiscal 2000, the Company currently
estimates that it will make between $12 million and $15 million in capital
expenditures primarily for technological upgrades for the interactive commerce
web site and infrastructure, and retail store expansion. These expenditures are
expected to be funded from available cash balances, and to the extent necessary,
the Company's existing bank credit facility.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
The Company believes that cash flow from operations and borrowing capacity under
its bank credit facility will be sufficient to support operations and future
growth for the foreseeable future. Thereafter, the Company may be required to
seek additional sources of funds for continued or accelerated growth and there
can be no assurance that such funds will be available on satisfactory terms.
Failure to obtain such financing could delay or prevent the Company's planned
growth, which could adversely affect the Company's business, financial position,
results of operations and cash flows.
Other Matters
- -------------
Future Outlook
- --------------
Beginning in the fourth quarter of fiscal 1997, the Company began to experience,
as did other direct retailers, a significant softening of consumer demand
particularly for upscale women's fashions such as those featured by the Company
in its Spirit of the West catalog. In light of the then uncertain state of this
niche of the marketplace, the Company modified its growth expectations and
proceeded cautiously in its mailings of Spirit of the West. Particularly, the
Company curtailed its previously aggressive prospect mailings of Spirit of the
West until a reasonably sustained improvement in consumer demand for upscale
womens' fashions was noted. While awaiting such upturn, the Company and its new
chief merchant embarked on a program to significantly revamp the Spirit of the
West fashions which began being featured in the Company's Fall 1999 offerings.
Subsequently, the Company has noted sustained improvement in consumer demand for
upscale womens' apparel. Should this positive trend not be sustained the growth
and financial performance of the Company's Northcountry and Home catalogs could
be diminished by the financial performance of Spirit of the West.
Year 2000 Compliance
- ----------------------
The Company has completed its enterprise-wide Year 2000 project. As a result of
its efforts over the past two years, the Company experienced no significant
problems at the turn of the century with either its own technology or that of
its infrastructure providers. The only identified incidents in the new year to
date have been minor in nature and necessitated an upgrade to a software package
on two workstations at the Company's Sandpoint retail store and a modification
to the Company's order management software to disallow credit cards with an
expiration date prior to 2000. Month-end processing for December was completed
without incident. The remaining software code to be exercised in operations is
fiscal year-end processing, where the probability of a significant Y2K related
problem is considered by management to be remote. Contingency plans to manage
all identified areas of perceived risk will remain in place throughout 2000.
The costs incurred by the Company in connection with its Year 2000 compliance
program have been and are expected to remain immaterial to the Company's
financial position, results of operations and cash flows.
Recently Issued Accounting Standards Not Yet Adopted
- ----------------------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. In June 1999, the FASB issued Statement
of Financial Accounting Standard No. 137 delaying the effective date of SFAS No.
133. SFAS No. 133, as amended, is effective for the Company's fiscal 2001
financial statements. As the Company currently is not a party to any derivative
financial instruments and does not anticipate becoming a party to any derivative
instruments, management does not currently expect the adoption of SFAS No. 133
to have a material impact on the Company's consolidated financial statements.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Risk Factors
- ------------
Competition
- ------------
The markets for the Company's merchandise are highly competitive, and the recent
growth in these markets has encouraged the entry of many new competitors as well
as increased competition from established companies. Although the Company
believes that it does not compete directly with any single company with respect
to its entire range of merchandise, within each merchandise category the Company
has significant competitors and may face new competition from new entrants or
existing competitors who focus on market segments currently served by the
Company. These competitors include large retail operations, including some with
catalog operations, other catalog and direct marketing companies and
international competitors. The recent addition of Internet commerce operations
by a number of these retailers, as well as the emergence of a number of stand-
alone e-commerce companies, has introduced a further element of competition into
the Company's markets. The Company is in direct competition with more
established catalog operations, some with substantially greater experience in
selling similar merchandise and which may focus on prospective customers sharing
some of the demographic characteristics of the Company's customers. Any failure
on the part of the Company to successfully market its merchandise or to compete
effectively against such competitors could have a material adverse affect on the
Company's growth and could adversely affect the Company's business, financial
position, results of operations and cash flows.
Many of these competitors are larger and have significantly greater financial,
marketing and other resources than the Company. Increased catalog mailings and
Internet solicitations by the Company's competitors may adversely affect
response rates to the Company's catalog mailings and Internet offerings. In
addition, because the Company sources the majority of its merchandise from
vendors located in the United States, where labor and production costs may be
higher than in foreign countries, there can be no assurance that the Company's
merchandise will or can be competitively priced when compared to merchandise
offered by other retailers. While the Company believes that it has been able to
compete successfully because of its brand recognition, the exclusivity and broad
range and quality of its merchandise, including its private label merchandise
offerings, and its customer service policies, there can be no assurance that the
Company will be able to maintain or increase its market share in the future. The
failure of the Company to compete successfully could materially and adversely
affect the Company's business, financial position, results of operations and
cash flows.
Reliance on Catalog Operations
- ------------------------------
The Company's success for the foreseeable future depends predominately on the
success of its catalog operations, which the Company believes is achieved
through the efficient targeting of its mailings, a high volume of prospect
mailing when market conditions permit, appropriate shifts in the Company's
merchandise mix and the Company's ability to achieve adequate response rates to
its mailings. Catalog mailings entail substantial paper, postage, merchandise
acquisition and human resource costs, including costs associated with catalog
development and increased inventories, virtually all of which are incurred prior
to the mailing of each catalog. As a result, the Company is not able to adjust
the costs being incurred in connection with a particular mailing to reflect the
actual performance of the catalog. If, for any reason, the Company were to
experience a significant shortfall in anticipated revenue from a particular
mailing, and thereby not recover the costs associated with that mailing, the
Company's financial condition, results of operations and cash flows could be
adversely affected. In addition, response rates to the Company's mailings and,
as a result, revenues generated by each mailing, can be affected by factors such
as consumer preferences, economic conditions, the timing and mix of catalog
mailings and changes in the merchandise mix, several of which may be outside the
Company's control. Furthermore, the Company historically has experienced
fluctuations in the response rates to its catalog mailings. Any inability of
the Company to accurately target the appropriate segment of the consumer catalog
market or to achieve adequate response rates could result in lower sales,
significant markdowns or write-offs of inventory, increased merchandise returns,
lower results of operations and decreased cash flows.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Risk Factors (continued)
- ------------------------
Risks Associated with Growth Strategy
- -------------------------------------
The Company's growth strategy primarily includes the following components:
introducing expanded catalog and merchandise offerings, publishing new catalog
titles, increasing catalog circulation, expanding the Company's customer base
through aggressive prospect mailings when market conditions permit, and
increasing the use of other marketing channels, such as retail stores and the
Internet. The Company's growth strategy involves various risks, including a
reliance on a high degree of prospect mailings when market conditions permit,
which may lead to less predictable response rates. The failure of the Company
to successfully implement any or all of its growth strategies could have a
material adverse effect on the Company's business, financial position, results
of operations and cash flows.
The Company believes its growth is attributable in large part to the Company's
success in meeting the merchandise, timing and service demands of an expanding
customer base with certain demographic characteristics. There can be no
assurance that the Company will be able to continually identify and offer new
merchandise that appeals to its customer base or that the introduction of new
merchandise categories or new marketing or distribution strategies, such as the
sale of the Company's merchandise through new catalog titles, retail stores or
the Internet, will be successful or profitable, or that any such efforts will
achieve sustainable acceptance in the market. Any inability on the part of the
Company to sustain the growth of its catalog operations and sales, to maintain
its current average order size and response rates or to leverage the success of
existing catalog titles to new merchandise lines, catalogs, retail stores and
the Internet could have a material adverse effect on the Company's business,
financial position, results of operations and cash flows.
Management's long-term brand building strategy includes the selective opening of
highly visible retail stores in high traffic areas, including major urban areas
and "destination locations" such as locations near major national parks or other
resort areas. The Company currently operates four full-line retail stores.
Management is actively considering the opening of additional retail stores in
the future as prime locations become available. To date, the Company has had
limited experience operating retail stores, particularly stores outside the
vicinity of its headquarters. The cost of opening a retail store varies
dramatically depending on several factors such as whether the Company purchases
or leases the facilities in which the store will be placed, the size of the
store, the location of the store as well as the attendant differences in the
cost of real estate and the type and range of merchandise to be offered at the
store. In addition, retail store operations entail substantial fixed costs,
including costs associated with real estate, inventory maintenance and staffing.
Failure to successfully implement this store-based strategy could result in
significant write-offs of inventory and fixtures and could have a material
adverse effect on the Company's business, financial position, results of
operations and cash flows.
Management's long-term brand building strategy also includes increased promotion
of the Company's interactive Internet commerce web site. While Internet-related
sales remained immaterial to the Company's overall financial results for the
fiscal year ended February 27, 1999 and the first nine months of fiscal 1999,
the increases realized from this new sales channel have been substantial on a
percentage basis. As a result, the Company recently formed a dedicated Internet
Commerce Division which is personally led by Dennis Pence, the Company's Co-
Founder and Chief Executive Officer. In June of 1999, the Company expanded the
number of clearance items available for viewing and sale on its web site from
approximately 70 items to over 600 items. In July of 1999, the Company began
offering its entire spectrum of catalog merchandise, consisting of over 15,000
items, for viewing and sale on its web site. The Company also has recently
improved the site's structure and capacity to handle additional customer demand
and enhanced its usability and informational content by adding a number of
search and inquiry capabilities, including detailed product specifications and
real-time inventory availability. The development and expansion of the
Company's e-commerce capabilities will continue to entail substantial costs,
including costs associated with computer hardware and
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Risk Factors (continued)
- ------------------------
Risks Associated with Growth Strategy (continued)
- -------------------------------------------------
software, technical staffing and continuing web site maintenance and
development. Additionally, substantial costs will be incurred in the marketing
of the Company's web site. Failure to successfully implement and maintain this
Internet-based strategy could result in significant write-offs of inventory and
computer hardware and software and could have a material adverse effect on the
Company's business, financial position, results of operations and cash flows.
In addition, the continued expansion of the Company's Internet operations entail
significant risks including the uncertainty of widespread consumer acceptance
and use of the Internet as a way to buy products. This consumer practice is at
an early stage of development, and demand and continued market acceptance is
uncertain. The Company cannot predict the number of consumers that will be
willing to shift their purchasing habits to online retailers. The Internet may
not become a viable commercial marketplace due to inadequate development of
network infrastructure and enabling technologies that address consumer concerns
about network performance, security, reliability, speed of access, and ease of
use. In addition, the Internet's viability as a commercial marketplace could be
adversely affected by government regulation. Changes in or insufficient
availability of telecommunications or other services to support the Internet
also could result in slower response times and adversely affect general usage of
the Internet. Also, negative publicity and consumer concern about the security
of transactions conducted on the Internet and the privacy of users may also
inhibit the growth of commerce on the Internet. There can be no assurances that
e-commerce sales will continue to increase at current rates if at all.
The Company may need to raise additional funds in order to support greater
expansion, develop enhanced services, respond to competitive pressures, acquire
complementary businesses or respond to unanticipated or seasonal requirements.
In addition, various elements of the Company's growth strategies may require
additional capital, including its plans to broaden existing merchandise lines,
including its private label offerings, its plans to introduce new merchandise
and catalog titles and its aggressive mailing program when market conditions
permit. There can be no assurance that funds will be available to the Company
on terms satisfactory to the Company when needed.
Management of Expanding Operations
- ----------------------------------
The Company's growth has resulted in an increased demand on the Company's
managerial, operational and administrative resources. The Company recently has
invested significant resources in its distribution facilities, management
information systems and telephone infrastructure. However, in order to manage
currently anticipated levels of future demand, the Company will be required to
continue, among other things, to improve and integrate its management
information systems and controls, including inventory management, and attract
and retain qualified personnel, including middle management. Recently, the
Company significantly expanded its warehousing and distribution capabilities as
well as added additional retail stores. There can be no assurance that the
upgrades, improvements and expansions in the Company's information or telephone
systems or its current expansion of its warehousing and distribution facilities
and operations will increase the productivity or efficiency of the Company's
operations or that the same will be adequate to meet the present or future needs
of the Company. Continued growth could result in a strain on the Company's
management, financial, merchandising, marketing, distribution and other
resources and the Company may experience operating difficulties, including
difficulties in training and managing an increasing number of employees,
difficulties in obtaining sufficient quantities of certain merchandise from its
vendors, problems in upgrading its management information systems and delays in
merchandise shipments. The inability of the Company to respond to and manage
these changing business conditions could have a material adverse effect on the
Company's business, financial position, results of operations and cash flows.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Risk Factors (continued)
- ------------------------
Quarterly and Seasonal Fluctuations
- -----------------------------------
The Company's revenue and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of a number
of factors including, among other things, the timing of new merchandise and
catalog offerings, recognition of costs or net sales contributed by new
merchandise and catalog offerings, fluctuations in response rates, fluctuations
in paper, production and postage costs and expenses, merchandise returns,
adverse weather conditions that affect distribution or shipping, shifts in the
timing of holidays and changes in the Company's merchandise mix. If revenues are
below expectations in any given period, the adverse impact of such a shortfall
may be magnified by the Company's inability to adjust spending to compensate for
the shortfall.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Coldwater Creek is not exposed to financial market risks from changes in foreign
currency exchange rates and is only minimally impacted by changes in interest
rates. Borrowings under the Company's bank credit facility are at a variable
rate of interest and, based on the current level of borrowings, the Company
experiences only modest changes in interest expense when market interest rates
change. However, in the future, the Company may enter into transactions
denominated in non-U.S. currencies or increase the level of its borrowings,
which could increase the Company's exposure to these market risks. The Company
has not used, and currently does not contemplate using, any derivative financial
instruments.
21
<PAGE>
PART II
Item 1. Legal Proceedings
There are no material legal proceedings presently pending to which Coldwater
Creek Inc. or its subsidiary is a party or of which any of their properties are
the subject.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
NUMBER DESCRIPTION OF DOCUMENT
- ------------------------------
27.1 Financial Data Schedule
There were no reports filed on Form 8-K during the three months ended November
27, 1999.
22
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sandpoint,
State of Idaho, on this 11th day of January 2000.
COLDWATER CREEK INC.
By: /s/Donald A. Robson
---------------------------------------
Donald A. Robson
Senior Vice President, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> MAR-04-2000 FEB-27-1999
<PERIOD-START> FEB-28-1999 MAR-01-1998
<PERIOD-END> NOV-27-1999 NOV-28-1998
<CASH> 20,092 0
<SECURITIES> 0 0
<RECEIVABLES> 9,069 0
<ALLOWANCES> 0 0
<INVENTORY> 60,771 0
<CURRENT-ASSETS> 92,009 0
<PP&E> 59,488 0
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<TOTAL-ASSETS> 148,795 0
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<BONDS> 0 0
0 0
0 0
<COMMON> 103 0
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<TOTAL-LIABILITY-AND-EQUITY> 148,795 0
<SALES> 226,115 235,618
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<EPS-BASIC> 0.80 0.57
<EPS-DILUTED> 0.78 0.55
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