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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 25, 2000
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 ____
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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 December 31, 2000
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Common Stock ($.01 par value) 10,584,692
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<PAGE>
INDEX TO FORM 10-Q
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at November 25, 2000 and February 26, 2000................... 4
Condensed Consolidated Statements of Operations for the three and nine month periods ended
November 25, 2000 and November 27, 1999............................................................ 5
Condensed Consolidated Statements of Cash Flows for the nine month periods ended
November 25, 2000 and November 27, 1999............................................................ 6
Notes to Condensed Consolidated Financial Statements............................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 26
Item 2. Changes in Securities and Use of Proceeds................................................ 26
Item 3. Defaults Upon Senior Securities.......................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders...................................... 26
Item 5. Other Information........................................................................ 26
Item 6. Exhibits and Reports on Form 8-K......................................................... 26
</TABLE>
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
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PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3
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COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except for share data)
<TABLE>
<CAPTION>
November 25, February 26,
2000 2000
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,970 $ 7,533
Receivables 7,237 5,741
Inventories 85,505 60,203
Prepaid expenses 1,790 1,319
Prepaid catalog costs 1,217 3,994
Deferred income taxes 915 915
------------ ------------
Total current assets 106,634 79,705
Deferred catalog costs 17,450 2,817
Property and equipment, net 49,721 38,895
Executive loans 1,236 1,453
------------ ------------
Total assets $ 175,041 $ 122,870
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 60,140 $ 30,098
Accrued liabilities 20,613 13,549
Income taxes payable 234 2,140
------------ ------------
Total current liabilities 80,987 45,787
Deferred income taxes 513 513
------------ ------------
Total liabilities 81,500 46,300
------------ ------------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued and outstanding - -
Common stock, $.01 par value, 60,000,000 shares authorized,
10,573,242 and 10,319,345 issued and
outstanding, respectively 106 103
Additional paid-in capital 46,081 41,579
Retained earnings 47,354 34,888
------------ ------------
Total stockholders' equity 93,541 76,570
------------ ------------
Total liabilities and stockholders' equity $ 175,041 $ 122,870
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except for per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
November 25, November 27, November 25, November 27,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 123,698 $ 101,190 $ 288,622 $ 226,115
Cost of sales 58,323 48,045 138,271 108,841
------------ ------------ ------------ ------------
Gross profit 65,375 53,145 150,351 117,274
Selling, general and administrative expenses 53,980 44,895 130,643 105,045
------------ ------------ ------------ ------------
Income from operations 11,395 8,250 19,708 12,229
Interest, net, and other 204 339 752 541
Gain on sale of Milepost Four assets - - - 826
------------ ------------ ------------ ------------
Income before provision for income taxes 11,599 8,589 20,460 13,596
Provision for income taxes 4,535 3,401 7,994 5,394
------------ ------------ ------------ ------------
Net income $ 7,064 $ 5,188 $ 12,466 $ 8,202
============ ============ ============ ============
Net income per share - Basic $ 0.67 $ 0.51 $ 1.19 $ 0.80
============ ============ ============ ============
Net income per share - Diluted $ 0.64 $ 0.49 $ 1.15 $ 0.78
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------------
November 25, November 27,
2000 1999
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 12,466 $ 8,202
--------------- ---------------
Non cash items:
Depreciation and amortization 6,704 5,118
Deferred income tax benefit - (90)
Gain on sale of Milepost Four assets - (826)
Gain on sale of marketable securities - (155)
Other non cash charges 230 -
Net change in current assets and liabilities:
Receivables (1,496) (6,386)
Inventories (25,302) (5,017)
Prepaid expenses (418) (5)
Prepaid catalog costs 2,777 3,436
Accounts payable 30,042 42,918
Accrued liabilities 7,064 9,195
Income taxes payable (103) (3,105)
Increase in deferred catalog costs (14,633) (11,700)
--------------- ---------------
Net cash provided by operating activities $ 17,331 $ 41,585
--------------- ---------------
INVESTING ACTIVITIES:
Purchase of property and equipment $ (17,704) $ (14,497)
Repayments of loans to executives 161 100
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 $ (17,543) $ (12,696)
--------------- ---------------
FINANCING ACTIVITIES:
Net repayments of advances under revolving line of credit $ - $ (9,938)
Other financing costs (53) -
Net proceeds from exercises of stock options 2,702 992
--------------- ---------------
Net cash provided by (used in) financing activities $ 2,649 $ (8,946)
--------------- ---------------
Net increase in cash and cash equivalents 2,437 19,943
Cash and cash equivalents, beginning 7,533 149
--------------- ---------------
Cash and cash equivalents, ending $ 9,970 $ 20,092
=============== ===============
SUPPLEMENTAL CASH FLOW DATA:
Cash paid for interest $ 6 $ 47
Cash paid for income taxes 8,097 8,589
Tax benefit from exercises of stock options 1,803 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Condensed Consolidated Financial Statements
Organizational Structure and Nature of Operations
Coldwater Creek Inc. (the ''Company''), a Delaware corporation
headquartered in Sandpoint, Idaho, is a multi-channel retailer of women's
apparel, jewelry, gifts and soft home accessories, primarily marketing its
merchandise through targeted catalog mailings, interactive e-commerce web sites
(www.coldwatercreek.com and www.galleryatthecreek.com) and full-line retail
stores.
Through its wholly owned subsidiary, Coldwater Creek Outlet Stores Inc.,
the Company also operates outlet stores which, along with its coldwatercreek.com
e-commerce web site and periodic clearance catalogs, serve as disposition
vehicles for excess merchandise inventory. This subsidiary is consolidated in
these financial statements and all material intercompany transactions and
balances have been eliminated.
Preparation of Interim Condensed Consolidated Financial Statements
The interim condensed consolidated financial statements included herein
have been prepared by the management of Coldwater Creek Inc., 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 consolidated financial position, results of operations and cash
flows for the periods presented. Certain information and note 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
consolidated financial position, results of operations and cash flows 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 audited consolidated financial statements and related notes
thereto for the fiscal year ended February 26, 2000.
Certain amounts in the condensed consolidated financial statements for the
prior fiscal year interim period have been reclassified to be consistent with
the current fiscal year's interim presentation.
Use of Estimates
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 and disclosure of contingent assets and
liabilities at the date of the condensed consolidated financial statements.
Actual results could differ from those estimates.
Fiscal Periods
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 immediately
preceding or following February 28, whichever is chronologically closer. The
fiscal year is generally 52 weeks, but occasionally will consist of 53 weeks, as
will be the case in the current fiscal year 2000. References to three and nine
month periods generally refer to the respective thirteen and thirty-nine weeks
ended on the date indicated, as is the case for the interim periods presented
herein. The pending fourth quarter of fiscal 2000 will include a fourteenth
week, resulting in a 53 week fiscal year.
7
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COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Interim Condensed Consolidated Financial Statements (continued)
Recently Adopted Accounting Standards
In December 1999, the United States ("U.S.") Securities and Exchange
Commission released Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements". SAB 101 provides interpretive guidance on
the proper recognition, presentation and disclosure of revenues in financial
statements. As the Company's revenue recognition policies previously complied
with generally accepted accounting principles and the related interpretive
guidance set forth in SAB 101, the adoption of SAB 101 did not have a material
impact on the Company's consolidated financial statements.
In May 2000, the Emerging Issues Task Force issued EITF 00-14, "Accounting
for Certain Sales Incentives" ("EITF 00-14"). Under the provisions of EITF 00-
14, for sales incentives that will not result in a loss on the sale of product
or service, a vendor should recognize the "cost" of the sales incentive at the
latter of the date the related revenue is recorded by the vendor or the date the
sales incentive is offered. The reduction to or refund of the selling price of
the product or service resulting from any cash sales incentive should be
classified as a reduction of revenue. The adoption of EITF 00-14 did not have a
material impact on the Company's consolidated financial statements.
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, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" delaying the effective date of SFAS No. 133. In June 2000, the FASB issued
Statement of Financial Accounting Standard No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" amending certain
accounting and reporting standards 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, as amended, to have a material
impact on the Company's consolidated financial statements.
In July 2000, the Emerging Issues Task Force issued EITF 00-10, "Accounting
for Shipping and Handling Fees and Costs" ("EITF 00-10"). Under the provisions
of EITF 00-10, amounts billed to a customer in a sale transaction related to
shipping and handling represent revenues earned for the goods provided and
should be classified as sales revenue. The provisions of EITF 00-10 prohibit the
netting of related shipping and handling costs against sales revenue and require
disclosure of the dollar amount of any significant shipping and handling costs
excluded from cost of sales. In September 2000, the EITF made an addition to the
final consensus reached at the July 2000 meeting requiring that the income
statement classification of any significant shipping and handling costs also be
disclosed pursuant to APB Opinion No. 22, "Disclosure of Accounting Policies."
The Company currently nets shipping and handling fees earned against shipping
and handling fees incurred within selling, general and administrative expenses.
As required, the Company will adopt EITF 00-10 in its consolidated financial
statements for the fourth quarter of fiscal 2000 with restatement of all
comparative prior period financial statements. The adoption of EITF 00-10 will
have no impact on the determination of income from operations or net income. Its
adoption will impact gross profit and selling, general and administrative
expenses, the extent to which will depend upon whether the Company continues to
include shipping and handling costs within selling, general and administrative
expenses or reclassifies such costs to cost of sales.
8
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COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Revolving Line of Credit
The Company executed a new bank agreement effective October 23, 2000 that
provides the Company with an $80.0 million unsecured revolving credit facility
(with a sub-limit of $10.0 million for letters of credit) and a term standby
letter of credit of $2.1 million. This new agreement supercedes the Company's
previously existing bank agreement that provided the Company with a $47.4
million unsecured revolving credit facility (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 under the new agreement 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
underlying bank credit agreement provides that the Company must satisfy certain
specified EBITDA, EBITDAR, leverage and current ratio requirements, as defined,
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 new credit facility has a maturity date of July 31, 2003.
3. Key Executive Loan and Incentive Compensation Programs
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 other than
Dennis and Ann Pence. 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.
During fiscal years 1999 and 2000 the Board of Directors authorized
compensation bonus pools aggregating up to $1.9 million as additional incentives
to retain key executives. Under such program, bonus pools up to $1.7 million and
$0.2 million designated to certain key executives will be payable in lump sums
on September 25, 2001 and March 25, 2002, respectively, provided that certain
specified performance criteria over a 24 month period have been met by both the
key executive and the Company as a whole. The Company is accruing the related
compensation expense to each key employee on a straight-line basis over the
period based on performance to date and the current expectation that the
specified performance criteria will be met by both the key employee and the
Company as a whole.
4. Capital Stock
On July 31, 2000, the Company obtained majority approval from its
shareholders to increase its common shares authorized for issuance from
15,000,000 common shares to 60,000,000 common shares.
5. 1996 Stock Option/Stock Issuance Plan
The Company's 1996 Stock Option/Stock Issuance Plan (the ''1996 Plan'') was
adopted by the Board of Directors and approved by the stockholders on March 4,
1996. Since February 13, 1998, 1,461,847 shares of common stock have been
authorized for issuance under the 1996 Plan. On May 20, 2000, the Company's
Board of Directors authorized an additional 100,000 shares of common stock for
issuance under the 1996 Plan. The addition of these 100,000 shares to the 1996
Plan was subsequently approved by a majority of shareholders at the Company's
annual meeting on July 15, 2000.
9
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COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 25, November 27, November 25, November 27,
2000 1999 2000 1999
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net income $7,064 $5,188 $12,466 $8,202
====== ====== ======= ======
Average shares outstanding used to
determine net income per basic common share 10,553 10,234 10,454 10,215
Net effect of dilutive stock options based
on the treasury stock method using average
market price (1) 402 443 405 341
------ ------ ------- ------
Average shares outstanding used to determine
net income per diluted common share 10,955 10,677 10,859 10,556
====== ====== ======= ======
</TABLE>
(1) Anti-dilutive stock options excluded from the above computations for the
three months ended November 25, 2000 and November 27, 1999 were 188 and
227, respectively. Anti-dilutive stock options excluded from the above
computations for the nine months ended November 25, 2000 and November 27,
1999 were 252 and 280, respectively.
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 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 and its subsidiary only collect sales taxes from customers
transacting purchases in states which the Company or its subsidiary have
physically based some portion of their retailing business. The Company and its
subsidiary also pay applicable corporate income, franchise and other taxes to
states in which retail or outlet stores are physically located. Various states
have attempted to collect back sales and use taxes from direct marketers 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 United States
Supreme Court has held that these states, absent congressional legislation, may
not impose tax collection obligations on an out-of-state mail order company. The
Company anticipates that any legislative changes regarding direct marketers, if
adopted, would be applied only on a prospective basis.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion may contain forward-looking statements, including
statements regarding our strategies, sales trends and operations, within the
meaning of the federal securities laws that involve risks and uncertainties.
When used in this discussion, the words "anticipate," "believe," "estimate,"
"expect," and similar expressions are intended to identify such forward-looking
statements. These statements are based on our current expectations and our
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 our
control such as customer response rates, consumer preferences, and fluctuations
in paper, postage and telecommunication costs; competition; effects of shifting
patterns of e-commerce versus catalog purchases; success of operating and growth
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,
especially as a result of the transition of senior executive officers;
availability of qualified personnel; labor and employee benefit costs;
uncertainties due to our relatively short experience in operating the e-commerce
and retail store aspects of our business; and construction costs; as well as
those factors discussed in this Form 10-Q Quarterly Report as well as in our
most recent Form 10-K Annual Report filed with the U.S. Securities and Exchange
Commission. References to a fiscal year refer to the calendar year in which such
fiscal year commences. Our fiscal year ends on the Saturday immediately
preceding or following February 28, whichever is chronologically closer. Our
fiscal year is generally 52 weeks, but occasionally will consist of 53 weeks, as
will be the case in the current fiscal year 2000. References to three and nine
month periods generally refer to the respective thirteen and thirty-nine weeks
ended on the date indicated, as is the case for the interim periods presented
herein. The pending fourth quarter of fiscal 2000 will include a fourteenth
week, resulting in a 53 week fiscal year.
Overview of Business and Recent Developments
--------------------------------------------
Coldwater Creek Inc. ("the Company" or "Coldwater Creek") is a multi-
channel retailer of women's apparel, jewelry, gifts and soft home accessories.
Our long-standing mission has been to differentiate ourself from other retailers
by offering exceptional value through superior customer service and a
merchandise assortment that reflects a relaxed and casual lifestyle. We endeavor
to continually offer unique assortments of merchandise targeted to our core
customer demographic of women between the ages of 35 to 55 with household
incomes in excess of $50,000.
Our primary focus during the current fiscal year ending March 3, 2001
("fiscal 2000") has been on further executing and expanding upon the strategic
marketing and merchandising initiatives implemented during the prior fiscal year
ended February 26, 2000 ("fiscal 1999"). Fiscal 1999 was a milestone year in the
history of Coldwater Creek as we embarked on a major program of evolution and
expansion. First and foremost, we transitioned the Company from its historical
roots as a single-channel catalog retailer into a more dynamic retailer with two
distinct channels, Direct and Retail. Our Direct Channel encompasses our
traditional catalog business and rapidly growing e-commerce business whereas our
Retail Channel encompasses our expanding base of full-line retail stores.
Recognizing early into fiscal 1999 that our targeted core demographic of
customers was beginning to enthusiastically embrace the Internet as an exciting,
convenient and secure shopping medium, we evolved our previously modest and
largely informational web site into a fully-interactive, user-friendly e-
commerce web site (www.coldwatercreek.com) where current and prospective
customers can enjoyably shop and purchase from our entire line of merchandise.
This marketing initiative proved successful with online sales being profitable
and accounting for $26.1 million, or 8.0%, of consolidated fiscal 1999 net
sales, as compared to only $400,000 for fiscal 1998. This rapid growth in online
sales has subsequently continued with substantial quarter-over-quarter
increases, accounting for $63.9 million, or 22.1%, of consolidated net sales for
the nine months ended November 25, 2000. In addition to our e-commerce customers
tending to be more frequent purchasers than our traditional catalog customers,
approximately one-quarter of the customers patronizing our web site have had no
previous purchasing history with the Company. This indicates to us that, in
addition to providing for certain longer-term operating efficiencies, our web
site is not merely redistributing sales among our channels but is significantly
contributing to our overall growth in consolidated net sales. As our web site
also quickly became our most effective and efficient promotional vehicle for the
disposition of excess catalog merchandise inventory, we have subsequently been
able to close three of thirteen leased outlet stores with additional closures
being considered.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Overview of Business and Recent Developments (continued)
--------------------------------------------------------
So as to further leverage its cost effectiveness, we continue to
aggressively seek ways of attracting new customers and migrating existing
customers to our e-commerce web site. We promote our web site in various major
national consumer publications popular with our targeted demographic base as
well as actively disseminate its address in all of our catalogs and stores. We
also utilize weekly targeted e-mails to our approximately 1.3 million name e-
mail database, which we continue to expand daily by approximately 2,000 to 3,000
e-mail addresses. Recently, we began adding what we call "webalogs" to our
traditional catalog circulation. These "webalogs" feature some of our most
popular catalog items in a condensed, several page format with customer ordering
directed to our web site. We have also added new functionality to our web site
to enable international customers to more easily place orders online and we are
currently developing translated versions of our e-commerce web site for
marketing in Japan and certain European countries. Most recently, we launched a
second "premium services" e-commerce web site (www.galleryatthecreek.com)
dedicated to featuring our new "Gallery" merchandise line, consisting of a
limited, yet unique and upscale, assortment of fine apparel, jewelry and
artworks.
Believing that the ability to occasionally "touch and feel" merchandise
will remain a coveted aspect of the American woman's shopping experience and to
provide another means by which to introduce current and prospective customers to
our catalogs and e-commerce web sites, we began selectively establishing for the
first time during fiscal 1999 full-line retail stores in highly-trafficked
metropolitan areas. Based on the success realized by our initial Seattle,
Washington and Kansas City, Kansas stores, which we opened just prior to the
1999 holiday selling season, we subsequently opened six additional full-line
retail stores in the Dallas, Texas, Cincinnatti, Ohio, Denver, Colorado,
Chicago, Illinois, Mission Viejo, California, and Tuscon, Arizona metropolitan
areas. These eight full-line "metropolitan" retail stores are in addition to our
two previously existing full-line "destination" or "resort" retail stores in
Sandpoint, Idaho and Jackson Hole, Wyoming. Our new full-line retail stores,
despite being in metropolitan settings, retain the Coldwater Creek ambience of
soft woods, natural lighting and soothing waterfalls. Each of the new retail
stores continues to perform at or above our initial expectations, currently
averaging sales on an annualized basis of approximately $500 per square foot. We
have identified through the use of our Direct Channel's customer database a
total of 80 potential "metropolitan" retail store sites in 29 states where a
prerequisite level of Coldwater Creek brand awareness exists and we remain fully
committed at this time to further growing our Retail Channel. Additional store
openings will ultimately be influenced by, among other factors, our ability to
timely procure optimum locations within major metropolitan malls and lifestyle
centers.
In an attempt to fulfill what we believe to be an underserved niche of
women's apparel, we also introduced in February 2000 a new complementary apparel
line entitled Natural Elements which features mix and match, versatile, casual
separates in a vast array of colors and extended sizes. This complementary new
line, which we rolled-out across all of our sales channels, is in addition to
our three established merchandise lines. Our Northcountry line, first introduced
in 1985, remains our core line of merchandise and features casual, comfortable
apparel, hard-to-find jewelry, distinctive artwork, gifts and items for the
home. Introduced in 1993, our recently updated Spirit of the West line features
fashionable, upscale apparel and hard-to-find jewelry and accessories. Our Home
line, an expansion upon our previously successful Bed & Bath line first
introduced in 1997, features unique and comfortable textiles, decorative
accessories, upscale bed and bath products and, recently added, lounge wear
apparel.
Our overall strategic marketing plan is to continue to use the competitive
advantages provided by our well-established catalog infrastructure, a resource
not available to single-channel e-commerce retailers, to generate revenues
across all of our sales channels, target new customers and introduce new
merchandise lines. We believe that our new multi-channel structure positions us
well for increased growth and market share in the future.
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Overview of Business and Recent Developments (continued)
--------------------------------------------------------
Our revenues and results of operations have fluctuated and can be expected to
continue to fluctuate on a quarterly basis as a result of a number of factors,
including, among other things, the timing of new merchandise and related
offerings, recognition of net sales and costs contributed by new merchandise and
related offerings, fluctuations in customer response rates, fluctuations in
paper, production, postage and telecommunication costs and expenses, merchandise
returns, unseasonal weather conditions affecting customer demand, adverse
weather conditions affecting distribution or shipping, shifts in the timing of
holidays and changes in our merchandise mix.
We defer the recognition of catalog development and production costs and
record them as related catalog sales are recognized. Consequently, quarter to
quarter revenue and expense comparisons will be impacted by the timing of the
mailing of our catalogs. Mailings may occur in different quarters from year to
year depending on the performance of third party couriers, the day of the week
on which certain holidays fall and our assessment of prevailing market
opportunities. Approximately three-quarters of the revenue generated by each
catalog mailing is recognized within the subsequent 30 to 45 days. A portion of
the revenue from a catalog mailing may also be recognized in the quarter after
the quarter in which the catalog was mailed and the revenue from a particular
catalog offering may be recognized in a quarter different from the quarter in
which the revenue from a similar catalog offering was recognized in the previous
year.
We have experienced, and will likely continue to experience, seasonal
fluctuations in our sales and operating results, which are typical of many
apparel retailers. Historically, each fiscal year's net sales and profits have
been heavily reliant on the November and December holiday season. In
anticipation of increased sales activity during November and December, we incur
significant additional expenses, including the hiring of a substantial number of
temporary employees to supplement our permanent, full-time staff. In addition,
due to the larger percentage of gifts and accessories offered in the second half
of the fiscal year related to holiday gift-giving, we normally expect higher
gross margins in the second half of the fiscal year than in the first half. If,
for any reason, our sales were to fall below expectations during November and
December, our financial condition, results of operations and cash flows could be
materially adversely affected.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Results of Operations
---------------------
The following table sets forth certain information regarding our costs and
expenses expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
<S> <C> <C> <C> <C>
November 25, November 27, November 25, November 27,
2000 1999 2000 1999
-------------- -------------- -------------- ---------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 47.1 47.5 47.9 48.1
-------------- -------------- -------------- ---------------
Gross profit 52.9 52.5 52.1 51.9
Selling, general and
administrative expenses 43.6 44.4 45.3 46.5
-------------- -------------- -------------- ---------------
Income from operations 9.2 8.2 6.8 5.4
Interest, net, and other 0.2 0.3 0.3 0.2
Gain on sale of Milepost Four assets 0.0 0.0 0.0 0.4
-------------- -------------- -------------- ---------------
Income before provision for
income taxes 9.4 8.5 7.1 6.0
Provision for income taxes 3.7 3.4 2.8 2.4
-------------- -------------- -------------- ---------------
Net income 5.7% 5.1% 4.3% 3.6%
============== ============== ============== ===============
</TABLE>
Note: Certain of the above sub-totals and totals may vary arithmetically due to
the effects of rounding.
Our consolidated net sales for the three months ended November 25, 2000
("the fiscal 2000 third quarter") were $123.7 million, an increase of $22.5
million, or 22.2%, from the $101.2 million in consolidated net sales realized
during the three months ended November 27, 1999 ("the fiscal 1999 third
quarter"). For the nine months ended November 25, 2000 ("the first nine months
of fiscal 2000"), our consolidated net sales were $288.6 million, an increase of
$62.5 million, or 27.6%, from the $226.1 million in consolidated net sales
realized during the nine months ended November 27, 1999 ("the first nine months
of fiscal 1999").
Our Direct Channel, comprising our traditional catalog business and rapidly
growing Internet-based, e-commerce business, contributed $112.7 million in net
sales during the fiscal 2000 third quarter, an increase of $14.8 million, or
15.1%, from the $97.9 million in net sales contributed during the fiscal 1999
third quarter. For the first nine months of fiscal 2000, our Direct Channel
contributed $267.8 million in net sales, an increase of $49.8 million, or 22.8%,
from the $218.0 million in net sales contributed during the first nine months of
fiscal 1999.
Our e-commerce business accounted for $31.9 million, or 25.8%, of
consolidated net sales for the fiscal 2000 third quarter as compared to only
$9.9 million, or 9.8%, of consolidated net sales for the fiscal 1999 third
quarter. On-line sales for the fiscal 2000 third quarter also increased
significantly from the $18.8 and $13.2 million in on-line sales realized during
the immediately preceding fiscal 2000 second and first quarters. For the first
nine months of fiscal 2000, our e-commerce business accounted for $63.9 million,
or 22.1%, of consolidated net sales as compared to $13.0 million, or 5.7%, of
consolidated net sales for the first nine months of fiscal 1999.
Our Retail Channel, which consisted of nine full-line retail stores by the
end of the fiscal 2000 third quarter, contributed $11.0 million in net sales
during the fiscal 2000 third quarter, an increase of $7.7 million, or 233.3%,
from the $3.3 million in net sales contributed by four full-line retail stores
during the fiscal 1999 third quarter. For the first nine months of fiscal 2000,
these nine full-line retail stores contributed $20.8 million, or 7.2%, of
consolidated net sales, representing an increase of $12.6 million, or
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Results of Operations (continued)
---------------------------------
153.7%, from the $8.2 million, or 3.6%, of consolidated net sales contributed by
the four full-line retail stores during the first nine months of fiscal 1999.
The net sales growth realized by our Direct Channel for the fiscal 2000
third quarter and first nine months primarily is attributable to increased
customer response to our merchandise offerings, including that for our new
Natural Elements merchandise line. This increased response primarily was
realized through our e-commerce web site in the form of Internet orders received
from existing, yet migrating, catalog customers and, to a lesser extent, new
customers. The net sales growth realized by our Retail Channel for the fiscal
2000 third quarter and first nine months primarily was attributable to the
addition of new full-line "metropolitan" retail stores.
A key element of our overall marketing strategy has been to pursue an
aggressive circulation strategy when market conditions permit. Our catalog
mailings were 67.4 million (excluding 4.1 million webalogs) during the fiscal
2000 third quarter, an increase of 11.8 million, or 21.2%, from the 55.6 million
catalog mailings during the fiscal 1999 third quarter. For the first nine months
of fiscal 2000, our catalog mailings were 143.6 million (excluding 4.1 million
webalogs), an increase of 27.0 million, or 23.2%, from the 116.6 million catalog
mailings during the first nine months of fiscal 1999. 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, our proprietary mailing list increased to
10.1 million names at November 25, 2000 from 8.9 million names at February 26,
2000 and 8.5 million names at November 27, 1999. Active customers, defined as a
customer who has purchased from us during the preceding twelve months, were 2.5
million at November 25, 2000 as compared to 2.2 million at February 26, 2000 and
2.1 million at November 27, 1999.
Our consolidated gross profit consists of net sales less cost of sales,
with cost of sales primarily being merchandise acquisition costs, freight in,
handling and storage costs. Our consolidated gross profit for the fiscal 2000
third quarter was $65.4 million, an increase of $12.2 million, or 23.0%, from
the $53.1 million realized during the fiscal 1999 third quarter. For the first
nine months of fiscal 2000, our consolidated gross profit was $150.4 million, an
increase of $33.1 million, or 28.2%, from the $117.3 million realized during the
first nine months of fiscal 1999. Our consolidated gross margins were 52.9% and
52.1% for the fiscal 2000 third quarter and first nine months, respectively,
versus 52.5% and 51.9% for the fiscal 1999 third quarter and first nine months,
respectively. The increases in consolidated gross profit dollars for the fiscal
2000 third quarter and first nine months primarily are attributable to the
consolidated net sales increases outlined above. The improved gross margins
realized during the fiscal 2000 third quarter and first nine months primarily
are attributable to our ability to maintain targeted gross margins in light of
the aforementioned increased customer response to our merchandise offerings and,
to a lesser extent, higher margin realizations on excess inventory disposition
sales through our e-commerce web site. These positive gross margin effects were
offset in part by increased distribution capacity costs incurred in connection
with the addition of our East Coast Operations Center to support our continued
sales growth and increased sales of marked down excess inventory arising from
the demand-driven increase in overall inventory throughput. Our gross margin for
the first nine months of fiscal 2000 was also adversely impacted by certain
incremental inbound freight costs we elected to incur during the fiscal 2000
first quarter to meet the above-expectations customer demand for our newly
launched Natural Elements merchandise line.
Selling, general and administrative expenses ("SG&A") primarily consist of
marketing, net distribution and general and administrative expenses. The
marketing expense component primarily consists of catalog production and postage
costs. Production costs primarily consist of paper, printing, computer services
and list rental costs (net of list rental revenue). Our consolidated SG&A
expenses increased by $9.1 million, or 20.2%, to $54.0 million during the fiscal
2000 third quarter from $44.9 million in the fiscal 1999 third quarter. For the
first nine months of fiscal 2000, our consolidated SG&A expenses increased by
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Results of Operations (continued)
---------------------------------
$25.6 million, or 24.4%, to $130.6 million from $105.0 million in the first nine
months of fiscal 1999. Our consolidated SG&A expenses decreased as a percentage
of consolidated net sales to 43.6% during the fiscal 2000 third quarter from
44.4% in the fiscal 1999 third quarter. Similarly, our consolidated SG&A
expenses decreased as a percentage of consolidated net sales to 45.3% during the
first nine months of fiscal 2000 from 46.5% in the first nine months of fiscal
1999. The increases in our consolidated SG&A expenses for the fiscal 2000 third
quarter and first nine months primarily are attributable to production and
circulation costs incurred in connection with increased catalog mailings and, to
a lesser extent, incremental infrastructure and personnel costs incurred with
the addition of our East Coast Operations Center. The decreases in our
consolidated SG&A rate for the fiscal 2000 third quarter and first nine months
primarily are attributable to increased sales leveraging of our fixed
infrastructure costs and, to a lesser extent, productivity improvements realized
at our added East Coast Operations Center. These favorable effects on our
consolidated SG&A rate were partially offset by incremental catalog costs
incurred in connection with increased customer prospecting.
As a result of the foregoing, our consolidated income from operations
increased by $3.1 million, or 38.1%, to $11.4 million for the fiscal 2000 third
quarter from $8.3 million for the fiscal 1999 third quarter. For the first nine
months of fiscal 2000, our consolidated income from operations increased by $7.5
million, or 61.2%, to $19.7 million from $12.2 million for the first nine months
of fiscal 1999. Expressed as a percentage of consolidated net sales, our
consolidated income from operations was 9.2% and 6.8% for the fiscal 2000 third
quarter and first nine months, respectively, versus 8.2% and 5.4% for the fiscal
1999 third quarter and first nine months, respectively.
We realized consolidated net interest and other income of $0.2 million and
$0.8 million during the fiscal 2000 third quarter and first nine months,
respectively, as compared to $0.3 million and $0.5 million in the fiscal 1999
third quarter and first nine months, respectively. Our non-operating results for
the first nine months of fiscal 1999 additionally reflect a non-recurring, pre-
tax gain of $0.8 million from the sale of assets related to our previously
discontinued Milepost Four men's apparel catalog.
As a percentage of our consolidated income before provision for income
taxes, our consolidated provisions for income taxes were 39.1% for both the
fiscal 2000 third quarter and first nine months as compared to 39.6% and 39.7%
for the fiscal 1999 third quarter and first nine months, respectively. These
rate decreases primarily reflect the favorable effects of certain continuing tax
credits obtained in connection with the establishing of our east coast
operations in West Virginia and, to a lesser extent, the favorable effects of
shipping orders from West Virginia to customers residing in certain states.
We completed the fiscal 2000 third quarter realizing consolidated net
income of $7.1 million (net income per basic and diluted share of $0.67 and
$0.64, respectively) versus $5.2 million (net income per basic and diluted share
of $0.51 and $0.49, respectively) for the fiscal 1999 third quarter, an
improvement of $1.9 million or 36.2%. For the first nine months of fiscal 2000,
we realized consolidated net income of $12.5 million (net income per basic and
diluted share of $1.19 and $1.15, respectively) as compared to $8.2 million (net
income per basic and diluted share of $0.80 and $0.78, respectively) for the
first nine months of fiscal 1999, an improvement of $4.3 million or 52.0%.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Liquidity and Capital Resources
-------------------------------
We have historically funded our growth through a combination of funds
generated from operations, trade credit arrangements and short-term bank credit
facilities. As our working capital requirements generally precede the
realization of sales, we occasionally draw on our revolving line of credit to
produce catalogs and increase inventory levels in anticipation of future sales
realization. Our standard trade credit arrangements for purchased inventory and
services typically require the net amount due to be paid by us within sixty days
of the invoice date.
We executed a new bank agreement effective October 23, 2000 that provides
us an $80.0 million unsecured revolving credit facility (with a sub-limit of
$10.0 million for letters of credit) and a term standby letter of credit of $2.1
million. This new agreement supercedes our previously existing bank agreement
that provided us with a $47.4 million unsecured revolving credit facility (with
a sub-limit of $7.0 million for letters of credit) and a term standby letter of
credit of $2.6 million. At our option, the interest rate under the new agreement
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 our then EBITDA Coverage Ratio, as defined. The
underlying bank credit agreement provides that we must satisfy certain specified
EBITDA, EBITDAR, leverage and current ratio requirements, as defined, and places
restrictions on our ability to, among other things, sell assets, participate in
mergers, incur debt, pay dividends, and make investments or guarantees. The new
credit facility has a maturity date of July 31, 2003.
Our consolidated operating activities generated $17.3 million of positive
cash flow during the first nine months of fiscal 2000 as compared to $41.6
million of positive cash flow during the first nine months of fiscal 1999. On a
comparative period-to-period basis, the decrease for the first nine months of
fiscal 2000 primarily reflects the negative cash flow effects of increased
inventories (primarily incurred to achieve higher customer order fulfillment
rates) and deferred catalog costs and decreased accounts payable and accrued
liabilities. These negative cash flow effects were partially offset by the
positive cash flow effects of higher net income, increased depreciation and
amortization, and decreased accounts receivable.
Our net positive operating cash flow of $17.3 million for the first nine
months of fiscal 2000, as well as $2.7 million in net proceeds from exercises of
stock options and $0.2 million in repayments of loans by executives, primarily
were utilized to fund $17.7 million of capital expenditures and to increase our
cash and cash equivalents balance by $2.4 million. For the first nine months of
fiscal 1999, our net positive operating cash flow of $41.6 million, along with
$1.5 million in proceeds from the sale of assets related to our previously
discontinued Milepost Four men's apparel catalog and $1.0 million in net
proceeds from exercises of stock options, primarily were utilized to fully repay
our $9.9 million revolving line of credit balance, to increase our cash and cash
equivalents by $19.9 million and to fund $14.5 million of capital expenditures.
Our consolidated investing activities consumed $17.5 million and $12.7
million of cash during the first nine months of fiscal 2000 and fiscal 1999,
respectively, with cash outlays principally being for capital expenditures. Our
capital expenditures for the first nine months of fiscal 2000 primarily reflect
leasehold improvements for our recently opened and currently planned full-line
"metropolitan" retail stores, hardware and software additions and upgrades for
our e-commerce web sites, a new point-of-sale computer system for our growing
base of retail stores, leasehold improvements and furnishings for our newly
leased Coeur d'Alene Customer Service Call Center discussed below, and
miscellaneous hardware and software upgrades for our corporate systems. Our
capital expenditures for the first nine months of fiscal 1999 primarily reflect
the cost of material handling, telecommunication and information systems for the
added East Coast Operations Center and, to a lesser extent, hardware and
software additions and upgrades to corporate systems, including the
www.coldwatercreek.com e-commerce web site.
17
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Liquidity and Capital Resources (continued)
-------------------------------------------
Our consolidated financing activities provided $2.6 million of cash during
the first nine months of fiscal 2000 whereas financing activities used $8.9
million of cash during the first nine months of fiscal 1999. The first nine
months of fiscal 2000 principally reflects net proceeds from exercises of stock
options. The first nine months of fiscal 1999 reflects the full repayment of our
$9.9 million revolving line of credit balance and the receipt of $1.0 million in
net proceeds from exercises of stock options.
As a result of the foregoing, we had $25.6 million in consolidated working
capital at November 25, 2000 as compared to $33.9 million and $12.7 million at
February 26, 2000 and November 27, 1999, respectively. Our consolidated current
ratio was 1.3 at November 25, 2000 as compared to 1.7 and 1.2 at February 26,
2000 and November 27, 1999, respectively. We continue to have no outstanding
short- or long-term bank debt at November 25, 2000.
As previously referenced, we opened in July of 1999 a new 600,000 square
foot East Coast Operations Center to accommodate our continued sales growth. We
will incur annual lease expense of approximately $2.5 million over the twenty
year lease term. The lease allows us, at our 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.
In February 2000, we entered into a build-to-suit, sale-lease agreement for
the construction of a new 60,000 square foot customer service call center in
Coeur d'Alene, Idaho to replace the leased 45,000 square foot facility there
which was not able to sufficiently accommodate the future technology and space
requirements of our Direct Channel. Construction of the new facility was
completed, as planned, during July 2000. We will incur annual lease expense of
approximately $0.7 million during the first three years of the fifteen year
lease term with subsequent annual lease payments adjusted based upon the
Northwest region's consumer price index.
Also, as previously discussed, we began selectively establishing for the
first time during fiscal 1999 full-line retail stores in highly-trafficked
metropolitan areas. To date, we have opened eight full-line retail stores in
major metropolitan areas. These eight full-line "metropolitan" retail stores are
in addition to our two previously existing full-line "destination" or "resort"
retail stores. We have identified through the use of our Direct Channel's
customer database a total of 80 potential "metropolitan" retail store sites in
29 states where a prerequisite level of Coldwater Creek brand awareness exists
and we remain fully committed at this time to further growing our Retail
Channel. Our current schedule contemplates the opening of approximately twelve
additional full-line "metropolitan" retail stores during fiscal year 2001. To
this end, we have recently executed leases for stores in the Salt Lake City,
Utah, Aspen Grove, Colorado and Sagemore, New Jersey metropolitan areas. We
currently estimate that each such retail store will be leased, as are our
existing stores, with an average initial cash investment per store being limited
to leasehold improvements and inventory in the approximate range of $1.5 million
to $2.0 million depending upon size and design elements. Additional store
openings will be influenced by, among other factors, our ability to timely
procure optimum locations within major metropolitan malls and lifestyle centers.
We currently estimate between $4.0 million and $7.0 million in total
capital expenditures during the fiscal 2000 fourth quarter primarily consisting
of the retrofitting of a portion of our existing Sandpoint Distribution Center
into additional administrative office space, leasehold improvements for new
retail stores, and hardware and software additions and upgrades for our
corporate systems, including our e-commerce web sites. These expenditures are
expected to be primarily funded from operating cash flows, and to the extent
necessary, our existing bank credit facility.
We believe that cash flow from operations and borrowing capacity under our
bank credit facility will be sufficient to support operations and future growth
for the foreseeable future. Thereafter, we may be required to seek additional
sources of funds for continued or accelerated growth and there can be no
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Liquidity and Capital Resources (continued)
-------------------------------------------
assurance that such funds will be available on satisfactory terms. Failure to
obtain such financing could delay or prevent our planned growth, which could
adversely affect our business, financial position, results of operations and
cash flows.
Other Matters
-------------
Year 2000 Compliance
--------------------
We experienced no significant problems at the turn of the century with
either our own technology or that of our infrastructure providers. Contingency
plans to manage all identified areas of perceived risk will remain in place
throughout 2000. The costs incurred by us in connection with our Year 2000
compliance program have been and are expected to remain immaterial to our
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, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" delaying the effective date of SFAS No. 133. In June 2000, the FASB issued
Statement of Financial Accounting Standard No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" amending certain
accounting and reporting standards of SFAS No. 133. SFAS No. 133, as amended, is
effective for the Company's fiscal 2001 financial statements. As we currently
are not a party to any derivative financial instruments and do not anticipate
becoming a party to any derivative instruments, we do not currently expect the
adoption of SFAS No. 133, as amended, to have a material impact on our
consolidated financial statements.
In July 2000, the Emerging Issues Task Force issued EITF 00-10, "Accounting
for Shipping and Handling Fees and Costs" ("EITF 00-10"). Under the provisions
of EITF 00-10, amounts billed to a customer in a sale transaction related to
shipping and handling represent revenues earned for the goods provided and
should be classified as sales revenue. The provisions of EITF 00-10 prohibit the
netting of related shipping and handling against sales revenue and require
disclosure of the dollar amount of any significant shipping and handling costs
excluded from cost of sales. In September 2000, the EITF made an addition to the
final consensus reached at the July 2000 meeting requiring that the income
statement classification of any significant shipping and handling costs also be
disclosed pursuant to APB Opinion No. 22, "Disclosure of Accounting Policies."
We currently net shipping and handling fees earned against shipping and handling
fees incurred within selling, general and administrative expenses. As required,
we will adopt EITF 00-10 in our consolidated financial statements for the fourth
quarter of fiscal 2000 with restatement of all comparative prior period
financial statements. The adoption of EITF 00-10 will have no impact on the
determination of income from operations or net income. Its adoption will impact
gross profit and selling, general and administrative expenses, the extent to
which will depend upon whether we continue to include shipping and handling
costs within selling, general and administrative expenses or reclassify such
costs to cost of sales.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors
------------
Continued Dependence On and Risks Associated with Our Catalog Sales Channel
---------------------------------------------------------------------------
Our success as a Company for the foreseeable future will depend
significantly on the future success of our established Catalog Sales Channel. We
believe that the future success of our catalog business will be predicated upon
the efficient targeting of our catalog mailings, a high volume of prospect
catalog mailing, appropriate shifts in our merchandise mix and our ability to
achieve adequate response rates to our catalog 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, we are not able to adjust the costs being incurred in connection with a
particular catalog mailing to reflect the actual performance of the catalog. If,
for any reason, we were to experience a significant shortfall in anticipated
revenue from a particular catalog mailing, and thereby not recover the costs
associated with that catalog mailing, our financial condition, results of
operations and cash flows could be materially adversely affected. In addition,
response rates to our catalog mailings and, as a result, revenues generated by
each catalog 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 factors may be outside our control. Further,
we have historically experienced fluctuations in the response rates to our
catalog mailings. Any inability we have to accurately target the appropriate
segment of the consumer catalog market or to achieve adequate response rates
could result in lower sales, significant markdowns or write-offs of inventory,
increased merchandise returns, and lower margins, which could have a material
adverse effect on our financial condition, results of operations and cash flows.
Our New Internet and Retail Sales Channels are Untested and Extremely Difficult
-------------------------------------------------------------------------------
to Evaluate
-----------
Although we have been in the catalog business for many years and certain of
our executive vice presidents gained significant retail experience with previous
employers, we have had only limited experience with our Internet and Retail
Sales Channels. Our approaches in these new sales channels are untested as a
business matter, and we cannot be sure that these approaches will provide the
value to us that we expect. Furthermore, our management does not have
significant experience operating in these new sales channels and our future
success will depend on recent, and possibly, future additions to our management
team. Additionally, because the Internet is constantly changing, we will likely
need to correspondingly alter our business in the future. Frequent changes could
impose significant burdens on our management and our employees and could result
in loss of productivity or even increased employee attrition. Any investment in
us must be considered in light of the problems frequently encountered by
companies at this stage of development in new and rapidly evolving markets. We
cannot be certain that our business strategy will be successful or that we will
successfully address the risks and challenges associated with the Internet and
Retail sales channels.
Risks Associated with Our Growth Strategy
-----------------------------------------
Our growth strategy primarily includes the following components: (i)
further development of our Catalog, Internet and Retail Sales Channels, (ii)
introduction of new merchandise lines, (iii) expansion of our existing
merchandise selection, and (iv) increased catalog circulation and response
rates. Our growth strategy involves various risks, including a reliance on a
high degree of prospect mailings, which may lead to less predictable response
rates, and increased patronage of our Internet web site. Our failure to
successfully implement any or all of our growth strategies would likely have a
material adverse effect on our financial condition, results of operations and
cash flows. We believe our growth has been attributable in large part to our
success in meeting the merchandise, timing and service demands of an expanding
customer base with certain demographic characteristics. There can be no
assurance that we will be able to continually identify and offer new merchandise
that appeals to our customer base or that the introduction of new merchandise
categories or new marketing or distribution strategies, such as the sale of our
merchandise in retail stores or through new catalog titles, will be successful
or profitable, or that any such
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors
------------
Risks Associated with Our Growth Strategy (continued)
-----------------------------------------------------
efforts will achieve sustainable acceptance in the marketplace. Any substantial
inability on our part to further develop and grow our Catalog, Internet and
Retail Sales Channels, to maintain our current average order size and response
rates, and leverage the success of existing catalog titles to new merchandise
lines, catalogs, web site and retail stores would likely have a material adverse
effect on our financial condition, results of operations and cash flows. As part
of our Retail Sales Channel strategy, we are currently establishing for the
first time in our history a base of full-line "metropolitan" retail stores.
We have identified through the use of our Direct Channel's customer
database a total of 80 potential "metropolitan" retail store sites in 29 states
where a prerequisite level of Coldwater Creek brand awareness exists and we
remain fully committed at this time to further growing our Retail Channel. Our
current schedule contemplates the opening of approximately twelve additional
full-line "metropolitan" retail stores during fiscal year 2001. To this end, we
have recently executed leases for stores in the Salt Lake City, Utah, Aspen
Grove, Colorado and Sagemore, New Jersey metropolitan areas. These stores will
be in addition to the eight full-line "metropolitan" retail stores we recently
opened and currently operate.
We have had limited experience operating retail stores and, other than
operating our Jackson Hole, Wyoming retail store since 1997, we have had no
significant experience operating stores outside the vicinity of our
headquarters. In addition, retail store operations entail substantial fixed
costs, including costs associated with real estate leases, inventory maintenance
and staffing. There can be no assurance that these stores will be opened, will
be opened in a timely manner, or, if opened, that these stores will be
profitable. Failure to successfully implement this store-based strategy could
result in significant write-offs of inventory and fixtures and would likely have
a material adverse effect on our financial condition, results of operations and
cash flows. We may need to raise additional funds in order to support greater
expansion, develop enhanced services, respond to competitive pressures, acquire
complementary businesses or respond to unanticipated or seasonal requirements.
In addition, various elements of our growth strategies, including our aggressive
catalog-mailing program, our aggressive Internet growth strategy, our plans to
introduce new merchandise and our plans to broaden existing merchandise lines,
may require additional capital. There can be no assurance that funds will be
available to us on terms satisfactory to us when needed.
Risks Affecting Our Ability to Fulfill Orders
---------------------------------------------
Our ability to provide superior customer service, effectively and
efficiently target our merchandise offerings, and fulfill customer orders
depends, to a large degree, on the efficient and uninterrupted operation of our
two customer service call centers, two distribution centers, management
information systems and on the timely performance of third parties such as
shipping companies and the United States Postal Service. Although we believe we
have built redundancy into our telephone, Internet and management information
systems and maintain relationships with several different shipping companies,
any material disruption or slowdown in our order processing or fulfillment
systems resulting from strikes or labor disputes, telephone or Internet down
times, electrical outages, mechanical problems, human error or accidents, fire,
natural disasters or comparable events could cause delays in our ability to
receive and distribute orders and may cause orders to be lost or to be shipped
or delivered late. As a result, customers may cancel orders or refuse to receive
goods on account of late shipments that would result in a reduction of net sales
and could mean increased administrative and shipping costs. Excess order volume
could result in telephone or Internet answer delays and delays in placing
orders. There can be no assurance that volumes will not exceed present telephone
or Internet system capacities and that, as a result, answer delays and delays in
placing orders will not occur. We believe that our success to date has been
based in part on our reputation for levels of customer service substantially
superior to the standards in the catalog industry, any impairment of our
superior customer service reputation could have a material adverse effect on our
business. Any material disruption in or destruction of part or all of our
distribution centers caused by strike, fire or natural disaster would likely
have a material adverse effect on our ability to provide the
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors
------------
Risks Affecting Our Ability to Fulfill Orders (continued)
---------------------------------------------------------
timely delivery of merchandise and on our financial condition, results of
operations and cash flows.
Risks Associated with System Disruptions
----------------------------------------
Our ability to attract and retain users and customers to our e-commerce web
sites depends on the performance, reliability and availability of our web sites
and network infrastructure. We have periodically experienced service
interruptions caused by temporary problems in our own systems or software or in
the systems or software of third parties. While we continue to implement
procedures to improve the reliability of our systems, these interruptions may
continue to occur from time to time. Third parties may not be liable to us for
any damage or loss they may cause to our business, and we may be unable to seek
reimbursement from them for losses that they cause. Our users also depend on
third party Internet service providers for access to our web sites. These
entities have experienced significant outages in the past, and could experience
outages, delays and other difficulties due to system failures in the future
which are unrelated to our systems, but which could nonetheless adversely affect
our business.
We May Face Potential Business-Related Liabilities and Expenses
---------------------------------------------------------------
As a result of doing business through our catalogs, e-commerce web sites
and retail stores, we may be exposed to legal risks and uncertainties, including
potential liabilities to consumers of such products. Some of the risks that may
result from doing business via any of our three sales channels:
. product liability or other tort claims relating to goods;
. claims of consumer fraud and false or deceptive advertising or sales
practices;
. breach of contract claims relating to merchant transactions; and
. claims relating to any failure to appropriately collect and remit sales
or other taxes arising from electronic commerce transactions.
Even to the extent that such claims do not result in material liability,
investigating and defending such claims could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
Quarterly and Seasonal Fluctuations
-----------------------------------
Our 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 our merchandise mix. In addition, we maintain
a common industry policy of deferring the recognition of the costs of catalog
development and production until sales are realized on each mailing and
recognize such costs as sales are realized. Consequently, quarter to quarter
revenue and expense comparisons will be impacted by the timing of the mailing of
our catalogs. Catalog mailings may occur in different quarters from year to year
depending on the performance of third party couriers, the day of the week on
which certain holidays fall and our assessment of prevailing market
opportunities. A portion of the revenue from a catalog mailing may be recognized
in the quarter after the quarter in which the catalog was mailed and the revenue
from a particular catalog offering may be
22
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors (continued)
------------------------
Quarterly and Seasonal Fluctuations (continued)
-----------------------------------------------
recognized in a quarter different from the quarter in which the revenue from a
similar offering was recognized in the previous year. We have experienced, and
may continue to experience, seasonal fluctuations in our sales and operating
results, which is typical of many apparel retailers. In past fiscal years, our
net sales and profits have been heavily reliant on the November and December
holiday season. We believe that in the future this seasonality will continue. In
anticipation of increased sales activity during November and December, we incur
significant additional expenses, including the hiring of a substantial number of
temporary employees to supplement our permanent, full-time staff. If, for any
reason, our sales were to fall below our expectations during November and
December, our financial condition, results of operations and cash flows would
likely be materially adversely affected.
Merchandise Returns
-------------------
As part of our customer service commitment, we maintain a liberal
merchandise return policy that allows customers to return any merchandise,
virtually at any time and for any reason, and regardless of merchantable
condition. We make allowances in our financial statements for anticipated
merchandise returns based on historical return rates and our future
expectations. While we believe our allowances are adequate, there can be no
assurance that actual merchandise returns will not exceed our allowances. In
addition, there can be no assurance that the introduction of new merchandise
through our various channels, changes in the merchandise mix or other factors
will not cause actual returns to exceed return allowances. Any significant
increase in merchandise returns or merchandise returns that exceed our
allowances could materially adversely affect our financial condition, results of
operations and cash flows.
Ability to Manage Expanding Operations
--------------------------------------
Our growth has resulted in an increased demand on our managerial,
operational and administrative resources. However, in order to manage currently
anticipated levels of future demand, we will be required to continue, among
other things, to (i) improve and integrate our management information systems
and controls, including inventory management, (ii) adjust our distribution
capabilities and (iii) attract and retain qualified personnel, including middle
management. In addition, there can be no assurance that any upgrades,
improvements and expansions in our overall infrastructure and operations will
increase the productivity or efficiency of our operations or that the same will
be adequate to meet our present or future needs. Continued growth could result
in a strain on our management, financial, merchandising, marketing, distribution
and other resources and we may experience operating difficulties, including
difficulties in training and managing an increasing number of employees,
difficulties in obtaining sufficient materials and manufacturing capacity from
vendors to produce our merchandise, problems in upgrading our management
information systems and delays in production and shipments. There can be no
assurance that we will be able to manage future growth effectively and any
failure to manage growth effectively could have a material adverse effect on our
financial condition, results of operations and cash flows. Our inability to
respond to and manage these changing business conditions could have a material
adverse effect on our financial condition, results of operations and cash flows.
Competition
-----------
The markets for our 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 we believe that we
do not compete directly with any single company with respect to our entire range
of merchandise, within each merchandise category we have significant competitors
and may face new competition from new entrants or existing competitors who focus
on market segments currently served by us. These competitors include large
retail operations, including some with catalog and
23
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors (continued)
------------------------
Competition (continued)
-----------------------
e-commerce operations, and other catalog and direct marketing companies and
international competitors. With respect to the apparel merchandise offered by
us, we are in direct competition with more established catalog, Internet and
retail operations, some with substantially greater experience in selling apparel
merchandise and which may focus on prospective customers sharing some of the
demographic characteristics of our customers. Any failure on our part to
successfully market our apparel merchandise or compete effectively against such
competitors would likely have a material adverse effect on our growth and could
adversely affect our financial condition, results of operations and cash flows.
Many of these competitors are larger and have significantly greater financial,
marketing and other resources than us. Increased catalog mailings by our
competitors may adversely affect response rates to our own catalog mailings. In
addition, because we source a significant percentage of our merchandise from
suppliers and manufacturers located in the United States, where labor and
production costs may be higher than in foreign countries, there can be no
assurance that our merchandise will or can be competitively priced when compared
to merchandise offered by other retailers. While we believe that we have been
able to compete successfully because of our brand recognition, the exclusivity
and broad range and quality of our merchandise, including our private label
merchandise offerings, and our superior customer service policies, there can be
no assurance that we will be able to maintain or increase our market share in
the future. Our failure to compete successfully would likely have a material
adverse effect our financial condition, results of operations and cash flows.
Changing Consumer Preferences; General Economic Conditions
----------------------------------------------------------
Although we believe that our business has benefited from increasing
consumer interest in merchandise that reflects a casual and relaxed lifestyle,
there can be no assurance that this belief is correct or that such trends will
continue. Any change in these trends could have a material adverse effect on our
financial condition, results of operations and cash flows. In addition, although
we believe that the sale of our merchandise historically has not been primarily
driven by fashion trends, all of our merchandise is subject to changing consumer
preferences. A shift in consumer preferences away from the merchandise that we
offer could have a material adverse effect on financial condition, results of
operations and cash flows. Our future success depends in part on our ability to
anticipate and respond to changes in consumer preferences and there can be no
assurance that we will respond in a timely or commercially appropriate manner to
such changes. Failure to anticipate and respond to changing consumer preferences
could lead to, among other things, lower sales of our products, significant
markdowns or write-offs of inventory, increased merchandise returns, and lower
margins, which would likely have a material adverse effect on our financial
condition, results of operations and cash flows. Our business is sensitive to
regional changes in customers' spending and discretionary income patterns which,
in turn, are controlled to a large extent by prevailing economic conditions.
Adverse economic conditions in one or more regions in which we have significant
sales could have a material adverse effect on sales of our merchandise and, as a
result, on our financial condition, results of operations and cash flows.
Dependence on Key Personnel
---------------------------
Our success depends largely on the efforts of our key personnel. Our
founders, Dennis and Ann Pence, have in the past been involved in all aspects of
our business, including marketing, merchandising and operations. Effective
January 1, 2001, Dennis and Ann Pence retired from their respective day-to-day
executive management positions with the Company while retaining their positions
as Chairman and Vice-Chairman, respectively, on the Company's Board of
Directors. Concurrently, Georgia Shonk-Simmons was promoted to Chief Executive
Officer and appointed to the Company's Board of Directors. Additionally, Don
Robson and Tom Scott were elevated to Executive Vice Presidents while retaining
their prior positions as Chief Financial Officer and Chief Operations Officer,
respectively. In their new positions, Ms. Shonk-Simmons, Mr. Robson and Mr.
Scott are responsible for policy making and
24
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors (continued)
------------------------
Dependence on Key Personnel (continued)
---------------------------------------
day-to-day operations. The loss of any of the aforementioned individuals from
their respective board or management positions could have a material adverse
effect on our financial condition, results of operations and cash flows. Other
operational, marketing and merchandising personnel are important to our
financial condition, results of operations and cash flows. Our ability to
attract and retain well-qualified key personnel, including, but not limited to,
the above-named individuals, is crucial to our successful continued operations
and expansion, in particular with respect to our new sales channels. In
addition, our relatively remote location may make it more difficult to replace
key employees who leave us, or to add the employees required to manage our
further growth.
Possible Volatility of Our Stock Price
--------------------------------------
The market price for our common stock may be significantly affected by such
factors as our quarterly operating results, changes in any earnings estimates
publicly announced by us or by analysts, announcements of new merchandise
offerings by us or our competitors, seasonal effects on sales and various
factors affecting the economy in general. In addition, the Nasdaq National
Market has experienced a high level of price and volume volatility and market
prices for the stock of many companies have experienced wide price fluctuations
not necessarily related to the operating performance of such companies.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not exposed to financial market risks from changes in foreign
currency exchange rates and are only minimally impacted by changes in interest
rates. Borrowings under our bank credit facility are at a variable rate of
interest and, based on the current level of borrowings, we experience only
modest changes in interest expense when market interest rates change. However,
in the future, we may enter into transactions denominated in non-U.S. currencies
or increase the level of our borrowings, which could increase our exposure to
these market risks. We have not used, and currently do not contemplate using,
any derivative financial instruments.
25
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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
On July 31, 2000, the Company obtained majority approval from its
shareholders to increase its common shares authorized for issuance from
15,000,000 common shares to 60,000,000 common shares.
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
25, 2000.
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 9th day of January 2001.
COLDWATER CREEK INC.
By: /s/ Donald A. Robson
--------------------------------------
Donald A. Robson
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
26
