| COLDWATER CREEK INC Item 1A Risk Factors We may be unable to successfully implement our retail store rollout strategy, which could result in significantly lower revenue growth |
| The key driver of our growth strategy is the retail store expansion |
| At January 28, 2006, we operated 174 full-line retail stores and, as of the date of this report, we have since opened an additional six stores in the fiscal 2006 first quarter for a total of 180 stores currently in operation |
| However, there can be no assurance that these stores will be opened, will be opened in a timely manner, or, if opened, that these stores will be profitable |
| The ability to open our planned retail stores depends on our ability to successfully: • identify or secure premium retail space; • negotiate site leases or obtain favorable lease terms for the retail store locations we identify; and • prevent construction delays and cost overruns in connection with the build-out of new stores |
| Any miscalculations or shortcomings in the planning and control of the retail growth strategy could materially impact results of operations and financial condition |
| The retail store model requires us to incur substantial financial commitments and fixed costs that we will not be able to recover if a store is not successful |
| The success of an individual store location depends largely on the success of the lifestyle center or shopping mall where the store is located, and may be influenced by changing customer demographic and buying trends |
| These factors cannot be predicted with complete accuracy |
| Because we are required to make long-term financial commitments when leasing retail store locations, and to incur substantial fixed costs for each store’s design, leasehold improvements, fixtures, and information and management systems, it would be costly for us to close a store that does not prove successful |
| We may be unable to manage significant increases in the costs associated with the catalog business, which could affect results of operations |
| We incur substantial costs associated with catalog mailings, including paper, postage, merchandise acquisition and human resource costs associated with catalog layout and design, production and circulation and increased inventories |
| Significant increases in US Postal Service rates and the cost of telecommunications services, paper and catalog production could significantly increase catalog production costs and result in lower profits for the catalog business |
| Most of the catalog-related costs are incurred prior to mailing, and we are not able to adjust the costs of a particular catalog mailing to reflect the actual subsequent performance of the catalog |
| Moreover, customer response rates have been unpredictable in recent years, particularly for mailings to prospective customers |
| Because the catalog business accounts for a significant portion of total net sales, any performance shortcomings experienced by the catalog business would likely have a material adverse effect on overall business, financial condition, results of operations and cash flows |
| The spa test may prove unprofitable and may be abandoned at any time |
| During 2006 we will begin the test of Coldwater Creek ~ The Spa concept in six locations |
| There is no assurance that the test of this concept will be successful or that we will continue to develop spas |
| Factors that could cause us to curtail or abandon the spa concept include: • unexpected or increased costs or delays in the concept’s development; • the potential strain on management resources in developing and testing this new concept; 12 ______________________________________________________________________ [37]Table of Contents • legal and regulatory constraints; • the inherent difficulty in forecasting consumer tastes and trends through market research, concept testing or otherwise, and the possibility that we will determine through the performance of our test sites that demand does not meet our expectations; • our inability to fund our spa concept or its expansion with operating cash as a result of either lower sales from our retail and direct businesses or higher than anticipated costs, or both |
| If we were to abandon the spa concept, we would be required to write off any costs we have capitalized, which would have a material and adverse effect on results of operations, particularly for the quarter in which a write off is recognized |
| Consumers’ concerns about purchasing items via the Internet as well as external or internal infrastructure system failures could negatively impact our e-commerce sales or cause us to incur additional costs |
| The e-commerce business is vulnerable to consumer privacy concerns relating to purchasing items over the Internet, security breaches, and failures of Internet infrastructure and communications systems |
| If consumer confidence in making purchases over the Internet declines as a result of privacy or other concerns, e-commerce net sales could decline |
| We may be required to incur increased costs to address or remedy any system failures or security breaches |
| We may be unable to manage expanding operations and the complexities of our multi-channel strategy, which could harm results of operations |
| During the past few years, with the implementation of a multi-channel business model, our overall business has become substantially more complex |
| This increasing complexity has resulted and is expected to continue to result in increased demands on managerial, operational and administrative resources and has forced us to develop new expertise |
| In order to manage our complex multi-channel strategy, we will be required to, among other things: • improve and integrate our management information systems and controls, including installing new accounting, financial planning, inventory management, direct segment order processing and retail segment point-of-sale systems; • expand our distribution capabilities, including efficiently managing the expansion of and upgrade of certain equipment at our distribution center, which is scheduled for completion during 2006; and • attract, train and retain qualified personnel, including middle and senior management, and manage an increasing number of employees |
| We may be unable to anticipate changing customer preferences and to respond in a timely manner by adjusting merchandise offerings, which could result in lower sales |
| Future success will depend largely on our ability to continually select the right merchandise assortment, maintain appropriate inventory levels and creatively present merchandise in a way that is appealing to customers |
| Consumer preferences cannot be predicted with certainty, as they continually change and vary from region to region |
| On average, we begin the design process for apparel nine to ten months before merchandise is available to customers, and we typically begin to make purchase commitments four to six months in advance |
| These lead times make it difficult for us to respond quickly to changing consumer preferences and amplify the consequences of any misjudgments we might make in anticipating customer preferences |
| Consequently, if we misjudge our customers’ merchandise preferences or purchasing habits, our sales may decline significantly, and we may be required to mark down certain products to significantly lower prices to sell excess inventory, which would result in lower margins |
| We depend on key vendors for timely and effective sourcing and delivery of our merchandise |
| If these vendors are unable to timely fill orders or meet quality standards, we may lose customer sales and our reputation may suffer |
| The direct business depends largely on the ability to fulfill orders on a timely basis, and the direct and retail businesses depend largely on our ability to keep appropriate levels of inventory in the distribution center and stores |
| As we grow the retail business, we may experience difficulties in obtaining sufficient manufacturing capacity from vendors to produce merchandise |
| We generally maintain non-exclusive relationships with multiple vendors that manufacture our merchandise |
| However, we have no contractual assurances of continued supply, pricing or access to new products, and any vendor could discontinue selling to us at any time |
| If we were required to change vendors or if a key vendor was unable to supply desired merchandise in sufficient quantities on acceptable terms, particularly in light of the recent trend toward consolidating more merchandise purchases with fewer vendors, we could experience delays in filling customer orders or delivering inventory to stores until alternative supply arrangements were secured, which could result in lost sales and a decline in customer satisfaction |
| 13 ______________________________________________________________________ [38]Table of Contents Increasing reliance on foreign vendors will subject us to uncertainties that could impact our cost to source merchandise and delay or prevent merchandise shipments |
| As we expand retail stores and merchandise volume requirements increase, we expect to source merchandise directly from foreign vendors, particularly those located in Asia as well as Central America |
| During fiscal 2006, we anticipate that we will be the importer of record on approximately 30prca of total merchandise purchases |
| This will expose us to new and greater risks and uncertainties, the occurrence of which could substantially impact our ability to source merchandise through foreign vendors and to realize any perceived cost savings |
| We will be subject to, among other things: • burdens associated with doing business overseas, including the imposition of, or increases in, tariffs or import duties, or import/export controls or regulation, as well as credit assurances we are required to provide to foreign vendors; • declines in the relative value of the US dollar to foreign currencies; • failure of foreign vendors to adhere to our quality assurance standards or our standards for conducting business; • changing or uncertain economic conditions, political uncertainties or unrest, or epidemics or other health or weather-related events in foreign countries resulting in the disruption of trade from exporting countries; and • restrictions on the transfer of funds or transportation delays or interruptions |
| The United States and the European Union have imposed trade quotas on certain apparel and textile categories from the Peoples Republic of China |
| The memorandum of understanding between the United States and The Peoples Republic of China, which outlines the new quotas, will be in effect through December 2008 |
| Our sourcing strategy is designed to allow us to adjust to potential shifts in availability of apparel following the expiration of quotas for World Trade Organization member countries, and the re-imposition of quotas for apparel and textiles exported from the Peoples Republic of China |
| However, sourcing operations may be adversely affected by trade limits, political and/or financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the US dollar against foreign currencies, and/or other trade disruptions |
| We may be unable to fill customer orders efficiently, which could harm customer satisfaction |
| If we are unable to efficiently process and fill customer orders, customers may cancel or refuse to accept orders, and customer satisfaction could be harmed |
| We are subject to, among other things: • failures in the efficient and uninterrupted operation of our customer service call centers or our sole distribution center in Mineral Wells, West Virginia, including system failures caused by telecommunications systems providers and order volumes that exceed our present telephone or Internet system capabilities; • delays or failures in the performance of third parties, such as shipping companies and the US postal and customs services, including delays associated with labor disputes, labor union activity, inclement weather, natural disasters, health epidemics and possible acts of terrorism; and • disruptions or slowdowns in our order processing or fulfillment systems resulting from the recently increased security measures implemented by US customs, or from homeland security measures, telephone or Internet down times, system failures, computer viruses, electrical outages, mechanical problems, human error or accidents, fire, natural disasters or comparable events |
| We have a liberal merchandise return policy, and we may experience a greater number of returns than we anticipate |
| As part of our customer service commitment, we maintain a liberal merchandise return policy that allows customers to return any merchandise, virtually at any time and for any reason, and regardless of condition |
| We make allowances in financial statements for anticipated merchandise returns based on historical return rates and future expectations |
| These allowances may be exceeded, however, by actual merchandise returns as a result of many factors, including changes in the merchandise mix, size and fit, actual or perceived quality, differences between the actual product and its presentation in catalogs or on the website, timeliness of delivery, competitive offerings and consumer preferences or confidence |
| Any significant increase in merchandise returns or merchandise returns that exceed allowances would result in adjustments to the sales return accrual and to cost of sales and could have a material and adverse affect on financial condition, results of operations and cash flows |
| 14 ______________________________________________________________________ [39]Table of Contents Quarterly results of operations fluctuate and may be negatively impacted by a failure to predict sales trends and by seasonal influences |
| Net sales, operating results, liquidity and cash flows have fluctuated, and will continue to fluctuate, on a quarterly basis, as well as on an annual basis, as a result of a number of factors, including, but not limited to, the following: • the number and timing of full-line retail store openings; • the timing of catalog mailings and the number of catalogs we mail; • the ability to accurately estimate and accrue for merchandise returns and the costs of obsolete inventory disposition; • the timing of merchandise receiving and shipping, including any delays resulting from labor strikes or slowdowns, adverse weather conditions, health epidemics or national security measures; and • shifts in the timing of important holiday selling seasons relative to our fiscal quarters, including Valentine’s Day, Easter, Mother’s Day, Thanksgiving and Christmas, and the day of the week on which certain important holidays fall |
| Our results continue to depend materially on sales and profits from the November and December holiday shopping season |
| In anticipation of traditionally increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement the existing workforce |
| If, for any reason, we were to realize lower-than-expected sales or profits during the November and December holiday selling season, our financial condition, results of operations, including related gross margins, and cash flows for the entire fiscal year would be materially adversely affected |
| We face substantial competition from discount retailers in the women’s apparel industry |
| We face substantial competition from discount retailers, such as Kohl’s and Target, for basic elements in our merchandise lines, and net sales may decline or grow more slowly if we are unable to differentiate our merchandise and shopping experience from these discount retailers |
| In addition, the retail apparel industry has experienced significant price deflation over the past several years largely due to the downward pressure on retail prices caused by discount retailers |
| We expect this price deflation to continue as a result of the expiration of quota restrictions on the importing of apparel into the United States from foreign countries that are members of the World Trade Organization |
| This price deflation may make it more difficult for us to maintain gross margins and to compete with retailers that have greater purchasing power than we have |
| Furthermore, because we currently source a significant percentage of our merchandise through intermediaries and from suppliers and manufacturers located in the United States and Canada, where labor and production costs, on average, tend to be higher, gross margins may be lower than those of competing retailers |
| Our success is dependent upon our senior management team |
| Future success depends largely on the efforts of Dennis Pence, Chairman and Chief Executive Officer; Georgia Shonk-Simmons, President and Chief Merchandising Officer; Melvin Dick, Executive Vice President and Chief Financial Officer; and Dan Griesemer, Executive Vice President, Sales and Marketing |
| The loss of any of these individuals or other key personnel could have a material adverse effect on the business |
| Furthermore, the location of our corporate headquarters in Sandpoint, Idaho, may make it more difficult to replace key employees who leave us, or to add qualified employees we will need to manage our further growth |
| Prior to joining our company, Melvin Dick, our Executive Vice President and Chief Financial Officer, served as the lead engagement partner for Arthur Andersen’s audit of WorldCom’s consolidated financial statements for the fiscal year ended December 31, 2001, and its subsequent review of WorldCom’s condensed consolidated financial statements for the fiscal quarter ended March 31, 2002 |
| The ongoing investigation of the WorldCom matter may require Mr |
| Dick’s attention, which may impair his ability to devote his full time and attention to our company |
| Further, Mr |
| Dick’s association with the WorldCom matter may adversely affect customers’ or investors’ perception of our company |
| 15 ______________________________________________________________________ [40]Table of Contents Lower demand for merchandise could reduce gross margins and cause us to slow our retail expansion |
| Our merchandise is comprised primarily of discretionary items, and demand is affected by a number of factors that influence consumer spending |
| Lower demand may cause us to move more full-price merchandise to clearance, which would reduce gross margins, and could adversely affect liquidity (including compliance with our debt covenants) and, therefore, slow the pace of retail expansion |
| We have maintained conservative inventory levels, which we believe will make us less vulnerable to sales shortfalls |
| If we elect to carry relatively low levels of inventory in anticipation of lower demand but demand is stronger than we anticipated, we may be forced to backorder merchandise, which may result in lost sales and lower customer satisfaction |
| Our tax collection policy may expose us to the risk that we may be assessed for unpaid taxes |
| Our multi-channel business model subjects us to state and local taxes in numerous jurisdictions, including state income, franchise, and sales and use tax |
| We collect these taxes in any jurisdiction in which we have a physical presence |
| While we believe we have paid or accrued for all taxes based on our interpretation of applicable law, tax laws are complex and interpretations differ from state to state |
| In the past, some taxing jurisdictions have assessed additional taxes and penalties on us, asserting either an error in our calculation or an interpretation of the law that differed from our own |
| It is possible that taxing authorities may make additional assessments in the future |
| In addition to taxes, penalties and interest, these assessments could cause us to incur legal fees associated with resolving disputes with taxing authorities |
| Additionally, changes in state and local tax laws, such as temporary changes associated with “tax holidays” and other programs, require us to make continual changes to our collection and reporting systems that may relate to only one taxing jurisdiction |
| If we fail to update our collection and reporting systems in response to these changes, any over collection or under collection of sales taxes could subject us to interest and penalties, as well as private lawsuits and damage to our reputation |
| Any determination that we have a material weakness in our internal control over financial reporting could have a negative impact on our stock price |
| We are applying significant management and financial resources to document, test, monitor and enhance internal control over financial reporting in order to meet the requirements of the Sarbanes-Oxley Act of 2002 |
| All internal control systems, no matter how well designed, have inherent limitations |
| Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation |
| Further, the effectiveness of internal control may vary over time |
| We cannot be certain that internal control systems will be adequate or effective in preventing fraud or human error |
| Any failure in the effectiveness of internal control over financial reporting could have a material effect on financial reporting or cause us to fail to meet reporting obligations, which upon disclosure, could negatively impact the market price of the common stock |
| The stock price has fluctuated and may continue to fluctuate widely |
| The market price for our common stock has fluctuated and has been and will continue to be significantly affected by, among other factors, quarterly operating results, changes in any earnings estimates publicly announced by us or by analysts, customer response to merchandise offerings, the size of catalog mailings, the timing of retail store openings or of important holiday seasons relative to our fiscal periods, seasonal effects on sales and various factors affecting the economy in general |
| The reported high and low closing sale prices of our common stock were dlra22dtta97 per share and dlra10dtta75 per share, respectively, during the fiscal year ended January 28, 2006 |
| 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 |
| The largest stockholders may exert influence over our business regardless of the opposition of other stockholders or the desire of other stockholders to pursue an alternate course of action |
| Dennis Pence, our Chairman and Chief Executive Officer, and Ann Pence, our former Vice Chairman, have informed the company that they have an informal arrangement pursuant to which they have agreed to vote their shares together |
| This arrangement is not in writing, and can be terminated at any time, and there is no assurance that Dennis Pence and Ann Pence will continue to act together with respect to their shares |
| Because of their informal arrangement, Dennis Pence and Ann Pence together may be deemed to beneficially own, directly and indirectly, approximately 36dtta8prca of outstanding common stock as of December 31, 2005 |
| Dennis Pence and Ann Pence acting together, or either of them acting independently, could have significant influence over any matters submitted to stockholders, including the election of directors and approval of business combinations, and could delay, deter or prevent a change of control of the company, which may adversely affect the market price of common stock |
| The interests of Dennis Pence and Ann Pence may not always coincide with the interests of other stockholders |
| 16 ______________________________________________________________________ [41]Table of Contents Provisions in the charter documents and Delaware law may inhibit a takeover and discourage, delay or prevent stockholders from replacing or removing current directors or management |
| Provisions in our Certificate of Incorporation and Bylaws may have the effect of delaying or preventing a merger with or acquisition of us, even where the stockholders may consider it to be favorable |
| These provisions could also prevent or hinder an attempt by stockholders to replace current directors and include: • providing for a classified Board of Directors with staggered, three-year terms; • prohibiting cumulative voting in the election of directors; • authorizing the Board to designate and issue “blank check” preferred stock; • limiting persons who can call special meetings of the Board of Directors or stockholders; • prohibiting stockholder action by written consent; and • establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted on by stockholders at a stockholders meeting |
| Because the Board of Directors appoints management, any inability to effect a change in the Board of Directors may also result in the entrenchment of management |
| We are also subject to Section 203 of the Delaware General Corporation Law, which, subject to exceptions, prohibits a Delaware corporation from engaging in any business combination with an interested stockholder for a period of three years following the date that the stockholder became an interested stockholder |
| The preceding provisions of our Certificate of Incorporation and Bylaws, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management |