COLDWATER TAKES A POUNDING
Byline: Evan Clark
NEW YORK — A dramatic, unexpected profit warning made Wednesday a crushing day on the stock market for Coldwater Creek Inc.
Fourth-quarter earnings per diluted share are now expected to come in between 4 cents and 7 cents. The earnings drought, which promises to be a fraction of Wall Street’s expectations of 66 cents, comes primarily from a shortfall in full-price early-spring sales and ends what essentially had been a stellar fiscal streak for Coldwater Creek in recent years.
The firm’s stock Wednesday plummeted 43.4 percent, hitting a new 52-week low of $15.31 in midday trading and closing at $20 on the Nasdaq. By the end of trading, the company had lost $162 million of the nearly $374 million in market capitalization it had 24 hours earlier. The stock hit its 12-month high of $40.38 on Sept. 14.
Net income for the period is expected to be between $400,000 and $700,000. This compares to year-ago earnings of $6 million, or 56 cents per diluted share. The Sandpoint, Idaho-based company expects sales to be $112 million to $117 million as increased clearance activity pushed revenues above their year-ago level of $102.1 million.
Dennis Pence, chairman and president, said on a conference call Wednesday: “We had no reason [previously] to believe that Coldwater Creek would be impacted so much by the promotional selling environment that has been holding the retailing industry hostage.
“I certainly can’ t recall another time when heavy discounting begun late in the year continued right through Christmas and into February of the following year at the magnitude at which it has. In the past, Coldwater Creek has not been affected that much by conditions impacting traditional retailers,” added Pence.
After a solid Christmas season, Coldwater said average order size decreased significantly in January and continued into February, primarily at its North Country catalog. Sixty-three percent of the firm’s catalog circulation came from that title in January, creating wide-reaching financial impact on the overall company.
Despite margin-killing discounts, the company said it remains committed to maintaining an inventory target of $72 million to $74 million for the end of the quarter.
Georgia Shonk-Simmons, Coldwater’s recently appointed chief executive officer, said that its customers just weren’t responding to full-priced selling as they had in previous years. She blamed this on the beleaguered retail landscape and severe winter. The firm has, up until now, been enjoying strong full-price sales, despite many of the macroeconomic challenges facing the retail industry.
“We were out possibly too early with too much spring merchandise,” she admitted. The ceo stressed, however, that this was predominantly a financial and not a merchandising issue.
The ceo added that fresh spring apparel was “not what the customer is willing to spend her money on if she can’t wear it right now.”
Shonk-Simmons assumed the ceo post at Coldwater on Jan. 1.
In the warning, she said, “this [shortfall] has been occurring despite the fact that January merchandise offerings and the timing of our catalog mailing schedule were consistent with last year, when we enjoyed outstanding performance in our core business at full price.”
Coldwater is adjusting by “immediately ramping up clearance activities, which will continue through February, in an effort to maintain yearend inventories,” said the ceo.
Donald Robson, executive vice president and chief financial officer, said the company would also be “working triple time to reel in that expense checkbook.”
The firm, though, said it doesn’t intend to cut back on its retail expansion plans or the development of its e-commerce business.
Pence noted that Coldwater is proceeding toward a “tripod” business model with catalog, Internet and retail channels, and to become more heavily weighted on the brick-and-mortar side.
Stressing the importance of the different channels, he said on the call that a downturn like this would have exacted a greater toll two years ago, without an e-commerce presence to help clear inventory. In the future, when the company’s three divisions are of more equal size, he noted that such surprises would hurt earnings less.
Pence said that he felt confident the company would be able to “work through this difficult time for ourselves and the retailing industry in general.”
“We are solid financially and in a good position to execute our fiscal 2001 initiatives,” he said.
Ken Gassman, an analyst with Davenport & Co., told WWD that it still wouldn’t surprise him to see some slowing of the retail expansion, noting that the company said it would look to cut costs everywhere including capital expenditure.
The decreased order size obviously caught Coldwater off guard, after reporting all of its vital signs strong in a Dec. 20 conference call and robust third-quarter results. Gassman said, though, that the firm’s management was “frank and open” on the conference call — an attitude that may have lessened the severity as Wall Street absorbed a surprise of this magnitude.
He noted that Coldwater, to some degree, is following market trends which indicate that “upper-end retailers have experienced more softness in demand” than lower-end retailers. He pointed to the erratic stock market and tougher economy as important causes of jitters among high-end consumers.
Buying cycles, according to the analyst, “are getting shorter and shorter and people are buying closer to the need.” If consumers are indeed buying more in season than they were last year, it would help explain the sales discrepancy.
Twenty-twenty hindsight may allow one to say Coldwater made a merchandising mistake, but it would have also allowed praise for the market share gains had the company produced gains as it had in recent quarters.
“You’re either the hero or the goat, and right now they’re the goat,” said Gassman. “Their business model is not broken.”
If the question is whether or not you can still sell apparel to upscale consumers through a catalog, he said, the answer is yes.
“The current financial situation is a speed bump on the fashion super highway,” said Gassman.