10-K 1 cwtr2012-10k.htm 10-K CWTR.2012-10K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________________
Form 10-K
 ____________________________________________________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended February 2, 2013
Commission File Number 0-21915
 ____________________________________________________________  
COLDWATER CREEK INC.
(Exact name of registrant as specified in its charter)
  ____________________________________________________________
DELAWARE
82-0419266
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
ONE COLDWATER CREEK DRIVE, SANDPOINT, IDAHO 83864
(Address of principal executive offices)
 
(208) 263-2266
(Registrant’s telephone number, including area code)
 ____________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock $0.01 par value
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
 ____________________________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES  o  NO  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES  o  NO  x

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  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  x NO  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer  o
Accelerated filer  x
 
Non-accelerated filer  o
Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o NO x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on July 28, 2012, the last business day of the registrant's most recently completed second fiscal quarter, based on the last reported trading price of the registrant's common stock on the NASDAQ was approximately $80,502,008.

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 March 19, 2013
Common Stock ($0.01 par value)
30,530,987

 
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form are incorporated by reference into Part III of this Form 10-K.




Coldwater Creek Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended February 2, 2013

Table of Contents  
 
 
Page

"We," "us," "our," "Company," "Coldwater," and "Coldwater Creek," unless the context otherwise requires, means Coldwater Creek Inc. and its wholly-owned subsidiaries.


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PART I
Item 1.     BUSINESS
The following discussion contains various statements regarding our current initiatives, financial position, results of operations, cash flows, operating and financial trends and uncertainties, as well as certain forward-looking statements regarding our future expectations. When used in this discussion, words such as "anticipate," "believe," "estimate," "expect," "could," "may," "will," "should," "plan," "predict," "potential," and similar expressions are intended to identify such forward-looking statements. Our forward-looking statements are based on our current expectations and are subject to numerous risks and uncertainties. As such, our actual future results, performance or achievements may differ materially from the results expressed in, or implied by, our forward-looking statements. Refer to our Item 1A. Risk Factors, in this Form 10-K. We assume no obligation to update our forward-looking statements or to provide periodic updates or guidance.
General
Coldwater Creek is a leading specialty retailer of women's apparel, jewelry and accessories. The Company was founded in 1984 in Sandpoint, Idaho, and sells its merchandise through premium retail stores across the country, online, and through its mobile applications. Our customers look to us for distinctive style, which includes vibrant and colorful palettes and our signature point of view. A commitment to providing superior customer service is manifested in all aspects of our business.
On October 4, 2012, we effected a reverse stock split of the Company's common stock following stockholder approval (the "Reverse Stock Split"). As a result of the split, every four shares of common stock outstanding were consolidated into one share, reducing the number of common shares outstanding on the effective date from 122.0 million to 30.5 million. The shares of Series A Preferred Stock outstanding remains the same. However, the number of shares of common stock each share of Series A Preferred Stock is convertible into and the related exercise price has been adjusted proportionally. The Reverse Stock Split did not affect the registration of our common stock under the Securities Exchange Act of 1934, as amended, or the listing of our common stock under the symbol "CWTR." All share and per share information in this Form 10-K has been retroactively adjusted to reflect the Reverse Stock Split.
References to a fiscal year refer to the calendar year in which the fiscal year begins. Our fiscal year ends on the Saturday nearest January 31st. This reporting schedule is followed by many national retail companies and typically results in 13-week fiscal quarters and a 52-week fiscal year, but occasionally will contain an additional week resulting in a 14-week fiscal fourth quarter and a 53-week fiscal year.
Our Multi-Channel Approach
Since the opening of our first premium retail store in November 1999, we have evolved from a direct marketer to a multi-channel specialty retailer. Our merchandise is offered through two distinct operating segments: retail and direct. The retail segment consists of our premium retail stores, factory outlet stores and day spas. The direct segment consists of sales generated through our e-commerce website and mobile applications as well as orders taken from customers over the phone and through the mail. Our multi-channel approach allows us to cross-promote our brand with a consistent message and shopping experience. It also gives us multiple contact points with customers while providing access to our merchandise and service, regardless of how they prefer to shop. Our catalogs remain an important part of our business, driving traffic to all channels. Our website features our entire merchandise offering and is designed for fast response time and ease-of-use. As part of our commitment to superior customer service, we accept returns through any channel regardless of the initial point of purchase.
Information regarding segment performance is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, in this Form 10-K. Additionally, selected financial data for our segments is presented in Note 15. Segment Reporting, to our consolidated financial statements.
Retail Segment
As of February 2, 2013, we operated 349 premium retail stores throughout the United States at an average size of approximately 5,700 square feet per store. We conduct periodic seasonal sales events and have a dedicated full-time sales section within our premium retail stores to clear excess merchandise. Approximately 60 percent of our stores are located in lifestyle centers, 35 percent are located in traditional malls and 5 percent on street locations. During fiscal 2012, we opened one new premium retail store and closed 15 premium retail stores. Approval of new store locations or changes to existing store leases are based on a comprehensive analysis and includes such information as projected sales, average consumer age and income level, buying habits and the retail location of competitors within the same trade area.

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As of February 2, 2013, we operated 38 factory outlet stores at an average size of approximately 6,700 square feet per store. We use factory outlets to sell products made solely for this channel and to manage excess merchandise transferred from our premium retail stores.
We also operate our Coldwater Creek ~ The Spa concept in 8 locations. These day spas offer a complete menu of spa treatments, including massages, facials, body treatments, manicures and pedicures. In addition to spa treatments, the day spas carry an assortment of relevant apparel as well as lines of personal care products. Our day spas are staffed with experienced professionals in all treatment areas.
Direct Segment
We use our e-commerce website, www.coldwatercreek.com, to cost-effectively reach our customer base and provide another convenient shopping alternative for customers. The website features our entire merchandise offering and serves as an efficient promotional vehicle for the clearance of excess inventory. We continue to take orders from customers over the phone and through the mail using our customer contact center located in Coeur d'Alene, Idaho.
Marketing
Customers are driven to all channels primarily by our loyalty programs, e-commerce platforms and programs, and print media, including catalogs. We have an extensive proprietary database of customer information, including customer demographics, purchasing history, and geographic proximity to our premium retail stores. We believe our ability to effectively design and manage our marketing and promotional programs is enhanced by this source of information, allowing us to adjust the frequency, timing and content of each marketing program to maximize its benefits. We seek to present a consistent brand image throughout all of our marketing and promotion activities. We continue to evaluate our marketing programs to ensure that we are reaching the greatest number of customers in the most effective and efficient manner possible.
We offer customer loyalty programs, such as Coldwater Creek Rewards and ONEcreek, and a co-branded credit card program. The loyalty programs have benefits that vary by program, including sneak peeks at upcoming trends and new merchandise, customer service specialists, exclusive savings and promotions, free shipping on returns, and a special birthday gift. The co-branded credit card program is operated through a third party. Customers who participate in our credit card reward program earn points on purchases made with the credit card at Coldwater Creek and at other businesses where the card is accepted. Cardholders who accumulate the requisite number of points are issued a coupon that is valid towards the purchase of our merchandise. In addition to earning points, all participants in the co-branded credit card program receive exclusive offers throughout the year. These offers have included special discounts, invitations to our shopping events, and periodic opportunities to earn double and triple points.
Traffic to our retail stores and to our website is driven by a variety of media, including email campaigns, catalogs, online advertising, store window displays and social media. In addition, we participate in cost-per-click search and revenue share-based affiliate programs whereby numerous popular Internet search engines and consumer websites provide direct access to our website. Our merchandise is offered through one core catalog title: Coldwater Creek. We also use national magazine advertising and postcards targeting specific markets to drive traffic while promoting overall brand awareness.
Merchandise Design and Procurement
We design and develop the majority of our apparel either in-house or through collaboration with independent designers. To ensure our designers stay abreast of trends in styles and fabrics, we operate a design center in New York City. Our New York design team merges the latest fashion trends with our customers' preferences to build an overall vision that guides the design and development of our seasonal merchandise assortment.
Our product management team translates the overall vision for each season into various product designs, fabrics and prints, indicating the construction and exact specifications for each item. Our design team seeks inspiration from their extensive travels, fashion shows and our direct sourcing team, which provides new fabrics and novelty prints along with product samples from various manufacturers. Our direct sourcing team assists in identifying the appropriate manufacturers to supply each item and in negotiating price and delivery terms.
Once our merchandise assortment is selected, our inventory planning team determines the quantities of each item to purchase in order to meet anticipated demand. This determination is made through the analysis of information such as historical sales, planned merchandise presentation, local market preferences, scheduled store openings, and sales and margin projections. This process culminates in the issuance of various purchase orders. Coordinating with the direct sourcing department, quality assurance and quality compliance personnel monitor the production process to verify the merchandise is produced to exact specifications and within the designated timeline.

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We alter the composition, magnitude and timing of merchandise offerings based upon an understanding of prevailing consumer demand, preferences and trends. The timing of merchandise offerings may be further impacted by, among other factors, the performance of various third parties on which we are dependent. Additionally, the net sales we realize from a particular merchandise offering may impact more than one fiscal quarter and year and the amount and pattern of the sales realization may differ from that realized by a similar merchandise offering in a prior fiscal quarter or year. We continually review inventory to identify excess and slow moving merchandise and clear this merchandise through markdown and other promotional offerings. We also dispose of excess and slow moving inventory internally through our full-time sales section within our premium retail stores, factory outlets and website.
Our apparel is purchased through both domestic importers who procure the merchandise on our behalf and international manufacturers through our direct sourcing program. During fiscal 2012, we had approximately 200 active apparel and non-apparel vendors and our largest individual vendor represented less than 10 percent of our merchandise purchases. We have a sourcing office in Hong Kong to assist with product development and production management, as well as monitoring compliance with our code of conduct and monitoring program.
For fiscal 2012, we were the importer of record for approximately 70 percent of our total units of apparel purchased. We believe direct sourcing provides us with more control over the production, quality and transportation logistics of our apparel and results in faster speed to market and lower merchandise costs. Domestic importers will remain, however, a crucial component of our overall sourcing strategy, providing unique industry and marketplace knowledge along with product design and development capabilities.
We are committed to sourcing our products in a responsible manner, respecting both the countries in which we have a business presence and the business partners that manufacture our products. We have a code of conduct and monitoring program that applies to all factories contracted in the production of merchandise for Coldwater Creek. Within this code, we recognize that local customs and laws vary from one region of the world to another; however, we strongly believe the issues of business ethics, human rights, health, safety and environmental stewardship transcend geographical boundaries. The intention of this code is to communicate our expectations to each of our business partners.
Distribution Center
We lease a 960,000 square-foot distribution center in Mineral Wells, West Virginia, which fulfills merchandise needs for our retail locations and merchandise sold through our direct channel. We believe that our distribution facility is adequate to provide the capacity required for the foreseeable future.
Seasonality
Our quarterly results of operations and cash flows can fluctuate significantly depending on a number of factors including the particular seasonal fashion lines and customer response to our merchandise offerings, shifts in the timing of certain holidays, including Valentine's Day, Easter, Mother's Day, Thanksgiving and Christmas, and weather related influences.
Competition
The women's retail apparel market is highly competitive. Competitors range from specialty apparel retail companies such as Chico's FAS, Inc. ("Chico's"), The Talbots, Inc. ("Talbots"), Christopher & Banks Corporation ("Christopher & Banks") and ANN INC., to small single channel catalog, e-commerce and retail store companies. We also compete with national department store chains such as Macy's, Inc., Nordstrom, Inc., Dillard's, Inc. and J.C. Penney Company, Inc., along with discount retailers that offer women's apparel and accessories, such as Kohl's Corporation and Target Corporation.
We believe that we compete principally on the basis of our high-quality, distinctive merchandise selection and superior customer service. We also believe that our multi-channel approach enhances our ability to compete in the marketplace by providing our customers easy access to our merchandise, regardless of how they prefer to shop.
Employees
As of February 2, 2013, we had approximately 2,500 full-time employees and 4,100 part-time employees. We utilize temporary employees to supplement our existing workforce during the November and December holiday shopping season. None of our employees are covered by collective bargaining agreements.
Trademarks
Our registered trademarks include Coldwater Creek® and other proprietary logos. We believe that our registered and common law trademarks have significant value and are instrumental to our ability to market and sustain demand for our merchandise and brand.

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Available Information
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and therefore file periodic reports and other information with the Securities and Exchange Commission (the "SEC"). These reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website at www.sec.gov that contains reports, proxy information statements and other information regarding issuers that file electronically.
Our filings under the Exchange Act, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, are also available free of charge on the investor relations portion of our website at www.coldwatercreek.com. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.
Executive Officers of the Registrant
The table below sets forth the name, age and positions of our executive officers as of March 19, 2013:
Name
 
Age
 
Positions
Jill Brown Dean
 
56
 
President and Chief Executive Officer
Jerome Jessup
 
52
 
President and Chief Creative Officer
James A. Bell
 
45
 
Executive Vice President, Chief Operating Officer and Chief Financial Officer
John E. Hayes III
 
50
 
Senior Vice President, Human Resources and General Counsel
Mark A. Haley
 
45
 
Vice President and Chief Accounting Officer
Jill Brown Dean has served as President and Chief Executive Officer since January 2013, having joined the Company in February 2011 as President and Chief Merchandising Officer. Prior to joining Coldwater Creek, Ms. Dean served as President of the Limited Too division of Tween Brands from October 2006 to April 2008. Prior to that, Ms. Dean spent eighteen years with Limited Brands, serving as Executive Vice President, General Manager for Victoria's Secret flagship stores from July 2003 to October 2006, as well as President and Chief Executive Officer of Lane Bryant from June 1994 to October 2001. Ms. Dean began her career at Limited Brands in merchandising for the Express division.
Jerome Jessup has served as President and Chief Creative Officer since February 2011, having joined the Company in August 2009 as Executive Vice President and Creative Director. Prior to joining Coldwater Creek, Mr. Jessup ran his own fashion collection and consulting practice for four years. Prior to that, he was the Senior Executive Vice President of Design and Merchandising for ANN INC. Mr. Jessup also spent ten years with The Gap, Inc. ("The Gap"), leading the design and product development functions for Banana Republic, as well as for The Gap, GapKids, babyGap and GapBody divisions.
James A. Bell was appointed Executive Vice President and Chief Operating Officer in January 2012 and continues to serve as Chief Financial Officer. Upon joining the Company, Mr. Bell served as Divisional Vice President of Financial Planning from September 2009 until December 2009. From December 2009 to March 2010, Mr. Bell served as Vice President of Financial Planning. From March 2010 to January 2012, Mr. Bell served as Senior Vice President and Chief Financial Officer. Prior to joining Coldwater Creek, Mr. Bell served from April 2007 to June 2009 as Senior Vice President, Finance and Planning for Harry and David Holdings, Inc. From October 2002 to April 2007, Mr. Bell was Senior Director, Finance at The Gap. Prior to his role at The Gap, Mr. Bell served in various senior finance roles at SmartPipes, Inc., a software company, and in Piper Jaffray's Investment Banking group. Prior to his role at Piper Jaffray, Mr. Bell served in the U.S. Navy for nine years on active duty as a Naval Flight Officer.
John E. Hayes III has served as Senior Vice President, Human Resources and General Counsel since April 2010, having joined the Company in February 2009 as Senior Vice President and General Counsel. In addition, Mr. Hayes served as the Company's interim Chief Financial Officer from November 2009 to April 2010. Prior to joining Coldwater Creek, Mr. Hayes was engaged for seventeen years in private law practice, most recently as a partner with Hogan & Hartson, LLP, from March 2003 to February 2009. While in private practice, Mr. Hayes served as our outside corporate and securities law counsel from 1999 until joining us. Prior to his legal career, Mr. Hayes practiced as an accountant with KPMG LLP.
Mark A. Haley has served as Vice President and Chief Accounting Officer since October 2011. Upon joining the Company, Mr. Haley served as Vice President and Controller from September 2010 until October 2011. Prior to joining the Company, Mr. Haley served from December 2007 to September 2010 as Senior Director of Financial Reporting for SUPERVALU Inc.

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From July 1991 through December 2007, Mr. Haley was with Deloitte & Touche LLP, where he served in various roles, including Director, Assurance Services beginning in September 2006.
Item 1A.      RISK FACTORS
In addition to the other information set forth in this annual report, you should carefully consider the following risk factors which could materially affect our business, financial condition or future results of operations. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known or deemed immaterial may also adversely affect our business, financial condition, or future results of operations.
We must successfully gauge fashion trends and changing consumer preferences or our sales and results of operations will be adversely affected.
Forecasting consumer demand for our merchandise is difficult given the nature of changing fashion trends and consumer preferences. In addition, our merchandise assortment differs in each seasonal flow and at any given time our assortment may not resonate with our customers. On average, we begin the design process for apparel nine to ten months before merchandise is available to consumers, and we typically begin to make purchase commitments four to eight months in advance. These lead times make it difficult for us to respond quickly to changes in demand for our merchandise. To the extent we misjudge the market for our merchandise or the products suitable for local markets, our sales will be adversely affected. If the demand for our merchandise is lower than expected, causing us to hold excess inventory, we would be forced to further discount merchandise, which reduces our gross margins and negatively impacts results of operations and operating cash flows. If the demand for merchandise is stronger than expected, we may not be able to reorder merchandise on a timely basis to meet demand, which may adversely affect sales and customer satisfaction.
We continue to update our style orientation and reinvigorate our brand, which includes improving the balance of our assortment to address more aspects of our customers' lifestyle and rebuilding our under-performing categories. If these changes do not resonate with our customers, our sales, gross margins and results of operations will be adversely affected.
We may be unable to improve the value of our brand and our failure to do so may adversely affect our business.
Our success is driven by the value of the Coldwater Creek brand. Our marketing programs, which include loyalty programs, e-commerce platforms and programs, and print media, is designed to improve Coldwater Creek's brand value and to increase traffic to all channels. The value of our brand is largely dependent on the success of our design, merchandise assortment, and marketing efforts and our ability to provide a consistent, high quality customer experience. If we are not able to improve our brand perception, we may not fully realize the benefits of improvements to our merchandise assortment and our business and results of operations may be adversely affected.
Our Secured Term Loan and Credit Agreement have restrictions that may limit our ability to fund operations, which could adversely affect our business.
Both our Secured Term Loan and Credit Agreement have covenants that may restrict the manner in which we operate our business. These covenants, among other things, subject us to capital expenditure limitations, minimum amount of inventory to be held, minimum amount of liquidity and minimum excess availability over the borrowing base that must be maintained, along with various other conditions. Should we fail to comply with the covenants and conditions, we may be unable to fund our operations without a significant restructuring of our business.
We use the revolving line of credit provided under our Credit Agreement to secure trade letters of credit and, from time to time for borrowings, both of which reduce the amount of available borrowings. The actual amount that is available under our revolving line of credit fluctuates from time to time, due to factors including, but not limited to, eligible inventory and credit card receivables, reserve amounts, outstanding letters of credit, and borrowing under our revolving line of credit. Consequently, it is possible that, should we need to access any additional funds from our revolving line of credit, it may not be available in full. As of February 2, 2013, the revolving line of credit was limited to a borrowing base of $62.8 million with $14.5 million in letters of credit issued and no borrowings on our revolving line of credit, resulting in $48.3 million available for borrowing under our revolving line of credit.

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Continued material operating losses could adversely impact our liquidity, including our cash, and it may be necessary to seek additional sources of financing, which may not be available to us in amounts or on terms acceptable to us.
We believe we have sufficient liquidity, including cash and our revolving line of credit that we may continue to draw on from time to time, to fund our operations for at least the next twelve months. However, we have had recurring operating losses and if our future operating performance is below our expectations or our revolving line of credit is not fully available to us, our liquidity could be adversely impacted and it may be necessary to seek additional sources of liquidity. Our current level of debt could adversely affect our ability to raise additional capital to fund our operations, which could limit our ability to react to changes in our business. There is no assurance that debt or equity financing will be available in amounts or on terms acceptable to us.
We may be unable to successfully realize the benefits of our store optimization program.
We continue to believe that retail expansion will be a key driver for our long-term growth. However, due to our business performance and our focus on improving financial results, in 2011 we announced a store optimization program where we expect to close up to 45 premium retail stores through fiscal 2013 based on an ongoing review of the performance of our premium retail stores. To date, we have closed 30 total premium retail stores. The optimization program is being achieved through a staged approach based primarily on natural lease expirations and early termination rights. In total, when the program is completed, we expect these actions to generate approximately $8.0 to $12.0 million in annualized improvement in pretax operating results. However, there can be no assurance that the store optimization program will realize the expected benefits and we may incur delays and unexpected costs in its execution. Any miscalculations or shortcomings we may make in the planning and implementation of the store optimization program may adversely affect our financial position, results of operations and cash flows.
Economic conditions have impacted consumer spending and may adversely affect our financial position and results of operations.
Consumer spending patterns are highly sensitive to the economic climate and consumer spending continues to be impacted by reduced household incomes, high unemployment, and other negative economic conditions, nationally and regionally. We continue to be affected by challenging macroeconomic conditions which are evidenced in our business by a highly competitive retail selling environment and low retail store traffic. We believe these conditions will continue for the foreseeable future. If consumer spending on apparel and accessories continues to decline and demand for our products decreases further, we may be forced to further discount our merchandise or sell it at a loss, which would adversely affect our results of operations. In addition, higher costs for transportation, raw materials, labor, insurance and health care, and other negative economic factors may adversely affect our results of operations.
We have incurred substantial financial commitments and fixed costs related to our retail stores that we will not be able to recover if our stores are not successful.
The success of an individual store location is dependent on the success of the lifestyle center, shopping mall or outlet center where the store is located, and may be influenced by changing customer demographic and consumer spending patterns. These factors are difficult to predict with accuracy. Because we enter into long-term financial commitments when leasing retail store locations and incur substantial fixed costs for each store's design, leasehold improvements, fixtures and management information systems, it would be costly for us to close a store that does not prove successful.
The testing of our retail stores' long-lived assets for impairment requires us to make significant estimates about our future performance and cash flows that are inherently uncertain. These estimates can be affected by numerous factors, including changes in economic conditions, our results of operations, and competitive conditions in the industry. These factors, along with changes in estimates of sales, gross margins, operating earnings and cash flows, may affect the timing and the fair value estimates used in our testing of long-lived assets, which may result in impairment charges.
We may be unable to manage the complexities of our multi-channel business model, which could adversely affect our results of operations.
The complexity of our multi-channel business model requires a level of expertise to successfully manage operations. As we continue to tightly control expenses, we may experience an increase in demands on our managerial, operational and administrative resources, as well as our control environment. If we do not manage these demands, we may not realize the full benefits of our multi-channel business model, which may adversely affect our results of operations.

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We operate our distribution function from one facility, which could adversely affect our business if the operations of this facility were severely disrupted.
Our single distribution center is located in Mineral Wells, West Virginia, which fulfills merchandise needs for our retail locations and merchandise sold through our direct channel. Any significant disruption to the operations of our distribution center due to natural disasters, accidents, system failures or other unforeseen causes could adversely affect our business and results of operations.
We are subject to significant risks associated with our management information systems, which, if not working properly, could adversely affect our results of operations.
We have a number of complex management information systems that are critical to our operations, including systems such as accounting, human resources, inventory purchasing and management, financial planning, direct segment order processing, and retail segment point-of-sale systems. While we regularly evaluate the capabilities and requirements of our information systems, there can be no assurances that our existing information systems will be adequate to support the future needs of our business. We may have to undertake significant information system implementations, modifications and/or upgrades in the future at significant cost to us. Installing new systems or maintaining and upgrading existing systems carries substantial risk, including potential loss of data or information, cost overruns, disruption of operations, lower customer satisfaction, inability to deliver merchandise to our stores or our customers and our potential inability to meet regulatory requirements, any of which would harm our business and may adversely affect our results of operations.
Compromises of our data security could adversely affect our results of operations.
In the ordinary course of our business, we collect and store certain personal information from our customers, employees and vendors, and we process customer payments using payment information. In addition, business is primarily conducted over the Internet for our direct segment. In order to reduce our vulnerability to computer viruses, physical and electronic break-ins, and similar disruptions, we have taken steps designed to secure our computer systems, which include network firewalls, two-factor authentication and access technology, data encryption, intrusion detection and prevention devices, and the encryption of Company laptops. We also employ secure file transfer options to provide security for processing, transmission and storage of confidential information. Nevertheless, there can be no assurance that we will not suffer a data compromise. Attempts to penetrate our computer system could result in misappropriation of personal information, payment information or confidential business information. In addition, an employee, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information, and may purposefully or inadvertently cause a breach involving such information. We may not have the resources or technical sophistication to prevent rapidly evolving types of cyber attacks. Risks of attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third party specialists. Any compromise of our data security and loss of personal or business information could disrupt our operations, damage our reputation and customer confidence, and subject us to additional costs and liabilities, which could adversely affect our business and results of operations.
We are required to maintain compliance with Payment Card Industry Data Security Standards ("PCI Standards"), which are common standards for protecting cardholder data. As part of an overall security program and to meet PCI Standards, we undergo frequent external vulnerability scans and we are reviewed by a third party security assessor. As PCI Standards change, we may be required to implement additional security measures. Failure to maintain compliance could violate agreements with major credit card companies and result in significant fines or a loss of credit processing capabilities.
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.
We may experience difficulties in obtaining sufficient manufacturing capacity from our vendors. 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. Moreover, a key vendor may not be able to supply our inventory needs due to capacity constraints, financial instability, or other factors beyond our control, or we could decide to stop using a vendor due to quality or other issues. If we were required to change vendors or if a key vendor were unable to supply desired merchandise in sufficient quantities on acceptable terms, particularly in light of current global economic conditions, we could experience delays in filling customer orders or delivering inventory to stores until alternative supply arrangements are secured. These delays could result in lost sales and a decline in customer satisfaction. The inability of key vendors to access credit and liquidity, or the insolvency of key vendors, could lead to their failure to deliver our merchandise, which could result in lost sales and lower customer satisfaction. It is also possible that the inability of our vendors to access credit, or concerns vendors or their lenders may have with our creditworthiness, may cause them to extend less favorable terms to us, which could adversely affect our cash flows, margins and financial condition, as well as limit the availability under our revolving line of credit. Additionally, delays by our vendors

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in supplying our inventory needs could cause us to incur more expensive air freight charges, which may adversely affect our margins.
Our reliance on foreign vendors subjects us to uncertainties that could impact our costs to source merchandise, delay or prevent merchandise shipments, which could adversely affect our business.
We continue to source apparel directly from foreign vendors, particularly those located in Asia, India and Central America. We were the importer of record for approximately 70 percent of the total apparel units purchased during fiscal 2012. Irrespective of our direct sourcing from foreign vendors, substantially all of our merchandise, including that which we buy from domestic vendors, is manufactured overseas. This exposes us to risks and uncertainties which could substantially impact our ability to realize any perceived cost savings. These risks include, 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 regulations, as well as credit assurances we are required to provide to foreign vendors;
    declines in the relative value of the U.S. dollar to foreign currencies;
    volatile labor, fuel, energy and raw material costs;
failure of vendors to adhere to our quality assurance standards, code of conduct and other environmental, labor, health, and safety standards for the benefit of workers;
financial instability of a vendor or vendors, including their potential inability to obtain credit to manufacture the merchandise they produce for us;
    the potential inability of our vendors to meet our production needs due to raw material or labor shortages;
changing, uncertain or negative 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.
We face substantial competition from other retailers in the women's apparel industry and if we are unable to compete effectively, our business could be adversely affected.
We face substantial competition from department stores, discount retailers and other specialty retailers in the women's apparel industry and our net sales may decline or grow more slowly if we are unable to differentiate our merchandise and shopping experience from those of other 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 declining consumer spending, resulting in increased promotional and competitive activity. This competitive environment may make it more difficult to pass on product cost increases to our customers and to compete with retailers that have greater purchasing power, which may result in lower gross margins.
If we are unable to efficiently fill customer orders in our direct segment, customer satisfaction, our reputation and our business could be adversely affected.
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 contact center or our distribution center, including system failures caused by telecommunication system providers, order volumes that exceed our present telephone or Internet system capabilities, computer viruses, electrical outages, mechanical problems and human error;
delays or failures in the performance of third parties, such as vendors who supply our merchandise, shipping companies and the U.S. postal and customs services, including delays associated with labor strikes or slowdowns, adverse weather conditions, or health epidemics; and
disruptions or slowdowns in our order processing or fulfillment systems resulting from increased security measures implemented by U.S. customs or from homeland security measures, fire, natural disasters or comparable events.

10


If we experience a greater number of merchandise returns than anticipated, our results of operations could be adversely affected.
We make allowances in our 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 that exceed our estimates would result in adjustments to revenue and to cost of sales and may adversely affect our financial condition, results of operations and cash flows.
We may be unable to manage significant increases in the costs associated with our catalog business, which could adversely impact our business.
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 U.S. Postal Service rates and the cost of catalog production could result in lower profits. Most of our catalog-related costs are incurred prior to mailing, and as such 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 volatile in recent years, particularly for mailings to prospective customers. Any performance shortcomings experienced by the catalog business may adversely affect our overall business, financial condition, results of operations and cash flows.
Our success is dependent upon our ability to attract and retain qualified employees.
Our future success depends largely on the contributions and abilities of our employees. Significant turnover or the loss of key employees may adversely affect our business. Furthermore, the current economic conditions or the location of our corporate headquarters in Sandpoint, Idaho, may make it more difficult or costly to attract qualified employees.
Our multi-channel business model may expose us to assessments for unpaid taxes, penalties and interest, which could be substantial.
Our multi-channel business model subjects us to taxes in numerous jurisdictions, including state and local income, franchise, payroll, and sales and use tax. We collect and remit these taxes in any jurisdiction in which we have a physical presence. While we believe we have appropriately paid or accrued for all taxes based on our interpretation of applicable law, tax laws are complex. In the past, some taxing authorities 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 taxes could subject us to interest and penalties, as well as private lawsuits and damage to our reputation.
We are subject to potentially adverse outcomes in litigation matters, which could adversely affect our business.
We are, from time to time, involved in various legal proceedings incidental to the conduct of our business. Actions which may be filed against us include commercial, intellectual property infringement, customer and employment claims, including class action lawsuits alleging that we have violated federal and state wage and hour and other laws. These issues arise primarily in the ordinary course of business but could raise complex factual and legal issues, which are subject to multiple risks and uncertainties and could require significant management time and costs to defend. We believe that our current litigation issues will not have a material adverse effect on our results of operations or financial condition. However, our assessment of current litigation could change in light of the discovery of facts not presently known to us with respect to pending legal actions, or adverse determinations by judges, juries or other finders of fact. Moreover, additional litigation that is not currently pending may adversely affect our results of operations or financial condition.
If we are unable to protect our trademarks from infringement, our business could be adversely affected.
Our registered trademarks, which include Coldwater Creek® and other proprietary logos, are important to our success. Even though we register and protect our trademarks and other intellectual property rights, there is no assurance that our actions will protect us from others infringing upon our trademarks and proprietary rights or seeking to block sales of our products as infringements of their trademarks and proprietary rights. If we cannot adequately protect our trademarks or prevent infringement of them, our business and results of operations could be adversely affected.

11


Because the majority of our cash and cash equivalents are concentrated with one financial institution, we may experience losses on our deposits.
We maintain the majority of our cash and cash equivalents with one major financial institution in the United States, in the form of demand deposits and other short-term investments. Deposits in this institution may exceed the amounts of insurance provided on such deposits. With the current financial environment and the potential instability of financial institutions, we cannot be assured that we will not experience losses on our deposits.
Our stock price has fluctuated and may continue to fluctuate widely.
The market price for our common stock has fluctuated 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, timing of retail store openings and closings, and other Company announcements. In addition, stock markets generally have experienced a high level of price and volume volatility and market prices for the stock of many companies, including ours, have experienced wide price fluctuations not necessarily related to operating performance. On October 4, 2012, we effected a Reverse Stock Split and our common stock began trading on a post-Reverse Stock Split adjusted basis (every four shares of common stock outstanding were consolidated into one share). The reported high and low closing prices (as retroactively adjusted to reflect the Reverse Stock Split) of our common stock during the fiscal year ended February 2, 2013 were $5.73 per share and $1.84 per share, respectively. The current price of our common stock may not be indicative of future market prices. The fluctuation of the market price of our common stock may have a negative impact on our results of operations and liquidity. Changes in the market price of our common stock could considerably affect the valuation of our derivative liability resulting in significant non-cash fluctuations in earnings. In addition, price volatility of our common stock may expose us to stockholder litigation, which could adversely affect our financial condition, results of operations and cash flows.
Failure to comply with applicable laws and regulations may adversely affect our business and results of operations.
We have policies and procedures that are designed to help us comply with applicable laws and regulations, including those imposed by the SEC, Nasdaq, and other foreign, federal, state and local authorities. Any new or changes to laws and regulations that affects employment and labor, trade, product labeling and safety, transportation and logistics, health care, tax, privacy, consumer protection, environmental, or other areas applicable to us, may increase the complexity and the related cost of compliance. Failure to comply with applicable laws and regulations may adversely affect our business and results of operations.
Our largest stockholders may exert influence over our business regardless of the opposition of other stockholders or the desire of other stockholders to pursue an alternate course of action.
Golden Gate Capital has voting rights through their holdings of Series A Preferred Stock that can be converted to shares of our common stock of 16.6% on an as-converted basis. Dennis Pence, our Chairman of the Board of Directors and co-founder, and Ann Pence, our co-founder, have voting rights of 15.4% and 12.4%, respectively, through beneficial ownership of our common stock and considering conversion of the shares beneficially owned by Golden Gate Capital. Either Golden Gate Capital, Dennis Pence or Ann Pence acting independently would have significant influence over, and should they act together, could effectively control the outcome of, 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 our common stock. The interests of these stockholders may not always coincide with the interests of other stockholders.
Provisions in our 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 of Directors 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

12


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.
Item 1B.      UNRESOLVED STAFF COMMENTS
None.
Item 2.      PROPERTIES
The general location, use and approximate size of our principal properties as of February 2, 2013 are as follows:
Facility
 
Location
 
Owned/Leased
 
Approximate Size
Corporate Offices
 
Sandpoint, Idaho
 
Owned
 
250,000 sq. ft.
Distribution Center
 
Mineral Wells, West Virginia
 
Leased
 
960,000 sq. ft.
Customer Contact Center
 
Coeur d'Alene, Idaho
 
Leased
 
69,000 sq. ft.
Foreign Sourcing Office
 
Hong Kong
 
Leased
 
6,800 sq. ft.
New York Design Studio
 
New York City, New York
 
Leased
 
20,000 sq. ft.
Premium Retail Stores (a)
 
349 various U.S. locations
 
Leased
 
1,998,000 sq. ft.
Factory Outlet Stores (b)
 
38 various U.S. locations
 
Leased
 
 255,000 sq. ft.
Day Spas (c)
 
8 various U.S. locations
 
Leased
 
42,000 sq. ft.
____________________________________________________________
(a)
Our premium retail stores average approximately 5,700 square feet in size per store. The base term of our premium retail store leases is generally ten years. Store count includes one flagship store located in Manhattan, New York.
(b)
Our factory outlet stores average approximately 6,700 square feet in size per store. The base term of our factory outlet store leases is generally five years.
(c)
Our day spas average approximately 5,300 square feet in size per spa. The base term of our day spa leases is generally ten years.
We believe that our corporate offices, distribution center and customer contact center will meet our operational needs for the foreseeable future.
Item 3.       LEGAL PROCEEDINGS
See Note 13. Commitments and Contingencies, to our condensed consolidated financial statements.
Item 4.     MINE SAFETY DISCLOSURES
Not applicable.

13


PART II
Item 5. 
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND     ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock and Dividend Policy
Our common stock has been quoted on the NASDAQ Stock Market under the symbol "CWTR" since our initial public offering on January 29, 1997. On March 19, 2013, we had 6,119 stockholders of record and 30,530,987 shares of common stock, $0.01 par value per share, outstanding.
The following table sets forth the high and low sales prices for our common stock for the periods indicated (retroactively adjusted to reflect the Reverse Stock Split):
 
Price Range of
Common Stock
 
High
 
Low
Fiscal 2012:
 
 
 
First Quarter
$
5.08

 
$
3.52

Second Quarter
$
4.00

 
$
1.84

Third Quarter
$
4.36

 
$
1.88

Fourth Quarter
$
5.73

 
$
3.69

Fiscal 2011:
 
 
 
First Quarter
$
12.44

 
$
9.12

Second Quarter
$
12.28

 
$
4.84

Third Quarter
$
7.32

 
$
3.20

Fourth Quarter
$
4.84

 
$
3.24

We have never paid a cash dividend on our common stock nor do we expect to declare a cash dividend in the foreseeable future. In addition, the payment of dividends is subject to certain restrictions under our Secured Term Loan and our Credit Agreement.


14


Performance Graph
The following graph compares the cumulative five-year total return to stockholders on Coldwater Creek Inc.'s common stock to the cumulative total returns of the NASDAQ Composite Index, the S&P Apparel Retail Index, and a customized peer group of Chico's, Christopher & Banks, and ANN INC (referred to as the "Peer Group"). Due to Talbots, one of the companies that was included in the Peer Group for fiscal 2011, becoming a privately held company, and in an effort to include a broader range of companies that includes industry sectors in which we operate, instead of comparing our stock performance to an individually selected group of peer companies, we have used a published industry index. Accordingly, for fiscal 2012, we are including the S&P Apparel Retail Index and we do not intend to present the Peer Group in future fiscal years. The stock performance shown below is not necessarily indicative of future performance.
 
Base
Period
 
Indexed Returns (a)
for the Fiscal Years Ended
 
February 2,
2008
 
January 31,
2009

 
January 30,
2010

 
January 29,
2011
 
January 28,
2012

 
February 2, 2013
Company/Index:
 
 
 
 
 
 
 
 
 
 
 
Coldwater Creek Inc.
$
100.00

 
$
40.11

 
$
63.44

 
$
41.68

 
$
12.80

 
$
13.12

NASDAQ Composite
100.00

 
60.26

 
84.82

 
110.53

 
114.46

 
128.46

S&P Apparel Retail
100.00

 
51.01

 
100.86

 
132.43

 
174.63

 
234.52

Peer Group
100.00

 
29.40

 
84.66

 
90.88

 
94.12

 
140.98

____________________________________________________________
(a)
$100 invested on 2/2/08 in stock or 1/31/08 in index, including reinvestment of dividends. Indexes calculated on month-end basis.
The information required by this item concerning equity compensation plans is incorporated by reference to Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, in this Form 10-K.

15


Item 6.     SELECTED FINANCIAL DATA
The information presented below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Historical data is not necessarily indicative of the Company's future results of operations or financial condition. Refer to Item 1A. Risk Factors, included in this Form 10-K.
 
Fiscal Year Ended
 
February 2,
2013 (a)
 
January 28,
2012 (c)(d)
 
January 29,
2011
 
January 30,
2010 (e)
 
January 31,
2009
 
(53 weeks)
 
(52 weeks)
 
(52 weeks)
 
(52 weeks)
 
(52 weeks)
 
(in thousands, except per share and store data)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
742,472

 
$
773,021

 
$
981,101

 
$
1,038,581

 
$
1,024,221

Gross profit
$
233,121

 
$
229,328

 
$
307,285

 
$
334,281

 
$
350,560

Net loss
$
(81,842
)
 
$
(99,694
)
 
$
(44,111
)
 
$
(56,132
)
 
$
(25,963
)
Net loss per share — Basic and Diluted (b)
$
(2.69
)
 
$
(3.98
)
 
$
(1.91
)
 
$
(2.45
)
 
$
(1.14
)
Weighted average common shares outstanding — Basic and Diluted (b)
30,477

 
25,065

 
23,079

 
22,899

 
22,759

Cash dividends declared per common share
$

 
$

 
$

 
$

 
$

Selected Segment Data:
 
 
 
 
 
 
 
 
 
Net sales:
 
 
 
 
 
 
 
 
 
Retail
$
574,425

 
$
595,192

 
$
732,430

 
$
782,429

 
$
751,352

Direct
$
168,047

 
$
177,829

 
$
248,671

 
$
256,152

 
$
272,869

Segment operating income (loss):
 
 
 
 
 
 
 
 
 
Retail
$
18,896

 
$
(1,803
)
 
$
27,085

 
$
37,624

 
$
30,625

Direct
20,015

 
23,948

 
40,529

 
41,918

 
42,108

Total segment operating income
38,911

 
22,145

 
67,614

 
79,542

 
72,733

Unallocated corporate and other
(107,596
)
 
(117,845
)
 
(110,087
)
 
(123,968
)
 
(117,940
)
Loss from operations
$
(68,685
)
 
$
(95,700
)
 
$
(42,473
)
 
$
(44,426
)
 
$
(45,207
)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
21,734

 
$
51,365

 
$
51,613

 
$
84,650

 
$
81,230

Inventory
$
125,207

 
$
131,975

 
$
156,481

 
$
161,546

 
$
135,376

Working capital
$
24,032

 
$
54,222

 
$
81,846

 
$
98,885

 
$
92,989

Total assets
$
345,908

 
$
413,115

 
$
506,723

 
$
583,523

 
$
628,627

Total debt and capital lease obligations
$
64,361

 
$
42,310

 
$
13,037

 
$
13,338

 
$
15,040

Stockholders' equity
$
37,136

 
$
116,413

 
$
193,009

 
$
235,561

 
$
282,496

Selected Operating Data:
 
 
 
 
 
 
 
 
 
Total catalogs mailed
55,570

 
58,757

 
83,125

 
91,365

 
85,950

Premium Retail Stores:
 
 
 
 
 
 
 
 
 
Beginning of the fiscal year
363

 
373

 
356

 
348

 
306

Opened during the period
1

 
5

 
19

 
8

 
42

Closed during the period
15

 
15

 
2

 

 

End of the fiscal year
349

 
363

 
373

 
356

 
348

Average square footage per store
5,700

 
5,900

 
5,900

 
5,900

 
5,900


16


____________________________________________________________
(a)
On July 9, 2012, we obtained a five-year, $65.0 million senior secured term loan (the "Secured Term Loan") provided by an affiliate of Golden Gate Capital. In conjunction with the Secured Term Loan, we issued 1,000 shares of Series A Preferred Stock, which is convertible into up to 6.1 million shares of our common stock, based upon the initial conversion rate. The fair value of the Series A Preferred Stock is recorded as a derivative liability and is included in accrued liabilities. The initial fair value of the Series A Preferred Stock was recorded as a discount to the Secured Term Loan. Changes in the fair value of the derivative liability are recorded as other gain or loss, net, in our consolidated statement of operations and comprehensive operations. Fiscal 2012 results included a $2.9 million loss on the derivative liability.
(b)
On October 4, 2012, we effected a Reverse Stock Split where every four shares of common stock outstanding were consolidated into one share. Per share and weighted average shares outstanding have been retroactively adjusted to reflect the Reverse Stock Split.
(c)
Net sales for fiscal 2011 included $11.8 million of a cumulative one-time adjustment reflecting a change in our estimate of gift card breakage as we began to recognize income from gift card breakage when the likelihood of redemption is considered remote and for the estimated non-escheatable amount. Prior to fiscal 2011, we only recognized income from the non-escheated portion of unredeemed gift cards after the filing of the corresponding escheatment to the relevant jurisdictions.
(d)
On October 24, 2011, we completed an underwritten public offering of 7.2 million shares of our common stock. We received net proceeds from the offering of $22.9 million after deducting underwriting discounts and commissions and offering expenses.
(e)
During fiscal 2009, we recorded a $24.4 million non-cash income tax charge, or $1.07 per share, related to a valuation allowance against net deferred tax assets. U.S. GAAP requires that we assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a "more-likely-than-not" standard. In making such judgments, significant weight is given to evidence that can be objectively verified. Current or previous losses are given more weight than projected future performance. Consequently, based on available evidence, in particular our historical cumulative losses, we recorded a valuation allowance against our net deferred tax asset. The recording of a valuation allowance does not preclude us from utilizing the full amount of the deferred tax asset in future profitable periods.


17


Item 7.    
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains various statements regarding our current initiatives, financial position, results of operations, cash flows, operating and financial trends and uncertainties, as well as certain forward-looking statements regarding our future expectations. When used in this discussion, words such as "anticipate," "believe," "estimate," "expect," "could," "may," "will," "should," "plan," "predict," "potential," and similar expressions are intended to identify such forward-looking statements. Our forward-looking statements are based on our current expectations and are subject to numerous risks and uncertainties. As such, our actual future results, performance or achievements may differ materially from the results expressed in, or implied by, our forward-looking statements. Refer to our Item 1A. Risk Factors, in this Form 10-K. We assume no obligation to update our forward-looking statements or to provide periodic updates or guidance.
Overview
We encourage you to read this Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying consolidated financial statements and related notes. References to a fiscal year refer to the calendar year in which the fiscal year begins. Our fiscal year ends on the Saturday nearest January 31st. This reporting schedule is followed by many national retail companies and typically results in a 52-week fiscal year, but occasionally will contain an additional week, resulting in a 53-week fiscal year. Fiscal 2012 consisted of 53 weeks, and fiscal 2011 and 2010 each consisted of 52 weeks.
On October 4, 2012, we effected a reverse stock split of the Company's common stock following stockholder approval (the "Reverse Stock Split"). As a result of the split, every four shares of common stock outstanding were consolidated into one share, reducing the number of common shares outstanding on the effective date from 122.0 million to 30.5 million. All share and per share information in this Form 10-K has been retroactively adjusted to reflect the Reverse Stock Split.
Executive Summary
Net sales decreased to $742.5 million for fiscal 2012 compared to $773.0 million for fiscal 2011. This decrease in net sales was primarily the result of store closures, a decrease in direct segment net sales, and the cumulative one-time adjustment for gift card breakage income of $11.8 million recorded during fiscal 2011, partially offset by an increase in comparable premium retail store sales of 0.8 percent(1) and the impact of the additional week in fiscal 2012.
Gross profit for fiscal 2012 was $233.1 million, or 31.4 percent of net sales, compared to $229.3 million, or 29.7 percent of net sales, for fiscal 2011. The increase in gross profit margin was primarily due to increased leverage of buying and occupancy costs and improvements in merchandise margins reflecting improved product performance, partially offset by the benefit in fiscal 2011 from the cumulative one-time adjustment for gift card breakage income.
Selling, general and administrative expenses ("SG&A") for fiscal 2012 were $301.8 million, or 40.6 percent of net sales, compared to $319.8 million, or 41.4 percent of net sales, for fiscal 2011. The decrease of $18.0 million in SG&A dollars was primarily due to lower marketing expenses.
Net loss for fiscal 2012 was $81.8 million, or $2.69 per share, on 30.5 million weighted average shares outstanding. The fiscal 2012 net loss includes other loss, net, of $4.0 million, or $0.13 per share, due to the change in the fair value of the derivative liability and issuance costs related to the Series A Preferred Stock, and costs associated with the CEO transition, net of tax, of $1.7 million, or $0.06 per share, recorded in the fourth quarter. This compared to a net loss of $99.7 million, or $3.98 per share, on 25.1 million weighted average shares outstanding for fiscal 2011. Net loss for fiscal 2011 included the impact of a cumulative one-time adjustment for gift card breakage income of $11.8 million, or $0.47 per share, and $5.2 million of non-cash impairment charges, or $0.21 per share, related to certain retail store assets. The increase in the number of weighted average shares in fiscal 2012 versus the prior year period reflects the sale of 7.2 million shares of common stock on October 24, 2011.
__________________________________
(1) 
We define comparable premium retail stores as those stores in which the gross square footage has not changed by more than 20 percent in the previous 16 months and which have been open for at least 16 consecutive months without closure for seven consecutive days or moving to a different temporary or permanent location. Due to the extensive promotions that occur as part of the opening of a premium store, we believe waiting 16 months rather than 12 months to consider a store to be comparable provides a better view of the growth pattern of the premium retail store base. For fiscal 2012, calculation of comparable premium retail store sales excludes the additional week. The calculation of comparable store sales varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation.

18


We ended fiscal 2012 with $21.7 million in cash and cash equivalents and no outstanding borrowings under our revolving line of credit. This compares to $51.4 million cash and cash equivalents and $15.0 million of borrowings under our revolving line of credit at the end of fiscal 2011. At the end of fiscal 2012, working capital was $24.0 million, which reflects the $18.7 million derivative liability, compared to $54.2 million at the end of fiscal 2011. Premium retail store inventory per square foot, including retail inventory in our distribution center, increased 8.0 percent at the end of fiscal 2012 compared to fiscal 2011. Total inventory decreased 5.1 percent to $125.2 million at the end of fiscal 2012 from $132.0 million at the end of fiscal 2011
Company Initiatives
For fiscal 2013, we are focused on the following strategic initiatives:
Our first initiative is to strengthen the Coldwater Creek brand by continuing to reposition Coldwater Creek as a leader in the marketplace, providing trend right, age-appropriate fashion, and a consistent multi-channel experience to our customers. We have recently completed a comprehensive study of our target customer, which will guide our decision making and enable our organization to execute more consistently.
In merchandising and design, we will continue to build on the base that we established in 2012. We will broaden our core product offering by introducing new categories, and evolve our assortment architecture by increasing the penetration of fashion and color, print, and pattern.
We will refine our marketing platform to drive traffic to all channels by leveraging our loyalty program, which was rolled out in fiscal 2012. We are focused on adding new loyalty members and increasing the shopping frequency of our current members.
We remain focused on improving our inventory productivity through tighter inventory commitments by adjusting the depth, while maintaining the breadth, in our assortments.
We will continue to execute our real estate optimization program, which we began in fiscal 2011. To date we have closed a total of 30 underperforming stores and expect to close an additional 15 stores in fiscal 2013, bringing the total to 45 stores. We are focused on maximizing transfer sales from closed stores. As part of our strategy to reduce the average store size over time, we will continue to opportunistically downsize and relocate stores in certain markets.
We will also focus on optimizing our supply chain capabilities, which should enable us to reduce our cycle time and lower our cost of goods. We plan to reduce our cycle time by streamlining our product development processes, improving our forecasting and planning of capacity and raw materials, and enhancing our overall logistics model.
Outlook
We have made significant changes to both people and processes over the past few years to enable us to evolve the Coldwater Creek brand to what customers are looking for today. We are continuing to see the benefits of these investments in the form of higher margins and meaningful reductions in our year-over-year losses, which gives us confidence that we are moving in the right direction.
We expect that a competitive promotional environment will continue. In addition, weakness in consumer spending persists as a result of continued uncertain macroeconomic conditions reflected in reduced household incomes and high unemployment. We believe these conditions will continue to have a negative impact on our sales, gross margin and operating performance.
We remain committed to disciplined management of expenses and inventory and expect to reduce SG&A year-over-year by $4.0 million to $6.0 million in fiscal 2013. Also, for fiscal 2013, we expect capital expenditures to be $17.0 million to $20.0 million and depreciation and amortization expense to be approximately $40.0 million to $45.0 million.
If we are in a loss position for a quarter or the year, we do not expect to generate any significant federal income tax benefit due to our valuation allowance and we may incur a small expense as a result of various state taxation requirements.

19


Results of Operations
Fiscal 2012 Compared to Fiscal 2011
Highlights of results of operations for fiscal 2012 compared to fiscal 2011 are as follows:
 
Fiscal Year Ended
 
February 2,
2013
 
% of
 Net Sales
 
January 28,
2012
 
% of
 Net Sales
 
$ Change
 
% Change
 
(dollars in thousands, except per share data)
Net sales:
 

 
 

 
 

 
 

 
 

 
 

Retail
$
574,425

 
77.4
 %
 
$
595,192

 
77.0
 %
 
$
(20,767
)
 
(3.5
)%
Direct
168,047

 
22.6

 
177,829

 
23.0

 
(9,782
)
 
(5.5
)
 
742,472

 
100.0

 
773,021

 
100.0

 
(30,549
)
 
(4.0
)
Cost of sales
509,351

 
68.6

 
543,693

 
70.3

 
(34,342
)
 
(6.3
)
Gross profit
233,121

 
31.4

 
229,328

 
29.7

 
3,793

 
1.7

Selling, general and administrative expenses
301,806

 
40.6

 
319,812

 
41.4

 
(18,006
)
 
(5.6
)
Loss on asset impairments

 

 
5,216

 
0.7

 
(5,216
)
 
*

Loss from operations
(68,685
)
 
(9.3
)
 
(95,700
)
 
(12.4
)
 
27,015

 
(28.2
)
Other loss, net
4,025

 
0.5

 

 

 
4,025

 
*

Interest expense, net
9,596

 
1.3

 
2,275

 
0.3

 
7,321

 
321.8

Loss before income taxes
(82,306
)
 
(11.1
)
 
(97,975
)
 
(12.7
)
 
15,669

 
(16.0
)
Income tax provision (benefit)
(464
)
 
(0.1
)
 
1,719

 
0.2

 
(2,183
)
 
*

Net loss
$
(81,842
)
 
(11.0
)%
 
$
(99,694
)
 
(12.9
)%
 
$
17,852

 
(17.9
)%
Net loss per share — Basic and Diluted
$
(2.69
)
 
 

 
$
(3.98
)
 
 

 
$
1.29

 


____________________________________________________________
*     Percentage comparisons for changes are not considered meaningful.
Net Sales
The $20.8 million decrease in retail segment net sales for fiscal 2012 as compared to fiscal 2011 is primarily the result of the impact of store closures in connection with our store optimization program and the impact of a $10.7 million one-time adjustment for gift card breakage income recognized in fiscal 2011, partially offset by an increase in comparable premium retail store sales of 0.8 percent and the impact of the additional week in fiscal 2012. The increase in comparable premium retail store sales was driven primarily by a 9.2 percent increase in conversion partially offset by a 6.9 percent decline in comparable traffic and lower comparable average transaction value.
The $9.8 million decrease in direct segment net sales for fiscal 2012 as compared to fiscal 2011 is primarily the result of a 3.8 percent decrease in order volume on flat average transaction value, partially offset by the impact of the additional week in fiscal 2012. Direct segment net sales were also negatively impacted by a decrease of $3.6 million in shipping revenue during fiscal 2012 as compared to fiscal 2011, as well as the impact of a $1.1 million one-time adjustment for gift card breakage income recognized in fiscal 2011.
Comparable premium retail store sales by quarter are as follows:
 
Percentage
increase (decrease)
 
Fiscal
2012
 
Fiscal
2011
First Quarter
(0.6
)%
 
(27.5
)%
Second Quarter
(6.5
)%
 
(30.6
)%
Third Quarter
7.3
 %
 
(19.8
)%
Fourth Quarter
2.7
 %
 
(11.4
)%

20


Gross Profit
Gross profit margin increased by 1.7 percentage points during fiscal 2012 as compared to fiscal 2011. Gross profit margin was favorably impacted by a 1.7 percentage point improvement due to increased leverage of buying and occupancy costs and a 1.1 percentage point increase in merchandise margins, reflecting improved product performance, partially offset by the 1.1 percentage point impact of the one-time gift card breakage income recognized in fiscal 2011.
Selling, General and Administrative Expenses
SG&A decreased $18.0 million during fiscal 2012 as compared to fiscal 2011, primarily due to lower marketing expenses, partially offset by $2.1 million of incremental costs associated with our CEO transition in the fourth quarter of fiscal 2012.
Loss on Asset Impairments
No impairment charge was recorded during fiscal 2012 whereas we recorded impairment charges of $5.2 million related to certain long-lived assets, primarily premium store leasehold improvements during fiscal 2011.
Loss from Operations
We evaluate the performance of our operating segments based upon segment operating income, as shown below, along with segment net sales: 
 
Fiscal Year Ended
February 2,
2013
 
% of
 Segment
Sales
 
January 28,
2012
 
% of
 Segment
Sales
 
%
  Change
(dollars in thousands)
Segment operating income:
 

 
 

 
 

 
 

 
 

Retail
$
18,896

 
3.3
%
 
$
(1,803
)
 
(0.3
)%
 
*

Direct
20,015

 
11.9

 
23,948

 
13.5

 
(16.4
)%
Total segment operating income
38,911

 
 

 
22,145

 
 

 
75.7

Unallocated corporate and other
(107,596
)
 
 

 
(117,845
)
 
 

 
(8.7
)
Loss from operations
$
(68,685
)
 
 

 
$
(95,700
)
 
 

 
(28.2
)
____________________________________________________________
*     Percentage comparisons are not considered meaningful.
Retail segment operating income rate expressed as a percent of retail segment sales for fiscal 2012 as compared to fiscal 2011 increased by 3.6 percentage points. The retail segment operating income rate was favorably impacted by 2.1 percentage points due to lower occupancy expenses and impairment charges, 1.2 percentage points due to higher margins, and the favorable impact of lower marketing expenses and store closures. The change in the retail segment operating income rate was also negatively impacted by approximately 2.3 percentage points due to the cumulative one-time adjustment for gift card breakage income recognized in fiscal 2011.
Direct segment operating income rate expressed as a percent of direct segment sales for fiscal 2012 as compared to fiscal 2011 decreased by 1.6 percentage points. The direct segment operating income rate was negatively impacted by 1.9 percentage points due to the deleveraging impact of lower sales and the impact of the cumulative one-time adjustment for gift card breakage income recognized in fiscal 2011, partially offset by higher margins.
Unallocated corporate and other expenses decreased $10.2 million for fiscal 2012 as compared to fiscal 2011 primarily due to a decrease in marketing expenses as we did not anniversary our national television campaign, partially offset by higher employee related expenses, including $2.1 million of costs associated with our CEO transition in the fourth quarter of fiscal 2012.
Other Loss, net
During fiscal 2012, we recorded a $2.9 million loss from a fair value adjustment related to the derivative liability and $1.1 million of issuance costs related to the Series A Preferred Stock.
Interest Expense, net
The increase in interest expense, net, for fiscal 2012 as compared to fiscal 2011 is primarily the result of interest on borrowings under the Secured Term Loan that closed during fiscal 2012.

21


Provision (Benefit) for Income Taxes
The income tax provision (benefit) for fiscal 2012 and fiscal 2011 primarily reflects the continuing impact of the valuation allowance against our deferred tax assets, various state taxation requirements, and certain discrete items.

Fiscal 2011 Compared to Fiscal 2010:
Highlights of results of operations for fiscal 2011 compared to fiscal 2010 are as follows:
 
Fiscal Year Ended
 
January 28,
2012
 
% of
 Net Sales
 
January 29,
2011
 
% of
 Net Sales
 
$ Change
 
% Change
 
(dollars in thousands, except per share data)
Net sales:
 

 
 

 
 

 
 

 
 

 
 

Retail
$
595,192

 
77.0
 %
 
$
732,430

 
74.7
 %
 
$
(137,238
)
 
(18.7
)%
Direct
177,829

 
23.0

 
248,671

 
25.3

 
(70,842
)
 
(28.5
)
 
773,021

 
100.0

 
981,101

 
100.0

 
(208,080
)
 
(21.2
)
Cost of sales
543,693

 
70.3

 
673,816

 
68.7

 
(130,123
)
 
(19.3
)
Gross profit
229,328

 
29.7

 
307,285

 
31.3

 
(77,957
)
 
(25.4
)
Selling, general and administrative expenses
319,812

 
41.4

 
345,827

 
35.2

 
(26,015
)
 
(7.5
)
Loss on asset impairments
5,216

 
0.7

 
3,931

 
0.4

 
1,285

 
32.7

Loss from operations
(95,700
)
 
(12.4
)
 
(42,473
)
 
(4.3
)
 
(53,227
)
 
125.3

Interest expense, net
2,275

 
0.3

 
1,736

 
0.2

 
539

 
31.0

Loss before income taxes
(97,975
)
 
(12.7
)
 
(44,209
)
 
(4.5
)
 
(53,766
)
 
121.6

Income tax provision (benefit)
1,719

 
0.2

 
(98
)
 

 
1,817

 
*

Net loss
$
(99,694
)
 
(12.9
)%
 
$
(44,111
)
 
(4.5
)%
 
$
(55,583
)
 
126.0
 %
Net loss per share — Basic and Diluted
$
(3.98
)
 
 

 
$
(1.91
)
 
 

 
$
(2.07
)
 


____________________________________________________________
*     Percentage comparisons are not considered meaningful.
Net Sales
The $137.2 million decrease in retail segment net sales for fiscal 2011 as compared to fiscal 2010 is primarily due to a decrease in comparable premium retail store sales of 22.5 percent, reflecting a 15.3 percent decline in comparable traffic, a 7.5 percent decline in units per transaction, and a 7.1 percent decline in comparable conversion, while our comparable average unit retail increased 5.1 percent. Offsetting the decrease in comparable premium retail store sales is $10.7 million of the retail segment's portion of the cumulative one-time adjustment for gift card breakage income. Retail segment net sales were also negatively impacted by a decrease of $6.8 million in net sales from factory outlet stores during fiscal 2011 as compared to fiscal 2010.
The $70.8 million decrease in direct segment net sales during fiscal 2011 as compared to fiscal 2010 is primarily the result of a decrease in order volume of 29.3 percent while our average unit retail increased 6.5 percent. Contributing to the decrease in order volume is a shift in clearance sales from our direct segment to our retail segment with the introduction of our full-time sale section in our premium retail stores. Offsetting the decrease in direct segment net sales is $1.1 million of the direct segment's portion of the cumulative one-time adjustment for gift card breakage income. Direct segment net sales were also negatively impacted by a decrease of $6.8 million in shipping revenue during fiscal 2011 as compared to fiscal 2010.

22


Comparable premium retail store sales by quarter are as follows:
 
Percentage
increase (decrease)
 
Fiscal
2011
 
Fiscal
2010
First Quarter
(27.5
)%
 
1.0
 %
Second Quarter
(30.6
)%
 
4.8
 %
Third Quarter
(19.8
)%
 
(20.1
)%
Fourth Quarter
(11.4
)%
 
(20.5
)%
Gross Profit
Gross profit margin decreased by 1.6 percentage points during fiscal 2011 as compared to fiscal 2010, which included a 1.1 percentage point benefit resulting from the cumulative one-time adjustment for gift card breakage income. Gross profit margin was negatively impacted by the deleveraging of fixed expenses of 3.9 percentage points, primarily retail occupancy expenses, given the lower sales, offset by improvement in merchandise margins of 1.3 percentage points.
 Selling, General and Administrative Expenses
SG&A decreased $26.0 million during fiscal 2011 as compared to fiscal 2010, primarily driven by decreased employee related expenses, occupancy expenses, and variable and fixed operating expenses. These decreases were partially offset by an increase in marketing expenses primarily due to our national television campaign. As a percent of net sales, SG&A increased by 6.2 percentage points for fiscal 2011 as compared to fiscal 2010, primarily driven by lower net sales, partially offset by our continued efforts to control expenses. 
Loss on Asset Impairment
During fiscal 2011, we recorded impairment charges of $5.2 million related to certain long-lived assets, primarily premium store leasehold improvements. During fiscal 2010, we recorded impairment charges of $3.9 million related to certain long-lived assets, primarily premium store leasehold improvements and certain computer software.
Loss from Operations
We evaluate the performance of our operating segments based upon segment operating income (loss), as shown below, along with segment net sales: 
 
Fiscal Year Ended
January 28,
2012
 
% of
 Segment
Sales
 
January 29,
2011
 
% of
 Segment
Sales
 
%
  Change
(dollars in thousands)
Segment operating income:
 

 
 

 
 

 
 

 
 

Retail
$
(1,803
)
 
(0.3
)%
 
$
27,085

 
3.7
%
 
*

Direct
23,948

 
13.5

 
40,529

 
16.3

 
(40.9
)%
Total segment operating income
22,145

 
 

 
67,614

 
 

 
(67.2
)
Unallocated corporate and other
(117,845
)
 
 

 
(110,087
)
 
 

 
7.0

Loss from operations
$
(95,700
)
 
 

 
$
(42,473
)
 
 

 
125.3

____________________________________________________________
*     Percentage comparisons are not considered meaningful.
Retail segment operating income rate expressed as a percent of retail segment sales for fiscal 2011 as compared to fiscal 2010 decreased by 4.0 percentage points, which included a 2.3 percentage point benefit resulting from the cumulative one-time adjustment for gift card breakage income. The retail segment operating rate was negatively impacted by deleveraging of occupancy expenses and employee related expenses of 4.4 and 3.4 percentage points, respectively, offset by improvement in merchandise margins.

23


Direct segment operating income rate expressed as a percent of direct segment sales for fiscal 2011 as compared to fiscal 2010 decreased by 2.8 percentage points. The direct segment operating income rate was negatively impacted by a 1.7 percentage point decline due to the deleveraging of marketing expenses and employee related expenses, offset by improvement in merchandise margins.
Unallocated corporate and other expenses increased $7.8 million for fiscal 2011 as compared to fiscal 2010 due to an increase in marketing expenses primarily related to our national brand marketing campaign, partially offset by decreases in corporate support costs and employee related expenses.
Interest Expense, net
The increase in interest expense, net, for fiscal 2011 as compared to fiscal 2010 is primarily the result of higher amounts of debt.
Provision (Benefit) for Income Taxes
The income tax provision (benefit) for fiscal 2011 and fiscal 2010 primarily reflects the continuing impact of the valuation allowance against our deferred tax assets and various state taxation requirements.
Seasonality 
Our results of operations 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 composition, size and timing of various merchandise offerings;
    the timing and number of premium retail store openings and closings;
    the timing and number of promotions;
    the timing and number of catalog mailings;
    the ability to accurately estimate and accrue for merchandise returns and the costs of inventory disposition;
the timing of merchandise shipping and receiving, 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 temporary employees to supplement the existing workforce.
Liquidity and Capital Resources
Overview
Key measurements of liquidity resources were as follows:
 
February 2,
2013
 
January 28,
2012
 
(dollars in thousands)
Cash and cash equivalents
$
21,734

 
$
51,365

Working capital (a)
$
24,032

 
$
54,222

Current ratio (a)
1.16

 
1.36

Borrowings under revolving line of credit
$

 
$
15,000

Revolving line of credit availability
$
48,348

 
$
31,851

____________________________________________________________
(a) The working capital and current ratio as of February 2, 2013 reflect the impact of the $18.7 million derivative liability.

24


We rely on our liquidity resources to fund our operations and use our revolving line of credit to secure trade letters of credit and, from time to time for borrowings, both of which reduce the amount of available borrowings. The actual amount that is available under our revolving line of credit fluctuates from time to time, due to factors including, but not limited to, eligible inventory and credit card receivables, reserve amounts, outstanding letters of credit, and borrowing under our revolving line of credit. Consequently, it is possible that, should we need to access any additional funds from our revolving line of credit, it may not be available in full. 
We believe we have sufficient liquidity, including cash and our revolving line of credit that we may continue to draw on from time to time, to fund our operations for at least the next twelve months. However, we have had recurring operating losses and if our future operating performance is below our expectations or our revolving line of credit is not fully available to us, our liquidity could be adversely impacted and it may be necessary to seek additional sources of liquidity. Our current level of debt could adversely affect our ability to raise additional capital to fund our operations, which could limit our ability to react to changes in our business.
Net cash flow activities were as follows:
 
Twelve Months Ended
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
 
(in thousands)
Net cash used in operating activities
$
(42,144
)
 
$
(44,224
)
 
$
(989
)
Net cash used in investing activities
$
(16,352
)
 
$
(7,785
)
 
$
(30,121
)
Net cash provided by (used in) financing activities
$
28,865

 
$
51,761

 
$
(1,927
)
Operating Cash Flows
Net cash used in operating activities decreased $2.1 million during fiscal 2012 as compared with fiscal 2011, primarily as a result of the decrease in net loss, net of non-cash activity, partially offset by higher use of cash from operating assets and liabilities. The higher use of cash from operating assets and liabilities was primarily due to the timing of certain payments in relation to our fiscal year end with the additional week during fiscal 2012. The $43.2 million decrease in cash flows from operating activities during fiscal 2011 as compared with fiscal 2010 resulted primarily from the increased net loss offset by changes in our operating assets and liabilities.
Investing Cash Flows
Net cash used in investing activities principally consisted of cash outflows for capital expenditures which totaled $16.5 million, $8.9 million and $31.1 million during fiscal 2012, fiscal 2011, and fiscal 2010, respectively. Capital expenditures during fiscal 2012, fiscal 2011 and fiscal 2010 primarily related to leasehold improvements and furniture and fixtures associated with the opening of additional premium retail stores, the relocation and remodeling of certain existing stores and the continued development of our technology infrastructure.
Financing Cash Flows
Net cash provided by financing activities during fiscal 2012 primarily reflects proceeds from our new secured term loan with a portion of the proceeds used to pay down our revolving line of credit, the repayment of the separate term loan previously provided by Wells Fargo Bank, and related debt issuance costs. Net cash provided by financing activities during fiscal 2011 were primarily derived from proceeds of $22.9 million from our stock offering, net of underwriting discounts and commissions and offering expenses, and borrowings on our revolving line of credit and our previous term loan, net of debt issuance costs. Net cash used by financing activities in fiscal 2010 primarily reflect payments on our capital lease obligations.
Secured Term Loan
On July 9, 2012, we obtained a five-year, $65.0 million senior secured term loan (the "Secured Term Loan") provided by an affiliate of Golden Gate Capital. The Secured Term Loan bears interest at a rate of 5.5% to be paid in cash quarterly and 7.5% due and payable in kind ("PIK") upon maturity. The Secured Term Loan is collateralized by a second lien on our inventory and credit card receivables, and a first lien on our remaining assets. The Secured Term Loan is scheduled to mature upon the earlier of July 9, 2017 or the date that the obligations under the Amended and Restated Credit Agreement with Wells Fargo Bank dated May 16, 2011 (the "Credit Agreement") mature or are accelerated. Upon maturity of the Secured Term Loan, the principal balance and any unpaid interest, including $29.8 million of PIK interest, will become due and payable. As of February 2, 2013, $2.9 million of PIK interest has been accrued. Also, on July 9, 2012 in conjunction with the Secured Term

25


Loan, we issued 1,000 shares of Series A Preferred Stock and the initial fair value of $15.7 million was recorded as a discount to the Secured Term Loan. This discount is being amortized to interest expense based on the effective interest rate method.
Credit Agreement
In May 2011, we entered into the Credit Agreement with a maturity date of May 16, 2016, which is secured primarily by our inventory, credit card receivables, and certain other assets. The Credit Agreement provides a revolving line of credit of up to $70.0 million, with subfacilities for the issuance of up to $70.0 million in letters of credit and swingline advances of up to $10.0 million. The amount of credit that is available under the revolving line of credit is limited to a borrowing base that is determined according to, among other things, a percentage of the value of eligible inventory and credit card receivables, as reduced by certain reserve amounts required by Wells Fargo Bank. In conjunction with the closing of the Secured Term Loan, we amended the Credit Agreement and repaid the separate term loan previously provided by Wells Fargo Bank. The amendment did not materially change the terms of the Credit Agreement. As of February 2, 2013, the revolving line of credit was limited to a borrowing base of $62.8 million with no borrowings and $14.5 million in letters of credit issued resulting in $48.3 million available for borrowing under our revolving line of credit.
Pursuant to the Credit Agreement, borrowings issued under the revolving line of credit will generally accrue interest at a rate ranging from 1.00% to 2.50% (determined according to the average unused availability under the credit facility (the "Availability")) over a reference rate of, at our election, either LIBOR or a base rate (the "Reference Rate"). Letters of credit issued under the revolving line of credit will accrue interest at a rate ranging from 1.50% to 2.50% (determined according to the Availability) with an interest rate of 2.00% as of February 2, 2013. Commitment fees accrue at a rate ranging from 0.375% to 0.50% (determined according to the Availability), which is assessed on the average unused portion of the credit facility maximum amount. 
Debt Covenants
Both the Secured Term Loan and Credit Agreement have restrictive covenants that subject us to capital expenditure limitations based on our approved annual plan, maintaining a minimum of $95.0 million of inventory, and maintaining a minimum of $15.0 million of liquidity and a minimum excess availability of 15 percent of our borrowing base, as defined in the Credit Agreement. The Secured Term Loan and Credit Agreement also contain various covenants relating to customary matters, such as indebtedness, liens, investments, acquisitions, mergers, dispositions, dividends, and other various conditions. Our current plan to close up to 45 stores under our store optimization program and the related transfer or disposition of store assets is not limited by our Secured Term Loan or Credit Agreement. We were in compliance with all covenants for all periods presented.  
Both the Secured Term Loan and Credit Agreement contain customary events of default. Upon an event of default that is not cured or waived within any applicable cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral.
Capital and Real Estate Plans
Capital expenditures for fiscal 2013 are expected to be between $17.0 million and $20.0 million. We currently plan to limit new store openings to two factory outlet stores in fiscal 2013 and will continue to take advantage of real estate opportunities to improve the efficiency of our store base, including relocating stores to more favorable locations and reducing overall store size.
In fiscal 2011, we announced a store optimization program where we expect to close up to 45 stores through fiscal 2013. To date, we have closed 30 premium retail stores. The optimization program is being achieved through a staged approach based primarily on natural lease expirations and early termination rights. In total, when the program is completed, we expect these actions to generate approximately $8.0 million to $12.0 million in annualized improvement in pretax operating results. We typically do not incur significant termination costs or disposal charges as a result of store closures. Early termination clauses generally relieve us of any future obligation under a lease if specified sales levels or certain occupancy targets are not achieved by a specified date.

26


Off-Balance Sheet Liabilities and Other Contractual Obligations
We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
The following table summarizes our minimum contractual commitments and commercial obligations as of February 2, 2013:
 
Payments Due in Fiscal Year
 
Total
 
2013
 
2014-2015
 
2016-2017
 
Thereafter
 
(in thousands)
Operating leases (a) (d)
$
415,991

 
$
70,256

 
$
126,537

 
$
89,531

 
$
129,667

Contractual commitments (b)
98,801

 
98,801

 

 

 

Debt, including estimated interest payments (c)
114,506

 
3,883

 
8,698

 
101,925

 

Capital leases (d)
22,154

 
1,489

 
2,510

 
2,330

 
15,825

Benefit obligations (e)
15,381

 
4,017

 
1,642

 
1,298

 
8,424

Total
$
666,833

 
$
178,446

 
$
139,387

 
$
195,084

 
$
153,916

____________________________________________________________
(a)
We have a significant operating lease for our 960,000 square foot distribution center located in Mineral Wells, West Virginia, with a remaining lease commitment as of February 2, 2013 of $54.0 million. All other operating leases primarily pertain to premium and factory outlet retail stores, day spas and various equipment. Certain store leases have provisions to adjust the payment based on certain criteria, for example additional rent for our store sales above a specified minimum or less rent based on landlord vacancy rates below a specified minimum. The operating lease obligations noted above do not include any of these adjustments or payments made for maintenance, insurance and real estate taxes. Several lease agreements provide renewal options or allow for termination rights under certain circumstances. Future operating lease obligations would change if these renewal options or termination rights were exercised.
(b)
Contractual commitments include commitments to purchase inventory of $98.4 million and capital expenditures of $0.4 million. The timing of the payments is subject to change based upon actual receipt of the inventory or capital asset and the terms of payment with the vendor.
(c)
Upon maturity of the Secured Term Loan, $29.8 million of PIK interest will become due and payable.
(d)
The primary capital lease is for our 69,000 square foot facility located in Coeur d'Alene, Idaho, which functions as a customer contact center, IT data center, and office space. This lease was amended on April 22, 2009 resulting in the lease classified as a capital lease through July 2028, with a remaining capital lease commitment as of February 2, 2013 of $18.0 million, and as an operating lease from August 2028 through July 2038, with a remaining operating lease commitment as of February 2, 2013 of $16.5 million. All other capital leases pertain to various technology equipment and other real estate. The capital lease obligations represent the minimum payments including principal and interest, and excluding maintenance, insurance and real estate taxes.
(e)
Benefit obligations include cash payments expected to be made related to the Supplemental Executive Retirement Plan and other compensation arrangements.
Critical Accounting Policies and Estimates 
Preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We base our estimates on historical experience and on other assumptions that we believe are reasonable. As a result, actual results could differ because of the use of estimates. Note 2. Significant Accounting Policies, to our consolidated financial statements describes the significant accounting policies used in the preparation of our consolidated financial statements. The critical accounting policies used in the preparation of our consolidated financial statements, as described below, include those that require us to make estimates about matters that are uncertain and could have a material impact to our consolidated financial statements. 

27


Sales Returns
We recognize sales and the related cost of sales for our direct segment at the time the merchandise is expected to be delivered to our customer and for our retail segment at the point-of-sale with a customer in a store. We reduce our sales and cost of sales and establish an accrual for expected sales returns based on historical experience and future expectations. The actual amount of sales returns we subsequently realize may fluctuate from estimates due to several factors, including size and fit, merchandise mix, actual or perceived quality, differences between the actual product and its presentation in the catalog or website, timeliness of delivery and competitive offerings. We continually track subsequent sales return experience, compile customer feedback to identify any pervasive issues, reassess the marketplace, compare our findings to previous estimates and adjust the accrual accordingly. Provisions for sales returns were as follows:
 
Fiscal Year Ended
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
 
(in thousands)
Provision for sales returns - beginning of period
$
3,535

 
$
3,383

 
$
4,365

Additions charged to income
62,995

 
63,407

 
77,475

Deductions for actual returns
(61,578
)
 
(62,848
)
 
(77,337
)
Adjustments recorded to income
(1,214
)
 
(407
)
 
(1,120
)
Provision for sales returns - end of period
$
3,738

 
$
3,535

 
$
3,383

Gift Card Breakage
Proceeds from the sale of gift cards and certificates are recorded as a liability and are recognized as net sales when the cards are redeemed for merchandise. Our gift cards do not have an expiration date. During fiscal 2011, we identified a history of redemption patterns associated with our gift cards that support a change in our estimate of the term over which we should recognize income on gift card breakage. Based on historical information, the likelihood of a gift card remaining unredeemed can be reasonably estimated at the time of gift card issuance. Breakage income is recognized over the estimated average redemption period of redeemed gift cards, for those gift cards for which the likelihood of redemption is deemed to be remote and for the amount for which there is no legal obligation for us to remit the value of such unredeemed gift cards to any relevant jurisdictions. During fiscal 2011, we recorded $11.8 million of a cumulative one-time adjustment reflecting the change in our estimate of gift card breakage. During fiscal 2012, gift card breakage income was $2.0 million.
Inventory Adjustments
Our inventories consist of merchandise purchased for resale and are recorded at the lower of weighted average cost or market. The nature of our business requires that we make substantially all of our merchandising decisions and corresponding inventory purchase commitments with vendors several months in advance of the time in which a particular merchandise item is intended to be included in the merchandise offerings. These decisions and commitments are based upon, among other possible considerations, historical sales with identical or similar merchandise, our understanding of then-prevailing fashion trends and influences, and an assessment of likely economic conditions and various competitive factors. We continually make assessments as to whether the carrying cost of inventory exceeds its market value, and, if so, by what dollar amount. To determine whether inventory should be written down we consider current and anticipated demand and customer preferences in addition to the current and future estimated selling price. The carrying value of the inventory is reduced to its net realizable value with a corresponding charge to cost of sales. Actual results may differ from our estimates if we are required to markdown or discount merchandise beyond our current expectations. For the inventory marked down to net realizable value, a one percentage point increase in our adjustment rate at February 2, 2013 would have affected net loss by less than $0.5 million.
We estimate and record physical inventory losses that have occurred since our last physical inventory date by applying the most recent average physical inventory loss experience. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our inventory loss estimate. However, if our estimates regarding physical inventory losses are inaccurate, we may be exposed to losses or gains that could be material.
Stock-Based Compensation
The calculation of stock-based compensation expense requires us to expense the fair value of equity awards over the requisite employee service period, which is generally the vesting period. Calculating the fair value of stock options on the date of grant requires judgment, including estimating the expected life of the award, the expected stock price volatility over the expected life and pre-vesting forfeitures. Our expected stock price volatility assumption is based upon a combination of both the

28


implied and historical volatilities of our stock which is obtained from public data sources. The expected life represents the weighted average period of time that stock options are expected to be outstanding, giving consideration to vesting schedules and historical exercise patterns. An increase in expected volatility or expected life would result in an increase in the fair value of our stock options and higher compensation expense, while a decrease in expected volatility or expected life would result in a decrease in the fair value of our stock options and lower compensation expense. We also grant various restricted stock units which are generally less subjective in determining fair value as the fair value of these awards is based primarily upon the fair market value of our common stock on the date of grant. We estimate forfeitures for all of our equity awards based upon historical experience, and only recognize expense for those awards expected to vest. We revise our estimated forfeitures in subsequent periods, when necessary, if actual forfeitures vary from those originally estimated. We believe that our estimates are based upon outcomes that are reasonably likely to occur. If actual forfeitures vary from our estimates, compensation expense would vary from what we record in the current and prior fiscal years. Total stock-based compensation expense during fiscal 2012, fiscal 2011 and fiscal 2010 was $2.0 million, $2.4 million, and $2.5 million, respectively.
Impairment of Long-Lived Assets
Long-lived assets are subject to a review for impairment if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the expected future undiscounted cash flows generated by an asset or asset group is less than its carrying amount, we then determine the fair value of the asset generally by using a discounted cash flow model. A loss is recognized, if any, equal to the amount by which the carrying amount of the asset or asset group exceeds the fair value. In assessing future cash flows, management makes certain significant assumptions and judgments. Specifically for retail store asset groups reviewed for impairment, these assumptions and judgments may include projected sales, margins and operating expenses over the estimated remaining useful life. These assumptions and judgments can be affected by consumer spending and overall economic conditions on a localized or regional basis, as well as other factors not necessarily within our control.
During fiscal 2012, based on our review of the operating results for each of our stores, we evaluated certain store assets for impairment but did not record an impairment charge.
Derivative Liability
On July 9, 2012, we issued 1,000 shares of Series A Preferred Stock in conjunction with the Secured Term Loan, which is convertible up to 6.1 million shares of our common stock at an initial exercise price of $3.40 per share of underlying common stock. The fair value of the Series A Preferred Stock at issuance was $15.7 million, which was recorded as a derivative liability and is measured at fair value on a recurring basis using the Black-Scholes option valuation model, which is significantly dependent on the market price of our common stock. Changes in the fair value are recorded as gain or loss, net, in the consolidated statements of operations and comprehensive operations. As of February 2, 2013, the derivative liability was $18.7 million, resulting in a $2.9 million loss on the derivative liability for the fiscal year ended 2012. A 10 percent increase (decrease) in the closing price of our common stock at February 2, 2013, in isolation of the impact to the volatility assumption, would have increased (decreased) the fair value of the derivative liability by approximately $2.1 million.
Income Taxes 
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated taxes to be paid. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and respective tax bases and operating loss and tax credit carryforwards, as measured using enacted tax rates expected to be in effect in the periods where temporary differences are expected to be realized or settled. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company's results of operations, cash flows or financial position.
Assessing the realization of deferred tax assets requires significant judgment. We consider all available evidence to determine whether it is more likely than not that existing deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable. In making such judgments, significant weight is given to evidence that can be objectively verified. Current or previous losses are given more weight than projected future performance. Consequently, based on all available evidence, in particular our three-year cumulative loss, we have a valuation allowance against a significant portion of our net deferred tax assets. The determination of when to reduce a valuation allowance requires significant judgment by management in determining the appropriate level of evidence to objectively support the realization of the net deferred tax assets. When the results of our operations demonstrate a sustained level of taxable income it may result in the reduction of the valuation allowance.

29


The valuation allowance activity on net deferred tax assets was as follows:
 
Fiscal Year Ended
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
 
(in thousands)
Valuation allowance - beginning of period
$
78,854

 
$
41,916

 
$
24,523

Net additions charged to income tax expense
28,920

 
36,938

 
17,393

Valuation allowance - end of period
$
107,774

 
$
78,854

 
$
41,916

Contingencies
An estimated loss from a contingency is recorded if it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Gain contingencies are not recorded until realization is assured beyond a reasonable doubt.
We are involved in litigation and administrative proceedings arising in the normal course of our business. Actions filed against us from time to time include commercial, intellectual property infringement, customer and employment claims, including class action lawsuits alleging that we violated federal and state wage and hour and other laws. The assessment of the outcome of litigation can be very difficult to predict as it is subject to many factors, including those not within our control, and is highly dependent on individual facts and circumstances. Litigation is subject to highly complex legal processes and the final outcome of these matters could vary significantly from the amounts that have been recorded in the financial statements.
Item 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in interest rates and the market price of our common stock. We have not been materially impacted by fluctuations in foreign currency exchange rates as substantially all of our business is transacted in, and is expected to continue to be transacted in, U.S. dollars or U.S. dollar-based currencies. We do not enter into financial instruments for trading or other speculative purposes.
Our Secured Term Loan bears interest at a fixed rate and would not be affected by interest rate changes. Future borrowings under our revolving line of credit would be affected by interest rate changes.
The derivative liability, representing shares of Series A Preferred Stock, is measured at fair value using the Black-Scholes option valuation model, which is significantly dependent on the market price of our common stock. Changes in the fair value are recorded as gain or loss, net, in our consolidated statements of operations and comprehensive operations. A 10 percent increase (decrease) in the closing price of our common stock at February 2, 2013, in isolation of the impact to the volatility assumption, would have increased (decreased) the fair value of the derivative liability by approximately $2.1 million.

30


Item 8.     CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to the Consolidated Financial Statements

31


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Coldwater Creek Inc.
Sandpoint, Idaho

We have audited the accompanying consolidated balance sheets of Coldwater Creek Inc. and subsidiaries (the "Company") as of February 2, 2013 and January 28, 2012, and the related consolidated statements of operations and comprehensive operations, stockholders' equity, and cash flows for each of the three years in the period ended February 2, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Coldwater Creek Inc. and subsidiaries as of February 2, 2013 and January 28, 2012, and the results of their operations and their cash flows for each of the three years in the period ended February 2, 2013, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of February 2, 2013, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 22, 2013 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP

Boise, Idaho
March 22, 2013


32


COLDWATER CREEK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for per share data)
 
February 2,
2013

January 28,
2012
ASSETS
 


 

Current assets:
 


 

Cash and cash equivalents
$
21,734


$
51,365

Receivables
5,150


8,199

Inventories
125,207


131,975

Prepaid and other current assets
17,072


9,410

Deferred income taxes
1,252


2,313

Total current assets
170,415


203,262

Property and equipment, net
169,007


206,079

Deferred income taxes
2,112


1,891

Other assets
4,374


1,883

Total assets
$
345,908


$
413,115

LIABILITIES AND STOCKHOLDERS’ EQUITY
 


 

Current liabilities:
 


 

Accounts payable
$
57,891


$
55,130

Accrued liabilities
87,915


78,175

Current maturities of debt and capital lease obligations
577


15,735

Total current liabilities
146,383


149,040

Deferred rents
82,726


101,384

Long-term debt and capital lease obligations
63,784


26,575

Supplemental executive retirement plan
10,994


12,142

Deferred income taxes
699


1,716

Other liabilities
4,186


5,845

Total liabilities
308,772


296,702

Commitments and contingencies





Stockholders’ equity:
 


 

Preferred stock, $0.01 par value, 1,000 shares authorized; 1 and 0 shares issued, respectively



Common stock, $0.01 par value, 75,000 shares authorized; 30,531 and 30,417 shares issued, respectively
305


304

Additional paid-in capital
153,146


151,254

Accumulated other comprehensive loss
(1,532
)

(2,204
)
Accumulated deficit
(114,783
)

(32,941
)
Total stockholders’ equity
37,136


116,413

Total liabilities and stockholders’ equity
$
345,908


$
413,115

 
The accompanying notes are an integral part of these consolidated financial statements.

33


COLDWATER CREEK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(in thousands, except for per share data) 
 
Fiscal Year Ended

February 2,
2013

January 28,
2012

January 29,
2011
Net sales
$
742,472


$
773,021


$
981,101

Cost of sales
509,351


543,693


673,816

Gross profit
233,121


229,328


307,285

Selling, general and administrative expenses
301,806


319,812


345,827

Loss on asset impairments


5,216


3,931

Loss from operations
(68,685
)

(95,700
)

(42,473
)
Other loss, net
4,025





Interest expense, net
9,596


2,275


1,736

Loss before income taxes
(82,306
)

(97,975
)

(44,209
)
Income tax provision (benefit)
(464
)

1,719


(98
)
Net loss
$
(81,842
)

$
(99,694
)

$
(44,111
)
Other comprehensive loss (income):








Supplemental executive retirement plan liability adjustment, net of tax of $408, $0, $0
(672
)

1,740


91

Total comprehensive loss
$
(81,170
)

$
(101,434
)

$
(44,202
)
Net loss per share — Basic and Diluted
$
(2.69
)

$
(3.98
)

$
(1.91
)
Weighted average common shares outstanding — Basic and Diluted
30,477


25,065


23,079

 
The accompanying notes are an integral part of these consolidated financial statements.

34


COLDWATER CREEK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total
 
Shares
 
Par Value
 
Shares
 
Par Value
 
 
 
 
Balance at January 30, 2010

 
$

 
23,042

 
$
230

 
$
124,840

 
$
(373
)
 
$
110,864

 
$
235,561

Net loss

 

 

 

 

 

 
(44,111
)
 
(44,111
)
Supplemental executive retirement plan liability adjustment

 

 

 

 

 
(91
)
 

 
(91
)
Net proceeds from exercise of stock options

 

 
31

 

 
364

 

 

 
364

Issuance of shares under the employee stock purchase plan

 

 
35

 
1

 
563

 

 

 
564

Tax withholding payments

 

 

 

 
(93
)
 

 

 
(93
)
Reduction in valuation allowance from shortfall in stock-based compensation

 

 

 

 
(1,661
)
 

 

 
(1,661
)
Stock-based compensation

 

 
18

 

 
2,476

 

 

 
2,476

Balance at January 29, 2011

 

 
23,126

 
231

 
126,489

 
(464
)
 
66,753

 
193,009

Net loss

 

 

 

 

 

 
(99,694
)
 
(99,694
)
Supplemental executive retirement plan liability adjustment

 

 

 

 

 
(1,740
)
 

 
(1,740
)
Net proceeds from stock offering

 

 
7,214

 
72

 
22,873

 

 

 
22,945

Issuance of shares under the employee stock purchase plan

 

 
57

 

 
330

 

 

 
330

Reduction in valuation allowance from shortfall in stock-based compensation

 

 

 

 
(841
)
 

 

 
(841
)
Stock-based compensation

 

 
20

 
1

 
2,403

 

 

 
2,404

Balance at January 28, 2012

 

 
30,417

 
304

 
151,254

 
(2,204
)
 
(32,941
)
 
116,413

Net loss

 

 

 

 

 

 
(81,842
)
 
(81,842
)
Supplemental executive retirement plan liability adjustment

 

 

 

 

 
672

 

 
672

Issuance of shares under the employee stock purchase plan

 

 
65

 
1

 
227

 

 

 
228

Preferred stock issuance
1

 

 

 

 

 

 

 

Tax withholding payments

 

 

 

 
(24
)
 

 

 
(24
)
Reduction in valuation allowance from shortfall in stock-based compensation

 

 

 

 
(312
)
 

 

 
(312
)
Stock-based compensation

 

 
49

 

 
2,001

 

 

 
2,001

Balance at February 2, 2013
1

 
$

 
30,531

 
$
305

 
$
153,146

 
$
(1,532
)
 
$
(114,783
)
 
$
37,136


The accompanying notes are an integral part of these consolidated financial statements.


35


COLDWATER CREEK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 
 
Fiscal Year Ended
 
February 2,
2013

January 28,
2012
 
January 29,
2011
Operating activities:
 


 




Net loss
$
(81,842
)

$
(99,694
)

$
(44,111
)
Adjustments to reconcile net loss to net cash used in operating activities:
 


 




Depreciation and amortization
51,437


56,743


63,329

Non-cash interest expense
5,478





Stock-based compensation expense
2,001


2,403


2,476

Supplemental executive retirement plan expense
587


555


886

Deferred income taxes
(585
)

(68
)

(1,200
)
Valuation allowance adjustments
(312
)

(839
)

(2,564
)
Deferred marketing fees and revenue sharing
(1,048
)

(1,509
)

(2,055
)
Deferred rents
(19,029
)

(15,948
)

(7,249
)
Loss on derivative liability
2,939





Series A Preferred Stock issuance costs
1,086





Net loss on asset dispositions and other termination charges
2,295


197


447

Loss on asset impairments


5,216


3,931

Other
23


148


(516
)
Net change in operating assets and liabilities:
 


 




Receivables
2,337


2,212


(3,584
)
Inventories
6,768


24,506


5,065

Prepaid and other current assets
(8,007
)

11,198


7,168

Accounts payable
2,869


(22,769
)

(21,776
)
Accrued liabilities
(9,141
)

(6,575
)

(1,236
)
Net cash used in operating activities
(42,144
)

(44,224
)

(989
)
Investing activities:
 


 




Purchase of property and equipment
(16,496
)

(8,895
)

(31,084
)
Proceeds from asset dispositions
144


1,110


73

Change in restricted cash




890

Net cash used in investing activities
(16,352
)

(7,785
)

(30,121
)
Financing activities:
 


 




Net proceeds from stock offering


22,945



Borrowings on revolving line of credit
10,000


15,000