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Coldwater Creek Inc. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 2004
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

COLDWATER CREEK INC.
(Exact name of registrant as specified in its charter)

        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    ý NO    o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in a definitive proxy or information statement incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): YES    ý NO    o

        At August 2, 2003, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $110,351,000 based upon the closing price on the Nasdaq National Market reported for such date. Shares of Common Stock held by each executive officer and director have been excluded in that such person may be deemed to be an affiliate. This determination for executive officer is not necessarily a conclusive determination for other purposes. As of March 31, 2004, 24,220,597 shares of the Registrant's $.01 par value Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        The following documents (or portions thereof) are incorporated by reference into the Parts of this Form 10-K noted:

        Part III incorporates by reference information from the definitive proxy statement for the registrant's 2004 Annual Meeting of Stockholders 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.

Coldwater Creek Inc.

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 2004

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PART I

Item 1. BUSINESS

        The following discussion contains various statements regarding our current strategies, 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," 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. Please refer to our "Risk Factors" in this Annual Report on Form 10-K. We assume no future obligation to update our forward-looking statements or to provide periodic updates or guidance.

        We maintain an internet web site at http://www.coldwatercreek.com. (This web site address is for information only and is not intended to be an active link or to incorporate any web site information into this document.) We make available, free of charge, through our website our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with the SEC.

Coldwater Creek Profile

        Coldwater Creek is a specialty retailer of women's apparel, accessories, jewelry and gift items. Founded in 1984 as a catalog company, today we are a multi-channel retailer generating $518.8 million in net sales in fiscal 2003. We have established a differentiated brand by offering exceptional value through a unique, proprietary merchandise assortment that reflects a sophisticated yet relaxed and casual lifestyle, coupled with superior customer service. Our target customers are women between the ages of 30 and 60, a group that spent in excess of $29 billion on apparel in 2002.

        We reach our customers through our direct segment, which encompasses our catalog and e-commerce businesses, and our rapidly expanding base of retail stores. We believe this multi-channel approach allows us to cross-promote the Coldwater Creek brand and meet our customers' apparel and accessory needs by providing them convenient access to our merchandise lines regardless of the preferred shopping channel.

        Our catalog business is a significant sales channel and acts as an efficient marketing platform to cross-promote our website and stores. In fiscal 2003, we mailed 117.8 million catalogs. In July 1999, we launched our full-scale e-commerce website, www.coldwatercreek.com, to cost-effectively expand our customer base and provide another convenient shopping alternative for our customers. We now have over 2.2 million e-mail addresses to which we regularly send customized e-mails.

        We initiated testing of a full-line retail store model in 1999 based on our belief that the ability to touch and feel merchandise is an important aspect of a consumer's shopping experience. Over the past four years, we have been building the infrastructure to support the growth of our retail business and realize the benefits of our multi-channel model by undertaking the following initiatives:

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introducing a scaleable retail store model for national rollout;



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enhancing the management team, particularly in our retail segment, by hiring key members of management with extensive retail experience at both the corporate level and in stores;



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focusing our merchandise offering by refining our product assortment and increasing our investment in key items; and



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integrating our retail and direct merchandise planning and inventory management functions to insure consistency of merchandise and our brand message across all channels.

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        Our retail segment is the key driver in our growth strategy and, in fiscal 2003, accounted for $194.6 million in net sales, or 37.5% of total net sales. As of January 31, 2004, we operated 66 full-line retail stores, 25 of which were opened in fiscal 2003, as well as two resort stores and 16 merchandise clearance outlet stores in 51 markets.

Business Strategies

        We believe our success and future growth will be the result of consistent execution of the following business strategies:

        Target a highly desirable, underserved customer.    Generally, our target customers are women between the ages of 30 and 60. Women in this age bracket represent approximately 42% of the female population and spent over $29 billion on apparel in 2002. Within this population, our core customer generally has higher than average levels of disposable income, with total household incomes in excess of $75,000. While teens and younger adult female consumers have a relatively broad range of specialty retail brands from which to choose, we believe our core customer has more limited options that cater specifically to her tastes and needs. Furthermore, we believe our customer, who has traditionally shopped at department stores, is migrating away from them, as their product selection and customer service have become less appealing to her over time. For these reasons, we believe that by continuing to make our brand relevant and accessible to this core customer, we will be able to increase our share of the apparel market over time.

        Offer a differentiated brand with broad appeal.    We believe the Coldwater Creek brand is synonymous with a sophisticated yet relaxed and casual lifestyle that appeals to a broad range of women who lead busy, active lives. We design our merchandise, retail stores, catalogs and website to embody the warmth of this aspirational lifestyle and attitude and to promote the Coldwater Creek brand image. We deliver quality, consistency, convenience and easy care through our proprietary merchandise. Our styles and cuts are conservative, while, at the same time, our colors, novelty designs and textures provide our customer's wardrobe with flare that she cannot easily find elsewhere.

        Deliver the brand through an integrated multi-channel model.    Our strategy of offering merchandise across three channels enables us to enhance visibility of our brand, accessibility to our merchandise and, consequently, customer loyalty. We integrate our three channels in a number of ways, which allows us to maximize sales and provide superior customer service. These include offering in-store web kiosks to allow customers to purchase items through our website that may not be in stock at stores, accepting returns through any channel regardless of the point of purchase, systematically reallocating inventory between channels and utilizing the data provided by our direct segment to identify new store locations. We continue to identify new ways to develop our multi-channel model to further optimize our business.

        Provide an outstanding shopping experience through exceptional customer service. We believe our company-wide focus on exceptional customer service has been integral to our success and has enabled us to build a loyal customer base. In our retail stores, we seek to hire our customers to provide better knowledge and understanding of our customers' needs. We continually monitor service metrics, such as conversion rates, secret shopper scores, answer rates and order fulfillment rates. We have also invested in management information systems that provide our associates with easy access to information, including customer purchasing histories, merchandise availability, product specifications, available substitutes and accessories, and expected shipment dates. By promoting a culture of prompt, knowledgeable and courteous service, no matter how our customers choose to shop, we believe we will continue to attract a growing customer base and build brand loyalty.

        Effectively use and leverage extensive business data across all our channels.    Through our heritage as a direct marketer, we have the systems and discipline to collect customer data across all of our channels. We have formed a dedicated business intelligence group whose mission is to improve decision

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making by performing a variety of functions, including data warehousing, reporting and analysis, sales forecasting, statistical modeling and geographic analysis. We use these analyses to determine where to place stores and to more effectively select and allocate merchandise for our stores. We also use this data to personalize our marketing efforts through directed customer communications, including targeted mailings when we open new stores and regular, customized e-mails. Our executive management team meets daily to review and discuss key business metrics produced by this group in order to continually assess performance of the business across channels and merchandise assortments. We believe our access to this information and our effective use of it will allow us to continue to optimize productivity of all our channels.

        Execute our growth strategy with an experienced management team.    Over the past three years we have built out our team with senior management who have extensive retail, merchandising, brand-building, real estate, information technology and finance experience from a variety of retail, direct marketing and apparel companies, including Gap Inc., Newport News, Spiegel, Federated Department Stores, Williams-Sonoma, J. Crew, Toys "R" Us.com, Amazon.com and Tuesday Morning. We believe our management team is well-rounded in all areas and provides us with a competitive advantage.

Growth Strategy

        Over the last four years, we have continually refined our retail store model and operating strategy. We believe we will continue to realize the benefits of our multi-channel strategy with our retail channel being the primary source of our future growth. Our management team is committed to executing the following key growth strategies:

        Expand our retail channel.    We believe there is an opportunity for us to grow to 400 to 500 stores in up to 275 to 300 identified markets nationwide over the next six to eight years. As of January 31, 2004, we had 66 full-line retail stores, 25 of which were opened in fiscal 2003. We currently plan to open 45 new full-line retail stores in fiscal 2004, including two stores opened in March 2004, and 40 to 50 new full-line retail stores in fiscal 2005. Currently, we have signed leases for 29 store locations for our 2004 plan. The pace, scope and size of our retail store expansion will be influenced by the economic environment, available working capital, our ability to obtain favorable terms on suitable locations for our stores and, if necessary, external financing. Our core new store model is 5,000 to 6,000 square feet and generally located in upscale malls and lifestyle centers. In addition, we are introducing a smaller store format of approximately 3,000 to 4,000 square feet. Our goal is to use our smaller stores to access attractive middle markets, fill in major metropolitan markets and take advantage of a greater number of premium real estate locations.

        Further strengthen our brand and build customer loyalty.    We continue to identify means of leveraging our brand and building customer loyalty. Our multi-channel initiatives include the introduction of a multi-channel gift card that is redeemable through any of our channels, wrapping our catalogs with promotional offers to direct customers in the vicinity of new store openings, offering in-store web kiosks to drive improved customer conversion rates and to increase familiarity with our direct channel, and accepting direct returns in our retail stores. These initiatives allow us to introduce our direct customers to our retail channel and give us the opportunity to convert a return to an exchange or an incremental purchase.

        As we grow the retail portion of our business, we believe we will continue to identify new and effective ways to improve our brand visibility and build customer loyalty. For example, we will be introducing a customer loyalty program during the first half of 2005, under which our customers can earn and redeem points through any of our channels.

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        Improve Profitability.    As we grow our business and open new stores, we intend to improve our operating income. Key elements of our profitability improvement strategy include:

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focusing the business toward a higher margin retail model;



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leveraging corporate overhead costs over a larger sales base and realizing sales growth that outpaces additional overhead costs;



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lowering cost of goods sold through improving vendor prices as our order quantities grow over time;



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sourcing more of our merchandise directly from overseas manufacturers; and



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continuing to optimize mailing and production costs within the catalog business.

Merchandising

        Our merchandising philosophy reflects a casual, unhurried approach to living. We offer our customers colorful, proprietary designs and novelty items that reflect different aspects of their lifestyles, including casual weekend wear, soft career and special occasion. The products we offer are current but not trendy and address our customers' needs for ease and simplicity. Our "buy-now, wear-now" strategy puts merchandise in front of our customers when it is seasonally appropriate and offers versatile fabrics she can wear for up to nine months out of the year. Our "easy care" fabrics and comfortable styles are designed to facilitate product care, thereby making her life easier.

        All of our apparel is designed, developed and sold under the Coldwater Creek label. We differentiate merchandise lines under separate catalog titles to appeal to different areas of our customers' wardrobes. Our entire collection of merchandise is available through our website. Merchandise for our retail stores is carefully selected to include the best and most popular items, historically about one-third of what is offered in our direct segment.

        Product Design and Development.    Our in-house design and product development team is responsible for conceptualizing and directing the design of all Coldwater Creek apparel. We believe our in-house team of designers and buyers allows us to exercise significant control over the merchandise development process and the quality of our product to create an overall merchandise assortment that is consistent with the Coldwater Creek brand.

        Our design team travels to Europe twice a year to capture key themes that will appear in our collections throughout the upcoming seasons. Working in tandem with outside vendors and fabric designers, our design team creates an overall vision for each season's assortment that is then translated into collections for the season. We believe this approach allows us to introduce fresh products into our catalogs and retail locations every season and to supplement these selections with new items or styles throughout the year.

        In the second quarter of fiscal 2004, we intend to open a design studio in New York. We believe this studio will allow us to market new designs more quickly and will provide us with further opportunities to develop a higher percentage of our distinctive designs, with a dedicated team creating novel prints, patterns and working on new fabric development.

        Planning and Allocation.    We employ an integrated inventory planning team for our retail and direct sales channels. This group is responsible for conducting top-down and bottom-up planning and allocation across channels, seasons, collections and promotional events in order to maximize retail store, catalog and website productivity.

        Initial planning and allocation decisions are made by assessing historical sales, individual item, store and catalog performance, and anticipated economic outlook. Equipped with distribution center and inventory management systems that allow us to allocate and re-allocate merchandise by channel,

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our inventory planning group is able to assess sales trends, customer demand and current inventory positions and to allocate items to enhance sales. We track sales at the item level on a daily basis and adjust our reorder and markdown strategies accordingly. Working together with our design and product development team, our inventory planning team has allowed us to optimize our overall number of styles and items of merchandise.

        Sourcing and Distribution.    In the past three years, we have focused on reducing our total number of outside vendors and have concentrated our production with selected vendors who we believe consistently adhere to our quality standards and production demands. We maintain relationships with approximately 300 vendors and, during fiscal 2003, sourced 52% of our apparel from our top 20 vendors. During fiscal 2003, approximately 58% of our merchandise was manufactured overseas, most of which we purchase from domestic suppliers. As retail becomes a more important part of our business we anticipate that more of our merchandise will be sourced directly from overseas manufacturers. In the first half of fiscal 2004, we plan to create a global sourcing department, which we anticipate will provide an opportunity to increase our margins through direct importing of our proprietary designs. We believe this new development will allow us to improve economies of scale as we leverage the combined impact of merchandising our retail and direct segments.

        We hold our vendors to strict quality standards, testing products for flammability, care instructions, sizing and durability. Each shipment is checked against a certified sample upon delivery and can be returned if it does not meet our standards. Additionally, we issue monthly vendor "report cards" to our top 75 vendors to provide them with important feedback and evaluation of their performance.

        We operate a 600,000 square foot distribution center in Mineral Wells, West Virginia where we receive all of our merchandise. We process all of our retail store replenishment and direct order shipments from this facility. Our distribution center is able to ship more than 95% of all in-stock items within 24 hours of an order placement and process more than 80% of all merchandise returns within a 24-hour period. At its current size, we estimate that the distribution center can service an additional 130 stores. This building was designed to allow us to expand up to a total of 930,000 square feet as needed.

        Disposition.    Relying on ongoing analysis of product performance, we maintain a disciplined approach to promotional selling of our merchandise. We conduct four key seasonal sales events per year in our retail stores, catalog and website. Additionally, items with higher-than-expected inventory counts are cleared through our website or one of our 16 outlet locations. Unlike many other retailers that produce items for sale through their outlet locations, we use our outlets exclusively to manage overstocked premium merchandise. We believe this approach to disposition of our merchandise conditions our customer to expect to pay full price for our items, effectively managing the margin impact of off-price selling. Additionally, we have the ability to choose the most efficient channel to use for liquidation at any given time.

Direct Segment Operations

        Since the first mailing of our Northcountry catalog in 1985, we have grown our direct segment to include both our catalog and e-commerce businesses. Our catalogs and e-commerce website are designed to create a distinctive and easy shopping experience. Merchandise presentations feature full color photographs, graphics and artwork designed to appeal to our target customer. We present our apparel "off-figure", leaving the customer to decide if an item of merchandise is right for her based on the item's inherent style and design. All catalog and website pages are created and designed by an in-house team of artists, copywriters and editors to ensure a consistent presentation of the Coldwater Creek brand.

        Our direct channel represented 62.5% of our total net sales in fiscal 2003. As we continue to rollout our retail stores, we expect our direct segment to decrease as a percentage of net sales over

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time. It will continue to be a core component of our brand identity and our operations, serving as a valuable source of marketing information, helping promote each of our channels and providing cash flow to support our retail store expansion.

Our Catalogs

        In fiscal 2003, our catalog business generated $175.9 million in net sales, or 33.9% of total net sales. Historically, we have used three catalog titles, Northcountry, Spirit and Elements, to feature our entire full-price line of merchandise using different assortments for each title to target separate sub-groups of our core demographic. In January 2004, we combined our two smaller catalogs, Spirit and Elements, and re-introduced the combined catalog under the Spirit title. The new Spirit catalog combines the sophistication of Spirit and the mix-and-match versatility of Elements in a format that focuses on the customer's lifestyle. We believe this initiative allows us to better meet the needs of our Spirit and Elements customers by assembling "head-to-toe" assortments and offering merchandise for a wider range of occasions by combining soft career wear with sportswear and separates.

        Our two current catalogs are each devoted to slightly different lifestyles within our core customer base:

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Northcountry features a casual clothing assortment with an emphasis on comfort and color. The merchandise often includes novel detailing, such as embroidery, fabric piecework and design ornamentation. The clothing in this assortment has its focus on complete outfits, generally offering tops and bottoms displayed as a complete ensemble. Northcountry represents the broadest product assortment, mixing apparel with jewelry, fashion accessories, gift items and home-related hardgoods. Products in Northcountry are priced in the range of approximately $20 to $100.



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The Spirit product assortment is differentiated by an accent on finer fabrics and upscale detailing, such as fully lined jackets at higher price points. Along with apparel offered in sophisticated fabrics like linen and matte jersey, the Spirit assortment also features merchandise designed for easy care travel, including items in knit and cotton twills. This apparel is merchandised with versatility in mind, making it simple for the customer to mix and match items to create a personal look. Spirit apparel is complemented by a selection of jewelry and fashion accessories with average price points ranging from $20 to $150.

        Additionally, to serve the gift-giving needs of our customers and generate incremental sales during the important holiday shopping season, each year we assemble selected merchandise, which is featured in a festive Gifts-to-Go catalog and on our e-commerce website. Gifts-to-Go generally features a varied assortment of the most popular items featured in our primary merchandise lines described above.

        Since 2000, in an effort to increase the productivity of our direct business and reduce costs, we have reduced our catalog circulation and have been actively promoting the migration of our customers from our catalogs to our more cost-efficient e-commerce website. We have also focused on decreasing our number of prospect mailings because they increasingly produce lower response rates and contribute fewer sales than catalog mailings to our proprietary customers. In fiscal 2003, we mailed 117.8 million catalogs, down 35.8% from our peak mailings of 183.6 million catalogs in 2000. We expect to continue to reduce our catalog circulation, particularly to prospective customers, until we have reached what we believe to be optimal levels.

Our E-commerce Website

        As part of our effort to provide our customers with new channels of accessibility, we launched our full-scale e-commerce website, www.coldwatercreek.com, in July of 1999. This cost-effective medium is designed to offer a convenient, user-friendly and secure online shopping option for our customers. The

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website features our entire full-price merchandise offering found in our catalogs and retail stores. It also serves as an efficient vehicle for the disposition of excess inventory.

        During 2003, we redesigned the website homepage and site navigation, added product color swatching and zooming views and included personalized product recommendations based on customers' previous purchases. Prior to the 2003 holiday season, we added a new streamlined checkout process and product substitutions. This spring, we expect to test online catalogs and enhanced search capabilities.

        In fiscal 2003, online sales amounted to $148.3 million and represented 28.6% of total net sales. We have over 2.2 million opt-in e-mail addresses to which we regularly send promotional e-mails. Our promotional e-mails are customized to meet subscribers' shopping preferences and merchandise tastes.

        We continue to participate in a net sales commission-based program whereby numerous popular Internet search engines and consumer and charitable websites promote the Coldwater Creek brand to their visitors. These noncompetitive "affiliate" merchants provide convenient hotlink access to our website, which also serves as an effective tool in prospecting for new customers.

Retail Segment Operations

        Building on our success in the direct channel, we opened our first full-line store in November 1999, and from 1999 to the spring of 2002 we opened 34 additional full-line stores, methodically testing and refining our store format and reducing capital expenditures required for build-out. As of January 31, 2004, we operated 66 full-line retail stores, two resort stores and 16 outlet stores in 51 markets. We plan to open 45 new full-line retail stores in fiscal 2004, including two stores opened in March 2004, and 40 to 50 full-line retail stores in fiscal 2005. In fiscal 2003, retail sales amounted to $194.6 million and represented 37.5% of total net sales. We expect our retail segment to continue as our primary growth vehicle, as over 90% of women's apparel in the U.S. is purchased in retail stores.

Store Format and Atmosphere

        In the second half of 2002, we introduced our scaleable model of 5,000 to 6,000 square foot stores. We have continually improved our construction processes, materials and fixtures, merchandise layout and store design to minimize our initial capital investment per store, while maintaining an overall atmosphere that is comfortable and relevant to our core customers.

        Our retail stores are designed to reflect the brand's focus on casual comfort, as well as to highlight merchandise being featured across all channels. Our wide, windowed storefront and forest green logo above a soft archway provide an inviting first impression to our customers. Our store interiors combine an appealing mix of cherry wood, slate and soft, neutral colored carpeting and typically offer a seating area for others who may be accompanying our shoppers.

        Our retail stores showcase our apparel assortment and encourage browsing by displaying jewelry, accessories and gifts in a manner that provides the customer with a sense of discovery. We display apparel according to occasion, separating weekend and casual wear from soft career and special occasion wear. We locate our accessories section next to the dressing rooms, which allows our sales associates to encourage incremental purchases as customers try on clothes.

        Our 5,000 to 6,000 square foot model makes use of central fixtures and tables to evoke elements of our customers' lives. For example, we may display a cozy sweater and comfortable pants with a chess set or art box, or a colorful cocktail party outfit with a distinctive set of wine glasses. This presentation method promotes the sale of non-apparel items, facilitates our customers' shopping experiences, further establishes Coldwater Creek as a lifestyle brand and gives our customers an eclectic boutique experience.

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        We are also introducing a 3,000 to 4,000 square foot store model and opened six of these stores in the second half of fiscal 2003. The smaller store format allows us to more effectively take advantage of wall space to display compelling arrangements. We believe the ability to use wall space for key items will afford us greater productivity per square foot. Our goal is to use these stores to access smaller markets as well as fill in the larger markets.

Unit Economics

        We believe we have developed and refined a scaleable store model for nationwide rollout. Our core new store model of 5,000 to 6,000 square feet assumes an average initial net investment of $560,000 and anticipates sales per square foot of approximately $500 in the third year of operations. In fiscal 2003, our 41 full-line retail stores that had been open at least 13 months averaged 7,207 square feet in size and $460 per square foot in net sales. Most of these stores have been open for one to two years. We are also introducing a smaller store model of 3,000 to 4,000 square feet. This model assumes an average initial net investment of $400,000 and anticipates sales per square foot of approximately $600 in the third year of operations. We currently have six stores open in this model, none of which has been open for a full year.

Outlet Stores & Resort Stores

        In addition to our full-line retail stores, we currently operate 18 outlet stores where we sell excess inventory. We plan to open three outlet stores in fiscal 2004. We generally locate the outlets within clusters of our retail stores to efficiently manage our inventory clearance activities, but far enough away to avoid significantly diminishing our full-line store sales. Unlike many other apparel retailers that produce merchandise directly for their outlet stores, merchandise sold through our outlets is limited to overstocked premium items from our full-line retail stores. We believe this use of our outlet stores enables us to effectively manage our inventory and clearance activities. We currently operate two resort stores in Sandpoint, Idaho and Jackson Hole, Wyoming.

Store Management and Training

        We organize our stores into regions and districts, which are overseen by regional and district managers who report to our executive vice president, retail stores. Each district manager oversees between six and ten store managers. On average, our store managers have 11 years of experience as retail managers. Approximately 24% of our managers have district manager-level experience with major brands in the retail sector.

Store Locations

        The following table indicates our retail stores by location.

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Real Estate Strategy

        We locate our new stores primarily in regional shopping malls and lifestyle centers. Lifestyle centers are generally located in affluent suburban areas and feature a clustered assortment of well-known specialty retailers, including bookstores and home goods retailers, other apparel retailers and full service restaurants, in an open-air format. Currently, approximately 58% of our full-line stores are located in traditional malls, 33% in lifestyle centers and 9% in street locations.

        We utilize a disciplined, fact-based site selection process to determine our store locations. We believe we are at a competitive advantage to other traditional retailers as we are able to collect significant amounts of data regarding the location and concentration of our customers through our direct segment. This data, combined with additional demographic research, helps us identify markets and target specific locations based on geographic clustering of our direct segment customers.

        After a specific location is identified, we evaluate the opportunity based on other factors, including attractiveness of economic and business terms of the lease, overall mix of tenants within the mall or center and proximity to direct competitors. Our real estate committee, comprised of our Chief Executive Officer, President and Chief Merchandising Officer, Executive Vice President and Chief Financial Officer, Executive Vice President, Retail Stores and our Divisional Vice President of Real Estate, must approve each transaction before a lease is signed. We then contract the design, build-out and fixturing of the stores and coordinate directly with vendors and landlords during construction.

Customer Service

        Over the past 20 years, we have built a reputation and company-wide culture of providing superior customer service. We view customer service as a critical aspect of our business that can be consistently improved upon. Accordingly, we monitor service metrics for our call center operations, retail stores and distribution center on a daily basis.

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        A central feature of our commitment to customer service is our unconditional return policy for all of our merchandise. A customer can return an item for any reason at any time through any channel, regardless of the point of purchase. We believe this policy builds customer loyalty and helps overcome any reluctance a customer may have to purchasing merchandise from catalogs or via the Internet.

        We have invested in management information systems that provide our associates with easy access to information, including customer purchasing histories, merchandise availability, product specifications, available substitutes and accessories and expected shipment dates, which allows our call center and retail sales associates to answer questions and deal with customer complaints directly.

        We have also established the following practices to provide consistently high levels of customer service through our direct channel:

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All of our call center associates receive comprehensive instruction when they are hired and receive regular retraining, along with detailed product orientation and instruction on order processing. We also cross-train more experienced call center associates to communicate with customers on the live chat feature on our website;



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Our toll-free telephone services may be accessed 21 hours a day, seven days a week and our website may be accessed 24 hours a day, seven days a week, to place orders, request a catalog or make merchandise, catalog, website or store location inquiries;



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On average, we answer calls for catalog orders in less than eight seconds during peak ordering seasons, and we have consistently maintained a 99% answer rate, which measures the percentage of calls successfully connected to a call center representative;



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We feature an instant help option on our website if a customer has questions about our products, navigating the site or placing and completing orders. Trained call center associates respond to inquiries in an average of 10 to 15 seconds through live-chat technology. Requests or questions sent by e-mail receive a personalized reply, rather than an automated response, in an average of 15 minutes; and



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In each of our call centers, we employ specialized product experts who receive extensive product training and who can respond in real time to detailed product questions from customers.

        We have implemented several measures to ensure that we maintain our tradition of superior customer service in our retail stores:

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We seek to hire our customers as retail sales associates. Our experience has been that our customers often make excellent employees because they are familiar with our brand, have personally experienced our commitment to customer service and fall within our consumer demographic, which allows them to relate effectively to other customers;



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All of our retail sales associates undergo extensive employee orientation and training programs. These programs include detailed training on the Coldwater Creek "customers first" philosophy and instruction on our products, how to effectively sell and, for store managers, sales floor layout, presentation and supervisory skills;



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We employ operations managers at each of our retail stores who are responsible for all back office activities, which allows our sales associates and store managers to devote their full attention to customers;



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To ensure that merchandise is available in our stores when our customers want it, we recently installed an automated system in our distribution center to streamline our shipping process. We are now able to replenish all store locations in one to four days, with daily restocking at top-performing stores; and

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We track store conversion rates, which measure the percentage of customers who enter a store who make a purchase. We gather hourly conversion data at each of our retail stores and reward our store managers based on improvements in their conversion rates.

Marketing and Promotion

        Our marketing and promotion initiatives focus on reinforcing our brand message and retaining our existing customers and attracting new customers. As we grow our business and broaden our retail footprint, we intend to increase our mass marketing initiatives to enhance national visibility of the brand.

        We believe our ability to effectively design and run each of our marketing and promotional programs is enhanced by our proprietary database of customer information, which includes demographic data, purchasing history by sales channel and their physical proximity to our existing and planned retail stores. This system allows us to segment our customer base according to many variables to analyze each segment's performance and buying patterns. We use the resulting information to adjust the frequency, timing and content of our various programs and promotions to maximize the productivity of each one.

        As we have moved to a multi-channel strategy we have implemented the following marketing and promotional initiatives to maximize purchases by our existing customers in all three of our channels, reinforce the Coldwater Creek brand, and encourage customer loyalty:

•

We place kiosks linked to our user-friendly, e-commerce website in our retail stores to encourage our customers to explore our website and, if they prefer, place their order over the Internet;



•

We prominently display our website address and the location of our retail stores in each of our catalogs;



•

We publicize our retail store openings utilizing cover wraps on local catalog mailings, announcement mailings and e-mails and various local advertising media;



•

We send customized e-mail messages alerting customers about special sales events and the arrival of new merchandise; and



•

We run certain promotional events in our direct and retail channels each month, which are designed to increase order size, clear seasonal merchandise or reactivate customers who have not recently shopped with us.

        In November 2003, we launched a multi-channel gift card to replace our gift certificate program. We also anticipate introducing a customer loyalty program in early 2005 that allows customers to earn and redeem award points through all our channels.

        As part of our e-commerce marketing initiatives, we participate in an affiliate website program. We select popular Internet search engines, consumer and charitable websites to promote the Coldwater Creek brand to their visitors and provide convenient hotlink access to our website in exchange for a commission based on net sales from referred customers.

        We also conduct a national magazine advertising campaign to reinforce awareness of Coldwater Creek as we open stores in new markets, draw the attention of potential direct customers and establish national visibility for our brand. We run full-page, color advertisements to promote our three channels in lifestyle and shelter publications consistent with the Coldwater Creek brand, including Better Homes and Gardens, Sunset, Country Living and Cooking Light. In Spring 2004, we will also begin testing these advertisements in local and regional publications in new and existing retail markets. In addition, in

14

fiscal 2004 we expect to increase mailings targeted at customers who live within driving distance of our existing retail stores to drive traffic to those stores.

Information Technology

        We are committed to investing in our information systems to increase operating efficiency, provide superior customer service and support our anticipated growth. Our management information systems consist of a full range of selling channel solutions, including retail point-of-sale, catalog and e-commerce systems, financial and merchandising systems, including inventory planning, distribution and control, sales reporting, credit, accounts payable, merchandise reporting and logistics.

        Our systems allow us to monitor hourly and daily performance metrics in our direct and retail channels. These systems enable us to analyze the historical performance of individual merchandise items by various categories and have allowed us to realize increased accuracy in our product performance forecasting, and, as such, better manage our retail inventory, reduce product overstocks and backorders, increase our in-stock levels and realize additional logistic efficiencies.

        Our technical infrastructure provides for geographic diversity and redundant computing complexes to serve our growing and expanding multi-channel business. We have data centers located in three of our corporate facilities that provide for instant backup in the event of a telecommunications or systems failure. Our call center telecommunication system is designed to reduce the risk of telephone delays and capacity constraints and allows us to operate our call centers as a single "virtual call center". Calls coming into one location are automatically routed to the other locations if the load is too high or if a call center is unable to receive incoming calls due to factors such as natural disasters, power failures or systems problems. Additionally, we have call center capabilities in our Sandpoint, Idaho facility that we use to capture overflow traffic.

        We have also installed network and server load balancing devices that allow customer orders received on our e-commerce website to be routed to the least busy server farm and the least busy server in that farm. We use encryption technology to protect sensitive customer information transmitted on our website. We protect company sensitive information on our servers from unauthorized access using industry standard network security systems in addition to anti-virus and firewall protection.

        We expect to continue to make significant investments in our systems and infrastructure to support our retail store expansion, inventory management, merchandising, order taking and customer service, order fulfillment, marketing, product development and financial control and reporting and forecasting.

Competition

        The women's retail apparel market is highly competitive. Our competitors range from specialty apparel retailers, such as Chico's, Talbots and J. Jill, to small single-sales channel catalog, e-commerce and retail store companies. We also compete with national department stores, such as Bloomingdale's, Macy's, JC Penney, Dillards and Nordstrom, and with discount retailers that offer women's apparel and accessories, such as Kohl's and Target.

        We believe that we compete principally on the basis of the distinctive merchandise selection and superior customer service associated with the Coldwater Creek brand, as well as our commitment to understanding and providing merchandise that is relevant to our targeted customer base. With over 90% of women's apparel being purchased in retail stores in 2002, we believe that our retail store expansion will allow us to compete more effectively in the women's apparel market by providing this important aspect of the shopping experience to more of our customers. We also believe that our integrated, multi-channel strategy enhances our ability to compete by allowing our customers to choose the most convenient sales channel and allowing us to reach a broader audience in existing and in new markets and to continue to build Coldwater Creek into a nationally recognized brand.

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Employees

        As of January 31, 2004, we had 1,467 full-time employees and 1,966 part-time employees. During our peak selling season, which includes the months of November and December, we utilize a substantial number of temporary employees. None of our employees are covered by collective bargaining agreements. We consider our employee relations to be good.

Trademarks

        Our registered trademarks include Coldwater Creek®, Coldwater Creek Spirit® and the stylized Coldwater Creek logo. We believe that our registered and common law trademarks have significant value and are instrumental to our ability to create and sustain demand for and market our merchandise.

Risk Factors

We may be unable to successfully implement our retail store rollout strategy, which could result in significantly lower revenue growth.

        The key driver of our growth strategy is our retail store expansion. We currently plan to open 45 new stores in fiscal 2004, including two stores opened in March 2004, and 40 to 50 new stores in fiscal 2005. We believe we will ultimately have 400 to 500 retail stores. However, there can be no assurance that these stores will be opened, will be opened in a timely manner, or, if opened, that these stores will be profitable. Our ability to open our planned retail stores depends on our ability to successfully:

•

Identify or secure premium retail space;



•

Negotiate site leases or obtain favorable lease terms for the retail store locations we identify; and



•

Avoid construction delays and cost overruns in connection with the build-out of new stores.

        Any miscalculations or shortcomings in the planning and control of our retail growth strategy could materially impact our results of operations and our financial condition.

We may continue to refine our retail store model, which could delay our planned retail store rollout and result in slower revenue growth.

        We have made numerous refinements in our retail store format since opening our first full-line store in 1999. Our retail model may undergo further refinements as we gain experience operating more stores. If we determine to make further refinements to our store model, it may delay the progress of our retail store rollout, which could slow our anticipated revenue growth. We are required to make long-term financial commitments when leasing retail store locations, which would make it more costly for us to close or relocate stores that do not prove to be successful. Furthermore, retail store operations entail substantial fixed costs, including costs associated with maintaining inventory levels, leasehold improvements, fixtures, store design and information and management systems, and we must continue to make these investments to maintain our current and future stores.

We may not select optimal locations for our retail stores, which could harm our net sales.

        The success of individual retail stores will depend to a great extent on locating them in desirable shopping venues in markets that include our target demographic. The success of individual stores may depend on the success of the shopping malls or lifestyle centers in which they are located. In addition, the demographic and other marketing data we rely on in determining the location of our stores cannot predict future consumer preferences and buying trends with complete accuracy. As a result, retail stores we open may not be profitable or may be less successful than we anticipate.

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We may be unable to manage the costs associated with our catalog business, which could harm our results of operations.

        We incur substantial costs associated with our catalog mailings, including paper, postage, merchandise acquisition and human resource costs associated with catalog layout and design, production and circulation and increased inventories. Most of these costs are incurred prior to mailing. As a result, we are not able to adjust the costs of a particular catalog mailing to reflect the actual subsequent performance of the catalog. Increases in U.S. Postal Service rates and the cost of telecommunications services, paper and catalog production could result in lower profits for our catalog business to the extent we are unable to pass these costs onto our customers or implement more cost effective printing, mailing or distribution systems. Because our catalog business accounts for a significant portion of total net sales, any performance shortcomings experienced by our catalog business would likely have a material adverse effect on our overall business, financial condition, results of operations and cash flows.

Response rates to our catalogs could decline, which would negatively impact our net sales and results of operations.

        Response rates to our catalog mailings and, as a result, the net sales generated by each catalog mailing, can be affected by factors beyond our control such as changing consumer preferences, willingness to purchase goods through catalogs, weak economic conditions and uncertainty, and unseasonable weather in key geographic markets. A portion of our catalog mailings are to prospective customers. These mailings generally have lower and less predictable response rates than mailings to our existing customers. Additionally, it has become more difficult for us and other direct retailers to obtain quality prospecting mailing lists, which may limit our ability to maintain the size of our active catalog customer list. Lower response rates could result in lower-than-expected full-price sales and higher-than-expected clearance sales at substantially reduced margins.

Our direct segment sales may decline if we are unable to mail our catalogs in a timely manner.

        The timely mailing of our catalogs is critical to the success of our direct business, particularly during our peak holiday selling seasons, and requires the involvement of many different groups within our organization as well as outside vendors. Consequently, we are subject to potential delays at multiple points throughout the process of producing a catalog, many of which we may be unable to prevent. Any delay in mailing a catalog could cause customers to forego or defer purchases from us.

Consumers concerns about purchasing items via the Internet as well as external or internal infrastructure system failures could negatively impact our e-commerce sales or cause us to incur additional costs.

        Our e-commerce business is vulnerable to consumer privacy concerns relating to purchasing items over the Internet, security breaches, and failures of internet infrastructure and communications systems. If consumer confidence in making purchases over the Internet declines as a result of privacy or other concerns, our e-commerce net sales could decline. We may be required to incur increased costs to address or remedy any system failures or security breaches.

We may be unable to manage expanding operations and the complexities of our multi-channel strategy, which could harm our results of operations.

        During the past few years, with the implementation of our multi-channel business model, our overall business has become substantially more complex. This increasing complexity has resulted and will continue to result in increased demands on our managerial, operational and administrative

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resources and has forced us to develop new expertise. In order to manage our complex multi-channel strategy, we will be required to continue, among other things, to:

•

improve and integrate our management information systems and controls, including installing and integrating a new inventory management system;



•

expand our distribution capabilities;



•

attract, train and retain qualified personnel, including middle and senior management, and manage an increasing number of employees; and



•

obtain sufficient manufacturing capacity from vendors to produce our merchandise.

We may be unable to anticipate changing customer preferences and to respond in a timely manner by adjusting our merchandise offerings, which could result in lower sales.

        Our future success will depend on our ability to continually select the right merchandise assortment, maintain appropriate inventory levels and creatively present merchandise in a way that is appealing to our customers. Consumer preferences cannot be predicted with certainty, as they continually change and vary from region to region. On average, we begin the design process for our apparel nine to ten months before merchandise is available to our customers, and we typically begin to make purchase commitments four to six months in advance. These lead times make it difficult for us to respond quickly to changing consumer preferences and amplify the consequences of any misjudgments we might make in anticipating customer preferences. Consequently, if we misjudge our customers' merchandise preferences or purchasing habits, our sales may decline significantly, and we may be required to mark down certain products to significantly lower prices to sell excess inventory, which would result in lower margins.

We depend on key vendors for timely and effective sourcing and delivery of our merchandise. If these vendors are unable to timely fill orders or meet our quality standards, we may lose customer sales and our reputation may suffer.

        Our direct business depends largely on our ability to fulfill orders on a timely basis, and our direct and retail businesses largely depend on our ability to keep appropriate levels of inventory in our distribution center and our stores. As we grow our retail business, we may experience difficulties in obtaining sufficient manufacturing capacity from vendors to produce our merchandise. We generally maintain non-exclusive relationships with multiple vendors that manufacture our merchandise. However, we have no contractual assurances of continued supply, pricing or access to new products, and any vendor could discontinue selling to us at any time. If we were required to change vendors or if a key vendor were unable to supply desired merchandise in sufficient quantities on acceptable terms, we may experience delays in filling customer orders or delivering inventory to our stores until alternative supply arrangements are secured, which could result in lost sales and a decline in customer satisfaction.

Our increasing reliance on foreign vendors will subject us to uncertainties that could impact our cost to source merchandise and delay or prevent merchandise shipments.

        As we expand our retail stores and our merchandise volume requirements increase, we expect to source merchandise directly from foreign vendors, particularly those located in Asia. This will expose us to new and greater risks and uncertainties, the occurrence of which could substantially impact our ability to source merchandise through foreign vendors and to realize any perceived cost savings. We will be subject to, among other things:

•

burdens associated with doing business overseas, including the imposition of, or increases in, tariffs or import duties, or import/export controls or regulation, and the availability of quotas, as well as credit assurances we are required to provide to foreign vendors;

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•

declines in the relative value of the U.S. dollar to other foreign currencies;



•

failure of foreign vendors to adhere to our quality assurance standards or our standards for conducting business;



•

changing or uncertain economic conditions, political uncertainties or unrest, or epidemics or other health or weather-related events in foreign countries resulting in the disruption of trade from exporting countries; and



•

restrictions on the transfer of funds or transportation delays or interruptions.

We may be unable to fill customer orders efficiently, which could harm customer satisfaction.

        If we are unable to efficiently process and fill customer orders, customers may cancel or refuse to accept orders, and customer satisfaction could be harmed. We are subject to, among other things:

•

failures in the efficient and uninterrupted operation of our customer service call centers or our sole distribution center in Mineral Wells, West Virginia, including system failures caused by telecommunications systems providers and order volumes that exceed our present telephone or Internet system capabilities;



•

delays or failures in the performance of third parties, such as shipping companies and the U.S. postal and customs services, including delays associated with labor disputes, labor union activity, inclement weather, natural disasters, health epidemics and possible acts of terrorism; and



•

disruptions or slowdowns in our order processing or fulfillment systems resulting from the recently increased security measures implemented by U.S. customs, or from homeland security measures, telephone or Internet down times, system failures, computer viruses, electrical outages, mechanical problems, human error or accidents, fire, natural disasters or comparable events.

We have a liberal merchandise return policy, and we may experience a greater number of returns than we anticipate.

        As part of our customer service commitment, we maintain a liberal merchandise return policy that allows customers to return any merchandise, virtually at any time and for any reason, and regardless of condition. We make allowances in our financial statements for anticipated merchandise returns based on historical return rates and our future expectations. These allowances may be exceeded, however, by actual merchandise returns as a result of many factors, including changes in the merchandise mix or consumer preferences or confidence. Any significant increase in merchandise returns or merchandise returns that exceed our allowances could materially adversely affect our financial condition, results of operations and cash flows.

Our quarterly results of operations fluctuate and may be negatively impacted by a failure to predict sales trends and by seasonal influences.

        Our net sales, operating results, liquidity and cash flows have fluctuated, and will continue to fluctuate, on a quarterly basis, as well as on an annual basis, as a result of a number of factors, including, but not limited to, the following:

•

the number and timing of our full-line retail store openings;



•

the timing of our catalog mailings and the number of catalogs we mail;



•

our ability to accurately estimate and accrue for merchandise returns and the costs of obsolete inventory disposition;

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•

the timing of merchandise receiving and shipping, including any delays resulting from labor strikes or slowdowns, adverse weather conditions, health epidemics or national security measures; and



•

shifts in the timing of important holiday selling seasons relative to our fiscal quarters, including Valentine's Day, Easter, Mother's Day, Thanksgiving and Christmas, and the day of the week on which certain important holidays fall.

        Our results continue to depend materially on sales and profits from the November and December holiday shopping season. In anticipation of traditionally increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce. If, for any reason, we were to realize lower-than-expected sales or profits during the November and December holiday selling season, our financial condition, results of operations, including related gross margins, and cash flows for the entire fiscal year would be materially adversely affected.

We face substantial competition from discount retailers in the women's apparel industry.

        We believe our customers are willing to pay slightly higher prices for our unique merchandise and superior customer service. However, we face substantial competition from discount retailers, such as Kohl's and Target, for basic elements in our merchandise lines, and our net sales may decline if we are unable to differentiate our merchandise and shopping experience from these discount retailers. In addition, the retail apparel industry has experienced significant price deflation over the past several years largely due to the downward pressure on retail prices caused by discount retailers. This price deflation may make it more difficult for us to maintain our gross margins and to compete with retailers that have greater purchasing power than we have. Furthermore, because we currently source a significant percentage of our merchandise through intermediaries and from suppliers and manufacturers located in the United States and Canada, where labor and production costs, on average, tend to be higher, our gross margins may be lower than those of competing retailers.

Our success is dependent upon our senior management team.

        Our future success depends largely on the efforts of Dennis Pence, Chairman and Chief Executive Officer; Georgia Shonk-Simmons, President and Chief Merchandising Officer; Melvin Dick, Executive Vice President and Chief Financial Officer; and Dan Griesemer, Executive Vice President, Retail Stores. The loss of any of these individuals or other key personnel could have a material adverse effect on our business. Furthermore, the location of our corporate headquarters in Sandpoint, Idaho may make it more difficult to replace key employees who leave us, or to add qualified employees we will need to manage our further growth.

        Prior to joining our company, Melvin Dick, our Executive Vice President and Chief Financial Officer, served as the lead engagement partner for Arthur Andersen's audit of WorldCom's consolidated financial statements for the fiscal year ended December 31, 2001, and its subsequent review of WorldCom's condensed consolidated financial statements for the fiscal quarter ended March 31, 2002. The ongoing investigation of the WorldCom matter may require Mr. Dick's attention, which may impair his ability to devote his full time and attention to our company. Further, Mr. Dick's association with the WorldCom matter may adversely affect customers' or investors' perception of our company.

Lower demand for our merchandise could reduce our gross margins and cause us to slow our retail expansion.

        Our merchandise is comprised primarily of discretionary items, and demand for our merchandise is affected by a number of factors that influence consumer spending. Lower demand may cause us to move more full-price merchandise to clearance, which would reduce our gross margins, and could

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adversely affect our liquidity (including compliance with our debt covenants) and, therefore, slow the pace of our retail expansion. We have maintained conservative inventory levels, which we believe will make us less vulnerable to sales shortfalls. However, low inventory levels also carry the risk that, if demand is stronger than we anticipate, we will be forced to backorder merchandise, which may result in lost sales and lower customer satisfaction.

Our sales tax collection policy may expose us to the risk that we may be assessed for unpaid taxes.

        Many states have attempted to require that out-of-state direct marketers and e-commerce retailers whose only contact with the taxing state are solicitations and delivery of purchased products through the mail or the Internet collect sales taxes on sales of products shipped to their residents. The U.S. Supreme Court has held that these states, absent congressional legislation, may not impose tax collection obligations on an out-of-state mail order or Internet company. Although we believe that we have collected sales tax where we are required to do so under existing law, state tax authorities may disagree, and we could be subject to assessments for uncollected sales taxes, as well as penalties and interest and demands for prospective collection of such taxes. Furthermore, if Congress enacts legislation permitting states to impose sales tax collection obligations on out-of-state catalog or e-commerce businesses, or if we are otherwise required to collect additional sales taxes, such tax collection obligations may negatively affect customer response and could have a material adverse effect on our financial position, results of operations and cash flows. In addition, as we open more retail stores, our tax collection obligations will increase significantly and complying with the greater number of state and local tax regulations to which we will be subject may strain our resources.

Our stock price has fluctuated and may continue to fluctuate widely.

        The market price for our common stock has fluctuated and has been and will continue to be significantly affected by, among other factors, our quarterly operating results, changes in any earnings estimates publicly announced by us or by analysts, customer response to our merchandise offerings, the size of our catalog mailings, the timing of our retail store openings or of important holiday seasons relative to our fiscal periods, seasonal effects on sales and various factors affecting the economy in general. The reported high and low closing sale prices of our common stock were $11.36 per share and $5.37 per share, respectively, during the fiscal year ended February 1, 2003, and were $14.71 per share and $5.86 per share, respectively, during our 2003 fiscal year. In addition, the Nasdaq National Market has experienced a high level of price and volume volatility and market prices for the stock of many companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies.

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Item 2. PROPERTIES

        Our principal executive and administrative offices are located at One Coldwater Creek Drive, Sandpoint, Idaho 83864. Our telephone number is (208) 263-2266. The general location, use and approximate size of our principal properties as of January 31, 2004 are set forth below:

(a)

Our full-line retail stores are generally between approximately 4,000 and 9,000 square feet, with six smaller-sized stores between approximately 3,000 to 4,000 square feet. As of January 31, 2004, our full-line retail stores averaged approximately 6,380 square feet per store. Our retail store leases generally have base terms between five and ten years.

(b)

Our outlet stores are generally between approximately 5,000 and 7,500 square feet, and averaged approximately 6,300 square feet as of January 31, 2004. Our outlet store leases generally have base terms of five years.

(c)

Our two resort stores average approximately 17,000 square feet, and the base terms of these leases will expire in 2006 and 2004.

        We believe that our corporate offices, distribution center and call centers will meet our operational needs for the foreseeable future. Our distribution center was designed to allow us to expand up to an aggregate of 930,000 square feet, as needed. We intend to expand capacity at our distribution center in fiscal 2005 and fiscal 2006 to support our expanding retail store base.

Item 3. LEGAL PROCEEDINGS

Legal Proceedings

        We are, from time to time, involved in various legal proceedings incidental to the conduct of our business. In the opinion of management, our gross liability, if any, and without any consideration given to the availability of insurance or other indemnification, under any pending litigation or administrative proceedings, would not materially affect our consolidated financial position, results of operations or cash flows.

Government Regulation

        Our direct business is subject to the Merchandise Mail Order Rule and related regulations promulgated by the Federal Trade Commission. While we believe we are in material compliance with

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these regulations, no assurance can be given that new laws or regulations will not be enacted or adopted which might adversely affect our operations.

        We collect sales taxes from customers transacting purchases in states in which we have physically based some portion of our retailing business. We also pay applicable corporate income, franchise and other taxes, to states in which retail or outlet stores are physically located. Upon entering a new state, we accrue and remit the applicable taxes. As we open more retail stores, we will be subject to an increasing number of state and local taxing jurisdictions. In addition, we accrue use taxes on catalogs used in our stores or at our corporate headquarters or sent to customers with shipments from our distribution center. Although we believe we have properly accrued for these taxes based on our current interpretation of the tax code, state taxing authorities may challenge our interpretation. Failure to properly determine or to timely remit these taxes may result in additional interest and related penalties being assessed.

        Various states have attempted to collect back sales and use taxes from direct marketers whose only contacts with the taxing state are solicitations through the mail or the Internet, and whose subsequent delivery of purchased goods is by mail or interstate common carriers, and we may be subject to these attempts in states in which we have no physical presence. However, the U.S. Supreme Court has held that these states, absent congressional legislation, may not impose tax collection obligations on an out-of-state mail order or Internet company. We anticipate that any legislative changes regarding direct marketers, if adopted, would be applied only on a prospective basis.

        Many of our products are manufactured outside the United States and are subject to existing or potential duties, tariffs or quotas that may limit the quantity of products we are allowed to import or increase the cost of such products. To date, we have not been restricted by quotas in the operation of our business, and customs duties have not comprised a material portion of the total cost of most of our products. As we expand our retail operations and begin to source more merchandise overseas, however, our business may be impacted by quotas and the imposition of customs duties or tariffs. We are also subject to foreign governmental regulation and trade restrictions, including U.S. retaliation against certain prohibited foreign activities, with respect to our product sourcing.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were brought to a vote of our stockholders in the fourth quarter of the fiscal year ended January 31, 2004.

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MANAGEMENT

        The table below sets forth the current name, age and position of our directors and executive officers as of January 31, 2004:

(a)

Member of the Executive Committee

(b)

Member of the Audit Committee

(c)

Member of the Compensation Committee

(d)

Mr. Hashagen was appointed to the Audit Committee in March 2004.

(e)

Member of the Nominating Committee which the Company's Board of Directors established in April 2004.

        Dennis C. Pence co-founded Coldwater Creek in 1984 and has served as a Director since our incorporation in 1988, serving as the Board's Chairman since July 1999 and as our Vice-Chairman prior to that. Since September 26, 2002 as well as from 1984 through December 2000, Mr. Pence has served as our Chief Executive Officer. From June 4, 2002 to September 25, 2002, he provided his executive management services to us. From January 5, 2002 to June 3, 2002, Mr. Pence served as our Interim Chief Financial Officer and Treasurer; he was semi-retired prior to that through all of 2001. Mr. Pence has also served as Chairman of the Board's Executive Committee since its formation on May 20, 2000 and, as Secretary since July 1998. From 1984 through 2000, Mr. Pence also served as our President. From April 1999 to December 2000, he was also the President of our Internet Commerce Division. Prior to co-founding Coldwater Creek, Mr. Pence was employed by Sony Corp. of America, a publicly held manufacturer of audio, video, communication, and information technology products, from 1975 to 1983, where his final position was National Marketing Manager—Consumer Video Products. Mr. Pence also serves as a Board member of Panhandle State Bank. Dennis Pence and Ann Pence were formerly married to each other.

        Georgia Shonk-Simmons has served as a Director, as well as our President, since January 1, 2001. Since September 26, 2002, Ms. Shonk-Simmons has served as our Chief Merchandising Officer. From January 1, 2001 to September 25, 2002, Ms. Shonk-Simmons served as our Chief Executive Officer.

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From April 1999 to December 2000, Ms. Shonk-Simmons served as President of our Catalog & Retail Sales Division. Ms. Shonk-Simmons joined us as Chief Merchant and Vice President of Merchandising in June 1998. From 1994 to 1998, Ms. Shonk-Simmons was Executive Vice President of the Newport News Catalog Division of Spiegel, Inc., a publicly held international retailer. Prior to that, from 1981 to 1994, Ms. Shonk-Simmons held a number of other positions of increasing responsibility with Spiegel, including Vice President of Merchandising for Spiegel Catalog beginning in 1991. Prior to joining Spiegel, Ms. Shonk-Simmons held various buyer positions with Lytton's, Carson Pirie Scott and Hahne's.

        Melvin Dick has served as our Executive Vice President and Chief Financial Officer since June 2002. Prior to joining Coldwater Creek, Mr. Dick was employed by and was a partner at Arthur Andersen LLP from 1975 through May 2002. While at Arthur Andersen LLP he held a number of progressively responsible positions including serving as the global managing partner of Andersen's technology, media and communications practice and as a member of Andersen's Worldwide Board of Partners.

        Dan Griesemer has served as our Executive Vice President, Retail Stores since April 7, 2004 and, prior to that, as our Senior Vice President of Retail since October 1, 2001. Prior to joining Coldwater Creek, from 1989 to 2000, Mr. Griesemer held a number of progressively responsible positions with, and ultimately served as Divisional Merchandise Manager for Gap Inc. From 1983 to 1989, Mr. Griesemer worked in a variety of positions at Federated Department Stores.

        James Brownell has been our Senior Vice President and Chief Information Officer since November 2003. From November 2000 through October 2002, Mr. Brownell was Senior Vice President/Chief Information Officer for Williams-Sonoma, where he was responsible for all information technology and systems development in the company's 450 retail stores, as well as its direct sales channel. Before joining Williams-Sonoma, Mr. Brownell served as Vice President/Information Technology for the Gap Inc. until March 2000. In addition, Mr. Brownell has held executive positions in information technology with J. Crew and Toys "R" Us.com.

        Karen Reed has served as our Senior Vice President of Marketing since November 2001 and, prior to that, as our Vice President of Internet Sales since September 1999. From March 1997 to September 1999, Ms. Reed served as our Vice President of Marketing and from 1995 to 1997 as our Director of Circulation. From 1992 to 1995, Ms. Reed served as our Circulation Manager. Prior to joining Coldwater Creek, from 1988 to 1990, Ms. Reed served as a computer programmer for Serac, a ski clothing manufacturer. Prior to that, she worked in the accounting profession in various capacities. Ms. Reed has informed us that she intends to retire from Coldwater Creek during the second quarter of fiscal 2004. Following her retirement, Mr. Pence will assume her reponsibilities until we hire a replacement for this position.

        Duane A. Huesers has served as our Vice President of Finance since September 2002. His duties include all controllership, external reporting and other finance related matters. Prior to joining Coldwater Creek, Mr. Huesers had a 25-year career in the retail industry, most recently with Tuesday Morning Corporation where he served as Vice President of Finance. Prior to that, Mr. Huesers served as Vice President and Controller for the Maison Blanche department store chain, as well as Senior Vice President and Chief Financial Officer for BOOKSTOP, Inc.

        Ann Pence co-founded Coldwater Creek in 1984, and served as our Executive Creative Director until September 1, 2002 when she retired. Ms. Pence has served as a Director since our incorporation in 1988, serving as the Board's Vice Chairman since July 1999 and as our Chairman prior thereto. Prior to co-founding Coldwater Creek, Ms. Pence had an eleven year career in retail advertising, and was employed by Macy's California from 1974 to 1982 where her final position was Copy Director. Dennis Pence and Ann Pence were formerly married to each other.

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        James R. Alexander has served as a Director since March 2000, as well as a member of the Board's Audit Committee since July 2000, a member of the Board's Compensation Committee since November 9, 2002 and as Chairman of Board's Nominating Committee since April 2004. From July 2000 to July 2001, Mr. Alexander also served as a member of the Board's Compensation Committee. Mr. Alexander had previously served as a Director, as well as Chairman of the Board's Compensation Committee, from 1994 to 1998 before declining to stand for re-election due to other professional obligations. Mr. Alexander has been an independent catalog consultant for over 20 years, serving a variety of mail order retailers of apparel, gifts and home decor. Mr. Alexander is President of Alexander & Co., LLC.

        Michelle Collins has served as a Director, as well as a member of the Board's Compensation Committee, since September 1997 and as a member of the Board's Audit Committee since November 9, 2002. In January 1998, Ms. Collins co-founded Svoboda, Collins L.L.C, a private equity firm, for which she serves as Managing Director. Ms. Collins also serves as a director on the boards of directors of CDW Corporation, a publicly held provider of technology solutions for businesses, government agencies and educational institutions, and Molex Incorporated, a publicly held manufacturer of electronic, electrical and fiber optic interconnection products and systems, as well as a number of privately held companies.

        Warren R. Hashagen has served as a Director since September 2003, as a member of the Board's Audit Committee since March 2004 and as a member of the Board's Nominating Committee since April 2004. Prior to his retirement in 2001, Mr. Hashagen was Senior Vice President, International of Gap Inc., a position he held since 1999, and was Senior Vice President, Finance and Chief Financial Officer of Gap Inc. between 1995 and 1999. He held various other finance and accounting positions at Gap Inc. from 1982 to 1995, including Senior Vice President, Finance between 1992 and 1995.

        Curt Hecker has served as a Director, as well as a member of the Board's Audit Committee, since August 1995 and as a member of the Board's Nominating Committee since April 2004. Mr. Hecker has also served as Chairman of the Board's Compensation Committee and as a member of the Board's Executive Committee since July 2001. Since October 1997, Mr. Hecker has served as President, Chief Executive Officer and a Board member of publicly held Intermountain Community Bancorp as well as Chief Executive Officer and a Board member of Panhandle State Bank, Intermountain Community Bancorp's wholly-owned subsidiary. From August 1995 to October 2001, Mr. Hecker also served as President of Panhandle State Bank. Prior to joining Panhandle State Bank, Mr. Hecker held various management positions with West One Bank.

        Robert H. McCall, a Certified Public Accountant, has served as a Director since 1994, as Chairman of the Board's Audit Committee since February 1995 and as a member of the Board's Nominating Committee since April 2004. Mr. McCall has also served as a member of the Board's Executive Committee since its formation on May 20, 2000. From February 1995 to July 2000, Mr. McCall also served as a member of the Board's Compensation Committee. Since 1981, Mr. McCall has been President of McCall & Landwehr, P.A., an accounting firm based in Hayden Lake, Idaho.

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PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Price Range of Common Stock and Dividend Policy

        Our common stock has been quoted on the Nasdaq National Market under the symbol "CWTR" since our initial public offering on January 29, 1997. On January 31, 2004, we had 153 stockholders of record and 24,166,201 shares of $0.01 par value common stock outstanding. On December 19, 2002 and on August 4, 2003, our Board of Directors declared 50% stock dividends, each having the effect of a 3-for-2 stock split, on our issued and outstanding common stock. The new shares were distributed on January 30, 2003 and on September 9, 2003, respectively. The stock prices below reflect the effect of these two stock dividends

        The following table sets forth certain sales price data for our common stock for the periods indicated:

        We have never paid any cash dividends on our common stock and do not expect to declare cash dividends in the foreseeable future. Additionally, we are currently restricted from paying cash dividends under our credit facility.

Equity Compensation Plans

        The following table summarizes our equity compensation plans that have been approved by the stockholders as of January 31, 2004. We do not have any equity compensation plans that have not been approved by the stockholders

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Item 6. SELECTED FINANCIAL AND OPERATING DATA

        The selected financial and operating data in the following table sets forth (i) balance sheet data as of January 31, 2004 and February 1, 2003 and statement of operations data for the respective 12-month and 11-month periods then ended, derived from our consolidated financial statements audited by KPMG LLP, independent auditors, which are included elsewhere in this Form 10-K Annual Report, (ii) balance sheet data as of March 2, 2002 and statement of operations data for the fiscal year ended March 2, 2002, derived from our consolidated financial statements audited by Arthur Andersen LLP, independent auditors who have ceased operations, which are included elsewhere in this Form 10-K Annual Report, (iii) balance sheet data as of March 3, 2001 and February 26, 2000, and statement of operations data for the fiscal years ended and March 3, 2001 and February 26, 2000, derived from our consolidated financial statements audited by Arthur Andersen LLP which are not presented herein and (iv) selected operating data as of and for the periods indicated. The information below should be read in conjunction with "Item 7—Management's Discussion and Analysis" and "Item 8—Consolidated Financial Statements" included elsewhere.

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(a)

References to a fiscal year refer to the calendar year in which the fiscal year commences. On December 16, 2002, our Board of Directors approved a change in our fiscal year end from the Saturday nearest February 28 to the Saturday nearest January 31, effective February 1, 2003. We made this decision to align our reporting schedule with the majority of other national retail companies. Accordingly, our 2002 fiscal year consisted of an 11-month transition period. In addition, our floating fiscal year-end typically results in 13-week fiscal quarters and a 52-week fiscal year, but will occasionally give rise to an additional week resulting in a 14-week fiscal fourth quarter and a 53-week fiscal year. For the fiscal years presented above, only our fiscal year ended March 3, 2001 reflects an incremental fifty-third week.

(b)

The weighted average shares outstanding and net income per share amounts reflect two 50% stock dividends, each having the effect of a 3-for-2 stock split, declared by our Board of Directors on December 19, 2002 and August 4, 2003, respectively.

(c)

Beginning with our first quarter of fiscal 2003, we reclassified our outlet store business and phone and Internet orders that originate in our retail stores from our direct segment to our retail segment. We have reclassified prior period financial statements on a consistent basis for fiscal years 2002, 2001 and 2000 only. Due to information systems limitations, we did not reclassify periods prior to fiscal 2000 because it was not practicable for us to do so. In addition, management believes that the reclassification of these periods would be immaterial.

(d)

An "active customer" is defined as a customer who purchased merchandise from us through any of our sales channels during the 12-month period preceding the end of the period indicated. Active customers do not include retail customers who have not provided identifying information to us.

(e)

Excludes outlet stores and includes our two resort stores.

(f)

We currently have a $60 million unsecured revolving line of credit, and, as of the date of this report, we have not borrowed under this facility.

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion contains various statements regarding our current strategies, 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. Please refer to our "Risk Factors" elsewhere in this Annual Report on Form 10-K for. We assume no future obligation to update our forward-looking statements or to provide periodic updates or guidance.

Introduction to Management's Discussion and Analysis of Financial Condition and Results of Operations

        We encourage you to read this Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our accompanying consolidated financial statements and their related notes.

        When we refer to a fiscal year, we mean the calendar year in which the fiscal year begins. On December 16, 2002, our Board of Directors approved a change in our fiscal year end from the Saturday nearest February 28 to the Saturday nearest January 31, effective February 1, 2003. Accordingly, our 2002 fiscal year consisted of an 11-month transition period. We made this decision to align our financial reporting schedule with the majority of other national retail companies.

        We currently operate in two reportable segments, our direct segment and our retail segment. Beginning in the quarter ended May 3, 2003, we reclassified our outlet store business and phone and Internet orders that originate in our retail stores from our direct segment to our retail segment. We made these reclassifications to reflect the manner in which our segments are currently managed. We have reclassified prior period financial statements on a consistent basis for fiscal years 2002, 2001 and 2000. These reclassifications had no impact on our consolidated net sales, net income, retained earnings or cash flows for any period. Due to information system limitations, we did not reclassify periods prior to fiscal 2000 because it was not practicable for us to do so. In addition, management believes that the reclassification of these prior periods would be immaterial.

        Unless otherwise indicated, the common stock outstanding, retained earnings and net income per share amounts appearing in this report and the financial statements included herein reflect two 50% stock dividends, each having the effect of a 3-for-2 stock split, declared by our Board of Directors on December 19, 2002 and August 4, 2003, respectively. These stock dividends have the combined effect of a 2.25-for-1 stock split.

Coldwater Creek Profile

        Coldwater Creek is a multi-channel, specialty retailer of women's apparel, accessories, jewelry and gift items. Our unique, proprietary merchandise assortment and our retail stores, catalogs and e-commerce website are designed to appeal to women between the ages of 30 and 60, with household incomes in excess of $75,000. We reach our customers through our direct segment, which consists of our catalog and e-commerce businesses, and our rapidly expanding base of retail stores.

        Our catalog business is a significant sales channel and acts as an efficient marketing platform to cross-promote our website and retail stores. During fiscal 2003, we mailed 117.8 million catalogs. We launched our full-scale e-commerce website, www.coldwatercreek.com, in 1999 to cost-effectively expand

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our customer base and provide another convenient shopping alternative for our customers. We currently have a database of over 2.2 million e-mail addresses to which we regularly send customized e-mails.

        We expect our retail business, which represented approximately 38% of our total net sales in fiscal 2003, to be the key driver of our growth strategy. As of January 31, 2004, we operated 66 full-line retail stores, 25 of which were opened in fiscal 2003, as well as two resort stores and 16 merchandise clearance outlet stores in 51 markets. We currently plan to open 45 new stores in fiscal 2004, including two stores opened in March 2004, and 40 to 50 new stores in fiscal 2005. Over the past four years, we have been refining our retail store model and have taken the following steps to support the growth of our retail business and realize the benefits of our multi-channel model:

•

introducing a scaleable retail store model for national rollout;



•

enhancing the management team, particularly in our retail segment, by hiring key members of management with extensive retail experience;



•

focusing our merchandise offering by refining our product assortment and increasing our investment in key items; and



•

integrating our retail and direct merchandise planning and inventory management functions to maintain fashion continuity and brand integrity across all channels.

Direct Segment Operations

        Our direct segment includes our catalog and e-commerce businesses. Our direct channel generated $324.2 million in net sales, or 62.5% of our total net sales, for fiscal 2003. As we continue to rollout our retail stores, we expect our direct segment to decrease as a percentage of total net sales over time. However, we expect our direct segment to continue to be a core component of our operations and brand identity and an important vehicle to promote each of our channels and provide cash flow to support our retail store expansion.

Our Catalogs

        For fiscal 2003, our catalog business generated $175.9 million in net sales, or 33.9% of total net sales. Historically, we used three catalogs, Northcountry, Spirit and Elements, to feature our entire line of full-price merchandise with different assortments for each title to target separate sub-groups of our core demographic. In January 2004, we combined our two smaller catalogs, Spirit and Elements, and re-introduced the combined catalog under the Spirit title. Additionally, each year we assemble selected merchandise from the most popular items in our primary merchandise lines and feature them in a festive Gifts-to-Go holiday catalog and on our website.

        Since 2000, in an effort to increase the productivity of our direct business and reduce costs, we have reduced our catalog circulation and have been actively promoting the migration of our customers from our catalogs to our more cost-efficient e-commerce website. We have also focused on decreasing the number of mailings to prospective customers because they have increasingly generated lower response rates and contributed fewer sales than mailings to our existing customers. In fiscal 2003, we mailed 117.8 million catalogs, down 35.8% from our peak mailings of 183.6 million catalogs in 2000. We expect to continue to reduce our catalog circulation, particularly to prospective customers, which we believe will continue to have a positive impact on our selling, general and administrative expenses. Although we anticipate losing some potential prospect sales, we believe that optimizing the level of our mailings to prospective customers will have an overall positive impact on our net income.

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E-commerce Website

        We launched our full-scale e-commerce website, www.coldwatercreek.com, in July of 1999 to offer a convenient, user-friendly and secure online shopping option for our customers. The website features our entire full-price merchandise offering found in our catalogs and retail stores. It also serves as an efficient promotional vehicle for the disposition of excess inventory.

        In fiscal 2003, our e-commerce net sales were $148.3 million and represented 28.6% of total net sales. As of January 31, 2004, we had over 2.2 million opt-in e-mail addresses to which we regularly send customized e-mails to drive sales through our website and our other channels. We also participate in a net sales commission-based program whereby numerous popular Internet search engines and consumer and charitable websites provide hotlink access to our website. This affiliate program serves as an effective tool in prospecting for new customers.

Retail Segment Operations

        Our retail segment includes our full-line retail, resort and outlet stores and catalog and Internet sales that originate in our retail stores. Our retail channel generated $194.6 million in net sales, or 37.5% of total net sales, for fiscal 2003.

Full-Line Stores

        We opened our first full-line retail store in November 1999 and have since tested and refined our store format and reduced capital expenditures required for build-out. We believe there is an opportunity to grow to 400 to 500 stores in up to 275 to 300 identified markets nationwide over the next six to eight years. At January 31, 2004 we operated 66 stores and we currently plan to open 45 new stores in fiscal 2004, including two stores opened in March 2004. We have identified suitable locations for these planned stores and believe we will be able to complete our 2004 expansion plans with available working capital. In 2005, we currently plan to open 40 to 50 new stores, and are in the process of securing appropriate sites for these stores.

        After 2005 it is our current intention to continue to open new stores at our current pace, although we do not maintain a specific rollout plan beyond a two-year horizon. We continually reassess our store rollout plans based on the overall retail environment, the performance of our retail business, our access to working capital and external financing and the availability of suitable store locations. For example, it is possible that in any year we will increase our planned store openings, particularly if we experience strong retail sales and have access to the necessary working capital or external financing. Likewise, we would be inclined to curtail our store rollout if we were to experience weaker retail sales or if we did not have adequate working capital or access to financing.

        Our core new store model, which we introduced in the second half of 2002, consists of 5,000 to 6,000 square foot stores. These stores reflect improvements in our construction processes, materials and fixtures, merchandise layout and store design and have reduced our initial capital investment per store compared to previously opened stores. This model assumes an average initial net investment per store of approximately $560,000 and anticipates net sales per square foot of approximately $500 in the third year of operations. For fiscal 2003, our 41 full-line stores that had been open at least 13 months averaged 7,207 square feet and net sales per square foot of $460. Most of these stores have been open for one to two years.

        We are also introducing a smaller store model of 3,000 to 4,000 square foot stores. We have designed these stores to access smaller markets and to increase our presence in larger metropolitan markets. This model assumes an average initial net investment per store of approximately $400,000 and anticipates net sales per square foot of approximately $600 in the third year of operations. We currently have six stores open in this model, none of which has been open for a full year.

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Outlet Stores and Resort Stores

        We currently operate 16 outlet stores where we sell excess inventory. We plan to open three outlet stores in fiscal 2004. We generally locate the outlets within clusters of our retail stores to efficiently manage our inventory and clearance activities, but far enough away to avoid significantly diminishing our full-line store sales. Unlike many other apparel retailers, we use our outlet stores only to sell overstocked premium items from our full-line retail stores and do not have merchandise produced directly for them. We currently operate two resort stores in Sandpoint, Idaho and Jackson Hole, Wyoming.

Results of Operations

        The following table sets forth certain information regarding our costs and expenses expressed as a percentage of consolidated net sales:

Comparison of the Twelve-Month Period Ended January 31, 2004 with the Eleven-Month Period Ended February 1, 2003

Consolidated Results of Operations

        Fiscal year 2002 was an 11-month transition period attributable to the change in our fiscal year end as of February 1, 2003. To assist the reader, the following discussions first compare a 12-month fiscal year 2003 with an 11-month fiscal year 2002, including the amount attributed to the fact that there was one less month in fiscal 2002. The remaining discussions compare the 12-month fiscal 2003 with the comparable 12-month period ended February 1, 2003.

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        The table below is provided to assist the reader in assessing differences in our overall fiscal 2003 and 2002 performance and sets forth our results of operations for the periods indicated below:

(1)

This information is derived from our consolidated financial statements audited by KPMG LLP, independent auditors, which are included elsewhere in this Annual Report on Form 10-K.

        Net Sales.    Our consolidated net sales for the 12-month fiscal 2003 were $518.8 million, an increase of $45.7 million, or 9.7%, compared with consolidated net sales of $473.2 million during the 11-month fiscal 2002. We attribute $28.3 million of the $45.7 million increase in our consolidated net sales to the fact that there was one less month in fiscal 2002 than in fiscal 2003.

        Our consolidated net sales for the 12-month fiscal 2003 increased $17.4 million, or 3.5%, compared with consolidated net sales of $501.5 million during the comparable 12-month period ended February 1, 2003. This increase is primarily due to incremental net sales of $47.9 million contributed by our retail expansion and, to a lesser extent, to improved direct segment sales returns. In fiscal 2003, our direct segment sales returns expressed as a percentage of gross sales declined by 2.1 percentage points from the comparable 12-month period ended February 1, 2003. These positive impacts were partially offset primarily by a decrease of $30.1 million, or 17.2%, in full-price net sales by our direct segment's catalog business. Please refer to our discussions titled "Comparison of the Twelve-Month Period Ended January 31, 2004 with the Eleven-Month Period Ended February 1, 2003—Consolidated Results of Operations—Operating Segment Results" below for further details.

        Gross Profit Dollars.    Our consolidated gross profit dollars for the 12-month fiscal 2003 were $202.8 million, an increase of $14.1 million, or 7.4%, compared with consolidated gross profit dollars for the 11-month fiscal 2002 of $188.8 million. We attribute $10.2 million of the $14.1 million increase in consolidated gross profit to the fact that there was one more month in fiscal 2003 than in fiscal 2002.

        Our consolidated gross profit dollars for the 12-month fiscal 2003 increased $3.9 million, or 2.0%, compared with consolidated gross profit dollars of $198.9 million during the comparable 12-month period ended February 1, 2003. The increase in our consolidated gross profit dollars was primarily attributable to the increase in consolidated net sales.

        Gross Profit Rate.    Our consolidated gross profit rate for the 12-month fiscal 2003 decreased to 39.1% from 39.9% for the 11-month fiscal 2002 and from 39.7% for the comparable 12-month period ended February 1, 2003. This decrease was primarily due to a reduction in merchandise margins of

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2.3 percentage points on full-price sales from our catalog and e-commerce businesses as we undertook promotional campaigns to reactivate customers and increase average units per order in our direct segment. Our gross profit rate was also negatively impacted by an increase in the percentage of total net sales contributed by clearance sales compared with full-price sales. Clearance sales comprised approximately 15% of our total net sales in fiscal 2003 and approximately 14% of our total net sales in the comparable 12-month period ended February 1, 2003. We have discontinued many of our promotional campaigns in our direct segment. Additionally, we believe that our inventory levels are now aligned with our retail store growth strategy and do not anticipate disposition activities beyond those typically encountered by retailers. Consequently, we expect that our gross profit rate will stabilize and we believe that we observed this trend commence in our fiscal 2003 fourth quarter.

        These negative impacts on our gross profit rate were partially offset primarily by improved merchandise margins on clearance sales and, to a lesser extent, by improved merchandise margins on full-price retail store sales, and by improved leveraging of retail store occupancy costs. The merchandise margins on our clearance sales improved by 8.0 percentage points during the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. We attribute this positive change to our focus on identifying slow moving merchandise more quickly. This has enabled us to offer discounted merchandise when it is more seasonally appropriate. The merchandise margins on our full-price retail store sales increased by 1.7 percentage points during the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. We attribute our improved margins on full-price retail sales to our decision to reduce the number of days merchandise is discounted before it is moved to our outlet stores. Our gross profit rate for the 12-month fiscal 2003 was positively impacted by an improvement of 1.1 percentage points in the leveraging of our full-line retail store occupancy costs from the comparable 12-month period ended February 1, 2003. We were able to leverage our retail store occupancy costs primarily due to improved net sales at our retail stores.

        We recognized $3.1 million of vendor rebates during the 12-month fiscal 2003 versus $2.0 million in both the 11-month fiscal 2002 and the comparable 12-month period ended February 1, 2003. These rebates were credited to cost of sales as the related merchandise was sold.

        Selling, General and Administrative Expenses.    Our consolidated selling, general and administrative expenses for the 12-month fiscal 2003 were $182.2 million, an increase of $8.9 million, or 5.1%, over the 11-month fiscal 2002. We attribute $12.6 million in selling, general and administrative expenses to the fact that there was one more month in fiscal 2003 than in fiscal 2002. We mailed 117.8 million catalogs during the 12-month fiscal 2003 compared with 136.2 million during the 11-month fiscal 2002.

        Our consolidated selling, general and administrative expenses for the 12-month fiscal 2003 decreased $3.7 million, or 2.0%, compared with consolidated selling, general and administrative expenses of $185.9 million during the comparable 12-month period ended February 1, 2003. Our consolidated selling, general and administrative expenses were positively impacted by reduced costs associated with catalog mailings of approximately $15.1 million. We decreased our catalog mailings by 19.0%, to 117.8 million in the 12-month fiscal 2003 from 145.4 million in the comparable 12-month period ended February 1, 2003. Additionally, the fiscal 2002 consolidated selling, general and administrative expenses included costs of approximately $0.9 million associated with settling a dispute with a former merchandise vendor.

        These positive impacts were partially offset by increased personnel costs associated with our retail expansion and, to a lesser extent, an accrual of approximately $1.4 million (pre-tax) for expected sales tax liabilities. Personnel costs impacting our consolidated selling, general and administrative expenses associated with our retail expansion increased $12.6 million, or 37.1%, for the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. The personnel costs primarily included store employee wages, administrative and technical support salaries, related taxes and employee benefits. The majority of the $1.4 million (pre-tax) sales tax accrual resulted from an error in our

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Canadian tax returns related to refunds of the Canadian Goods and Services Tax, known as the GST. Canada allows refunds for GST paid by retailers, as it imposes a value-added tax that is collected from the consumer or user of the goods and services purchased. During the fiscal 2003 third quarter, we discovered we had included Canadian provincial sales tax in our GST refund claims. The provincial sales taxes we were including are not refundable. Since discovering this, we have properly filed our current GST refund claims and we have accrued the amount of taxes we estimate we will need to pay back to Canada. Also, we accrued for sales taxes we estimate are payable to certain counties in one state in which we have a retail presence but did not collect sufficient sales taxes from our customers. This accrual is included in the $1.4 million (pre-tax) amount.

        Selling, General and Administrative Expenses Expressed as a Percentage of Consolidated Net Sales.    Our consolidated selling, general and administrative expenses expressed as a percentage of our consolidated net sales decreased to 35.1% for 12-month fiscal 2003 from 36.6% for the 11-month fiscal 2002 and from 37.1% for the comparable 12-month period ended February 1, 2003. This improvement is primarily due to our strategic decision to mail more catalogs to our existing customers relative to the total catalog mailings during fiscal 2003 compared with both the 11-month fiscal 2002 and the comparable 12-month period ended February 1, 2003. We generally realize better response rates to mailings to our existing customers than to our prospecting catalog mailings and have observed falling response rates to our prospecting catalog mailings. The percentage of mailings to our existing customers increased 7.8 percentage points in fiscal 2003 from the 11-month fiscal 2002. The percentage of mailings to our existing customers increased 7.0 percentage points in fiscal 2003 from the comparable 12-month period ended February 1, 2003.

        Other Operating Data.    Our mailing list grew to 15.6 million names at January 31, 2004 from 14.0 million names at February 1, 2003. Also, our proprietary e-mail address database consisted of 2.2 million names at January 31, 2004 compared with 1.8 million names at February 1, 2003. Our active customers declined slightly to 2.6 million at January 31, 2004 from 2.7 million at February 1, 2003. Our active customers are those customers who have purchased merchandise from us through any of our three sales channels during the preceding 12 months. Active customers do not include retail customers who have not provided identifying information to us.

        Income Tax Rate.    For fiscal 2003 our consolidated provision for income taxes was $8.0 million, an increase of $1.8 million, or 28.6%, compared with a consolidated provision for income taxes of $6.2 million for the 11-month fiscal 2002. Our effective income tax rate for fiscal 2003 decreased to 39.1% from 40.0% for the 11-month fiscal 2002. The increase in our income tax expense was primarily the result of higher pre-tax income. The decrease in our effective income tax rate was lower because we reversed an accrual for approximately $0.2 million related to certain income taxes that we determined would not ultimately be due.

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Operating Segment Results

        Net Sales.    The table below is provided to assist the reader in assessing differences in our fiscal 2003 and 2002 net sales by business channel and sets forth our net sales by business channel for the periods indicated below:

(1)

This information is derived from our consolidated financial statements audited by KPMG LLP, independent auditors, which are included elsewhere in this Annual Report on Form 10-K.

        The following table summarizes our net sales by segment for the 12-month fiscal 2003 compared with the 11-month fiscal 2002:

(1)

This information is derived from our consolidated financial statements audited by KPMG LLP, independent auditors, which are included elsewhere in this Annual Report on Form 10-K.

        The following table summarizes our net sales by segment for the 12-month fiscal 2003 compared with the comparable 12-month period ended February 1, 2003:

(1)

This information is derived from our consolidated financial statements audited by KPMG LLP, independent auditors, which are included elsewhere in this Annual Report on Form 10-K.

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        Our direct segment's net sales decreased $20.8 million, or 6.0% in the 12-month fiscal 2003 from the 11-month fiscal 2002. Our direct segment's net sales decreased $43.0 million, or 11.7% in the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. We primarily attribute this decrease to our strategic decision to mail 27.6 million, or 19.0% fewer catalogs in the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. Also, we believe that our direct segment has been adversely impacted by a continuing softness in the direct mail business.

        We believe that our catalog business did not decrease proportionally with the decrease in catalogs mailed due to a higher percentage of mailings to our existing customers. The percentage of mailings to our existing customers increased 7.0 percentage points in fiscal 2003 from the comparable 12-month period ended February 1, 2003. We believe that our e-commerce business's net sales were not as severely impacted by the decrease in catalog mailings primarily due to our continued efforts to reduce our e-commerce business's dependence on our catalogs as an advertising medium. For example, we continued to participate in a net sales commission-based "affiliate" website program in which numerous popular search engines and consumer and charitable websites provide access to our website.

        Our retail segment's net sales increased $66.5 million, or 51.8%, in the 12-month fiscal 2003 from the 11-month fiscal 2002. We attribute $6.1 million of this increase to the fact there was one less month in fiscal 2002 than in fiscal 2003. Our retail segment's net sales increased $60.4 million, or 45.0%, in the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. We primarily attribute this increase to net sales of $33.3 million contributed by the 25 full-line retail stores that we opened during fiscal 2003 and, to a lesser extent, $14.6 million contributed by full-line retail stores that were opened during only a portion of the 12-month period ended February 1, 2003, but were open during the entirety of the 12-month fiscal 2003. Collectively, these two amounts total $47.9 million and represent the net sales contribution of our retail expansion.

        Operating Contribution.    The table below is provided to assist the reader in assessing differences in our fiscal 2003 and 2002 operating contribution by segment and sets forth our operating contribution by segment for the periods indicated below: