COLDWATER CREEK INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Fiscal Quarter Ended October 30, 2004

		OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-21915

COLDWATER CREEK INC.

Exact name of registrant as specified in its charter)

DELAWARE

82-0419266

(State of other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

ONE COLDWATER CREEK DRIVE, SANDPOINT, IDAHO 83864

(Address of principal executive offices)

(208) 263-2266

(Registrant’s telephone number, including area code)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

YES ý NO o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Shares outstanding as of December 3, 2004
Common Stock ($.01 par value)		40,409,678

COLDWATER CREEK INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except for share data)

ASSETS

	October 30,		January 31,
	2004		2004
CURRENT ASSETS:
Cash and cash equivalents	$	113,128	$	45,754
Receivables	17,439		9,457
Inventories	91,151		52,701
Prepaid and other	6,547		5,797
Prepaid and deferred catalog costs	9,583		4,219

Total current assets	237,848		117,928

Property and equipment, net	116,667		92,232
Other	425		497

Total assets	$	354,940	$	210,657

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	94,933		38,855
Accrued liabilities	30,997		24,246
Income taxes payable	2,079		4,089

Total current liabilities	128,009		67,190

Deferred income taxes	3,844		3,844
Deferred rents	34,622		19,826
Other	200		—

Total liabilities	166,675		90,860

Commitments and contingencies

STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued and outstanding	—		—
Common stock, $.01 par value, 60,000,000 shares authorized, 40,365,990 and 36,249,302 shares issued, respectively	404		363
Additional paid-in capital	98,086		47,927
Retained earnings	89,775		71,507

Total stockholders’ equity	188,265		119,797

Total liabilities and stockholders’ equity	$	354,940	$	210,657

COLDWATER CREEK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands except for per share data)

	Three Months Ended						Nine Months Ended
	October 30,			November 1,			October 30,		November 1,
Statements of Operations:	2004			2003			2004		2003

Net sales	$	150,504		$	138,152		$	386,179	$	350,010
Cost of sales	81,365			81,214			215,765		213,273
Gross profit	69,139			56,938			170,414		136,737
Selling, general and administrative expenses	53,403			47,993			140,249		126,874
Income from operations	15,736			8,945			30,165		9,863
Interest, net, and other	(168		)	(14		)	86		(126		)
Income before income taxes	15,568			8,931			30,251		9,737
Income tax provision	6,149			3,328			11,971		3,643
Net income	$	9,419		$	5,603		$	18,280	$	6,094

Net income per share - Basic	$	0.23		$	0.15		$	0.47	$	0.17

Weighted average shares outstanding - Basic	40,220			36,194			38,495		36,066

Net income per share - Diluted	$	0.23		$	0.15		$	0.46	$	0.17

Weighted average shares outstanding - Diluted	41,527			36,830			39,847		36,464

COLDWATER CREEK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

	Nine Months Ended
	October 30,			November 1,
	2004			2003

OPERATING ACTIVITIES:
Net income	$	18,280		$	6,094
Non cash items:
Depreciation and amortization	14,432			12,478
Deferred rent amortization	(1,684		)	(860		)
Deferred income taxes	—			4,890
Tax benefit from exercises of stock options	3,558			271
Other	200			—
Loss on asset disposition	128			66
Net change in current assets and liabilities:
Receivables	(7,758		)	(12,840		)
Inventories	(38,450		)	(19,044		)
Prepaid and other	(1,578		)	(1,470		)
Prepaid and deferred catalog costs	(5,364		)	(3,997		)
Accounts payable	56,078			20,383
Accrued liabilities	4,244			1,298
Income taxes payable	(2,010		)	(3,650		)
Deferred rents	18,326			9,668

Net cash provided by operating activities	58,402			13,287

INVESTING ACTIVITIES:
Purchase of property and equipment	(37,648		)	(22,762		)
Repayments of preexisting executive loans	191			200

Net cash used in investing activities	(37,457		)	(22,562		)

FINANCING ACTIVITIES:
Net proceeds from stock offering	42,616		(a)	—
Net proceeds from exercises of stock options	3,813			844
Other financing costs	—			(517		)

Net cash provided by financing activities	46,429			327

Net increase (decrease) in cash and cash equivalents	67,374			(8,948		)
Cash and cash equivalents, beginning	45,754			26,630

Cash and cash equivalents, ending	$	113,128		$	17,682

Note (a): Net proceeds from stock offering does not include $518,000 of costs incurred in the prior fiscal year.

COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Nature of Business and Organizational Structure

Coldwater Creek Inc., together with its wholly-owned subsidiaries (the “Company” or “Coldwater Creek”), a Delaware corporation headquartered in Sandpoint, Idaho, is a multi-channel specialty retailer of women’s apparel, accessories, jewelry, and gift items. The Company operates in two reportable operating segments: Retail and Direct. The Company’s Retail Segment consists of its full-line retail stores, resort stores and outlet stores. The Company’s Direct Segment consists of its catalog and Internet-based e-commerce businesses.

The Company has four wholly-owned subsidiaries. Three of these subsidiaries currently have no substantive assets, liabilities, revenues or expenses. The fourth subsidiary, Aspenwood Advertising, Inc., produces, designs and distributes catalogs and other advertising materials used in the Company’s business.

2. Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.

Fiscal Periods

References to a fiscal year refer to the calendar year in which such fiscal year commences. The Company’s 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. References to three-month periods, or fiscal quarters, refer to the 13 weeks ended on the date indicated. References to the nine-month periods, or to fiscal first nine months, refer to the 39 weeks ended on the date indicated.

Preparation of Interim Consolidated Financial Statements

The Company’s interim consolidated financial statements have been prepared by the management of Coldwater Creek pursuant to the rules and regulations of the Securities and Exchange Commission. These consolidated financial statements have not been audited. In the opinion of management, these consolidated financial statements contain all adjustments necessary to fairly present the Company’s consolidated financial position, results of operations and cash flows for the periods presented. The adjustments consist solely of normal recurring adjustments. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These statements should be read in conjunction with the audited consolidated financial statements, and related notes, included in the Company’s most recent Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004.

The Company’s consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the financial position, results of operations or cash flows to be realized in future periods.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and timing of the recognition of revenue and expenses, the recognition of reported amounts and classification of assets and liabilities, and the disclosure of contingent assets and liabilities. Examples of these estimates and assumptions are embodied in our sales returns accrual and our inventory obsolescence calculation. These estimates and assumptions are based on the Company’s historical results as well as management’s future expectations. The Company’s actual results could vary from its estimates and assumptions.

Reclassifications

Certain amounts in the consolidated financial statements for the prior fiscal year’s interim period have been reclassified to be consistent with the current fiscal year’s interim presentation. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or cash flows for the periods presented.

Additionally, the common stock outstanding, retained earnings and net income per share amounts for all periods presented reflect three 50% stock dividends, each having the effect of a 3-for-2 stock split, declared by the Company’s Board of Directors on December 19, 2002, August 4, 2003 and June 14, 2004.

Inventories

Inventories primarily consist of merchandise purchased for resale. Inventory in the Company’s distribution center is stated at the lower of first-in, first-out cost or market. Inventory in the Company’s full-line retail stores, resort stores and outlet stores is stated at the lower of weighted average cost or market.

Prepaid and Deferred Catalog Costs

Catalog costs include all direct costs associated with the development, production and circulation of direct mail catalogs and are accumulated as prepaid catalog costs until such time as the related catalog is mailed. Once mailed, these costs are reclassified as deferred catalog costs and are amortized into selling, general and administrative expenses over the expected sales realization cycle, typically several weeks.

Store Pre-Opening Costs

The Company incurs certain preparation and training costs prior to the opening of a retail store. These pre-opening costs are expensed as incurred and are included in selling, general and administrative expenses. Pre-opening costs were approximately $0.9 million and $0.5 million during the third quarters of fiscal 2004 and fiscal 2003, respectively. Pre-opening costs were approximately $2.1 million and $0.9 million during the first nine months of fiscal 2004 and fiscal 2003, respectively.

List rental income (expense)

Customer list rental income is netted against selling, general and administrative expenses. An accrual for rental income and rental expense, as applicable, is established at the time the related catalog is mailed to the names contained in the rented lists. The amounts of income netted against selling, general and administrative expense are as follows:

	Three Months Ended						Nine Months Ended
	Oct. 30,			Nov. 1,			Oct. 30,			Nov. 1,
	2004			2003			2004			2003
	(in thousands)

List rental income	$	1,188		$	692		$	2,707		$	1,856
List rental (expense)	(101		)	(431		)	(499		)	(1,214		)
Net list rental income	$	1,087		$	261		$	2,208		$	642

Interest, net, and other

Interest, net, and other consists of the following:

	Three Months Ended						Nine Months Ended
	Oct. 30,			Nov. 1,			Oct. 30,			Nov. 1,
	2004			2003			2004			2003
	(in thousands)

Interest (expense), including financing fees	$	(441	)	$	(113	)	$	(673	)	$	(208	)
Interest income	352			25			679			100
Other income	85			165			428			221
Other (expense)	(164		)	(91		)	(348		)	(239		)
Interest, net, and other	$	(168	)	$	(14	)	$	86		$	(126	)

Net Income Per Share

Basic earnings per share (“EPS”) is calculated by dividing income applicable to common shareholders by the weighted average number of shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), outstanding for the year. Diluted EPS reflects the potential dilution that could occur under the treasury stock method if potentially dilutive securities, such as stock options, were exercised or converted into Common Stock. Should the Company incur a net loss, potentially dilutive securities are excluded from the calculation of diluted EPS as they would be antidilutive.

On December 19, 2002, on August 4, 2003 and on June 14, 2004, the Company’s Board of Directors declared three 50% stock dividends having the cumulative effect of a 3.375-for-1 stock split on its issued Common Stock. The Common Stock outstanding, retained earnings and net income per share amounts for all periods presented reflect these stock dividends.

Accounting for Stock Based Compensation

As allowed by SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”), the Company has retained the compensation measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”), and its related interpretations, for stock options. Under APB No. 25, compensation expense is recognized based upon the difference, if any, at the measurement date between the market value of the stock and the option exercise price. The measurement date is the date at which both the number of options and the exercise price for each option are known.

The following table presents a reconciliation of the Company’s actual net income to its pro forma net income had compensation expense for the Company’s 1996 Stock Option/Stock Issuance Plan been determined using the compensation measurement principles of SFAS No. 123 (in thousands except for per share data):

	Three Months Ended						Nine Months Ended
	Oct. 30,			Nov. 1,			Oct. 30,			Nov. 1,
	2004			2003			2004			2003

Net Income:
As reported	$	9,419		$	5,603		$	18,280		$	6,094
Impact of applying SFAS 123	(213		)	(205		)	(567		)	(581		)
Proforma net income	$	9,206		$	5,398		$	17,713		$	5,513

Net income per share:
As reported - Basic	$	0.23		$	0.15		$	0.47		$	0.17
Pro forma - Basic	$	0.23		$	0.15		$	0.46		$	0.15
As reported - Diluted	$	0.23		$	0.15		$	0.46		$	0.17
Pro forma - Diluted	$	0.22		$	0.15		$	0.44		$	0.15

The above effects of applying SFAS No. 123 are not indicative of future amounts. Additional awards may be made in the future .

In calculating the preceding, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions:

	Three Months Ended				Nine Months Ended
	Oct. 30,		Nov. 1,		Oct. 30,		Nov. 1,
	2004		2003		2004		2003

Risk free interest rate	3.1	%	2.8	%	3.0	%	2.5	%
Expected volatility	74.5	%	79.3	%	76.9	%	78.8	%
Expected life (in years)	4		4		4		4
Expected dividends	None		None		None		None

Recently Issued Accounting Standards Not Yet Adopted

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company will adopt the provisions of SFAS No. 151, effective January 29, 2006 for its fiscal 2006 consolidated financial statements. Management currently believes that adoption of the provisions of SFAS No. 151 will not have a material impact on the Company’s consolidated financial statements.

3. Receivables

Receivables consist of the following:

	October 30,		January 31,
	2004		2004
	(in thousands)
Tenant improvement	$	7,147	$	3,728
Credit cards	6,998		3,305
Vendor Allowance	1,824		—
Customer list rental	885		1,037
Other	585		620
Income tax refund	—		767
	$	17,439	$	9,457

The Company evaluates the credit risk associated with its receivables. At October 30, 2004 and January 31, 2004 no reserve was recorded.

4. Accrued Liabilities

Accrued liabilities consist of the following:

	October 30,		January 31,
	2004		2004
	(in thousands)
Accrued payroll, related taxes and benefits	$	10,733	$	5,755
Accrued sales returns	5,410		3,960
Accrued taxes	4,901		4,359
Current portion of deferred rents	4,497		2,651
Gift certificate/card liability	5,240		7,063
Other	216		458
	$	30,997	$	24,246

5. Deferred Compensation Program

During fiscal 2002, 2003 and 2004, the Compensation Committee of the Company’s Board of Directors authorized compensation bonus pools that, in aggregate, currently total $4.0 million. These bonus pools serve as additional incentives to retain certain key employees. The Company is accruing the related compensation expense to each employee on a straight-line basis over the retention periods as it is currently anticipated that the performance criteria specified in the agreements will be met. The total compensation and dates to be paid are summarized as follows (in thousands):

Description	Amount		Dates to be paid(1)

Five executive employees	$	1,725	September 2005
	225		April 2006
	150		February 2007
	225		May 2007
	$	2,325


Fourteen non-executive employees	$	150	October 2005
	525		April 2006
	350		July 2006
	75		February 2007
	300		May 2007
	100		July 2007
	150		September 2007
	$	1,650

(1) The amounts will be paid contingent upon the employee and the Company achieving the performance criteria specified in the agreements.

6. Arrangements with Principal Shareholders

Dennis Pence personally participates in a jet timeshare program through two entities he owns. For flights by Dennis Pence and other corporate executives made exclusively for official corporate purposes, the Company reimburses these entities for:

• a usage based pro rata portion of the actual financing costs of the jet timeshare rights;

• a usage based pro rata portion of the actual monthly maintenance fees; and

• actual hourly usage fees.

Aggregate expense reimbursements totaled approximately $144,000 and $303,000 for the third quarters of fiscal 2004 and fiscal 2003, respectively, and approximately $407,000 and $643,000 for the first nine months of fiscal 2004 and fiscal 2003, respectively.

On June 14, 2003, the Company’s Board of Directors approved a charitable contribution of $100,000 to the Morning Light Foundation, Inc, a not-for-profit charitable organization. Dennis Pence, the Company’s Chairman and Chief Executive Officer is the founder and a Board member of the Morning Light Foundation, Inc.

Elizabeth Ann Pence retired from her position as a Director of the Company effective August 23, 2004. In connection with her retirement and in recognition of her contributions as co-founder of the Company, she was given an honorary title of Chairman Emeritus, and the Company extended to her certain post-retirement benefits. During the fiscal 2004 third quarter, the Company accrued $200,000 related to these post-retirement benefits. The $200,000 accrual represents the net present value of the expected future benefit costs.

7. Revolving Line of Credit

On March 5, 2003, the Company entered into a credit agreement (the “Agreement”) with a consortium of banks that provides it with a $60.0 million unsecured revolving line of credit. This line of credit has a $20.0 million limit for letters of credit and a $5.0 million limit for same day advances. The interest rate under the Agreement is the London InterBank Offered Rate which is increased by a factor that is based on the Company’s leverage ratio.

The Agreement provides that the Company must satisfy certain specified financial covenants which include a fixed charge coverage ratio, leverage ratio, current ratio and minimum net worth requirements, as defined in the Agreement. The Agreement also places restrictions on the Company’s ability to, among other things, sell assets, participate in mergers, incur debt, pay dividends, and make investments or guarantees. The Agreement has a maturity date of March 5, 2006. During the fiscal 2003 first quarter, the Company paid $0.5 million in financing costs associated with obtaining its new credit facility, which was being amortized over the life of the Agreement. In the fiscal 2004 third quarter, unamortized financing costs of approximately $0.3 million were charged to expense because the Company anticipates entering into a new financing agreement in the fiscal 2004 fourth quarter.

The Company had $1.7 million and $0.3 million in outstanding letters of credit at October 30, 2004 and January 31, 2004, respectively.

8. Net Income Per Share

The following is a reconciliation of net income and the number of shares of Common Stock used in the computations of net income per basic and diluted share (in thousands except for per share data and anti-dilutive stock option data):

	Three months ended				Nine months ended
	Oct. 30,		Nov. 1,		Oct. 30,		Nov. 1,
	2004		2003		2004		2003

Net income	$	9,419	$	5,603	$	18,280	$	6,094

Shares used to determine net income per basic share(1)	40,220		36,194		38,495		36,066

Net effect of dilutive stock options(1)(2)	1,307		636		1,352		398

Shares used to determine net income per diluted share(1)	41,527		36,830		39,847		36,464

Net income per share
Basic	$	0.23	$	0.15	$	0.47	$	0.17
Diluted	$	0.23	$	0.15	$	0.46	$	0.17

(1) The shares of Common Stock outstanding and dilutive and anti-dilutive share amounts for all periods presented reflect three 50% stock dividends, each having the effect of a 3-for-2 stock split, declared by the Board of Directors on December 19, 2002, August 4, 2003 and June 14, 2004.

(2) The number of anti-dilutive stock options excluded from the above computations were 0 and 550,000 for the three months ended October 30, 2004 and November 1, 2003, respectively, and were 54,000 and 999,000 for the nine months ended October 30, 2004 and November 1, 2003, respectively.

9. Commitments

The Company leases its Distribution Center, Coeur d’Alene, Idaho Call Center, retail and outlet store space as well as certain other property and equipment under operating leases. Certain lease agreements are noncancellable with aggregate minimum lease payment requirements, contain escalation clauses and renewal options, and set forth incremental rental payments based on store sales above specified minimums (“contingent rental payments”).

The Company incurred aggregate rent expense under its operating leases of $6.7 million and $5.2 million, including contingent rent expense of $34,000 and $70,000, for the third quarters of fiscal 2004 and fiscal 2003, respectively. The Company incurred aggregate

rent expense under its operating leases of $18.8 million and $14.8 million, including contingent rent expense of $95,000 and $107,000, for the first nine months of fiscal 2004 and fiscal 2003, respectively.

As of October 30, 2004, the Company’s minimum lease payment requirements, which include the predetermined fixed escalations of the minimum rentals and exclude contingent rental payments and the amortization of lease incentives, were as follows (in thousands):

Remainder of 2004	$	6,808
Fiscal 2005	28,414
Fiscal 2006	29,158
Fiscal 2007	29,309
Fiscal 2008	28,385
Fiscal 2009	27,295
Thereafter	103,810
Total	$	253,179

Additionally, the Company had inventory purchase commitments of approximately $113.9 million and $85.4 million at October 30, 2004 and November 1, 2003, respectively.

10. Contingencies

The Company and its subsidiaries are periodically involved in litigation and administrative proceedings primarily arising in the normal course of its business. In addition, from time to time the Company has received claims that its products and/or the manner in which it conducts its business infringes on the intellectual property rights of third parties. In particular, a lawsuit has been filed that claims the Company infringed on various intellectual property patents. In the opinion of management, the Company’s gross liability, if any, and without any consideration given to the availability of insurance or other indemnification, under any pending litigation or administrative proceedings, including the recently filed lawsuit, would not materially affect its consolidated financial position, results of operations or cash flows.

The Company had accrued $1.1 million for expected tax liabilities resulting from an error in its Canadian tax returns related to refunds of the Canadian Goods and Services Tax, known as GST. Subsequent to the fiscal 2004 third quarter, the Canadian taxing authorities completed their review of the Company’s GST returns and determined that the Company owes approximately $1.2 million. Since then, the Company has remitted to the Canadian taxing authorities the majority of the $1.2 million pending finalization of the amount.

The Company collects sales taxes from customers transacting purchases in states in which the Company has physically based some portion of its business. The Company also pays applicable corporate income, franchise and other taxes to states in which retail or outlet stores are physically located. Upon entering a new state, the Company accrues and remits the applicable taxes. The Company has accrued for these taxes based on its current interpretation of the tax code as written. Failure to properly determine or to timely remit these taxes may result in interest and related penalties being assessed.

11. Segment Reporting

The Company’s executive management, being its chief operating decision makers, work together to allocate resources and assess the performance of the Company’s business. The Company’s executive management manages the Company as two distinct operating segments, Direct and Retail. Although offering customers substantially similar merchandise, the Company’s Direct and Retail operating segments have distinct management, marketing and operating strategies and processes.

The Company’s executive management assesses the performance of each operating segment based on an “operating contribution” measure, which is defined as net sales less the cost of merchandise and related acquisition costs and certain directly identifiable and allocable operating costs, as described below. For the Direct Segment, these operating costs primarily consist of catalog development, production, and circulation costs, e-commerce advertising costs and order processing costs. For the Retail Segment, these operating costs primarily consist of store selling and occupancy costs. Operating contribution less corporate and other expenses is equal

to income before interest and taxes. Corporate and other expenses consist of unallocated shared-service costs and general and administrative expenses. Unallocated shared-service costs include merchandising, distribution, inventory planning and quality assurance costs as well as corporate occupancy costs. General and administrative expenses include costs associated with general corporate management and shared departmental services (e.g., finance, accounting, data processing and human resources).

Operating segment assets are those directly used in or clearly allocable to an operating segment’s operations. For the Retail Segment, these assets primarily include inventory, fixtures and leasehold improvements. For the Direct Segment, these assets primarily include inventory and prepaid and deferred catalog costs. Corporate and other assets include corporate headquarters, merchandise distribution and shared technology infrastructure as well as corporate cash and cash equivalents and prepaid expenses. Operating segment depreciation and amortization and capital expenditures are correspondingly allocated to each operating segment. Corporate and other depreciation and amortization and capital expenditures are related to corporate headquarters, merchandise distribution, and technology infrastructure.

The following tables provide certain financial data for the Company’s Direct and Retail Segments as well as reconciliations to the Company’s consolidated financial statements. The accounting policies of the operating segments are the same as those described in Note 2 — “Significant Accounting Policies”.

	Three Months Ended						Nine Months Ended
	Oct. 30,			Nov. 1,			Oct. 30,			Nov. 1,
	2004			2003			2004			2003

Net sales(1):
Retail	$	80,114		$	54,322		$	197,889		$	128,224
Direct	70,390			83,830			188,290			221,786
Consolidated net sales	$	150,504		$	138,152		$	386,179		$	350,010

Operating contribution:
Retail	$	17,312		$	9,262		$	35,807		$	13,512
Direct	14,847			13,208			39,530			33,274
Total operating contribution	32,159			22,470			75,337			46,786
Corporate and other	(16,423		)	(13,525		)	(45,172		)	(36,923		)
Consolidated income from operations	$	15,736		$	8,945		$	30,165		$	9,863

Depreciation and amortization:
Retail	$	3,184		$	2,128		$	8,610		$	5,891
Direct	115			378			379			1,320
Corporate and other	1,920			1,669			5,443			5,267
Consolidated depreciation and amortization	$	5,219		$	4,175		$	14,432		$	12,478

Total assets:
Retail							$	143,513		$	103,271
Direct							55,125			51,231
Corporate and other assets							156,302			71,639
Consolidated total assets							354,940			226,141

Capital expenditures:
Retail	$	12,829		$	9,403		$	30,050		$	18,273
Direct	915			223			2,376			1,793
Corporate and other	2,591			1,042			5,222			2,696
Consolidated capital expenditures	$	16,335		$	10,668		$	37,648		$	22,762

Item 2. 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 Quarterly Report on Form 10-Q and in our most recent Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004. 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. We currently operate in two reportable operating segments, our direct segment and our retail segment. 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 three 50% stock dividends, each having the effect of a 3-for-2 stock split, declared by our Board of Directors on December 19, 2002, August 4, 2003 and June 14, 2004. These stock dividends have the combined effect of a 3.375-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 35 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 retail segment, which consists of our expanding base of retail stores, our outlet stores and our resort 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 the fiscal 2004 third quarter, we mailed 26.4 million catalogs. Our full-scale e-commerce website, www.coldwatercreek.com, cost-effectively expands our customer base and provides another convenient shopping alternative for our customers. We currently have a database of approximately 2.0 million e-mail addresses to which we regularly send customized e-mails.

We expect our retail business, which represented over 53% of our total net sales in the fiscal 2004 third quarter, to be the key driver of our growth strategy. As of October 30, 2004, we operated 107 full-line retail stores as well as two resort stores and 19 merchandise clearance outlet stores in 99 markets. We have opened a total of 48 new stores in fiscal 2004, including seven retail stores opened during the fiscal 2004 fourth quarter. We do not plan to open any additional stores during the remainder of the fiscal 2004 fourth quarter. We currently plan to open approximately 60 new stores in fiscal 2005 which is an increase of 20% over the 50 stores we had originally planned to open during fiscal 2005. We have increased the number of stores we plan to open in fiscal 2005 because we believe there is an opportunity for our brand to gain market share by putting new stores in additional markets during the coming year. Over the past four years, we have refined 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 roll-out;

• 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.

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 segment generated $80.1 million in net sales and represented 53.2% of total net sales, for the fiscal 2004 third quarter.

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 450 to 500 stores in up to 300 identified markets nationwide over the next six to eight years. At October 30, 2004, we operated 107 stores and we have since opened an additional seven stores in the fiscal 2004 fourth quarter for a total of 114 stores currently in operation. We do not plan to open any additional stores during the remainder of the fiscal 2004 fourth quarter. We currently plan to open approximately 60 new stores in fiscal 2005 which is an increase of 20% over the 50 stores we had originally planned to open during fiscal 2005. We are in the process of securing appropriate sites for these planned stores.

After fiscal 2005 it is our current intention to continue to open new stores at our current pace, although we do not maintain a specific roll-out plan beyond a two-year horizon. We continually reassess our store roll-out 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, as we did in fiscal 2004 and plan to do in fiscal 2005, 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 roll-out 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.

During fiscal 2003 we introduced 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 18 stores open in this model, six of which have been open for a full year as of the date of this report.

For the twelve months ended October 30, 2004, our 56 full-line stores that had been open at least 13 months averaged 6,666 square feet and net sales per square foot of approximately $486. Most of these stores have been open for one to two years.

Outlet Stores and Resort Stores

We currently operate 19 outlet stores where we sell excess inventory. We do not plan to open any additional outlet stores during the remainder of fiscal 2004. We currently plan to open three outlet stores in fiscal 2005. 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 resort stores in Sandpoint, Idaho and Jackson, Wyoming.

Direct Segment Operations

Our direct segment includes our catalog and e-commerce businesses. Our direct segment generated $70.4 million in net sales, or 46.8% of our total net sales, for the fiscal 2004 third quarter. As we continue to roll-out 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.

Our Catalogs

For the fiscal 2004 third quarter, our catalog business generated $31.4 million in net sales, or 20.8% 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. In August 2004, we began offering a new line of active-wear apparel merchandise under the Sport catalog 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. In the fiscal 2004 third quarter, we mailed 26.4 million catalogs, down 38.1% from the 42.7 million catalogs mailed in the fiscal 2003 third quarter. However, in fiscal 2003, we mailed approximately 11.0 million of our first Northcountry holiday catalogs in late October which fell in the fiscal 2003 third quarter. This year, we mailed our first Northcountry holiday catalogs in early November which fell in the fiscal 2004 fourth quarter. Excluding the approximately 11.0 million catalogs associated with our first fiscal 2003 Northcountry holiday catalog, we decreased our catalog mailings by 16.0%, to 26.4 million in the fiscal 2004 third quarter from 31.4 million in the fiscal 2003 third quarter. During fiscal 2005, we expect our total catalog mailings as well as the ratio of mailings to our existing customers versus mailings to prospective customers to be comparable with the fiscal 2004 mailings, subject to fluctuations between quarters due to variations in mailing dates. Although we anticipate forgoing 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.

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, including the merchandise offered in our new Sport catalog, and our retail stores. It also serves as an efficient promotional vehicle for the disposition of excess inventory.

In the fiscal 2004 third quarter, our e-commerce net sales were $39.0 million and represented 25.9% of total net sales. As of October 30, 2004, we had approximately 2.0 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 popular Internet search engines and consumer and charitable websites provide hotlink access to our website.

Results of Operations

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

	Three months ended				Nine months ended
	Oct. 30,		Nov. 1,		Oct. 30,		Nov. 1,
	2004		2003		2004		2003

Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	54.1	%	58.8	%	55.9	%	60.9	%
Gross profit	45.9	%	41.2	%	44.1	%	39.1	%
Selling, general and administrative expenses	35.5	%	34.7	%	36.3	%	36.2	%
Income from operations	10.5	%	6.5	%	7.8	%	2.8	%
Interest, net, and other	(0.1	)%	0.0	%	0.0	%	0.0	%
Income before income taxes	10.3	%	6.5	%	7.8	%	2.8	%
Income tax provision	4.1	%	2.4	%	3.1	%	1.0	%
Net income	6.3	%	4.1	%	4.7	%	1.7	%

Comparison of the Three- and Nine-Month Periods Ended October 30, 2004 with the Three- and Nine-Month Periods Ended November 1, 2003:

Consolidated Results of Operations

Net Sales. Our consolidated net sales for the fiscal 2004 third quarter and first nine months increased by $12.4 million and $36.2 million, respectively.

For the fiscal 2004 third quarter, the increase was primarily due to incremental net sales of $25.2 million contributed by our retail stores, and to increases of $0.7 million, or 2.2%, in full-price Internet net sales and $0.6 million, or 7.5%, in outlet store net sales. These positive impacts were partially offset by decreases of $11.2 million, or 27.7%, in full-price catalog net sales, $2.2 million, or 50.4%, in clearance catalog net sales and $0.7 million, or 8.3%, in Internet clearance net sales.

For the first nine months of fiscal 2004, the increase was primarily due to incremental net sales of $67.3 million contributed by our retail stores, and to increases of $4.5 million, or 6.2%, in full-price Internet net sales and $2.3 million, or 12.2%, in outlet store net sales. These positive impacts were partially offset by decreases of $30.1 million, or 27.0%, in full-price catalog net sales, $4.7 million, or 39.4%, in clearance catalog net sales and $3.2 million, or 12.1%, in Internet clearance net sales.

Gross Profit Our consolidated gross profit dollars for the fiscal 2004 third quarter and first nine months increased by $12.2 million, or 21.4%, to $69.1 million, and by $33.7 million, or 24.6%, to $170.4 million, respectively. Our consolidated gross profit rate for the fiscal 2004 third quarter and first nine months increased to 45.9% and to 44.1%, respectively.

The increases in our consolidated gross profit dollars and rate were primarily attributable to an aggregate improvement in merchandise margins of 6.7 percentage points and 6.2 percentage points on sales in all channels for the fiscal 2004 third quarter and first nine months, respectively. Merchandise margins on full-price direct segment sales improved approximately 3.9 percentage points in both the fiscal 2004 third quarter and first nine months due to fewer sales discounts offered in fiscal 2004 compared with fiscal 2003. Merchandise margins on full-price retail sales increased 4.8 percentage points and 4.4 percentage points in the fiscal 2004 third quarter and first nine months, respectively. The merchandise margins on our clearance sales improved by 9.8 percentage points and 7.9 percentage points in the fiscal 2004 third quarter and first nine months respectively. The improvement in merchandise margins on our clearance sales in both the three- and nine-months periods of fiscal 2004 is attributable to strong full-price selling and on our focus on identifying slow moving merchandise more quickly which has enabled us to offer discounted merchandise when it is more seasonally appropriate.

Also contributing to the increases in our consolidated gross profit rate were improvements of 1.1 percentage points and 2.4 percentage points in the leveraging of our retail store occupancy costs in the fiscal 2004 third quarter and first nine months, respectively. We were able to leverage our retail store occupancy costs during these periods primarily due to improved net sales at our retail stores. Additionally, decreases in the percentage of total net sales contributed by clearance sales compared with full-price sales contributed to these increases in our consolidated gross profit rate. Clearance sales comprised approximately 13% and 14% of our total net sales in the fiscal 2004 third quarter and first nine months, respectively, compared with approximately 16% of our total net sales in both the fiscal 2003 third quarter and first nine months.

We recognized $1.3 million and $3.2 million of vendor rebates during the fiscal 2004 third quarter and first nine months, respectively, versus $0.2 million and $1.5 million in the fiscal 2003 third quarter and first nine months, respectively. These rebates were credited to cost of sales as the related merchandise was sold. The increases in the vendor rebates in the fiscal 2004 third quarter and first nine months were due to our continuing efforts to negotiate agreements with merchandise vendors.

Selling, General and Administrative Expenses. Our consolidated selling, general and administrative expenses for the fiscal 2004 third quarter were $53.4 million, an increase of $5.4 million over the fiscal 2003 third quarter, and were $140.2 million for the first nine months of fiscal 2004, an increase of $13.4 million over the first nine months of fiscal 2003. Our consolidated selling, general and administrative expenses for both the fiscal 2004 third quarter and first nine months were negatively impacted by increased personnel costs, primarily consisting of retail administrative staff wages, store employee wages, related taxes and employee benefits associated with our retail expansion. These personnel costs increased $4.2 million, or 51.9%, and $11.6 million, or 57.1%, in the fiscal 2004 third quarter and first nine months, respectively, from the comparable periods in the prior year. Additionally, incentive compensation expense which is based on corporate performance increased $2.2 million and $4.2 million in the fiscal 2004 third quarter and first nine months, respectively. Partially offsetting these negative impacts were reduced costs associated with catalog mailings of approximately $2.8 million and approximately $8.5 million for the fiscal 2004 third quarter and first nine months, respectively. Excluding the approximately 11.0 million catalogs associated with our first fiscal 2003 Northcountry holiday catalog, we decreased our catalog mailings by 16.0% and by 19.0% in the fiscal 2004 third quarter and first nine months, respectively, from the comparable periods last year. In fiscal 2003, we mailed approximately 11.0 million of our first Northcountry holiday catalogs in late October which fell in the fiscal 2003 third quarter. This year, we mailed our first Northcountry holiday catalogs in early November which fell in the fiscal 2004 fourth quarter.

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 increased to 35.5% and to 36.3% for fiscal 2004 third quarter and first nine months, respectively. The increase was primarily due to the additional incentive compensation expense incurred during both the three and nine month periods of fiscal 2004 which was discussed in the preceding paragraph. Also contributing to the increase in the fiscal 2004 third quarter were reduced response rates to catalogs mailed during the fiscal 2004 third quarter. The impact of the reduced response rates was mitigated primarily by our strategic decision to mail more catalogs to our existing customers relative to the total catalog mailings during fiscal 2004 compared with fiscal 2003.

Income Tax Rate. For the fiscal 2004 third quarter our effective income tax rate was 39.5% compared with 37.3% in the fiscal 2003 third quarter. For the first nine months of fiscal 2004 our effective income tax rate was 39.6% compared with 37.4% in the first nine months of fiscal 2003. The rates for both the three- and nine-month periods of fiscal 2003 were lower than the corresponding fiscal 2004 periods’ rates because, in the fiscal 2003 third quarter, we reversed an accrual for approximately $0.2 million related to certain income taxes.

Operating Segment Results

Net Sales. The following table summarizes our net sales by segment (in thousands):

	Three Months Ended
			% of				% of		Change
	Oct. 30, 2004		Total		Nov. 1, 2003		Total		$			%

Retail	$	80,114	53.2	%	$	54,322	39.3	%	$	25,792		47.5	%
Catalog	31,368		20.8	%	44,749		32.4	%	(13,381		)	(29.9	)%
Internet	39,022		25.9	%	39,081		28.3	%	(59		)	(0.2	)%
Direct	70,390		46.8	%	83,830		60.7	%	(13,440		)	(16.0	)%
Total	$	150,504	100.0	%	$	138,152	100.0	%	$	12,352		8.9	%

	Nine Months Ended
			% of				% of		Change
	Oct. 30, 2004		Total		Nov. 1, 2003		Total		$			%

Retail	$	197,889	51.2	%	$	128,224	36.6	%	$	69,665		54.3	%
Catalog	88,379		22.9	%	123,138		35.2	%	(34,759		)	(28.2	)%
Internet	99,911		25.9	%	98,648		28.2	%	1,263			1.3	%
Direct	188,290		48.8	%	221,786		63.4	%	(33,496		)	(15.1	)%
Total	$	386,179	100.0	%	$	350,010	100.0	%	$	36,169		10.3	%

Our retail segment’s net sales increased $25.8 million, or 47.5%, and increased $69.7 million, or 54.3%, in the fiscal 2004 third quarter and first nine months, respectively, from the same periods a year ago. We primarily attribute these increases to net sales of $25.2 million and $67.3 million contributed by our retail stores in the fiscal 2004 third quarter and first nine months, respectively. Also contributing to the increases in our retail segment’s net sales, although to a lesser extent, were increases of $0.6 million, or 7.5%, and $2.3 million, or 12.2%, in our outlet store net sales for the fiscal 2004 third quarter and first nine months.

Our direct segment’s net sales decreased in both fiscal 2004 periods primarily due to our strategic decision to mail fewer catalogs in the fiscal 2004 third quarter and first nine months from the same periods a year ago. Excluding the approximately 11.0 million catalogs associated with our first fiscal 2003 Northcountry holiday catalog, we decreased our catalog mailings by 16.0% and by 19.0% in the fiscal 2004 third quarter and first nine months, respectively, from the comparable periods last year. Also negatively impacting our direct segment’s net sales in both fiscal 2004 periods were fewer promotional campaigns in fiscal 2004 than in fiscal 2003, reduced clearance catalog and e-commerce clearance sales and increased direct segment sales returns on full-price sales.

Our direct segment sales returns expressed as a percentage of gross sales increased by 2.4 percentage points and by 2.0 percentage points in the fiscal 2004 third quarter and first nine months, respectively, from the comparable periods last year. We primarily attribute the increase in direct segment sales returns to an increase of 1.8 percentage points and 2.1 percentage points in the percentage of total net sales contributed by apparel sales in the the fiscal 2004 third quarter and first nine months, respectively. Apparel sales typically have higher return rates than sales related to gift and accessory merchandise.

These negative impacts on our direct segment’s net sales were partially offset by increases in full-price e-commerce business net sales of $0.7 million, or 2.2%, in the fiscal 2004 third quarter and $4.5 million, or 6.2%, in the first nine months of fiscal 2004. We believe these increases were the result of our continued efforts to reduce our e-commerce business’ dependence on our catalogs as an advertising medium.

Operating Contribution. The following table summarizes our operating contribution by segment (in thousands):

	Three Months Ended
	Oct. 30,					Nov. 1,					Change
	2004			%		2003			%		$			%

Retail	$	17,312		21.6	%(1)	$	9,262		17.1	%(1)	$	8,050		86.9	%
Direct	14,847			21.1	%(2)	13,208			15.8	%(2)	1,639			12.4	%
Corporate and other	(16,423		)	(10.9	)%(3)	(13,525		)	(9.8	)%(3)	(2,898		)	21.4	%
Consolidated income from operations	$	15,736		10.5	%(3)	$	8,945		6.5	%(3)	$	6,791		75.9	%

	Nine Months Ended
	Oct. 30,					Nov.1,					Change
	2004			%		2003			%		$			%

Retail	$	35,807		18.1	%(1)	$	13,512		10.5	%(1)	$	22,295		165.0	%
Direct	39,530			21.0	%(2)	33,274			15.0	%(2)	6,256			18.8	%
Corporate and other	(45,172		)	(11.7	)%(3)	(36,923		)	(10.5	)%(3)	(8,249		)	22.3	%
Consolidated income from operations	$	30,165		7.8	%(3)	$	9,863		2.8	%(3)	$	20,302		205.8	%

(1) Retail segment operating contribution expressed as a percentage of retail segment net sales.

(2) Direct segment operating contribution expressed as a percentage of direct segment net sales

(3) Corporate and other operating contribution and consolidated income from operations expressed as a percentage of consolidated net sales.

Our retail segment’s operating contribution increased $8.1 million, or 86.9%, and increased $22.3 million, or 165.0%, in the fiscal 2004 third quarter and first nine months, respectively, from the fiscal 2003 periods. We primarily attribute these increases in both fiscal 2004 periods to the 44 retail stores opened since the end of the fiscal 2003 third quarter, to increased merchandise margins on our full-price retail sales and outlet store sales and, to a lesser extent, to improved net sales at our retail stores, which has allowed us to improve the leveraging of retail store occupancy costs. Merchandise margins on full-price sales from our retail segment improved by 4.8 percentage points and by 4.4 percentage points during the fiscal 2004 third quarter and first nine months, respectively, from same periods last year. Merchandise margins on outlet store sales improved by 11.4 percentage points and by 8.8 percentage points during the fiscal 2004 third quarter and first nine months, respectively, from the fiscal 2003 periods. Additionally, we experienced improvements of 1.1 percentage points and 2.4 percentage points in the leveraging of our full-line retail store occupancy costs during the fiscal 2004 third quarter and first nine months, respectively, from the comparable periods last year.

Partially offsetting these positive impacts in both fiscal 2004 periods were increased personnel costs associated with our retail expansion. The personnel costs primarily included administrative and technical support salaries, store employee wages and related taxes and employee benefits. For the fiscal 2004 third quarter, personnel costs impacting our retail segment’s operating contribution increased $4.2 million, or 47.0%. For the first nine months of fiscal 2004, personnel costs impacting our retail segment’s operating contribution increased $11.6 million, or 51.2%.

The increases in our direct segment’s operating contribution are primarily due to improvements in merchandise margins on full-price sales from our catalog and e-commerce businesses of approximately 3.9 percentage points in both the fiscal 2004 third quarter and first nine months. Also contributing to the improvements was a 3.1% increase and a 2.5% increase in our direct segment’s average sales per order for the fiscal 2004 third quarter and first nine months, respectively. Partially offsetting the improvements in the fiscal 2004 third quarter was a decrease of 6.6% in the average response rate to catalogs mailed during the fiscal 2004 third quarter from the comparable period last year. However, our strategic decision to mail more catalogs to our existing customers relative to the total catalog mailings mitigated the negative impact of the reduced average response rate. The percentage of mailings to our existing customers increased 17.1 percentage points and 14.5 percentage points in the fiscal 2004 third quarter and first nine months, respectively, from the same periods a year ago. We generally realize better response rates to mailings to our existing customers than to our prospective customers and have observed falling response rates to catalogs mailed to our prospective customers.

The decreases in our corporate and other operating contribution for both fiscal 2004 periods were primarily due to increases in our administrative and technical support salaries associated with our retail expansion of $1.3 million, or 29.4%, and $3.3 million, or 24.6%, for the fiscal 2004 third quarter and first nine months, respectively. Also, negatively impacting our corporate and other operating contribution in both fiscal 2004 periods were increases in incentive compensation expense, which is based on corporate performance, of $2.2 million, or 2,187.3%, and $4.2 million, or 353.2%, in the fiscal 2004 third quarter and first nine months, respectively. Our corporate and other operating contribution for the fiscal 2004 third quarter and first nine months was also negatively impacted by increases of $0.5 million, or 83.7%, and $1.2 million, or 106.9%, respectively, in advertising expenses designed to promote the Coldwater Creek brand. These negative impacts in both fiscal periods were partially offset by the positive impact of our ongoing cost control initiatives.

Quarterly Results of Operations and Seasonal Influences

As with many apparel retailers, our net sales, operating results, liquidity and cash flows have fluctuated, and will continue to fluctuate as a result of a number of factors, including, the following:

• the composition, size and timing of our various merchandise offerings.

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

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

• customer response to merchandise offerings, including the impact of economic and weather-related influences, the actions of our competitors and similar factors;

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

• overall merchandise return rates, including the impact of actual or perceived service and quality issues;

• market price fluctuations in critical materials and services, including paper, production, postage and telecommunications costs;

• 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.

We alter the composition, magnitude and timing of our merchandise offerings based upon our understanding of prevailing consumer demand, preferences and trends. The timing of our merchandise offerings may be further impacted by, among other factors, the performance of various third parties on which we are dependent and the day of the week on which certain important holidays fall. Additionally, the net sales we realize from a particular merchandise offering may impact more than one fiscal quarter and year and the amount and pattern of the sales realization may differ from that realized by a similar merchandise offering in a prior fiscal quarter or year. The majority of net sales from a merchandise offering generally are realized within the first several weeks after its introduction with an expected significant decline in customer orders thereafter.

Our business materially depends 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. Additionally, as gift items and accessories are more prominently represented in our November and December holiday season merchandise offerings, we typically expect, absent offsetting factors, to realize higher consolidated gross margins in the second half of our fiscal year. If, for any reason, we were to realize significantly 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 will be materially adversely affected. Due to our change in fiscal year end in fiscal 2002, the November and December holiday season falls into our fiscal fourth quarter. Previously, the November portion of the holiday season fell into our fiscal third quarter and the December portion of the holiday season fell into our fiscal fourth quarter. Although our fiscal 2004 second quarter was profitable, it has generally not been profitable in the past and may again become unprofitable in the future.

Liquidity and Capital Resources

In recent fiscal years, we have financed our ongoing operations and growth initiatives primarily from cash flow generated by our operations and trade credit arrangements. However, as we produce catalogs, open retail stores and purchase inventory in anticipation of future sales realization and as our operating cash flows and working capital experience seasonal fluctuations, we may occasionally utilize short-term bank credit.

On March 5, 2003, we entered into a credit agreement with a consortium of banks that provides us with a $60 million unsecured revolving line of credit. This line of credit has a $20.0 million sub-limit for letters of credit and a $5.0 million sub-limit for

same day advances. The interest rate under the agreement is equal to the London InterBank Offered Rate which is increased by a factor that is based on our leverage ratio.

The agreement provides that we must satisfy certain specified financial covenants which include a fixed charge coverage ratio, leverage ratio, current ratio and minimum net worth requirements, as defined in the agreement. The agreement also places restrictions on our ability to, among other things, sell assets, participate in mergers, incur debt, pay dividends, and make investments or guarantees. At October 30, 2004 we were in compliance with these covenants and restrictions. The credit facility has a maturity date of March 5, 2006. During the fiscal 2003 first quarter, we paid $0.5 million in financing costs associated with obtaining our new credit facility, which was being amortized over the life of the agreement. During the fiscal 2004 third quarter, unamortized financing costs of approximately $0.3 million were charged to expense because we anticipate entering into a new financing agreement in the fiscal 2004 fourth quarter. At October 30, 2004, we had $1.7 million in outstanding letters of credit under this agreement.

Our operating activities generated $58.4 million and $13.3 million during the first nine months of fiscal 2004 and the first nine months of fiscal 2003, respectively. On a comparative year-to-year basis, the increase in the first nine months of fiscal 2004 primarily reflects increased accounts payable, increased net income and, to a lesser extent, increased deferred rents. The deferred rents have increased due to our retail expansion. These positive cash flow effects were partially offset by the negative cash flow effect of increased inventory.

Our investing activities consumed $37.5 million and $22.6 million of cash during the first nine months of fiscal 2004 and the first nine months of fiscal 2003, respectively. Cash outlays in these periods were principally for capital expenditures.

Our capital expenditures during the first nine months of fiscal 2004 principally reflect the cost of leasehold improvements, furniture and fixtures and various technology hardware and software additions and upgrades for 41 new retail stores and, to a lesser extent, for soon-to-be-opened and existing retail stores. Our fiscal 2003 year-to-date capital expenditures primarily reflect the cost of leasehold improvements for 22 new retail stores and, to a lesser extent, furniture and fixtures for both new and existing retail stores and various corporate technology hardware and software additions and upgrades.

Our financing activities provided $46.4 million and $0.3 million during the first nine months of fiscal 2004 and the first nine months of fiscal 2003, respectively. Our financing activities during the first nine months of fiscal 2004 primarily reflect net proceeds of $42.1 million from our recent public stock offering. Also, contributing to our financing activities during the fiscal 2004 year-to-date period were proceeds from the exercise of previously granted options to purchase approximately 700,000 shares of common stock at an average exercise price of $5.75 per share. Our financing activities during the first nine months of fiscal 2003 reflect proceeds from the exercise of previously granted options to purchase approximately 248,000 shares of common stock at an average exercise price of $3.40 per share partially offset by $0.5 million in financing costs associated with our new credit facility.

As a result of the foregoing, we had $109.8 million in consolidated working capital at October 30, 2004 compared with $50.7 million at January 31, 2004. Our consolidated current ratio was 1.9 at October 30, 2004 compared with 1.8 at January 31, 2004. We had no outstanding short-term or long-term bank debt at October 30, 2004 or January 31, 2004.

On May 26, 2004, we completed a public offering of 3,360,000 shares of our common stock at a price to the public of $13.67 per share. The net proceeds to us were approximately $42.1 million after deducting underwriting discounts and commissions and our offering expenses. We currently intend to use the net proceeds from the offering to continue to expand our retail operations and for working capital and for other general corporate purposes. Please note that the common share and price per share amounts discussed here have been adjusted to reflect our most recent stock dividend declared by the Board of Directors on June 14, 2004.

At October 30, 2004, we operated 107 stores and we have since opened an additional seven stores in the fiscal 2004 fourth quarter for a total of 114 stores currently in operation. We do not plan to open any additional stores during the remainder of the fiscal 2004 fourth quarter. We currently plan to open approximately 60 new stores in fiscal 2005 which is an increase of 20% over the 50 stores we had orginally planned to open during fiscal 2005. We believe there is an opportunity to open 450 to 500 stores in up to 300 identified markets nationwide over the next six to eight years. The pace, scope and size of our retail store expansion will be influenced by the economic environment, available working capital, our ability to identify and obtain favorable terms on suitable locations for our stores and, if necessary, external financing.

We currently estimate approximately $7.0 million in total capital expenditures for the fiscal 2004 fourth quarter, primarily for the seven full-line retail stores, and, to a substantially lesser extent, various technology additions and upgrades. These expenditures are expected to be funded from operating cash flows and working capital and the proceeds from the public offering of shares of our Common Stock completed on May 26, 2004.

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. Our smaller store model of 3,000 to 4,000 square feet 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 believe that our cash flow from operations, available borrowing capacity under our bank credit facility and the net proceeds from the recent stock offering will be sufficient to fund our current operations and retail store openings under our current store roll-out plan. However, we may be required to seek additional sources of funds if, for example, we decide to accelerate our retail roll-out strategy.

Future Outlook

Due to competition from discount retailers that has put downward pressure on retail prices for women’s apparel, the apparel industry has experienced significant retail price deflation over the past several years. We expect this trend to continue. Furthermore, on December 31, 2004, quota restrictions on the importing of apparel into the United States from foreign countries which are members of the World Trade Organization are expected to expire. The effect this quota expiration will have on global sourcing patterns is uncertain but is likely to continue the retail price deflation. We currently believe that our sourcing strategy will allow us to adjust to potential shifts in availability of apparel following the expiration of these quotas.

We expect our retail segment to be the key driver of our growth in the future. In the near term, we do not expect growth in our catalog business as we roll-out our retail strategy, and we expect our retail and direct segments will continue to each represent approximately 50% of net sales in fiscal 2004. During fiscal 2005, we expect our total catalog mailings as well as the ratio of mailings to our existing customers versus mailings to prospective customers to be comparable with the fiscal 2004 mailings. At the same time, we expect to increase mailings to our retail customers in fiscal 2004 to promote our retail stores. As our retail business grows, we will add additional overhead. However, we expect our sales dollar growth to outpace our addition of infrastructure expenses. Consequently, we believe that our retail expansion will increase our overall profitability.

Other Matters

Critical Accounting Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect:

• the reported amounts and timing of revenue and expenses;

• the reported amounts and classification of assets and liabilities; and

• the disclosure of contingent assets and liabilities.

These estimates and assumptions are based on our historical results as well as our future expectations. Our actual results could vary from our estimates and assumptions.

The accounting policies listed below are those that we believe are the most critical to our consolidated financial condition and results of operations. They are also the accounting policies that typically require our most difficult, subjective and complex judgments and estimates, often for matters that are inherently uncertain. With respect to our critical accounting policies, even a relatively minor variance between our actual and expected experience can potentially have a materially favorable or unfavorable impact on our subsequent consolidated results of operations.

• Revenue Recognition and Sales Return Estimate

• Inventories

• Catalog Costs

During the first nine months of fiscal 2004, there were no changes in the above critical accounting policies.

Off-Balance Sheet Liabilities and Other Contractual Obligations

Our off-balance sheet liabilities primarily consist of lease payment obligations incurred under operating leases, which are required to be excluded from our consolidated balance sheet by accounting principles generally accepted in the United States. Our only individually significant operating lease is for our distribution center and call center located in Mineral Wells, West Virginia. Our off-balance sheet liabilities also include our inventory purchase orders which represent agreements to purchase inventory that are legally binding and that specify all significant terms. All of our other operating leases pertain to our retail and outlet stores, our Coeur d’Alene, Idaho call center and to various equipment and technology.

The following tables summarize our minimum contractual commitments and commercial obligations as of October 30, 2004:

	Payments Due in Period
	Total		Remainder of 2004		2005-2006		2007-2008		2009		Thereafter
	(In thousands)
Contractual Obligations
Operating leases(a)	$	253,179	$	6,808	$	57,572	$	57,694	$	27,295	$	103,810
Inventory purchase orders	113,905		61,880		52,025		—		—		—
Total	$	367,084	$	68,688	$	109,597	$	57,694	$	27,295	$	103,810

(a) We lease our retail store space as well as other property and equipment under operating leases. Our retail store leases require percentage rentals on sales above specified minimums. These operating lease obligations do not include contingent rental expense we may incur based on future sales above the specified minimums. Some lease agreements provide us with the option to renew the lease. Our future operating lease obligations would change if we exercised these renewal options.

	Payments Due in Period
	Total		Remainder of 2004		2005-2006		2007-2008		2009		Thereafter
	(In thousands)
Commercial Commitments
Letters of Credit	$	1,656	$	717	$	939	$	—	$	—	$	—
Total	$	1,656	$	717	$	939	$	—	$	—	$	—

Risk Factors

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

The key driver of our growth strategy is our retail store expansion. At October 30, 2004, we operated 107 stores and we have since opened an additional seven stores in the fiscal 2004 fourth quarter for a total of 114 stores currently in operation. We do not plan to open any additional stores during the remainder of the fiscal 2004 fourth quarter. We currently plan to open approximately 60 new stores in fiscal 2005 which is an increase of 20% over the 50 stores we had originally planned to open during fiscal 2005. We believe we have the potential to open 450 to 500 retail stores over the next six to eight years. 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 roll-out 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 roll-out, 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.

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 significantly increase our catalog production costs and 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. In addition, a portion of our catalog mailings are to prospective customers. These mailings involve risks not present in mailings to our existing customers, including lower and less predictable response rates. 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 timely mail our catalogs.

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 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;

• 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.

On December 31, 2004, quota restrictions on the importing of apparel into the United States from foreign countries which are members of the World Trade Organization are expected to expire. The effect this quota expiration will have on global sourcing patterns is uncertain but is likely to continue the retail price deflation. We currently believe that our sourcing strategy will allow us to adjust to potential shifts in availability of apparel following the expiration of these quotas.

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;

• 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 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 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 $7.57 per share and $3.58 per share, respectively, during the fiscal year ended February 1, 2003, and were $9.81 per share and $5.86 per share, respectively, during the fiscal year ended January 31, 2004. The reported high and low closing sale prices of our common stock were $23.27 per share and $16.55 per share, respectively, during the fiscal 2004 third quarter. In addition, the Nasdaq National Market has experienced a high level of price and volume volatility and market prices for the stock of many companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have not been materially impacted by fluctuations in foreign currency exchange rates as substantially all of our business is transacted in, and is expected to continue to be transacted in, U.S. dollars or U.S. dollar-based currencies. We have only been minimally impacted by fluctuations in interest rates as a result of our relatively modest bank borrowings in recent fiscal years. During the nine-month period ended October 30, 2004, we did not have borrowings under our credit facility and, consequently, did not have any material exposure to interest rate market risks during or at the end of the nine-month period ended October 30, 2004. However, as any future borrowings under our new bank credit facility will be at a variable rate of interest, we could potentially be materially adversely impacted should we require significant borrowings in the future, particularly during a period of rising interest rates. We have not used, and currently do not anticipate using, any derivative financial instruments.

	Page
PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited)	3

Consolidated Balance Sheets at October 30, 2004 and January 31, 2004	4

Consolidated Statements of Operations for the three- and nine-month periods ended October 30, 2004 and November 1, 2003	5

Consolidated Statements of Cash Flows for the nine-month periods ended October 30, 2004 and November 1, 2003	6

Notes to the Consolidated Financial Statements (unaudited)	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3. Quantitative and Qualitative Disclosures About Market Risk	32

Item 4. Controls and Procedures	33

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3. Defaults Upon Senior Securities	34

Item 4. Submission of Matters to a Vote of Security Holders	34

Item 5. Other Information	34

Item 6. Exhibits	35

Exhibit
Number		Description of Document
3.1		Certificate of Amendment of Amended and Restated Certificate of Incorporation
10.1		2004 Salaried Employee Performance Incentive Award Program
31.1		Certification by Dennis C. Pence of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2		Certification by Melvin Dick of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32.1		Certification by Dennis C. Pence and Melvin Dick pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	COLDWATER CREEK INC.

	By:	/s/ MELVIN DICK
		Executive Vice-President and Chief Financial Officer (Principal Financial Officer)

	By:	/s/ DENNIS C. PENCE
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ DUANE A. HUESERS
		Vice President of Finance (Principal Accounting Officer)