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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Fiscal Quarter Ended May 3, 2003

OR

Commission File Number 0-21915

COLDWATER CREEK INC.

(Exact name of registrant as specified in its charter)

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  x  NO  ¨        

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

YES  x  NO  ¨        

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

INDEX TO FORM 10-Q

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PART I. FINANCIAL INFORMATION

Item  1. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

COLDWATER CREEK INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except for share data)

The accompanying notes are an intregral part of these financial statements.

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COLDWATER CREEK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands except for per share data)

The accompanying notes are an intregral part of these financial statements.

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COLDWATER CREEK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

The accompanying notes are an intregral part of these financial statements.

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COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Interim Consolidated Financial Statements

Nature of Business and Organizational Structure

Coldwater Creek Inc., together with its wholly-owned subsidiaries (the “Company”), a Delaware corporation headquartered in Sandpoint, Idaho, is a triple-sales channel, two-operating segment retailer of women’s apparel, jewelry, footwear, gift items and home merchandise. The Company’s Direct Segment encompasses its traditional catalog business and Internet-based e-commerce business, whereas its Retail Segment encompasses its expanding base of full-line retail stores as well as its clearance outlet stores.

The Company has three wholly owned subsidiaries. Two of these subsidiaries currently have no substantive assets, liabilities, revenues or expenses. The third subsidiary, Aspenwood Advertising, Inc., produces, designs and distributes catalogs and other advertising materials used in Coldwater Creek’s business.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material 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. Historically, the Company’s fiscal year ended on the Saturday nearest February 28^th. However, on December 16, 2002, the Company’s board of directors approved a change in the Company’s fiscal year end from the Saturday nearest February 28^th to the Saturday nearest January 31^st, effective in 2003. The last day of fiscal year 2002, therefore, was February 1, 2003.

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 herein to three-month periods, or fiscal quarters refer to the respective 13 weeks ended on the date indicated.

Preparation of Interim Consolidated Financial Statements

The interim consolidated financial statements included herein have been prepared by the management of Coldwater Creek Inc., without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission and, in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows for the periods presented. 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 pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The consolidated financial position, results of operations and cash flows for the interim periods depicted herein are not necessarily indicative of that to be realized in future interim periods or for the fiscal year in its entirety. As these consolidated financial statements are condensed, they should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended February 1, 2003.

Use of Estimates

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 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 the Company’s historical results as well as management’s future expectations. The Company’s actual results could vary from management’s estimates and assumptions.

Reclassifications

Certain amounts in the accompanying consolidated financial statements for the comparative prior fiscal year’s interim periods have been reclassified to be consistent with the current fiscal year’s interim presentations.

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In particular, during the fiscal 2003 first quarter, the Company began classifying its outlet store business and the revenue generated from phone and Internet orders originating at its retail stores as components of its Retail Segment. The Company made these reclassifications to reflect the manner in which the Company’s segments are currently managed. Previously, the Company’s outlet store business and the revenue generated from phone and Internet orders originating at the Company’s retail stores were managed and classified as components of its Direct Segment. The Company has reclassified all prior period financial statements on a consistent basis. These reclassifications had no impact on the Company’s consolidated net sales, net income, retained earnings or cash flows for any period.

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

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:

The above effects of applying SFAS No. 123 are not indicative of future amounts. Additional awards in future years are anticipated. In calculating the preceding, the fair value of each option granted during the first three-months of fiscal 2003 and fiscal 2002 was estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions:

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Recently Adopted Accounting Standards

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”), which sets forth the financial accounting and reporting to be followed for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company adopted SFAS No. 143, effective February 2, 2003 for its fiscal 2003 consolidated financial statements with no material impact.

In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF No. 94-3”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and initially measured at fair value. EITF No. 94-3 required that a liability for an exit cost (as defined in EITF No. 94-3) was recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company would be impacted by SFAS No. 146 only if it were to commit to a plan for an exit or disposal activity. Currently, the Company has not committed to a plan for an exit or disposal activity.

In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123” (“SFAS No. 148”). This Statement amends FASB Statement No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. In fiscal 2002, the Company adopted the disclosure requirements of SFAS No. 148. However, the Company, at this time, does not intend to change to the fair value based method of accounting for stock-based employee compensation.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” The primary objectives of FIN 46 are to provide guidance on the identification of, and financial reporting for, entities for which control is achieved through means other than through voting rights; such entities are known as variable-interest entities (“VIEs”). FIN 46 is effective for VIEs which are created after January 31, 2003 and for all VIEs for the first fiscal year or interim period beginning after June 15, 2003. The Company has evaluated the provisions of FIN 46 and believes that this interpretation will have no material effect on its consolidated financial statements.

2. Receivables

Receivables consist of the following:

The Company evaluates the credit risk associated with its receivables. At May 3, 2003 and February 1, 2003, no allowance for doubtful receivables was deemed necessary.

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3. Accrued Liabilities

Accrued liabilities consist of the following:

4. Executive Loan and Deferred Compensation Programs

Prior to the enactment of the Sarbanes-Oxley Act (“the Act”), the Company maintained an Executive Loan Program under which the Company made, at its sole discretion and with prior approvals from the Chief Executive Officer and the Board of Directors’ Compensation Committee, secured long-term loans to key executives other than the Company’s founders, Dennis Pence and Ann Pence. Each loan is secured by the executive’s personal net assets, inclusive of all vested stock options in the Company, bears interest at three percent per annum, and becomes due and payable on the earlier of (i) the date ten days before the date on which the vested stock options serving as partial security expire or (ii) 90 days from the date on which the executive’s employment with the Company terminates for any reason. Outstanding loans were $0.5 million at both May 3, 2003 and February 1, 2003, respectively. None of the loans outstanding prior to enactment of the Act have had any of their terms modified.

During fiscal 2000 and 2001, the Compensation Committee of the Company’s Board of Directors authorized compensation bonus pools totaling $250,000 and $75,000, respectively, as additional incentives to retain certain designated key employees. The Company is accruing the related compensation expense to each designated key employee on a straight-line basis over a 24-month period based on specified performance criteria. During fiscal 2002, the $250,000 compensation bonus pool was considered earned and was paid in full. During the fiscal 2003 first quarter, $50,000 of the $75,000 compensation bonus pool was considered earned and was paid in full. The remaining balance in this 2001 pool will be payable provided certain specified performance criteria are met over the preceding 24-month period.

On March 15, 2002, the Compensation Committee of the Board of Directors authorized retention compensation incentive agreements for two designated key employees in the aggregate amount of $900,000. On September 1, 2002, the Compensation Committee of the Board of Directors amended the agreements for the two previously designated key employees and authorized one additional key employee to receive a retention compensation incentive. Currently, the aggregate amount of the three agreements is $1,875,000. The Company accrued the compensation expense related to the original aggregate amount of $900,000 on a straight-line basis through September 1, 2002. The Company is accruing the remaining portion of the original aggregate amount of $900,000 and the additional amount of $975,000 on a straight-line basis over the re-established 36-month retention period based on specified performance criteria and the current expectation that the specified performance criteria will be met.

Additionally, on March 22, 2003, the Compensation Committee of the Board of Directors authorized retention compensation incentive agreements for seven designated key employees in the aggregate amount of $975,000. The Company is accruing the related compensation expense on a straight-line basis over a 36-month retention period based on specified performance criteria and the current expectation that the specified performance criteria will be met.

5. Arrangements with Principal Shareholders

In light of the Company not achieving its financial goals for fiscal 2001, the Company’s principal shareholders, Dennis Pence and Ann Pence, declined to accept any salaries for their executive management services from the beginning of fiscal 2002 through September 26, 2002 and through September 1, 2002, respectively. As required by generally accepted accounting principles in the United States, the Company imputed on a straight-line basis into its consolidated SG&A expenses the fair market value of salaries for Dennis Pence and Ann Pence for these periods with corresponding offsetting credits to its consolidated additional paid-in capital. During the first quarter of fiscal 2002, approximately $100,000 was imputed into the Company’s consolidated SG&A expenses.

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Dennis Pence and Ann Pence personally participate in a jet timeshare program. For flights by them and other corporate executives made exclusively for official corporate purposes, the Company reimburses them for (i) a usage based pro rata portion of the financing costs, (ii) a usage based pro rata portion of monthly maintenance fees, and (iii) actual hourly usage fees. Aggregate expense reimbursements totaled $178,000 and $372,000 for the first quarters of fiscal 2003 and 2002, respectively.

6. Revolving Line of Credit

The Company was party to an agreement with a consortium of banks that provided it with an $80.0 million unsecured revolving credit facility (with a sub-limit of $10.0 million for letters of credit) and a term standby letter of credit of $1.1 million. The credit facility had a maturity date of July 31, 2003. During the fiscal 2003 first quarter, the Company entered into a new credit agreement (the Agreement), which replaced the prior credit facility, with a consortium of banks effective March 5, 2003, that provides it with a $60.0 million unsecured revolving credit facility (with a sub-limit of $20.0 million for letters of credit and a $5.0 million sub-limit for same day advances) and a term standby letter of credit of $1.1 million. The interest rate under the Agreement is LIBOR Rate [i.e., LIBOR divided by one minus the Reserve Requirement, increased or decreased by a margin based upon the Company’s then leverage ratio, as defined in the Agreement]. The Agreement provides that the Company must satisfy certain specified EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), EBITDAR (i.e., EBITDA before rental/lease expenses), 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 credit facility has a maturity date of March 4, 2006. During the fiscal 2003 first quarter, the Company incurred $0.5 million in financing costs associated with obtaining its new credit facility.

The Company had $0.8 million and $0.7 in outstanding letters of credit for merchandise purchases at May 3, 2003 and February 1, 2003, respectively.

7. Net Income Per Share

The following is a reconciliation of net income (numerator) and the number of common shares (denominator) used in the computations of net income per basic and diluted common share (in thousands):

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8. Commitments

The Company leases its East Coast Operations 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 $4,740,000 and $3,582,000 for the first quarters of fiscal 2003 and fiscal 2002, respectively. The Company incurred no contingent rent expense during the first quarters of fiscal 2003 and fiscal 2002.

As of May 3, 2003, the Company’s minimum lease payment requirements, excluding contingent rental payments, are as follows (in thousands):

Additionally, the Company had inventory purchase commitments of approximately $100.2 million at May 3, 2003.

9. Contingencies

The Company and its subsidiaries are periodically involved in litigation and administrative proceedings primarily arising in the normal course of its business. 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 would not materially affect its consolidated financial position, results of operations or cash flows.

The Company collects sales taxes from customers transacting purchases in states in which the Company has physically based some portion of its retailing 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. In addition, the Company accrues use taxes on catalogs mailed to states where the Company has a presence. 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 additional interest and related penalties being assessed. Various states have attempted to collect back sales and use taxes from direct marketers whose only contacts with the taxing state are solicitations through the mail or the Internet, and whose subsequent delivery of purchased goods is by mail or interstate common carriers. The United States 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. The Company anticipates that any legislative changes regarding direct marketers, if adopted, would be applied only on a prospective basis.

10. Segment Reporting

The Company’s executive management, being its chief operating decision makers, work together to allocate resources to and assess the performance of the Company’s business. The Company’s executive management views and 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.

Beginning in the fiscal 2003 first quarter, the Direct Segment encompasses the Company’s traditional catalog business and Internet-based e-commerce business whereas the Retail Segment encompasses the Company’s expanding base of full-line retail stores and clearance outlet stores. Previously, the Company’s outlet store business was managed and classified as a component of its Direct Segment. Furthermore, during the fiscal 2003 first quarter, the Company began classifying the revenue generated from phone and Internet orders originating at its retail stores as components of its Retail Segment. Previously, the revenue generated from phone and Internet orders originating at the Company’s retail stores was managed and classified as a component of its Direct Segment. The Company made these reclassifications to reflect the manner in which the Company’s segments are currently managed. The Company has reclassified all prior period financial statements on a consistent basis. These reclassifications had no impact on the Company’s consolidated net sales, net income, retained earnings or cash flows for any period.

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The Company’s executive management assesses the performance of each operating segment based on an “operating contribution” measure, being net sales less merchandise 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, 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 Direct Segment, these assets primarily include inventory and prepaid and deferred catalog costs. For the Retail Segment, these assets primarily include inventory, fixtures and leasehold improvements. 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” to the audited consolidated financial statements included in the Company’s Fiscal 2002 Annual Report on Form 10-K.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

The following discussion contains various statements regarding our current strategies, financial position, results of operations, cash flows, operating and financial trends and uncertainties, as well as certain forward-looking statements regarding our future expectations. When used in this discussion, words such as “anticipate,” “believe,” “estimate,” “expect,” and similar expressions are intended to identify such forward-looking statements. Our forward-looking statements are based on our current expectations and are subject to numerous risks and uncertainties. As such, our actual future results, performance or achievements may differ materially from the results expressed in, or implied by, our forward-looking statements. Please refer to our “Risk Factors” in this Form 10-Q Quarterly Report and in our most recent Form 10-K Annual Report for the fiscal year ended February 1, 2003, filed with the United States Securities and Exchange Commission. We assume no future obligation to update our forward-looking statements or to provide periodic updates or guidance.

Introductory Note

The following discussions are intended to be read in conjunction with our accompanying consolidated financial statements and notes thereto. In the discussions and table that follow, please note that certain minor arithmetical variances may arise due to the effects of rounding.

References to a fiscal year refer to the calendar year in which such fiscal year commences. Historically, our fiscal year ended on the Saturday nearest February 28^th. However, on December 16, 2002, our Board of Directors approved a change in our fiscal year end from the Saturday nearest February 28^th to the Saturday nearest January 31^st, effective in 2003. We made this decision to align our reporting schedule with the majority of other national retail companies.

When we discuss net sales and operating contribution by operating segment, please specifically refer to Note 10 – “Segment Reporting” to our accompanying consolidated financial statements. Please note that, during the fiscal 2003 first quarter, we began classifying our outlet store business and the revenue generated from phone and Internet orders originating at our retail stores as components of our Retail Segment. We made these reclassifications to reflect the manner in which our segments are currently managed. Previously, our outlet store business and the revenue generated from phone and Internet orders originating at our retail stores were managed and classified as components of our Direct Segment. We have reclassified all prior period financial statements on a consistent basis. These reclassifications had no impact on our consolidated net sales, net income, retained earnings or cash flows for any period.

In addition, the fiscal 2003 and fiscal 2002 first quarter common stock outstanding, retained earnings and net income per share amounts reflect a 50% stock dividend having the effect of a 3-for-2 stock split declared by our Board of Directors on December 19, 2002.

Coldwater Creek Profile

Coldwater Creek is a triple-sales channel, two-operating segment retailer of women’s apparel, jewelry, footwear, gift items and home merchandise. Our Direct Segment encompasses our traditional catalog business and Internet-based, e-commerce business, whereas our Retail Segment encompasses our expanding base of full-line retail stores as well as our clearance outlet stores. Our long-standing mission has been to differentiate our company from other retailers by offering exceptional value through superior customer service and a merchandise assortment that reflects a truly relaxed and casual lifestyle. We endeavor to continually offer unique assortments of merchandise primarily targeted to our core customer demographic of women between the ages of 30 to 60 with household incomes in excess of $75,000. Please refer to Note 10 “Segment Reporting” to our accompanying consolidated financial statements for further details.

Our long-established catalog business currently consists of regular targeted mailings of our three catalog titles and merchandise lines, Northcountry, Spirit and Elements, as well as periodic targeted mailings of specialty and seasonal catalogs such as our Gifts-To-Go holiday catalog. Our catalogs remain our most efficient and effective medium for building Coldwater Creek brand recognition and deploying our various sales growth and merchandising initiatives. Accordingly, we design each of our catalogs to promote our triple-sales channel structure and to encourage each customer to place her order utilizing whichever sales channel she deems most convenient and pleasurable. Please note that, in the fiscal 2001 fourth quarter, we made the decision to eliminate our stand-alone “Home” catalog by the fall of 2002. Consistent with that decision, we ceased mailing Home catalogs at the end of the fiscal 2002 second quarter.

Our catalog business provides a marketing platform from which to broadly promote our www.coldwatercreek.com web site to existing catalog customers with minimal incremental marketing costs. Our web site features our entire full-price merchandise line and also serves as an effective and efficient promotional vehicle for the disposition of excess inventory. As approximately one in six individuals currently patronizing our web site have no previous purchasing history with us, we continue to devote substantial effort towards attracting both new customers and our existing catalog and retail store customers to this convenient, secure and cost effective shopping medium.

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Our full-line retail store business currently is, and for the foreseeable future is expected to remain, our fastest growing sales channel on a percentage of net sales basis. Four years ago, we embarked on a long-term program of establishing full-line retail stores in major metropolitan areas throughout the U.S. We did so based on our continuing belief that the ability to “touch and feel” merchandise will remain a coveted aspect of the American woman’s shopping experience. We view our retail stores not only as revenue centers, but as geographically dispersed marketing vehicles by which to build further brand recognition and introduce both current and prospective customers to our catalogs and e-commerce web site.

In summary, our primary corporate strategy is to use our well-established catalog infrastructure to generate sales across all three channels, target new customers and introduce new merchandise concepts. Although there can be no assurance of such, we believe that over time this strategy will build broad brand recognition and help us to increase market share.

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, on a quarterly basis, as well as an annual basis, as a result of a number of factors, including, but not limited to, the following: the composition, magnitude and timing of our various merchandise offerings, including our recognition of related sales and costs; the number and timing of our full-line retail store openings; customer responsiveness, including the impact of economic and weather-related influences; 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 adverse weather conditions or national security measures; and chronological shifts in the timing of important holiday selling seasons, including Valentine’s Day, Easter, Mother’s Day, and Christmas. We alter the composition, magnitude and timing of our merchandise offerings based upon our then 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 to 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 transcend fiscal quarters and years 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 is realized within the first several weeks after its introduction with an expected significant decline in customer orders thereafter.

Particularly notable is our continuing material dependency 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 would be materially adversely affected. Please note that, due to our change in fiscal year end, 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 whereas the December portion of the holiday season fell into our fiscal fourth quarter. While we believe that, based on current economic conditions, the remainder of fiscal year 2003 as a whole should be profitable, we expect that this will be heavily dependent upon our performance in the second half of the fiscal year.

Fiscal 2003 First Quarter Overview

During our fiscal 2003 first quarter, we remained focused on further deploying and refining our triple-sales channel marketing strategy. We opened three new full-line retail stores utilizing a refined store model, while maintaining a balance sheet with no short- or long-term debt. Our refined store model, which we introduced in the fiscal 2002 first quarter, features a slightly smaller footprint and what we believe to be significant improvements in construction processes, materials and fixtures, thereby allowing us to measurably reduce our initial capital investment per store. We believe that our revised store model will allow us to ultimately access many attractive middle-market areas in addition to the 80 major metropolitan markets identified by us in fiscal 1999 as having significant existing Coldwater Creek brand awareness. We currently plan to open 20 additional full-line retail stores during the remainder of fiscal 2003 (including three full-line retail stores opened so far during our fiscal 2003 second quarter). Also, three of the 20 full-line retail stores we plan to open during the remainder of fiscal 2003 will serve to test a substantially smaller footprint than our current store model. Further retail store openings will ultimately be influenced primarily by, among other factors, the prevailing economic environment, our available working capital, and if necessary, external financing, and our ability to timely procure optimum locations within attractive metropolitan malls and lifestyle centers.

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We continued activities designed to make our e-commerce business more self-sufficient with respect to new customer prospecting, thereby reducing its historical dependency on our catalogs and stores. Most significantly, we continue to participate in a net sales commission-based program whereby numerous popular Internet search engines and consumer and charitable web sites promote the Coldwater Creek brand to their visitors and provide convenient hotlink access to our www.coldwatercreek.com web site. These “affiliate” web sites, which currently number approximately 9,500, accounted for approximately $3.7 million in net sales during our fiscal 2003 first quarter, with approximately one-fifth of the buyers being new to our house file. Our participation in this program complements our promotional e-mailings to our 2.1 million customer e-mail address database and our advertising in national publications popular with our targeted demographic.

We were pleased to be able to achieve the above while confronting the significant business challenges that continue to be presented by a less-than-robust U.S. economy. You are encouraged to fully read the following discussions which analyze our fiscal 2003 first quarter consolidated results of operations, liquidity and capital resources, as well as our individual operating segment results, in much greater detail.

Results of Operations

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

(1) – Please note that the Company classifies store occupancy and certain other distribution center costs as a cost of sales.

Comparison of the Three-months Ended May 3, 2003 with the Three-months Ended May 4, 2002:

Consolidated Results

Our consolidated net sales for the three-months ended May 3, 2003 (“fiscal 2003 first quarter”) were $115.2 million, an increase of $9.0 million, or 8.4%, compared with the consolidated net sales of $106.2 million during three-months ended May 4, 2002 (“fiscal 2002 first quarter”).

Our consolidated net sales in the fiscal 2003 first quarter were positively impacted primarily by increased full-price sales from our Retail Segment and, to a lesser extent, increased clearance sales. These increases were partially offset by decreased net sales from our Direct Segment’s full-price catalog and e-commerce businesses. Please refer to “Comparison of the Three-months Ended May 3, 2003 with the Three-months Ended May 4, 2002 – Operating Segment Results” below for further details.

Our consolidated cost of sales primarily consists of merchandise acquisition costs, including related buying and freight-in costs, as well as warehousing and distribution costs, shipping and handling costs, returned merchandise processing costs, and retail and outlet store occupancy costs. For the fiscal 2003 first quarter, our consolidated cost of sales were $70.1 million, an increase of $8.8 million, or 14.4%, from $61.3 million in the fiscal 2002 first quarter. Our consolidated gross profit increased by $0.2 million, or 0.4%, to $45.1 million for the fiscal 2003 first quarter from $45.0 million in the fiscal 2002 first quarter, and our consolidated gross profit rate decreased to 39.2% for the fiscal 2003 first quarter from 42.3% in the fiscal 2002 first quarter.

The increase in our consolidated gross profit was attributable to the aforementioned increase in consolidated net sales. Diminished margins on full-price sales from our Direct Segment’s catalog and e-commerce businesses mitigated the aforementioned increase in gross profit dollars and primarily accounted for the decrease in our gross profit rate. We believe that the margins in our Direct Segment’s full-price catalog and e-commerce businesses were negatively impacted by a decrease in apparel relative to other merchandise offerings and by marketing campaigns designed to increase the average units per order and to reactivate customers. These negative impacts were partially

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offset by improved margins on full-price sales from our Retail Segment and, to a lesser extent, improved margins on clearance sales in our outlet stores and in our clearance catalog. We believe that the margins on full-price sales in our Retail Segment improved due to a strategic decision to reduce the number of days our retail store merchandise is discounted. This decision moved more clearance activity to our traditional clearance vehicles (i.e., outlet stores, clearance catalog and e-commerce clearance). At the same time, however, we were able to improve the margins realized in our outlet stores and clearance catalogs and realized only slightly diminished margins on e-commerce clearance sales. We attribute this improvement to our renewed focus on identifying slow moving merchandise more quickly thereby enabling us to offer discounted merchandise when it is more seasonally appropriate.

Our consolidated selling, general & administrative (“SG&A”) expenses consist primarily of general and administrative expense and, to a slightly lesser extent, selling and marketing expenses. Our consolidated SG&A expenses for the fiscal 2003 first quarter were $42.1 million, a decrease of $0.5 million, or 1.2%, from $42.6 million in the fiscal 2002 first quarter. Our consolidated SG&A expenses as a percentage of our consolidated net sales decreased to 36.6% in the fiscal 2003 first quarter from 40.1% in the fiscal 2002 first quarter.

Our SG&A expenses were positively affected by reduced catalog cost amortization related to the mailing of 1.8 million, or 5.6% fewer catalogs. These decreased expenses were substantially offset by incremental personnel and infrastructure costs incurred in connection with the continued development and expansion of our Retail Segment. The associated personnel costs primarily included administrative and technical support salaries, store employee wages, and related taxes and employee benefits. The associated infrastructure costs primarily consisted of depreciation and other costs associated with incremental administrative support facilities and hardware and software technology. Our SG&A rate was positively impacted primarily by improved response rates to catalogs mailed to our house file and, to a lesser extent, reduced catalog production costs. These positive impacts were partially offset by slightly increased customer prospecting from which we historically elicit diminished customer response rates and lower average order dollars.

We view each of our catalog mailings as an integral part of our ongoing overall marketing investment in current and future customer growth across all of our sales channels. Traditionally, we have pursued an aggressive catalog circulation strategy, with vigorous new customer prospecting, when market conditions permitted. However, we continued to maintain a conservative circulation strategy during the first three-months of fiscal 2003, as we did throughout all of fiscal 2002, pending indications of a sustained recovery of the U.S. economy. As a result, our fiscal 2003 first quarter catalog mailings were 30.0 million, a decrease of 1.8 million catalogs, or 5.6%, from our 31.8 million catalog mailings in the fiscal 2002 first quarter. Although curtailed, our fiscal 2003 first three-month catalog mailings resulted in our proprietary catalog mailing list growing to 14.3 million names at May 3, 2003 from 14.0 million names at February 1, 2003. Our active customers, being those customers who have purchased merchandise from us through any of our three sales channels during the preceding twelve months, declined slightly to 2.6 million at May 3, 2003 from 2.7 million at February 1, 2003.

As a result of the foregoing, our consolidated income from operations was $3.0 million for the fiscal 2003 first quarter, an increase of $0.7 million, or 27.4%, compared with the consolidated income from operations of $2.4 million for the fiscal 2002 first quarter.

Our consolidated net interest and other income was minimal during the first quarters of both fiscal 2003 and fiscal 2002 as we continued to utilize excess working capital to fund the continued expansion of our Retail Segment.

For the fiscal 2003 first quarter our consolidated provision for income taxes was $1.3 million, an increase of 0.3 million, or 28.3%, compared with a consolidated provision for income taxes of $1.0 million for the fiscal 2002 first quarter. Our effective income tax rate for the fiscal 2003 first quarter decreased to 39.6% from 40.9% for the fiscal 2002 first quarter. The increase in our income tax expense was primarily the result of higher pre-tax income. The fiscal 2002 first quarter effective income tax rate was adversely impacted by the non-deductibility for tax purposes of the imputation into our SG&A expenses of the fair market value of salaries for Dennis Pence and Ann Pence. The absence of this negative impact in the fiscal 2003 first quarter was partially offset by our Retail Segment’s expansion into and within states with higher corporate income tax rates. Please see Note 5 – “Arrangements with Principal Shareholders” to our accompanying consolidated financial statements for further details.

We completed the fiscal 2003 first quarter realizing consolidated net income of $1.9 million (net income per basic and diluted share of $0.12) as compared to consolidated net income of $1.4 million (net income per basic and diluted share of $0.09) in the fiscal 2002 first quarter, an increase of $0.5 million or 35.4%.

Operating Segment Results

Our Direct Segment contributed $81.9 million in net sales for the fiscal 2003 first quarter, a decrease of $0.1 million, or 0.1%, from the $82.0 million contributed in the fiscal 2002 first quarter. Our Direct Segment constituted 71.1% and 77.1% of our consolidated net sales for the first quarters of fiscal 2003 and 2002, respectively.

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Our Direct Segment’s catalog business, on a stand-alone basis, contributed $46.0 million in net sales for the fiscal 2003 first quarter, an increase of $0.1 million, or 0.2%, from the $45.9 million contributed in the fiscal 2002 first quarter. Our catalog business constituted 39.9% and 43.2% of our consolidated net sales, and 56.1% and 55.9% of our Direct Segment’s net sales, for the first quarters of fiscal 2003 and 2002, respectively. We primarily attribute the slight increase in catalog net sales to improved response rates to catalogs mailed to our house file mitigated by the mailing of 1.8 million, or 5.6%, fewer catalogs.

Our Direct Segment’s e-commerce business, on a stand-alone basis, contributed $35.9 million in net sales for the fiscal 2003 first quarter, a decrease of $0.2 million, or 0.5%, from the $36.1 million in net sales contributed in the fiscal 2002 first quarter. Our e-commerce business constituted 31.2% and 34.0% of our consolidated net sales, and 43.9% and 44.1% of our Direct Segment’s net sales, for the first quarters of fiscal 2003 and 2002, respectively. We primarily attribute the slight decrease in e-commerce net sales to the mailing of 1.8 million, or 5.6%, fewer catalogs partially offset by increased e-commerce clearance sales. Our proprietary e-mail address database consisted of 2.1 million names at May 3, 2003 compared to 1.8 million names at February 1, 2003.

Our Retail Segment contributed $33.3 million in net sales for the fiscal 2003 first quarter, an increase of $9.1 million, or 37.3%, from the $24.3 million contributed in the fiscal 2002 first quarter. Our Retail Segment constituted 28.9% and 22.9% of our consolidated net sales for the first quarters of fiscal 2003 and 2002, respectively. The above increase in net sales substantially reflects incremental sales from our addition of 14 full-line retail stores and seven outlet stores since our fiscal 2002 first quarter.

Our Direct Segment’s operating contribution, as defined, for the fiscal 2003 first quarter was $13.5 million as compared with $13.7 million for the fiscal 2002 first quarter. We primarily attribute this decrease in our Direct Segment’s operating contribution, as defined, to diminished margins realized by our full-price catalog and e-commerce businesses partially offset by reduced catalog marketing expenses.

Our Retail Segment’s operating contribution, as defined, for the fiscal 2003 first quarter was $1.5 million as compared with $0.1 million for the fiscal 2002 first quarter. We primarily attribute the improvement in our Retail Segment’s operating contribution, as defined, to increased margins on our full-price sales and improved leveraging of personnel and infrastructure costs.

Liquidity and Capital Resources

In recent fiscal years, we have funded our ongoing operations and growth initiatives primarily using cash generated by our operations and 60-day 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.

We were party to an agreement with a consortium of banks that provided us with an $80.0 million unsecured revolving credit facility (with a sub-limit of $10.0 million for letters of credit) and a term standby letter of credit of $1.1 million. The credit facility had a maturity date of July 31, 2003. During the fiscal 2003 first quarter, we entered into a new credit agreement (the Agreement), which replaced the prior credit facility, with a consortium of banks effective March 5, 2003, that provides us with a $60.0 million unsecured revolving credit facility (with a sub-limit of $20.0 million for letters of credit and a $5.0 million sub-limit for same day advances) and a term standby letter of credit of $1.1 million. The interest rate under the Agreement is LIBOR Rate [i.e., LIBOR divided by one minus the reserve requirement, increased or decreased by a margin based upon our leverage ratio, as defined in the Agreement]. The Agreement provides that we must satisfy certain specified EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), EBITDAR (i.e., EBITDA before rental/lease expenses), 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. The credit facility has a maturity date of March 4, 2006. During the fiscal 2003 first quarter, we incurred $0.5 million in financing costs associated with obtaining our new credit facility.

Our operating activities consumed $6.1 million during the first three-months of fiscal 2003, a decrease of $9.6 million, or 274.9%, as compared with the $3.5 million of positive cash flow generated during the first three-months of fiscal 2002. The decrease in our operating cash flows primarily reflects the negative cash flow effects of increased inventories, accounts receivable and income tax deposits. Partially offsetting such decreases were the positive cash flow effects of increased accounts payable and increased net income.

Our investing activities consumed $4.6 million and $4.9 million of cash during the first three-months of fiscal 2003 and 2002, respectively, with cash outlays principally being for capital expenditures. Our fiscal 2003 year-to-date capital expenditures primarily reflect the cost of leasehold improvements for three 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 fiscal 2002 year-to-date capital expenditures primarily reflected the cost of leasehold improvements for three 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 year-to-date investing activities for fiscal 2002 also reflect $0.3 million in repayments of loans from executives.

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Our financing activities used $0.5 million and provided $0.5 million of cash during the first three-months of fiscal 2003 and 2002, respectively. The fiscal 2002 year-to-date financing activities consisted of $0.5 million financing costs associated with our new credit facility. The fiscal 2002 year-to-date financing activities consisted of $0.5 million in net proceeds from exercises of stock options.

As a result of the foregoing we had $38.7 million in consolidated working capital at May 3, 2003 as compared with $37.4 million at February 1, 2003. Our consolidated current ratio was 1.6 and 1.5 at May 3, 2003 and February 1, 2003, respectively. We had no outstanding short- or long-term bank debt at May 3, 2003 or February 1, 2003.

We embarked on a long-term program during fiscal 1999 of selectively establishing for the first time full-line retail stores in major metropolitan areas throughout the U.S. Our 44 full-line “metropolitan” retail stores at May 3, 2003 are in addition to our two previously existing full-line “resort” retail stores. We currently plan to open 20 additional full-line retail stores during the remainder of fiscal 2003 (including three full-line retail stores opened so far during our fiscal 2003 second quarter). Also, three of the 20 full-line retail stores we plan to open during the remainder of fiscal 2003 will serve to test a significantly smaller footprint than our current store model. Each of these retail stores will be leased, as are all of our existing stores, with an average initial cash investment per store, including leasehold improvements and inventory, in the approximate range of $0.7 million to $1.0 million depending upon size and design elements. Further retail store openings will ultimately be influenced primarily by, among other factors, the prevailing economic environment, our available working capital, and if necessary, external financing, and our ability to timely procure optimum locations on favorable terms within attractive metropolitan malls and lifestyle centers.

We currently estimate between $19.0 million and $23.0 million in total capital expenditures for the remainder of fiscal 2003, primarily being leasehold improvements for 20 new retail stores and, to a substantially lesser extent, various technology additions and upgrades and the cost of leasehold improvements for five additional outlet stores. These expenditures are expected to be primarily funded from operating cash flows and working capital, and to the extent necessary, our new bank credit facility. However, the above planned capital expenditures will ultimately be influenced by, among other factors, the prevailing economic environment and our financial condition, results of operations and cash flows.

On March 31, 2001, our Board of Directors authorized a stock repurchase program under which we may repurchase in the open market up to 300,000 outstanding shares of our common stock to be held in treasury. During fiscal 2001, the Company repurchased 209,100 common shares at an average market price of $22.55 per share. We currently do not anticipate any additional share repurchases.

We believe that our cash flow from operations and available borrowing capacity under our bank credit facility will be sufficient to fund our current operations and growth initiatives for the balance of fiscal 2003. Thereafter, we may be required to seek additional sources of funds for continued or accelerated growth and there can be no assurance that such funds will be available on satisfactory terms. Failure to obtain such financing could delay or prevent our planned growth, which could adversely affect our business, financial position, results of operations and cash flows.

Other Matters

Critical Accounting Policies

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:

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. However, it must be noted, that 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.

During the fiscal 2003 first quarter, there were no changes in the above critical accounting policies.

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Off-Balance Sheet Liabilities

Our off-balance sheet liabilities primarily are limited to 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 East Coast Operations Center. All of our other operating leases pertain to our retail and outlet stores, our Coeur d’Alene call center and to various equipment and technology.

As of May 3, 2003 our minimum lease payment requirements, excluding contingent rental payments, are as follows (in thousands):

Additionally, we had inventory purchase commitments of approximately $100.2 million at May 3, 2003.

See Note 8 – “Commitments” to our accompanying consolidated financial statements for further details.

Risk Factors

Continuing Economic Weakness and Uncertainty

As of the date of this report, we have not seen a sustained improvement in the U.S. economy. If demand for our products is less than anticipated, the mix of our sales will be weighted more toward clearance merchandise than to full price merchandise, which would have a negative impact on our gross margins. We currently do not anticipate any significant and sustained improvement in the U.S. economy prior to early fall of 2003, if then. In an effort to address the relatively weak U.S. economy, 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 low customer satisfaction. Should the U.S. economy not recover in a timely manner, or should we not sufficiently participate in any such recovery, our overall business, financial condition, results of operations and cash flows would be materially adversely impacted. Further, lower than anticipated sales or higher than anticipated costs could adversely affect our liquidity (including compliance with our debt covenants) and, therefore, the pace of our retail expansion.

Our Dependence on Key Personnel

Our future success depends largely on the efforts of our executive management team, which consists of Dennis Pence, Chairman and Chief Executive Officer; Georgia Shonk-Simmons, President and Chief Merchandising Officer and Mel Dick, Executive Vice-President and Chief Financial Officer. The loss of any of these individuals could have a material adverse effect on our business. Continuing to attract and retain well-qualified key personnel is crucial to our successful continued operations and expansion. In addition, our location may make it more difficult to replace key employees who leave us, or to add the employees required to manage our further growth. Further, if we experience vacancies in key roles, it could have a material adverse impact upon of our ability to properly conduct our business operations and pursue our growth initiatives, and as a result, could have a material adverse impact on our overall business, financial condition, results of operations and cash flows.

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Prior to joining our Company, Mr. Dick, our Executive Vice-President and Chief Financial Officer, was the Partner in-charge of the Technology, Telecommunications and Media practice of Arthur Andersen LLP. Mr. Dick served as the lead engagement partner for 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. In connection with the government’s investigation into WorldCom’s restatement of its financial statements and earnings, Mr. Dick voluntarily testified in a hearing before the U.S. House of Representative’s Finance Committee regarding Andersen’s audit of WorldCom’s consolidated financial statements. The ongoing investigation of the WorldCom matter may impair Mr. Dick’s 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.

Risks Associated with Our Retail Store Business and Its Continued Expansion

During the fiscal 2003 first quarter, we opened three additional full-line retail stores. We currently plan to open 20 full-line retail stores during the remainder of fiscal 2003 (including three full-line retail stores opened so far in during our fiscal 2003 second quarter). Also, three of the 20 full-line retail stores we plan to open during the remainder of fiscal 2003 will serve to test a smaller footprint than our current store model. Opening each new store involves several steps, including site selection, lease negotiation and build-out, and each of these steps presents new risks. Competition remains high for premium retail space in many areas and we may encounter difficulty in identifying acceptable sites for our stores, which could delay our expansion. We are also subject to possible delays in negotiating leases and to construction delays and cost overruns associated with the build-out of our stores.

Additionally, our expansion continues to add significant costs, not only with respect to leasehold costs and capital improvements, but also with respect to management and administrative resources, which must keep pace with our expansion. To be successful, we must therefore generate sufficient incremental sales to support our new cost structure. There can be no assurance that our retail expansion will be successful or that we will be able to address the risks and challenges associated with this relatively new and rapidly expanding business. In March 2002, we refined our store model to incorporate a smaller footprint and what we believe to be significant improvements in construction processes, materials and fixtures, and our retail model may undergo further refinements as we gain experience owning and operating more stores. For example, as discussed in the preceding paragraph, we currently plan to open three smaller sized test stores during the remainder of fiscal 2003. Additionally, you should consider that any miscalculations in our retail strategies, shortcomings in our planning, implementation, management and control, or our inability to sufficiently leverage incremental costs will likely have a material adverse impact on our overall business, financial condition, results of operations and cash flows.

Risks Associated with Our Catalog Sales and E-commerce Sales Businesses

Our overall success as a Company for the foreseeable future will remain dependent on the success of our well-established catalog sales business. We also continue to primarily rely on our catalogs to promote our www.coldwatercreek.com e-commerce web site and full-line retail stores. We believe that the future success of our catalog sales business will continue to be predicated upon the effective targeting of our catalog mailings, a high volume of prospect catalog mailings, when market conditions permit, appropriate shifts in our merchandise mix and our ability to achieve adequate response rates to our mailings. Catalog mailings entail substantial paper, postage, merchandise acquisition and human resource costs, including costs associated with catalog development, production and circulation and increased inventories, virtually all of which are incurred prior to the mailing of each catalog. As a result, we are not able to adjust the costs being incurred in connection with a particular catalog mailing to reflect the actual subsequent performance of the catalog. If, for any reason, we were to experience a significant shortfall in anticipated net sales from a particular catalog mailing, our overall business, financial condition, results of operations and cash flows would likely be materially adversely affected. In addition, 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 weak economic conditions and uncertainty and unseasonable weather in key demographic markets. Other influencing factors may include, but not be limited to, unpredictable and changing consumer preferences, the timing and mix of catalog mailings and changes in our merchandise mix. Any one or more of these factors could result in lower-than-expected full-priced sales and higher-than-expected clearance sales at substantially reduced margins. These factors could also result in increased merchandise returns, slower turning or obsolete inventories, inventory write-downs and working capital constraints. 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.

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Our ability to attract and retain users and customers to our e-commerce web site depends on the performance, reliability and availability of our web site and network infrastructure. We have periodically experienced service interruptions caused by temporary problems in our own systems or software or in the systems or software of third parties. While we continue to implement procedures to improve the reliability of our systems, these interruptions may continue to occur from time to time. Third parties may not be liable to us for any damage or loss they may cause to our business, and we may be unable to seek reimbursement from them for losses that they cause. Our users also depend on third party Internet service providers for access to our web site. These entities have experienced outages in the past, and could experience outages, delays and other difficulties due to system failures in the future that are unrelated to our systems, but which could nonetheless adversely affect our business.

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. However, as any future borrowings under our existing 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.

ITEM  4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures: The company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the design and operation of the company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)) as of a date within 90 days of the filing date of this quarterly report (the “Evaluation Date”), have concluded that as of the Evaluation Date, the company’s disclosure controls and procedures were effective to ensure that material information relating to the company and its consolidated subsidiaries would be made known to such officers on a timely basis.

(b) Change in internal controls: Since the company’s most recent evaluation of internal controls, the company has made no significant changes in, nor taken any corrective actions regarding, internal controls or other factors that could significantly affect these controls.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company and its subsidiaries are periodically involved in litigation and administrative proceedings primarily arising in the normal course of its business. 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 would not materially affect its consolidated financial position, results of operations or cash flows.

Item 2. Changes in Securities and Use of Proceeds

No reportable events

Item 3. Defaults Upon Senior Securities

No reportable events

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

None.

Item 5. Other Information

The following table sets forth the net sales by channel information as reclassified:

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Item 6. Exhibits and Reports on Form 8-K

The Company filed one report on Form 8-K and one report on Form 8-K/A during the quarter ended May 3, 2003 and one report on Form 8-K subsequent to the quarter ended May 3, 2003. Information regarding the items reported on is as follows:

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sandpoint, State of Idaho, on this 16th day of June, 2003.

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Certification pursuant to Rule 13a-14 promulgated under the Securities Exchange

Act of 1934, as amended

I, Dennis C. Pence, Chairman and Chief Executive Officer of the Board of Directors of Coldwater Creek Inc., certify that:

Date: June 16, 2003

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Certification pursuant to Rule 13a-14 promulgated under the Securities Exchange

Act of 1934, as amended

I, Melvin Dick, Executive Vice President and Chief Financial Officer of Coldwater Creek Inc., certify that:

Date: June 16, 2003

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