Coldwater Creek (CWTRQ) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the Fiscal Quarter Ended August 2, 2008

OR

oTRANSITION 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  x    NO  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer  x Accelerated filer  o Non-accelerated filer  o Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  o    NO  x

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 September 8, 2008
Common Stock ($.01 par value)	91,110,011

Coldwater Creek Inc.

Form 10-Q

For the Fiscal Quarter Ended August 2, 2008

Table of Contents

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)	3
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Operations	4
Condensed Consolidated Statements of Cash Flows	5
Notes to the Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	28
Item 4. Controls and Procedures	28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3. Defaults Upon Senior Securities	31
Item 4. Submission of Matters to a Vote of Security Holders	31
Item 5. Other Information	32
Item 6. Exhibits	32
Signatures	33
Exhibit Index	34

“We”, “us”, “our”, “Company” and “Coldwater”, unless the context otherwise requires means Coldwater Creek Inc. and its subsidiaries.

2

PART 1. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)

COLDWATER CREEK INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except for share data)

	August 2, 2008			February 2, 2008			August 4, 2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	89,239		$	62,479		$	129,926
Receivables	29,409			28,520			32,495
Inventories	127,119			139,993			153,647
Prepaid and other	19,158			17,246			17,530
Income taxes recoverable	11,113			14,265			2,439
Prepaid and deferred marketing costs	10,289			13,662			15,008
Deferred income taxes	8,096			8,073			6,051
Total current assets	294,423			284,238			357,096
Property and equipment, net	344,303			328,991			290,188
Deferred income taxes	8,109			7,680			6,219
Restricted cash	2,664			2,664			3,552
Other	683			686			1,084
Total assets	$	650,182		$	624,259		$	658,139
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	97,040		$	75,936		$	103,122
Accrued liabilities	81,937			87,300			59,603
Current deferred marketing fees and revenue sharing	5,314			5,252			5,518
Total current liabilities	184,291			168,488			168,243
Deferred rents	136,496			122,819			113,765
Deferred marketing fees and revenue sharing	7,459			7,064			8,327
Supplemental Employee Retirement Plan	8,201			8,041			6,834
Capital lease and other financing obligations	13,777			14,467			11,517
Other	1,316			1,517			2,878
Total liabilities	351,540			322,396			311,564
Commitments and contingencies
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued and outstanding	—			—			—
Common stock, $.01 par value, 300,000,000 shares authorized, 91,054,614, 90,796,551 and 93,608,537 shares issued, respectively	911			908			936
Additional paid-in capital	112,736			110,010			131,779
Accumulated other comprehensive loss	(1,864		)	(2,014		)	(2,313		)
Retained earnings	186,859			192,959			216,173
Total stockholders’ equity	298,642			301,863			346,575
Total liabilities and stockholders’ equity	$	650,182		$	624,259		$	658,139

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

3

COLDWATER CREEK INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands except for per share data)

	Three Months Ended				Six Months Ended
	August 2, 2008		August 4, 2007		August 2, 2008			August 4, 2007
Net sales	$	241,434	$	253,476	$	512,539		$	534,768
Cost of sales	145,786		143,324		324,091			296,129
Gross profit	95,648		110,152		188,448			238,639
Selling, general and administrative expenses	88,450		98,109		196,256			208,832
Loss on asset impairment	1,452		—		1,452			—
Income (Loss) from operations	5,746		12,043		(9,260		)	29,807
Interest, net, and other	537		2,333		1,090			4,549
Income (Loss) before income taxes	6,283		14,376		(8,170		)	34,356
Income tax provision (benefit)	3,143		5,680		(2,070		)	13,630
Net income (loss)	$	3,140	$	8,696	$	(6,100	)	$	20,726
Net income (loss) per share - Basic	$	0.03	$	0.09	$	(0.07	)	$	0.22
Weighted average shares outstanding - Basic	90,972		93,422		90,911			93,316
Net income (loss) per share - Diluted	$	0.03	$	0.09	$	(0.07	)	$	0.22
Weighted average shares outstanding - Diluted	91,539		94,733		90,911			94,653

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

4

COLDWATER CREEK INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

	Six Months Ended
	August 2, 2008			August 4, 2007
OPERATING ACTIVITIES:
Net income (loss)	$	(6,100	)	$	20,726
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	29,812			24,059
Stock-based compensation expense	2,284			2,762
Supplemental Employee Retirement Plan expense	645			1,283
Deferred rent amortization	(4,485		)	(2,064		)
Deferred income taxes	(855		)	(4,783		)
Excess tax benefit from exercises of stock options	(2		)	(2,216		)
Net (gain) loss on asset disposition	(85		)	616
Loss on asset impairments	1,452			—
Other	311			6
Net change in current assets and liabilities:
Receivables	(889		)	(10,357		)
Inventories	12,874			(26,694		)
Prepaid and other and income taxes recoverable	1,281			(6,343		)
Prepaid and deferred marketing costs	3,373			(5,757		)
Accounts payable	15,874			18,409
Accrued liabilities	(7,866		)	(3,787		)
Income taxes payable	—			930
Change in deferred marketing fees and revenue sharing	457			(311		)
Change in deferred rents	20,204			26,103
Other changes in non-current assets and liabilities	(232		)	1,769
Net cash provided by operating activities	68,053			34,351
INVESTING ACTIVITIES:
Purchase of property and equipment	(44,802		)	(57,519		)
Proceeds from asset dispositions	3,086			—
Net cash used in investing activities	(41,716		)	(57,519		)
FINANCING ACTIVITIES:
Net proceeds from exercises of stock options and ESPP purchases	872			2,198
Excess tax benefit from exercises of stock options	2			2,216
Payments on capital lease and other financing obligations	(451		)	—
Net cash provided by financing activities	423			4,414
Net increase (decrease) in cash and cash equivalents	26,760			(18,754		)
Cash and cash equivalents, beginning	62,479			148,680
Cash and cash equivalents, ending	$	89,239		$	129,926

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

5

COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. 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 multi-channel specialty retailer of women’s apparel, accessories, jewelry and gift items. We operate in two operating segments: retail and direct. The retail segment consists of our premium retail stores, merchandise clearance outlet stores and day spas. The direct segment consists of sales generated through our e-commerce web site and from orders taken from customers over the phone or through the mail. Intercompany balances and transactions have been eliminated.

The accompanying condensed consolidated financial statements are unaudited and have been prepared by management pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The year-end condensed consolidated balance sheet information was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the interim financial statements presented herein.

The condensed 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.

2. Significant Accounting Policies

Comprehensive Income (Loss)

Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, requires the presentation of comprehensive income, in addition to the existing income statement. Comprehensive income is defined as the change in equity during a period from transactions and other events, excluding changes resulting from investments by owners and distributions to owners.   The following table provides a reconciliation of net income (loss) to total other comprehensive income (loss) (in thousands):

	Three Months Ended						Six Months Ended
	August 2, 2008			August 4, 2007			August 2, 2008			August 4, 2007
Net income (loss)	$	3,140		$	8,696		$	(6,100	)	$	20,726
Amortization of unrecognized prior service cost	123			162			246			328
Effect of curtailments	—			1,167			—			1,167
Tax effect	(48		)	(518		)	(96		)	(583		)
Comprehensive income (loss)	$	3,215		$	9,507		$	(5,950	)	$	21,638

Revenue Recognition

We recognize sales, including shipping and handling income and the related cost of those sales at the time of estimated receipt by the customer for orders placed from a catalog or on our e-commerce web site and at the point of sale for retail store transactions. We maintain an allowance for sales returns based on historical experience and future expectations.

Our policy regarding gift certificates and gift cards is to record revenue as certificates and cards are redeemed for merchandise. Prior to their redemption, amounts received from the sale of gift certificates and gift cards are recorded as a liability.

6

Co-branded credit card  During the second quarter of fiscal 2005, we introduced a co-branded customer credit card program. Under this program (as amended during the second quarter of fiscal 2007), we receive from the issuing bank a non-refundable up-front marketing fee for each new credit card account that is opened and activated. The initial up-front marketing fee is deferred and recognized into revenue over the estimated period that the customer will use the credit card. We are also eligible to receive an annual revenue sharing payment if certain profitability measures of the program are met. The revenue sharing payment we receive annually, if any, is deferred and recognized into revenue over the expected life of the co-branded credit card program. In addition, we receive an ongoing sales royalty which is based on a percentage of purchases made by the holder of the card. Cardholders receive reward coupons from their credit card purchases that can be used to purchase our merchandise.  The sales royalty is deferred and subsequently recognized as revenue over the redemption period, adjusted for that portion of awards that we estimate will not be redeemed by customers (“breakage”). We recognize the breakage for unredeemed awards in proportion to the actual awards that are redeemed by customers.   We determine our breakage rate based upon company specific historical redemption patterns.

To encourage customers to apply for and activate the co-branded credit card we provide a discount to customers on their first Coldwater Creek purchase made with the co-branded credit card. These discounts are netted against the sales price of the related merchandise. In addition to marketing sales discounts we also incur the cost of printing and mailing customized catalogs to customers who have been pre-approved by the credit card issuer to receive a credit card offer. These costs are expensed as incurred as selling, general and administrative expenses. Approximately 10,700 and 26,900 cards were activated in the three months ended August 2, 2008 and August 4, 2007, respectively. Approximately 25,300 and 59,000 cards were activated during the six months ended August 2, 2008 and August 4, 2007, respectively.

Onecreek  In September of 2007, we introduced onecreek, a customer loyalty program which entitles enrolled customers who maintain an annual minimum level of spending to earn awards in the form of future discounts that can be redeemed towards a future purchase of merchandise.

Under the program, a onecreek customer can earn an award, in the form of a future discount, on each qualifying purchase that can be redeemed towards future purchases of merchandise. For awards that are earned on individual purchases, we have concluded that they represent significant incremental discounts and as a result, we allocate the consideration received from the customer between the goods purchased and the award earned based on their relative fair values.  The consideration allocated to the award is recorded as deferred revenue and subsequently recognized as revenue over the redemption period, adjusted for breakage. We recognize the breakage for unredeemed awards in proportion to the actual awards that are redeemed by customers. We determine our breakage rate based upon company specific historical redemption patterns. During the three months ended August 2, 2008, we discontinued the existing method of providing discounts on future purchases based on individual purchases and we expect to introduce a new method of providing discounts the third quarter of fiscal 2008. The deferred revenue related to these awards was approximately $0.2 million and $1.2 million as of August 2, 2008 and February 2, 2008, respectively.

In addition, enrolled onecreek customers who maintain their annual minimum spending level also earn a yearly “birthday award”. We have determined that this award does not represent a significant incremental discount and as a result account for it using the incremental cost approach.  Under this approach we accrue a liability for the cost of award over the time period that the customer earns the award. This liability is reduced for that portion of the rewards that we estimate, based on our own historical experience, will not be redeemed by customers.   The accrued liability related to the birthday gift coupons was approximately $0.4 million and $0.2 million as of August 2, 2008 and February 2, 2008, respectively.

Advertising Costs

Direct response advertising includes catalogs and national magazine advertisements that contain an identifying code which allows us to track related sales. All direct costs associated with the development, production and circulation of direct response advertisements are accumulated as prepaid marketing costs. Once the related catalog or national magazine advertisement is either mailed or first appears in print, these costs are reclassified to deferred marketing costs. These costs are then amortized as expense to selling, general and administrative expenses over the expected sales realization cycle, typically several weeks. Direct response advertising costs of $8.5 million and $18.4 million for the three months ended August 2, 2008 and August 4, 2007, respectively and $26.8 million and $43.8 million for the six months ended August 2, 2008 and August 4, 2007, respectively are included in consolidated selling, general and administrative expenses.

Advertising costs other than direct response advertising include commissions associated with our participation in a web-based affiliate program, store promotional and signage expenses and television advertising. Production costs related to television commercials are expensed when the commercials are first aired, while other advertising costs are expensed as incurred or when the particular store promotion begins. Non-direct response advertising costs of $3.6 million and $4.7 million for the three months ended August 2, 2008 and August 4, 2007, respectively and $9.7 million and $15.2 million for the six months ended August 2, 2008 and August 4, 2007, respectively are included in consolidated selling, general and administrative expenses.

7

Impairment of Long-Lived Assets

Long-lived assets, including leasehold improvements, equipment, and furniture and fixtures at our retail stores and day spas, are reviewed for impairment on a semi-annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. During the three and six months ended August 2, 2008, we recorded an impairment charge of $1.5 million related to the long-lived assets of certain day spa locations within our retail segment. No impairments were recorded during the three and six months ended August 4, 2007.

We introduced the day spa concept on a limited basis resulting in the opening of six day spas in fiscal 2006 and three day spas in fiscal 2007.  As of August 2, 2008, the first day spa we opened has been operating for approximately 28 months while the last day spa has been operating for approximately nine months, for an average opening period of approximately 21 months for all nine day spas.  Management determined in the second quarter of fiscal 2008 that the day spa concept has been operating for a sufficient amount of time to perform a detailed impairment evaluation, given that the concept continues to incur operating and cash flow losses.   This evaluation was also done in conjunction with our established policy to review all retail locations for impairment on a semi-annual basis. Consequently, we determined that the leasehold improvements, equipment, and furniture and fixtures at certain day spa locations were impaired. We used the expected present value model, in which multiple cash flow scenarios that reflect the range of possible outcomes and a risk-free rate were used to estimate fair value.

The fair value calculations used for these tests require us to make assumptions about items that are inherently uncertain. Assumptions related to future market demand, market prices, labor and product costs could vary from actual results, and the impact of such variations could be material. Factors that could affect the assumptions include changes in economic conditions and competitive conditions in the day spa industry.

Accounting for Leases

Certain of our operating leases contain predetermined fixed escalations of the minimum rental payments over the lease. For these leases, we recognize the related rental expense on a straight-line basis over the term of the lease, which commences for accounting purposes on the date we have access and control over the leased store (possession). Possession occurs prior to the making of any lease payments and approximately 60 to 90 days prior to the opening of a store. In the early years of a lease with rent escalations, the recorded rent expense will exceed the actual cash payments. The amount of rent expense that exceeds the cash payments is recorded as deferred rent in the consolidated balance sheet. In the later years of a lease with rent escalations, the recorded rent expense will be less than the actual cash payments. The amount of cash payments that exceed the rent expense is then recorded as a reduction to deferred rent. Deferred rent related to lease agreements with escalating rent payments was $26.9 million, $23.5 million and $20.2 million at August 2, 2008, February 2, 2008 and August 4, 2007, respectively.

Additionally, certain operating leases contain terms which obligate the landlord to remit cash to us as an incentive to enter into the lease agreement. These lease incentives are commonly referred to as “tenant allowances”. When we take possession of a store we record the amount to be remitted by the landlord as a tenant allowance receivable. At the same time, we record deferred rent in an equal amount in the consolidated balance sheet. The tenant allowance receivable is reduced as cash is received from the landlord, while the deferred rent is amortized as a reduction to rent expense over the lease term. Deferred rent related to tenant allowances, including both the current and long-term portions, in the amount of $128.7 million, $116.4 million and $108.8 million existed at August 2, 2008, February 2, 2008 and August 4, 2007, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

For the three and six months ended August 2, 2008, we have determined that our annual effective tax rate cannot be reliably estimated primarily due to the expected projected near break-even results of operations for the fiscal year ending January 31, 2009.  Therefore, we determined that the actual effective tax rate for the three and six months ended August 2, 2008 is the best estimate of the annual effective tax rate.  The effective tax rate for the three and six months ended August 4, 2007 was based on the estimated annual tax rate.

8

Stock-Based Compensation

Stock-based compensation is accounted for according to SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires companies to expense the estimated fair value of share-based awards over the requisite employee service period, which for us is generally the vesting period. Stock-based compensation is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations.

Total stock-based compensation recognized in selling, general and administrative expenses from stock options, restricted stock units (RSUs) and common stock issued to employees under our Customer Service Recognition Program during the three and six months ended August 2, 2008 and August 4, 2007 was as follows (in thousands):

	Three Months Ended				Six Months Ended
	August 2, 2008		August 4, 2007		August 2, 2008		August 4, 2007
Stock Options	$	687	$	766	$	1,399	$	1,448
RSUs	394		527		885		948
Customer Service Recognition Program	—		278		—		366
Total	$	1,081	$	1,571	$	2,284	$	2,762

Options to purchase 1,058,750 and 413,750 shares of our common stock were granted to employees during the six months ended August 2, 2008 and August 4, 2007, respectively. The weighted average fair value of those options was $3.18 and $12.41, respectively. Options to purchase 98,163 and 387,019 shares of our common stock were exercised during the six months ended August 2, 2008 and August 4, 2007, respectively with a total intrinsic value of $0.2 million and $7.3 million, respectively. During the six months ended August 2, 2008 and August 4, 2007, employees were granted 263,826 and 90,650 RSUs with a weighted average grant date fair market value of $6.07 and $23.26, respectively. During the six months ended August 2, 2008 and August 4, 2007, the total fair market value of RSUs vested was approximately $510,000 and $121,000, respectively.

As of August 2, 2008, total unrecognized compensation expense related to nonvested share-based compensation arrangements (including stock options and RSUs) was approximately $11.8 million. This expense is expected to be recognized over a weighted average period of 2.6 years.

We issued 16,028 shares of common stock to employees under our Customer Service Recognition Program during the six months ended August 4, 2007.   We did not issue any shares of common stock under this program in the six months ended August 2, 2008.

Store Pre-Opening Costs

We incur rent, preparation and training costs prior to the opening of a retail store or day spa. These pre-opening costs are expensed as incurred and are included in selling, general and administrative expenses. Pre-opening costs were approximately $0.6 million and $2.5 million for the three months ended August 2, 2008 and August 4, 2007, respectively. Pre-opening costs were approximately $1.2 million and $4.2 million for the six months ended August 2, 2008 and August 4, 2007, respectively.

List Rental Income (Expense)

Net customer list rental income is recorded as a reduction to selling, general and administrative expenses. We recognize rental income and accrue rental expense, as applicable, at the time the related catalog is mailed to the names contained in the rented lists. The amount of income netted against selling, general and administrative expenses is as follows (in thousands):

	Three Months Ended						Six Months Ended
	August 2, 2008			August 4, 2007			August 2, 2008			August 4, 2007
List rental income	$	129		$	226		$	557		$	648
List rental (expense)	(9		)	(134		)	(84		)	(241		)
Net list rental income	$	120		$	92		$	473		$	407

9

Interest, Net, and Other

Interest, net, and other consists of the following (in thousands):

	Three Months Ended						Six Months Ended
	August 2, 2008			August 4, 2007			August 2, 2008			August 4, 2007
Interest (expense), including financing fees	$	(235	)	$	(60	)	$	(395	)	$	(104	)
Interest income	467			2,135			853			4,090
Other income	485			480			1,053			1,008
Other (expense)	(180		)	(222		)	(421		)	(445		)
Interest, net, and other	$	537		$	2,333		$	1,090		$	4,549

Accounting for Vendor Allowances

We account for allowances received from a merchandise vendor as an adjustment to the price of the vendor’s products. This adjustment is characterized as a reduction of the carrying amount of inventory and, when sold, as cost of sales. Consolidated cost of sales includes allowances from merchandise vendors of $1.6 million and $2.2 million for the three months ended August 2, 2008 and August 4, 2007, respectively. Consolidated cost of sales includes allowances from merchandise vendors of $3.8 million and $4.1 million for the six months ended August 2, 2008 and August 4, 2007, respectively.

Recently Issued Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measures (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands fair value measurement disclosures. SFAS 157, as originally issued, was effective for fiscal years beginning after November 15, 2007. However, in February 2008, the FASB issued FASB Staff Position, (“FSP”) No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (FSP 157-1) and FSP No. 157-2 Partial Deferral of the Effective Date of Statement 157, (FSP 157-2). FSP 157-1 excludes FASB Statement No. 13, Accounting for Leases (SFAS 13), and other accounting pronouncements that address fair value measurements under SFAS 13, from the scope of SFAS 157. FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. For all other provisions, SFAS 157 was effective for us as of February 3, 2008, but the adoption of these provisions did not have a material impact on our financial position, results of operations or cash flows. We have not yet determined the impact that the adoption of the provisions of SFAS No. 157 which were deferred until fiscal 2009 by FSP 157-2 will have on our financial position, results of operations or cash flows.

In June 2008, FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. (“FSP-EITF No. 03-6-1”) Under FSP-EITF No. 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing earnings per share. FSP-EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. We do not expect the adoption of FSP-EITF No. 03-6-1 to have any impact on the determination or reporting of our earnings per share.

3. Receivables

Receivables consist of the following (in thousands):

	August 2, 2008		February 2, 2008		August 4, 2007
Tenant improvement allowances	$	19,345	$	18,483	$	24,680
Trade	7,124		5,637		5,813
Other	2,940		4,400		2,002
	$	29,409	$	28,520	$	32,495

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We evaluate the credit risk associated with our receivables to determine if an allowance for doubtful accounts is necessary. At August 2, 2008, February 2, 2008 and August 4, 2007 no allowance for doubtful accounts was deemed necessary.

4. Property and Equipment, Net

Property and equipment, net, consists of the following (in thousands):

	August 2, 2008			February 2, 2008			August 4, 2007
Land	$	242		$	242		$	242
Building and land improvements and capital leases (a)	41,094			41,074			40,379
Leasehold improvements	245,630			222,509			175,938
Furniture and fixtures	107,985			108,145			96,719
Technology hardware and software	75,212			69,281			54,062
Machinery and equipment and other	36,509			38,275			27,970
Construction in progress (b)	35,957			18,525			37,108
	542,629			498,051			432,418
Less: Accumulated depreciation and amortization	(198,326		)	(169,060		)	(142,230			)
	$	344,303		$	328,991		$		290,188

(a)	Building and land improvements include capital leases of real estate of approximately $11.5 million as of August 2, 2008, February 2, 2008 and August 4, 2007.
(b)	Construction in progress is comprised primarily of leasehold improvements and furniture and fixtures related to unopened premium retail stores, as well as internal-use software under development.

Certain classification changes between technology hardware and software and machinery and equipment have been made to August 4, 2007 amounts to conform to the current-period presentation.

5. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	August 2, 2008		February 2, 2008		August 4, 2007
Accrued payroll and benefits	$	19,913	$	19,151	$	15,074
Gift cards and coupon rewards	28,083		34,004		18,734
Current portion of deferred rents	19,121		17,079		15,241
Accrued sales returns	6,310		7,177		5,269
Accrued taxes	4,634		5,762		3,579
Other	3,876		4,127		1,706
	$	81,937	$	87,300	$	59,603

6. Net Income (Loss) Per Common Share

We calculate net income (loss) per common share in accordance with SFAS No. 128, Earnings per Share (SFAS 128). Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the combination of other potentially dilutive weighted average common shares and the weighted average number of common shares outstanding during the period. Other potentially dilutive common shares include the dilutive effect of stock options and RSUs for each period using the treasury stock method. Under the treasury stock method, the exercise price of a share, the amount of compensation expense, if any, for future service that has not yet been recognized, and the amount of benefits that would be recorded in additional paid-in-capital, if any, when the share is exercised are assumed to be used to repurchase shares in the current period.

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The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands, except for per share data):

	Three Months Ended				Six Months Ended
	August 2, 2008		August 4, 2007		August 2, 2008			August 4, 2007
Net income (loss)	$	3,140	$	8,696	$	(6,100	)	$	20,726
Weighted average common shares outstanding during the period (for basic calculation)	90,972		93,422		90,911			93,316
Dilutive effect of other potential common shares	567		1,311		—			1,337
Weighted average common shares and potential common shares (for diluted calculation)	91,539		94,733		90,911			94,653
Net income (loss) per common share—Basic	$	0.03	$	0.09	$	(0.07	)	$	0.22
Net income (loss) per common share—Diluted	$	0.03	$	0.09	$	(0.07	)	$	0.22

The computation of the dilutive effect of other potential common shares excluded options to purchase 2.3 million and 0.7 million shares of common stock for the three months ended August 2, 2008 and August 4, 2007, respectively, and 2.7 million and 0.7 million shares of common stock for the six months there ended, respectively. Under the treasury stock method, the inclusion of these options would have resulted in higher earnings per share, causing their effect to be antidilutive.

7. Supplemental Executive Retirement Plan

Net periodic benefit cost is comprised of the following components for the three and six months ended August 2, 2008 and August 4, 2007 (in thousands):

	Three Months Ended				Six Months Ended
	August 2, 2008		August 4, 2007		August 2, 2008		August 4, 2007
Service cost	$	75	$	68	$	151	$	155
Interest cost	124		101		248		202
Amortization of prior service cost	123		162		246		328
Net curtailment loss	—		598		—		598
Net periodic benefit cost	$	322	$	929	$	645	$	1,283

As of August 2, 2008, we had no unrecognized actuarial losses and $3.1 million ($1.9 million after-tax) of unrecognized prior service costs recognized in accumulated other comprehensive income (loss). We expect to amortize an additional $0.2 million in unrecognized prior service cost during the remainder of fiscal 2008.

Significant assumptions related to the SERP include the discount rate used to calculate the actuarial present value of benefit obligations to be paid in the future and the average rate of compensation expense increase by SERP participants. The discount rate was 6 percent as of both August 2, 2008 and February 2, 2008, respectively. The rate of compensation expense increase was 4 percent as of both August 2, 2008 and February 2, 2008.

As the SERP is an unfunded plan, we were not required to make any contributions during the three and six months ended August 2, 2008 and August 4, 2007. We did make benefit payments of $0.3 million, funded by operating cash flows, during the three and six months ended August 2, 2008. No benefit payments were made during the three and six months ended August 4, 2007.

The following table summarizes the expected future benefit payments (in thousands):

Remainder of fiscal 2008	$	204
2009	408
2010	408
2011	523
2012	581
Years 2013 - 2017	2,905

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8. Commitments

During the three months ended August 2, 2008 and August 4, 2007, we incurred aggregate rent expense under operating leases of $18.2 million and $15.7 million, respectively, including contingent rent expense of $0.1 for both respective periods and $0.3 million and $1.8 million, respectively, of rent expense classified as store pre-opening cost. During the six months ended August 2, 2008 and August 4, 2007, we incurred aggregate rent expense under operating leases of $35.8 million and $30.6 million, respectively, including contingent rent expense of $0.1 million and $0.3 million, respectively and $0.6 million and $2.8 million, respectively, of rent expense classified as store pre-opening cost.

As of August 2, 2008 our 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 for our operating leases and our commitment under capital leases are as follows (in thousands):

	Operating Leases		Capital Leases
Remainder of fiscal 2008	$	37,172	$	509
Fiscal 2009	77,715		1,031
Fiscal 2010	77,841		1,053
Fiscal 2011	76,100		1,033
Fiscal 2012	69,911		1,039
Thereafter	352,142		21,421
Total	$	690,881	$	26,086
Less - weighted average interest of 7.9% on capital leases			14,322
Total principal payable and accrued interest			$	11,764	(1)

(1)Based upon the payment terms of the lease agreements, the lease payments primarily represent interest only payments for the next twelve months.

Subsequent to August 2, 2008, we have entered into additional retail leases with minimum lease payment requirements, which include the predetermined fixed escalations of the minimum rentals. As of September 8, 2008 our lease commitments increased by $0.2 million.

On February 13, 2007, we entered into an amended and restated credit agreement with Wells Fargo Bank, N.A., providing for an unsecured revolving line of credit of up to $60.0 million and allowing us to issue up to $60.0 million in letters of credit. The interest rate under the credit agreement is based upon either the London InterBank Offered Rate plus a margin ranging from 0.7 percent to 1.5 percent depending upon our leverage ratio (as defined in the credit agreement), or the lender’s prime rate.   The credit agreement also contains financial covenants, including requirements for specified minimum net worth and fixed charge ratio (as defined in the credit agreement). The credit agreement restricts our ability to, among other things, dispose of assets except in the ordinary course of business, participate in mergers or acquisitions in excess of $25 million, incur other indebtedness in excess of $25 million and make certain investments. In addition, we are subject to unused commitment fees based on a varying percentage of the amount of the total facility that is not drawn down under the credit agreement on a quarterly basis. The credit facility has a maturity date of January 28, 2012.

On April 16, 2008, we entered into a second amendment to the amended and restated credit agreement with Wells Fargo Bank, N.A.  The amendment provides us with additional operating flexibility by reducing the quarterly fixed charge coverage requirement for the remainder of fiscal 2008.  We also agreed that we will not repurchase Coldwater Creek stock prior to May 2, 2009 and will maintain liquidity of at least $30 million through April 2009.  The amount available under the facility and the term were unchanged by the amendment.

We had inventory purchase commitments of approximately $198.3 million, $150.7 million and $213.7 million at August 2, 2008, February 2, 2008 and August 4, 2007, respectively. Additionally, as of August 2, 2008, February 2, 2008 and August 4, 2007 we had no borrowings outstanding under the revolving line of credit and $16.9 million, $28.3 million and $34.0 million in commercial letters of credit issued, respectively.

9. Contingencies

We are involved in litigation and administrative proceedings arising in the normal course of our business. Actions filed against us from time to time include commercial, intellectual property infringement, customer and employment claims, including class action lawsuits alleging that we violated federal and state wage and hour and other laws. We believe that we have meritorious defenses to all lawsuits and legal proceedings.  Though we will continue to vigorously defend against them,

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we are unable to predict with certainty whether we will ultimately be successful.  However based on management’s evaluation, we believe that the resolution of these matters, taking into account existing contingency accruals and the availability of insurance and other indemnifications, will not materially impact our consolidated financial position, results of operations or cash flows.

Our multi-channel business model subjects us to state and local taxes in numerous jurisdictions, including franchise, and sales and use tax. We collect these taxes in jurisdictions in which we have a physical presence. While we believe we have paid or accrued for all taxes based on our interpretation of applicable law, tax laws are complex and interpretations differ from state to state. In the past, we have been assessed additional taxes and penalties by various taxing jurisdictions, asserting either an error in our calculation or an interpretation of the law that differed from our own. It is possible that taxing authorities may make additional assessments in the future. In addition to taxes, penalties and interest, these assessments could cause us to incur legal fees associated with resolving disputes with taxing authorities.

Additionally, changes in state and local tax laws, such as temporary changes associated with “tax holidays” and other programs, require us to make continual changes to our collection and reporting systems that may relate to only one taxing jurisdiction. If we fail to update our collection and reporting systems in response to these changes, any over collection or under collection of sales taxes could subject us to interest and penalties, as well as private lawsuits and damage to our reputation. In the opinion of management, resolutions of these matters will not have a material impact on our consolidated financial position, results of operations or cash flows.

10. Co-Branded Credit Card Program

Deferred marketing fees and revenue sharing

The following table summarizes the deferred marketing fee and revenue sharing activity for the three and six months ended August 2, 2008 and August 4, 2007 (in thousands):

	Three Months Ended						Six Months Ended
	August 2, 2008			August 4, 2007			August 2, 2008			August 4, 2007
Deferred marketing fees and revenue sharing - beginning of period	$	11,377		$	14,478		$	12,316		$	14,156
Marketing fees received	515			1,330			1,195			3,864
Revenue sharing received	2,946			—			2,946			—
Marketing fees recognized to revenue	(1,504		)	(1,963		)	(3,123		)	(4,175		)
Revenue sharing recognized to revenue	(561		)	—			(561		)	—
Deferred marketing fees and revenue sharing - end of period	$	12,773		$	13,845		$	12,773		$	13,845
Less - Current deferred marketing fees and revenue sharing	5,314			5,518			5,314			5,518
Long-term deferred marketing fees and revenue sharing	$	7,459		$	8,327		$	7,459		$	8,327

The following table provides an estimate of when we expect to amortize the deferred marketing fees of $10.4 million and the deferred revenue sharing payment of $2.4 million as of August 2, 2008 into revenue (in thousands). The schedule of deferred marketing fees is based upon current estimates and assumptions of the expected period the customer will use the credit card while the deferred revenue sharing payment is based upon the expected life of the co-branded credit card program, therefore amounts shown are subject to change.

Fiscal Period	Deferred Marketing Fees		Deferred Revenue Sharing Payment		Total
Remainder of 2008	$	2,587	$	241	$	2,828
2009	4,176		481		4,657
2010	2,537		481		3,018
2011	901		481		1,382
2012	187		481		668
Thereafter	—		220		220
	$	10,388	$	2,385	$	12,773

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Sales Royalty

The amount of sales royalty recognized as revenue during the three months ended August 2, 2008 and August 4, 2007 was approximately $1.3 million and $0.5 million, respectively.  During the six months ended August 2, 2008 and August 4, 2007 sales royalty revenue recognized was approximately $2.4 million and $1.2 million, respectively.  The amount of deferred sales royalty recorded in accrued liabilities was $3.4 million, $2.7 million and $0.7 million at August 2, 2008, February 2, 2008 and August 4, 2007, respectively.

11. Segment Reporting

The following table provides certain financial data for the direct and retail segments as well as reconciliations to the condensed consolidated financial statements (in thousands):

	Three Months Ended						Six Months Ended
	August 2, 2008			August 4, 2007			August 2, 2008			August 4, 2007
Net sales (a):
Retail	$	189,357		$	177,654		$	376,228		$	362,514
Direct	52,077			75,822			136,311			172,254
Consolidated net sales	$	241,434		$	253,476		$	512,539		$	534,768
Segment operating income:
Retail	$	24,341		$	26,597		$	26,946		$	59,650
Direct	10,669			17,922			27,155			42,150
Total segment operating income	35,010			44,519			54,101			101,800
Corporate and other	(29,264		)	(32,476		)	(63,361		)	(71,993		)
Consolidated income from operations	$	5,746		$	12,043		$	(9,260	)	$	29,807
Depreciation and amortization:
Retail	$	10,971		$	8,826		$	21,224		$	16,868
Direct	424			316			871			584
Corporate and other	3,433			3,211			7,717			6,607
Consolidated depreciation and amortization	$	14,828		$	12,353		$	29,812		$	24,059

(a)There have been no inter-segment sales during the reported periods.

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” in our most recent Annual Report on Form 10-K for the fiscal year ended February 2, 2008, as well as in this Quarterly Report on Form 10-Q and other reports we file with the SEC. We assume no future obligation to update our forward-looking statements or to provide periodic updates or guidance.

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

Coldwater Creek Profile

Coldwater Creek is a specialty retailer of women’s apparel, accessories, jewelry and gift items. Founded in 1984 as a catalog company, today we are a multi-channel specialty retailer generating $241.4 million in net sales in the three months ended August 2, 2008. Our proprietary merchandise assortment reflects a sophisticated yet relaxed and casual lifestyle.

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A commitment to providing superior customer service is manifest in all aspects of our business. We serve our customers through an expanding base of retail stores, as well as our catalog and e-commerce channels. Our merchandise assortment, retail stores, catalogs and e-commerce web site are designed to appeal to women who are 35 years of age and older with average annual household incomes in excess of $75,000.

Our mission is to become one of the premier specialty retailers for women 35 years of age and older in the United States by offering our customers a compelling merchandise assortment with superior customer service through all three sales channels.

References to a fiscal year are to the calendar year in which the fiscal year begins. We currently have two operating segments: retail and direct.

Fiscal 2008 Initiatives

Our business continues to be affected by increasingly challenging macroeconomic conditions, which are evidenced in our business by a highly promotional retail selling environment and a continued decrease in retail store traffic. We expect to continue to face these challenges, in particular the decreasing retail store traffic and heavy promotional discounting, during the second half of fiscal 2008 and foreseeable future. Our efforts during the remainder of fiscal 2008 will continue to be focused on our fiscal 2008 initiatives which we believe will continue to further our goal of becoming one of the premier specialty retailers for women 35 years of age and older in the United States. We expect that these initiatives will not be fully reflected in our business until the fourth quarter of fiscal 2008. These key initiatives include:

· Increased focus on product and customer experience

· Restoration of the full price heritage of the Coldwater Creek brand

· Shift in marketing approach

· Increased efficiency in the use of resources

Increased focus on product and customer experience   Our product and the customer experience are the foundation of all decision making at Coldwater Creek. Our highest priority is to improve our product as we believe that our success depends on having compelling product offerings for our customer. We are committed to returning to the look and feel that the Coldwater Creek brand originally represented, comfortable and casual, refocusing on quality, fit and consistency.

In connection with improving our product we are on track to lower our style and color count by at least 20 percent to provide a more focused and cohesive offering. We believe that the style and color reduction will allow us to focus our efforts towards fewer styles enabling us to better execute on our product offerings. In addition to expanding our direct sourcing from 50 percent of our apparel to approximately 60 percent of our apparel in fiscal 2008, we are also working towards reducing our retail inventories per square foot by an average of 15 percent in fiscal 2008. During the twelve month period ended August 2, 2008 we reduced our retail inventory per square foot by approximately 24 percent, while premium retail square footage grew by approximately 27 percent over the same period.

Restoration of the full price heritage of the Coldwater Creek brand   We are committed to restoring the full price heritage to our brand by being more prudent with promotional activity and discounting. Specifically, we have begun to limit the frequency, length, duration, and amount of our overall promotion cadence. We expect to refine our promotional approach to feature fewer, but more targeted campaigns. This is evidenced by a reduction in transactions carrying a promotional discount(1) from 44 percent during the second quarter of fiscal 2007 to 15 percent during the same period of 2008. We believe that prudently managing our promotions and discounting, accompanied with lowering our style and color count, reducing our retail inventories per square foot, and expanding our direct sourcing program, is critical to improving margins and returning to our full price heritage.

Shift in marketing approach   Historically, we have used a broad based marketing strategy of national magazine advertising and catalog circulation, with television advertising on a test basis. We are now shifting to a more point of sale, in-store focus. Our efforts are focused on maintaining and better engaging our best customers, as well as attracting new customers through select advertising placement. We believe this more focused approach will result in a reduction in our spending in 2008 by approximately $35 million versus fiscal 2007. During the first half of fiscal 2008, marketing expense, primarily including national magazine advertising and catalog circulation, decreased approximately $22.6 million, as compared with the first half of fiscal 2007.

(1) We define promotional discounts generally as temporary offerings, which include coupons and in-store promotions, to customers for specified dollar amount discounts or percentage discounts.

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For the six months ended August 2, 2008 we decreased national magazine advertising circulation by 52.7 percent compared to the six months ended August 4, 2007. Catalog circulation also decreased by 10.7 million or 20.4 percent during the same period, from 52.4 million catalogs to 41.7 million catalogs. The decrease in catalog circulation was primarily due to reduced Northcountry and Spirit catalog mailings. We have added approximately 562,000 net new names to our e-mail database since August 4, 2007 and conducted more targeted e-mail campaigns, which resulted in an additional 30.6 percent or 81.1 million emails being delivered in the six months ended August 2, 2008, as compared with the six months ended August 4, 2007.

Increased efficiency in the use of resources   In addition to a more focused approach on marketing, we have carefully evaluated our entire organization to determine where we can improve operational efficiencies. In January 2008, we eliminated 65 of our corporate support positions as a first step in executing our efficiency initiative. We believe our current personnel infrastructure will position us for sustained growth in the future. There were no positions eliminated in the Company’s retail stores, distribution center or customer contact centers.

We are also continuing to improve various information technology tools and systems in order to enhance operating efficiency and enable our infrastructure to accommodate growth. During the second half of fiscal 2007, we completed the initial implementation of our new financial and human resources systems.  During the second quarter of fiscal 2008, we continued activities to enhance or replace several fundamental systems, such as our inventory planning and allocation, financial and human resources systems and we continued to make improvements in our distribution infrastructure, processes and technology in order to expedite the flow of merchandise through our distribution center with the goal of moving product more quickly to our direct customers and premium retail stores.

We believe that a successful execution of these initiatives, which will be fully implemented by the fourth quarter of fiscal 2008, will position us well competitively when there is an improvement in macroeconomic conditions.

Other Developments

Revolving Line of Credit On April 16, 2008, we entered into a Second Amendment to our Amended and Restated Credit Agreement with Wells Fargo Bank, N.A. to, among other things, modify the covenant specifying a minimum fixed charge coverage ratio, thereby reducing the quarterly fixed charge coverage requirement for the remainder of fiscal 2008, add a covenant that we will not repurchase any of our stock prior to May 2, 2009, and require us to maintain minimum liquidity of $30 million through April 2009. The amount available under the facility and the term were unchanged by the amendment.

Loss on Asset Impairment We recorded an impairment charge of $1.5 million ($0.9 million after-tax) in the second quarter of fiscal 2008, related to the Coldwater Creek ~ The Spa concept. The impairment charge represents the excess of recorded carrying values of the long lived assets of certain day spa locations over the estimated fair value of these assets. We continue to operate nine day spa locations, focusing on the brand experience and opportunity to cross-market with Coldwater Creek retail stores. We have no plans to open additional day spa locations.

Comparison of the Three Months Ended August 2, 2008 with the Three Months Ended August 4, 2007

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the three months ended August 2, 2008 as compared to the three months ended August 4, 2007. It is provided to assist in assessing differences in our overall performance (in thousands):

	Three Months Ended
	August 2,			% of		August 4,			% of
	2008			net sales		2007			net sales		$	change		% change
Net sales	$	241,434		100.0	%	$	253,476		100.0	%	$	(12,042	)	(4.8	)%
Cost of sales	145,786			60.4	%	143,324			56.5	%	2,462			1.7	%
Gross profit	95,648			39.6	%	110,152			43.5	%	(14,504		)	(13.2	)%
Selling, general and administrative expenses	88,450			36.6	%	98,109			38.7	%	(9,659		)	(9.8	)%
Loss on asset impairments	1,452			0.6	%	—			0.0	%	1,452			—
Income from operations	5,746			2.4	%	12,043			4.8	%	(6,297		)	(52.3	)%
Interest, net and other	537			0.2	%	2,333			0.9	%	(1,796		)	(77.0	)%
Income before income taxes	6,283			2.6	%	14,376			5.7	%	(8,093		)	(56.3	)%
Income tax provision	3,143			1.3	%	5,680			2.2	%	(2,537		)	(44.7	)%
Net income	$	3,140		1.3	%	$	8,696		3.4	%	$	(5,556	)	(63.9	)%
Effective income tax rate	50.0		%			39.5		%

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Net Sales

Net sales consist of retail and direct sales, which include co-branded credit card program marketing fees, revenue sharing and sales royalty revenue and shipping fees received from customers for delivery of merchandise.

Net sales decreased during the three months ended August 2, 2008 as compared with the three months ended August 4, 2007 primarily due to decreases in sales within our direct segment and a decrease in comparable premium store sales. This decrease was offset by the addition of 62 premium retail stores, five merchandise clearance outlet stores and three day spa locations since August 4, 2007. We experienced a decline of 13.7 percent in comparable premium store sales in the three months ended August 2, 2008 as compared to a 6.0 percent decrease in comparable premium store sales(2) for the three months ended August 4, 2007.

We believe our sales performance for the three months ended August 2, 2008 was negatively impacted by the current challenging economic conditions, which are evidenced in our business by a highly promotional selling environment and decreased retail store traffic. In addition, during the three months ended August 2, 2008, our business was negatively impacted as we continued to navigate through what we believe was an over-assortment of merchandise that did not differentiate us from our competitors.  During the three months ended August 2, 2008, we experienced a decline in comparable premium retail store traffic and a decrease in average transaction value in both our premium retail stores and direct channel as compared to the same period in 2007. The decrease in average transaction value was primarily due to higher levels of markdowns(3) in both segments.

Shipping fees received from customers for delivery of merchandise decreased $3.3 million to $6.5 million for the three months ended August 2, 2008 as compared with the same period in 2007. We experienced an increase in co-branded credit card marketing fee revenue and royalty revenue of $0.4 million for the three months ended August 2, 2008 as compared with the same period in 2007. As part of the co-branded credit card program, we received our first revenue sharing payment of approximately $2.9 million during the three months ended August 2, 2008. The amount of revenue sharing recognized as revenue during the three months ended August 2, 2008 was approximately $0.6 million.

Cost of Sales/Gross Profit

The gross profit rate decreased by 3.9 percentage points during the three months ended August 2, 2008 as compared to the three months ended August 4, 2007.  Approximately 0.7 percentage points of this decrease was due to increased in-store markdowns, slightly offset by higher initial merchandise markups. The remainder of the decrease in our gross profit rate was the result of decreased leveraging of our retail occupancy costs and buying and distribution costs of approximately 4.0 and 0.2 percentage points, respectively, offset by a 1.0 percentage point improvement in shipping and handling costs as a percentage of sales.

Selling, General and Administrative Expenses

As a percentage of net sales, selling, general and administrative expense (SG&A) decreased by 2.1 percentage points in the three months ended August 2, 2008 as compared with the three months ended August 4, 2007. This decrease in SG&A rate

(2)   We define comparable premium stores as those stores in which the gross square footage has not changed by more than 20 percent in the previous 16 months and which have been open for at least 16 consecutive months (provided that store has been considered comparable for the entire quarter) without closure for seven consecutive days or moving to a different temporary or permanent location. Due to the extensive promotions that occur as part of the opening of a premium store, we believe waiting sixteen months rather than twelve months to consider a store to be comparable provides a better view of the growth pattern of the premium retail store base. During the three months ended August 2, 2008, the comparable premium store retail base included 236 premium retail stores compared to 172 premium retail stores for the same period of fiscal 2007. The calculation of comparable store sales varies across the retail industry and as a result, the calculations of other retail companies may not be consistent with our calculation.

(3) We define markdowns generally as permanent reductions from the original selling price.

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was the result of a 4.1 percentage point decrease in marketing expenses, offset by a 1.7 percentage point increase in employee expenses and a 0.3 percentage point increase in overhead costs.

Employee expenses and overhead costs as a percentage of net sales increased as the result of retail administrative and store employee salaries, wages, taxes and benefits as we continue to increase staffing to support the expanding retail store base. The decrease in marketing expenses as a percentage of net sales was driven primarily by decreased catalog and national magazine advertising circulation and the discontinuation of testing of television advertising. The reduced leveraging in employee and overhead expenses is primarily due to the decrease in comparable store sales.

Loss on Asset Impairment

During the three months ended August 2, 2008, we recorded an impairment charge of $1.5 million related to leasehold improvements and furniture and fixtures at certain day spa locations. No impairments were recorded during the three months ended August 4, 2007.

Interest, Net and Other

The decrease in interest, net and other for the three months ended August 2, 2008 as compared with the same period in the prior year is primarily the result of lower interest income earned on lower average cash balances and lower interest rates.

Provision for Income Taxes

The decrease in the consolidated provision for income taxes for the three months ended August 2, 2008 as compared with the same period in the prior year was the result of lower pre-tax income. The increase in effective tax rate for the comparable periods is also due to lower pre-tax income as permanent book-tax differences, primarily relating to state taxes, non-deductible stock compensation expense and interest, did not change significantly during the respective periods. See Note 2 to our condensed consolidated financial statements for further discussion of the effective tax rate.

Segment Results

We evaluate the performance of our operating segments based upon segment operating income, which is shown below along with segment net sales (in thousands):

	Three Months Ended
	August 2, 2008		% of Net Sales		August 4, 2007		% of Net Sales		% Change
Net sales:
Retail	$	189,357	78.4	%	$	177,654	70.1	%	6.6	%
Direct	52,077		21.6	%	75,822		29.9	%	(31.3	)%
	$	241,434	100.0	%	$	253,476	100.0	%	(4.8	)%
Segment operating income:
Retail	$	24,341			$	26,597
Direct	10,669				17,922
	$	35,010			$	44,519

The following table reconciles segment operating income to income from operations (in thousands):

	Three Months Ended
	August 2, 2008			August 4, 2007			% Change
Segment operating income	$	35,010		$	44,519		(21.4	)%
Unallocated corporate and other	(29,264		)	(32,476		)	(9.9	)%
Income from operations	$	5,746		$	12,043		(52.3	)%

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Retail Segment

Sales

The $11.7 million increase in retail segment net sales for the three months ended August 2, 2008 as compared with the three months ended August 4, 2007 is primarily the result of the addition of 62 premium retail stores, five merchandise clearance outlet stores and three day spa locations since August 4, 2007. This increase was offset by decreases in comparable premium store sales, as our premium retail stores experienced continued poor traffic over this period. Net sales in our comparable premium retail stores decreased $20.2 million to $127.7 million for the three months ended August 2, 2008 as compared with $147.9 million for the three months ended August 4, 2007.  During the three months ended August 2, 2008, we experienced a decline in comparable premium retail store traffic of 13.4 percent and a decrease in average transaction value of premium retail stores of 4.3 percent as compared to the same period in 2007. The decrease in average transaction value was primarily due to higher levels of in-store markdowns due to increased clearance activity.

Also contributing to the increase in retail segment net sales were increases of $0.6 million in co-branded credit card program revenue, $2.0 million in net sales from merchandise clearance outlet stores, and $1.3 million in net sales from our day spa concept in the three months ended August 2, 2008, as compared with the three months ended August 4, 2007.

We believe our sales performance for the three months ended August 2, 2008 was negatively impacted by the current challenging economic conditions, which are evidenced in our business by a highly promotional selling environment and decreased retail store traffic.  In addition, during the three months ended August 2, 2008, our business was negatively impacted as we continued to navigate through what we believe was an over-assortment of merchandise that did not differentiate us from our competitors.

Segment Operating Income

Retail segment operating income rate expressed as a percentage of retail segment sales for the three months ended August 2, 2008 as compared with the three months ended August 4, 2007 decreased by 2.1 percentage points. The decrease was primarily due to a 4.3 percentage point reduction in the leveraging of retail occupancy costs, which includes the impairment charge of $1.5 million or 0.8 percentage point reduction related to certain day spa locations, and a 0.1 percentage point increase in employee expenses. These reductions were offset by higher initial merchandise markups associated with our direct sourcing initiative and higher purchase volumes related to the retail expansion, partially offset by increased in-store markdown activity resulting in a 0.3 percentage point improvement in merchandise margins. In addition, improved leveraging of certain overhead costs and a decrease in marketing costs contributed a 1.2 and 0.8 percentage point improvement, respectively.

Costs related to the day spa concept, which are included in the above analysis, decreased our overall retail segment operating income rate by 0.9 percentage points for the three months ended August 2, 2008 compared to approximately 1.4 percentage points for the three months ended August 4, 2007.

Direct Segment

Sales

The direct segment net sales decreased $23.7 million during the three months ended August 2, 2008 as compared to the three months ended August 4, 2007. Sales through our Internet channel decreased $15.4 million from $54.8 million for the three months ended August 4, 2007 to $39.4 million for the three months ended August 2, 2008.  Sales from our phone and mail channel for the same period decreased $8.3 million from $21.0 million to $12.7 million.

Phone and mail net sales are derived from orders taken from customers over the phone or through the mail. Catalogs are used as a brand marketing vehicle to drive sales in all channels and we encourage customers to choose the channel they deem most convenient. Sales made through other channels that we believe were driven by the initial receipt of a catalog are not included in phone and mail net sales. Consequently, as customers choose to purchase merchandise through other channels, we expect catalog business net sales to continue to generally decrease as a percent of total net sales.

The decrease in Internet business net sales is primarily due to fewer orders over the Internet, fewer catalogs mailed, and an approximate 3.4 percent decrease in average transaction value during the period as a result of higher levels of Internet markdowns. The decrease in phone and mail businesses net sales is related to fewer catalogs mailed during the period, offset by an approximate 11.9 percent increase in average transaction value during the three months ended August 2, 2008 as compared to the three months ended August 4, 2007.

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Direct segment net sales were also negatively impacted by a decrease of $3.3 million in shipping revenue in the three months ended August 2, 2008 as compared to the three months ended August 4, 2007. These decreases were offset by an increase of $0.4 million in co-branded credit card program revenue over the same periods.

Segment Operating Income

Direct segment operating income rate expressed as a percentage of direct segment sales for the three months ended August 2, 2008 as compared with the three months ended August 4, 2007 decreased by 3.2 percentage points. Increased clearance activity, slightly offset by higher initial merchandise margins, resulted in a 4.1 percentage point decline in merchandise margins. In addition, our direct segment operating income rate was negatively impacted by reduced leveraging of employee expenses and overhead costs which resulted in a 2.5 percentage point and 1.3 percentage point decline in direct segment operating income rate, respectively. These increases were partially offset by a decrease in marketing expense, which resulted in a 4.7 percentage point improvement in direct segment operating income rate.

Corporate and Other

Corporate and other expenses decreased $3.2 million in the three months ended August 2, 2008 as compared to the three months ended August 4, 2007. The decrease is mainly due to a $3.8 million decrease in marketing expenses, primarily related to a reduction in national magazine advertisement circulation and the discontinuation of our television advertising test. Additionally, employee expense decreased $0.7 million, consisting predominantly of wages. This decrease was offset by an increase in corporate support costs of $0.7 million, primarily professional service fees, and an occupancy cost increase of $0.6 million primarily as a result of facilities maintenance and information technology support.

Comparison of the Six Months Ended August 2, 2008 with the Six Months Ended August 4, 2007

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the six months ended August 2, 2008 as compared to the six months ended August 4, 2007. It is provided to assist in assessing differences in our overall performance (in thousands):

	Six Months Ended
	August 2,			% of		August 4,			% of
	2008			net sales		2007			net sales		$ change			% change
Net sales	$	512,539		100.0	%	$	534,768		100.0	%	$	(22,229	)	(4.2	)%
Cost of sales	324,091			63.2	%	296,129			55.4	%	27,962			9.4	%
Gross profit	188,448			36.8	%	238,639			44.6	%	(50,191		)	(21.0	)%
Selling, general and administrative expenses	196,256			38.3	%	208,832			39.1	%	(12,576		)	(6.0	)%
Loss on asset impairments	1,452			0.3	%	—			0.0	%	1,452			—
Income (Loss) from operations	(9,260		)	(1.8	)%	29,807			5.6	%	(39,067		)		*
Interest, net and other	1,090			0.2	%	4,549			0.9	%	(3,459		)	(76.0	)%
Income (Loss) before income taxes	(8,170		)	(1.6	)%	34,356			6.4	%	(42,526		)		*
Income tax provision (benefit)	(2,070		)	(0.4	)%	13,630			2.5	%	(15,700		)		*
Net income (loss)	$	(6,100	)	(1.2	)%	$	20,726		3.9	%	$	(26,826	)		*
Effective income tax rate	25.3		%			39.7		%

* Comparisons from positive to negative values are considered not meaningful.

Net Sales

Net sales consist of retail and direct sales, which include co-branded credit card program marketing fees, revenue sharing and sales royalty revenue and shipping fees received from customers for delivery of merchandise.

Net sales decreased during the six months ended August 2, 2008 as compared with the six months ended August 4, 2007 primarily due to decreases in comparable premium store sales and decreases in sales through our direct segment. This decrease was offset by the addition of 62 premium retail stores, five merchandise clearance outlet stores and three day spa concept locations since August 4, 2007. We experienced decreases in comparable premium retail store sales of 19.0 percent and 13.7 percent in the first and second quarters of fiscal 2008, respectively.

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We believe our sales performance for the six months ended August 2, 2008 was negatively impacted by the current challenging economic conditions, which are evidenced in our business by a highly promotional selling environment and decreased retail store traffic. In addition, during the six months ended August 2, 2008, our business was negatively impacted as we continued to navigate through what we believe was an over-assortment of merchandise that did not differentiate us from our competitors.

During the six months ended August 2, 2008, we experienced a decline in comparable premium retail store traffic and a decrease in average transaction value in both premium retail stores and direct channel as compared to the same period in 2007. The decrease in average transaction value was primarily due to higher levels of markdown activity in both segments.

Shipping fees received from customers for delivery of merchandise decreased $3.4 million to $17.7 million for the six months ended August 2, 2008 as compared with the same period in 2007. We experienced an increase in co-branded credit card marketing fee revenue and royalty revenue of $0.1 million for the six months ended August 2, 2008 as compared with the same period in 2007. As part of the co-branded credit card program, we received our first revenue sharing payment of approximately $2.9 million during the six months ended August 2, 2008. The amount of revenue sharing recognized as revenue during the six months ended August 2, 2008 was approximately $0.6 million.

Cost of Sales/Gross Profit

The gross profit rate decreased by 7.8 percentage points during the six months ended August 2, 2008 as compared to the six months ended August 4, 2007.  Approximately 4.5 percentage points of this decrease was due to increased markdowns and clearance activity, slightly offset by higher initial merchandise markups. The remainder of the decrease in our gross profit rate was the result of decreased leveraging of our retail occupancy costs and buying and distribution costs of approximately 3.4 and 0.4 percentage points, respectively, offset by a 0.5 percentage point improvement in shipping and handling costs as a percentage of sales.

Selling, General and Administrative Expenses

As a percentage of net sales, selling, general and administrative expense (SG&A) decreased by 0.8 percentage points in the six months ended August 2, 2008 as compared with the six months ended August 4, 2007. This decrease in SG&A rate was the result of a 3.9 percentage point decrease in marketing expenses, offset by a 2.5 percentage point increase in employee expenses and a 0.6 percentage point increase in overhead costs.

Employee expenses and overhead costs as a percentage of net sales increased as the result of retail administrative and store employee salaries, wages, taxes and benefits as we continue to increase staffing to support the expanding retail store base. The decrease in marketing expenses as a percentage of net sales was driven primarily by decreased catalog and national magazine advertising circulation and the discontinuation of testing of television advertising. The reduced leveraging in employee and overhead expenses is primarily due to the decrease in comparable store sales and decrease in direct segment sales.

Loss on Asset Impairment

During the six months ended August 2, 2008, we recorded an impairment charge of $1.5 million related to leasehold improvements and furniture and fixtures at certain day spa locations. No impairments were recorded during the six months ended August 4, 2007.

Interest, Net and Other

The decrease in interest, net and other for the six months ended August 2, 2008 as compared with the same period in the prior year is primarily the result of lower interest income earned on lower average cash balances and lower interest rates.

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Provision for Income Taxes

The benefit for income taxes for the six months ended August 2, 2008 as compared to the provision in the same period in the prior year was the result of a pre-tax loss, resulting in a tax benefit of $2.1 million. See Note 2 to our condensed consolidated financial statements for further discussion on the effective tax rate.

Segment Results

We evaluate the performance of our operating segments based upon segment operating income, which is shown below along with segment net sales (in thousands):

	Six Months Ended
	August 2, 2008		% of Net Sales		August 4, 2007		% of Net Sales		% Change
Net sales:
Retail	$	376,228	73.4	%	$	362,514	67.8	%	3.8	%
Direct	136,311		26.6	%	172,254		32.2	%	(20.9	)%
	$	512,539	100.0	%	$	534,768	100.0	%	(4.2	)%
Segment operating income:
Retail	$	26,946			$	59,650
Direct	27,155				42,150
	$	54,101			$	101,800

The following table reconciles segment operating income to income from operations (in thousands):

	Six Months Ended
	August 2, 2008			August 4, 2007			% Change
Segment operating income	$	54,101		$	101,800		(46.9	)%
Unallocated corporate and other	(63,361		)	(71,993		)	(12.0	)%
Income (Loss) from operations	$	(9,260	)	$	29,807			*

* Comparisons from positive to negative values are considered not meaningful.

Retail Segment

Sales

The $13.7 million increase in retail segment net sales for the six months ended August 2, 2008 as compared with the six months ended August 4, 2007 is primarily the result of the addition of 62 premium retail stores, five merchandise clearance outlet stores and three day spa concept locations since August 4, 2007, offset by decreases in comparable premium store sales of 19.0 and 13.7 percent, respectively, during the first and second quarters of fiscal 2008. The decrease in comparable store sales reflects decreases in comparable premium retail store traffic of 9.4 and 13.4 percent, respectively, during the first and second quarters of fiscal 2008. During the six months ended August 2, 2008, we also experienced a decrease in average transaction value of premium retail stores of 9.1 percent as compared to the same period in 2007. The decrease in average transaction value was primarily due to higher levels of in-store markdowns.

Also contributing to the increase in retail segment net sales was an increase of $4.4 million in net sales from merchandise clearance outlet stores, $2.6 million in net sales from our day spa concept, and $0.2 million in co-branded credit card program revenue in the six months ended August 2, 2008 as compared with the six months ended August 4, 2007.

We believe our sales performance for the six months ended August 2, 2008 was negatively impacted by the current challenging economic conditions, which are evidenced in our business by a highly promotional selling environment and decreased retail store traffic. In addition, during the six months ended August 2, 2008, our business was negatively impacted as we continued to navigate through what we believe was an over-assortment of merchandise that did not differentiate us from our competitors.

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Segment Operating Income

Retail segment operating income rate expressed as a percentage of retail segment sales for the six months ended August 2, 2008 as compared with the six months ended August 4, 2007 decreased by 9.3 percentage points. Increased in-store markdown activity, slightly offset by higher initial merchandise margins, resulted in a 4.6 percentage point decline in merchandise margins. Retail segment operating rate was also negatively impacted by a 4.1 percentage point reduction in the leveraging of retail store occupancy costs, which includes the impairment charge of $1.5 million or 0.4 percentage point reduction related to certain day spa locations, and a 1.4 percentage point increase in employee expense. Improved leveraging of certain overhead costs and a decrease in marketing costs contributed a 0.6 and 0.2 percentage point improvement, respectively. The reduced leveraging of operating expenses is primarily due to a decrease in comparable store sales.

Costs related to the day spa concept, which are included in the above analysis, decreased our overall retail segment operating income rate by 0.8 percentage points for the six months ended August 2, 2008 compared to approximately 1.4 percentage points for the six months ended August 4, 2007.

Direct Segment

Sales

The direct segment net sales decreased $35.9 million during the six months ended August 2, 2008 as compared to the six months ended August 4, 2007. Sales through our Internet channel decreased $17.5 million from $120.6 million for the six months ended August 4, 2007 to $103.1 million for the six months ended August 2, 2008.  Sales from our phone and mail channel for the same period decreased $18.4 million from $51.6 million to $33.2 million.

Phone and mail net sales are derived from orders taken from customers over the phone or through the mail. Catalogs are used as a brand marketing vehicle to drive sales in all channels and we encourage customers to choose the channel they deem most convenient. Sales made through other channels that we believe were driven by the initial receipt of a catalog are not included in phone and mail net sales. Consequently, as customers choose to purchase merchandise through other channels, we expect catalog business net sales to continue to generally decrease as a percent of total net sales.

The decrease in Internet business net sales is primarily due to fewer orders over the Internet, fewer catalogs mailed, and an approximate 8.1 percent decrease in average transaction value during the period as a result of higher levels of Internet markdowns. The decrease in phone and mail businesses net sales is related to fewer catalogs mailed and an approximate 2.6 percent decrease in average transaction value during the six months ended August 2, 2008 as compared to the six months ended August 4, 2007.

Direct segment net sales were also negatively impacted by a decrease of $3.4 million in shipping revenue in the six months ended August 2, 2008 as compared to the six months ended August 4, 2007. These decreases were offset by an increase of $0.5 million in co-branded credit card program revenue over the same periods.

Segment Operating Income

Direct segment operating income rate expressed as a percentage of direct segment sales for the six months ended August 2, 2008 as compared with the six months ended August 4, 2007 decreased by 4.5 percentage points. Increased clearance activity, slightly offset by higher initial merchandise margins, resulted in a 4.4 percentage point decline in merchandise margins. In addition, our direct segment operating income rate was negatively impacted by reduced leveraging of employee expenses and overhead costs which resulted in a 1.6 and 1.3 percentage point decline in direct segment operating income rate, respectively. These increases were partially offset by a decrease in marketing expense which resulted in a 2.8 percentage point improvement in direct segment operating income rate.

Corporate and Other

Corporate and other expenses decreased $8.6 million in the six months ended August 2, 2008 as compared to the six months ended August 4, 2007. The decrease is mainly due to a $12.8 million decrease in marketing expenses primarily related to a reduction in national magazine advertisement circulation and the discontinuation of our television advertising test . This decrease was offset by increases in corporate support costs of $1.3 million, consisting primarily of professional service fees and retail manager meetings, occupancy costs of $1.6 million, consisting primarily of depreciation, and employee expenses of $1.3 million, consisting predominantly of corporate salaries.

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Seasonality

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 various merchandise offerings;

·the number and timing of premium retail store openings;

·the timing of catalog mailings and the number of catalogs mailed;

·the timing of e-mail campaigns;

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

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

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

·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 merchandise offerings based upon an understanding of prevailing consumer demand, preferences and trends. The timing of merchandise offerings may be further impacted by, among other factors, the performance of various third parties on which we are dependent. Additionally, the net sales we realize from a particular merchandise offering may impact more than one fiscal quarter and year and the amount and pattern of the sales realization may differ from that realized by a similar merchandise offering in a prior fiscal quarter or year. 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 demand 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 the existing workforce. Additionally, as gift items and accessories are more prominently represented in the November and December holiday season merchandise offerings, we typically expect, absent offsetting factors, to realize higher consolidated gross margins and earnings 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.

Liquidity and Capital Resources

In recent fiscal years, we financed ongoing operations and growth initiatives primarily from cash flow generated by operations, trade credit arrangements and the proceeds from our May 2004 public offering of common stock. However, as we produce catalogs, open retail stores and purchase inventory in anticipation of future sales realization, and as operating cash flows and working capital experience seasonal fluctuations, we might occasionally utilize our bank credit facility.

On February 13, 2007, we entered into an amended and restated credit agreement with Wells Fargo Bank, N.A., providing for an unsecured revolving line of credit of up to $60.0 million and allowing us to issue up to $60.0 million in letters of credit. The interest rate under the credit agreement is based upon either the London InterBank Offered Rate plus a margin ranging from 0.7 percent to 1.5 percent depending upon our leverage ratio (as defined in the credit agreement), or the lender’s prime rate.  The credit agreement also contains financial covenants, including requirements for specified minimum net worth and fixed charge ratio (as defined in the credit agreement). The credit agreement restricts our ability to, among other things, dispose of assets except in the ordinary course of business, participate in mergers or acquisitions in excess of $25 million, incur other indebtedness in excess of $25 million and make certain investments. In addition, we are subject to unused commitment fees based on a varying percentage of the amount of the total facility that is not drawn down under the credit agreement on a quarterly basis. The credit facility has a maturity date of January 28, 2012.

On April 16, 2008, we entered into a second amendment to the amended and restated credit agreement with Wells Fargo Bank, N.A.  The amendment provides us with additional operating flexibility by reducing the quarterly fixed charge coverage

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requirement for the remainder of fiscal 2008.  We also agreed that we will not repurchase Coldwater Creek stock prior to May 2, 2009 and will maintain liquidity of at least $30 million through April 2009.  The amount available under the facility and the term were unchanged by the amendment.

Operating activities generated $68.1 million and $34.4 million of positive cash flow during the six months ended August 2, 2008 and August 4, 2007, respectively.

On a comparative year-to-year basis, the $33.7 million increase in cash flows from operating activities during the six months ended August 2, 2008 as compared with the six months ended August 4, 2007 resulted primarily from reduced payments on inventory purchases and reduced marketing costs, taxes received of $4.6 million versus taxes paid of $10.5 million in the comparable period, and an increase of $0.8 million in fees collected from the co-branded credit card program, which includes a $2.9 million payment related to the revenue sharing component of our co-branded credit card program that we received for the first time in the second quarter of fiscal 2008. We also experienced an increase in cash collected on tenant allowances of $5.0 million as total cash collected was $19.2 million during the six months ended August 2, 2008 as compared to $14.2 million during the six months ended August 4, 2007. This increase was offset by decreased revenues and lower gross margins, as well as a decrease of $3.2 million in interest income collected.

Cash outflows from investing activities principally consisted of capital expenditures which totaled $44.8 million and $57.5 million during the six months ended August 2, 2008 and August 4, 2007, respectively. Capital expenditures during the six months ended August 2, 2008 primarily related to leasehold improvements and furniture and fixtures associated with the opening of 16 additional premium retail stores, 23 premium retail stores under construction, three merchandise clearance outlet stores, office space expansion and to a lesser extent the remodeling of certain existing stores, and the expansion of our IT and distribution infrastructure. Capital expenditures during the six months ended August 4, 2007 primarily related to leasehold improvements and furniture and fixtures associated with the opening of 20 additional premium retail stores and 18 premium retail stores under construction, and to a lesser extent the remodeling of certain existing stores, and the expansion of our IT and distribution infrastructure.  The decrease in capital expenditures in the current six month period is the result of our initial investment in our new enterprise resource planning system, the build-out of our New York flagship store and the expansion of our customer contact and IT data center in the first half of fiscal 2007. Cash outflows for the six months ended Augst 2, 2008 were offset by cash inflows of  $3.1 million related to the proceeds from the sale of certain assets.

Cash inflows from financing activities were $0.4 million and $4.4 million during the six months ended August 2, 2008 and August 4, 2007, respectively. The cash inflows were derived from activity related to stock option exercises and the purchase of shares under our employee stock purchase plan.  During the six months ended August 2, 2008, cash inflows were partially offset by payments made on our capital leases and other financing obligations.

As a result of the foregoing, we had $110.1 million in consolidated working capital at August 2, 2008, compared with $115.8 million at February 2, 2008. Our consolidated current ratio was 1.60 at August 2, 2008, compared with 1.69 at February 2, 2008. We had no outstanding borrowings under our credit facility at August 2, 2008 or February 2, 2008.

Capital expenditures for the full year in fiscal 2008 are expected to be approximately $80.0 million, primarily associated with the premium retail store expansion, store-related expenditures, office space expansion, investments in information technology and, to a lesser extent, other corporate related capital expenditures.

We believe cash flow from operations and available borrowing capacity under our bank credit facility will be sufficient to fund current operations and retail store openings under our current store roll-out plan.

Future Outlook

Though we were profitable in the second quarter of fiscal 2008, we continue to operate and compete in increasingly challenging economic conditions. These conditions are evidenced in our business by a highly promotional selling environment and a continued decrease in retail store traffic. These conditions, which continued into the second half of fiscal 2008, have had a negative impact on our sales, gross margins and earnings. We believe the current conditions, in particular the decreasing retail store traffic and heavy promotional discounting, will continue during the remainder of fiscal 2008 and the foreseeable future.

We expect our retail expansion to continue to be the key driver of future growth. As we execute our fiscal 2008 initiatives we will continue to incur additional costs to support our retail expansion and improve existing information technology infrastructure while at the same time focusing on controlling costs. We believe that an effective implementation of these initiatives will put us in a strong competitive position when there is an improvement in macroeconomic conditions.

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Critical Accounting Policies and Estimates

Preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. These estimates and assumptions are based on historical results as well as future expectations. Actual results could vary from our estimates and assumptions.

The accounting policies and estimates 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. Please refer to the discussion of critical accounting policies in our most recent Annual Report on Form 10-K for the fiscal year ended February 2, 2008, for further details.

·Sales Returns

·Customer Loyalty Programs

·Inventory Valuation

·Direct Response Advertising

·Stock-Based Compensation

·Impairment of Long-Lived Assets

·Supplemental Executive Retirement Plan

Recently Issued Accounting Standards

See Note 2 to our condensed consolidated financial statements.

Off-Balance Sheet Liabilities and Other Contractual Obligations

We do not have any material off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

The following table summarizes our minimum contractual commitments and commercial obligations as of August 2, 2008 (in thousands):

	Payments Due in Fiscal Year
	Total		2008		2009-2010		2011-2012		Thereafter
Contractual Obligations
Operating leases (a)	$	690,881	$	37,172	$	155,556	$	146,011	$	352,142
Contractual commitments (b)	200,068		200,068		—		—		—
Capital leases (c)	26,086		509		2,084		2,072		21,421
Other financing obligations (d)	3,584		556		3,028		—		—
Other long-term liabilities (e)(f)	12,425		2,683		1,675		1,104		6,963
Total	$	933,044	$	240,988	$	162,343	$	149,187	$	380,526

(a)

We lease retail store space as well as other property and equipment under operating leases. Retail store leases require the payment of additional rent based on sales above a specified minimum. The operating lease obligations noted above do not include any contingent rental expense we may incur based on future sales above the specified minimums. Several lease agreements provide lease renewal options. Future operating lease obligations would change if these renewal options were exercised.

(b)

Contractual commitments include inventory purchase orders of $198.3 million and construction commitments of $1.7 million. We expect to pay all of these commitments in the next twelve months. The actual timing of the payments is subject to change based upon actual receipt of the inventory and the terms of payment with the vendor.

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(c)	The weighted average interest rate on the capital leases is approximately 7.9 percent. Based upon the payment terms of the lease agreements, the lease payments primarily represent interest only payments for the next twelve months. Payments represent the principal and accrued interest of $11.8 million and interest expense to be incurred of approximately $14.3 million.
(d)	Payments on other financing obligations represent interest expense to be incurred of approximately $0.4 million and principal amounts due in the next twelve months of approximately $1.1 million, which has been recorded as a current liability.
(e)	Other long-term liabilities primarily include amounts on our August 2, 2008 consolidated balance sheet representing obligations under our supplemental executive retirement plan of $8.6 million, $3.2 million related to our employee retention compensation program, and asset retirement obligations under certain of our lease arrangements of $0.3 million. We expect payments of approximately $0.4 million during the next twelve months related to the supplemental executive retirement plan. The payments above relating to the $3.2 million retention program, of which $2.5 million will be paid during the next twelve months, do not include $1.2 million of additional compensation that is to be recognized over the employees’ remaining service periods.
(f)	We have excluded $136.5 million and $7.5 million of deferred rents and deferred revenue, respectively, from the other long-term liabilities in the above table. These amounts have been excluded as deferred rents and relate to operating leases which are already reflected in the operating lease category above, and the deferred revenue does not represent a contractual obligation that will be settled in cash.

Our only individually significant operating lease is for our distribution center and customer contact center located in Mineral Wells, West Virginia. During the third quarter of fiscal 2006, construction was completed on the 350,000 square-foot expansion to this distribution center, increasing the distribution center size from 610,000 square-feet to 960,000 square-feet. As a result, the distribution center operating lease was amended to include the expansion and extend the lease term from approximately 15 years to 20 years. Our remaining lease commitment as of August 2, 2008 is approximately $74.2 million and has been reflected in the schedule above. All other operating leases primarily pertain to retail and outlet stores, day spas and to various equipment and technology.

Subsequent to August 2, 2008, we entered into additional retail leases with minimum lease payment requirements, and as a result, as of September 8, 2008 our operating lease commitments increased by $0.2 million.

As of August 2, 2008 we had $16.9 million in letters of credit issued.

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. During the fiscal quarter ended August 2, 2008, 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 this period. However, as any future borrowings under our amended and restated 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

Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of August 2, 2008. Based on that evaluation, our President and Chief Executive Officer and

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Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of August 2, 2008.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended August 2, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

We are, from time to time, involved in various legal proceedings incidental to the conduct of business. Actions filed against us from time to time include commercial, intellectual property infringement, customer and employment claims, including class action lawsuits alleging that we violated federal and state wage and hour and other laws. We believe that we have meritorious defenses to all lawsuits and legal proceedings.  Though we will continue to vigorously defend against them, we are unable to predict with certainty whether or not we will ultimately be successful.  However based on management’s evaluation, we believe that the resolution of these matters, taking into account existing contingency accruals and the availability of insurance and other indemnifications, will not materially impact our consolidated financial position, results of operations or cash flows.

ITEM 1A.RISK FACTORS

Investing in our common stock is subject to a number of risks and uncertainties. We have updated the following risk factors to reflect changes during the second quarter of fiscal 2008 we believe to be material to the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008 filed with the Securities and Exchange Commission. The risks and uncertainties described below are not the only ones that we face and are more fully described in our Annual Report on Form 10-K and in other reports we file with the Securities and Exchange Commission. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial also may negatively impact our business.

Demand for our merchandise is difficult to gauge and our inability to predict consumer spending patterns and consumer preferences may reduce our revenues, gross margins and earnings.

Consumer spending patterns are difficult to predict and are sensitive to the general economic climate, the consumer’s level of disposable income, consumer debt, and overall consumer confidence, which has been impacted recently by rising energy and food costs. Declines in consumer spending on apparel and accessories could reduce our revenues, gross margins and earnings. We continue to be affected by increasingly challenging macroeconomic conditions which are evidenced in our business by a highly promotional retail selling environment and a continued decrease in retail store traffic. These conditions, which have continued into the third quarter of fiscal 2008, have had a negative impact on our revenues, gross margins and earnings. We believe these conditions, in particular the decreasing retail store traffic and heavy promotional discounting, will continue during the remainder of fiscal 2008 and the foreseeable future.  In addition, during the six months ended August 2, 2008, our business was negatively impacted as we continued to navigate through what we believe was an over-assortment of merchandise that did not differentiate us from our competitors.  We have recently announced changes in our business strategy that we hope over time will both increase the appeal of our merchandise to customers and reduce the impact of discounting and promotions. These initiatives will take time to be fully implemented and there is no assurance that they will be successful or that they will have any positive effect on our operating results.

Forecasting consumer demand for our merchandise is difficult given the nature of changing fashion trends and consumer preferences, which can vary by season and from one geographic region to another. On average, we begin the design process for apparel nine to ten months before merchandise is available to consumers, and we typically begin to make purchase commitments four to eight months in advance. These lead times make it difficult for us to respond quickly to changes in demand for our products and amplify the consequences of any misjudgments we might make.

If the demand for our merchandise is lower than expected we will be forced to discount more merchandise, which reduces our gross margins and earnings. Our inventory levels fluctuate seasonally, and at certain times of the year, such as during the holiday season, we maintain higher inventory levels and are particularly susceptible to risks related to demand for our merchandise. If we elect to carry relatively low levels of inventory and demand is stronger than we anticipated, we may be forced to backorder merchandise in our direct channels or not have merchandise available for sale in our retail stores, which may result in lost sales and lower customer satisfaction.

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The day spa concept may not be successful and may be abandoned at any time.

We operate the Coldwater Creek ~ The Spa concept in nine locations. We opened three of these locations during the second half of fiscal 2007. The other six locations have been open approximately two years. To date, our day spa has had a negative impact on our earnings, as we experiment with marketing approaches and gather data regarding the spa business and, in particular, our spa customer. During the three months ended August 2, 2008, we determined that the carrying amount of certain assets at certain day spa locations will not be recovered. Consequently, we recorded an impairment charge of $1.5 million related to the day spa concept.

We have not formed a conclusion as to the long-term prospects of this concept, although we have no plan to build additional day spas. There is no assurance that the day spa concept will ever be successful or that we will continue to develop future spas. Factors that could cause us to curtail or abandon the day spa concept include:

·unexpected or increased costs or delays in the concept’s development;

·the potential demands on management resources in developing this new concept;

·legal and regulatory constraints;

·the inherent difficulty in forecasting consumer tastes and trends through market research, and the possibility that we will determine through the performance of our day spas that demand does not meet our expectations; and

·our inability to fund our day spa concept or its expansion with operating cash as a result of either lower sales from our retail and direct businesses or higher than anticipated costs, or both.

If we were to abandon the day spa concept, we would be required to write off any costs we have capitalized and may incur lease termination costs, which would have a material and adverse effect on results of operations, particularly for the quarter in which a write off is recognized. Additionally, there is no assurance that we will not incur additional impairment charges related to our day spa concept.

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

The key driver of our growth strategy continues to be the retail store expansion. As of August 2, 2008, we operated 322 premium retail stores. We have since opened an additional four stores in the third quarter of fiscal 2008 for a total of 326 premium retail stores currently in operation. We plan to open approximately 40 to 45 premium retail stores in fiscal 2008. We believe we have the potential to grow our retail business to a total of 500 to 550 premium retail stores over the next three to five 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. The 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

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

Any miscalculations or shortcomings in the planning and control of the retail growth strategy could materially impact results of operations and financial condition.  In addition, recent macroeconomic conditions including the ongoing credit crisis could result in an inability on the part of real estate developers to obtain retail property in preferred locations.

Though it is our present intention to open approximately 40 to 45 new stores in fiscal 2008, we do not maintain a specific rollout plan beyond a one-year horizon. We continually reassess store rollout plans based on the overall retail environment, the performance of the 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 planned store openings, particularly if we experience strong retail sales and have access to the necessary working capital or external financing. Likewise, we would be inclined to curtail store rollout if we were to continue to experience weaker retail sales or if we did not have adequate working capital or access to financing, or as a part of a cost containment initiative.

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

We expect to continue to expand our direct sourcing program and to source more apparel directly from foreign vendors, particularly those located in Asia as well as those located in India and Central America. During fiscal 2007 we were the importer of record for approximately 50 percent of total apparel purchases and we anticipate that we will be the importer of record on approximately 60 percent of total apparel purchases for fiscal 2008, with the ultimate target being 70 percent. This will expose us to new and greater risks and uncertainties, the occurrence of which could substantially impact our ability to source apparel 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, as well as credit assurances we are required to provide to foreign vendors;

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

·rising fuel and energy costs;

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

·financial instability of a vendor or vendors;

·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.

Irrespective of our direct sourcing initiative, substantially all of our merchandise, including that which we buy from domestic vendors, is manufactured overseas. Consequently, regardless of how we source our merchandise, we are exposed to the uncertainties of relying on foreign vendors for our merchandise.

The United States and the European Union have imposed trade quotas on certain apparel and textile categories from the Peoples Republic of China. The memorandum of understanding between the United States and The Peoples Republic of China, which outlines the new quotas, will be in effect through December 2008. Our sourcing strategy is designed to allow us to adjust to potential shifts in availability of apparel following the expiration of quotas for World Trade Organization member countries, and the re-imposition of quotas for apparel and textiles exported from the Peoples Republic of China. However, sourcing operations may be adversely affected by trade limits, political and/or financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, and/or other trade disruptions.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None

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

The 2008 Annual Meeting of Stockholders of Coldwater Creek Inc. was held on June 14, 2008. At such meeting, the following proposals were voted upon and approved:

Proposal No. 1: To elect three class I directors to the Company’s Board of Directors.

	For	Withheld
Curt Hecker	60,735,728	670,426
Georgia Shonk-Simmons	60,959,477	446,677
Michael J. Potter	61,101,325	304,829

Continuing Directors:

Dennis Pence

Daniel Griesemer

Robert H. McCall

James R. Alexander

Kay Isaacson-Leibowitz

Jerry Gramaglia

Frank M. Lesher

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Proposal No. 2: To ratify the appointment of Deloitte and Touche LLP as our independent auditors.

For	Against	Abstain	Broker non-votes
61,156,136	231,196	18,822	—

ITEM 5.OTHER INFORMATION

None

ITEM 6.EXHIBITS

(A) Exhibits:

Exhibit Number	Description of Document
31.1	Certification by Daniel Griesemer of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2	Certification by Timothy O. Martin of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32.1	Certification by Daniel Griesemer and Timothy O. Martin pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements 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 11th day of September 2008.

COLDWATER CREEK INC.
By:	/s/ Daniel Griesemer
	Daniel Griesemer
	President and Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Timothy O. Martin
	Timothy O. Martin
	Senior Vice-President and
	Chief Financial Officer
	(Principal Financial Officer and
	Principal Accounting Officer)

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EXHIBIT INDEX

ExhibitNumber	Description of Document
31.1	Certification by Daniel Griesemer of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2	Certification by Timothy O. Martin of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32.1	Certification by Daniel Griesemer and Timothy O. Martin pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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