Coldwater Creek (CWTRQ) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the Quarterly Period Ended August 1, 2009

OR

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

Commission File Number 0-21915

COLDWATER CREEK INC.

(Exact name of registrant as specified in its charter)

DELAWARE	82-0419266
(State of other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

ONE COLDWATER CREEK DRIVE, SANDPOINT, IDAHO 83864

(Address of principal executive offices)

(208) 263-2266

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  o    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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

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

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

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, 2009
Common Stock ($.01 par value)	91,451,444

Coldwater Creek Inc.

Form 10-Q

For the Fiscal Quarter Ended August 1, 2009

Table of Contents

	Page
PART I. FINANCIAL INFORMATION	3
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	27
Item 4. Controls and Procedures	28
PART II. OTHER INFORMATION	28
Item 1. Legal Proceedings	28
Item 1A. Risk Factors	28
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	31
Item 6. Exhibits	31
Signatures	33
Exhibit Index	34

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

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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 1, 2009			January 31, 2009			August 2, 2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	85,414		$	81,230		$	89,239
Receivables	13,511			15,991			29,409
Inventories	141,317			135,376			127,119
Prepaid and other	18,844			11,086			19,158
Income taxes recoverable	5,077			14,895			11,113
Prepaid and deferred marketing costs	6,786			5,361			10,289
Deferred income taxes	10,466			9,792			8,096
Total current assets	281,415			273,731			294,423
Property and equipment, net	320,114			337,766			344,303
Deferred income taxes	13,792			14,147			8,109
Restricted cash	1,776			1,776			2,664
Other	1,689			1,207			683
Total assets	$	618,786		$	628,627		$	650,182
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	103,302		$	93,355		$	97,040
Accrued liabilities	73,876			82,469			81,937
Current deferred marketing fees and revenue sharing	5,671			4,918			5,314
Total current liabilities	182,849			180,742			184,291
Deferred rents	133,205			137,216			136,496
Capital lease and other financing obligations	12,408			13,316			13,777
Supplemental Employee Retirement Plan	8,003			7,807			8,201
Deferred marketing fees and revenue sharing	8,126			5,823			7,459
Other	699			1,227			1,316
Total liabilities	345,290			346,131			351,540
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, 91,421,899, 91,264,527 and 91,054,614 shares issued, respectively	914			913			911
Additional paid-in capital	119,254			115,921			112,736
Accumulated other comprehensive loss	(1,184		)	(1,334		)	(1,864		)
Retained earnings	154,512			166,996			186,859
Total stockholders’ equity	273,496			282,496			298,642
Total liabilities and stockholders’ equity	$	618,786		$	628,627		$	650,182

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

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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 1, 2009			August 2, 2008		August 1, 2009			August 2, 2008
Net sales	$	225,192		$	241,434	$	453,559		$	512,539
Cost of sales	149,464			145,786		306,731			324,091
Gross profit	75,728			95,648		146,828			188,448
Selling, general and administrative expenses	82,761			88,450		165,473			196,256
Loss on asset impairment	—			1,452		—			1,452
Income (Loss) from operations	(7,033		)	5,746		(18,645		)	(9,260		)
Interest, net, and other	(151		)	537		(310		)	1,090
Income (Loss) before income taxes	(7,184		)	6,283		(18,955		)	(8,170		)
Income tax provision (benefit)	(2,262		)	3,143		(6,471		)	(2,070		)
Net income (loss)	$	(4,922	)	$	3,140	$	(12,484	)	$	(6,100	)
Net income (loss) per share - Basic	$	(0.05	)	$	0.03	$	(0.14	)	$	(0.07	)
Weighted average shares outstanding - Basic	91,376			90,972		91,332			90,911
Net income (loss) per share - Diluted	$	(0.05	)	$	0.03	$	(0.14	)	$	(0.07	)
Weighted average shares outstanding - Diluted	91,376			91,539		91,332			91,911

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 1, 2009			August 2, 2008
OPERATING ACTIVITIES:
Net loss	$	(12,484	)	$	(6,100	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	31,563			29,812
Stock-based compensation expense	2,852			2,284
Supplemental Employee Retirement Plan expense	646			645
Deferred income taxes	(415		)	(855		)
Excess tax benefit from exercises of stock options	(3		)	(2		)
Net loss (gain) on asset dispositions	227			(85		)
Loss on asset impairments	—			1,452
Other	204			311
Net change in current assets and liabilities:
Receivables	2,480			(889		)
Inventories	(5,941		)	12,874
Prepaid and other and income taxes recoverable	1,138			1,281
Prepaid and deferred marketing costs	(1,425		)	3,373
Accounts payable	10,216			15,874
Accrued liabilities	(9,049		)	(7,866		)
Change in deferred marketing fees and revenue sharing	3,056			457
Change in deferred rents	(3,634		)	15,719
Other changes in non-current assets and liabilities	(920		)	(232		)
Net cash provided by operating activities	18,511			68,053
INVESTING ACTIVITIES:
Purchase of property and equipment	(13,306		)	(44,802		)
Proceeds from asset dispositions	—			3,086
Net cash used in investing activities	(13,306		)	(41,716		)
FINANCING ACTIVITIES:
Net proceeds from exercises of stock options and ESPP purchases	434			872
Credit facility financing costs	(618		)	—
Payments on capital lease and other financing obligations	(840		)	(451		)
Excess tax benefit from exercises of stock options	3			2
Net cash (used in) provided by financing activities	(1,021		)	423
Net increase in cash and cash equivalents	4,184			26,760
Cash and cash equivalents, beginning	81,230			62,479
Cash and cash equivalents, ending	$	85,414		$	89,239

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., a Delaware corporation, together with its wholly-owned subsidiaries, 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. Subsequent events have been evaluated through September 10, 2009, the date of issuance of our Condensed Consolidated Financial Statements.

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)

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 1, 2009			August 2, 2008			August 1, 2009			August 2, 2008
Net income (loss)	$	(4,922	)	$	3,140		$	(12,484	)	$	(6,100	)
Amortization of unrecognized prior service cost	123			123			246			246
Tax effect	(48		)	(48		)	(96		)	(96		)
Total comprehensive income (loss)	$	(4,847	)	$	3,215		$	(12,334	)	$	(5,950	)

Fair Value

Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measures (SFAS 157) defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements of financial and non-financial assets and liabilities.

The statement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

·Level 1 — Quoted prices in active markets for identical assets or liabilities;

·Level 2 — Quoted prices for similar assets or liabilities in active markets or inputs that are observable;

·Level 3 — Inputs that are unobservable.

As of August 1, 2009, we held money market funds that are measured at fair value on a recurring basis. The following table represents our fair value hierarchy for financial assets measured at fair value on a recurring basis as of August 1, 2009 (in thousands):

	Level 1		Level 2		Level 3
Cash Equivalents	$	41,066	$	—	$	—

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We also have financial assets and liabilities, not required to be measured at fair value on a recurring basis, which primarily consist of cash, restricted cash, receivables, payables and financing obligations, the carrying value of which materially approximate their fair values.

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 to selling, general and administrative expenses over the expected sales realization cycle, typically several weeks. Direct response advertising expense was $8.4 million and $8.5 million for the three months ended August 1, 2009 and August 2, 2008, respectively and $17.6 million and $26.8 million for the six months ended August 1, 2009 and August 2, 2008, respectively.

Advertising costs other than direct response advertising include store and event promotions, signage expenses and other general customer acquisition activities. These advertising costs are expensed as incurred or when the particular store promotion begins. Advertising expenses other than those related to direct response advertising of $3.1 million and $3.6 million for the three months ended August 1, 2009 and August 2, 2008, respectively and $8.6 million and $9.7 million for the six months ended August 1, 2009 and August 2, 2008, respectively are included in selling, general and administrative expenses.

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 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 1, 2009, we did not record any impairment charges.  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.

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.

In assessing the realizability of deferred tax assets, we consider all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In the event that we determine that a deferred tax asset will not be realized, a valuation allowance is recorded against the deferred tax asset with a corresponding charge to tax expense in the period we make such determination. Based upon our taxable income in prior carryback years, projections of future reversals of existing temporary differences, the historical level of taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of substantially all of these deductible differences. Though we believe that no additional valuation allowance of deferred tax assets is necessary as of August 1, 2009, if we were to continue to incur operating losses or not generate sufficient future taxable income, it is possible that we could record a valuation allowance in a future period.

For the three and six months ended August 1, 2009 and August 2, 2008 we determined that our annual effective tax rate could not be reliably estimated primarily due to the projected near break-even results of operations for the fiscal year ending January 30, 2010 and January 31, 2009.  Consequently, we concluded that the actual effective tax rate for the three and six months ended August 1, 2009 and August 2, 2008 was the best estimate of the annual effective tax rate.

In August 2009 we received notification from the Internal Revenue Service that they will be conducting an examination of our federal income tax returns for fiscal years 2008, 2007 and 2006. During the six months ended August 1, 2009 and August 2, 2008, we received income tax refunds of $15.9 million and $4.6 million, respectively.

7

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 from stock options and restricted stock units (RSUs) during the three and six months ended August 1, 2009 and August 2, 2008 was as follows (in thousands):

	Three Months Ended				Six Months Ended
	August 1, 2009		August 2, 2008		August 1, 2009	August 2, 2008
Stock Options	$	900	$	687	1,716	$	1,399
RSUs	572		394		1,136	885
Total	$	1,472	$	1,081	2,852	$	2,284

Options to purchase 781,000 and 1,058,750 shares of our common stock were granted to employees during the six months ended August 1, 2009 and August 2, 2008, respectively. The weighted average fair value of those options was $2.81 and $3.18, respectively. Options to purchase 38,036 and 98,163 shares of our common stock were exercised during the six months ended August 1, 2009 and August 2, 2008, respectively with a total intrinsic value of $0.1 million and $0.2 million, respectively.

During the six months ended August 1, 2009 and August 2, 2008, we granted 29,659 and 263,826 RSUs, with only service conditions, at a weighted average grant date fair market value of $5.90 and $6.07, respectively.  During the three months ended August 1, 2009 we also granted 156,000 RSUs, that, in addition to service conditions, contained performance and market conditions, at a weighted average grant date fair value of $5.23. The awards with the additional performance and market conditions are independent of each other and equally weighted, and are based on three metrics: operating income, comparable store growth (CSG) relative to a peer group, and total shareholder return (TSR) relative to a peer group.  The fair value of the RSUs with operating income and CSG goals are based on the fair market value at the date of grant.  The fair value of the RSUs containing the TSR condition was determined using a statistical model that incorporates the probability of meeting performance targets based on historical returns relative to a peer group.  All awards with performance and market conditions are measured over the vesting period and are charged to compensation expense over the requisite service period based on the number of shares expected to vest. During the six months ended August 1, 2009 and August 2, 2008, the total fair market value of RSUs vested was approximately $0.2 million and $0.5 million, respectively.

As of August 1, 2009, total unrecognized compensation expense related to nonvested share-based compensation arrangements (including stock options and RSUs) was approximately $9.1 million. This expense is expected to be recognized over a weighted average period of 2.5 years.

Interest, Net, and Other

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

	Three Months Ended						Six Months Ended
	August 1, 2009			August 2, 2008			August 1, 2009			August 2, 2008
Interest (expense), including financing fees	$	(341	)	$	(235	)	$	(630	)	$	(395	)
Interest income	8			467			9			853
Other income	399			485			776			1,053
Other (expense)	(217		)	(180		)	(465		)	(421		)
Interest, net, and other	$	(151	)	$	537		$	(310	)	$	1,090

Recently Issued Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measures. 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

8

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. The adoption of the provisions of SFAS No. 157 which were deferred until fiscal 2009 by FSP 157-2 did not have a material impact on our financial position, results of operations or cash flows.

In June 2008, FASB issued 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. The adoption of FSP-EITF No. 03-6-1 did not have any impact on the determination or reporting of our earnings per share.

In April 2009, the FASB issued FSP FAS No. 107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1 (“FSP FAS No. 107-1 and APB No. 28-1”), Interim Disclosures about Fair Value of Financial Instruments, which amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, and requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP FAS No. 107-1 and APB No. 28-1 is effective for interim reporting periods ending after June 15, 2009. FSP FAS No. 107-1 and APB No. 28-1 does not require disclosure for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, comparative disclosures are only required for periods ending after initial adoption. The adoption of FSP FAS No. 107-1 and APB No. 28-1 during the second quarter of fiscal 2009 did not have a material impact on our results of operations or financial position.

In May 2009, the FASB issued SFAS No.165, Subsequent Events (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the date that the financial statements are issued or are available to be issued. It requires disclosure of the date through which an entity has evaluated subsequent events. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. The adoption of SFAS 165 during the second quarter of fiscal 2009 did not have a material impact on our results of operations or financial position.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (SFAS 168).  Upon adoption, the FASB Accounting Standards Codification (ASC) established by SFAS No. 168 will become the source of authoritative generally accepted accounting principles in the United States, and will supersede all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the ASC will become non-authoritative.  SFAS 168 is effective for interim and annual financial periods beginning after September 15, 2009.  The adoption of SFAS 168 in our fiscal fourth quarter of fiscal 2009 will not have a material impact on our results of operations or financial position.

3. Receivables

Receivables consist of the following (in thousands):

	August 1, 2009		January 31, 2009		August 2, 2008
Tenant improvement allowances	$	3,862	$	7,972	$	19,345
Trade	6,213		4,518		7,124
Other	3,436		3,501		2,940
	$	13,511	$	15,991	$	29,409

We evaluate the credit risk associated with our receivables to determine if an allowance for doubtful accounts is necessary. At August 1, 2009, January 31, 2009 and August 2, 2008 no allowance for doubtful accounts was deemed necessary.

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4. Property and Equipment, Net

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

	August 1, 2009			January 31, 2009			August 2, 2008
Land	$	242		$	242		$	242
Building and land improvements and capital leases (a)	40,941			40,861			41,094
Leasehold improvements	278,638			270,456			245,630
Furniture and fixtures	115,389			113,648			107,985
Technology hardware and software	86,754			77,598			75,212
Machinery and equipment and other	37,771			37,493			36,509
Construction in progress (b)	16,546			26,300			35,957
	576,281			566,598			542,629
Less: Accumulated depreciation and amortization	(256,167		)	(228,832		)	(198,326		)
	$	320,114		$	337,766		$	344,303

(a)	Building and land improvements include capital leases of real estate of approximately $11.5 million as of August 1, 2009, January 31, 2009 and August 2, 2008.
(b)	Construction in progress is comprised primarily of the construction of a new office building (see Note 8), internal-use software under development and, to a lesser extent, leasehold improvements and furniture and fixtures related to unopened premium retail stores.

5. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	August 1, 2009		January 31, 2009		August 2, 2008
Accrued payroll and benefits	$	15,515	$	17,538	$	19,913
Gift cards and coupon rewards	27,246		32,491		28,083
Current portion of deferred rents	19,411		19,035		19,121
Accrued sales returns	3,658		4,295		6,310
Accrued taxes	4,427		4,424		4,634
Other	3,619		4,686		3,876
	$	73,876	$	82,469	$	81,937

Accrued payroll and benefits included $0.4 million and $2.4 million of accrued severance payments as of August 1, 2009 and January 31, 2009, respectively.

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, RSUs and shares to be purchased under our Employee Stock Purchase Plan 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.

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 1, 2009			August 2, 2008		August 1, 2009			August 2, 2008
Net income (loss)	$	(4,922	)	$	3,140	$	(12,484	)	$	(6,100	)
Weighted average common shares outstanding during the period (for basic calculation)	91,376			90,972		91,332			90,911
Dilutive effect of other potential common shares	—			567		—			—
Weighted average common shares and potential common shares (for diluted calculation)	91,376			91,539		91,332			90,911
Net income (loss) per common share—Basic	$	(0.05	)	$	0.03	$	(0.14	)	$	(0.07	)
Net income (loss) per common share—Diluted	$	(0.05	)	$	0.03	$	(0.14	)	$	(0.07	)

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The computation of the dilutive effect of other potential common shares excluded options to purchase 3.4 million and 2.3 million shares of common stock for the three months ended August 1, 2009 and August 2, 2008, respectively, and 3.9 million and 2.7 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 lower loss per share or 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 1, 2009 and August 2, 2008 (in thousands):

	Three Months Ended				Six Months Ended
	August 1, 2009		August 2, 2008		August 1, 2009		August 2, 2008
Service cost	$	70	$	75	$	140	$	151
Interest cost	130		124		260		248
Amortization of prior service cost	123		123		246		246
Net periodic benefit cost	$	323	$	322	$	646	$	645

As of August 1, 2009, we had $1.9 million ($1.2 million after-tax) of unrecognized prior service costs and unrecognized actuarial losses recognized in accumulated other comprehensive loss. We expect to amortize an additional $0.2 million in unrecognized prior service cost during the remainder of fiscal 2009.

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 6.5 percent as of both August 1, 2009 and January 31, 2009, respectively. The rate of compensation expense increase was 4 percent as of both August 1, 2009 and January 31, 2009.

As the SERP is an unfunded plan, we were not required to make any contributions during the three and six months ended August 1, 2009 and August 2, 2008. We did make benefit payments of $0.2 million and $0.3 million, funded by operating cash flows, during the six months ended August 1, 2009 and August 2, 2008, respectively.

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

Remainder of fiscal 2009	$	204
2010	408
2011	586
2012	572
2013	572
Years 2014 - 2018	2,859

8. Commitments

Leases

During the three months ended August 1, 2009 and August 2, 2008, we incurred aggregate rent expense under operating leases of $19.7 million and $18.2 million, respectively, and $0.1 million and $0.3 million, respectively, of rent expense classified as store pre-opening cost. During the six months ended August 1, 2009 and August 2, 2008, we incurred aggregate rent expense under operating leases of $39.2 million and $35.8 million, respectively, and $0.3 million and $0.6 million, respectively, of rent expense classified as store pre-opening cost.

As of August 1, 2009 our minimum operating 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 totaled $647.4 million.

We lease, from an unrelated third party, a 60,000 square foot facility located on approximately 10.7 acres of land in Coeur d’Alene, Idaho, which functions as a customer contact center, IT data center, and office space. On July 19, 2007, the lease was amended to

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provide for the construction of a new building, construction of an extension to the existing building, and to extend the term through July 31, 2028. The modification of the lease terms resulted in the existing building being accounted for as a capital lease. Previously, this facility was accounted for as an operating lease. During fiscal 2007, the amount capitalized as of the lease commencement date was $10.5 million. We recorded all construction costs related to the construction of the new building and extension to the existing building on our consolidated balance sheet as we have determined that for accounting purposes we are the owner of the construction projects during the construction period. Under the terms of the lease, the landlord agreed to reimburse us for approximately $7.0 million in construction costs once we incurred $7.0 million in qualifying costs.

During the first half of fiscal 2008 we temporarily suspended construction on the new building. As a result of suspending construction, the landlord disputed its obligation to reimburse these costs. We settled this dispute with the landlord by entering into an amendment to the lease dated April 22, 2009.  Under the amendment, the landlord is no longer obligated to reimburse us for $7.0 million in construction costs and we will not be obligated to make the related lease payments on the new building or extension to the existing building.  Accordingly, all construction cost will remain on our consolidated balance sheet and be subject to our accounting policies for property and equipment.

In addition, the amendment extended the lease term for the existing building and land through July 31, 2038.   This amendment is considered to be a new lease for accounting purposes and was determined to be an operating lease primarily due to a higher incremental borrowing rate for commercial real estate with a similar term given the real estate and credit markets at the time. Therefore, the original lease will continue to be accounted for as a capital lease through the end of the original lease term of July 31, 2028 and the extended ten-year term will be accounted for as an operating lease.

Credit Facility

On February 13, 2009, we entered into a new Credit Agreement (the “Agreement”) with Wells Fargo Retail Finance, LLC which is collateralized by substantially all of our assets. This credit facility replaced our previous unsecured revolving line of credit with Wells Fargo Bank N.A. (the “Prior Facility”). The Agreement provides for a $70.0 million revolving line of credit, with subfacilities for the issuance of up to $70.0 million in letters of credit and swingline advances of up to $10.0 million. The credit facility has a maturity date of February 13, 2012. The actual amount of credit that is available from time to time under the Agreement is limited to a borrowing base amount that is determined according to, among other things, a percentage of the value of eligible inventory plus a percentage of the value of eligible credit card receivables, as reduced by certain reserve amounts that may be required by the lender. The proceeds of any borrowings under the Agreement are available for working capital and other general corporate purposes. We did not incur any material penalties in connection with the early termination of the Prior Facility.

Borrowings under the Agreement will generally accrue interest at a margin ranging from 2.25% to 2.75% (determined according to the average unused availability under the credit facility) over a reference rate of, at the Company’s election, either LIBOR or a base rate, as defined in the Agreement. Letters of credit under the credit facility accrue fees at a rate equal to the interest margin that is in effect from time to time. Commitment fees accrue at a rate of 0.50%, which is assessed on the average unused portion of the credit facility maximum amount.

The Agreement has financial covenants that are limited to capital expenditures, minimum inventory book value and maximum facility usage as a percentage of the borrowing base value. The Agreement also contains various restrictive covenants relating to customary matters, such as indebtedness, liens, investments, acquisitions, mergers, dispositions and dividends.

The Agreement generally contains customary events of default for credit facilities of this type. Upon an event of default that is not cured or waived within any applicable cure periods, in addition to other remedies that may be available to the lender, the obligations under the Agreement may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral.

The Prior Facility provided for an unsecured revolving line of credit of up to $60.0 million and allowed us to issue up to $60.0 million in letters of credit. The interest rate under the Prior Facility was 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 loan agreement for the Prior Facility), or the lender’s prime rate. The Prior Facility also contained customary financial and negative covenants and imposed unused commitment fees based on a varying percentage of the amount of the total facility that was not drawn down under the Prior Facility  on a quarterly basis.

As of August 1, 2009, January 31, 2009 and August 2, 2008 we had no borrowings under the credit facilities and $27.7 million, $16.1 million and $13.7 million in letters of credit outstanding, respectively.

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Other

We had inventory purchase commitments of approximately $230.8 million, $145.8 million and $198.3 million at August 1, 2009, January 31, 2009 and August 2, 2008, respectively.  As of August 1, 2009, January 31, 2009 and August 2, 2008 we had $2.4 million, $2.4 million and $3.2 million, respectively, committed under our standby letter of credit related to the lease of our distribution center.

9. Contingencies

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 currently pending against us. Though we will continue to vigorously defend such lawsuits and legal proceedings, 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.

On September 12, 2006, as amended on April 25, 2007, Brighton Collectibles, Inc. (“Brighton”) filed a complaint against us in the United States District Court for the Southern District of California. The complaint alleged, among other things, that we violated trade dress and copyright laws. On November 21, 2008, a jury found us liable to Brighton for copyright and trade dress infringement.  In January 2009, the court entered a judgment in the total amount of $8.0 million, which includes damages of $2.7 million on the trade dress claim, $4.1 million in damages and profits on the copyright claim and $1.2 million in attorneys’ fees.  We have appealed the judgment as we believe there are legitimate grounds to overturn the judgment. Pending the appeal, the court entered a temporary stay of execution conditioned on us posting an $8.0 million bond, which has been posted. We currently have insurance coverage and have been provided defense by our insurance carrier. The amount of damages currently awarded plus attorneys’ fees and bond expenses are estimated to be within the insurance coverage limits.

Other

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 1, 2009 and August 2, 2008 (in thousands):

	Three Months Ended						Six Months Ended
	August 1, 2009			August 2, 2008			August 1, 2009			August 2, 2008
Deferred marketing fees and revenue sharing - beginning of period	$	9,679		$	11,377		$	10,741		$	12,316
Marketing fees received	437			515			828			1,195
Revenue sharing received	6,549			2,946			6,549			2,946
Marketing fees recognized to revenue	(1,257		)	(1,504		)	(2,590		)	(3,123		)
Revenue sharing recognized to revenue	(1,611		)	(561		)	(1,731		)	(561		)
Deferred marketing fees and revenue sharing - end of period	$	13,797		$	12,773		$	13,797		$	12,773
Less - Current deferred marketing fees and revenue sharing	5,671			5,314			5,671			5,314
Long-term deferred marketing fees and revenue sharing	$	8,126		$	7,459		$	8,126		$	7,459

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The following table provides an estimate of when we expect to amortize the deferred marketing fees of $6.8 million and the deferred revenue sharing payment of $7.0 million as of August 1, 2009 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 2009	$	2,161	$	880	$	3,041
2010	2,911		1,759		4,670
2011	1,205		1,759		2,964
2012	430		1,759		2,189
2013	127		806		933
	$	6,834	$	6,963	$	13,797

Sales Royalty

The amount of sales royalty recognized as revenue during the three months ended August 1, 2009 and August 2, 2008 was approximately $0.8 million and $1.3 million, respectively.  During the six months ended August 1, 2009 and August 2, 2008 sales royalty revenue recognized was approximately $2.4 million for both periods presented.  The amount of deferred sales royalty recorded in accrued liabilities was $4.4 million, $4.1 million and $3.4 million at August 1, 2009, January 31, 2009 and August 2, 2008, 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 1, 2009			August 2, 2008			August 1, 2009			August 2, 2008
Net sales (a):
Retail	$	183,394		$	189,357		$	354,104		$	376,228
Direct	41,798			52,077			99,455			136,311
Consolidated net sales	$	225,192		$	241,434		$	453,559		$	512,539
Segment operating income:
Retail	$	12,844		$	24,341		$	16,200		$	26,946
Direct	8,495			10,669			18,607			27,155
Total segment operating income	21,339			35,010			34,807			54,101
Corporate and other	(28,372		)	(29,264		)	(53,452		)	(63,361		)
Consolidated income (loss) from operations	$	(7,033	)	$	5,746		$	(18,645	)	$	(9,260	)
Depreciation and amortization:
Retail	$	11,919		$	10,971		$	23,720		$	21,224
Direct	356			424			739			871
Corporate and other	3,556			3,433			7,104			7,717
Consolidated depreciation and amortization	$	15,831		$	14,828		$	31,563		$	29,812

(a)There were no sales between the retail and direct segments during the reported periods.

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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 January 31, 2009, 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 sales through our retail stores, as well as our catalog and e-commerce channels. Our proprietary merchandise assortment reflects a sophisticated yet relaxed and casual lifestyle. A commitment to providing superior customer service is manifest in all aspects of our business. 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 our 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.  Retail sales consists of sales generated at our premium retail stores and outlet stores along with our day spa locations.  Direct sales consist of sales generated through our e-commerce web site and from orders taken over the phone or through the mail.

Company Initiatives

Over the past 18 months, we have made substantial changes to our merchandise and business by implementing certain key initiatives, which will continue to be our focus through fiscal 2009. We believe these initiatives 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. These key initiatives include:

·Increased focus on product and customer experience

·Injecting product and the customer into decision making throughout the company

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

·Shift in marketing approach

·Increased efficiency in the use of resources

Our product and the customer experience are the foundation of all decision making at Coldwater Creek. Our highest priority is to continually improve our product and assortment as we believe that our success depends on offering the appropriate balance of fashion, fit, quality and value that is relevant to the entire range of our target customer base. We are focused on expanding our product by offering more diversity in fit and fabrics to ensure we are more relevant to our entire customer demographic. In addition, we remain focused on enhancing the customer experience by returning to the boutique shopping experience through offering the appropriate balance of key items and unique products, combined with our exceptional customer service. We believe our merchandise initiatives in fashion, fit and value are reflected in our fall assortment. For this reason, we plan to make additional investments in marketing and inventory in order to drive traffic and sales.

Historically, we have used a broad based marketing strategy of catalog circulation and national magazine advertising. During fiscal 2008 and the first half of fiscal 2009, we shifted to a more point-of-sale, in-store focus through programs, such as assisting customers

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through a personal shopper. In addition, we are developing traffic drivers through innovative e-mail campaigns, retail mailers and newspaper ads, as well as through our customer loyalty programs, as we continued to focus on maintaining and better engaging our best customers, as well as attracting new customers through select advertising placement. We continue to test and refine these promotions to ensure that we are reaching the greatest number of customers in the most cost effective and efficient manner possible. As we believe our merchandise initiatives in fashion, fit and value are reflected in our fall assortment, our third quarter 2009 catalog circulation is expected to increase by at least 40% over the third quarter 2008. We also expect to make additional investments in national magazine advertising during the third quarter of fiscal 2009. We believe our national advertising campaign will enable us to effectively market the changes we have made to our merchandise.

We also expect to invest in increased levels of inventory during the third quarter of fiscal 2009 as a result of our implemented merchandise initiatives. We reduced our premium retail store inventory per square foot by approximately 8.1 percent as of August 1, 2009 compared to August 2, 2008, while premium retail square footage grew by approximately 11.3 percent over the same period. While we will continue to tightly manage our inventories, we believe that our recent efforts to reduce inventories on a per square foot basis has positioned us to capitalize on our implemented merchandise initiatives.

We remain committed to restoring the full price heritage to our brand by continuing to be more prudent with promotional activity and discounting. However, we will continue to have promotions to drive traffic to our stores and to remain competitive in this challenging environment. We believe that prudently managing our promotions and discounting, maintaining conservative retail inventories on a square foot basis, and expanding our direct sourcing program, are critical to improving margins and returning to our full price heritage. In addition, we have seen a shift in customer purchasing toward more value-priced merchandise, which we believe is a result of today’s challenging economic conditions and the decline in consumer confidence. Therefore, during the remainder of fiscal 2009, we will continue to offer quality merchandise at compelling prices through value-pricing on select merchandise and promotions.

In addition, we have carefully evaluated our entire organization to determine where we can improve operational efficiencies. We remain focused on further reducing our cost structure and preserving capital as business conditions warrant. During the second quarter of fiscal 2009, our cost control efforts resulted in decreased selling, general and administrative expense (SG&A) of approximately $5.7 million compared to the second quarter of fiscal 2008. This decrease is primarily the result of lower employee expense as a result of the realignment of retail operations staffing and the elimination of certain corporate support positions during fiscal 2008. We believe that these select staff reductions, as well as reduced travel, lower catalog page counts, more cost effective advertising and other cost savings initiatives put us on track to achieve our goal of reducing SG&A expenses by approximately $30 million for the full year of fiscal 2009.

We continue to expect our capital expenditures to approximate $30 million in fiscal 2009, down from approximately $81 million in fiscal 2008, which is based on reduced new store growth plans and lower technology investments. During the first six months of fiscal 2009, we have opened nine of the 10 new stores planned in fiscal 2009 and replaced our inventory planning and allocation systems. Despite overall lower technology investments, we are continuing to improve various information technology tools and systems to enhance operating efficiency and enable our infrastructure to accommodate growth. We are also in the process of relocating our New York design office.

Other Developments

On February 13, 2009, we entered into a secured Credit Agreement with Wells Fargo Retail Finance, LLC. This credit facility replaced our previous unsecured revolving line of credit with Wells Fargo Bank, N.A. Our new agreement provides a revolving line of credit up to $70 million, with subfacilities for the issuance of up to $70.0 million in letters of credit and swingline advances of up to $10.0 million.

Comparison of the Three Months Ended August 1, 2009 with the Three Months Ended August 2, 2008

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the three months ended August 1, 2009 as compared to the three months ended August 2, 2008. It is provided to assist in assessing differences in our overall performance (in thousands):

	Three Months Ended
	August 1,			% of		August 2,			% of
	2009			net sales		2008			net sales		$ change			% change
Net sales	$	225,192		100.0	%	$	241,434		100.0	%	$	(16,242	)	(6.7	)%
Cost of sales	149,464			66.4	%	145,786			60.4	%	3,678			2.5	%
Gross profit	75,728			33.6	%	95,648			39.6	%	(19,920		)	(20.8	)%
Selling, general and administrative expenses	82,761			36.8	%	88,450			36.6	%	(5,689		)	(6.4	)%
Loss on asset impairments	—			0.0	%	1,452			0.6	%	(1,452		)	(100.0	)%
Income (Loss) from operations	(7,033		)	(3.1	)%	5,746			2.4	%	(12,779		)	*
Interest, net and other	(151		)	(0.1	)%	537			0.2	%	(688		)	*
Income (Loss) before income taxes	(7,184		)	(3.2	)%	6,283			2.6	%	(13,467		)	*
Income tax provision (benefit)	(2,262		)	(1.0	)%	3,143			1.3	%	(5,405		)	*
Net income (loss)	$	(4,922	)	(2.2	)%	$	3,140		1.3	%	$	(8,062	)	*
Effective income tax rate	31.5		%			50.0		%

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

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Net Sales

Net sales consist of retail and direct sales, which include revenue from our co-branded credit card program. In addition, shipping fees received from customers for delivery of merchandise are included in the direct segment.

Net sales decreased during the three months ended August 1, 2009 as compared with the three months ended August 2, 2008 primarily due to a 10.2 percent decrease in comparable premium store sales(1) and a $10.3 million decrease in sales through our direct segment. These decreases were partially offset by net sales generated by the addition of 33 premium retail stores and four merchandise clearance outlet stores since August 2, 2008. During the three months ended August 1, 2009 we closed one merchandise clearance outlet store.

We believe our sales performance for the three months ended August 1, 2009 was negatively impacted by difficult macroeconomic conditions, which are evidenced in our business by a highly promotional retail selling environment, low retail store traffic levels and a shift in customer purchasing toward more value priced merchandise. During the three months ended August 1, 2009, we experienced a decline in comparable premium retail store traffic of 11.0 percent and a decrease in average transaction value of direct sales of 16.0 percent as compared to the same period in 2008.  The average transaction value of premium retail stores declined 7.8 percent for the three months ended August 1, 2009, as compared to the same three-month period in 2008. In addition, we believe that our lower inventory levels negatively impacted the results of our summer sales event. During the three months ended August 1, 2009, catalog circulation remained relatively flat, compared to the three months ended August 2, 2008.

In addition, shipping fees received from customers for delivery of merchandise decreased by $1.4 million from $6.5 million for the three months ended August 2, 2008, to $5.1 million for the three months ended August 1, 2009, which is associated with lower order volume.

Revenue from our co-branded credit card program remained relatively flat, increasing $0.3 million for the three months ended August 1, 2009, as compared with the same period in 2008. As part of the co-branded credit card program, we received revenue sharing payments of approximately $6.5 million and $2.9 million during the three months ended August 1, 2009 and August 2, 2008, respectively. The amount of revenue sharing recognized as revenue during the three months ended August 1, 2009 and August 2, 2008 was approximately $1.6 million and $0.6 million, respectively. The amount of sales royalty and marketing fees revenue recognized as revenue during the three months ended August 1, 2009 and August 2, 2008 was approximately $2.1 million and $2.8 million, respectively.

Cost of Sales/Gross Profit

The gross profit rate decreased by 6.0 percentage points during the three months ended August 1, 2009, as compared to the three months ended August 2, 2008.  The decrease in our gross profit rate was primarily the result of a 4.5 percentage point decline

(1) 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 1, 2009, the comparable premium store retail base included 300 premium retail stores compared to 233 premium retail stores for the same period of fiscal 2008. 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.

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attributable to value-pricing and an increase in promotional discounts(2), which were partially offset by a decrease in markdowns(3). We also experienced a decrease in the leveraging of our retail occupancy costs, which represented an approximate 2.0 percentage point decline. These decreases were offset by lower shipping and handling costs of 0.2 percentage points due to lower direct sales and lower buying and distribution costs of 0.3 percentage points.

Selling, General and Administrative Expenses

SG&A decreased $5.7 million in the three months ended August 1, 2009 as compared with the same period in the prior year, primarily driven by decreased employee and overhead expenses and to a lesser extent a decrease in marketing expenses, related to our cost savings initiatives. As a percentage of net sales, SG&A expense increased by 0.2 percentage points in the three months ended August 1, 2009 as compared with the three months ended August 2, 2008. This increase in SG&A rate was the result of a 0.2 percentage point increase in overhead expenses and 0.1 percentage point increase in marketing expenses, offset by a 0.1 percentage point decrease in employee expenses. The increase in overhead and marketing expenses as a percentage of sales is primarily the result of decreased leveraging. The decrease in employee expenses is primarily due to the elimination of certain corporate support positions during fiscal 2008.

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 1, 2009.

Interest, Net and Other

The decrease in interest, net and other for the three months ended August 1, 2009 as compared with the same period in the prior year is primarily the result of lower interest income rates on our cash balances.

Provision for Income Taxes

The benefit for income taxes for the three months ended August 1, 2009 as compared with the provision in the same period in the prior year was the result of a pre-tax loss, resulting in a tax benefit of $2.3 million. 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 1, 2009			% of Net Sales		August 2, 2008			% of Net Sales		% Change
Net sales:
Retail	$	183,394		81.4	%	$	189,357		78.4	%	(3.1	)%
Direct	41,798			18.6	%	52,077			21.6	%	(19.7	)%
	$	225,192		100.0	%	$	241,434		100.0	%	(6.7	)%
Segment operating income:
Retail	$	12,844				$	24,341				(47.2	)%
Direct	8,495					10,669					(20.4	)%
Segment operating income	$	21,339				$	35,010				(39.0	)%
Unallocated corporate and other	(28,372		)			(29,264		)			(3.0	)%
Income from operations	$	(7,033	)			$	5,746				*

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

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

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

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Retail Segment

Net Sales

The $6.0 million decrease in retail segment net sales for the three months ended August 1, 2009 as compared with the three months ended August 2, 2008 is primarily the result of a decrease in net sales in our comparable premium retail stores of 10.2 percent.  This decrease in comparable store sales reflects a decrease in comparable premium retail store traffic of 11.0 percent and a decrease in premium retail store transaction value of 7.8 percent for the three months ended August 1, 2009 as compared to the three months ended August 2, 2008. In addition, retail segment net sales were negatively impacted by our low inventory levels. This decrease was partially offset by net sales generated from the addition of 33 premium retail stores since August 2, 2008.

Additionally, net sales from merchandise clearance outlet stores decreased $0.7 million, which includes the addition of four outlet stores and the closure of one, in the three months ended August 1, 2009 as compared with the three months ended August 2, 2008. Net sales generated from our day spas decreased $0.5 million for the three months ended August 1, 2009 as compared with the three months ended August 2, 2008.

Segment Operating Income

Retail segment operating income rate expressed as a percentage of retail segment sales for the three months ended August 1, 2009 as compared with the three months ended August 2, 2008 decreased by 5.9 percentage points. Increased promotional discounts, which were partially offset by decreased in-store markdown activity, contributed to a 5.6 percentage point decline in merchandise margins. Retail segment operating income was also negatively impacted by a 1.5 percentage point reduction in the leveraging of retail occupancy costs, which includes an impairment charge of $1.5 million in the three months ended August 2, 2008, and a 0.4 percentage point reduction in the leveraging of marketing costs. The reduced leveraging of operating expenses is primarily due to a decrease in comparable store sales. These reductions were offset by lower employee expenses and certain overhead costs, which contributed to a 1.4 and 0.2 percentage point improvement, respectively.

Direct Segment

Net Sales

The direct segment net sales decreased $10.3 million during the three months ended August 1, 2009 as compared to the three months ended August 2, 2008. Sales through our Internet channel decreased $8.2 million from $39.4 million for the three months ended August 2, 2008 to $31.2 million for the three months ended August 1, 2009.  Sales from our phone and mail channel for the same period decreased $2.1 million from $12.7 million to $10.6 million.

The decrease in Internet business net sales is primarily due to fewer orders over the Internet, our low inventory levels, and an approximate 14.6 percent decrease in average transaction value during the period as a result of higher levels of Internet markdowns.  Phone and mail net sales were also impacted by fewer orders, our low inventory levels and an approximate 19.7 percent decrease in average transaction value during the period. In addition we mailed 0.3 million, or 2.8 percent, fewer catalogs during the three months ended August 1, 2009 as compared to the same period in the prior year.

Phone and mail net sales are derived from orders taken from customers over the phone or through the mail. Phone and mail 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 our retail or Internet 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 phone and mail business net sales to continue to generally decrease as a percentage of total net sales.

Direct segment net sales were also negatively impacted by a decrease of $1.4 million in shipping revenue during the three months ended August 1, 2009 as compared to the three months ended August 2, 2008, which is associated with lower order volume.

Segment Operating Income

Direct segment operating income rate expressed as a percentage of direct segment sales for the three months ended August 1, 2009 as compared with the three months ended August 2, 2008 decreased by 0.2 percentage points. The direct segment operating income rate was negatively impacted by a 0.5 and 0.4 percentage point decrease in leveraging of employee expenses and marketing expenses, respectively. In addition, increased clearance activity resulted in a 0.1 percentage point decline in merchandise margins. These

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decreases were partially offset by a 0.8 percentage point improvement due to lower overhead costs, as a result of our cost savings initiatives.

Corporate and Other

Corporate and other expenses decreased $0.9 million in the three months ended August 1, 2009 as compared to the three months ended August 2, 2008. This decrease is primarily the result of:

·      $0.3 million decrease in employee expenses, primarily consisting of a reduction in salaries and incentive compensation;

·      $0.2 million decrease in marketing expenses, primarily as a result of fewer national magazine advertising campaigns;

·      $0.2 million decrease in corporate support costs, primarily as a result of cost savings initiatives; and

·      $0.2 million decrease in occupancy costs.

Comparison of the Six Months Ended August 1, 2009 with the Six Months Ended August 2, 2008

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the six months ended August 1, 2009 as compared to the six months ended August 2, 2008. It is provided to assist in assessing differences in our overall performance (in thousands):

	Six Months Ended
	August 1,			% of		August 2,			% of
	2009			net sales		2008			net sales		$ change			% change
Net sales	$	453,559		100.0	%	$	512,539		100.0	%	$	(58,980	)	(11.5	)%
Cost of sales	306,731			67.6	%	324,091			63.2	%	(17,360		)	(5.4	)%
Gross profit	146,828			32.4	%	188,448			36.8	%	(41,620		)	(22.1	)%
Selling, general and administrative expenses	165,473			36.5	%	196,256			38.3	%	(30,783		)	(15.7	)%
Loss on asset impairments	—			0.0	%	1,452			0.3	%	(1,452		)	(100.0	)%
Loss from operations	(18,645		)	(4.1	)%	(9,260		)	(1.8	)%	(9,385		)	(101.3	)%
Interest, net and other	(310		)	(0.1	)%	1,090			0.2	%	(1,400		)	*
Loss before income taxes	(18,955		)	(4.2	)%	(8,170		)	(1.6	)%	(10,785		)	(132.0	)%
Income tax benefit	(6,471		)	(1.4	)%	(2,070		)	(0.4	)%	(4,401		)	(212.6	)%
Net loss	$	(12,484	)	(2.8	)%	$	(6,100	)	(1.2	)%	$	(6,384	)	(104.7	)%
Effective income tax rate	34.1		%			25.3		%

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

Net Sales

Net sales decreased during the six months ended August 1, 2009 as compared with the six months ended August 2, 2008 primarily due to a decrease in comparable premium store sales and a $36.9 million decrease in sales through our direct segment. These decreases were partially offset by net sales generated by the addition of 33 premium retail stores and four merchandise clearance outlet stores since August 2, 2008. During the second quarter of fiscal 2009 we closed one merchandise clearance outlet store.

We believe our sales performance for the six months ended August 1, 2009 was negatively impacted by difficult macroeconomic conditions, which are evidenced in our business by a highly promotional retail selling environment, low retail store traffic levels and a shift in customer purchasing toward more value priced merchandise. We experienced a decline in comparable premium retail store traffic of 19.0 percent and 11.0 percent in the first and second quarters of fiscal 2009, respectively. The average transaction value of premium retail and direct sales declined 3.9 and 6.8 percent, respectively for the six months ended August 1, 2009, as compared to the same six-month period in 2008. In addition, we believe that our lower inventory levels negatively impacted the results of our summer sales event. During the six months ended August 1, 2009, catalog circulation decreased 10.9 million, or 26.2 percent, compared to the six months ended August 2, 2008, which we believe also contributed to lower total net sales in all channels.

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In addition, shipping fees received from customers for delivery of merchandise decreased by $6.9 million from $17.7 million for the six months ended August 2, 2008, to $10.8 million for the six months ended August 1, 2009, which is associated with lower order volume.

Revenue from our co-branded credit card program increased $0.6 million for the six months ended August 1, 2009 as compared with the same period in 2008. The amount of revenue sharing recognized as revenue during the six months ended August 1, 2009 and August 2, 2008 was approximately $1.7 million and $0.6 million, respectively. The amount of sales royalty and marketing fees revenue recognized as revenue during the three months ended August 1, 2009 and August 2, 2008 was approximately $5.0 million and $5.5 million, respectively.

Cost of Sales/Gross Profit

The gross profit rate decreased by 4.4 percentage points during the six months ended August 1, 2009 as compared to the six months ended August 2, 2008.  The decrease in our gross profit rate was primarily the result of decreased leveraging of our retail occupancy costs, representing approximately 3.0 percentage points and a 1.8 percentage point decline attributable to value-pricing and an increase in promotional discounts, which were partially offset by decrease in markdowns. These decreases were offset by lower shipping and handling costs of 0.3 percentage points due to lower direct sales and a 0.1 percent point increase as a result of decreased buying and distribution costs.

Selling, General and Administrative Expenses

SG&A decreased $30.8 million in the six months ended August 1, 2009 as compared with the same period in the prior year, primarily driven by decreased employee, marketing and overhead expenses related to our cost savings initiatives. As a percentage of net sales, SG&A expense decreased by 1.8 percentage points in the six months ended August 1, 2009 as compared with the six months ended August 2, 2008. This decrease in SG&A rate was the result of a 1.3 percentage point decrease in marketing expenses, a 0.2 percentage point decrease in overhead expenses and a 0.3 percentage point decrease in employee expenses.

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 1, 2009.

Interest, Net and Other

The decrease in interest, net and other for the six months ended August 1, 2009 as compared with the same period in the prior year is primarily the result of lower interest income rates on our cash balances.

Provision for Income Taxes

The increase in the benefit for income taxes for the six months ended August 1, 2009 as compared with the same period in the prior year was the result of a higher pre-tax loss. 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 1, 2009			% of Net Sales		August 2, 2008			% of Net Sales		% Change
Net sales:
Retail	$	354,104		78.1	%	$	376,228		73.4	%	(5.9	)%
Direct	99,455			21.9	%	136,311			26.6	%	(27.0	)%
	$	453,559		100.0	%	$	512,539		100.0	%	(11.5	)%
Segment operating income:
Retail	$	16,200				$	26,946				(39.9	)%
Direct	18,607					27,155					(31.5	)%
Segment operating income	$	34,807				$	54,101				(35.7	)%
Unallocated corporate and other	(53,452		)			(63,361		)			(15.6	)%
Loss from operations	$	(18,645	)			$	(9,260	)			101.3	%

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Retail Segment

Net Sales

The $22.1 million decrease in retail segment net sales for the six months ended August 1, 2009 as compared with the six months ended August 2, 2008 is primarily the result of a decrease in net sales in our comparable premium retail stores.  This decrease in comparable store sales reflects a decrease in comparable premium retail store traffic of 19.0 percent and 11.0 percent in the first and second quarters of fiscal 2009, respectively. Sales were also negatively impacted by a decline in average transaction value of premium retail stores of 3.9 percentage points for the six months ended August 1, 2009, as compared to the same six-month period in 2008. In addition, retail segment net sales were negatively impacted by our low inventory levels. This decrease was partially offset by net sales generated from the addition of 33 premium retail stores since August 2, 2008.

Additionally, net sales from merchandise clearance outlet stores increased $0.7 million, which includes the addition of four outlet stores and the closure of one, in the six months ended August 1, 2009 as compared with the six months ended August 2, 2008. These increases were partially offset by net sales from our day spas, which decreased $0.9 million for the six months ended August 1, 2009 as compared with the six months ended August 2, 2008.

Segment Operating Income

Retail segment operating income rate expressed as a percentage of retail segment sales for the six months ended August 1, 2009 as compared with the six months ended August 2, 2008 decreased by 2.6 percentage points. The decrease was primarily due to a 2.8 percentage point reduction in the leveraging of retail occupancy costs, which includes an impairment charge of $1.5 million in the six months ended August 2, 2008, and a 0.4 percentage point reduction in the leveraging of marketing costs. The reduced leveraging of operating expenses is primarily due to a decrease in comparable store sales. Increased promotional discounts, which were partially offset by decreased in-store markdown activity, contributed to a 1.2 percentage point decline in merchandise margins. These reductions were offset by a decrease in employee related costs and certain overhead costs, which contributed to a 1.3 and 0.5 percentage point improvement, respectively.

Direct Segment

Net Sales

The direct segment net sales decreased $36.9 million during the six months ended August 1, 2009 as compared to the six months ended August 2, 2008. Sales through our Internet channel decreased $25.5 million from $103.1 million for the six months ended August 2, 2008 to $77.6 million for the six months ended August 1, 2009.  Sales from our phone and mail channel for the same period decreased $11.4 million from $33.2 million to $21.8 million.

The decrease in Internet business net sales is primarily due to fewer orders over the Internet, our low inventory levels, and an approximate 6.0 percent decrease in average transaction value during the period as a result of higher levels of Internet markdowns.  Phone and mail net sales were also impacted by fewer orders, our low inventory levels and an approximate 5.3 percent decrease in average transaction value during the period. In addition we mailed 10.9 million, or 26.2 percent, fewer catalogs during the six months ended August 1, 2009 as compared to the same period in the prior year.

Phone and mail net sales are derived from orders taken from customers over the phone or through the mail. Phone and mail 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 our retail and Internet 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 phone and mail business net sales to continue to generally decrease as a percent of total net sales.

Direct segment net sales were also negatively impacted by a decrease of $6.9 million in shipping revenue during the six months ended August 1, 2009 as compared to the six months ended August 2, 2008, which is associated with lower order volume.

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Segment Operating Income

Direct segment operating income rate expressed as a percentage of direct segment sales for the six months ended August 1, 2009 as compared with the six months ended August 2, 2008 decreased by 1.2 percentage points. Increased clearance activity resulted in a 3.8 percentage point decline in merchandise margins. In addition, our direct segment operating income rate was negatively impacted by a 1.2 percentage point decrease in leveraging of employee expenses. These decreases were partially offset by a 3.1 and 0.7 percentage point improvement due to a decrease in marketing costs and certain overhead costs, respectively, as a result of our cost savings initiatives.

Corporate and Other

Corporate and other expenses decreased $9.9 million in the six months ended August 1, 2009 as compared to the six months ended August 2, 2008. This decrease is primarily the result of:

·      $5.1 million decrease in employee expenses, primarily consisting of a reduction in salaries and incentive compensation;

·      $2.3 million decrease in marketing expenses, primarily as a result of fewer national magazine advertising campaigns;

·      $1.4 million decrease in corporate support costs, primarily as a result of cost savings initiatives; and

·      $1.1 million decrease in occupancy costs.

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.

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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, as we did in fiscal years 2008 and 2007, our financial condition, results of operations, including related gross margins, and our 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 may occasionally utilize our bank credit facility.

Our secured Credit Agreement (the “Agreement”) with Wells Fargo Retail Finance, LLC provides a revolving line of credit up to $70.0 million, with subfacilities for the issuance of up to $70.0 million in letters of credit and swingline advances of up to $10.0 million. The credit facility has a maturity date of February 13, 2012. The actual amount of credit that is available from time to time under the Agreement is limited to a borrowing base amount that is determined according to, among other things, a percentage of the value of eligible inventory plus a percentage of the value of eligible credit card receivables, as reduced by certain reserve amounts that may be required by the lender. The proceeds of any borrowings under the Agreement are available for working capital and other general corporate purposes. As of August 1, 2009, we had no borrowings under this credit facility and $27.7 million in letters of credit issued.

Operating activities generated $18.5 million and $68.1 million of positive cash flow during the six months ended August 1, 2009 and August 2, 2008, respectively.

On a comparative year-to-year basis, the $49.5 million decrease in cash flows from operating activities during the six months ended August 1, 2009 as compared with the six months ended August 2, 2008 resulted primarily from lower sales, decreased gross margin and increased payments on inventory purchases. We also experienced a decrease in cash collected on tenant allowances of $12.8 million as total cash collected was $6.4 million during the six months ended August 1, 2009 as compared to $19.2 million during the six months ended August 2, 2008 and a $0.8 million decrease in interest income collected. These decreases were offset by an increase of $2.7 million in fees collected from the co-branded credit card program, which includes a $6.5 million payment received related to the revenue sharing component of our co-branded credit card program and an $11.3 million dollar increase in tax refunds received.

Cash outflows from investing activities principally consisted of capital expenditures which totaled $13.3 million and $44.8 million during the six months ended August 1, 2009 and August 2, 2008, respectively. Capital expenditures during the six months ended August 1, 2009 primarily related to leasehold improvements and furniture and fixtures associated with the opening of seven additional premium retail stores, four merchandise clearance outlet stores, one premium retail store under construction, 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 2, 2008 primarily related to leasehold improvements and furniture and fixtures associated with the opening of 16 additional premium retail stores, three merchandise clearance outlet stores, 23 premium retail stores under construction, office space expansion and to a lesser extent the remodeling of certain existing stores, and the expansion of our IT and distribution infrastructure. Cash outflows for the six months ended August 2, 2008 were offset by cash inflows of $3.1 million related to the proceeds from the sale of certain assets.

Cash outflows from financing activities were $1.0 million during the six months ended August 1, 2009, whereas, we had cash inflows from financing activities of $0.4 million during the six months ended August 2, 2008. The cash outflows were derived from costs associated with our credit facility and payments made on our capital lease and other financing obligations. Cash outflows were offset by activity related to proceeds we received from stock option exercises and the purchase of shares under our employee stock purchase plan.

As a result of the foregoing, we had $98.6 million in consolidated working capital at August 1, 2009, compared with $93.0 million at January 31, 2009 and $110.1 million at August 2, 2008. Our consolidated current ratio was 1.54 at August 1, 2009, compared with 1.51 at January 31, 2009 and 1.60 at August 2, 2008.

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Capital expenditures for the full year in fiscal 2009 are expected to be approximately $30.0 million, primarily associated with the premium retail store expansion, store-related expenditures, corporate branding, the relocation of our New York design office, investments in information technology and, to a lesser extent, other corporate related capital expenditures.

The deterioration of the financial, credit and housing markets has led to declines in consumer confidence, reduced credit availability, and liquidity concerns. We have factored these considerations into our business plans and have responded by implementing significant cost and capital savings initiatives. We have reduced our planned capital expenditures to approximately $30 million primarily as a result of our reduced store growth plans and lower information technology purchases. During the first six months of fiscal 2009, we have opened nine of our 10 new stores planned in fiscal 2009 and replaced our inventory planning and allocation systems. We have also invested our cash deposits in U.S. Treasury Bills and money market funds that are invested in U.S. Treasury Securities.

We do not anticipate borrowing under our credit facility during fiscal 2009. We believe cash flow from operations and current cash on hand will be sufficient to fund current operations and retail store openings under our current store roll-out plan. However, if the macroeconomic environment were to continue to deteriorate, it is possible that consumer spending could decline further and impact our cash flows, which may require us to borrow under our credit facility. It is also possible that due to the impact of worsening economic conditions on our business, should we need to access our credit facility, it may not be available in full, or at all, for future borrowings, due to borrowing base and other limitations.

Future Outlook

We continue to operate and compete in challenging economic conditions. These conditions continued in the first half of fiscal 2009, with the deterioration of the financial, credit and housing markets, resulting in continued low consumer confidence and availability of consumer credit. These conditions have carried into the third quarter of fiscal 2009 and continue to have a negative impact on our sales, gross margins and operating performance. We believe the current conditions, in particular low retail store traffic levels, highly competitive retail selling environment and a shift in customer purchasing toward more value priced merchandise, will continue for the remainder of fiscal 2009 and the foreseeable future.

Although we have implemented and continue to improve on our initiatives and have seen meaningful improvement in our sales trends, we remain cautious given the ongoing promotional retail environment, which may limit our ability to increase our margins in the third quarter of fiscal 2009. Our main focus for the foreseeable future will continue to be preservation of our brand and core competencies, and the prudent management of our business, including controlling costs, managing our inventory levels and preserving cash. However, we believe our merchandise initiatives in fashion, fit and value are reflected in our fall assortment. For this reason, we plan to make additional investments in marketing and inventory in order to drive traffic and sales.

We continue to believe that our retail expansion will be the key driver for our long term growth. However, we intend to pursue a significantly scaled back store rollout program until such time as we experience a sustained improvement in economic conditions. We are planning to open no more than ten stores in fiscal 2009, of which nine have opened as of September 8, 2009.

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. Management believes the most complex and sensitive judgments, because of their significance to our consolidated financial statements, result primarily from the need to make estimates about effects of matters that are inherently uncertain. The most significant areas involving management judgments are described below. These estimates and assumptions are based on historical results as well as future expectations. Actual results could vary from our estimates and assumptions.

Sales Returns

We recognize sales and the related cost of sales for our direct segment at the time the merchandise is expected to be delivered to our customer and for our retail segment at the point of sale with a customer in a store. We reduce our sales and costs of sales and establish an accrual for expected sales returns based on historical experience and future expectations.

The ability to reasonably estimate sales returns is made more complex by the fact that we offer our customers a return policy whereby they may return merchandise for any reason and at any time without any restrictions as to condition or time of purchase to any of our locations. The actual amount of sales returns we subsequently realize may fluctuate from estimates due to several factors, including size and fit, merchandise mix, actual or perceived quality, differences between the actual product and its presentation in the catalog or web site, timeliness of delivery and competitive offerings. We continually track subsequent sales return experience, compile customer

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feedback to identify any pervasive issues, reassess the marketplace, compare our findings to previous estimates and adjust the sales return accrual and cost of sales accordingly.

Inventory Valuation

Our inventories consist of merchandise purchased for resale and are recorded at the lower of cost or market. The nature of our business requires that we make substantially all of our merchandising and marketing decisions and corresponding inventory purchase commitments with vendors several months in advance of the time in which a particular merchandise item is intended to be included in the merchandise offerings. These decisions and commitments are based upon, among other possible considerations, historical sales with identical or similar merchandise, our understanding of then-prevailing fashion trends and influences, and an assessment of likely economic conditions and various competitive factors. We continually make assessments as to whether the carrying cost of inventory exceeds its market value, and, if so, by what dollar amount. To determine whether inventory should be written down we consider current and anticipated demand and customer preferences in addition to the current and future estimated selling price. The carrying value of the inventory is reduced to its net realizable value with a corresponding charge to cost of sales. Though we currently believe our inventory write-down is adequate based upon current forecasts which consider current and future selling prices, actual results may differ from our estimates if we are required to markdown or discount merchandise beyond our current expectations.

Stock-Based Compensation

Effective January 1, 2006, our accounting policy related to stock option accounting changed upon our adoption of SFAS 123R. SFAS 123R requires us to expense the fair value of employee stock options and other forms of stock-based compensation. Under the fair value recognition provisions of SFAS 123R, share-based compensation cost is estimated at the grant date based upon the value of the award and is recognized as expense ratably over the requisite service period of the award (generally the vesting period of the equity award). Determining the appropriate fair value model and calculating the fair value of share-based awards requires judgment, including estimating the expected life of the share-based award, the expected stock price volatility over the expected life of the share-based award and forfeitures.

To determine the fair value of stock options on the date of grant, we use the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock price volatility, option life, risk-free interest rate and dividend yield. The risk-free interest rate is a less-subjective assumption as it is based on factual data derived from public sources. We use a dividend yield of zero as we have never paid cash dividends and have no intention to pay cash dividends in the immediate future. The expected stock price volatility and option life assumptions require a greater level of judgment. Our expected stock-price volatility assumption is based upon a combination of both the implied and historical volatilities of our stock which is obtained from public data sources. The expected life represents the weighted average period of time that share-based awards are expected to be outstanding, giving consideration to vesting schedules and historical exercise patterns. We determine the expected life assumption based upon the exercise and post-vesting behavior that has been exhibited historically, adjusted for specific factors that may influence future exercise patterns. If expected volatility or expected life were to increase, that would result in an increase in the fair value of our stock options which would result in higher compensation charges, while a decrease in volatility or the expected life would result in a lower fair value of our stock option awards resulting in lower compensation charges.

We also grant restricted stock units and common stock which are less subjective in determining fair value as the fair value of these awards is based upon the fair market value of our common stock on the date of grant and not on an option-pricing model.

We estimate forfeitures for all of our awards based upon historical experience of stock-based pre-vesting forfeitures. We believe that our estimates are based upon outcomes that are reasonably likely to occur. If actual forfeitures are higher than our estimates it would result in lower compensation expense and to the extent the actual forfeitures are lower than our estimate we would record higher compensation expense.

Impairment of Long-Lived Assets

Long-lived assets, more specifically leasehold improvements and furniture and fixtures at our retail stores and day spas, are subject to a review for impairment if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the future undiscounted cash flows generated by an asset or asset group is less than its carrying amount, it is considered to be impaired and would be written down to its fair value. During the second quarter of fiscal 2008, management determined that our day spa concept needed to be evaluated for impairment. Consequently, we concluded that certain day spa locations were impaired and we recorded a charge of $1.5 million.

The deterioration of the financial, credit, and housing markets has had a severe impact on consumer confidence and discretionary spending. These market conditions have had a negative effect on our business resulting in us evaluating certain retail stores for impairment as of January 31, 2009. Based on this evaluation we concluded that these retail stores were not impaired. Though we

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believe that no impairment of our long-lived assets exists as of August 1, 2009, if market conditions were to continue to deteriorate for an extended period of time, it is possible that we could record impairments of certain long-lived assets in the future.

Contingent Liabilities

Contingent liabilities are accounted for in accordance with SFAS 5, Accounting for Contingencies. According to SFAS 5, an estimated loss from a loss contingency is charged to income if (a) it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (b) the amount of the loss can be reasonably estimated. If a probable loss cannot be reasonably estimated no accrual is recorded but disclosure of the contingency in the notes to the financial statements is required. Gain contingencies are not recorded until realized.

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. If the recognition criteria of SFAS 5 have been met, liabilities have been recorded. The assessment of the outcome of litigation can be very difficult to predict as it is subject to many factors, including those not within our control, and is highly dependent on individual facts and circumstances. Litigation is subject to highly complex legal processes and the final outcome of these matters could vary significantly from the amounts that have been recorded in the financial statements.

Income Taxes

Income taxes are accounted for under SFAS No. 109, Accounting for Income Taxes (SFAS No. 109). In accordance with SFAS No. 109, 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 respective tax bases, as measured by enacted tax rates that are expected to be in effect in the periods where deferred tax assets and liabilities are expected to be realized or settled.

Assessing the realizability of deferred tax assets requires significant judgment. We consider all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In the event that we determine that a deferred tax asset will not be realized, a valuation allowance is recorded against the deferred tax asset with a corresponding charge to tax expense in the period we make such determination. Based upon our taxable income in prior carryback years, projections of future reversals of existing temporary differences, the historical level of taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of substantially all of these deductible differences. Though we believe that no additional valuation allowance of deferred tax assets is necessary as of August 1, 2009, if we were to continue to incur operating losses or not generate sufficient future taxable income, it is possible that we could record a valuation allowance in a future period.

Recently Issued Accounting Standards

See Note 2 to our condensed consolidated financial statements.

Contractual Obligations

We have included a summary of our Contractual Obligations in our annual report on Form 10-K for the fiscal year ended January 31, 2009. As of August 1, 2009 our minimum operating 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, totaled $647.4 million. We also had inventory purchase commitments of approximately $230.8 million at August 1, 2009. There have been no other material changes in contractual obligations outside the ordinary course of business since January 31, 2009.

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 1, 2009, 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.

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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 1, 2009. Based on that evaluation, our President and Chief Executive Officer and Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of August 1, 2009.

Changes in Internal Control Over Financial Reporting

During the second quarter of fiscal 2009 we installed a new core merchandising system, the second phase of our new enterprise resource planning system.  As a result, management, with the participation of the Chief Executive Officer and Chief Financial Officer, has determined that these actions constitute a change in internal control over financial reporting that is reasonably likely to materially affect our internal controls over financial reporting.  Testing of the operating effectiveness of these changes to our internal controls over financial reporting will not be completed until the fourth quarter.

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 currently pending against us. Though we will continue to vigorously defend such lawsuits and legal proceedings, 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, would not materially affect our consolidated financial position, results of operations or cash flows.

On September 12, 2006, as amended on April 25, 2007, Brighton Collectibles, Inc. (“Brighton”) filed a complaint against us in the United States District Court for the Southern District of California. The complaint alleged, among other things, that we violated trade dress and copyright laws. On November 21, 2008, a jury found us liable to Brighton for copyright and trade dress infringement.  In January 2009, the court entered a judgment in the total amount of $8.0 million, which includes damages of $2.7 million on the trade dress claim, $4.1 million in damages and profits on the copyright claim and $1.2 million in attorneys’ fees.  We have appealed the judgment as we believe there are legitimate grounds to overturn the judgment. Pending the appeal, the court entered a temporary stay of execution conditioned on us posting an $8.0 million bond, which has been posted. We currently have insurance coverage and have been provided defense by our insurance carrier. The amount of damages currently awarded plus attorneys’ fees and bond expenses are estimated to be within the insurance coverage limits.

ITEM 1A.RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the following risk factors which could materially affect our business, financial condition or future results. We have updated the following risk factors to reflect changes during the quarter ended August 1, 2009 we believe to be material to the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009 filed with the Securities and Exchange Commission. Other risks facing the Company 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 currently known or that are currently deemed immaterial may also adversely affect the business, financial condition, and/or operating results of the Company.

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General economic conditions have impacted consumer spending and may adversely affect our financial position.

Consumer spending patterns are highly sensitive to the general economic climate, the consumer’s level of disposable income, consumer debt, and overall consumer confidence. Consumer spending has been impacted recently by the current recession, volatile energy and food costs, greater levels of unemployment, higher levels of consumer debt, declines in home values and in the value of consumers’ investments and savings, restrictions on the availability of credit and other negative economic conditions, nationally and regionally. We continue to be affected by challenging macroeconomic conditions which are evidenced in our business by a highly competitive retail selling environment, low retail store traffic levels and a shift in customer purchasing toward more value priced merchandise. These conditions, which have continued into the third quarter of fiscal 2009, had a negative impact on our revenues, gross margins, operating cash flows and earnings in the first half of fiscal 2009 and fiscal years 2008 and 2007. We believe these conditions, in particular the highly competitive selling environment, low retail store traffic levels and the shift in customer purchasing toward more value priced merchandise, will continue throughout fiscal 2009 and for the foreseeable future. Although we have seen improvement in some aspects of our business, overall economic conditions continue to be uncertain and these improvements may not be sustained. If consumer spending on apparel and accessories continues to decline and demand for our products decreases further, we may be forced to discount our merchandise or sell it at a loss, which would reduce our revenues, gross margins, operating cash flows and earnings. Continued declines in our profitability could result in a charge to earnings for a valuation allowance against our deferred tax assets or an impairment of our stores, which would not affect our cash flow but could decrease our earnings or increase our losses, and our stock price could be adversely affected. In addition, higher transportation costs, higher costs of labor, insurance and healthcare, and other negative economic factors may increase our cost of sales and operating expenses. Any opportunistic investments we make in inventory or marketing in the current economic climate may not achieve the intended results which could result in further decreases in earnings and operating cash flows.

Our credit facility contains borrowing base and other provisions that may restrict our ability to access it.

The recent distress in the financial markets has resulted in extreme volatility in securities prices and diminished liquidity and credit availability, which may affect our liquidity. Although we currently do not have any borrowings under our $70 million secured credit facility, tightening of the credit markets could make it difficult for us to access funds, enter into agreements for new indebtedness or obtain funding through the issuance of our securities. Additionally, if the macroeconomic environment were to continue to deteriorate, it is possible that consumer spending could decline further and impact our cash flows, which may require us to borrow under our credit facility. The actual amount of credit that is available from time to time under our credit facility is limited to a borrowing base amount that is determined according to, among other things, a percentage of the value of eligible inventory plus a percentage of the value of eligible credit card receivables, as reduced by certain reserve amounts that may be determined in the discretion of the lender. Consequently, it is possible that, should we need to access our credit facility, it may not be available in full. Additionally, our credit facility contains covenants related to capital expenditure levels and minimum inventory book value, and other customary matters. Our failure to comply with the covenants, terms and conditions of our credit facility could cause the facility not to be available to us.

Recent disruptions in the credit and financial markets could affect our liquidity and harm our financial performance.

The current credit crisis is having a significant negative impact on businesses around the world, and the impact of this crisis on our major suppliers cannot be predicted. The inability of key vendors to access credit and liquidity, or the insolvency of key vendors, could lead to their failure to deliver our merchandise, which would result in lost sales and lower customer satisfaction. It is also possible that the inability of our vendors to access credit will cause them to extend less favorable terms to us, which could negatively affect our margins and financial condition.

Our failure to predict customer spending patterns and preferences may reduce our revenues, gross margins and earnings.

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 and be affected by general economic conditions that are difficult to predict. 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.  If our merchandise does not appeal to our customers, we may be required to sell our merchandise at increased markdown levels and lower margins.

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. In addition, in the current economic environment we conservatively maintained low levels of inventory, and this lack of inventory may limit our ability to respond to increases in demand.  If we elect to maintain 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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We have recently implemented changes to our business strategy that we expect over time will both increase the appeal of our merchandise to customers and reduce the impact of discounting and promotions. However, these initiatives will take time to be fully implemented and may not have a positive effect on our operating results. In addition, if the demand for our merchandise is lower than expected, given our increased investments in inventory in the current economic climate, we will be forced to discount merchandise, which reduces our gross margins, results of operations and operating cash flows.

We are subject to significant risks associated with our ongoing implementation of major changes to our management information systems.

To support our increasingly complex business processes, we are replacing a number of our management information systems that are critical to our operations, including systems such as accounting, human resources, inventory purchasing and management, financial planning, direct segment order processing, and retail segment point-of-sale systems. While integration efforts are ongoing, we completed the installation of our new core merchandising system during the second quarter of fiscal 2009. This merchandising system is a central component affecting many aspects of our business. Installing and integrating vital components of our management information systems carries substantial risk, including potential loss of data or information, cost overruns, implementation delays, disruption of operations, lower customer satisfaction resulting in lost customers, inability to deliver merchandise to our stores or our customers and our potential inability to meet reporting requirements, any of which would harm our business and could impair our results of operations.

Any determination that we have a material weakness in our internal control over financial reporting could have a negative impact on our investor perceptions.

Our system of internal controls over financial reporting is designed to provide reasonable assurance that the objectives of an effective control system are met. However, any system of internal controls is subject to inherent limitations and the design of our controls does not provide absolute assurance that all of our objectives will be met. This includes the possibility that controls may be inappropriately circumvented or overridden, that judgments in decision-making can be faulty and that misstatements due to errors or fraud may not be prevented or detected. Any failure in the effectiveness of internal control over financial reporting could have a material effect on financial reporting or cause us to fail to meet reporting obligations, and could negatively impact investor perceptions.

Our reliance on third party vendors subjects 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 2008 we were the importer of record for approximately 60 percent of our total apparel purchases. We believe there is opportunity to increase our direct sourcing slightly during fiscal 2009, with the ultimate target being 65 to 70 percent. Irrespective of our direct sourcing initiative, substantially all of our merchandise, including that which we buy from domestic vendors, is manufactured overseas. This exposes us to risks and uncertainties, which could substantially impact our ability to realize any perceived cost savings. These risks include, among other things:

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

·increasing pressure on us regarding credit assurance and payment terms;

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

·volatile fuel and energy costs;

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

·financial instability of a vendor or vendors, including their potential inability to obtain credit to manufacture the merchandise they produce for us;

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

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

Financial insolvency of any of our major landlords could have a material adverse affect on our sales and operating results.

The current macroeconomic environment has had an adverse impact on the commercial real estate sector, including some of our retail landlords.   On April 16, 2009, a national owner and operator of shopping malls, General Growth Properties, Inc. (“GGP”) and many of its affiliates (collectively “GGP Debtors”) filed petitions for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code.

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We are currently the tenant in 44 stores that the GGP Debtors and certain of their non-debtor affiliates own, manage, or control. Approximately 22 of the 44 stores are subject to leases under which a GGP Debtor is a landlord, and the balance of the stores are with affiliates of GGP that did not file for bankruptcy relief. Because of the bankruptcy filing, the GGP Debtors may be able to exercise rights that could negatively impact us, including the right to reject existing store leases. Also, if a GGP Debtor or any buyer of a GGP Debtor’s property is unable to maintain the quality of a mall’s operations or otherwise perform its obligations as landlord, including its repair and maintenance obligations, then the performance of our stores in those malls could be adversely affected. If the current macroeconomic conditions continue or deteriorate further, additional commercial landlords may be similarly impacted. There can be no assurance that the GGP bankruptcies, or bankruptcies or financial difficulties of our other landlords, will not have a negative impact on our business.

Our success is dependent upon key personnel.

Our future success depends largely on the contributions and abilities of key executives and other employees. The loss of any of our key employees could have a material adverse effect on the business. Furthermore, the current economic conditions or the location of our corporate headquarters in Sandpoint, Idaho, may make it more difficult or costly to replace key employees who leave us, or to add qualified employees we will need to manage our further growth.

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 2009 Annual Meeting of Stockholders of Coldwater Creek Inc. was held on June 13, 2009. At such meeting, the following proposals were voted upon and approved:

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

	For	Withheld
Dennis C. Pence	63,389,498	3,834,129
Robert H. McCall	63,294,106	3,929,521
Frank M. Lesher	66,304,262	919,365

Continuing Directors:

Curt Hecker

Daniel Griesemer

Georgia Shonk-Simmons

James R. Alexander

Kay Isaacson-Leibowitz

Jerry Gramaglia

Michael J. Potter

Proposal No. 2: To ratify the appointment of Deloitte and Touche LLP as our independent registered public accounting firm for fiscal 2009.

For	Against	Abstain	Broker non-votes
66,737,658	450,367	35,602	—

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)

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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 10th day of September 2009.

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

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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