Coldwater Creek 10Q 2008 Q1 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 Fiscal Quarter Ended May 5, 2007

¨	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 ¨

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

Large accelerated filer x Accelerated file ¨ Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ 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 June 8, 2007
Common Stock ($.01 par value)		93,307,793

Coldwater Creek Inc.

Form 10-Q

For the Fiscal Quarter Ended May 5, 2007

Table of Contents


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		25

Item 4. Controls and Procedures		25

PART II. OTHER INFORMATION		25

Item 1. Legal Proceedings		25

Item 1A. Risk Factors		26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 3. Defaults Upon Senior Securities		27

Item 4. Submission of Matters to a Vote of Security Holders		27

Item 5. Other Information		27

Item 6. Exhibits		27

Signatures		28

Exhibit Index		29

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

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)

ASSETS


	May 5, 2007			February 3, 2007			April 29, 2006
CURRENT ASSETS:
Cash and cash equivalents	$	152,091		$	148,680		$	132,890
Receivables		25,534			22,138			29,792
Inventories		134,108			126,953			105,434
Prepaid and other		17,652			13,626			10,568
Prepaid and deferred marketing costs		15,003			9,251			14,451
Deferred income taxes		6,089			6,000			2,807

Total current assets		350,477			326,648			295,942

Property and equipment, net		259,555			247,385			189,147
Deferred income taxes		2,760			2,070			2,858
Restricted cash		3,552			3,552			4,503
Pension asset		—			—			4,667
Other		887			820			265

Total assets	$	617,231		$	580,475		$	497,382

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	107,872		$	85,412		$	95,330
Current deferred revenue		5,616			5,385			3,711
Accrued liabilities		57,825			60,941			47,818
Income taxes payable		—			1,591			8,689

Total current liabilities		171,313			153,329			155,548

Deferred rents		94,719			92,175			65,025
Deferred co-branded credit card revenue		8,862			8,771			6,490
Supplemental Employee Retirement Plan		7,234			7,046			5,317
Other		3,571			1,698			676

Total liabilities		285,699			263,019			233,056

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, 93,247,676, 93,168,138 and 92,366,199 shares issued, respectively		932			932			924
Additional paid-in capital		126,247			124,302			111,755
Accumulated other comprehensive loss		(3,124	)		(3,225	)		—
Retained earnings		207,477			195,447			151,647

Total stockholders’ equity		331,532			317,456			264,326

Total liabilities and stockholders’ equity	$	617,231		$	580,475		$	497,382

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

COLDWATER CREEK INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands except for per share data)


	Three Months Ended
	May 5, 2007		April 29, 2006
Net sales	$	281,292	$	215,261
Cost of sales		152,805		114,827

Gross profit		128,487		100,434
Selling, general and administrative expenses		110,723		82,911

Income from operations		17,764		17,523
Interest, net, and other		2,216		1,606

Income before income taxes		19,980		19,129
Income tax provision		7,950		7,557

Net income	$	12,030	$	11,572

Net income per share—Basic	$	0.13	$	0.13

Weighted average shares outstanding—Basic		93,209		92,215
Net income per share—Diluted	$	0.13	$	0.12

Weighted average shares outstanding—Diluted		94,575		94,660

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

COLDWATER CREEK INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	Three Months Ended
	May 5, 2007			April 29, 2006
OPERATING ACTIVITIES:
Net income	$	12,030		$	11,572
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,706			8,079
Stock-based compensation expense		1,191			691
Supplemental Employee Retirement Plan expense		354			335
Deferred rent amortization		(1,076	)		(1,302	)
Deferred income taxes		(844	)		(1,242	)
Excess tax benefit from exercises of stock options		(149	)		(2,569	)
Loss on asset disposition		474			13
Other		4			(2	)
Net change in current assets and liabilities:
Receivables		(3,396	)		(978	)
Inventories		(7,155	)		(19,125	)
Prepaid and other		(4,026	)		(2,249	)
Prepaid and deferred marketing costs		(5,752	)		(4,013	)
Accounts payable		25,106			20,696
Accrued liabilities		(4,235	)		1,185
Income taxes payable		(1,406	)		82
Deferred co-branded credit card revenue		322			1,661
Deferred rents		4,739			4,847
Other changes in non-current assets and liabilities		1,712			(84	)

Net cash provided by operating activities		29,599			17,597

INVESTING ACTIVITIES:
Purchase of property and equipment		(26,906	)		(19,978	)
Restricted cash		—			(50	)

Net cash used in investing activities		(26,906	)		(20,028	)

FINANCING ACTIVITIES:
Proceeds from exercises of stock options and ESPP purchases		569			896
Excess tax benefit from exercises of stock options		149			2,569

Net cash provided by financing activities		718			3,465

Net increase in cash and cash equivalents		3,411			1,034
Cash and cash equivalents, beginning		148,680			131,856

Cash and cash equivalents, ending	$	152,091		$	132,890

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

COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Nature of Business and Organizational Structure

Coldwater Creek Inc., together with its wholly-owned subsidiaries (the Company), a Delaware corporation headquartered in Sandpoint, Idaho, is a multi-channel specialty retailer of women’s apparel, accessories, jewelry and gift items. We operate in two operating segments: retail and direct. The retail segment consists of our premium retail stores, outlet stores and day spas. The direct segment consists of our catalog and Internet-based e-commerce businesses. 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 balance sheet information was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the interim financial statements presented herein.

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

2. Significant Accounting Policies

Comprehensive Income

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” requires the presentation of comprehensive income, in addition to the existing income statement. Comprehensive income is defined as the change in equity during a period from transactions and other events, excluding changes resulting from investments by owners and distributions to owners. Comprehensive income in the first quarter of fiscal 2007 was $0.1 million greater than net income as a result of amortization of unrecognized costs associated with our Supplemental Executive Retirement Plan. There was no difference between comprehensive income and net income in the first quarter of fiscal 2006.

Classification Revisions and Reclassifications

We revised our condensed consolidated statement of operations for the fiscal quarter ended April 29, 2006 to change the classification of the costs related to “free product” (gift-with-purchase) that we periodically provide to customers at the time of sale. Previously, we included the costs related to the gift-with-purchase as a marketing cost within selling, general, and administrative expenses. We determined that such costs should have been included in cost of sales. As a result, we increased cost of sales by approximately $1.2 million and decreased selling, general and administrative expenses by an equal amount for the first quarter of fiscal 2006.

In the fourth quarter of fiscal 2006, we also refined our definition of pre-opening costs, which is a component of selling, general and administrative expenses, to include rent expense that we incur during the build-out phase of a retail store prior to its opening. As a result, we reclassified approximately $0.4 million in rent expense from cost of sales to selling, general and administrative expenses for the first quarter of fiscal 2006. In addition, in the fourth quarter of fiscal 2006, we determined that certain day spa costs, primarily rent, that had previously been classified as selling, general and administrative expenses should have been classified in cost of sales. As a result, we changed the classification of approximately $0.1 million of day spa costs from selling, general and administrative expenses to cost of sales for the first quarter of fiscal 2006.

Our condensed consolidated statement of cash flows for the quarter ended April 29, 2006 has also been revised to reflect a change in the classification of a $50,000 increase in restricted cash. Previously, the increase was classified as a cash outflow from financing activities, but we subsequently determined that the increase in restricted cash would be more appropriately classified as an investing activity. As a result, we increased cash inflows from financing activities by $50,000 and increased cash outflows from investing activities by an equal amount for the quarter ended April 29, 2006.

These changes in classification, which we determined to be immaterial, had no impact on our consolidated financial position, income from operations, net income, or our net increase in cash and cash equivalents included in our condensed consolidated statements of cash flows.

Advertising Costs

Direct response advertising includes catalogs and national magazine advertisements that contain an identifying code which allows us to track related sales. All direct costs associated with the development, production and circulation of direct response advertisements are accumulated as prepaid marketing costs. Once the related catalog or national magazine advertisement is either mailed or first appears in print, these costs are reclassified to deferred marketing costs. These costs are then amortized as expense to selling, general and administrative expenses over the expected sales realization cycle, typically several weeks. Direct response advertising expense was $25.4 million and $23.0 million for the quarters ended May 5, 2007 and April 29, 2006, respectively.

Advertising costs other than direct response advertising include commissions associated with our participation in a web-based affiliate program, store promotional and signage expenses and television advertising. Production costs related to television commercials are expensed when the commercials are first aired, while other advertising costs are expensed as incurred or when the particular store promotion begins. Advertising expense other than that related to direct response advertising was $10.5 million and $2.8 million for the quarters ended May 5, 2007 and April 29, 2006, respectively.

Accounting for Leases

Certain of our operating leases contain predetermined fixed escalations of the minimum rental payments over the lease. For these leases, we recognize the related rental expense on a straight-line basis over the term of the lease, which commences for accounting purposes on the date we have access and control over the leased store (possession). Possession occurs prior to the making of any lease payments and approximately 60 to 90 days prior to the opening of a store. In the early years of a lease with rent escalations, the recorded rent expense will exceed the actual cash payments. The amount of rent expense that exceeds the cash payments is recorded as deferred rent in the condensed consolidated balance sheet. In the latter years of a lease with rent escalations, the recorded rent expense will be less than the actual cash payments. The amount of cash payments that exceed the rent expense is then recorded as a reduction to deferred rent. Deferred rent related to lease agreements with escalating rent payments was $18.0 million, $16.3 million and $11.2 million at May 5, 2007, February 3, 2007 and April 29, 2006, respectively.

Additionally, certain operating leases contain terms which obligate the landlord to remit cash to us as an incentive to enter into the lease agreement. These lease incentives are commonly referred to as “tenant allowances”. When we take possession of a store we record the amount to be remitted by the landlord as a tenant allowance receivable. At the same time, we record deferred rent in an equal amount in the condensed consolidated balance sheet. The tenant allowance receivable is reduced as cash is received from the landlord, while the deferred rent is amortized as a reduction to rent expense over the lease term. Deferred rent related to tenant allowances, including both the current and long-term portions, in the amount of $90.6 million, $88.7 million and $63.5 million existed at May 5, 2007, February 3, 2007 and April 29, 2006, respectively.

Income Taxes

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

We adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48) on February 4, 2007. Upon the implementation of FIN 48, we did not recognize any increase or decrease in the liability for unrecognized tax benefits. As of February 4, 2007, we had a liability of $0.6 million plus accrued interest of $0.2 million for tax positions taken on previously filed returns. We filed amended federal income tax returns during the first quarter of fiscal 2007 to resolve the federal income tax portion of the positions, resulting in a remaining liability as of May 5, 2007 of $0.2 million relating to state income taxes. Subsequent to May 5, 2007, we filed amended state returns to resolve the remaining liability for unrecognized tax benefits.

We file income tax returns in the U.S. federal jurisdiction and in various state and local and foreign jurisdictions. We are no longer subject to Internal Revenue Service (IRS) examinations for fiscal years prior to fiscal 2003 and are not currently under examination by the IRS. With limited exceptions, we are no longer subject to state or local examinations for our fiscal years prior to fiscal 2002. Currently several state examinations are in progress, however we do not anticipate any adjustments that would result in a material impact to our financial position, results of operations and cash flows. Income tax returns filed in foreign jurisdictions are immaterial to our financial position, results of operations and cash flows.

We recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. This policy did not change as a result of the adoption of FIN 48. No penalties were recognized during the first fiscal quarters ended May 5, 2007 and April 29, 2006. The amount of interest recognized during these same periods was not material. Approximately $43,000, $0.2 million and $0.5 million was accrued for the payment of interest at May 5, 2007, February 3, 2007 and April 29, 2006, respectively.

Stock-Based Compensation

Stock-based compensation is accounted for according to Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS 123R), “Share-Based Payment”. 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, restricted stock units (RSUs) and common stock issued to employees under our Customer Service Recognition Program in the first quarter of fiscal 2007 and fiscal 2006 was as follows (in thousands):


	Three Months Ended
	May 5, 2007		April 29, 2006
Stock Options	$	681	$	382
RSUs		421		124
Customer Service Recognition Program		89		185

Total	$	1,191	$	691

Options to purchase 73,500 and 21,750 shares of our common stock were granted to employees during the first quarter of fiscal 2007 and fiscal 2006, respectively. The weighted average fair value of those options was $10.31 and $12.75, respectively. Options to purchase 57,791 and 338,060 shares of our common stock were exercised during the first quarter of fiscal 2007 and fiscal 2006, respectively with a total intrinsic value of $0.9 million and $7.4 million, respectively.

During the first quarter of fiscal 2007, employees were granted 38,000 RSUs with a weighted average grant date fair market value of $21.72. No RSUs were granted during the first quarter of fiscal 2006.

We issued 4,736 and 7,350 shares of common stock to employees under our Customer Service Recognition Program in the first quarter of fiscal 2007 and fiscal 2006, respectively.

Store Pre-Opening Costs

We incur rent, preparation and training costs prior to the opening of a retail store or day spa. These pre-opening costs are expensed as incurred and are included in selling, general and administrative expenses. Pre-opening costs were approximately $1.7 million and $1.5 million during the quarters ended May 5, 2007 and April 29, 2006, respectively.

List rental income (expense)

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


	Three Months Ended
	May 5, 2007			April 29, 2006
List rental income	$	422		$	500
List rental expense		(107	)		(68	)

Net list rental income	$	315		$	432

Interest, net, and other

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


	Three Months Ended
	May 5, 2007			April 29, 2006
Interest (expense), including financing fees	$	(44	)	$	(103	)
Interest income		1,955			1,594
Other income		528			301
Other (expense)		(223	)		(186	)

Interest, net and other	$	2,216		$	1,606

Accounting for Vendor Allowances

We account for allowances received from a merchandise vendor as an adjustment to the price of the vendor’s products. This adjustment is characterized as a reduction of the carrying amount of inventory and, when sold, as cost of sales. Consolidated cost of sales includes allowances from merchandise vendors of $1.9 million and $1.5 million in the quarters ended May 5, 2007 and April 29, 2006, respectively.

Recently Issued Accounting Standards

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measures” (SFAS 157), which is effective for fiscal years beginning after November 15, 2007. 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. We are currently evaluating the effect, if any, the adoption of SFAS 157 will have on our financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits entities to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis under a fair value option. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157. We are currently evaluating the effect, if any the adoption of SFAS 159 will have on our financial statements.

3. Receivables

Receivables consist of the following (in thousands):


	May 5, 2007		February 3, 2007		April 29, 2006
Tenant improvement allowances	$	9,611	$	12,825	$	16,048
Trade		11,020		5,918		8,796
Vendor Allowance		2,095		—		2,112
Co-branded credit card fees and royalties		1,129		897		1,276
Customer list rental		593		780		396
Other		1,086		1,718		1,164

	$	25,534	$	22,138	$	29,792

We evaluate the credit risk associated with our receivables to determine if an allowance for doubtful accounts is necessary. At May 5, 2007, February 3, 2007 and April 29, 2006 no allowance for doubtful accounts was deemed necessary.

4. Property and Equipment, net

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


	May 5, 2007			February 3, 2007			April 29, 2006
Land	$	242		$	242		$	242
Building and land improvements and capital lease		29,930			29,852			26,543
Leasehold improvements		166,541			159,540			115,819
Furniture and fixtures		94,600			89,783			61,462
Technology hardware and software		82,966			80,549			70,416
Machinery and equipment and other		20,967			20,557			17,084
Construction in progress		22,347			14,408			17,726

		417,593			394,931			309,292
Less: Accumulated depreciation and amortization		(158,038	)		(147,546	)		(120,145	)

	$	259,555		$	247,385		$	189,147

Construction in progress is comprised primarily of costs related to leasehold improvements and furniture and fixtures related to unopened premium retail stores and the expansion of our IT and Distribution Center infrastructure.

5. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	May 5, 2007		February 3, 2007		April 29, 2006
Accrued payroll and benefits	$	10,010	$	15,186	$	11,489
Gift cards and coupon rewards		18,462		21,739		12,127
Current portion of deferred rents		13,911		12,792		9,746
Accrued sales returns		7,949		5,721		9,111
Accrued taxes		4,642		4,086		4,895
Other		2,851		1,417		450

	$	57,825	$	60,941	$	47,818

6. Net Income Per Common Share

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

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


	Three Months Ended
	May 5, 2007		April 29, 2006
Net income	$	12,030	$	11,572

Weighted average common shares outstanding during the period (for basic calculation)		93,209		92,215
Dilutive effect of other potential common shares		1,366		2,445

Weighted average common shares and potential common shares (for diluted calculation)		94,575		94,660

Net income per common share—Basic	$	0.13	$	0.13

Net income per common share—Diluted	$	0.13	$	0.12

The computation of the dilutive effect of other potential common shares excluded options to purchase approximately 638,000 and 234,000 shares of common stock in the quarters ended May 5, 2007 and April 29, 2006, respectively. Under the treasury stock method, the inclusion of these options would have resulted in higher earnings per share, causing their effect to be antidilutive.

7. Supplemental Executive Retirement Plan

On October 1, 2005, the Compensation Committee of the Board of Directors approved a Supplemental Executive Retirement Plan (SERP) for certain executive officers effective as of October 30, 2005. The SERP is an unfunded, non-qualified benefit plan that will provide eligible participants with monthly benefits upon retirement, termination of employment, death or disability, subject to certain conditions.

We account for our SERP using an actuarial model as required by Statement of Financial Accounting Standards No. 87 “Employers’ Accounting for Pensions.” Effective February 3, 2007, we adopted Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – An Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158) which requires companies to fully recognize an asset or liability for the overfunded or underfunded status of their benefit plans in the financial statements. The funded status of a benefit plan is measured as the difference between the fair value of the plan assets and the benefit obligation. SFAS 158 requires actuarial gains and losses, prior service costs, and any remaining transition assets or obligations that have not yet been recognized under previous accounting standards to be recognized as a component of accumulated other comprehensive income, net of tax, until they are amortized as a component of net periodic pension cost. Subsequent to the initial recognition of the funded status of the benefit plans, any changes to the funded status are recognized through accumulated other comprehensive income and then amortized as a component of net periodic pension cost.

Net periodic benefit cost is comprised of the following components for the three months ended May 5, 2007 and April 29, 2006 (in thousands):


	Three Months Ended
	May 5, 2007		April 29, 2006
Service expense	$	87	$	87
Interest expense		101		82
Amortization of:
Prior service cost		166		166
Actuarial loss		—		—

Net periodic benefit cost	$	354	$	335

As the SERP is an unfunded plan, we were not required to make any contributions during the three months ended May 5, 2007 and April 29, 2006. We anticipate that the majority of the expected future payments under the SERP will be made after 2011.

8. Commitments

During the first quarter of fiscal 2007 and fiscal 2006, we incurred aggregate rent expense under operating leases of $15.0 million and $10.4 million, including contingent rent expense of $207,000 and $18,000, respectively and $1.0 million and $0.4 million, respectively, of rent expense classified as store pre-opening cost.

As of May 5, 2007 our minimum lease payment requirements, which include the predetermined fixed escalations of the minimum rentals and exclude contingent rental payments and the amortization of lease incentives for our operating leases and our commitment under the capital lease are as follows (in thousands):


	Operating Leases		Capital Lease
Fiscal 2007	$	44,054	$	67
Fiscal 2008		62,492		89
Fiscal 2009		62,164		89
Fiscal 2010		61,599		89
Fiscal 2011		59,479		98
Thereafter		312,201		3,559

Total	$	601,989	$	3,991

Less - interest on capital lease at 10.5%				2,978

Total principal payable and accrued interest of $13 on capital lease			$	1,013	(1)

(1)	Based upon the payment terms of the lease agreement, principal payments will not begin until approximately 2021 and all payments through such date represent interest only payments.

Subsequent to May 5, 2007, we have entered into additional retail leases with minimum lease payment requirements, which include the predetermined fixed escalations of the minimum rentals. As of June 8, 2007 our lease commitments increased by $27.9 million.

On February 13, 2007, we entered into an amended and restated credit agreement with Wells Fargo Bank, N.A., providing for an unsecured revolving line of credit of up to $60.0 million and allowing us to issue up to $60.0 million in letters of credit. The interest rate under the credit agreement is based upon either the London InterBank Offered Rate plus a margin ranging from 0.7 percent to 1.5 percent depending upon our leverage ratio (as defined in the credit agreement), or the lender’s prime rate.

The credit agreement also contains financial covenants, including requirements for specified minimum net worth and fixed charge ratio (as defined in the credit agreement). The credit agreement restricts our ability to, among other things, dispose of assets except in the ordinary course of business, participate in mergers or acquisitions in excess of $25 million, incur other indebtedness in excess of

$25 million and make certain investments. In addition, we are subject to unused commitment fees based on a varying percentage of the amount of the total facility that is not drawn down under the credit agreement on a quarterly basis. The credit facility has a maturity date of January 28, 2012.

We had inventory purchase commitments of approximately $191.6 million, $169.3 million and $167.7 million at May 5, 2007, February 3, 2007 and April 29, 2006, respectively. Additionally, as of May 5, 2007, February 3, 2007 and April 29, 2006 we had no borrowings outstanding under the revolving line of credit and $22.1 million, $28.5 million and $18.2 million in letters of credit issued, respectively.

9. Contingencies

We are periodically involved in litigation and administrative proceedings primarily arising in the normal course of our business. In addition, from time to time, we have received claims that our products and/or the manner in which we conduct our business infringes on the intellectual property rights of third parties. In the opinion of management, our gross liability, if any, and without any consideration given to the availability of insurance or other indemnification, under any pending litigation or administrative proceedings, would not materially affect our consolidated financial position, results of operations or cash flows.

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

During the second quarter of fiscal 2005, we introduced a co-branded customer credit card program. Under this program, we receive from the issuing bank a non-refundable up-front marketing fee for each new account that is opened and activated. Approximately 32,100 and 45,500 cards were activated in the first quarter of fiscal 2007 and fiscal 2006, respectively. These fees are initially deferred and recognized in consolidated net sales as revenue over the customer relationship period. The following table summarizes the deferred marketing fee activity for the first quarter of fiscal 2007 and fiscal 2006 (in thousands).


	Three Months Ended
	May 5, 2007			April 29, 2006
Deferred co-branded credit card revenue—beginning of period	$	14,156		$	8,540
Marketing fees received		2,534			3,546
Amount recognized to revenue		(2,212	)		(1,885	)

Deferred co-branded credit card revenue—end of period	$	14,478		$	10,201

Less—Current deferred co-branded credit card revenue		5,616			3,711

Long-term deferred co-branded credit card revenue	$	8,862		$	6,490

The following table provides an estimate of when we expect to amortize the deferred marketing fees of $14.5 million as of May 5, 2007 into revenue (in thousands). This schedule is based upon current estimates and assumptions of the expected lives of our credit card customer relationships, therefore amounts shown are subject to change.


Fiscal Period	Total
Remainder of 2007	$	4,359
2008		4,478
2009		3,350
2010		1,888
2011		403

	$	14,478

To encourage customers to apply for and activate the co-branded credit card we provide a discount to customers on their first Coldwater Creek purchase made with the co-branded credit card. These discounts are netted against the sales price of the related merchandise. In addition to marketing sales discounts we also incur the cost of printing and mailing customized catalogs to customers who have been pre-approved by the credit card issuer to receive a credit card offer. These costs are expensed as incurred as selling, general and administrative expenses.

Once a customer is approved to receive a co-branded credit card and the credit card is activated, they become eligible to participate in our credit card reward program. Under this program, points are earned on purchases made with the credit card at Coldwater Creek and other businesses where the card is accepted. Cardholders who accumulate the requisite number of points are issued a coupon towards the purchase of Coldwater Creek merchandise. We receive a sales royalty from the issuing bank based upon a percentage of purchases made by the cardholder at Coldwater Creek and at other businesses where the card is accepted. The sales royalty received from the issuing bank is deferred and recognized when a cardholder uses reward coupons to purchase Coldwater Creek merchandise or when the coupon expires. The amount of sales royalty recognized as revenue during the first quarter of fiscal 2007 was approximately $0.8 million.

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
	May 5, 2007			April 29, 2006
Net sales (a):
Retail	$	184,860		$	128,565
Direct		96,432			86,696

Consolidated net sales	$	281,292		$	215,261

Segment operating income:
Retail	$	33,053		$	22,191
Direct		24,228			23,287

Total segment operating income		57,281			45,478
Corporate and other		(39,517	)		(27,955	)

Consolidated income from operations	$	17,764		$	17,523

Depreciation and amortization:
Retail	$	8,042		$	5,226
Direct		268			105
Corporate and other		3,396			2,748

Consolidated depreciation and amortization	$	11,706		$	8,079

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

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains various statements regarding our current strategies, financial position, results of operations, cash flows, operating and financial trends and uncertainties, as well as certain forward-looking statements regarding our future expectations. When used in this discussion, words such as “anticipate,” “believe,” “estimate,” “expect,” “could,” “may,” “will,” “should,” “plan,” “predict,” “potential,” and similar expressions are intended to identify such forward-looking statements. Our forward-looking statements are based on our current expectations and are subject to numerous risks and uncertainties. As such, our actual future results, performance or achievements may differ materially from the results expressed in, or implied by, our forward-looking statements. Please refer to our “Risk Factors” in our most recent Annual Report on Form 10-K for the fiscal year ended February 3, 2007, 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 $281.3 million in net sales in the first quarter of fiscal 2007. 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. We serve our customers through an expanding base of retail stores, as well as our catalog and e-commerce channels. Our merchandise assortment, retail stores, catalogs and e-commerce website are designed to appeal to women who are 35 years of age and older with average annual household incomes in excess of $75,000.

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

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

Recent Developments and Strategic Initiatives

Retail Growth

We expect the retail business to be the key driver of our growth strategy as we continue the expansion of our premium retail store base. As of May 5, 2007, we operated 252 premium retail stores and 25 merchandise clearance outlet stores in 151 markets. As of June 8, 2007, three premium retail stores and one outlet store have been opened in the second quarter of fiscal 2007, bringing the total premium retail store count to 255. We currently plan to open 50 additional premium retail stores during the remainder of fiscal 2007 for a total of 65 premium retail stores opened in fiscal 2007. We believe there is an opportunity for us to grow our premium retail store base to 450 to 500 stores in more than 250 identified markets nationwide over the next three to five years.

In the first quarter of fiscal 2007, we rolled out a new display format in all of our premium retail stores designed to present our customer with a more compelling overall Coldwater Creek experience. This new look is aimed at improving the presentation of the merchandise assortment within our stores.

National Branding Campaign

One of the primary vehicles for attracting new customers to the Coldwater Creek brand has been the placement of multiple-page advertisements in national magazines. These advertisements are designed to drive traffic and sales to all of our channels, while promoting a heightened awareness of the Coldwater Creek brand. Advertisements are placed in high-circulation magazine publications popular with our customer such asGood Housekeeping,Better Homes & Gardens,Country Living,Southern Living,Martha Stewart andWoman’s Day. During the first quarter of fiscal 2007, we increased our investment in this national magazine advertising campaign. We also began testing a television advertising campaign in limited markets during the second half of fiscal

2006. Testing of this campaign continued and was expanded during the first quarter of fiscal 2007. As such, national branding campaign spending increased $6.5 million from $5.7 million in the first quarter of fiscal 2006 to $12.2 million in the first quarter of fiscal 2007. We anticipate that through improved brand recognition these advertisements will continue to translate into increased market share and improved profitability.

Coldwater Creek Catalog

OurColdwater Creek catalog, which was introduced in the first quarter of fiscal 2005, differs from our other catalog titles in that it exclusively features merchandise available in our premium retail stores and is designed to encourage customers to shop at our stores. As such, it is mailed into markets where a premium retail store is located. The catalog supplements our other catalog titles, communicating with customers in between catalog mailings and notifying them of current promotions in the premium retail store. While the catalog is designed to increase retail segment sales, we believe it also contributes, albeit to a lesser extent, to direct segment sales. In the second quarter of fiscal 2007, we plan to introduce a new look to ourColdwater Creek catalog that will be even more reflective of our customers’ lifestyle and further aligned with our retail locations.

During the first quarter of fiscal 2007, we mailed approximately 8.7 millionColdwater Creek catalogs compared to the 6.0 million mailed during the first quarter of fiscal 2006. A contributing factor to this increase was our retail expansion which provided us with the opportunity to mail theColdwater Creek catalog into additional markets.

E-Commerce

In May 2007, we launched our updated Web site, providing our customer with enhancements for easier access to our apparel, accessories, home and gift products, outlet merchandise and day spa services and products. These enhancements are designed to improve our web shopping experience.

During the first quarter of fiscal 2007, we continued our e-mail initiative which resulted in more targeted e-mail campaigns as compared to the first quarter of fiscal 2006. As of May 5, 2007, the database of e-mail addresses to which we regularly send customized e-mails totaled approximately 3.2 million compared to 3.0 million as of April 29, 2006.

Direct Sourcing

Our merchandise has historically been purchased primarily through domestic importers who procured the merchandise on our behalf. During the third quarter of fiscal 2004 we began to work directly with foreign manufacturers, launching our direct sourcing initiative. The benefits of direct sourcing include improved control over the production, quality and transportation logistics of our merchandise. We believe these benefits result in faster speed to market, improved quality and higher profit margins. Approximately fifteen percent of our merchandise was purchased directly from manufacturers in fiscal 2005. During fiscal 2006, this percentage increased to approximately 30 percent. We currently plan to direct source 50 percent of our merchandise purchases by the end of fiscal 2007 and approximately 70 percent by the end of fiscal 2008.

To support this initiative we opened a sourcing office in Hong Kong in the fourth quarter of fiscal 2005 and an office in India in the first quarter of fiscal 2006, with additional staff located in Guatemala. These sourcing offices work closely with direct sourcing personnel located at our corporate headquarters. The primary functions of these offices include product development and production management.

Coldwater Creek ~ The Spa

We continue to test ourColdwater Creek ~ The Spaconcept in six locations, with plans to open three additional day spas in the second half of fiscal 2007. These day spas offer a complete menu of spa treatments, including massages, facials, body treatments, manicures and pedicures. In addition to spa treatments, the day spas carry an assortment of relevant apparel as well as lines of personal care products for women. Currently, each day spa is located in close proximity to an existing premium retail store as we believe this creates significant opportunities for us to cross-market Coldwater Creek retail stores andColdwater Creek ~ The Spa and thereby increase traffic and sales in both concepts. The three day spa locations to be opened in the second half of fiscal 2007 will be adjacent to one of our premium retail stores and will be connected to the store via an internal pass through in an effort to maximize cross marketing potential.

During the first quarter of fiscal 2007, operating losses related to the day spa concept reduced our consolidated income from operations as a percentage of net sales by approximately 0.7 percentage points. The day spa concept continues to differ in many aspects from our core business and will continue to require special attention to fully assess its long-term potential. Therefore, while we believe the period of time during which our day spa locations have been open is still too short to properly assess the financial viability of the concept, we currently anticipate incurring additional costs related to our test of the day spas, primarily for marketing and promotion.

IT Initiatives

We are continuing to improve various information technology tools and systems in order to enhance operating efficiency and enable our infrastructure to accommodate current and planned growth. During the first quarter of fiscal 2007, we continued activities to review, enhance and replace several fundamental systems, such as our inventory planning and allocation and financial and human resources systems. We currently expect to implement the systems related to financial and human resources during the second half of fiscal 2007.

Results of Operations

First Quarter Summary

•

Consolidated net sales increased $66.0 million, or 30.7 percent, due to:

•

the addition of 68 premium retail stores, three outlet retail stores and five day spas since the end of the first quarter of fiscal 2006;

•

quarter over quarter increase in comparable stores sales growth;

•

the expanded national branding campaign which includes both television and national magazine advertisements;

•

increased catalog circulation;

•

a growing database of customers along with more targeted e-mail campaigns; and

•

revenue related to the co-branded credit card program.

Increased revenue was partially offset by increased promotional activity, including discounts offered in conjunction with national magazine advertisements and the co-branded credit card program. First quarter results were also impacted by lower customer traffic rates.

•

Gross profit dollars increased $28.1 million, or 27.9 percent, while the gross profit rate decreased to 45.7 percent of net sales as a result of:

•

increased promotional activity, and

•

discounts offered in conjunction with national magazine advertising and the co-branded credit card program.

The decrease in gross profit rate was partially offset by increased initial merchandise margins primarily as a result of our direct sourcing program and revenue related to our co-branded credit card program.

•

Selling, general and administrative (SG&A) expenses increased $27.8 million, or 33.5 percent, and SG&A rate increased to 39.4 percent of net sales due to:

•

personnel and overhead costs associated with the retail expansion and costs associated with the day spa concept;

•

our national branding campaign, including increased national magazine advertisement circulation and television advertising; and

•

increased catalog circulation.

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the three months ended May 5, 2007 as compared to the three months ended April 29, 2006. It is provided to assist in assessing differences in our overall performance (in thousands):


	Three Months Ended
	May 5, 2007			% of net sales		April 29, 2006			% of net sales		$ change		% change
Net sales	$	281,292		100.0	%	$	215,261		100.0	%	$	66,031	30.7	%
Cost of sales		152,805		54.3	%		114,827		53.3	%		37,978	33.1	%

Gross profit		128,487		45.7	%		100,434		46.7	%		28,053	27.9	%
Selling, general and administrative expenses		110,723		39.4	%		82,911		38.5	%		27,812	33.5	%

Income from operations		17,764		6.3	%		17,523		8.2	%		241	1.4	%
Interest, net, and other		2,216		0.8	%		1,606		0.7	%		610	38.0	%

Income before income taxes		19,980		7.1	%		19,129		8.9	%		851	4.4	%
Income tax provision		7,950		2.8	%		7,557		3.5	%		393	5.2	%

Net income	$	12,030		4.3	%	$	11,572		5.4	%	$	458	4.0	%

Consolidated effective income tax rate		39.8	%				39.5	%

Classification Revisions and Reclassifications

In the fourth quarter of fiscal 2006, we revised our condensed consolidated statement of operations to change the classification of the costs related to “free product” (gift-with-purchase) that we periodically provide to customers at the time of sale. Previously, we included the costs related to the gift-with-purchase as a marketing cost within selling, general, and administrative expenses. We determined that such costs should have been included in cost of sales. As a result, we increased cost of sales by approximately $1.2 million and decreased selling, general and administrative expenses by an equal amount for the first quarter of fiscal 2006.

Comparison of the Three Months Ended May 5, 2007 with the Three Months Ended April 29, 2006

Consolidated Net Sales

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

Consolidated net sales increased during the first quarter of fiscal 2007 as compared with the first quarter of fiscal 2006 primarily due to the addition of 68 premium retail stores, three outlet retail stores and five day spas since the end of the first quarter of fiscal 2006. In addition, comparable premium store sales grew by 7.3 percent for the quarter, compared to a 9.6 percent increase in the prior year period.

We define comparable premium stores as those stores in which the gross square footage has not changed by more than twenty percent in the previous sixteen months and which have been open for at least sixteen 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 comparable provides a better view of the growth pattern of the premium retail store base. During the first quarter of fiscal 2007, the comparable premium store retail base included 148 premium retail stores compared to 97 premium retail stores for the first quarter of fiscal 2006.

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.

In addition to new store openings and comparable premium store sales growth, consolidated net sales for the fiscal 2007 first quarter benefited from a six percent increase in national magazine advertising circulation as compared to the fiscal 2006 first quarter. Catalog circulation also increased by 3.5 million or twelve percent during the same period, from 30.3 million catalogs to 33.8 million catalogs. The increase in circulation was primarily due to additionalNorthcountry andColdwater Creek catalog mailings. The addition of approximately 227,000 net new names to our e-mail database since the end of the fiscal 2006 first quarter along with more targeted e-mail campaigns also contributed to increased consolidated net sales.

Marketing fee revenue related to the co-branded credit card program contributed an additional $0.3 million to the overall increase, while sales royalty revenue related to reward coupons earned under the co-branded credit card program contributed an additional $0.8 million. Although our agreement with the issuing bank extends until the first quarter of fiscal 2010, subject to an annual automatic renewal, there is no assurance that our arrangement with the issuing bank will continue under its current terms.

Shipping fees received from customers for delivery of merchandise increased $0.8 million from $10.6 million in the first quarter of fiscal 2006 to $11.4 million in the first quarter of fiscal 2007.

These increases in net sales were partially offset by markdowns and discounts offered to customers due to increased promotional activity in the fiscal 2007 first quarter, as well as by discounts associated with our national branding campaign and the co-branded credit card program.

Consolidated Cost of Sales/Gross Profit

The consolidated gross profit rate decreased by 1.0 percentage points primarily due to increased promotional activity as well as costs related to our day spa concept which was introduced in the first quarter of fiscal 2006. The decrease in gross profit rate was partially offset by higher initial merchandise markups associated with the direct sourcing initiative and improved leveraging of retail occupancy costs.

The costs associated with our day spa concept decreased the consolidated gross profit rate in the first quarter of fiscal 2007 by approximately 0.3 percentage points as compared with the first quarter of fiscal 2006. Markdowns and discounts, including those related to national magazine advertisements increased due to higher promotional activity in the fiscal 2007 first quarter compared to the same period in the prior year, partially offset by higher initial merchandise markups, resulted in a decline of approximately 0.6 percentage points. Decreased leveraging of our buying and distribution costs and shipping and handling costs, partially offset by improved leveraging of our retail occupancy costs decreased our gross profit rate by approximately 0.1 percentage points.

Consolidated gross profit rate for the first quarter of fiscal 2007 benefited from the recognition of co-branded credit card program fee and royalty revenue of $3.0 million compared to $1.9 million in first quarter of fiscal 2006.

Consolidated Selling, General and Administrative Expenses

Fiscal 2007 first quarter consolidated SG&A expenses increased as compared to fiscal 2006 first quarter, primarily as the result of increased employee and marketing expenses. The increase in employee expenses was driven mainly by increased salaries and wages for retail administrative and store employee staff and related taxes and benefits as we continue to build personnel to support the expanding retail store base. Increased circulation in both national magazine advertisements and catalogs, along with the introduction of television advertising in the second half of fiscal 2006, drove the increase in marketing expenses as compared to the prior year.

As a percentage of net sales, SG&A expenses increased by 0.9 percentage points in the fiscal 2007 first quarter as compared with the fiscal 2006 first quarter. This increase was the result of a 2.3 percentage point increase in marketing and advertising expenses along with a 0.3 percentage point increase in employee expenses, partially offset by a 1.4 percentage point improvement in catalog expense and a 0.3 percentage point improvement in overhead costs. Marketing and advertising expense increases were driven primarily by

television advertising and retail store promotions. Employee expenses increased as the result of retail administrative and store employee wages and salaries. Catalog expense decreased as a percentage of net sales, as the retail segment continues to represent a larger portion of consolidated net sales, while decreases in overhead costs were driven by improved leveraging and reductions in travel. The overall increase in SG&A as a percentage of net sales was also driven by costs related to our day spa concept.

Consolidated Interest, Net and Other

The increase in consolidated interest, net and other for the first quarter of fiscal 2007 as compared to same period in the prior year is the result of higher interest income earned on the investment of a higher average cash balance, as well as higher average interest rates.

Consolidated Provision for Income Taxes

The increase in the consolidated provision for income taxes for the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006 was the result of higher pre-tax income. The increase in the effective income tax rate for the same periods is primarily due to an increase in stock-based compensation related to incentive stock options, which is not deductible for tax purposes.

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
	May 5, 2007		% of Net Sales		April 29, 2006		% of Net Sales		% Change
Net sales:
Retail	$	184,860	65.7	%	$	128,565	59.7	%	43.8	%
Direct
Internet		65,810	23.4	%		55,547	25.8	%	18.5	%
Catalog		30,622	10.9	%		31,149	14.5	%	(1.7	)%

Total Direct		96,432	34.3	%		86,696	40.3	%	11.2	%

	$	281,292	100.0	%	$	215,261	100.0	%	30.7	%

Segment operating income:
Retail	$	33,053			$	22,191
Direct		24,228				23,287

	$	57,281			$	45,478

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


	Three Months Ended
	May 5, 2007			April 29, 2006			% Change
Segment operating income	$	57,281		$	45,478		26.0	%
Unallocated corporate and other		(39,517	)		(27,955	)	41.4	%

Income from operations	$	17,764		$	17,523		1.4	%

Retail Segment

Sales

The $56.3 million growth in retail segment net sales for the first quarter of fiscal 2007 as compared with the first quarter of fiscal 2006 is primarily the result of the addition of 68 premium retail stores, three outlet retail stores and five day spas since the end of the first quarter of fiscal 2006. In addition, net sales in our comparable premium retail stores increased $7.3 million to $108.3 million in the first quarter of fiscal 2007 from $101.0 million in the first quarter of fiscal 2006.

Also included in the retail segment net sales growth in the first quarter of fiscal 2007 as compared with the first quarter of fiscal 2006 was an additional $0.9 million in co-branded credit card program fee and royalty revenue. Outlet stores contributed an additional $0.9 million while net sales from our day spa concept contributed an additional $2.3 million. We believe increased promotional activity, and increased circulation in both national magazine advertisements and catalogs also contributed to this growth in retail segment net sales.

Segment Operating Income

Retail segment operating income rate for the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006 increased by 0.6 percentage points. Higher initial merchandise markups associated with our direct sourcing initiative and higher purchase volumes related to the retail expansion, partially offset by increased promotional activity resulted in a 1.4 percentage point improvement in merchandise margins. Improved leveraging of employee and retail store occupancy costs contributed 0.4 percentage points and 0.4 percentage points, respectively to the increase. These improvements were partially offset by a 0.8 percentage point increase in marketing costs, primarily related to retail store promotions and a 0.6 percentage point increase in certain overhead costs, primarily shipping supplies. Costs associated with the day spa concept (primarily product and service costs and other employee expenses) partially offset the improvements in segment operating income rate by 0.2 percentage points.

Direct Segment

Sales

The direct segment net sales increase of $9.7 million during the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006 was driven by an 18.5 percent increase in Internet business net sales. Internet business net sales grew during the period as a result of increased promotional activity, along with the addition of approximately 227,000 net new names to our e-mail database since the end of the fiscal 2006 first quarter and more targeted e-mail campaigns.

Catalog business net sales experienced a 1.7 percent decline during the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006. Catalog net sales are derived from orders taken from customers over the phone or through the mail. Catalogs are used as a brand marketing vehicle to drive sales in all channels and we encourage customers to choose the channel they deem most convenient. Sales made through other channels that we believe were driven by the initial receipt of a catalog are not included in catalog net sales. Consequently, as customers choose to purchase merchandise through other channels, we expect catalog business net sales to continue to generally decrease as a percent of total net sales.

Included in the direct segment net sales increase was an additional $0.8 million in shipping revenue associated with increased direct segment net sales in the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006 and an additional $0.2 million in co-branded credit card program fee and royalty revenue.

Segment Operating Income

Direct segment operating income rate for the first quarter of fiscal 2007 decreased 1.7 percentage points as compared with the first quarter of fiscal 2006. This decrease was primarily due to a 4.0 percentage point decline in merchandise margins, as improvements resulting from higher initial merchandise markups associated with our direct sourcing initiative and higher purchase volumes related to the retail expansion were offset by increased promotional activity, primarily markdowns in the Internet business. This operating income decrease was partially offset by improved leveraging of marketing, employee and overhead costs as these costs were spread over increased direct segment sales, contributing improvements of 1.3 percentage points, 0.3 percentage points and 0.7 percentage points, respectively to the direct segment operating income rate.

Unallocated Corporate and Other

Unallocated corporate and other expenses increased in the first quarter of fiscal 2007 as compared to the first quarter of fiscal 2006 mainly due to an additional $6.5 million in marketing expenses primarily related to our national branding campaign. Corporate support costs, primarily professional service fees and depreciation, contributed an additional $2.8 million to the increase, while employee expenses, consisting predominantly of corporate salaries, increased by $2.2 million.

Seasonality

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

•

the composition, size and timing of various merchandise offerings;

•

the number and timing of premium retail store openings;

•

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

•

the timing of e-mail campaigns;

•

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

•

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

•

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

•

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

•

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

•

shifts in the timing of important holiday selling seasons relative to our fiscal quarters, including Valentine’s Day, Easter, Mother’s Day, Thanksgiving and Christmas.

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

Our business materially depends on sales and profits from the November and December holiday shopping season. In anticipation of traditionally increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement the existing workforce. Additionally, as gift items and accessories are more prominently represented in the November and December holiday season merchandise offerings, we typically expect, absent offsetting factors, to realize higher consolidated gross margins in the second half of our fiscal year. If, for any reason, we were to realize significantly lower-than-expected sales or profits during the November and December holiday selling season, our financial condition, results of operations, including related gross margins and cash flows for the entire fiscal year will be materially adversely affected.

Liquidity and Capital Resources

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

the ordinary course of business, participate in mergers or acquisitions in excess of $25 million, incur other indebtedness in excess of $25 million and make certain investments. In addition, we are subject to unused commitment fees based on a varying percentage of the amount of the total facility that is not drawn down under the credit agreement on a quarterly basis. The credit facility has a maturity date of January 28, 2012.

Operating activities generated $29.6 million and $17.6 million of positive cash flow during the first quarters of fiscal 2007 and fiscal 2006, respectively. On a comparative year-to-year basis, the $12.0 million increase in cash flows from operating activities in the first quarter of fiscal 2007 from the first quarter of fiscal 2006 resulted primarily from increased revenues, an increase of $2.4 million in collections of tenant allowances and an increase of $0.9 million in interest income collected. This increase was offset by higher operating expenses and inventory purchases primarily related to our retail expansion, in addition to an increase in income taxes paid of $2.5 million and a decrease of $2.9 million in fees collected from our co-branded credit card program.

Cash outflows from investing activities principally consisted of capital expenditures which totaled $26.9 million and $20.0 million during the first quarter of fiscal 2007 and fiscal 2006, respectively. Capital expenditures in the first quarter of fiscal 2007 primarily related to leasehold improvements and furniture and fixtures associated with the opening of twelve additional premium retail stores, and to a lesser extent the remodeling of certain existing stores, and the expansion of our IT and distribution infrastructure. Capital expenditures in the first quarter of fiscal 2006 primarily related to leasehold improvements and furniture and fixtures associated with the opening of nine additional premium retail stores and one day spa.

Cash inflows from financing activities were $0.7 million and $3.5 million during the first quarter of fiscal 2007 and fiscal 2006, respectively. The cash inflows were derived from activity related to stock option exercises and the purchase of shares under our employee stock purchase plan.

As a result of the foregoing, we had $179.2 million in consolidated working capital at May 5, 2007, compared with $173.3 million at February 3, 2007. Our consolidated current ratio was 2.05 at May 5, 2007, compared with 2.13 at February 3, 2007. We had no outstanding short-term or long-term bank debt at May 5, 2007 or February 3, 2007.

Capital expenditures for the full year in fiscal 2007 are expected to be approximately $115.0 million, primarily associated with the premium retail store expansion and store-related expenditures and, to a lesser extent, investments in information technology, the testing our day spa concept and other corporate-related capital expenditures.

We believe cash flow from operations and available borrowing capacity under our bank credit facility will be sufficient to fund current operations and retail store openings under our current store roll-out plan. However, we may be required to seek additional sources of funds if, for example, we decide to accelerate our retail roll-out strategy.

Future Outlook

Due to competition from discount retailers that has put downward pressure on retail prices for women’s apparel, the apparel industry has experienced significant retail price deflation over the past several years. We expect this trend to continue. Furthermore, on December 31, 2004, quota restrictions on the importing of apparel into the United States from foreign countries which are members of the World Trade Organization expired. The United States and the European Union have re-imposed trade quotas on certain textile categories that will be in effect through December 2008. We currently believe that our sourcing strategy will allow us to adjust to potential shifts in availability of apparel following the expiration of these quotas.

We expect the retail segment to be the key driver of future growth. As our retail business grows, we will add additional overhead, such as incremental corporate personnel costs and costs associated with improving existing or implementing new information technology infrastructure. However, over time, we expect sales dollar growth to outpace the addition of infrastructure expenses. Consequently, we believe retail expansion will continue to increase overall profitability.

We, along with many of our competitors, experienced a promotional retail selling environment in the latter part of fiscal 2006 that continued into the first quarter of 2007. We believe this promotional activity could continue during the remainder of fiscal 2007. This promotional selling environment has been driven largely by lower and sometimes erratic customer traffic patterns, which we and other retailers experienced during the first quarter of fiscal 2007.

We also anticipate that our recently implemented direct sourcing strategy will contribute to an increase in overall profitability by increasing the percentage of merchandise we purchase directly from overseas manufacturers. During fiscal 2006 we were the importer of record on approximately 30 percent of our total merchandise purchases. We anticipate we will be the importer of record on approximately 50 percent and 70 percent of our total merchandise purchases by the end of fiscal 2007 and fiscal 2008, respectively.

Critical Accounting Policies and Estimates

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

The accounting policies and estimates listed below are those that we believe are the most critical to our consolidated financial condition and results of operations. They are also the accounting policies that typically require our most difficult, subjective and complex judgments and estimates, often for matters that are inherently uncertain. Please refer to the discussion of critical accounting policies in our most recent Annual Report on Form 10-K for the fiscal year ended February 3, 2007, for further details.

•

Revenue Recognition and Sales Return Estimates

•

Inventory Valuation

•

Direct Response Advertising

•

Stock-Based Compensation

•

Impairment of Long-Lived Assets

Recently Issued Accounting Standards

See Note 2 to our condensed consolidated financial statements.

Off-Balance Sheet Liabilities and Other Contractual Obligations

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

The following tables summarize our minimum contractual commitments and commercial obligations as of May 5, 2007 (in thousands):


	Payments Due in Fiscal Year
	Total		2007		2008-2009		2010-2011		Thereafter
Contractual Obligations
Operating leases (a)	$	601,989	$	44,054	$	124,656	$	121,078	$	312,201
Inventory purchase orders (b)		191,596		191,596		—		—		—
Capital leases (c)		3,991		67		178		187		3,559
Other long-term liabilities (d) (e)		9,792		—		1,845		18		7,929

Total	$	807,368	$	235,717	$	126,679	$	121,283	$	323,689

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

b.	We expect to pay all of our commitments relating to inventory purchases in the next twelve months. The actual timing of the payments is subject to change based upon actual receipt of the inventory and the terms of payment with the vendor.

The term of the capital lease is approximately 30 years and bears interest at 10.5 percent. Payments represent the principal amount due of $1.0 million, accrued interest of $13,000 and interest expense to be incurred of approximately $3.0 million. Based upon the payment terms of the lease agreement, principal payments will not begin until approximately fiscal year 2021, and all payments through such date represent interest only payments.

Other long-term liabilities primarily include amounts on our May 5, 2007 condensed consolidated balance sheet representing obligations under our supplemental executive retirement plan of $7.2 million, $1.9 million related to our employee retention compensation program, and asset retirement obligations under certain of our lease arrangements of $0.5 million. The payments above relating to the $1.9 million retention program that are primarily due in fiscal years 2008 and 2009 do not include $2.4 million of additional compensation that is to be recognized over the employees’ remaining service periods.

We do not expect to pay any cash out in the next twelve months, for amounts relating to our supplemental executive retirement plan and the asset retirement obligations, however, the timing of cash flows associated with these obligations is uncertain and subject to change based upon circumstances not necessarily within our control.

We have excluded $94.7 million and $8.9 million of deferred rents and deferred revenue, respectively, from the other long-term liabilities in the above table. These amounts have been excluded as deferred rents relate to operating leases which are already reflected in the operating lease category above and the deferred revenue does not represent a contractual obligation that will be settled in cash.

Subsequent to May 5, 2007, we entered into additional retail leases with minimum lease payment requirements, and as a result, as of June 8, 2007 our operating lease commitments increased by $27.9 million.

As of May 5, 2007 we had $22.1 million in letters of credit issued.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have not been materially impacted by fluctuations in foreign currency exchange rates as substantially all of our business is transacted in, and is expected to continue to be transacted in, U.S. dollars or U.S. dollar-based currencies. During the fiscal quarter ended May 5, 2007, we did not have borrowings under our credit facility and, consequently, did not have any material exposure to interest rate market risks during or at the end of this period. However, as any future borrowings under our amended and restated bank credit facility will be at a variable rate of interest, we could potentially be materially adversely impacted should we require significant borrowings in the future, particularly during a period of rising interest rates. We have not used, and currently do not anticipate using, any derivative financial instruments.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

Our management, with the participation of our Chairman and Chief Executive Officer and our Executive 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 May 5, 2007. Based on that evaluation, our Chairman and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of May 5, 2007.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the first quarter of fiscal 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are, from time to time, involved in various legal proceedings incidental to the conduct of business. In addition, from time to time we have received claims that products and/or the manner in which we conduct business infringe on the intellectual property rights of third parties. In the opinion of management, our gross liability, if any, and without any consideration given to the availability of insurance or other indemnification, under any pending litigation or administrative proceedings, would not materially affect our consolidated financial position, results of operations or cash flows.

ITEM 1A.

RISK FACTORS

Investing in our common stock is subject to a number of risks and uncertainties. We have updated the following risk factors to reflect changes during the first quarter of fiscal 2007 we believe to be material to the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended February 3, 2007 filed with the Securities and Exchange Commission. The risks and uncertainties described below are not the only ones that we face and are more fully described in our Annual Report on Form 10-K and in other reports we file with the Securities and Exchange Commission. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial also may negatively impact our business.

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

The key driver of our growth strategy is the retail store expansion. As of May 5, 2007, we operated 252 premium retail stores. We have since opened an additional three premium retail stores in the fiscal 2007 second quarter for a total of 255 premium retail stores currently in operation. We plan to open a total of 65 premium retail stores in fiscal 2007. We believe we have the potential to grow our retail business to a total of 450 to 500 premium retail stores over the next three to five years. However, there can be no assurance that these stores will be opened, will be opened in a timely manner, or, if opened, that these stores will be profitable. The ability to open our planned retail stores depends on our ability to successfully:

•

identify or secure premium retail space;

•

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

•

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

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

The day spa test may prove unprofitable and may be abandoned at any time.

We continue to test our Coldwater Creek ~ The Spa concept in six locations, with plans to open three additional day spas in the second half of fiscal 2007. The current six locations have been open from ten to thirteen months and we have not formed a conclusion as to the long-term prospects for this concept. To date, however, our day spa test has had a negative impact on our earnings, as we experiment with marketing approaches and gather data regarding the spa business and, in particular, our spa customer. There is no assurance that the test of this concept will be successful or that we will continue to develop day spas. Factors that could cause us to curtail or abandon the day spa concept include:

•

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

•

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

•

legal and regulatory constraints;

•

the inherent difficulty in forecasting consumer tastes and trends through market research, concept testing or otherwise, and the possibility that we will determine through the performance of our test sites that demand does not meet our expectations; and

•

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

If we were to abandon the day spa concept, we would be required to write off any costs we have capitalized and may incur lease termination costs, which would have a material and adverse effect on results of operations, particularly for the quarter in which a write off is recognized.

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

Over the next two years we plan to replace 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. We are continuing the implementation of an enterprise resource planning system, which began in the third quarter of fiscal 2006, to support our increasingly complex business and business processes. Installing and integrating the various components of our management information systems carries substantial operations risk, including loss of data or information, cost overruns, implementation delays, disruption of operations, and our ability to meet regulatory reporting requirements.

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

None

ITEM 5.

OTHER INFORMATION

None

ITEM 6.

EXHIBITS

(A) Exhibits:


Exhibit Number		Description of Document
10.1		Employment Agreement with Daniel Griesemer, President and Chief Operating Officer

10.2		Employment Agreement with Dan Moen, Senior Vice President and Chief Information Officer

10.3		Employment Agreement with Gerard El Chaar, Senior Vice President - Operations

31.1		Certification by Dennis C. Pence of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)

31.2		Certification by Melvin Dick of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)

32.1		Certification by Dennis C. Pence and Melvin Dick pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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 14th day of June 2007.


COLDWATER CREEK INC.

By:		/s/ Dennis C. Pence
		Dennis C. Pence
		Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)


By:		/s/ Melvin Dick
		Melvin Dick
		Executive Vice-President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX


Exhibit Number		Description of Document
10.1		Employment Agreement with Daniel Griesemer, President and Chief Operating Officer

10.2		Employment Agreement with Dan Moen, Senior Vice President and Chief Information Officer

10.3		Employment Agreement with Gerard El Chaar, Senior Vice President - Operations

31.1		Certification by Dennis C. Pence of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)

31.2		Certification by Melvin Dick of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)

32.1		Certification by Dennis C. Pence and Melvin Dick pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Coldwater Creek (CWTRQ) Inactive 10-Q2008 Q1 Quarterly report

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