Coldwater's Still Lukewarm

Those of you who have read my retail rantings know that I put great emphasis on traffic and sales. But Coldwater Creek CWTR proved that expense and inventory control are important as well.

Shares of Coldwater were surging nearly 16% Wednesday after the women's apparel retailer posted better-than-expected quarterly results. The company was able to exceed expectations with the right merchandise mix, a 9% reduction in inventory and growth in sales at both new and established stores.

That said, I still have found something to gripe about. One of my key performance measures -- traffic -- was down by a mid-single-digits percentage.

Coldwater deserves credit. The company delivered despite the slow traffic. Clearly, shoppers who walked into the stores liked what they saw. But the trick is to get more people in the door.

I wrote about a similar problem at P.F. Chang's PFCB last year. Traffic was declining and I expected it to hurt the stock -- which it did.

These strong franchises aren't going to go out of business as a result of mid-single-digit traffic declines. But when investors place a premium on a stock because of its growth potential, lower traffic becomes a significant issue.

At Wednesday's recent price around $24, Coldwater trades at 39 times 2007 projected earnings of 61 cents a share and 1.4 times the consensus 27% growth rate. That's not egregiously expensive, although the forward price-to-earnings ratio is nearly double that of its peers.