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Coldwater Hit by Fashion Belly Flops

Shares plunge 28% after the retailer's latest disappointment.


Coldwater Creek


has owned up to the mistakes that will sink its profits for the rest of the year, but it's unclear how the women's apparel retailer will dig itself out of its mess.

Coldwater Creek shares plummeted 28% to $7.82 Friday after the company cut its profit forecasts for the second half of the year. With the plunge, the stock has now fallen 61% since the beginning of the year.

On a conference call with analysts Friday morning, Coldwater Creek executives pointed to a large stock of suede jackets and coats that did not sell well during the fall season. Those are products, though, that the retailer has historically relied on as its signature items.

Instead, customers turned to lower-priced items like woven shirts and knits that could not make up for the diminished revenue.

For the third quarter, the company now expects sales of $260 million to $265 million and a loss of 11 cents to 13 cents a share. Sales for the fourth quarter should be $360 million to $365 million, and Coldwater expects to break even on the bottom line.

Analysts were projecting profits of 14 cents a share for the third quarter and 20 cents in the fourth quarter, according to Thomson Financial. Previously, Coldwater's forecast profits for the second half would be flat with the prior year, when earnings were 34 cents a share.

"Although performance could change if traffic trends improve, our current expectation is that weak traffic patterns could very well remain," said Daniel Griesemer, Coldwater Creek's president and chief operating officer. "As a result we expect to continue to sell a higher than normal percentage of merchandise at markdown in the second half of the year."

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Griesemer will become chief executive at the end of the month, replacing Dennis Pence, who co-founded the company but announced his retirement last week after suffering from a heart attack. Pence will stay on as chairman.

Griesemer, who has been with Coldwater Creek since 2001, faces many obstacles ahead. On Friday's conference call, he acknowledged that the strategies that worked well for the company in a healthy retail environment have not worked so well for it now.

Analysts on Friday were critical of the company in the wake of the latest disappointment. Coldwater had already cut its guidance for the year in August, and earlier in the year shares plunged after sales came up short in the last holiday season.

Wachovia analyst Lyn Rhoads Walther downgraded the stock to market perform from outperform based on the guidance cut.

"While we acknowledge that the environment is difficult, particularly in the missy sector, we are stunned by the extent of the earnings revision," she said in a research note. "At this point, it is difficult to determine what is going on in the sector -- is it a fashion issue, a consumer issue, or is the space just overcrowded? But given the significant earnings miss by Coldwater Creek, we now have to question the viability of the concept and thecompany's business strategy."

Mark Montagna, vice president of specialty retail at CL King, says that Coldwater Creek's heavy emphasis on pricey jackets and coats has hurt the company. An embroidered jacket, for instance, costs $249, while a reversible faux croc coat carries a price tag of $369. Coldwater Creek cannot make up for a shortfall in revenue from those items with sales from T-shirts, which many customers switched to because of an unseasonably warm fall.

"Weather had an impact, but if they weren't so dependent on these big-ticket items, it wouldn't have negatively impacted them so much," Montagna says.

He also questions the company's decision to plow ahead with store openings, with 65 new ones planned per year. As of early September, Coldwater had 266 stores and 27 outlets.

Griesemer said the stores are part of the company's long-term strategy, and to move away from it would mean missing out on prime real estate currently available.

But Montagna says Coldwater Creeks needs to pull back on its spending.

"It seems at every conference call, they'll state that expenses rose as they grew the store base," he says. "To me, at some point, those expenses gotta stop."