Wednesday, September 5, 2007

Coldwater Creek's A Strong Bounce Candidate

CIBC has some very interesting comments on Coldwater Creek (NASDAQ:CWTR) after the women's apparel retailer last night reported a nearly 28 percent fall in quarterly profit, hurt by higher promotional activity, and forecast a "particularly challenging" third quarter. Coldwater shares fell more than 13 percent to $15.05 in late electronic trade after closing at $17.39 on the Nasdaq on Wednesday:

CIBC notes 2Q EPS of $0.09 were below their and the Street’s $0.12, with the miss to firm's model stemming from lower than expected sales (a -6% comp and lighter than expected direct sales growth) and a 270 bp decline in merchandise margin from higher markdowns.

While the bar for earnings was lowered early in the year (and they were hoping it was sufficiently low enough at that time), management in all fairness could not have accounted for the current psychological and/or real impact that the housing market has on the consumer. CIBC continues to believe that CWTR’s issues are indeed macro related and that the product looks strong. Since 2Q, initiatives have been in place to improve the store layout, website and catalog. Importantly, the company is incentivizing store managers to meet daily conversion targets - this was done successfully in 1Q and was started again this past Monday.

While CIBC was disappointed by the need to lower 2H guidance, CWTR isn’t exactly alone in the women’s space – there really hasn’t been any company focused on boomers that has thrived as of late. However, the difference between CWTR and its peers is that CWTR continues to be fundamentally strong; it isn’t facing serious product issues, it isn’t waiting for a new merchant or executive to formulate a new strategy, and it hasn’t hit a stumbling block in its growth. In their view, CWTR continues to be among the best stories in specialty retail given the attractive, underserved market it caters to, strength of the management team, significant store expansion still ahead, and the opportunity to more than double the operating margin via direct sourcing and sales leverage. CIBC believes that despite low visibility now is the time to step in.

CWTR remains CIBC's top pick into 2H. Firm maintains Sector Outperformer rating while cutting 12 month tgt to $25 from $29.

Notablecalls: I love this call from CIBC's Roxanne Meyer. I think lowering the bar for H2 was somewhat expected and I think there are investors who were waiting for it to happen in order to step in. Coldwater Creek continues to be one of the most compelling growth stories in the industry. The risk/reward is very favorable with the core earnings power both a supporter and driver of the stock price. Investors who wait on the sidelines for the news of an eventual earnings' rebound will likely miss a large percentage gain as the stock will likely slingshot when the improvement is realized.

Short interest in the stock stands at close to 20%. I think shorts have made decent money shorting CWTR and I feel that at least some of them will want to bank some profits into today's weakness.

CWTR could easily be a $25 to $30 stock if and when visibility returns. That makes it a shaky short and a very interesting long.

I wish some bow-wow firm downgraded CWTR this AM, giving you guys decent fills a tad below the $15 level. Absent any downgrades, $15 is the price I'd be willing to pay with a big smile on my face.

I feel CWTR is a bounce candidate here. Going to call the CIBC note actionable here!