Coldwater Creek broadens its shareholder base

By Brad Carlson

IDAHO BUSINESS REVIEW

Twenty months and three stock splits later, Coldwater Creek Inc. has broadened its shareholder base significantly, which should increase the appeal of its stock.

The broader float is the latest chapter in a story that began in 1983, when Dennis Pence, a former Sony marketing executive, and his wife, Ann, moved from Manhattan to north Idaho. In Sandpoint (population: 6,800) they launched a women’s apparel and accessories marketing company in 1984.

Today a $500 million company, Coldwater Creek operates 66 full-line retail stores and 16 outlet stores in 51 markets, and sells its wares via direct-mail catalogues and e-commerce channels (www.coldwatercreek.com).

The Pences took the company public in 1997. The stock rose from below $5 to above $10 from 1999 to 2001, then was between $4 and $8 for much of ’02. It was around $12 before the first stock dividend or split.

Coldwater issued 50 percent dividends in January and September 2003 and in July of this year. Last week the stock (NasdaqNM:CWTR) was trading around $21, near its 52-week high.

“Over the last 20 months or so, we have had a very large increase in the number of shareholders, and types of shareholders,” Coldwater spokesman Dave Gunter said. Previously the Pences and a few large institutions owned most outstanding shares, but after the dividends, “there are a number of mid-sized and smaller institutions that are now investors in the stock.”

Before the first dividend in January 2003, Coldwater’s tradable float was about 9 million shares, and its average daily trading volume for that month was about 25,000 shares. For August 2004, the first full month following the most recent dividend, Coldwater had just over 20 million shares in the market, and an average daily volume around 350,000 shares.

Institutions and mutual funds own 56 percent of CWTR, according to Yahoo Finance. The top five institutional holders at the end of the first quarter were Essex Investment Management, Putnam Investment Management, Wells Fargo, Security Management Co. and David L. Babson & Co. The top five mutual fund holders were Royce Opportunity Fund, Security Equity Fund Midcap Value Series, SBL Fund “V” Series, and two Putnam small-cap funds.

Stock splits don’t impact a company’s market capitalization or the value of an investor’s holding, because the price changes proportionately. They do impact liquidity.

“Making more shares available for trade simply made it more convenient for investors to get into the stock, and just as importantly, to get out of it when it reaches a point where they want to take profits,” Gunter said.

On Aug. 26, the day after Coldwater reported strong quarterly earnings, more than 1 million shares changed hands and the stock rose from $19.09 to $21.15 “on a day where there were quite a few buyers interested in the stock,” he said.

Some profit-taking occurred over the following week, though the price “remained very stable at $20.25 to $20.50. The stability has been great even with, for us, fairly aggressive trading,” Gunter said.

Coldwater has no plans for another stock dividend, he said.

“At this point we feel like we are in a really good spot as far as our shares outstanding, our float,” Gunter said. “Trading volume at this point will be driven investor awareness of, and interest in, the stock.”

While stock splits and stock dividends don’t directly impact a company’s market capitalization, Coldwater’s market cap’ has grown from about $200 million to $800 million over the last 20 months, mainly on four consecutive “really strong” quarters, he said.

“You have to have the shares available. The other issue is, the company has to be performing,” Gunter said.

The demographic group that Coldwater Creek targets – women aged 35 to 55, relatively affluent – is among the most promising in retail, “and the pie only gets bigger in the next four to five years,” said Kevin Foll, senior retail analyst with Next Generation Equity Research in Chicago. “It’s definitely an under-served niche.”

Retailers also targeting this group include Chico’s FAS and The J. Jill Group Inc., he said. J. Jill is similar to Coldwater in that it started as a catalog company and then decided to add stores, he noted.

For Coldwater, “the outlook fundamentally is very strong longer-term,” Foll said.

Coldwater recruited talent from specialty clothing retailer The Gap to fine-tune and grow its store network. Coldwater “shrank the store size, and reduced the breadth of inventory to focus on the key items that sell,” he said. This has resulted in “very strong unit-level economics at the store level. Going forward, this retail model is a less risky and more profitable model.”

In a recent column on Internet site The Motley Fool (www.fool.com), Rick Munarriz noted that Coldwater made a profit and reduced inventory levels during the summer lull, even after reducing catalog sales and growing its store base.

“No one is saying that this is the next Sears, given how that eventual giant had modest mail-order roots,” Munarriz said. “How well the company’s eclectic mix of apparel, accessories and home d&#233cor items mesh in a small store over a wider catalog remains to be seen over the longer haul.”

“We’re talking Chico’s and a miniature Pier 1 tossed into a blender,” Munarriz said. “Will it work? So far it has.” Coldwater’s near-term outlook “is compelling and promising,” he added.

In its most recent 10-Q filing with the SEC, Coldwater officials said the company has opened 29 of the 49 new stores planned in the current fiscal year. In fiscal 2005, the company plans about 50 new stores.

“We believe there is an opportunity to grow to 450 to 500 stores in up to 300 identified markets nationwide over the next six to eight years,” the company’s 10-Q filings says. The current pace of store openings likely will continue after fiscal ’05, “although we do not maintain a specific roll-out plan beyond a two-year time horizon.”

Coldwater Creek stores built since the second half of 2002 are 5,000 to 6,000 square feet, and incorporate designs and materials that “have reduced our initial capital investment per store,” officials said in the 10-Q.