This Company Is a Dangerous Investment

You wouldn't know by just looking at the 73% two-week gain -- before today's late day sell-off shaved 11% off its share price -- that anything was wrong on the surface. But make no mistake about it: Coldwater Creek (NAS: CWTR) is a potential nuclear weapon waiting to go off in your portfolio.

I've been warning investors for months about the decline of Coldwater Creek, and its most recent quarter again lived up to lofty disappointment expectations. For the quarter, revenue plummeted by 28%, with the company reporting a loss of $0.30 per share, reversing a year-ago profit and missing analysts' already lowered estimates by a clean 50%.

Perhaps most interesting was CEO Dennis Pence's long-term strategic plans, which entail taking the company's clothing line in a different direction and closing 35 to 45 underperforming stores. Wait a second -- that recommendation sounds awfully familiar! Well, at least that's one step in the right direction -- too bad the company has been walking so many miles in the wrong direction for the past couple of years.

Even with the potential savings from closing underperforming stores, the company hasn't addressed its enormous cash-burn rate. Coldwater ended the quarter with $31.5 million in cash, down substantially from the $72.3 million it had one year ago.

Perhaps more dire than its shrinking cash position are its tumbling gross margins.








Gross Margin %








Since 2006, Coldwater's gross margin has fallen every year, from 46.2% to where it sits now at 27.4%. This is the primary problem with Coldwater, and no amount of CEO insider buying is going to be enough to put this Humpty-Dumpty back together again.

Coldwater also can't use the sector-wide weakness excuse. If you look at some of its closest rivals, including Chico's (NYS: CHS) , ANN's (NYS: ANN) Ann Taylor, and Nordstrom (NYS: JWN) , you'd notice a trend of steadily rising gross margins and profits since the lows of the credit crisis. It appears that whatever customer base was shopping at Coldwater Creek has been more than happy to move on to one of its competitors.

So again, don't let the near doubling in the stock's price over the past two weeks be a dangling carrot. Instead, see this company for what it is. Turn around and walk away.

To keep up on the latest news from Coldwater Creek, I suggestadding it to your watchlist.

At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article, but he does get a kick out of poking fun at fashion trends. You can follow him on CAPS under the screen nameTMFUltraLong Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat never sells itself short.

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