Coldwater Creek Takes 1 Step Closer to the Inevitable

Coldwater Creek's (NAS: CWTR) turnaround plan is in full swing according to management - but it's pretty difficult to tell that it's working based on the figures the company released late last night.

Updating its fourth-quarter guidance, Coldwater Creek once again lowered its already previously lowered estimates and told shareholders to anticipate a loss of $0.18-$0.24 versus its own previous guidance of a loss of $0.13-$0.21.

But, here's where it really gets interesting. Management also told investors that same-store sales fell 9% over the year-ago period, but that this was, "a continuation of the sequential improvement in sales and traffic in the quarter-to-date period versus the 26% decline in comp sales for the first nine months of the year." Hang on while I grab my pom-pom's!

There are not enough happy pills in the world to disguise a 9% year-over-year sales comp decline as positive. Despite also working to shave $20 million to $25 million off of annual expenses by year's end, Coldwater is still burning through cash at an incredible rate. As of its third-quarter report, Coldwater had $37.9 million in cash, down drastically from the $72.3 million it had from five quarters prior. Even worse, the company isn't expected to return to profitability anytime soon.

Coldwater's problems are much the same concerns that are sacking Talbots (NYS: TLB) and Chico's (NYS: CHS) -- namely, changing consumers trends and excessive discounting. Chico's has been able to adjust its product line over time so many of its snafus turn out to be temporary. For Talbots and Coldwater, it hasn't been that simple. Year after year of choosing the wrong product and then needing to kill margins by discounting that product heavily just to move it has eaten into each company's cash balance and caused serious worries about their ability to survive.

It's no secret that this sector that would absolutely benefit from consolidation. ANN (NYS: ANN) has staved off the earnings warning bug that has plagued the sector by tightly controlling its inventory and selling items at full price. Companies like Coldwater and Talbots would be wise to shop themselves around, but I doubt ANN would come calling. Just last month Talbots turned down a $3-per-share bid to be taken private, and even that may turn out to bite the company in the behind.

Coldwater Creek's earnings warning today just moves the company one step closer to the inevitable: Chapter 11 bankruptcy protection. Coldwater already has borrowed $15 million against its revolving credit line and it's my prediction that this could be the year it seeks further loans. I continue to feel that Coldwater's turnaround simply isn't moving quickly enough and it's likely to wind up on the wrong end of the stick if it doesn't right itself very soon.

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At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Try any of our Foolish newsletter services free 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 a disclosure policy that never goes out of fashion.

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