Friday, January 19, 2007

Coldwater Creek (NASDAQ:CWTR) - bounce candidate

Couple of firms are out commenting on Coldwater Creek (NASDAQ:CWTR) after the co issued sharply lower Q4 results last night:

- Banc of America notes CWTR cut its Q4 EPS guidance by nearly 40% to $0.16-0.17 (from $0.26-0.27) with the majority of the shortfall due to margins (particularly at retail). They think the timing of the announcement (given the company was at an investor conference last week) could raise concerns about management credibility.

Inventory concern against tough spring comparisons. CWTR pointed to a tough retail environment, not product issues, and plans to clear through inventory by the end of Q4. However, the firm does not believe CWTR has made adjustments to spring flows and there could be some markdown risk in Q1 if trends do not improve. They also note CWTR faces tough comparisons (+HSD-LT comps) over the next 3

This takes 2006E to $0.59 from $0.69, 2007E to $0.72 from $0.92, and 2008E to $0.92 from $1.13. BAC expects conservative 2007 EPS guidance on 2/8, but believes the story has gone from a company that typically beats conservative guidance to one where there could be risk to numbers if weak trends persist. Thinks CWTR is a strong early stage story with a model highly leveraged to a retail rollout. Maintains Neutral but lowers tgt to $19 from $28.

- CIBC notes the EPS miss caught them off-guard given that: 1. they thought merchandise was highly appealing; 2. CWTR's promotional cadence was in line w/ LY, appearing as if inventory was moving as planned; and 3. they saw multiple margin drivers that they believed could offset modest markdowns.

While there may not be much downside from here, the firm thinks there could be an overhang on the stock near term given that investors were likely blind-sighted as well, will have to wait until 2/7 to get the 07 outlook (which is likely to trail the Street's) and 3/7 to get the critical details on 4Q.

However, LT they believe CWTR is among the best sales and margin growth stories, with still 40% three-year EPS growth. CIBC thinks the traffic issue is likely short-lived, inventories expected to be clean by end of 4Q, and the company remains on track to achieve LT operating margin goals.

Maintains Sector Outperformer. Lowers tgt to $29 from $35.

- JP Morgan says traffic was the primary reason for the company's lowered guidance ($0.16-$0.17 from $0.26-$0.27) and we see no reason to expect improvement in the near term. Despite this, however, they still believe that CWTR, with its leading sq. ft. growth and margin opportunity, remains an attractive investment-esp. given the 20%+ dip in CWTR shares aftermarket last night (SandP -0.3%).

Citing what are similar trends across the women's apparel space, the co. continues to experience declines in traffic. However, conversion metrics, units per transaction and average transaction size appear to remain positive. The worst categories include fashion-knit tops and jewelry/accessories-key categories for gifting/occasional dressing.

With strong 30% sq. ft. growth and easy margin opportunities still very much a part of the company's story, JPM believes that shares of CWTR should be able to sustain a premium valuation (similar to URBN and CHS) despite this blip. Should trends normalize, they estimate earnings power of closer to $1.50 over the next couple of years.

Reits Overweight.

- UBS says Coldwater Creek's 4Q profit warning announcement last night is a speed bump in what they believe is a unique long term growth story. A more promotional retail environment during Holiday resulted in soft traffic and margin pressure for Coldwater Creek. They do not believe the story is broken, however. They have lowered their EPS estimates and price target for CWTR. Firm's rating remains Buy.

Many of Coldwater Creek's competitors (Chico's, Talbots, and J. Jill) have already warned about 4Q falling short of expectations, due to company specific merchandising issues and subsequentaggressive promotions. Coldwater did not accelerate promotional activity pre holiday and accordingly, suffered soft traffic. Management plans to clear all remaining inventory in time for new deliveries in early February.

UBS thinks the CWTR story still represents one of the most compelling stories in the space, given 1) margin expansion, 2) 25%+ square footage growth, and 3) differentiated triple channel strategy. They would see any weakness today as a particularly attractive buying opportunity.

Target is cut to $28 from $30.

Notablecalls: I suspect CWTR is a prime bounce candidate. Firstly, the warning does not come as a surprise as several competitors have already issued negative news. Secondly, short interest continued to climb ahead of the announcement meaning there will be some short covering. Last but surely not least, the analyst community continues to be positive on CWTR, calling the news a speed bump. The 20%+ decline in after hrs seems to be excessive. Think the stock's a buy around $18.50 level.

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