CWTR- 2013.08.03-10Q

10-Q 1 cwtr-20130803x10q.htm 10-Q CWTR- 2013.08.03-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________

Form 10-Q

____________________________________________________________



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended August 3, 2013



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-21915

____________________________________________________________

COLDWATER CREEK INC.

(Exact name of registrant as specified in its charter)



DELAWARE	82-0419266
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

ONE COLDWATER CREEK DRIVE, SANDPOINT, IDAHO 83864

(Address of principal executive offices)

(208) 263-2266

(Registrant's telephone number, including area code)

____________________________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:



Large accelerated filer o	Accelerated filer x

Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:



Class		Shares outstanding as of September 6, 2013
Common Stock ($0.01 par value)		30,613,056

Table of Contents

Coldwater Creek Inc.

Form 10-Q

For the Fiscal Quarter Ended August 3, 2013

Table of Contents



		Page
PART I. FINANCIAL INFORMATION		3

Item 1. Financial Statements (unaudited)		3

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Operations and Comprehensive Operations	4

	Condensed Consolidated Statements of Cash Flows	5

	Notes to the Condensed Consolidated Financial Statements	6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3. Quantitative and Qualitative Disclosures About Market Risk		24

Item 4. Controls and Procedures		24

PART II. OTHER INFORMATION		25

Item 1. Legal Proceedings		25

Item 1A. Risk Factors		25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 3. Defaults Upon Senior Securities		27

Item 4. Mine Safety Disclosures		27

Item 5. Other Information		27

Item 6. Exhibits		28

Signatures		29

Exhibit Index		30

"We," "us," "our," "Company," "Coldwater," and "Coldwater Creek," unless the context otherwise requires, means Coldwater Creek Inc. and its wholly-owned subsidiaries.

Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COLDWATER CREEK INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except for per share data)



	August 3, 2013			February 2, 2013			July 28, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	17,271		$	21,734		$	45,517
Receivables	6,264			5,150			6,576
Inventories	123,878			125,207			133,615
Prepaid and other current assets	17,758			17,072			13,634
Deferred income taxes	1,184			1,252			2,313
Total current assets	166,355			170,415			201,655
Property and equipment, net	152,707			169,007			190,160
Deferred income taxes	2,108			2,112			1,884
Other assets	3,927			4,374			4,983
Total assets	$	325,097		$	345,908		$	398,682
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	62,128		$	57,891		$	67,992
Accrued liabilities	78,759			87,915			83,178
Current maturities of debt and capital lease obligations	15,710			577			544
Total current liabilities	156,597			146,383			151,714
Deferred rents	71,694			82,726			92,665
Long-term debt and capital lease obligations	67,468			63,784			59,998
Supplemental executive retirement plan	10,883			10,994			12,335
Deferred income taxes	636			699			1,716
Other liabilities	15,368			4,186			4,384
Total liabilities	322,646			308,772			322,812
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000 shares authorized; 1, 1 and 1 shares issued, respectively	—			—			—
Common stock, $0.01 par value, 75,000 shares authorized; 30,613, 30,531 and 30,493 shares issued, respectively	306			305			304
Additional paid-in capital	154,258			153,146			152,011
Accumulated other comprehensive loss	(1,532		)	(1,532		)	(2,186		)
Accumulated deficit	(150,581		)	(114,783		)	(74,259		)
Total stockholders' equity	2,451			37,136			75,870
Total liabilities and stockholders' equity	$	325,097		$	345,908		$	398,682

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

COLDWATER CREEK INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS

(Unaudited)

(in thousands, except for per share data)



	Three Months Ended						Six Months Ended
	August 3, 2013			July 28, 2012			August 3, 2013			July 28, 2012
Net sales	$	149,702		$	163,690		$	305,431		$	333,574
Cost of sales	105,662			115,170			210,427			230,663
Gross profit	44,040			48,520			95,004			102,911
Selling, general and administrative expenses	62,562			65,674			130,924			143,193
Loss from operations	(18,522		)	(17,154		)	(35,920		)	(40,282		)
Other gain, net	(5,632		)	(1,278		)	(6,558		)	(1,278		)
Interest expense, net	3,633			1,725			7,206			2,286
Loss before income taxes	(16,523		)	(17,601		)	(36,568		)	(41,290		)
Income tax provision (benefit)	(80		)	(43		)	(770		)	28
Net loss	$	(16,443	)	$	(17,558	)	$	(35,798	)	$	(41,318	)
Other comprehensive income:
Supplemental Executive Retirement Plan liability adjustment, net of tax	—			(18		)	—			(18		)
Total comprehensive loss	$	(16,443	)	$	(17,540	)	$	(35,798	)	$	(41,300	)
Net loss per share — Basic and Diluted	$	(0.54	)	$	(0.58	)	$	(1.17	)	$	(1.36	)
Weighted average shares outstanding — Basic and Diluted	30,583			30,452			30,560			30,440

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

COLDWATER CREEK INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



	Six Months Ended
	August 3, 2013			July 28, 2012
Operating activities:
Net loss	$	(35,798	)	$	(41,318	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	21,794			26,580
Non-cash interest expense	4,597			777
Stock-based compensation expense	1,182			869
Supplemental executive retirement plan expense	227			294
Deferred credit card program revenue	14,832			84
Deferred rents	(12,509		)	(9,159		)
Gain on derivative liability	(6,558		)	(2,349		)
Series A Preferred Stock issuance costs	—			1,070
Net loss on asset dispositions and other termination charges	1,082			1,320
Other	(383		)	(146		)
Net change in operating assets and liabilities:
Receivables	(1,114		)	1,055
Inventories	1,329			(1,640		)
Prepaid and other current assets	(830		)	(4,444		)
Accounts payable	2,490			10,891
Accrued liabilities	(4,810		)	(9,067		)
Net cash used in operating activities	(14,469		)	(25,183		)
Investing activities:
Purchase of property and equipment	(4,789		)	(9,784		)
Proceeds from asset dispositions	15			—
Net cash used in investing activities	(4,774		)	(9,784		)
Financing activities:
Borrowings on revolving line of credit	18,000			10,000
Payments on revolving line of credit	(3,000		)	(25,000		)
Proceeds from the issuance of long-term debt	—			65,000
Payments of long-term debt and capital lease obligations	(273		)	(15,177		)
Payment of debt and Series A Preferred Stock issuance costs	—			(5,809		)
Other	53			105
Net cash provided by financing activities	14,780			29,119
Net decrease in cash and cash equivalents	(4,463		)	(5,848		)
Cash and cash equivalents, beginning	21,734			51,365
Cash and cash equivalents, ending	$	17,271		$	45,517
Supplemental Cash Flow Data:
Interest paid, net of amount capitalized	$	2,611		$	1,511
Income taxes paid (refunded), net	$	(450	)	$	3,187

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Business and Organizational Structure

Coldwater Creek Inc., a Delaware corporation, together with its wholly-owned subsidiaries, headquartered in Sandpoint, Idaho, is a multi-channel specialty retailer of women's apparel, jewelry and accessories. We conduct business in two operating segments: retail and direct. The retail segment consists of our premium retail stores, factory stores and day spas. The direct segment consists of sales generated through our e-commerce website and mobile applications as well as orders taken from customers over the phone and through the mail.

The accompanying condensed consolidated financial statements are unaudited and have been prepared by management pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The condensed consolidated balance sheet as of February 2, 2013 was derived from the audited consolidated balance sheet as of that date. The condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented and should be read in conjunction with the consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

On October 4, 2012, we effected a reverse stock split of the Company's common stock following stockholder approval (the "Reverse Stock Split"). As a result of the split, every four shares of common stock outstanding were consolidated into one share. Certain prior period share and per share information in this Form 10-Q has been retroactively adjusted to reflect the Reverse Stock Split.

The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the financial position, results of operations or cash flows to be realized in future periods.

2. Significant Accounting Policies

Accounting Policies

The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

Principles of Consolidation

The consolidated financial statements include the accounts of Coldwater Creek Inc. and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.

Fiscal Periods

References to a fiscal year refer to the calendar year in which the fiscal year begins. Our fiscal year ends on the Saturday nearest January 31st.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and timing of revenue and expenses, the reported amounts and classification of assets and liabilities, and the disclosure of contingent assets and liabilities. These estimates and assumptions are embodied in our sales returns accrual, gift card breakage, inventory adjustments, derivative liability, stock-based compensation, impairment of long-lived assets, contingent liabilities and income taxes. These estimates and assumptions are based on historical results as well as management's future expectations. Actual results may vary from these estimates and assumptions.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss is made up entirely of unrecognized net actuarial loss, net of tax, for the Supplemental Executive Retirement Plan (the "SERP"). See Note 10. Supplemental Executive Retirement Plan, for amounts reclassified from accumulated other comprehensive loss to net periodic benefit costs due to the amortization of net actuarial loss to selling, general and administrative expenses.

Table of Contents

COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to the subjectivity associated with the inputs to fair value measurements as follows:


•	Level 1 — Quoted prices in active markets for identical assets or liabilities;


•	Level 2 — Quoted prices for similar assets or liabilities in active markets or inputs that are observable; and


•	Level 3 — Unobservable inputs in which little or no market activity exists.

On July 9, 2012, as disclosed in Note 8, we issued 1,000 shares of Series A Preferred Stock. The fair value of the Series A Preferred Stock is recorded as a derivative liability and is measured on a recurring basis at fair value with Level 3 inputs using the Black-Scholes option valuation model with the following inputs (retroactively adjusted to reflect the Reverse Stock Split):



	August 3, 2013			February 2, 2013			July 28, 2012
Closing price of Company's common stock	$	2.66		$	3.69		$	2.64
Exercise price	$	3.40		$	3.40		$	3.40
Risk-free interest rate	2.4		%	1.9		%	1.6		%
Expected volatility	77.4		%	84.9		%	89.3		%
Expected life	8.9 years			9.4 years			10.0 years
Expected dividends	$	—		$	—		$	—

The valuation model and the assumptions used in the model were determined based on the Series A Preferred Stock features and Company specific historical experience, taking into consideration expected future activity. The risk-free interest rate is based on the U.S. Treasury strip rates in effect at the time of measurement with an equivalent remaining term. The expected volatility of our stock prices is based on a combination of historical volatility and the implied volatility of our exchange traded options. Expected life is based on the remaining term of the Series A Preferred Stock. To the extent any of these assumptions increases or decreases in isolation, the fair value of the derivative liability increases or decreases accordingly. Other assumptions based on the Series A Preferred Stock features, including anti-dilution provisions, were considered and determined to be insignificant to the valuation.

Changes in the fair value are recorded as other gain or loss, net, in our condensed consolidated statements of operations and comprehensive operations. Activity for the derivative liability was as follows:



	Three Months Ended						Six Months Ended
	August 3, 2013			July 28, 2012			August 3, 2013			July 28, 2012
	(in thousands)
Balance at beginning of period	$	17,757		$	—		$	18,683		$	—
Issuance of Series A Preferred Stock	—			15,744			—			15,744
Gain on change in fair value	(5,632		)	(2,349		)	(6,558		)	(2,349		)
Balance at end of period	$	12,125		$	13,395		$	12,125		$	13,395

We have financial assets and liabilities, not required to be measured at fair value on a recurring basis, which primarily consist of cash, receivables, payables and debt. The carrying value of cash, receivables, payables and borrowing on our revolving line of credit approximate their fair values due to their short-term nature. As of August 3, 2013, the fair value of our senior secured term loan was $62.5 million compared to the carrying value of $56.5 million, which includes accrued PIK interest and net of the loan discount. As of July 28, 2012, the carrying value of our senior secured term loan approximated fair value as the debt was recently obtained during that period on July 9, 2012. The fair value of the senior secured term loan was estimated using Level 3 inputs by discounting the cash flows with an assumed interest rate that considers credit and liquidity risk.

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COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Income Taxes

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative pretax losses (adjusted for permanent differences) incurred over the last three years. Such objective evidence limits the ability to consider other subjective evidence. We have a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence.

Reclassifications

Certain prior period reclassifications were made to conform with the current period presentation. On the condensed consolidated balance sheets, prepaid and deferred marketing costs was combined with prepaid and other current assets, income taxes payable was combined with accrued liabilities, and deferred marketing fees and revenue sharing was combined with other liabilities. On the condensed consolidated statements of cash flows, deferred income taxes and valuation allowance adjustments were combined with other and income taxes payable was combined with accrued liabilities.

3. Receivables

Receivables consisted of the following:



	August 3, 2013		February 2, 2013		July 28, 2012
	(in thousands)
Credit card receivables	$	3,793	$	2,928	$	4,513
Tenant allowances	1,281		484		920
Other	1,190		1,738		1,143
	$	6,264	$	5,150	$	6,576

Credit card receivables do not bear interest and are generally converted to cash in two to three days. We evaluate the credit risk associated with our receivables to determine if an allowance for doubtful accounts is necessary. As of August 3, 2013, February 2, 2013 and July 28, 2012, no allowance for doubtful accounts was deemed necessary.

4. Property and Equipment, net

Property and equipment, net, consisted of the following:



	August 3, 2013			February 2, 2013			July 28, 2012
	(in thousands)
Land	$	221		$	242		$	242
Building and land improvements	29,634			29,655			29,656
Leasehold improvements	254,607			258,765			264,213
Furniture and fixtures	113,810			114,709			117,227
Technology hardware and software	92,207			89,992			90,406
Machinery and equipment and other	33,616			34,341			35,009
Capital leases	12,805			12,805			12,805
Construction in progress	16,792			16,480			16,613
	553,692			556,989			566,171
Less — Accumulated depreciation and amortization	(400,985		)	(387,982		)	(376,011		)
	$	152,707		$	169,007		$	190,160

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COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. Accrued Liabilities

Accrued liabilities consisted of the following:



	August 3, 2013		February 2, 2013		July 28, 2012
	(in thousands)
Accrued payroll and benefits	$	11,413	$	12,356	$	14,978
Gift cards and certificates	14,151		18,427		15,842
Derivative liability	12,125		18,683		13,395
Current portion of deferred rents	22,232		20,756		20,825
Current portion of deferred credit card revenue	8,167		4,484		5,590
Deferred sales royalty	2,819		3,106		3,346
Accrued sales returns	2,805		3,738		2,923
Accrued taxes	2,975		4,200		4,071
Other	2,072		2,165		2,208
	$	78,759	$	87,915	$	83,178

6. Debt and Capital Lease Obligations

Debt and capital lease obligations consisted of the following:



	August 3, 2013			February 2, 2013			July 28, 2012
	(in thousands)
Secured term loan, including accrued PIK interest due at maturity	$	70,464		$	67,866		$	65,271
Revolving line of credit	15,000			—			—
Capital lease obligations	11,634			11,901			12,163
Total debt and capital lease obligations	97,098			79,767			77,434
Less:
Secured term loan discount	(13,920		)	(15,406		)	(16,892		)
Current maturities of debt	(15,000		)	—			—
Current maturities of capital lease obligations	(710		)	(577		)	(544		)
Long-term debt and capital lease obligations	$	67,468		$	63,784		$	59,998

On July 9, 2012, we obtained a five-year, $65.0 million senior secured term loan (the "Secured Term Loan") provided by an affiliate of Golden Gate Capital. The Secured Term Loan bears interest at a rate of 5.5% to be paid in cash quarterly and 7.5% due and payable in kind ("PIK") upon maturity. The Secured Term Loan is collateralized by a second lien on our inventory and credit card receivables, and a first lien on our remaining assets. The Secured Term Loan is scheduled to mature upon the earlier of July 9, 2017 or the date that the obligations under the Amended and Restated Credit Agreement with Wells Fargo Bank dated May 16, 2011 (the "Credit Agreement") mature or are accelerated. Upon maturity of the Secured Term Loan, the principal balance and any unpaid interest, including $29.8 million of PIK interest, will become due and payable. As of August 3, 2013, $5.5 million of PIK interest has been accrued. Also on July 9, 2012 in conjunction with the Secured Term Loan, we issued 1,000 shares of Series A Preferred Stock and the initial fair value of $15.7 million was recorded as a discount to the Secured Term Loan. This discount is being amortized to interest expense based on the effective interest rate method.

In May 2011, we entered into the Credit Agreement with a maturity date of May 16, 2016, which is secured primarily by our inventory, credit card receivables and certain other assets. The Credit Agreement provides a revolving line of credit of up to $70.0 million, with subfacilities for the issuance of up to $70.0 million in letters of credit and swingline advances of up to $10.0 million. The amount of credit that is available under the revolving line of credit is limited to a borrowing base that is determined according to, among other things, a percentage of the value of eligible inventory and credit card receivables, as reduced by certain reserve amounts required by Wells Fargo Bank. The actual amount that is available under our revolving line of credit fluctuates due to factors including, but not limited to, eligible inventory and credit card receivables, reserve amounts,

Table of Contents

COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

outstanding letters of credit, and borrowing under our revolving line of credit. Consequently, it is possible that should we need to access any additional funds from our revolving line of credit, it may not be available in full. We have had continuing significant operating losses and, if our future operating performance is significantly below our expectations or our revolving line of credit is not fully available to us, our liquidity could be adversely impacted and it may be necessary to seek additional sources of liquidity. Additional actions may include further reducing our expenditures, curtailing our operations, significantly restructuring our business, or restructuring our debt. In connection with the closing of the Secured Term Loan, we amended the Credit Agreement and repaid the separate term loan previously provided by Wells Fargo Bank. The amendment did not materially change the terms of the Credit Agreement. As of August 3, 2013, the revolving line of credit was limited to a borrowing base of $64.0 million with $15.0 million in borrowings and $5.8 million in letters of credit issued, resulting in $43.2 million available for borrowing under our revolving line of credit.

Pursuant to the Credit Agreement, borrowings issued under the revolving line of credit will generally accrue interest at a rate ranging from 1.00% to 2.50% (determined according to the average unused availability under the credit facility (the "Availability")) over a reference rate of, at our election, either LIBOR or a base rate (the "Reference Rate") with an interest rate of 2.25% as of August 3, 2013. Letters of credit issued under the revolving line of credit will accrue interest at a rate ranging from 1.50% to 2.50% (determined according to the Availability) with an interest rate of 2.00% as of August 3, 2013. Commitment fees accrue at a rate ranging from 0.375% to 0.50% (determined according to the Availability), which is assessed on the average unused portion of the credit facility maximum amount.

Both the Secured Term Loan and Credit Agreement have restrictive covenants that subject us to capital expenditure limitations based on our approved annual plan, maintaining a minimum of $95.0 million of inventory, and maintaining a minimum of $15.0 million of liquidity and a minimum excess availability of 15 percent of our borrowing base, as defined in the Credit Agreement. The Secured Term Loan and Credit Agreement also contain various covenants relating to customary matters, such as indebtedness, liens, investments, acquisitions, mergers, dispositions, dividends and other various conditions. Our current plan to close up to 45 stores under our store optimization program and the related transfer or disposition of store assets is not limited by our Secured Term Loan or Credit Agreement. We were in compliance with all covenants for all periods presented.

Both the Secured Term Loan and Credit Agreement contain customary events of default. Upon an event of default that is not cured or waived within any applicable cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral.

7. Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the combination of other potentially dilutive common shares and the weighted average number of common shares outstanding during the period. Other potentially dilutive weighted average common shares include the dilutive effect of shares of Series A Preferred Stock, stock options, restricted stock units ("RSUs") and shares to be purchased under our Employee Stock Purchase Plan ("ESPP") for each period using the treasury stock method. Under the treasury stock method, the exercise price of a share, the amount of compensation expense, if any, for future service that has not yet been recognized, and the amount of excess tax benefits, if any, that would be recorded in additional paid-in-capital when the share is exercised are assumed to be used to repurchase shares in the current period.

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COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table sets forth the computation of basic and diluted net loss per common share (retroactively adjusted to reflect the Reverse Stock Split):



	Three Months Ended						Six Months Ended
	August 3, 2013			July 28, 2012			August 3, 2013			July 28, 2012
	(in thousands, except per share amounts)
Net loss	$	(16,443	)	$	(17,558	)	$	(35,798	)	$	(41,318	)
Weighted average common shares outstanding during the period (for basic calculation)	30,583			30,452			30,560			30,440
Dilutive effect of other potential common shares	—			—			—			—
Weighted average common shares and potential common shares (for diluted calculation)	30,583			30,452			30,560			30,440
Net loss per common share—Basic	$	(0.54	)	$	(0.58	)	$	(1.17	)	$	(1.36	)
Net loss per common share—Diluted	$	(0.54	)	$	(0.58	)	$	(1.17	)	$	(1.36	)

During the three months ended August 3, 2013 and July 28, 2012, 2.4 million and 1.4 million, respectively, of stock options, RSUs and shares to be purchased under our ESPP were outstanding but were excluded from the computation of diluted net loss per share because the effect would be antidilutive. During the six months ended August 3, 2013 and July 28, 2012, 2.2 million and 1.3 million, respectively, of stock options, RSUs and shares to be purchased under our ESPP were outstanding but were excluded from the computation of diluted net loss per share because the effect would be antidilutive. The conversion rights available to outstanding shares of Series A Preferred Stock were also excluded from the computation of diluted net loss per share because the effect would be antidilutive.

8. Stockholders' Equity

Reverse Stock Split

On October 4, 2012, we effected a reverse stock split of the Company's common stock following stockholder approval. As a result of the split, every four shares of common stock outstanding were consolidated into one share, reducing the number of common shares outstanding on the effective date from 122.0 million shares to 30.5 million shares. The shares of Series A Preferred Stock outstanding remained the same. However, the number of shares of common stock each share of Series A Preferred Stock is convertible into and the related exercise price has been adjusted proportionally. The Reverse Stock Split did not affect the registration of our common stock under the Securities Exchange Act of 1934, as amended, or the listing of our common stock under the symbol "CWTR." Our stockholders' equity has been retroactively adjusted to reflect the Reverse Stock Split for all periods presented by reducing common stock and increasing additional paid-in capital, with no change to stockholders' equity in the aggregate. Certain prior period share and per share information in this Form 10-Q has been retroactively adjusted to reflect the Reverse Stock Split.

Series A Preferred Stock

On July 9, 2012 in conjunction with the Secured Term Loan, we issued 1,000 shares of Series A Preferred Stock to an affiliate of Golden Gate Capital which gives that affiliate the right to purchase up to 6.1 million shares of our common stock through July 9, 2022. Shares of Series A Preferred Stock have an initial exercise price of $3.40 per share of underlying common stock. The Series A Preferred Stock is considered a derivative liability due to the net settlement features and is included in accrued liabilities.

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COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9. Stock-Based Compensation

Total stock-based compensation recognized primarily in selling, general and administrative expenses from stock options and RSUs consisted of the following:



	Three Months Ended				Six Months Ended
	August 3, 2013		July 28, 2012		August 3, 2013		July 28, 2012
	(in thousands)
Stock options	$	238	$	315	$	451	$	545
RSUs	312		206		731		324
	$	550	$	521	$	1,182	$	869

All share and per share information has been retroactively adjusted to reflect the Reverse Stock Split.

During the six months ended August 3, 2013 and July 28, 2012, employees were granted 109,000 and 271,575 stock options, respectively. The fair value of stock option awards was estimated at the grant date using the Black-Scholes option valuation model with the following weighted average assumptions:



	Six Months Ended
	August 3, 2013			July 28, 2012
Risk-free interest rate	0.8		%	0.7		%
Expected volatility	91.2		%	89.8		%
Expected life	5.0 years			4.9 years
Expected dividends	$	—		$	—
Weighted average fair value per share	$	2.45		$	3.04

During the six months ended August 3, 2013 and July 28, 2012, employees were granted 786,458 and 140,274 RSUs, respectively, at a weighted average fair value of $3.01 and $4.15, respectively. During the six months ended July 28, 2012, employees were also granted 123,500 performance RSUs at a weighted average grant date fair value of $4.64. For the performance RSUs granted during the six months ended July 28, 2012, half of the RSUs are subject to the achievement of combined operating income targets for fiscal years 2012, 2013 and 2014, and half of the RSUs are subject to the achievement of sales targets for fiscal years 2012, 2013 and 2014. The number of shares actually awarded under performance RSUs will range from 0% to 200% of the base award amount, depending on the results during the performance period.

10. Supplemental Executive Retirement Plan

Net periodic benefit cost of the SERP consisted of the following:



	Three Months Ended				Six Months Ended
	August 3, 2013		July 28, 2012		August 3, 2013		July 28, 2012
	(in thousands)
Interest cost	$	114	$	138	$	227	$	276
Amortization of net actuarial loss	—		9		—		18
	$	114	$	147	$	227	$	294

As the SERP is an unfunded plan, we were not required to make any contributions during fiscal 2013 and 2012. During the six months ended August 3, 2013 and July 28, 2012, we made benefit payments of $355,000 and $83,000, respectively.

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COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. Commitments and Contingencies

Operating Leases

As of August 3, 2013, our minimum operating lease payment requirements, which include the predetermined fixed escalations of the minimum rentals and exclude contingent rental payments, common area maintenance costs ("CAM"), real estate taxes, and the amortization of lease incentives for our operating leases, totaled $383.4 million.

Legal Proceedings

We are, from time to time, involved in various legal proceedings incidental to the conduct of business. Actions filed against us from time to time include commercial, intellectual property infringement, customer and employment claims, including class action lawsuits alleging that we violated federal and state wage and hour and other laws. We believe that we have meritorious defenses to all lawsuits and legal proceedings currently pending against us. Though we will continue to vigorously defend such lawsuits and legal proceedings, we are unable to predict with certainty whether or not we will ultimately be successful. However, based on management's evaluation, we believe that the resolution of these matters, taking into account existing contingency accruals and the availability of insurance and other indemnifications, will not materially impact our consolidated financial position, results of operations or cash flows.

Tax Contingencies

Our multi-channel business model subjects us to state and local taxes in numerous jurisdictions, including franchise, and sales and use tax. We collect these taxes in jurisdictions in which we have a physical presence. While we believe we have paid or accrued for all taxes based on our interpretation of applicable law, tax laws are complex and interpretations differ from state to state. In the past, we have been assessed additional taxes and penalties by various taxing jurisdictions, asserting either an error in our calculation or an interpretation of the law that differed from our own. It is possible that taxing authorities may make additional assessments in the future. In addition to taxes, penalties and interest, these assessments could cause us to incur legal fees associated with resolving disputes with taxing authorities.

Additionally, changes in state and local tax laws, such as temporary changes associated with "tax holidays" and other programs, require us to make continual changes to our collection and reporting systems that may relate to only one taxing jurisdiction. If we fail to update our collection and reporting systems in response to these changes, any over collection or under collection of sales taxes could subject us to interest and penalties, as well as private lawsuits and damage to our reputation. In the opinion of management, resolutions of these matters will not have a material impact on our consolidated financial position, results of operations or cash flows.

Other

As of August 3, 2013, we had non-cancelable inventory purchase commitments of $125.5 million.

12. Credit Card Program

On July 26, 2013, we entered into a Credit Card Program Agreement (the "Program Agreement") with Comenity Bank, a bank subsidiary of Alliance Data Systems Corporation ("ADS"). Under the Program Agreement, ADS will issue co-branded credit cards and private label credit cards to approved new and existing customers. ADS will also purchase the existing co-branded credit card portfolio at a future date from Chase Bank USA, N.A. ("Chase"). During the three months ended August 3, 2013, we received an up-front incentive payment of $11.5 million, which was deferred and will be amortized over the term of the Program Agreement. On September 11, 2013, ADS and Chase executed the purchase agreement for the existing co-branded credit card portfolio, triggering the second incentive payment of $11.5 million to Coldwater Creek. We will receive an additional $2.0 million upon the launch of a new private label credit card program. We will also be entitled to future payments after ADS begins issuing credit cards under the Program Agreement for revenue sharing based on a percentage of credit card sales, certain new credit card accounts opened and activated, and profit sharing based on certain profitability measures of the program. The term of the Program Agreement is seven years from ADS's purchase of the co-branded credit card portfolio from Chase, with automatic extensions for successive one year terms.

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COLDWATER CREEK INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Deferred Credit Card Revenue

The deferred credit card revenue activity was as follows:



	Three Months Ended						Six Months Ended
	August 3, 2013			July 28, 2012			August 3, 2013			July 28, 2012
	(in thousands)
Balance at beginning of period	$	7,063		$	8,148		$	7,752		$	8,800
Incentive payment received	11,500			—			11,500			—
Marketing fees received	890			996			1,756			1,859
Revenue sharing received	9,782			2,946			9,782			2,946
Marketing fees recognized to revenue	(1,071		)	(1,117		)	(2,188		)	(2,192		)
Revenue sharing recognized to revenue	(5,580		)	(2,089		)	(6,018		)	(2,529		)
Balance at end of period	22,584			8,884			22,584			8,884
Less — Current deferred credit card revenue	(8,167		)	(5,590		)	(8,167		)	(5,590		)
Long-term deferred credit card revenue	$	14,417		$	3,294		$	14,417		$	3,294

Sales Royalty

The amount of sales royalty recognized as revenue during the three months ended August 3, 2013 and July 28, 2012 was $1.8 million and $1.8 million, respectively. During the six months ended August 3, 2013 and July 28, 2012, sales royalty revenue was approximately $3.9 million and $3.7 million, respectively.

13. Segment Reporting

The following table provides certain financial data for the retail and direct segments as well as reconciliations to the condensed consolidated financial statements:



	Three Months Ended						Six Months Ended
	August 3, 2013			July 28, 2012			August 3, 2013			July 28, 2012
	(in thousands)
Net sales (a):
Retail	$	118,644		$	129,939		$	236,398		$	261,141
Direct	31,058			33,751			69,033			72,433
Net sales	$	149,702		$	163,690		$	305,431		$	333,574
Segment operating income (loss):
Retail	$	1,124		$	4,486		$	1,511		$	5,409
Direct	5,000			3,710			12,686			8,499
Total segment operating income	6,124			8,196			14,197			13,908
Unallocated corporate and other	(24,646		)	(25,350		)	(50,117		)	(54,190		)
Loss from operations	$	(18,522	)	$	(17,154	)	$	(35,920	)	$	(40,282	)

____________________________________________________________


(a)	There were no sales between the retail and direct segments during the reported periods.

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ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains various statements regarding our current initiatives, financial position, results of operations, cash flows, operating and financial trends and uncertainties, as well as certain forward-looking statements regarding our future expectations. When used in this discussion, words such as "anticipate," "believe," "estimate," "expect," "could," "may," "will," "should," "plan," "predict," "potential," and similar expressions are intended to identify such forward-looking statements. Our forward-looking statements are based on our current expectations and are subject to numerous risks and uncertainties. As such, our actual future results, performance or achievements may differ materially from the results expressed in, or implied by, our forward-looking statements. Refer to Part II, 1A. Risk Factors, in this Form 10-Q and other reports we file with the SEC. We assume no obligation to update our forward-looking statements to conform these statements to actual results or revised guidance.

Overview

We encourage you to read this Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying condensed consolidated financial statements and related notes. References to a fiscal year are to the calendar year in which the fiscal year begins.

Executive Summary

Net sales decreased to $149.7 million for the three months ended August 3, 2013, compared to $163.7 million for the three months ended July 28, 2012. The decrease in net sales was primarily driven by a decrease in comparable premium retail store sales⁽¹⁾ of 7.3 percent, the impact of store closures, the impact of the shift in weeks as a result of the 53rd week in fiscal 2012, and a decrease of 8.0 percent in our direct sales, partially offset by an increase in credit card revenue recognized.

Gross profit was $44.0 million, or 29.4 percent of net sales, for the three months ended August 3, 2013, compared to $48.5 million, or 29.6 percent of net sales, for the three months ended July 28, 2012. This decrease in gross profit margin was primarily due to lower merchandise margins as a result of increased promotional activity partially offset by increased leverage of occupancy costs.

Selling, general and administrative expenses ("SG&A") were $62.6 million, or 41.8 percent of net sales, for the three months ended August 3, 2013, compared to $65.7 million, or 40.1 percent of net sales, for the three months ended July 28, 2012. The decrease of $3.1 million in SG&A was primarily due to lower employee-related and marketing expenses.

Net loss for the three months ended August 3, 2013 was $16.4 million, or $0.54 per share, and included other gain, net, of $5.6 million, or $0.18 per share, due to the change in the fair value of the derivative liability related to the Series A Preferred Stock that we issued in July 2012. This compares to a net loss for the three months ended July 28, 2012 of $17.6 million, or $0.58 per share, and included other gain, net, of $1.3 million, or $0.04 per share, due to the change in the fair value of the derivative liability net of issuance costs related to the Series A Preferred Stock.

We ended the second quarter of fiscal 2013 with $17.3 million in cash and cash equivalents compared to $45.5 million at the end of the second quarter of fiscal 2012. As of August 3, 2013, we had $15.0 million of borrowings outstanding under our revolving line of credit compared to no outstanding borrowings as of July 28, 2012. At the end of the second quarter of fiscal 2013, working capital was $9.8 million compared to $49.9 million at the end of the second quarter of fiscal 2012. Retail inventory per square foot, which includes inventory in our premium retail stores, factory stores, and in our distribution center, decreased 7.5 percent compared to the second quarter of fiscal 2012. Total inventory decreased 7.3 percent to $123.9 million at the end of the second quarter of fiscal 2013 from $133.6 million at the end of the second quarter of fiscal 2012.

____________________________________________________________

(1)

Change in comparable store sales is calculated based on the net sales for stores that have been open for at least 16 consecutive months. Stores where square footage has been changed by more than 20 percent and stores relocated are treated as a new store upon reopening. Net sales for stores closed during the year are included in the change in comparable store sales up until the store closes. In a fiscal year with 53 weeks, the change in comparable store sales excludes the additional week. The calculation of comparable store sales varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation. Due to the extensive promotions that occur as part of a store opening or reopening, we believe waiting 16 months to consider a store to be comparable provides a better view of the change in store sales.

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Company Initiatives

For fiscal 2013, we are focused on the following strategic initiatives:

Our first initiative is to strengthen the Coldwater Creek brand by continuing to reposition Coldwater Creek as a leader in the marketplace, providing our customers with trend-right, age-appropriate fashion, and a consistent multi-channel experience. During fiscal 2013, we completed a comprehensive study of our target customer, which is guiding our decision making and is expected to enable our organization to execute more consistently.

In merchandising and design, we are continuing to build on the base that we established in 2012. We are broadening our core product offering by introducing new categories, and we are committed to executing our assortment architecture to ensure that our merchandise consistently offers the appropriate balance of color, print, and pattern and fit to flatter outfits in each and every product flow.

We are refining our marketing platform to drive traffic to all channels by leveraging our loyalty program, which was rolled out in fiscal 2012. In the second quarter we combined our legacy One Creek loyalty program with our new Rewards program into one comprehensive tiered loyalty platform with benefits and incentives associated with different levels of spend. In addition, we are focused on adding new loyalty members and increasing the shopping frequency of our current members.

We remain focused on improving our inventory productivity through tighter inventory commitments by adjusting the depth, while maintaining the breadth of styles and color choices, in our assortments. In the first quarter of fiscal 2013, we implemented a new inventory planning system, which is expected to enable us to improve our budgeting and forecasting, make better buying decisions and react more quickly to a product's demand.

We are continuing to execute our real estate optimization program, which we began in fiscal 2011. Through August 3, 2013, we have closed a total of 39 under-performing stores and expect to close an additional 6 stores, which would bring the total number of closures to 45 stores by the end of fiscal 2013, with the potential to close more under-performing stores beyond fiscal 2013. Additionally, as part of our strategy to reduce the average store size over time, we will continue to opportunistically downsize and relocate stores in certain markets.

We have also been focusing on optimizing our supply chain capabilities, which should enable us to reduce our cycle time and lower our cost of goods. We plan to reduce our cycle time by streamlining our product development processes, improving our forecasting and planning of capacity and raw materials, and enhancing our overall logistics model.

Outlook

We have made significant changes to both people and processes over the past few years to enable us to evolve the Coldwater Creek brand to what customers are looking for today. We are continuing to see the year-over-year benefits of these investments in the form of higher margins and reductions in losses, which gives us confidence that we are moving in the right direction. However, our turnaround has taken longer than we expected and we have not seen a consistent growth in sales. Our continued significant operating losses have adversely impacted our liquidity, including cash and availability under our revolving line of credit. Given these constraints, we remain committed to disciplined management of expenditures and inventory and expect to reduce SG&A year-over-year by $18.0 million to $23.0 million in fiscal 2013. Also, for fiscal 2013, we expect capital expenditures to be $10.0 million to $12.0 million and depreciation and amortization expense to be approximately $40.0 million to $45.0 million.

We expect that a competitive promotional environment will continue. In addition, weakness in consumer spending persists as a result of continued uncertain macroeconomic conditions reflected in reduced household incomes and high unemployment. We believe these conditions could continue to have a negative impact on our sales, gross margin and operating performance.

Other Developments

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Results of Operations

Comparison of the Three Months Ended August 3, 2013 with the Three Months Ended July 28, 2012:



	Three Months Ended
	August 3, 2013			% of net sales		July 28, 2012			% of net sales		$ change			% change
	(dollars in thousands, except per share data)
Net sales:
Retail	$	118,644		79.3	%	$	129,939		79.4	%	$	(11,295	)	(8.7	)%
Direct	31,058			20.7		33,751			20.6		(2,693		)	(8.0	)
	149,702			100.0		163,690			100.0		(13,988		)	(8.5	)
Cost of sales	105,662			70.6		115,170			70.4		(9,508		)	(8.3	)
Gross profit	44,040			29.4		48,520			29.6		(4,480		)	(9.2	)
Selling, general and administrative expenses	62,562			41.8		65,674			40.1		(3,112		)	(4.7	)
Loss from operations	(18,522		)	(12.4	)	(17,154		)	(10.5	)	(1,368		)	8.0
Other gain, net	(5,632		)	(3.8	)	(1,278		)	(0.8	)	(4,354		)	340.7
Interest expense, net	3,633			2.4		1,725			1.1		1,908			110.6
Loss before income taxes	(16,523		)	(11.0	)	(17,601		)	(10.8	)	1,078			(6.1	)
Income tax benefit	(80		)	(0.1	)	(43		)	—		(37		)	86.0
Net loss	$	(16,443	)	(11.0	)%	$	(17,558	)	(10.7	)%	$	1,115		(6.4	)%
Net loss per share — Basic and Diluted	$	(0.54	)			$	(0.58	)			$	0.04		(6.9	)%
Premium Retail Store Count:
Beginning of the period	347					359
Opened	—					—
Closed	3					4
End of the period	344					355

Net Sales

The $11.3 million decrease in retail segment net sales for the three months ended August 3, 2013 as compared to the three months ended July 28, 2012 is primarily the result of a 7.3 percent decrease in comparable premium retail store sales, the impact of 11 net store closures since the end of the second quarter of fiscal 2012, and the impact of the shift in weeks as a result of the 53rd week in fiscal 2012, partially offset by an increase in credit card revenue recognized. The decrease in comparable premium retail store sales was primarily driven by a 7.1 percent decrease in comparable average transaction value and a 5.0 percent decrease in traffic, partially offset by a 5.0 percent increase in conversion.

The $2.7 million decrease in direct segment net sales for the three months ended August 3, 2013 as compared to the three months ended July 28, 2012 is primarily the result of the impact of the shift in weeks as a result of the 53rd week in fiscal 2012 and lower order volume, offset by an increase in average transaction value.

Gross Profit

Gross profit margin decreased by 0.2 percentage points during the three months ended August 3, 2013 as compared to the three months ended July 28, 2012. Gross profit margin was unfavorably impacted by lower merchandise margins due to increased promotional activity in the three months ended August 3, 2013 as compared to the three months ended July 28, 2012, partially offset by increased leverage of occupancy costs.

Selling, General and Administrative Expenses

SG&A decreased $3.1 million during the three months ended August 3, 2013 as compared to the three months ended July 28, 2012, primarily due to lower employee-related and marketing expenses.

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Loss from Operations

We evaluate the performance of our operating segments based upon segment operating income, as shown below, along with segment net sales:



	Three Months Ended
	August 3, 2013			% of Segment Sales		July 28, 2012			% of Segment Sales		% Change
	(dollars in thousands)
Segment operating income (loss):
Retail	$	1,124		0.9	%	$	4,486		3.5	%	(74.9	)%
Direct	5,000			16.1		3,710			11.0		34.8
Total segment operating income	6,124					8,196					(25.3	)
Unallocated corporate and other	(24,646		)			(25,350		)			(2.8	)
Loss from operations	$	(18,522	)			$	(17,154	)			8.0	%

Retail segment operating income rate expressed as a percent of retail segment sales for the three months ended August 3, 2013 as compared to the three months ended July 28, 2012 decreased by 2.6 percentage points. The retail segment operating income rate was negatively impacted by 1.6 percentage points due to lower margins as well as higher employee-related expenses as a percentage of sales, partially offset by lower marketing expenses.

Direct segment operating income rate expressed as a percent of direct segment sales for the three months ended August 3, 2013 as compared to the three months ended July 28, 2012 increased by 5.1 percentage points. The direct segment operating income rate was favorably impacted by 3.4 percentage points due to higher margins, as well as lower fixed and variable expenses.

Unallocated corporate and other expenses decreased $0.7 million for the three months ended August 3, 2013 as compared to the three months ended July 28, 2012, primarily due to lower employee-related and marketing expenses, partially offset by higher fixed and variable expenses.

Other Gain, net

During the three months ended August 3, 2013, we recorded a $5.6 million gain from the fair value adjustment related to the derivative liability as compared to the $2.3 million gain from a fair value adjustment related to the derivative liability partially offset by $1.1 million of issuance costs related to the Series A Preferred Stock recorded during the three months ended July 28, 2012.

Interest Expense, net

The increase in interest expense, net, for the three months ended August 3, 2013 as compared to the same period in the prior year is primarily the result of interest on borrowings under the Secured Term Loan that closed in the second quarter of fiscal 2012. For the three months ended August 3, 2013, interest expense includes non-cash interest expense of $2.3 million as compared to $0.8 million for the same period in the prior year, which primarily includes accrued PIK interest expense and amortization of loan discounts and deferred debt issuance costs.

Income Tax Benefit

The income tax benefit primarily reflects the continuing impact of the valuation allowance against our deferred tax assets, various state taxation requirements and certain discrete items.

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Comparison of the Six Months Ended August 3, 2013 with the Six Months Ended July 28, 2012:



	Six Months Ended
	August 3, 2013			% of net sales		July 28, 2012			% of net sales		$ change			% change
	(dollars in thousands, except per share data)
Net sales:
Retail	$	236,398		77.4	%	$	261,141		78.3	%	$	(24,743	)	(9.5	)%
Direct	69,033			22.6		72,433			21.7		(3,400		)	(4.7	)
	305,431			100.0		333,574			100.0		(28,143		)	(8.4	)
Cost of sales	210,427			68.9		230,663			69.1		(20,236		)	(8.8	)
Gross profit	95,004			31.1		102,911			30.9		(7,907		)	(7.7	)
Selling, general and administrative expenses	130,924			42.9		143,193			42.9		(12,269		)	(8.6	)
Loss from operations	(35,920		)	(11.8	)	(40,282		)	(12.1	)	4,362			(10.8	)
Other gain, net	(6,558		)	(2.1	)	(1,278		)	(0.4	)	(5,280		)	413.1
Interest expense, net	7,206			2.4		2,286			0.7		4,920			215.2
Loss before income taxes	(36,568		)	(12.0	)	(41,290		)	(12.4	)	4,722			(11.4	)
Income tax provision (benefit)	(770		)	(0.3	)	28			—		(798		)	*
Net loss	$	(35,798	)	(11.7	)%	$	(41,318	)	(12.4	)%	$	5,520		(13.4	)%
Net loss per share — Basic and Diluted	$	(1.17	)			$	(1.36	)			$	0.19		(14.0	)%
Premium Retail Store Count:
Beginning of the period	349					363
Opened	—					—
Closed	5					8
End of the period	344					355

____________________________________________________________

* Percentage comparisons for changes are not considered meaningful.

Net Sales

The $24.7 million decrease in retail segment net sales for the six months ended August 3, 2013 as compared to the six months ended July 28, 2012 is primarily the result of a 9.0 percent decrease in comparable premium retail store sales and the impact of 11 net store closures since the end of the second quarter of fiscal 2012, partially offset by an increase in credit card revenue recognized. The decrease in comparable premium retail store sales was primarily driven by a 7.6 percent decrease in comparable average transaction value and a 7.5 percent decrease in traffic, partially offset by a 6.6 percent increase in conversion.

The $3.4 million decrease in direct segment net sales for the six months ended August 3, 2013 as compared to the six months ended July 28, 2012 is primarily the result of a 14.2 percent decrease in order volume, partially offset by a 12.3 percent increase in average transaction value and an increase in shipping revenue during the six months ended August 3, 2013 as compared to the six months ended July 28, 2012.

Gross Profit

Gross profit margin increased by 0.2 percentage points during the six months ended August 3, 2013 as compared to the six months ended July 28, 2012. Gross profit margin was favorably impacted by a 0.4 percentage point improvement due to increased leverage of buying and occupancy costs, partially offset by a decrease in merchandise margins due to increased promotional activity in the six months ended August 3, 2013 as compared to the six months ended July 28, 2012.

Selling, General and Administrative Expenses

SG&A decreased $12.3 million during the six months ended August 3, 2013 as compared to the six months ended July 28, 2012, primarily due to lower expenses across all categories with the largest declines from marketing and employee-related expenses.

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Loss from Operations

We evaluate the performance of our operating segments based upon segment operating income, as shown below, along with segment net sales:



	Six Months Ended
	August 3, 2013			% of Segment Sales		July 28, 2012			% of Segment Sales		% Change
	(dollars in thousands)
Segment operating income (loss):
Retail	$	1,511		0.6	%	$	5,409		2.1	%	(72.1	)%
Direct	12,686			18.4		8,499			11.7		49.3
Total segment operating income	14,197					13,908					2.1
Unallocated corporate and other	(50,117		)			(54,190		)			(7.5	)
Loss from operations	$	(35,920	)			$	(40,282	)			(10.8	)%

Retail segment operating income rate expressed as a percent of retail segment sales for the six months ended August 3, 2013 as compared to the six months ended July 28, 2012 decreased by 1.5 percentage points. The retail segment operating income rate was negatively impacted by 1.7 percentage points due to lower margins as well as higher employee-related expenses as a percentage of sales, partially offset by lower marketing expenses and the favorable impact of store closures since the end of the second quarter of fiscal 2012 as part of our store optimization program.

Direct segment operating income rate expressed as a percent of direct segment sales for the six months ended August 3, 2013 as compared to the six months ended July 28, 2012 increased by 6.7 percentage points. The direct segment operating income rate was favorably impacted by 4.9 percentage points due to higher margins, as well as lower expenses in all categories.

Unallocated corporate and other expenses decreased $4.1 million for the six months ended August 3, 2013 as compared to the six months ended July 28, 2012, primarily due to lower marketing and employee-related expenses.

Other Gain, net

During the six months ended August 3, 2013, we recorded a $6.6 million gain from the fair value adjustment related to the derivative liability as compared to the $2.3 million gain from a fair value adjustment related to the derivative liability partially offset by $1.1 million of issuance costs related to the Series A Preferred Stock recorded during the six months ended July 28, 2012.

Interest Expense, net

The increase in interest expense, net, for the six months ended August 3, 2013 as compared to the same period in the prior year is primarily the result of interest on borrowings under the Secured Term Loan that closed in the second quarter of fiscal 2012. For the six months ended August 3, 2013, interest expense includes non-cash interest expense of $4.6 million as compared to $0.8 million for the same period in the prior year, which primarily includes accrued PIK interest expense and amortization of loan discounts and deferred debt issuance costs.

Income Tax Provision (Benefit)

The income tax provision (benefit) primarily reflects the continuing impact of the valuation allowance against our deferred tax assets, various state taxation requirements and certain discrete items.

Seasonality

Our results of operations and cash flows have fluctuated, and will continue to fluctuate, on a quarterly basis, as well as on an annual basis, as a result of a number of factors, including, but not limited to, the following:


•	the composition, size and timing of various merchandise offerings;


•	the timing and number of premium retail store openings and closings;


•	the timing and number of promotions;


•	the timing and number of catalog mailings;


•	the ability to accurately estimate and accrue for merchandise returns and the costs of inventory disposition;


•	the timing of merchandise shipping and receiving, including any delays resulting from labor strikes or slowdowns,

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adverse weather conditions, health epidemics or national security measures; and


•	shifts in the timing of important holiday selling seasons relative to our fiscal quarters, including Valentine's Day, Easter, Mother's Day, Thanksgiving and Christmas, and the day of the week on which certain important holidays fall.

Our results continue to depend materially on sales and profits from the November and December holiday shopping season. In anticipation of traditionally increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of temporary employees to supplement the existing workforce.

Liquidity and Capital Resources

Overview

Key measurements of liquidity and capital resources were as follows:



	August 3, 2013		February 2, 2013		July 28, 2012
	(dollars in thousands)
Cash and cash equivalents	$	17,271	$	21,734	$	45,517
Working capital (a)	$	9,758	$	24,032	$	49,941
Current ratio (a)	1.06		1.16		1.33
Borrowings under revolving line of credit	$	15,000	$	—	$	—
Revolving line of credit availability	$	43,215	$	48,348	$	47,982

____________________________________________________________


(a)	The working capital and current ratios as of August 3, 2013, February 2, 2013 and July 28, 2012, include the impact of the derivative liability of $12.1 million, $18.7 million and $13.4 million, respectively, which is included in accrued liabilities.

We rely on our cash resources to fund our operations and use our revolving line of credit to secure trade letters of credit and for borrowings, both of which reduce the amount of available borrowings. The actual amount that is available under our revolving line of credit fluctuates due to factors including, but not limited to, eligible inventory and credit card receivables, reserve amounts, outstanding letters of credit, and borrowing under our revolving line of credit. Consequently, it is possible that, should we need to access any additional funds from our revolving line of credit, it may not be available in full.

We believe we have sufficient liquidity, including cash and availability under our revolving line of credit, to fund our operations for the next twelve months. However, we have had continued significant operating losses and, if our future operating performance is significantly below our expectations or our revolving line of credit is not fully available to us, our liquidity could be adversely impacted and it may be necessary to seek additional sources of liquidity, which may not be available in the amounts or on terms acceptable to us. Additional actions may include further reducing our expenditures, curtailing our operations, significantly restructuring our business, or restructuring our debt. Our current level of debt could adversely affect our ability to raise additional capital to fund our operations.

Net cash flow activities were as follows:



	Six Months Ended
	August 3, 2013			July 28, 2012
	(in thousands)
Net cash used in operating activities	$	(14,469	)	$	(25,183	)
Net cash used in investing activities	$	(4,774	)	$	(9,784	)
Net cash provided by financing activities	$	14,780		$	29,119

Operating Cash Flows

Net cash used in operating activities decreased $10.7 million during the six months ended August 3, 2013 as compared with the six months ended July 28, 2012, primarily due to the receipt of an $11.5 million incentive payment related to our new Credit Card Program Agreement with ADS and the receipt of our annual revenue sharing payments under our current program, partially offset by an increase in net loss, net of non-cash activity. Additionally, our cash balance was lower as of August 3, 2013 due to the timing of payments impacted by the shift in weeks as a result of the 53rd week in fiscal 2012.

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Investing Cash Flows

Net cash used in investing activities principally consisted of cash outflows for capital expenditures which totaled $4.8 million and $9.8 million during the six months ended August 3, 2013 and July 28, 2012, respectively. Capital expenditures during the six months ended August 3, 2013 and July 28, 2012 primarily related to the relocation and remodeling of certain existing stores and the additional investment in our technology infrastructure.

Financing Cash Flows

Net cash provided by financing activities during the six months ended August 3, 2013 primarily reflects net borrowings on our revolving line of credit. During the six months ended July 28, 2012, net cash provided by financing activities primarily reflects the new Secured Term Loan with a portion of the proceeds used to pay down outstanding borrowings and related debt issuance costs.

Secured Term Loan

Credit Agreement

In May 2011, we entered into the Credit Agreement with a maturity date of May 16, 2016, which is secured primarily by our inventory, credit card receivables and certain other assets. The Credit Agreement provides a revolving line of credit of up to $70.0 million, with subfacilities for the issuance of up to $70.0 million in letters of credit and swingline advances of up to $10.0 million. The amount of credit that is available under the revolving line of credit is limited to a borrowing base that is determined according to, among other things, a percentage of the value of eligible inventory and credit card receivables, as reduced by certain reserve amounts required by Wells Fargo Bank. In conjunction with the closing of the Secured Term Loan, we amended the Credit Agreement and repaid the separate term loan previously provided by Wells Fargo Bank. The amendment did not materially change the terms of the Credit Agreement. As of August 3, 2013, the revolving line of credit was limited to a borrowing base of $64.0 million with $15.0 million in borrowings and $5.8 million in letters of credit issued, resulting in $43.2 million available for borrowing under our revolving line of credit.

Debt Covenants

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Capital and Real Estate Plans

Capital expenditures for fiscal 2013 are expected to be between $10.0 million to $12.0 million. We currently plan to limit new store openings to one factory store in fiscal 2013 and will continue to take advantage of real estate opportunities to improve the efficiency of our store base, including relocating stores to more favorable locations and reducing overall store size.

In fiscal 2011, we announced a store optimization program where we expect to close up to 45 stores through fiscal 2013. Through August 3, 2013, we have closed a total of 39 under-performing stores. There is potential to close more under-performing stores beyond fiscal 2013. The optimization program is being achieved through a staged approach based primarily on natural lease expirations and early termination rights. We typically do not incur significant termination costs or disposal charges as a result of store closures. Early termination clauses generally relieve us of any future obligation under a lease if specified sales levels or certain occupancy targets are not achieved by a specified date.

Contractual Obligations

The following table summarizes our minimum contractual commitments and commercial obligations as of August 3, 2013:



	Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(in thousands)
Operating leases (a) (d)	$	383,371	$	67,561	$	118,676	$	76,717	$	120,417
Contractual commitments (b)	127,131		127,131		—		—		—
Debt, including estimated interest payments (c)	127,602		19,031		9,031		99,540		—
Capital leases (d)	21,421		1,603		2,228		2,363		15,227
Benefit obligations (e)	13,673		2,246		1,803		1,291		8,333
	$	673,198	$	217,572	$	131,738	$	179,911	$	143,977

____________________________________________________________

(a)

We have a significant operating lease for our 960,000 square foot distribution center located in Mineral Wells, West Virginia, with a remaining lease commitment as of August 3, 2013 of $51.7 million. All other operating leases primarily pertain to premium and factory retail stores, day spas and various equipment. Certain store leases have provisions to adjust the payment based on certain criteria, for example additional rent for our store sales above a specified minimum or less rent based on landlord vacancy rates below a specified minimum. The operating lease obligations noted above do not include any of these adjustments or payments made for maintenance, insurance and real estate taxes. Several lease agreements provide renewal options or allow for termination rights under certain circumstances. Future operating lease obligations would change if these renewal options or termination rights were exercised.


(b)	Contractual commitments include commitments to purchase inventory of $125.5 million and capital expenditures of $1.7 million. The timing of the payments is subject to change based upon actual receipt of the inventory or capital asset and the terms of payment with the vendor.


(c)	Upon maturity of the Secured Term Loan, $29.8 million of PIK interest will become due and payable.

(d)

The primary capital lease is for our 69,000 square foot facility located in Coeur d'Alene, Idaho, which functions as a customer contact center, IT data center and office space. This lease was amended on April 22, 2009 resulting in the lease classified as a capital lease through July 2028, with a remaining capital lease commitment as of August 3, 2013 of $17.5 million, and as an operating lease from August 2028 through July 2038, with a remaining operating lease commitment as of August 3, 2013 of $16.5 million. All other capital leases pertain to various technology equipment and other real estate. The capital lease obligations represent the minimum payments including principal and interest, and excluding maintenance, insurance and real estate taxes.


(e)	Benefit obligations include the cash payments expected to be made related to the Supplemental Executive Retirement Plan and other compensation arrangements.

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Critical Accounting Policies and Estimates

Preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We base our estimates on historical experience and on other assumptions that we believe are reasonable. As a result, actual results could differ because of the use of estimates. The critical accounting policies used in the preparation of our consolidated financial statements include those that require us to make estimates about matters that are uncertain and could have a material impact to our consolidated financial statements. The description of critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in interest rates and the market price of our common stock. We have not been materially impacted by fluctuations in foreign currency exchange rates as substantially all of our business is transacted in, and is expected to continue to be transacted in, U.S. dollars or U.S. dollar-based currencies. We do not enter into financial instruments for trading or other speculative purposes.

As of August 3, 2013, we had outstanding borrowings of $15.0 million under our revolving line of credit. The impact of a hypothetical 10 percent adverse change in interest rates for our revolving line of credit would have resulted in an immaterial amount of additional expense for the six months ended August 3, 2013. Our Secured Term Loan bears interest at a fixed rate and would not be affected by interest rate changes.

The derivative liability, representing shares of Series A Preferred Stock, is measured at fair value using the Black-Scholes option valuation model, which is significantly dependent on the market price of our common stock. Changes in the fair value are recorded as gain or loss, net, in our consolidated statements of operations and comprehensive operations. A 10 percent increase (decrease) in the closing price of our common stock at August 3, 2013, in isolation of the impact to the volatility assumption, would have increased (decreased) the fair value of the derivative liability by approximately $1.4 million.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our President and Chief Executive Officer and our Executive Vice President, Chief Operating Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of August 3, 2013. Based on that evaluation, our President and Chief Executive Officer and our Executive Vice President, Chief Operating Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of August 3, 2013.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the second quarter of fiscal 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 11. Commitments and Contingencies, to our condensed consolidated financial statements.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the following risk factors which could materially affect our business, financial condition or future results. We have updated the following risk factors to reflect changes during the six months ended August 3, 2013 we believe to be material to the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 filed with the Securities and Exchange Commission. Other risks that we face are more fully described in our Annual Report on Form 10-K and in other reports we file with the Securities and Exchange Commission. Additional risks and uncertainties that are not currently known or currently deemed immaterial may also adversely affect the business, financial condition, or future results of the Company.

We have a history of significant operating losses, and our failure to generate sufficient net sales and improve our results of operations in the future will impair our ability to continue to fund our operations without additional sources of financing, which may not be available to us in amounts or on terms acceptable to us.

Continued significant operating losses have adversely impacted our liquidity, including cash and availability under our revolving line of credit. In order to achieve and sustain improved financial results, we must increase our net sales. We expect our future net sales will depend on a variety of factors, including our ability to successfully anticipate and deliver merchandise assortments that resonate with customers, improve our brand value and increase customer traffic to all of our sales channels. If we are unable to achieve improved results, our liquidity will be adversely impacted and it will be necessary to seek additional sources of liquidity, which may not be available to us in amounts or on terms acceptable to us and may also include further reducing our expenditures, curtailing our operations, significantly restructuring our business, or restructuring our debt. Our current level of debt could adversely affect our ability to raise additional capital to fund our operations. There is no assurance that debt or equity financing will be available in the amounts or on terms acceptable to us.

Our Secured Term Loan and Credit Agreement have restrictions that limit our ability to fund operations, which could adversely affect our business.

Both our Secured Term Loan and Credit Agreement have covenants that may restrict the manner in which we operate our business. These covenants subject us to capital expenditure limitations based on our approved annual plan, maintaining a minimum amount of $95.0 million of inventory, and maintaining a minimum of $15.0 million of liquidity and a minimum excess availability of 15 percent of our borrowing base (as defined), along with various other conditions. Should we fail to comply with the covenants and conditions, our indebtedness could be accelerated if not cured or waived. If our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations without restructuring our debt and we may not be able to continue our operations as planned.

We use the revolving line of credit provided under our Credit Agreement to secure trade letters of credit and for borrowings, both of which reduce the amount of available borrowings. The actual amount available under our revolving line of credit fluctuates due to factors including, but not limited to, eligible inventory and credit card receivables, reserve amounts, outstanding letters of credit, and borrowing under our revolving line of credit. Consequently, it is possible that should we need to access any additional funds from our revolving line of credit, it may not be available in full. As of August 3, 2013, the revolving line of credit was limited to a borrowing base of $64.0 million with $5.8 million in letters of credit issued and $15.0 million in borrowings on our revolving line of credit, resulting in $43.2 million available for borrowing under our revolving line of credit.

We must successfully gauge fashion trends and changing consumer preferences or our sales, results of operations, and liquidity will be adversely affected.

Forecasting consumer demand for our merchandise can be challenging given the nature of changing fashion trends and consumer preferences. In addition, our merchandise assortment differs in each seasonal flow and at any given time our assortment may not resonate with our customers. On average, we begin the design process for apparel nine to ten months before merchandise is available to consumers, and we typically begin to make purchase commitments four to eight months in advance. These lead times make it difficult for us to respond quickly to changes in demand for our merchandise. To the extent we misjudge the market for our merchandise or the products suitable for local markets, our sales and results of operations will be adversely affected. If the demand for our merchandise is lower than expected, causing us to hold excess inventory, we would be forced to further discount merchandise, which reduces our gross margins and negatively impacts results of operations and operating cash flows. If the demand for merchandise is stronger than expected, we may not be able to reorder merchandise on a timely basis to meet demand, which may adversely affect sales and customer satisfaction.

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We continue to update our style orientation to reinvigorate our brand, which includes improving the balance of our assortment to address more aspects of our customers' lifestyle and rebuilding our under-performing categories. If these changes do not resonate with our customers, our sales, results of operations, and liquidity will be adversely affected.

We may be unable to improve the value of our brand and our failure to do so may adversely affect our sales, results of operations, and liquidity.

Our success is driven by the value of the Coldwater Creek brand, which is largely dependent on the success of our product design, merchandise assortment, and marketing efforts and our ability to provide a consistent, high quality customer experience. Our marketing programs, which include loyalty programs, e-commerce platforms and programs, and print media, are designed to improve Coldwater Creek's brand value and to increase traffic to all channels. If we are not able to improve our brand perception and increase traffic, our sales, results of operations, and liquidity may be adversely affected.

We are subject to significant risks associated with our management information systems, which, if not working properly, could adversely affect our business and results of operations.

We have a number of complex management information systems that are critical to our operations, including systems such as accounting, human resources, inventory purchasing and management, financial planning, direct segment order processing, and retail segment point-of-sale systems. While we regularly evaluate the capabilities and requirements of our information systems, there can be no assurances that our existing information systems will be adequate to support the future needs of our business. We are currently undertaking certain significant information system implementations, modifications and upgrades. Installing new systems and maintaining and upgrading existing systems carries substantial risk, including potential loss of data or information, cost overruns, disruption of operations, lower customer satisfaction, inability to deliver merchandise to our stores or our customers and our potential inability to meet regulatory requirements, any of which would harm our business and may adversely affect our results of operations.

Our reliance on foreign vendors subjects us to uncertainties that could adversely affect our business.

We continue to source the majority of our apparel directly from foreign vendors, particularly those located in Asia, India and Central America. Irrespective of our direct sourcing from foreign vendors, substantially all of our merchandise, including that which we buy from domestic vendors, is manufactured overseas. This exposes us to risks and uncertainties which could substantially impact our ability to realize any perceived cost savings or could damage our reputation or disrupt the production of our merchandise. These risks include, among other things:


•	burdens associated with doing business overseas, including the imposition of, or increases in, tariffs or import duties, or import/export controls or regulations, as well as credit assurances we are required to provide to foreign vendors;


•	declines in the relative value of the U.S. dollar to foreign currencies;


•	volatile labor, fuel, energy and raw material costs;


•	failure of vendors to adhere to our quality assurance standards, code of conduct and other environmental, labor, health, and safety standards for the benefit of workers;


•	financial instability of a vendor or vendors, including their potential inability to obtain credit to manufacture the merchandise they produce for us;


•	the potential inability of our vendors to meet our production needs due to raw material or labor shortages;


•	changing, uncertain or negative economic conditions, political uncertainties or unrest, natural disasters or health-related events in foreign countries resulting in the disruption of trade from exporting countries; and


•	restrictions on the transfer of funds or transportation delays or interruptions.

If we experience a change in the amount of merchandise returns than what is currently anticipated, our results of operations could be adversely affected.

We recently changed our return policy to be more restrictive than the previous return policy. We make allowances in our financial statements for anticipated merchandise returns based on historical return rates and future expectations. These allowances may differ from actual merchandise returns as a result of many factors, including the change to our return policy and changes in the merchandise mix, size and fit, actual or perceived quality, differences between the actual product and its presentation in catalogs or on the website, timeliness of delivery, competitive offerings and consumer preferences or confidence. Any significant increase in merchandise returns that exceeds our estimate would result in adjustments to revenue and to cost of sales and may adversely affect our results of operations and cash flows. In addition, due to the change to our return policy, customers may be more reluctant to make purchases and sales could be adversely affected.

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If we are unsuccessful in transitioning service providers of our credit card program, our liquidity and results of operations could be adversely affected.

On July 26, 2013, we entered into a Credit Card Program Agreement (the "Program Agreement") with Comenity Bank, a bank subsidiary of Alliance Data Systems Corporation ("ADS"). Under the Program Agreement, ADS will issue co-branded credit cards and private label credit cards to approved new and existing customers. ADS will also purchase the existing co-branded credit card portfolio at a future date from Chase Bank USA, N.A. ("Chase"). During the three months ended August 3, 2013, we received an up-front incentive payment of $11.5 million, which was deferred and will be amortized over the term of the Program Agreement. On September 11, 2013, ADS and Chase executed the purchase agreement for the existing co-branded credit card portfolio, triggering the second incentive payment of $11.5 million to Coldwater Creek. We will receive an additional $2.0 million upon the launch of a new private label credit card program. We will also be entitled to future payments after ADS begins issuing credit cards under the Program Agreement for revenue sharing based on a percentage of credit card sales, certain new credit card accounts opened and activated, and profit sharing based on certain profitability measures of the program. Our current credit card program with Chase will remain in place until ADS acquires the existing co-branded credit card portfolio, which is expected to occur in the first half of fiscal 2014. If the efforts to complete the portfolio acquisition are unsuccessful, or if we experience difficulties in the ensuing conversion to ADS systems and support infrastructure, a decrease in credit card sales from our customers, a loss of future payments from the program, and a repayment of the up-front incentive payments may result.

Our success is dependent upon our ability to attract and retain qualified employees and the failure to do so could adversely affect our business.

Our future success depends largely on the contributions and abilities of our employees. For the past few years, we have operated in challenging macroeconomic conditions, and within that environment the performance of our business has lagged behind most of our competitors, as our turnaround has taken longer than we expected. Our cost containment initiatives have placed a significant burden on our employees, who continue to operate with limited resources. In addition, further cost containment initiatives that we may implement in the future could result in additional employee turnover, causing additional stress on our operational capabilities and potentially harming our ability to operate our business in the manner we have done so in the past. Furthermore, the location of our corporate headquarters in Sandpoint, Idaho, may make it more difficult or costly to attract qualified employees.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS

(A) Exhibits:



Exhibit Number		Description of Document
10.1*		Credit Card Program Agreement by and between Coldwater Creek U.S. Inc. and Comenity Bank dated July 26, 2013 (confidential treatment has been requested for portions of this agreement)
31.1*		Certification by Jill Brown Dean of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2*		Certification by James A. Bell of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32.1°		Certification by Jill Brown Dean and James A. Bell pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS^		XBRL Instance
101.SCH^		XBRL Taxonomy Extension Schema
101.CAL^		XBRL Taxonomy Extension Calculation
101.DEF^		XBRL Taxonomy Extension Definition
101.LAB^		XBRL Taxonomy Extension Label
101.PRE^		XBRL Taxonomy Extension Presentation

____________________________________________________________



*	Filed electronically herewith.

°	Furnished electronically herewith.

^	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sandpoint, State of Idaho, on this 12th day of September 2013.



	COLDWATER CREEK INC.

	By:	/s/ Jill Brown Dean
		Jill Brown Dean
		President and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ James A. Bell
		James A. Bell
		Executive Vice President, Chief Operating Officer and
		Chief Financial Officer
		(Principal Financial Officer)

	By:	/s/ Mark A. Haley
		Mark A. Haley
		Vice President and Chief Accounting Officer
		(Principal Accounting Officer)

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EXHIBIT INDEX



Exhibit Number		Description of Document
10.1*		Credit Card Program Agreement by and between Coldwater Creek U.S. Inc. and Comenity Bank dated July 26, 2013 (confidential treatment has been requested for portions of this agreement)
31.1*		Certification by Jill Brown Dean of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2*		Certification by James A. Bell of periodic report pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32.1°		Certification by Jill Brown Dean and James A. Bell pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS^		XBRL Instance
101.SCH^		XBRL Taxonomy Extension Schema
101.CAL^		XBRL Taxonomy Extension Calculation
101.DEF^		XBRL Taxonomy Extension Definition
101.LAB^		XBRL Taxonomy Extension Label
101.PRE^		XBRL Taxonomy Extension Presentation

____________________________________________________________



*	Filed electronically herewith.

°	Furnished electronically herewith.

^	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability under these sections.