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Insiders Snap Up Shares of Another Global Warming Victim
By Michael Brush
Exclusively for InvestorIdeas.com
October 26, 2007
Given the concerns about potential consumer weakness – thanks to higher energy prices, declining home values and a tightening in the credit markets – it’s no surprise to see time and again that retailers get hit hard these days when they fess up to problems.
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But I’m still reasonably bullish on economic growth and consumer spending for the reasons I’ve outlined here even if it’s pretty clear the subprime mess isn’t going away soon.
So I still think it makes sense to take advantage of these retail blowups and get exposure to the beaten down names as long as a few conditions are in place:
- You have a medium-term time frame;
- The retailers have a solid brand, reasonable financial strength, a fairly cheap valuation, and some insider buying.
Another clothing retailer joined this list recently, in Coldwater Creek (CWTR). Last week, the president and chief operating officer and a director bought $363,000 worth of stock after it took another plunge on negative guidance.
Does that fact that insiders are buying mean that this the bottom for Coldwater Creek? Of course not. Insiders are normally early to an emerging trend or reversal. If you figure out how to call the exact bottom in a stock, please let me know.
But the insider buying is large enough and Coldwater Creek management has a good enough track record that the chances are good you will probably be rewarded over the next year or two if you take a position here, as part of a diversified stock portfolio. Management also recently announced a share buyback – another sign that there’s value in the stock.
Founded in 1984 as a catalog company, Coldwater Creek is a specialty retailer selling women’s apparel, accessories and jewelry. It tries to portray a sophisticated yet relaxed and casual lifestyle in its product line up, designed to appeal to women who 35 or older and have a household income above $75,000. The company recently had 266 premium retail stores and 27 clearance stores. It’s also rolling out a day spa.
Coldwater Creek shares are down 70% in the past year, most recently because the company cut its forecasts for the second half of this year. On October 12 it told analysts same store sales would take a painful 15% hit in the third and fourth quarters.
What’s going wrong
One of the big problems for Coldwater Creek is that customers failed to buy its lineup of suede jackets, coats, and sweaters this fall. Management went to great lengths not to blame it on the weather. This is commendable for two reasons. First, that’s the typical cheap excuse you hear from retailers.
But secondly, we may be looking at the hottest October on record in many parts of North America – so the weather really might have played a big role in women’s decision to buy blouses and shirts instead of suede jackets, at Coldwater Creek.
Clearly, more is at work, since the stock took a big hit, for example, at the end of August after Coldwater posted weaker-than-expected second quarter results.
Selling ice to Eskimos
So what will get Coldwater out of its tailspin? I’ll point to three factors. First, management, of course, is well aware that it needs to add some pizzazz to its line up if it wants to sell jackets and sweaters during the fall in an era of warmer temperatures and what seems to be a global warming trend. Think of it as the opposite of the proverbial “selling ice to Eskimos.”
“We have to be newer, we have to put things in the closet that are not already there, and we have to take some more risks, some more fashion risks,” said Coldwater Creek co-president and chief marketing officer Georgia Shonk-Simmons in a conference call to address some of the issues facing the company. “I do believe that this is something that is fixable.”
Next, despite the recent stumbles, management remains steadfast with its store expansion plan this year and next. You have to admire the chutzpah. But the company also points out that it has demographic trends going in its favor, with the aging of the population in North America.
"We think the stock will ultimately work and could generate a significant return from current levels," CIBC World Markets analyst Roxanne Meyer wrote in a recent note, citing, in part, management’s call to stick to its store opening schedule. It doesn’t hurt that new Coldwater Creek stores do well, turning cash flow positive in 12 months or less.
Third, of course, the company is actively cutting costs during these hard times.
Valuation
Coldwater Creek stock looks reasonably cheap. It trades at around 15.5 times trailing earnings, well below the sector average of 27.5 times, according to Reuters. The company has solid financial strength with about $1.30 a share in cash and little debt. It recently predicted it would turn cash-flow positive towards the end of this year.
The bottom line : We’ve recently been early on many of the blown-up retailers, when following insiders into them. So we’ll probably be early on this one, too. But timing profits on stocks isn’t as price as landing airplanes at JFK Airport. This is especially true when you follow insiders, who as a rule are not great market timers even if they often get the call right, ultimately.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site. For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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