Coldwater Creek Moat Check

Back to my list of potential wide moat stocks, this week I’m going to start by looking at Coldwater Creek Inc. (CWTR).  Coldwater Creek is a women’s fashion retailer.  The company operates both retail stores and direct sales through their catalog and website.  I am no expert on women’s fashion, so I decided to seek some expert advice.

My wife is the closest thing I found to an expert on women’s fashion.  When I asked my wife about Coldwater Creek, she had the following to say:

“It’s for a matronly clientele that doesn’t want to look matronly. The target audience is the mature women, post 35. They sell more forgiving clothes.  Something a soccer mom might wear when she wants to get dressed up.”

That description didn’t get me too excited.  A quick tour of Coldwater Creek’s website confirms my wife’s opinion.  The clothing is fairly conservative looking and definitely something you’d expect to see mothers wearing.  I also noticed a prominent box on the left side of the webpage for their outlet, which is advertising 60 – 80% off 200 items.  That’s definitely not something an investor wants to see.

Some of the things I do like about Coldwater Creek include their 22 year history and the fact that the company’s founder, Dennis Pence, is still currently the CEO.  Founder CEOs are usually extremely dedicated to their companies.

The company is based in Sandpoint, Idaho and has a customer service and distribution center in Parkersburg, West Viginia.  Both of those locations likely provide low cost real estate and labor.  However, those locations might not be well connected to the latest fashion trends in urban areas and Coldwater Creek might have trouble recruiting the top talent in the industry to relocate to those less metropolitan areas. It looks like the company opened a design studio in New York in 2004 to address these issues, so this is not likely to be a problem as long as the connection between headquarters and the design studio remain strong.

Justin, at the Rule One Investment Community, produced a spreadsheet summarizing the Big Five numbers for Coldwater Creek.  The company has exhibited double digit sales and earnings growth numbers in the past. Coldwater Creek’s latest financial results look even stronger.  It’s really hard to argue with these numbers, but I think I’m stilling going to try.

While Coldwater Creek’s business appears to be firing on all cylinders, I do not see any barriers to entry for their niche.  I think the business could be easily replicated. I don’t see anything unique about their clothes or brand. I also am concerned that the fickle fasion preferences of women could shift at any moment away from Coldwater Creek’s brand.  However, since Coldwater Creek’s clothing has a more “classic” look, it might be somewhat protected from shifts in style preferences.

I believe Coldwater Creek currently has a competitive advantage in the mature women’s retail market.  However, I’m not convinced that they have a sustainable competitive advantage. I believe that the key to Coldwater Creek’s current success likely comes from its management.  Changes in management and shifts in fashion preferences could come quickly, and I’m not convinced Coldwater Creek’s success would survive.