The following discussion contains various statements regarding our current strategies, 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. Please refer to our "Risk Factors" in our most recent Annual Report on Form 10-K for the fiscal year ended January 31, 2009, as well as in this Quarterly Report on Form 10-Q and other reports we file with the SEC. We assume no future obligation to update our forward-looking statements or to provide periodic updates or guidance.

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.

Coldwater Creek Profile

Coldwater Creek is a specialty retailer of women's apparel, accessories, jewelry and gift items. Founded in 1984 as a catalog company, today we are a multi-channel specialty retailer generating sales through our retail stores, as well as our catalog and e-commerce channels. Our proprietary merchandise assortment reflects a sophisticated yet relaxed and casual lifestyle. A commitment to providing superior customer service is manifest in all aspects of our business. Our merchandise assortment, retail stores, catalogs and e-commerce web site are designed to appeal to women who are 35 years of age and older with average annual household incomes in excess of $75,000.

Our mission is to become one of the premier specialty retailers for women 35 years of age and older in the United States by offering our customers a compelling merchandise assortment with superior customer service through all our sales channels.

References to a fiscal year are to the calendar year in which the fiscal year begins. We currently have two operating segments: retail and direct.

Company Initiatives

Our efforts in fiscal 2009 will continue to be focused on certain initiatives which we implemented during fiscal 2008. We believe these initiatives will continue to further our goal of becoming one of the premier specialty retailers for women 35 years of age and older in the United States. These key initiatives include:

†          Increased focus on product and customer experience



†          Injecting product and the customer into decision making throughout
the company

† Restoration of the full price heritage of the Coldwater Creek brand

† Shift in marketing approach

† Increased efficiency in the use of resources

Our product and the customer experience are the foundation of all decision making at Coldwater Creek. Our highest priority is to continually improve our product and assortment as we believe that our success depends on offering the appropriate balance of fashion, fit, quality and value that is relevant to the entire range of our target customer base. We are focused on expanding our product by offering more diversity in fit and fabrics to ensure we are more relevant to our entire customer demographic. In addition, we remain focused on enhancing the customer experience by returning to the boutique shopping experience through offering the appropriate balance of key items and unique products, combined with our exceptional customer service. We reduced our premium retail store inventory per square foot by approximately 14 percent as of May 2, 2009 compared to May 3, 2008, while premium retail square footage grew by approximately 13 percent over the same period. We believe these efforts have positioned us to continue to improve on our product and customer experience in fiscal 2009.

We remain committed to restoring the full price heritage to our brand by continuing to be more prudent with promotional activity and discounting. However, we will continue to have promotions to drive traffic to our stores and to remain competitive in this challenging environment. We believe that prudently managing our promotions and discounting, conservative retail inventories on a square foot basis, and expanding our direct sourcing program, are critical to improving margins and returning to our full price heritage. In addition, we have seen a shift in customer purchasing toward more value-priced merchandise, which we believe is a result of today's challenging economic conditions and the decline in consumer confidence. Therefore, during fiscal 2009, we will continue to work towards offering quality merchandise at a compelling price point.

Historically, we have used a broad based marketing strategy of catalog circulation and national magazine advertising. During fiscal 2008 we shifted to a more point-of-sale, in-store focus through programs such as personal shopper. We are also working to create a consistent message across all of our distribution channels to drive customers to our stores. We are developing traffic drivers through innovative e-mail campaigns, retail mailers and newspaper ads, as well as through our customer loyalty programs, as we continue to focus on maintaining and better engaging our best customers, as well as attracting new customers through select advertising placement. We are also sending personalized mailers to our top customers and directing our catalog circulation to our most frequent shoppers. We continue to test and refine these promotions to ensure that we are reaching the greatest number of customers in the most cost effective and efficient manner possible. As a result of this more focused approach, marketing expense, primarily relating to national magazine advertising and catalog circulation, decreased approximately $9.7 million during the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008.

During the first quarter of fiscal 2009 we temporarily suspended investment in national magazine advertising. However, we will be opportunistic with our investment in marketing and national magazine advertising as business conditions warrant for the remainder of fiscal 2009. Catalog circulation also decreased by 10.6 million, or 35.9 percent, during the same period, from 29.5 million catalogs to 18.9 million catalogs. We continue to evaluate our catalogs to ensure that we are reaching the greatest number of customers in the most effective and efficient manner possible. As a result, we began offering our merchandise under a single catalog title during late fiscal 2008 and expect to continue to operate under one catalog title during fiscal 2009.

In addition to a more focused approach on marketing, we have carefully evaluated our entire organization to determine where we can improve operational efficiencies. We remain focused on further reducing our cost structure and preserving capital as business conditions warrant. During the first quarter of fiscal 2009, our cost control efforts resulted in decreased selling, general and administrative expense (SG&A) of approximately $25 million compared to the first fiscal quarter of fiscal 2008. This decrease is primarily the result of the efficient use of marketing resources and lower employee expense as a result of the realignment of retail operations staffing and the elimination of certain corporate support positions during fiscal 2008. We believe that these select staff reductions, as well as reduced travel, lower catalog page counts, more cost effective advertising and other cost savings initiatives put us on track to achieve our goal of reducing SG&A expenses by approximately $30 million for the full year of fiscal 2009.

In addition, capital expenditures are expected to approximate $30 million in fiscal 2009, down from approximately $81 million in fiscal 2008, which is based on opening no more than ten new retail stores during fiscal 2009. We are also continuing to improve various information technology tools and systems to enhance operating efficiency and enable our infrastructure to accommodate growth, and we will be relocating our New York design office during fiscal 2009. We expect to replace our inventory planning and allocation systems during the second quarter of fiscal 2009.

We continue to make progress on implementing our initiatives and have seen meaningful improvement in our sales trends in April and May of 2009. Although we are encouraged by this improvement, we remain cautious given the ongoing promotional retail environment, which may limit our ability to increase our margins in the second quarter of fiscal 2009. In addition, our lower inventory levels may limit our sales volume during the second quarter of fiscal 2009. Our business continues to be affected by challenging macroeconomic conditions, which are evidenced by a highly competitive retail selling environment, low retail store traffic levels and a shift in customer purchasing toward more value priced merchandise. With the deterioration of the financial, credit and housing markets, these conditions have continued to have a negative impact on consumer confidence, and we expect them to persist during fiscal 2009 and for the foreseeable future. We are continuing to focus on lowering our cost structure, prudently managing our growth and improving our merchandise assortment and inventory management, which we believe will allow us to navigate through this difficult environment.

Other Developments

On February 13, 2009, we entered into a secured Credit Agreement with Wells Fargo Retail Finance, LLC. This credit facility replaced our previous unsecured revolving line of credit with Wells Fargo Bank, N.A. Our new agreement provides

for a $70.0 million revolving line of credit, with subfacilities for the issuance of up to $70.0 million in letters of credit and swingline advances of up to $10.0 million. As of the filing of this Quarterly Report, we have not borrowed any amounts under this facility.

Comparison of the Three Months Ended May 2, 2009 with the Three Months Ended May 3, 2008

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the three months ended May 2, 2009 as compared to the three months ended May 3, 2008. It is provided to assist in assessing differences in our overall performance (in thousands):

                                                   Three Months Ended
                         May 2,        % of        May 3,        % of
                          2009       net sales      2008       net sales    $ change     % change
Net sales               $ 228,367        100.0 %  $ 271,105        100.0 %  $ (42,738 )     (15.8 )%
Cost of sales             157,267         68.9 %    178,305         65.8 %    (21,038 )     (11.8 )%
Gross profit               71,100         31.1 %     92,800         34.2 %    (21,700 )     (23.4 )%
Selling, general and
administrative
expenses                   82,712         36.2 %    107,806         39.7 %    (25,094 )     (23.3 )%
Loss from operations      (11,612 )       (5.1 )%   (15,006 )       (5.5 )%     3,394        22.6 %
Interest, net and
other                        (159 )       (0.1 )%       553          0.2 %       (712 )         *
Loss before income
taxes                     (11,771 )       (5.1 )%   (14,453 )       (5.3 )%     2,682        18.6 %
Income tax benefit         (4,209 )       (1.8 )%    (5,213 )       (1.9 )%     1,004       (19.3 )%
Net loss                $  (7,562 )       (3.3 )% $  (9,240 )       (3.4 )% $   1,678        18.2 %
Effective income tax
rate                         35.8 %                    36.1 %

Net Sales

Net sales consist of retail and direct sales, which include revenue from our co-branded credit card program and shipping fees received from customers for delivery of merchandise.

Net sales decreased during the three months ended May 2, 2009 as compared with the three months ended May 3, 2008 primarily due to an 18.6 percent decrease in comparable premium store sales(1) and a $26.6 million decrease in sales through our direct segment. These decreases were partially offset by net sales generated by the addition of 36 premium retail stores and five merchandise clearance outlet stores since May 3, 2008.

We believe our sales performance for the three months ended May 2, 2009 was negatively impacted by a highly promotional retail environment accompanied by difficult macroeconomic conditions, which are evidenced in our business by a highly competitive retail selling environment, low retail store traffic levels and a shift in customer purchasing toward more value priced merchandise. During the three months ended May 2, 2009, we experienced a decline in comparable premium retail store traffic of 19.1 percent and a decrease in average transaction value of direct sales of 12.3 percent as compared to the same period in 2008. The average transaction value of premium retail stores was relatively flat for the three months ended May 2, 2009, as compared to the same three-month period in 2008. During the three months ended May 2, 2009, catalog circulation decreased by 10.6 million, or 35.9 percent, compared to the three months ended May 3, 2008, which we believe also contributed to lower total net sales in our phone and mail channels.

In addition, shipping fees received from customers for delivery of merchandise decreased by $5.5 million from $11.2 million for the three months ended May 3, 2008, to $5.7 million for the three months ended May 2, 2009, which is associated with lower order volume.

Cost of Sales/Gross Profit

The gross profit rate decreased by 3.1 percentage points during the three months ended May 2, 2009 as compared to the three months ended May 3, 2008. The decrease in our gross profit rate was primarily the result of decreased leveraging of our retail occupancy costs and buying and distribution costs, representing approximately 3.9 and 0.1 percentage points, respectively. These decreases were offset by lower shipping and handling costs of 0.4 percentage points due to lower direct sales and a 0.5 percentage point improvement attributable to an overall decrease in markdowns(2), which were partially offset by increased promotional discounts(3).

Selling, General and Administrative Expenses

As a percentage of net sales, SG&A expense decreased by 3.5 percentage points in the three months ended May 2, 2009 as compared with the three months ended May 3, 2008. This decrease in SG&A rate was the result of a 2.4 percentage point decrease in marketing expenses, a 0.6 percentage point decrease in employee costs, and a 0.5 percentage point decrease in overhead expenses.

The decrease in marketing expenses as a percentage of net sales was driven primarily by decreased catalog and national magazine advertising circulation. The decrease in employee expenses is primarily due to the elimination of certain corporate support positions during fiscal 2008 and the decrease in overhead expenses is primarily due to expense reductions as a result of cost savings initiatives.

Interest, Net and Other

The decrease in interest, net and other for the three months ended May 2, 2009 as compared with the same period in the prior year is primarily the result of lower interest income rates on our cash balances.

Provision for Income Taxes

The decrease in benefit for income taxes for the three months ended May 2, 2009 as compared to the same period in the prior year was the result of lower pre-tax loss. See Note 2 to our condensed consolidated financial statements for further discussion on the effective tax rate.

Segment Results



We evaluate the performance of our operating segments based upon segment
operating income, which is shown below along with segment net sales (in
thousands):



                                              Three Months Ended
                             May 2,       % of       May 3,       % of        %
                              2009      Net Sales     2008      Net Sales   Change
Net sales:
Retail                      $ 170,710        74.8 % $ 186,871        68.9 %   (8.6 )%
Direct                         57,657        25.2 %    84,234        31.1 %  (31.6 )%
                            $ 228,367       100.0 % $ 271,105       100.0 %  (15.8 )%
Segment operating income:
Retail                      $   3,356               $   2,605
Direct                         10,112                  16,486
                            $  13,468               $  19,091

The following table reconciles segment operating income to loss from operations (in thousands):

                                        Three Months Ended
                                   May 2,      May 3,       %
                                    2009        2008      Change
Segment operating income          $  13,468   $  19,091    (29.5 )%
Unallocated corporate and other     (25,080 )   (34,097 )   26.4 %
Loss from operations              $ (11,612 ) $ (15,006 )   22.6 %

(3) We define promotional discounts generally as temporary offerings. These include coupons and in-store promotions to customers for specified dollar or percentage discounts.

Retail Segment

Net Sales

The $16.2 million decrease in retail segment net sales for the three months ended May 2, 2009 as compared with the three months ended May 3, 2008 is primarily the result of a decrease in net sales in our comparable premium retail stores of 18.6 percent. This decrease in comparable store sales reflects a decrease in comparable premium retail store traffic of 19.1 percent for the three months ended May 2, 2009 as compared to the three months ended May 3, 2008. This decrease was partially offset by net sales generated from the addition of 36 premium retail stores since May 3, 2008.

Additionally, net sales from merchandise clearance outlet stores increased $1.4 million, which includes the addition of five outlet stores, in the three months ended May 2, 2009 as compared with the three months ended May 3, 2008. Net sales generated from our co-branded credit card and day spas remained relatively flat for the three months ended May 2, 2009 as compared with the three months ended May 3, 2008.

Segment Operating Income

Retail segment operating income rate expressed as a percentage of retail segment sales for the three months ended May 2, 2009 as compared with the three months ended May 3, 2008 increased by 0.6 percentage points. Decreased in-store markdown activity, which was partially offset by increased promotional discounts, contributed to a 3.3 percentage point improvement in merchandise margins. Retail segment operating rate was also positively impacted by a 1.3 and 0.5 percentage point improvement in leveraging of employee expenses and overhead costs, respectively, as a result of the realignment of retail operations staffing and cost savings initiatives. These increases were partially offset by a 4.1 and 0.4 percentage point reduction in the leveraging of retail store occupancy costs and marketing expenses, respectively. The reduced leveraging of operating expenses is primarily due to a decrease in comparable store sales.

Direct Segment

Net Sales

The direct segment net sales decreased $26.6 million during the three months ended May 2, 2009 as compared to the three months ended May 3, 2008. Sales through our Internet channel decreased $17.3 million from $63.7 million for the three months ended May 3, 2008 to $46.4 million for the three months ended May 2, 2009. Sales from our phone and mail channel for the same period decreased $9.3 million from $20.5 million to $11.2 million.

The decrease in Internet business net sales is primarily due to fewer orders over the Internet, fewer catalogs mailed, and an approximate 12.3 percent decrease in average transaction value during the period as a result of higher levels of Internet markdowns. Phone and mail net sales were also impacted by fewer orders and 10.6 million, or 35.9 percent, fewer catalogs mailed in addition to an approximate 1.5 percent decrease in average transaction value during the period.

Phone and mail net sales are derived from orders taken from customers over the phone or through the mail. Phone and mail are used as a brand marketing vehicle to drive sales in all channels and we encourage customers to choose the channel they deem most convenient. Sales made through other channels that we believe were driven by the initial receipt of a catalog are not included in phone and mail net sales. Consequently, as customers choose to purchase merchandise through other channels, we expect phone and mail business net sales to continue to generally decrease as a percent of total net sales.

Direct segment net sales were also negatively impacted by a decrease of $5.5 million in shipping revenue during the three months ended May 2, 2009 as compared to the three months ended May 3, 2008, which is associated with lower order volume. This was partially offset by an increase of $0.3 million in co-branded credit card program revenue over the same period.

Segment Operating Income

Direct segment operating income rate expressed as a percentage of direct segment sales for the three months ended May 2, 2009 as compared with the three months ended May 3, 2008 decreased by 2.0 percentage points. Increased clearance activity resulted in a 6.6 percentage point decline in merchandise margins. In addition, our direct segment operating income rate was

negatively impacted by a 1.6 percentage point decrease in leveraging of employee expenses. These decreases were partially offset by a 5.7 and 0.5 percentage point improvement due to a decrease in marketing costs and certain overhead costs, respectively, as a result of our cost savings initiatives.

Corporate and Other

Corporate and other expenses decreased $9.0 million in the three months ended May 2, 2009 as compared to the three months ended May 3, 2008. This decrease is primarily the result of:

† a $4.9 million decrease in employee expenses, primarily consisting of a reduction in salaries and related taxes and benefits;

† a $2.0 million decrease in marketing expenses, primarily as a result of fewer national magazine advertising campaigns;

† a $1.3 million decrease in corporate support costs, primarily as a result of other cost savings initiatives;

† and a $0.8 million decrease in occupancy costs, primarily related to lower depreciation.

Seasonality

As with many apparel retailers, our net sales, operating results, liquidity and cash flows have fluctuated, and will continue to fluctuate, as a result of a number of factors, including the following:

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

† the number and timing of premium retail store openings;

† the timing of catalog mailings and the number of catalogs mailed;

†          the timing of e-mail campaigns;



†          customer response to merchandise offerings, including the impact of
economic and weather-related influences, the actions of competitors and similar
factors;

† overall merchandise return rates, including the impact of actual or perceived service and quality issues;

† our ability to accurately estimate and accrue for merchandise returns and the costs of obsolete inventory disposition;

† market price fluctuations in critical materials and services, including paper, production, postage and telecommunications costs;

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

We alter the composition, magnitude and timing of merchandise offerings based upon our understanding of prevailing consumer demand, preferences and trends. The timing of merchandise offerings may be further impacted by, among other factors, the performance of various third parties on which we are dependent. Additionally, the net sales we realize from a particular merchandise offering may impact more than one fiscal quarter and year and the amount and pattern of the sales realization may differ from that realized by a similar merchandise offering in a prior fiscal quarter or year. The majority of net sales from a merchandise offering generally are realized within the first several weeks after its introduction with an expected significant decline in customer demand thereafter.

Our business materially depends 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 a substantial number of temporary employees to supplement the existing workforce. Additionally, as gift items and

. . .