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. Retail sales consists of sales generated at our premium retail stores and outlet stores along with our day spa locations. Direct sales consist of sales generated through our e-commerce web site and from orders taken over the phone or through the mail.

Company Initiatives

Over the past 18 months, we have made substantial changes to our merchandise and business by implementing certain key initiatives, which will continue to be our focus through fiscal 2009. 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 believe our merchandise initiatives in fashion, fit and value are reflected in our fall assortment. For this reason, we plan to make additional investments in marketing and inventory in order to drive traffic and sales.

Historically, we have used a broad based marketing strategy of catalog circulation and national magazine advertising. During fiscal 2008 and the first half of fiscal 2009, we shifted to a more point-of-sale, in-store focus through programs, such as assisting customers

through a personal shopper. In addition, 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 continued to focus on maintaining and better engaging our best customers, as well as attracting new customers through select advertising placement. 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 we believe our merchandise initiatives in fashion, fit and value are reflected in our fall assortment, our third quarter 2009 catalog circulation is expected to increase by at least 40% over the third quarter 2008. We also expect to make additional investments in national magazine advertising during the third quarter of fiscal 2009. We believe our national advertising campaign will enable us to effectively market the changes we have made to our merchandise.

We also expect to invest in increased levels of inventory during the third quarter of fiscal 2009 as a result of our implemented merchandise initiatives. We reduced our premium retail store inventory per square foot by approximately 8.1 percent as of August 1, 2009 compared to August 2, 2008, while premium retail square footage grew by approximately 11.3 percent over the same period. While we will continue to tightly manage our inventories, we believe that our recent efforts to reduce inventories on a per square foot basis has positioned us to capitalize on our implemented merchandise initiatives.

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, maintaining 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 the remainder of fiscal 2009, we will continue to offer quality merchandise at compelling prices through value-pricing on select merchandise and promotions.

In addition, 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 second quarter of fiscal 2009, our cost control efforts resulted in decreased selling, general and administrative expense (SG&A) of approximately $5.7 million compared to the second quarter of fiscal 2008. This decrease is primarily the result of 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.

We continue to expect our capital expenditures to approximate $30 million in fiscal 2009, down from approximately $81 million in fiscal 2008, which is based on reduced new store growth plans and lower technology investments. During the first six months of fiscal 2009, we have opened nine of the 10 new stores planned in fiscal 2009 and replaced our inventory planning and allocation systems. Despite overall lower technology investments, we are continuing to improve various information technology tools and systems to enhance operating efficiency and enable our infrastructure to accommodate growth. We are also in the process of relocating our New York design office.

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 a revolving line of credit up to $70 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.

Comparison of the Three Months Ended August 1, 2009 with the Three Months Ended August 2, 2008

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the three months ended August 1, 2009 as compared to the three months ended August 2, 2008. It is provided to assist in assessing differences in our overall performance (in thousands):

                                                      Three Months Ended
                          August 1,       % of       August 2,       % of
                             2009       net sales       2008       net sales    $ change     % change

Net sales                 $  225,192        100.0 %  $  241,434        100.0 %  $ (16,242 )      (6.7 )%
Cost of sales                149,464         66.4 %     145,786         60.4 %      3,678         2.5 %
Gross profit                  75,728         33.6 %      95,648         39.6 %    (19,920 )     (20.8 )%
Selling, general and
administrative
expenses                      82,761         36.8 %      88,450         36.6 %     (5,689 )      (6.4 )%
Loss on asset
impairments                        -          0.0 %       1,452          0.6 %     (1,452 )    (100.0 )%
Income (Loss) from
operations                    (7,033 )       (3.1 )%      5,746          2.4 %    (12,779 )         *
Interest, net and
other                           (151 )       (0.1 )%        537          0.2 %       (688 )         *
Income (Loss) before
income taxes                  (7,184 )       (3.2 )%      6,283          2.6 %    (13,467 )         *
Income tax provision
(benefit)                     (2,262 )       (1.0 )%      3,143          1.3 %     (5,405 )         *
Net income (loss)         $   (4,922 )       (2.2 )% $    3,140          1.3 %  $  (8,062 )         *
Effective income tax
rate                            31.5 %                     50.0 %

Net Sales

Net sales consist of retail and direct sales, which include revenue from our co-branded credit card program. In addition, shipping fees received from customers for delivery of merchandise are included in the direct segment.

Net sales decreased during the three months ended August 1, 2009 as compared with the three months ended August 2, 2008 primarily due to a 10.2 percent decrease in comparable premium store sales(1) and a $10.3 million decrease in sales through our direct segment. These decreases were partially offset by net sales generated by the addition of 33 premium retail stores and four merchandise clearance outlet stores since August 2, 2008. During the three months ended August 1, 2009 we closed one merchandise clearance outlet store.

We believe our sales performance for the three months ended August 1, 2009 was negatively impacted by difficult macroeconomic conditions, which are evidenced in our business by a highly promotional retail selling environment, low retail store traffic levels and a shift in customer purchasing toward more value priced merchandise. During the three months ended August 1, 2009, we experienced a decline in comparable premium retail store traffic of 11.0 percent and a decrease in average transaction value of direct sales of 16.0 percent as compared to the same period in 2008. The average transaction value of premium retail stores declined 7.8 percent for the three months ended August 1, 2009, as compared to the same three-month period in 2008. In addition, we believe that our lower inventory levels negatively impacted the results of our summer sales event. During the three months ended August 1, 2009, catalog circulation remained relatively flat, compared to the three months ended August 2, 2008.

In addition, shipping fees received from customers for delivery of merchandise decreased by $1.4 million from $6.5 million for the three months ended August 2, 2008, to $5.1 million for the three months ended August 1, 2009, which is associated with lower order volume.

Revenue from our co-branded credit card program remained relatively flat, increasing $0.3 million for the three months ended August 1, 2009, as compared with the same period in 2008. As part of the co-branded credit card program, we received revenue sharing payments of approximately $6.5 million and $2.9 million during the three months ended August 1, 2009 and August 2, 2008, respectively. The amount of revenue sharing recognized as revenue during the three months ended August 1, 2009 and August 2, 2008 was approximately $1.6 million and $0.6 million, respectively. The amount of sales royalty and marketing fees revenue recognized as revenue during the three months ended August 1, 2009 and August 2, 2008 was approximately $2.1 million and $2.8 million, respectively.

Cost of Sales/Gross Profit

The gross profit rate decreased by 6.0 percentage points during the three months ended August 1, 2009, as compared to the three months ended August 2, 2008. The decrease in our gross profit rate was primarily the result of a 4.5 percentage point decline

attributable to value-pricing and an increase in promotional discounts(2), which were partially offset by a decrease in markdowns(3). We also experienced a decrease in the leveraging of our retail occupancy costs, which represented an approximate 2.0 percentage point decline. These decreases were offset by lower shipping and handling costs of 0.2 percentage points due to lower direct sales and lower buying and distribution costs of 0.3 percentage points.

Selling, General and Administrative Expenses

SG&A decreased $5.7 million in the three months ended August 1, 2009 as compared with the same period in the prior year, primarily driven by decreased employee and overhead expenses and to a lesser extent a decrease in marketing expenses, related to our cost savings initiatives. As a percentage of net sales, SG&A expense increased by 0.2 percentage points in the three months ended August 1, 2009 as compared with the three months ended August 2, 2008. This increase in SG&A rate was the result of a 0.2 percentage point increase in overhead expenses and 0.1 percentage point increase in marketing expenses, offset by a 0.1 percentage point decrease in employee expenses. The increase in overhead and marketing expenses as a percentage of sales is primarily the result of decreased leveraging. The decrease in employee expenses is primarily due to the elimination of certain corporate support positions during fiscal 2008.

Loss on Asset Impairment

During the three months ended August 2, 2008, we recorded an impairment charge of $1.5 million related to leasehold improvements and furniture and fixtures at certain day spa locations. No impairments were recorded during the three months ended August 1, 2009.

Interest, Net and Other

The decrease in interest, net and other for the three months ended August 1, 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 benefit for income taxes for the three months ended August 1, 2009 as compared with the provision in the same period in the prior year was the result of a pre-tax loss, resulting in a tax benefit of $2.3 million. See Note 2 to our condensed consolidated financial statements for further discussion of 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
                                   August 1,       % of       August 2,       % of          %
                                      2009       Net Sales       2008       Net Sales    Change
Net sales:
Retail                             $  183,394         81.4 %  $  189,357         78.4 %     (3.1 )%
Direct                                 41,798         18.6 %      52,077         21.6 %    (19.7 )%
                                   $  225,192        100.0 %  $  241,434        100.0 %     (6.7 )%
Segment operating income:
Retail                             $   12,844                 $   24,341                   (47.2 )%
Direct                                  8,495                     10,669                   (20.4 )%
Segment operating income           $   21,339                 $   35,010                   (39.0 )%
Unallocated corporate and other       (28,372 )                  (29,264 )                  (3.0 )%
Income from operations             $   (7,033 )               $    5,746                       *

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

(3) We define markdowns generally as permanent reductions from the original selling price.

Retail Segment

Net Sales

The $6.0 million decrease in retail segment net sales for the three months ended August 1, 2009 as compared with the three months ended August 2, 2008 is primarily the result of a decrease in net sales in our comparable premium retail stores of 10.2 percent. This decrease in comparable store sales reflects a decrease in comparable premium retail store traffic of 11.0 percent and a decrease in premium retail store transaction value of 7.8 percent for the three months ended August 1, 2009 as compared to the three months ended August 2, 2008. In addition, retail segment net sales were negatively impacted by our low inventory levels. This decrease was partially offset by net sales generated from the addition of 33 premium retail stores since August 2, 2008.

Additionally, net sales from merchandise clearance outlet stores decreased $0.7 million, which includes the addition of four outlet stores and the closure of one, in the three months ended August 1, 2009 as compared with the three months ended August 2, 2008. Net sales generated from our day spas decreased $0.5 million for the three months ended August 1, 2009 as compared with the three months ended August 2, 2008.

Segment Operating Income

Retail segment operating income rate expressed as a percentage of retail segment sales for the three months ended August 1, 2009 as compared with the three months ended August 2, 2008 decreased by 5.9 percentage points. Increased promotional discounts, which were partially offset by decreased in-store markdown activity, contributed to a 5.6 percentage point decline in merchandise margins. Retail segment operating income was also negatively impacted by a 1.5 percentage point reduction in the leveraging of retail occupancy costs, which includes an impairment charge of $1.5 million in the three months ended August 2, 2008, and a 0.4 percentage point reduction in the leveraging of marketing costs. The reduced leveraging of operating expenses is primarily due to a decrease in comparable store sales. These reductions were offset by lower employee expenses and certain overhead costs, which contributed to a 1.4 and 0.2 percentage point improvement, respectively.

Direct Segment

Net Sales

The direct segment net sales decreased $10.3 million during the three months ended August 1, 2009 as compared to the three months ended August 2, 2008. Sales through our Internet channel decreased $8.2 million from $39.4 million for the three months ended August 2, 2008 to $31.2 million for the three months ended August 1, 2009. Sales from our phone and mail channel for the same period decreased $2.1 million from $12.7 million to $10.6 million.

The decrease in Internet business net sales is primarily due to fewer orders over the Internet, our low inventory levels, and an approximate 14.6 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, our low inventory levels and an approximate 19.7 percent decrease in average transaction value during the period. In addition we mailed 0.3 million, or 2.8 percent, fewer catalogs during the three months ended August 1, 2009 as compared to the same period in the prior year.

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 our retail or Internet 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 percentage of total net sales.

Direct segment net sales were also negatively impacted by a decrease of $1.4 million in shipping revenue during the three months ended August 1, 2009 as compared to the three months ended August 2, 2008, which is associated with lower order volume.

Segment Operating Income

Direct segment operating income rate expressed as a percentage of direct segment sales for the three months ended August 1, 2009 as compared with the three months ended August 2, 2008 decreased by 0.2 percentage points. The direct segment operating income rate was negatively impacted by a 0.5 and 0.4 percentage point decrease in leveraging of employee expenses and marketing expenses, respectively. In addition, increased clearance activity resulted in a 0.1 percentage point decline in merchandise margins. These

decreases were partially offset by a 0.8 percentage point improvement due to lower overhead costs, as a result of our cost savings initiatives.

Corporate and Other

Corporate and other expenses decreased $0.9 million in the three months ended August 1, 2009 as compared to the three months ended August 2, 2008. This decrease is primarily the result of:

† $0.3 million decrease in employee expenses, primarily consisting of a reduction in salaries and incentive compensation;

† $0.2 million decrease in marketing expenses, primarily as a result of fewer national magazine advertising campaigns;

† $0.2 million decrease in corporate support costs, primarily as a result of cost savings initiatives; and

† $0.2 million decrease in occupancy costs.

Comparison of the Six Months Ended August 1, 2009 with the Six Months Ended August 2, 2008

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the six months ended August 1, 2009 as compared to the six months ended August 2, 2008. It is provided to assist in assessing differences in our overall performance (in thousands):

                                                Six Months Ended
                    August 1,      % of       August 2,      % of
                       2009      net sales       2008      net sales    $ change    % change

Net sales           $  453,559       100.0 %  $  512,539       100.0 %  $ (58,980 )    (11.5 )%
Cost of sales          306,731        67.6 %     324,091        63.2 %    (17,360 )     (5.4 )%
Gross profit           146,828        32.4 %     188,448        36.8 %    (41,620 )    (22.1 )%
Selling, general
and
administrative
expenses               165,473        36.5 %     196,256        38.3 %    (30,783 )    (15.7 )%
Loss on asset
impairments                  -         0.0 %       1,452         0.3 %     (1,452 )   (100.0 )%
Loss from
operations             (18,645 )      (4.1 )%     (9,260 )      (1.8 )%    (9,385 )   (101.3 )%
Interest, net and
other                     (310 )      (0.1 )%      1,090         0.2 %     (1,400 )        *
Loss before
income taxes           (18,955 )      (4.2 )%     (8,170 )      (1.6 )%   (10,785 )   (132.0 )%
Income tax
benefit                 (6,471 )      (1.4 )%     (2,070 )      (0.4 )%    (4,401 )   (212.6 )%
Net loss            $  (12,484 )      (2.8 )% $   (6,100 )      (1.2 )% $  (6,384 )   (104.7 )%
Effective income
tax rate                  34.1 %                    25.3 %

Net Sales

. . .