Coldwater Creek: 2012 Preview

With 2011 almost in the rearview mirror, many investors start to mull over their portfolios and ask what comes next. It's a fair question, and the answers we find are really the crux of great investing. The ability to identify value before the market has already baked expectations into the stock price is what distinguishes the successful investor.

With that, let's take a look at Coldwater Creek (Nasdaq: CWTR  ) . This company is a specialty retailer of women's apparel, accessories, jewelry, and gift items. It operates through both retail and direct-to-consumer channels.

�Stats for Coldwater Creek

Year-To-Date Stock Return	(65.3%)%
Market Cap	$134**
Price / Earnings Ratio	NM
Estimated 5-Year Growth Rate	0%
Dividend Yield	0%
CAPS Rating (out of 5)	**

Source: S&P Capital IQ & Yahoo! Finance.
NM = not meaningful
**Value in millions.

2011 summary
It was not a kind year to Coldwater Creek. Tthe stock underperformed the Dow Jones Industrial Average (INDEX: ^DJI  ) by almost 67%.

Coldwater Creek Stock Chart by YCharts

This underperformance is a result of consistent mismanagement. The company recently posted a $29.2 million loss and posted a same-store-sales retraction of 19.8%. Their guidance had to be continually lowered throughout the year as the company suffered from excessive inventory levels.

What comes next
High cotton prices plagued clothing retailers over the past year, but as prices continue to drop, retailers should benefit from easing margins. At least most retailers, that is, but probably not Coldwater Creek. Though Coldwater has whittled down its inventory levels, they still remain extremely high. That means it must rely on deep discounts to sell out of season apparel, a move that has crushed competitor Talbots (NYSE: TLB  ) and will continue to weigh on American Eagle (NYSE: AEO  ) . With same-store sales continuing downward, it'll have to spend a lot on marketing to help boost traffic.

This traffic will be harder to generate as rivals such as Chico's FAS (NYSE: CHS  ) and ANN (NYSE: ANN  ) continue to build on their increased traffic.

Ultimately, Coldwater is up the creek and has to paddle twice as fast to get back to even. Bulging inventory and declining same-store sales are the hallmark of a dying retailer. Even if it dramatically turns things around, there will be a lag between the action and impact, so 2012 is shaping up to be another disappointing year.

If you're looking in the retail space, there are much better bets. One that I'm particularly excited about is The Motley Fool's Top Stock for 2012. Unlike Coldwater Creek, this retailer has realized 15% same-store sales for the past 15 months. It still has a small number of stores and a tremendous amount of room for growth. The report is 100% free, but it won't be forever, so access it today