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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

OR

For the Fiscal Year Ended January 28, 2006

Commission File Number 0-21915

COLDWATER CREEK INC.

(Exact name of registrant as specified in its charter)

ONE COLDWATER CREEK DRIVE, SANDPOINT, IDAHO 83864

(Address of principal executive offices)

(208) 263-2266

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  x    NO  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  x

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in a definitive proxy or information statement incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer  x    Accelerated Filer  ¨    Non-accelerated Filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    YES  ¨    NO  x

At July 30, 2005, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $1,025,286,000 based upon the closing price on the Nasdaq National Market reported for such date. As of March 24, 2006, 92,299,575 shares of the Registrant’s $.01 par value Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or portions thereof) are incorporated by reference into the Parts of this Form 10-K noted:

Part III incorporates by reference information from the definitive proxy statement for the Registrant’s 2006 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form.

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Coldwater Creek Inc.

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 28, 2006

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PART I

Item 1. BUSINESS

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 this Annual Report on Form 10-K. We assume no future obligation to update our forward-looking statements or to provide periodic updates or guidance.

We maintain an Internet web site at http://www.coldwatercreek.com. (This web site address is for information only and is not intended to be an active link or to incorporate any web site information into this document.) We make available, free of charge, through our website our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with the SEC.

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 retailer generating $788.2 million in net sales in fiscal 2005. Our proprietary merchandise assortment reflects a sophisticated yet relaxed and casual lifestyle. Commitment to providing superior customer service is manifest in all aspects of our business. We reach customers through an expanding base of retail stores, as well as catalog and e-commerce channels. Our merchandise assortment, retail stores, catalogs and e-commerce website are designed to appeal to women who are 35 years and older with average household income in excess of $75,000.

Our mission is to become one of the premier specialty retailers for women 35 years and older in the United States. The strategy to realize this vision is to offer our customer a compelling merchandise assortment with superior customer service through all three sales channels.

Recent Developments and Strategic Initiatives

During fiscal 2005, our efforts were focused on certain key business developments and strategic initiatives which we believe will further our goal of becoming one of the premier specialty retailers for women 35 years and older in the United States. These key developments and strategic initiatives were as follows:

Retail Expansion

Since the opening of our first premium retail store in November, 1999, we have gradually evolved from a direct marketer to a multi-channel specialty retailer. We have found that while our customer enjoys shopping through either the Internet or over the phone, she prefers to purchase a majority of her apparel in retail stores. To better align our services with the needs and preferences of our customers, we continued to invest in the expansion of our retail channel in fiscal 2005. These investments were in:

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Premium Retail Stores

We believe there is an opportunity for us to grow our premium retail store base to 450 to 500 stores in more than 300 identified markets nationwide over the next four to six years. In fiscal 2005, we successfully opened 60 premium retail stores, increasing our total premium store count to 174, covering 133 markets. Approximately 54% of these stores are located in traditional malls, 40% in lifestyle centers and 6% in street locations. In addition to the 174 premium retail stores we also operated two resort stores and 22 merchandise clearance outlets at the end of fiscal 2005.

We currently plan to open 65 stores during fiscal 2006, eleven of which are planned for opening in the first quarter, ten in the second quarter, 34 in the third quarter and ten in the fourth quarter. Approximately 63% of these new stores will be located in lifestyle centers, 31% in traditional malls and 6% in street locations. New premium retail stores will average 5,500 square feet. As of the date of this report, six stores have been opened in the first quarter of fiscal 2006, for a total of 180 stores currently in operation.

Each new store location is chosen through collaboration between our real estate and business intelligence departments. The real estate department uses its experience and current market knowledge to choose preliminary locations. The business intelligence department then analyzes each location based on information gathered through a combination of our own extensive customer database and external sources. This data includes information such as projected sales, consumer age, income level and buying habits, and the location of competitors in the area.

Retail and Corporate Infrastructure

As we pursued our retail expansion strategy in fiscal 2005, we also worked to strengthen our underlying infrastructure to better support our expansion. In particular, we have made and will continue to make significant investments in personnel and distribution.

Personnel

As a result of focused recruiting programs and staffing increases related to our retail store expansion, the number of full-time and salaried positions in our retail segment increased significantly during fiscal 2005, compared with the prior year. We also increased our investment in corporate support positions significantly during fiscal 2005, compared with the prior year. These positions include additions in information technology, human resources and finance. Because we believe that these investments in personnel infrastructure help to position us for our future growth, we anticipate that we will continue to make significant investments in this area for the foreseeable future.

Distribution

To effectively support the retail expansion strategy we must have adequate warehouse and distribution capacity. We estimate that our 610,000 square-foot distribution center located in Mineral Wells, West Virginia, is currently able to service up to 300 premium retail stores. In anticipation of retail expansion beyond that estimated capacity, we made the decision in fiscal 2005 to expand our existing distribution center. This expansion will increase the size of the distribution center to approximately 960,000 square feet. Construction on this expansion began in the first quarter of fiscal 2006. We plan to take possession of the new space in the second half of fiscal 2006.

Throughout fiscal 2005, improvements in distribution processes and technology were made in order to expedite the flow of merchandise through our distribution center. The goal of these improvements is to move product more quickly to our premium retail stores. We will continue to make such improvements in the future.

Exceptional Customer Service

Customer service has always been a hallmark of the Coldwater Creek brand. In fiscal 2005, we renewed our focus on providing customers with an exceptional shopping experience. This proved to be a major factor in our recognition by the National Retail Federation as the number one specialty apparel retailer for customer service in the United States and number two in customer service among retail companies. This award was based on survey results from over 8,500 consumers across the country. In connection with this renewed focus on customer service during fiscal 2005, we expanded our retail training program and implemented a Customer Service Recognition Award program.

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Expanded Retail Training Program

As we continue to implement our retail growth strategy, we must focus on imparting the Coldwater Creek culture of customer service to each new store. To ensure our customer receives the same level of exceptional customer service, whether at one of our retail stores or customer contact centers, we implemented a significant expansion of our retail training program, which we call “Coldwater Creek University.” This program, which is held in the state-of-the-art training center at our Sandpoint, Idaho, campus, consists of six days of leadership training for all new Store Managers and District Managers. This training program includes sessions on various topics, such as the Company’s history, visual merchandising, recruiting top performers and effective store operations. Managers complete this program with a clear understanding of the Coldwater Creek culture and the Company’s expectations of exceptional customer service.

Training continues after Coldwater Creek University with our hands-on Management Training Series and our Store Leadership Training program, both of which were launched in February 2005. Each emphasizes the Coldwater Creek culture and our commitment to exceptional customer service. As skills are mastered, managers are encouraged to lead store personnel through the training programs.

Customer Service Recognition Award Program

We strive to create an environment in which our personnel are rewarded for their dedication to customer service. One of the incentives we provide is the Customer Service Recognition Award Program, which was launched in the second quarter of fiscal 2005. Under this program, retail store and customer contact center personnel have the opportunity to earn shares of Coldwater Creek stock as a reward for providing exceptional customer service. Stock awards are based upon such criteria as secret shopper scores, customer comments, customer contact center response times and the observations of other personnel.

Increase Share of Women’s Apparel Market

We believe we have a competitive opportunity to increase our share of the women’s apparel market by appealing to potential customers who may be dissatisfied with the merchandise selections and customer service offered by department store chains. Once a customer becomes familiar with our brand, we believe she will be continually drawn to our distinctive merchandise assortment and exceptional customer service. To appeal to potential customers and ultimately gain market share, we implemented several initiatives during fiscal 2005. These initiatives included:

National Magazine Advertising

One of the primary vehicles for attracting new customers to the Coldwater Creek brand has been the placement of multiple-page advertisements in national magazines. These advertisements are designed to drive sales to all of our channels, while promoting a heightened awareness of the Coldwater Creek brand. We have placed advertisements in high-circulation publications popular with our customer such as Oprah, Good Housekeeping, Better Homes & Gardens, Country Living, Southern Living, Martha Stewart and Woman’s Day.

During fiscal 2005, we increased both the number of national publications in which we place advertisements and the number of pages per advertisement. These changes introduced the Coldwater Creek brand to a greater number of potential customers and displayed a more diverse assortment of our merchandise. The Company’s investment in national magazine advertisements increased to $12.1 million in fiscal 2005 from $3.2 million in fiscal 2004.

In fiscal 2006, we plan to continue our investment in national magazine advertising, increasing both the number of publications and the frequency with which we place advertisements. We plan to spend approximately $22 million on national magazine advertising during fiscal 2006. Over time, we anticipate that improved brand recognition will translate into increased market share and improved profitability.

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Coldwater Creek Catalog

In fiscal 2004, we began mailing “retail mailers,” which were similar to our regular catalogs, but with a significantly smaller page count. Retail mailers featured a limited assortment of merchandise and were targeted to customers who reside near our premium retail stores. At the same time, we began testing the response of these customers to a full-size catalog that featured a larger assortment of merchandise. These tests revealed that customers responded more positively to a full-size catalog and ultimately led to the introduction of our Coldwater Creek catalog in the first quarter of fiscal 2005.

Our Coldwater Creek catalog differs from our other catalog titles in that it contains merchandise available in our stores. The catalog is designed to encourage customers to shop at the stores and is mailed into markets where we have a premium retail store. The catalog is mailed in addition to our other catalog titles, communicating with customers in between catalog mailings and notifying them of current promotions in the retail store.

During fiscal 2005, we mailed approximately 11.9 million Coldwater Creek catalogs compared with only 2.7 million retail mailers during fiscal 2004. These catalogs are effective at increasing retail segment sales and, to a lesser extent, direct segment sales. Contributing to the increase in circulation is our retail expansion, which provided us with the opportunity to mail this catalog into additional markets. In fiscal 2006, we plan to increase the circulation of Coldwater Creek catalog to approximately 19.0 million.

E-mail Campaign

During fiscal 2005, we launched an expanded e-mail campaign program. As a result of this program approximately 59% more e-mails were delivered to our customers in fiscal 2005 than in fiscal 2004. We believe this increase was a contributing factor in the 23.6% increase in Internet net sales. We plan to continue this campaign in fiscal 2006, monitoring customer response and adjusting the campaign accordingly.

Direct Sourcing

Our merchandise has historically been purchased primarily through domestic importers who procured the merchandise on our behalf. While this practice has proved to be successful, we now believe we can benefit by working directly with foreign manufacturers. These benefits include improved control over the production, quality and transportation of our merchandise, which we believe will ultimately result in faster speed to market, improved quality and better margins. In order to realize these benefits, we launched our direct sourcing initiative in the third quarter of fiscal 2004.

Our strategy for direct sourcing includes the establishment of offices in select locations, including Hong Kong and India. Our Hong Kong office opened in the fourth quarter of fiscal 2005. Our office in India is scheduled to open in the second quarter of fiscal 2006. Our sourcing offices work closely with direct sourcing personnel located at our corporate headquarters. The primary functions of these offices are product development and production management.

Foreign office personnel are involved in selecting foreign manufacturers, ensuring adequate factory capacity and negotiating prices and delivery terms. They also provide samples of fabrics, colors and prints that are being developed in their region. Once a purchase order is issued, production management personnel work directly with foreign manufacturers to ensure merchandise is produced according to our exact specifications, including fabric quality and color, fit and design. The opportunity to verify these specifications throughout the manufacturing process provides more control over the quality of end product. Personnel also oversee the timeliness of the production process, from the initial receipt of fabric to merchandise shipment, generating improvements in inventory control.

Approximately 15% of our merchandise was purchased directly from factories in fiscal 2005. We plan to increase this to approximately 30% in fiscal 2006, with an ultimate goal of approximately 70% in fiscal 2008. As we increase the percentage of total merchandise that is purchased directly from manufacturers, the number of domestic importers, with whom we work, will decrease. Domestic importers will remain, however, a crucial component of our sourcing strategy, providing unique industry and competitive knowledge along with product design capabilities.

Social and Environmental Compliance

We have always been aware of the potential social and environmental impacts of the apparel manufacturing process. As we move into our new sourcing initiative, however we are provided with an opportunity to gain more control over these impacts. As such, we are committed to sourcing our products in a responsible manner, respecting both the countries in which we have a business presence, and the business partners who make our products.

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As a part of this commitment, in fiscal 2005, we implemented a comprehensive code of conduct and monitoring program that applies to all factories utilized in the production of merchandise for Coldwater Creek. Within this code, we recognize that local customs and laws vary from one region of the world to another; however, the issue of human rights transcends geographical boundaries. The intention of this code is to communicate our expectations to each of our business partners.

To ensure our business partners are complying with our code of conduct, we monitor their business practices through an annual on-site factory inspection and compliance audit. These audits are performed by an accredited compliance firm. These audits focus on areas such as compliance with local laws and regulations, child and forced labor, working hours, health and safety, freedom of association and the environment. Random audits will be conducted as needed.

If deficiencies are noted, personnel in each region will work with the business partner to correct those deficiencies. The goal of this process is to not only correct the deficiencies, but also to educate individuals, build strategic relationships and improve business practices long-term. Business relationships are severed with partners who do not make the necessary improvements in a timely manner.

Additionally, we have joined Business for Social Responsibility, a global organization that assists member companies in the achievement of success in ways that respect ethical values, people, communities and the environment. Through the many tools offered by this organization, and collaboration with other member companies, we will continue to develop and strengthen our social compliance program.

As a member of Business for Social Responsibility we, along with six other nationally known women’s apparel companies, became charter members of the Apparel Water Quality Working Group. The focus of this group is the development of a single set of standards for monitoring and improving water quality in the production of apparel. Water is a natural resource that can be significantly impacted by the apparel manufacturing process.

Coldwater Creek ~ The Spa

In the fourth quarter of fiscal 2005, we announced plans to expand on our legacy of providing exceptional customer service as we test a new concept, Coldwater Creek ~ The Spa. Based on positive response to this concept from focus groups comprised of both customers and non-customers, we learned there is a strong familiarity with the Coldwater Creek brand and its focus on providing exceptional customer service, as well as a broad consensus that the Company is well-suited to provide this new service.

Our test day spas will service six geographically distributed areas and will offer a complete menu of spa treatments, including massages, facials, body treatments, manicures and pedicures. Each day spa will be staffed with experienced professionals in all treatment areas. We will also carry an assortment of relevant apparel, including items from our Sport collection, as well as a line of personal care products for women.

Each location will average 5,000 square feet and will feature a relaxed setting with soft wood accents and ambient lighting. Our spas will be located within close proximity of an existing premium retail store. We believe this creates excellent potential for us to cross-market Coldwater Creek retail stores and Coldwater Creek ~ The Spa to increase traffic for both concepts and generate transactions in both directions.

We opened one Coldwater Creek ~ The Spa location during the first quarter of fiscal 2006 and plan to open the remaining five locations in the second quarter. It is premature at this time to evaluate the performance of this new concept. However, we will continue to monitor our customer’s response and evaluate, test and refine our day spas accordingly.

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Narrative Description of Business

If we are to fulfill our mission of becoming one of the premier retailers of specialty women’s apparel in the United States, we must focus not only on the strategic initiatives discussed above but also on our core business components. These core business components are:

Our Proprietary Merchandise

The Coldwater Creek brand is synonymous with a sophisticated yet relaxed and casual lifestyle. To maintain and strengthen this brand image we focus our merchandising efforts on the design and development of unique, colorful items with an emphasis on comfort and quality fabrics that provide easy care. Our merchandise is fashionable but not trendy and includes items for each aspect of our customer’s life, including soft career, casual weekend wear and special occasion.

We design and develop all of our apparel either in-house or through collaboration with independent designers. To ensure our designers stay abreast of trends in styles and fabrics, we opened our New York design studio during fiscal 2004. Our New York design team merges the latest fashion trends with our customer’s preferences to build an overall vision that guides the design and development of our seasonal merchandise assortment.

Our product development team translates the overall vision for each season into various product designs, fabrics and prints, indicating the construction and exact specifications for each item. Our team seeks inspiration from their extensive travels, fashion shows, and from our direct sourcing team which provides new fabrics and novelty prints along with product samples from various manufacturers. Our direct sourcing team also assists in identifying the appropriate manufacturers to manufacture each item and negotiating both price and delivery terms.

Once our merchandise assortment is selected, our inventory planning team must determine the exact quantities of each item to purchase in order to meet anticipated demand. This determination is made through the analysis of information such as historical sales, planned merchandise presentation, scheduled store openings and sales projections. This process culminates in the issuance of various purchase orders. Coordinating with the direct sourcing department, inventory planners monitor the production process to ensure the merchandise is produced to exact specifications and within the designated timeline.

Marketing and Promotion

Throughout all of our marketing and promotion activities we seek to present a consistent brand image. The primary initiatives in fiscal 2005 were aimed at retaining existing customers and attracting new customers while building overall brand awareness. National magazine advertising, Coldwater Creek catalogs and e-mail campaign initiatives were discussed above under the caption “Increase Share of Women’s Apparel Market.” In addition, we also continued to mail millions of our Northcountry and Spirit catalogs, participated in an affiliate website program and periodically offered our customers a gift-with-purchase.

As a catalog company we have been able to create an extensive proprietary database of customer information including customer demographics, purchasing history, and proximity to an existing or planned premium retail store. We believe our ability to effectively design and manage our marketing and promotional programs is enhanced by this rich source of information, allowing us to adjust the frequency, timing and content of each program to maximize the benefit gained.

Co-Branded Credit Card Program

In the second quarter of fiscal 2005, we introduced our co-branded credit card program. To encourage pre-approved customers to accept the credit card, we offer a one-time discount on merchandise purchased at the time of application. Cardholders are also able to earn points for every dollar spent at Coldwater Creek and at other businesses where our card is accepted. Cardholders who accumulate the requisite number of points are issued a coupon towards the purchase of Coldwater Creek merchandise. In addition to earning points, all participants in the co-branded credit card program receive exclusive offers throughout the year. These offers have included discounts, Coldwater Creek shopping events, and periodic opportunities to earn double and triple points.

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We receive a non-refundable, non-recurring fee from the issuing bank for each new account opened and activated. Approximately 153,000 new accounts were activated during fiscal 2005, resulting in a fee of $12.3 million. We also receive from the issuing bank a small sales royalty which is based on a percentage of all purchases made by the cardholder.

We believe over time the fee revenue component of our co-branded credit card program will decrease as a larger portion of our customer base enters the program. At the same time, we expect the sales royalty revenue to increase. This increase will be mostly offset by an increase in the expenses associated with the accumulation of points. The issuing bank has the right to modify certain terms of the agreement that govern the co-branded credit card program. Changes made to the terms of this agreement may not be to our benefit. We do not bear the credit risk associated with our co-branded credit card.

Our Multi-Channel Approach

Our merchandise is offered through two distinct segments, retail and direct. Our retail segment includes an expanding base of premium retail stores and outlet stores while the direct segment encompasses our direct-to-consumer business through e-commerce and catalog. This multi-channel approach allows us to cross-promote the brand and provide customers with convenient access to our merchandise, regardless of her preferred shopping method.

In addition, customer service is designed to facilitate this multi-channel approach. We accept returns through any channel regardless of the initial point of purchase. We also provide in-store web kiosks and assist customers in ordering items through the website if they are not currently available in her local premium retail store. Our catalogs are prominently displayed in each premium retail store to encourage customers to continue shopping with us even after they have left our stores.

Information regarding segment performance is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K. Additionally, selected financial data for our segments is presented in “Note 20. Segment Reporting” to our consolidated financial statements.

Retail Segment

Retail stores are designed to reflect the brand’s focus on a casual, unhurried lifestyle, encouraging customers to relax and enjoy their shopping experience. Our wide, windowed storefront and forest green logo above a soft archway provide an inviting first impression to the customer. Store interiors combine an appealing mix of wood and stone accents, along with other natural materials. A signature water feature and leather chairs create a warm, comfortable environment.

We seek to hire our customers, as we believe they are in the best position to provide knowledge and understanding of our customer’s needs. Ongoing training is provided for all store personnel concerning company culture, customer service methods and expectations, the product and the customer. Please refer to the “Expanded Retail Training Program” caption above for further discussion of the store personnel training program. To ensure we are providing the level of service customers have come to expect, we monitor secret shopper scores, customer comments, conversion rates and other metrics on a daily basis.

The visual presentation of our merchandise is key to maintaining brand integrity. From window displays and floor layout to the fold of our shirts and the direction of lighting fixtures, we focus attention on detail. The stores are clean and fully stocked at all times, ensuring visibility and access to the merchandise. To guarantee both frequent and new customers a fresh merchandise assortment, we continually introduce new styles and designs into the stores.

We conduct four key seasonal sales events per year in the retail stores. By minimizing the frequency of clearance activities, we feel we can better control the impact of these lower-priced sales on merchandise margins. Excess merchandise is cleared primarily through one of our 22 outlet stores. Unlike many other retailers that produce items for sale through their outlet locations, we use outlets exclusively to manage overstocked premium merchandise. We currently operate one outlet store for every eight premium retail stores. We plan to decrease this ratio as we expand the premium retail store base.

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We also operate resort stores in Sandpoint, Idaho, and Jackson, Wyoming. A new site for the Sandpoint store is currently under construction and is expected to open in the second quarter of fiscal 2006. Once opened, this new store will be considered a premium store for reporting purposes.

As of January 28, 2006, we operated 174 premium retail stores and we believe there is an opportunity for us to grow to 450 to 500 over the next four to six years. As of the date of this report, we have since opened an additional six stores in the fiscal 2006 first quarter for a total of 180 stores currently in operation. Please refer to the “Retail Expansion” caption above for further details.

Direct Segment

The direct segment began with the mailing of our first catalog in 1985 and was expanded in 1999 to include our e-commerce business. The web site and catalogs feature full color photographs, graphics and artwork. We present apparel “off-figure,” leaving the customer to decide if an item of merchandise is right for her based upon its inherent style and design. All website and catalog pages are created and designed by an in-house team of artists, copywriters and editors to ensure a consistent presentation of the Coldwater Creek brand.

Merchandise is presented to the customer via our e-commerce website and three core catalog titles, allowing her to choose her preferred method of order placement.

Our E-Commerce Business

Our e-commerce website, www.coldwatercreek.com, offers a convenient, user-friendly and secure online shopping option for customers. The website features the entire full-price merchandise offering found in the catalogs and retail stores. It also serves as an efficient promotional vehicle for the disposition of excess inventory. Customers are driven to the website primarily by catalogs and our e-mail campaigns. Please refer to the “E-mail Campaign” section above for further details. In addition, we participate in a commission-based program that provides for hotlink access to the website from numerous popular Internet search engines and consumer and charitable websites.

Our Catalogs

Merchandise is currently offered through three core catalog titles: Northcountry, Spirit and Coldwater Creek. In addition, we periodically distribute a holiday Gifts-to-Go catalog and a Sport catalog. We differentiate the merchandise assortment offered in each title to cater to the various lifestyles of the core customer.

Northcountry features a casual clothing assortment with an emphasis on comfort and color. The merchandise often includes novel detailing such as embroidery, fabric piecework and design ornamentation. The clothing in this assortment focuses on complete outfits, generally offering tops and bottoms displayed as a complete ensemble. Northcountry represents the broadest product assortment, mixing apparel with jewelry, fashion accessories, gift items and home-related hardgoods.

Spirit features fine fabrics and upscale detailing such as fully lined jackets at higher price points. Along with apparel offered in sophisticated fabrics like linen and matte jersey, the Spirit assortment also features merchandise designed for easy care travel, including items in knit and cotton twills. This apparel is merchandised with versatility in mind, making it simple for the customer to mix and match items to create a personal look.

The Coldwater Creek catalog is designed to drive traffic to our retail stores and therefore features merchandise that can be found in the premium retail stores. Refer to “Coldwater Creek Catalogs” above for further details.

Gifts-to-Go features a varied assortment of the most popular items from Northcountry and Spirit merchandise lines. This catalog is mailed each year during the holiday shopping season and serves the gift-giving needs of our customers.

We began offering a new line of active-wear apparel under the Sport catalog title in August 2004. This apparel represents a small but important portion of the overall merchandise mix. While this merchandise has been well received by customers, we plan to stop mailing a separate catalog in the second half of fiscal 2006. We intend to incorporate select Sport merchandise into the existing assortment in all channels and spa stores.

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Approximately 113 million catalogs were mailed in fiscal 2005, and we plan to mail approximately 117 million catalogs in fiscal 2006. The largest increase in circulation will be in the Coldwater Creek catalog, as growth in the retail store base is expected to provide additional circulation opportunities in a larger number of markets.

Customer Contact Centers

We have three customer contact centers located in Coeur d’Alene, Idaho, Mineral Wells, West Virginia, and Sandpoint, Idaho. Customer contact center personnel receive comprehensive, ongoing training on the Coldwater Creek culture, expectations of exceptional customer service, and the merchandise assortment. Certain personnel receive more extensive product training and are available to respond to customer inquiries. These Product Specialists can be quickly patched into a three-way call with the customer and contact center agent in order to answer highly specific questions about any of the merchandise sold by the Company.

If a customer visiting the website has questions about products, navigating the website or placing and completing orders they can request assistance from a knowledgeable customer contact center agent through the online instant help option. Customer contact center agents respond to inquiries in an average of seven to ten seconds through live-chat technology. Requests or questions sent via e-mail receive a personalized reply, rather than an automated response, in an average of fifteen minutes.

For customers who prefer to place orders over the phone, the customer contact center phone system is designed to ensure customer calls are answered immediately. Calls coming into one location are routed to another if the call volume is too high or if a contact center is off-line. On average, calls for catalog orders are answered in less than four seconds during peak ordering seasons. We also have consistently maintained a 99.4% answer rate. This rate measures the percentage of calls successfully connected to a customer contact center agent.

Competition

The women’s retail apparel market is highly competitive. Competitors range from specialty apparel retailers, such as Ann Taylor, Chico’s, Talbots and J. Jill, to small single-channel catalog, e-commerce and retail store companies. We also compete with national department stores such as Bloomingdale’s, Macy’s, JC Penney, Dillard’s and Nordstrom, and with discount retailers that offer women’s apparel and accessories, such as Kohl’s and Target.

We believe that we compete principally on the basis of our high-quality, distinctive merchandise selection and exceptional customer service. We also believe that an integrated, multi-channel strategy enhances our ability to compete by providing the customer with convenient access to the merchandise, regardless of her preferred shopping method.

Employees

As of January 28, 2006, we had 2,299 full-time employees and 5,871 part-time employees. During our peak selling season, which includes the months of November and December, we utilize a substantial number of temporary employees. None of our employees are covered by collective bargaining agreements. We consider our employee relations to be excellent.

Trademarks

Our registered trademarks include Coldwater Creek^®, Coldwater Creek Spirit^® and the stylized Coldwater Creek logo. We believe that our registered and common law trademarks have significant value and are instrumental to our ability to market and sustain demand for our merchandise.

Available Information

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and therefore file periodic reports and other information with the Securities and Exchange Commission (“SEC”). These reports may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street NW, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website at www.sec.gov that contains reports, proxy information statements and other information regarding issuers that file electronically.

Our filings under the Exchange Act (including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports) are also available free of charge on the investor relations portion of our website at

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www.coldwatercreek.com. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

Item 1A. Risk Factors

We may be unable to successfully implement our retail store rollout strategy, which could result in significantly lower revenue growth.

The key driver of our growth strategy is the retail store expansion. At January 28, 2006, we operated 174 full-line retail stores and, as of the date of this report, we have since opened an additional six stores in the fiscal 2006 first quarter for a total of 180 stores currently in operation. We plan to open a total of 65 full-line retail stores in fiscal 2006. We believe we have the potential to open 450 to 500 retail stores over the next four to six years. However, there can be no assurance that these stores will be opened, will be opened in a timely manner, or, if opened, that these stores will be profitable. The ability to open our planned retail stores depends on our ability to successfully:

Any miscalculations or shortcomings in the planning and control of the retail growth strategy could materially impact results of operations and financial condition.

The retail store model requires us to incur substantial financial commitments and fixed costs that we will not be able to recover if a store is not successful.

The success of an individual store location depends largely on the success of the lifestyle center or shopping mall where the store is located, and may be influenced by changing customer demographic and buying trends. These factors cannot be predicted with complete accuracy. Because we are required to make long-term financial commitments when leasing retail store locations, and to incur substantial fixed costs for each store’s design, leasehold improvements, fixtures, and information and management systems, it would be costly for us to close a store that does not prove successful.

We may be unable to manage significant increases in the costs associated with the catalog business, which could affect results of operations.

We incur substantial costs associated with catalog mailings, including paper, postage, merchandise acquisition and human resource costs associated with catalog layout and design, production and circulation and increased inventories. Significant increases in U.S. Postal Service rates and the cost of telecommunications services, paper and catalog production could significantly increase catalog production costs and result in lower profits for the catalog business. Most of the catalog-related costs are incurred prior to mailing, and we are not able to adjust the costs of a particular catalog mailing to reflect the actual subsequent performance of the catalog. Moreover, customer response rates have been unpredictable in recent years, particularly for mailings to prospective customers. Because the catalog business accounts for a significant portion of total net sales, any performance shortcomings experienced by the catalog business would likely have a material adverse effect on overall business, financial condition, results of operations and cash flows.

The spa test may prove unprofitable and may be abandoned at any time.

During 2006 we will begin the test of Coldwater Creek ~ The Spa concept in six locations. There is no assurance that the test of this concept will be successful or that we will continue to develop spas. Factors that could cause us to curtail or abandon the spa concept include:

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If we were to abandon the spa concept, we would be required to write off any costs we have capitalized, which would have a material and adverse effect on results of operations, particularly for the quarter in which a write off is recognized.

Consumers’ concerns about purchasing items via the Internet as well as external or internal infrastructure system failures could negatively impact our e-commerce sales or cause us to incur additional costs.

The e-commerce business is vulnerable to consumer privacy concerns relating to purchasing items over the Internet, security breaches, and failures of Internet infrastructure and communications systems. If consumer confidence in making purchases over the Internet declines as a result of privacy or other concerns, e-commerce net sales could decline. We may be required to incur increased costs to address or remedy any system failures or security breaches.

We may be unable to manage expanding operations and the complexities of our multi-channel strategy, which could harm results of operations.

During the past few years, with the implementation of a multi-channel business model, our overall business has become substantially more complex. This increasing complexity has resulted and is expected to continue to result in increased demands on managerial, operational and administrative resources and has forced us to develop new expertise. In order to manage our complex multi-channel strategy, we will be required to, among other things:

We may be unable to anticipate changing customer preferences and to respond in a timely manner by adjusting merchandise offerings, which could result in lower sales.

Future success will depend largely on our ability to continually select the right merchandise assortment, maintain appropriate inventory levels and creatively present merchandise in a way that is appealing to customers. Consumer preferences cannot be predicted with certainty, as they continually change and vary from region to region. On average, we begin the design process for apparel nine to ten months before merchandise is available to customers, and we typically begin to make purchase commitments four to six months in advance. These lead times make it difficult for us to respond quickly to changing consumer preferences and amplify the consequences of any misjudgments we might make in anticipating customer preferences. Consequently, if we misjudge our customers’ merchandise preferences or purchasing habits, our sales may decline significantly, and we may be required to mark down certain products to significantly lower prices to sell excess inventory, which would result in lower margins.

We depend on key vendors for timely and effective sourcing and delivery of our merchandise. If these vendors are unable to timely fill orders or meet quality standards, we may lose customer sales and our reputation may suffer.

The direct business depends largely on the ability to fulfill orders on a timely basis, and the direct and retail businesses depend largely on our ability to keep appropriate levels of inventory in the distribution center and stores. As we grow the retail business, we may experience difficulties in obtaining sufficient manufacturing capacity from vendors to produce merchandise. We generally maintain non-exclusive relationships with multiple vendors that manufacture our merchandise. However, we have no contractual assurances of continued supply, pricing or access to new products, and any vendor could discontinue selling to us at any time. If we were required to change vendors or if a key vendor was unable to supply desired merchandise in sufficient quantities on acceptable terms, particularly in light of the recent trend toward consolidating more merchandise purchases with fewer vendors, we could experience delays in filling customer orders or delivering inventory to stores until alternative supply arrangements were secured, which could result in lost sales and a decline in customer satisfaction.

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Increasing reliance on foreign vendors will subject us to uncertainties that could impact our cost to source merchandise and delay or prevent merchandise shipments.

As we expand retail stores and merchandise volume requirements increase, we expect to source merchandise directly from foreign vendors, particularly those located in Asia as well as Central America. During fiscal 2006, we anticipate that we will be the importer of record on approximately 30% of total merchandise purchases. This will expose us to new and greater risks and uncertainties, the occurrence of which could substantially impact our ability to source merchandise through foreign vendors and to realize any perceived cost savings. We will be subject to, among other things:

The United States and the European Union have imposed trade quotas on certain apparel and textile categories from the Peoples Republic of China. The memorandum of understanding between the United States and The Peoples Republic of China, which outlines the new quotas, will be in effect through December 2008. Our sourcing strategy is designed to allow us to adjust to potential shifts in availability of apparel following the expiration of quotas for World Trade Organization member countries, and the re-imposition of quotas for apparel and textiles exported from the Peoples Republic of China. However, sourcing operations may be adversely affected by trade limits, political and/or financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, and/or other trade disruptions.

We may be unable to fill customer orders efficiently, which could harm customer satisfaction.

If we are unable to efficiently process and fill customer orders, customers may cancel or refuse to accept orders, and customer satisfaction could be harmed. We are subject to, among other things:

We have a liberal merchandise return policy, and we may experience a greater number of returns than we anticipate.

As part of our customer service commitment, we maintain a liberal merchandise return policy that allows customers to return any merchandise, virtually at any time and for any reason, and regardless of condition. We make allowances in financial statements for anticipated merchandise returns based on historical return rates and future expectations. These allowances may be exceeded, however, by actual merchandise returns as a result of many factors, including changes in the merchandise mix, size and fit, actual or perceived quality, differences between the actual product and its presentation in catalogs or on the website, timeliness of delivery, competitive offerings and consumer preferences or confidence. Any significant increase in merchandise returns or merchandise returns that exceed allowances would result in adjustments to the sales return accrual and to cost of sales and could have a material and adverse affect on financial condition, results of operations and cash flows.

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Quarterly results of operations fluctuate and may be negatively impacted by a failure to predict sales trends and by seasonal influences.

Net sales, operating results, liquidity and cash flows have fluctuated, and will continue to fluctuate, on a quarterly basis, as well as on an annual basis, as a result of a number of factors, including, but not limited to, the following:

Our results continue to depend materially 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. If, for any reason, we were to realize lower-than-expected sales or profits during the November and December holiday selling season, our financial condition, results of operations, including related gross margins, and cash flows for the entire fiscal year would be materially adversely affected.

We face substantial competition from discount retailers in the women’s apparel industry.

We face substantial competition from discount retailers, such as Kohl’s and Target, for basic elements in our merchandise lines, and net sales may decline or grow more slowly if we are unable to differentiate our merchandise and shopping experience from these discount retailers. In addition, the retail apparel industry has experienced significant price deflation over the past several years largely due to the downward pressure on retail prices caused by discount retailers. We expect this price deflation to continue as a result of the expiration of quota restrictions on the importing of apparel into the United States from foreign countries that are members of the World Trade Organization. This price deflation may make it more difficult for us to maintain gross margins and to compete with retailers that have greater purchasing power than we have. Furthermore, because we currently source a significant percentage of our merchandise through intermediaries and from suppliers and manufacturers located in the United States and Canada, where labor and production costs, on average, tend to be higher, gross margins may be lower than those of competing retailers.

Our success is dependent upon our senior management team.

Future success depends largely on the efforts of Dennis Pence, Chairman and Chief Executive Officer; Georgia Shonk-Simmons, President and Chief Merchandising Officer; Melvin Dick, Executive Vice President and Chief Financial Officer; and Dan Griesemer, Executive Vice President, Sales and Marketing. The loss of any of these individuals or other key personnel could have a material adverse effect on the business. Furthermore, the location of our corporate headquarters in Sandpoint, Idaho, may make it more difficult to replace key employees who leave us, or to add qualified employees we will need to manage our further growth.

Prior to joining our company, Melvin Dick, our Executive Vice President and Chief Financial Officer, served as the lead engagement partner for Arthur Andersen’s audit of WorldCom’s consolidated financial statements for the fiscal year ended December 31, 2001, and its subsequent review of WorldCom’s condensed consolidated financial statements for the fiscal quarter ended March 31, 2002. The ongoing investigation of the WorldCom matter may require Mr. Dick’s attention, which may impair his ability to devote his full time and attention to our company. Further, Mr. Dick’s association with the WorldCom matter may adversely affect customers’ or investors’ perception of our company.

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Lower demand for merchandise could reduce gross margins and cause us to slow our retail expansion.

Our merchandise is comprised primarily of discretionary items, and demand is affected by a number of factors that influence consumer spending. Lower demand may cause us to move more full-price merchandise to clearance, which would reduce gross margins, and could adversely affect liquidity (including compliance with our debt covenants) and, therefore, slow the pace of retail expansion. We have maintained conservative inventory levels, which we believe will make us less vulnerable to sales shortfalls. If we elect to carry relatively low levels of inventory in anticipation of lower demand but demand is stronger than we anticipated, we may be forced to backorder merchandise, which may result in lost sales and lower customer satisfaction.

Our tax collection policy may expose us to the risk that we may be assessed for unpaid taxes.

Our multi-channel business model subjects us to state and local taxes in numerous jurisdictions, including state income, franchise, and sales and use tax. We collect these taxes in any jurisdiction in which we have a physical presence. While we believe we have paid or accrued for all taxes based on our interpretation of applicable law, tax laws are complex and interpretations differ from state to state. In the past, some taxing jurisdictions have assessed additional taxes and penalties on us, asserting either an error in our calculation or an interpretation of the law that differed from our own. It is possible that taxing authorities may make additional assessments in the future. In addition to taxes, penalties and interest, these assessments could cause us to incur legal fees associated with resolving disputes with taxing authorities.

Additionally, changes in state and local tax laws, such as temporary changes associated with “tax holidays” and other programs, require us to make continual changes to our collection and reporting systems that may relate to only one taxing jurisdiction. If we fail to update our collection and reporting systems in response to these changes, any over collection or under collection of sales taxes could subject us to interest and penalties, as well as private lawsuits and damage to our reputation.

Any determination that we have a material weakness in our internal control over financial reporting could have a negative impact on our stock price.

We are applying significant management and financial resources to document, test, monitor and enhance internal control over financial reporting in order to meet the requirements of the Sarbanes-Oxley Act of 2002. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, the effectiveness of internal control may vary over time. We cannot be certain that internal control systems will be adequate or effective in preventing fraud or human error. Any failure in the effectiveness of internal control over financial reporting could have a material effect on financial reporting or cause us to fail to meet reporting obligations, which upon disclosure, could negatively impact the market price of the common stock.

The stock price has fluctuated and may continue to fluctuate widely.

The market price for our common stock has fluctuated and has been and will continue to be significantly affected by, among other factors, quarterly operating results, changes in any earnings estimates publicly announced by us or by analysts, customer response to merchandise offerings, the size of catalog mailings, the timing of retail store openings or of important holiday seasons relative to our fiscal periods, seasonal effects on sales and various factors affecting the economy in general. The reported high and low closing sale prices of our common stock were $22.97 per share and $10.75 per share, respectively, during the fiscal year ended January 28, 2006. In addition, the Nasdaq National Market has experienced a high level of price and volume volatility and market prices for the stock of many companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies.

The largest stockholders may exert influence over our business regardless of the opposition of other stockholders or the desire of other stockholders to pursue an alternate course of action.

Dennis Pence, our Chairman and Chief Executive Officer, and Ann Pence, our former Vice Chairman, have informed the company that they have an informal arrangement pursuant to which they have agreed to vote their shares together. This arrangement is not in writing, and can be terminated at any time, and there is no assurance that Dennis Pence and Ann Pence will continue to act together with respect to their shares. Because of their informal arrangement, Dennis Pence and Ann Pence together may be deemed to beneficially own, directly and indirectly, approximately 36.8% of outstanding common stock as of December 31, 2005. Dennis Pence and Ann Pence acting together, or either of them acting independently, could have significant influence over any matters submitted to stockholders, including the election of directors and approval of business combinations, and could delay, deter or prevent a change of control of the company, which may adversely affect the market price of common stock. The interests of Dennis Pence and Ann Pence may not always coincide with the interests of other stockholders.

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Provisions in the charter documents and Delaware law may inhibit a takeover and discourage, delay or prevent stockholders from replacing or removing current directors or management.

Provisions in our Certificate of Incorporation and Bylaws may have the effect of delaying or preventing a merger with or acquisition of us, even where the stockholders may consider it to be favorable. These provisions could also prevent or hinder an attempt by stockholders to replace current directors and include:

Because the Board of Directors appoints management, any inability to effect a change in the Board of Directors may also result in the entrenchment of management.

We are also subject to Section 203 of the Delaware General Corporation Law, which, subject to exceptions, prohibits a Delaware corporation from engaging in any business combination with an interested stockholder for a period of three years following the date that the stockholder became an interested stockholder. The preceding provisions of our Certificate of Incorporation and Bylaws, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management.

Item 1B. Unresolved Staff Comments

None.

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Item 2. PROPERTIES

Stores, Distribution Center and Corporate Facility

Our principal executive and administrative offices are located at One Coldwater Creek Drive, Sandpoint, Idaho 83864. Our telephone number is (208) 263-2266. The general location, use and approximate size of our principal properties as of January 28, 2006 are set forth below:

We believe that our corporate offices, expanded distribution center and call centers will meet our operational needs for the foreseeable future.

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The following table summarizes the geographic location of our stores at the end of fiscal 2005 and fiscal 2004:

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Item 3. LEGAL PROCEEDINGS

Legal Proceedings

We are, from time to time, involved in various legal proceedings incidental to the conduct of business. In addition, from time to time we have received claims that products and/or the manner in which we conduct business infringe on the intellectual property rights of third parties. In the opinion of management, our gross liability, if any, and without any consideration given to the availability of insurance or other indemnification, under any pending litigation or administrative proceedings, would not materially affect our consolidated financial position, results of operations or cash flows.

Government Regulation

The direct business is subject to the Merchandise Mail Order Rule and related regulations promulgated by the Federal Trade Commission. While we believe we are in material compliance with these regulations, no assurance can be given that new laws or regulations will not be enacted or adopted which might adversely affect operations.

Our multi-channel business model subjects us to state and local taxes in numerous jurisdictions, including state income, franchise, and sales and use tax. We collect these taxes in any jurisdiction in which we have a physical presence. While we believe we have paid or accrued for all taxes based on our interpretation of applicable law, tax laws are complex and interpretations differ from state to state. In the past, some taxing jurisdictions have assessed additional taxes and penalties on us, asserting either an error in our calculation or an interpretation of the law that differed from our own. It is possible that taxing authorities may make additional assessments in the future. In addition to taxes, penalties and interest, these assessments could cause us to incur legal fees associated with resolving disputes with taxing authorities.

Additionally, changes in state and local tax laws, such as temporary changes associated with “tax holidays” and other programs, require us to make continual changes to our collection and reporting systems that may relate to only one taxing jurisdiction. If we fail to update our collection and reporting systems in response to these changes, any over collection or under collection of sales taxes could subject us to interest and penalties, as well as private lawsuits and damage to our reputation.

Various states have attempted to collect back sales and use taxes from direct marketers whose only contacts with the taxing state are solicitations through the mail or the Internet, and whose subsequent delivery of purchased goods is by mail or interstate common carriers. We may be subject to these attempts in states in which we have no physical presence. However, the U.S. Supreme Court has held that these states, absent congressional legislation, may not impose tax collection obligations on an out-of-state mail order or Internet company. We anticipate that any legislative changes regarding direct marketers, if adopted, would be applied only on a prospective basis.

Many of our products are manufactured outside the United States and are subject to existing or potential duties, tariffs or quotas that may limit the quantity of products we are allowed to import or increase the cost of such products. To date, we have not been restricted by quotas in the operation of the business, and customs duties have not comprised a material portion of the total cost of most of our products. As we expand retail operations and begin to source more merchandise overseas, however, business may be impacted by quotas and the imposition of customs duties or tariffs. We are also subject to foreign governmental regulation and trade restrictions, including U.S. retaliation against certain prohibited foreign activities, with respect to our product sourcing.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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DIRECTORS AND EXECUTIVE OFFICERS

The table below sets forth the name, current age and current position of our directors and executive officers as of March 31, 2006:

Dennis C. Pence co-founded Coldwater Creek in 1984, and has served as a Director since our incorporation in 1988, serving as the Board’s Chairman since July 1999 and as our Vice-Chairman prior to that. Since September 26, 2002, as well as from 1984 through December 2000, Mr. Pence has served as our Chief Executive Officer. From June 4, 2002, to September 25, 2002, he provided his executive management services to us. From January 5, 2002, to June 3, 2002, Mr. Pence served as our Interim Chief Financial Officer and Treasurer. From January 1, 2001 to January 4, 2002, Mr. Pence was semi-retired. Mr. Pence has also served as Chairman of the Board’s Executive Committee since its formation on May 20, 2000, and, as Secretary since July 1998. From 1984 through 2000, Mr. Pence also served as our President. From April 1999 to December 2000, he was also the President of our Internet Commerce Division. Prior to co-founding Coldwater Creek, Mr. Pence was employed by Sony Corp. of America, a publicly held manufacturer of audio, video, communication, and information technology products, from 1975 to 1983, where his final position was National Marketing Manager - Consumer Video Products. Mr. Pence served as a Board member of Panhandle State Bank from March 2002 through December 2005.

Georgia Shonk-Simmons has served as a Director, as well as our President, since January 1, 2001. Since September 26, 2002, Ms. Shonk-Simmons has served as our Chief Merchandising Officer. From January 1, 2001, to September 25, 2002, Ms. Shonk-Simmons served as our Chief Executive Officer. From April 1999 to December 2000, Ms. Shonk-Simmons served as President of our Catalog & Retail Sales Division. Ms. Shonk-Simmons joined us as Chief Merchant and Vice President of Merchandising in June 1998. From 1994 to 1998, Ms. Shonk-Simmons was Executive Vice President of the Newport News Catalog Division of Spiegel, Inc., a publicly held international retailer. Prior to that, from 1981 to 1994, Ms. Shonk-Simmons held a number of other positions of increasing responsibility with Spiegel, including Vice President of Merchandising for Spiegel Catalog beginning in 1991. Prior to joining Spiegel, Ms. Shonk-Simmons held various buyer positions with Lytton’s, Carson Pirie Scott and Hahne’s.

Melvin Dick has served as our Executive Vice President and Chief Financial Officer since June 2002. Prior to joining Coldwater Creek, Mr. Dick was employed by and was a partner at Arthur Andersen LLP from 1975 through May 2002. While at Arthur Andersen LLP he held a number of progressively responsible positions including serving as the global managing partner of Andersen’s technology, media and communications practice and as a member of Andersen’s Worldwide Board of Partners.

Dan Griesemer has served as our Executive Vice President of Sales and Marketing since January 2005. From April 2004 to December 2004, Mr. Griesemer served as our Executive Vice President of Retail. From October 2001 to April 2004, Mr. Griesemer served as our Senior Vice President of Retail. Prior to joining Coldwater Creek, from 1989 to 2000, Mr. Griesemer held a number of progressively responsible positions with, and ultimately served as Divisional Merchandise Manager for Gap Inc. From 1983 to 1989, Mr. Griesemer worked in a variety of positions at Federated Department Stores.

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Dan Moen has served as our Senior Vice President and Chief Information Officer since September 20, 2004. From June 2004 to September 2004, Mr. Moen served as our Interim Vice President and Chief Information Officer. From July 2003 to May 2004, Mr. Moen served as our Vice President of Marketing and Business Intelligence. From October 2002 to June 2003, Mr. Moen served as our Divisional Vice President of Business Intelligence. From August 2001 to September 2002, Mr. Moen served as our Divisional Vice President of Marketing. From August 2000 to July 2001, Mr. Moen was the Data Warehouse Manager for InfoSpace. From June 1999 to July 2000, Mr. Moen was the Director of Database Marketing for Network Commerce. From May 1995 to May 1999, Mr. Moen was employed by Coldwater Creek in various capacities in its Marketing Department.

Gerard El Chaar has served as our Senior Vice President of Operations since January 1, 2005. From March 2002 to December 2004, Mr. El Chaar served as our Vice President of Distribution. From January 2001 to February 2002, Mr. El Chaar served as our Divisional Vice President of Distribution. From October 2000 to December 2000, Mr. El Chaar served as our Director of Distribution. From January 2000 to October 2000, Mr. El Chaar was Senior Director of International Operations with eToys Inc. where he was responsible for Customer Service and Distribution in the United Kingdom and Belgium. From January 1998 to December 1999, Mr. El Chaar was the Director of Engineering for Amazon.com.

James R. Alexander has served as a Director since March 2000, as well as a member of the Board’s Audit Committee since July 2000, as a member of the Board’s Compensation Committee since November 2002, and as its Chairman since June 2004. Mr. Alexander has also served as Chairman of the Board’s Nominating Committee from April 2004 to June 2004, and as a member of that committee since April 2004. From July 2000 to July 2001, Mr. Alexander also served as a member of the Board’s Compensation Committee. Mr. Alexander had previously served as a Director, as well as Chairman of the Board’s Compensation Committee, from 1994 to 1998, before declining to stand for re-election due to other professional obligations. Mr. Alexander has been an independent catalog consultant for over 25 years, serving a variety of mail order retailers of apparel, gifts and home decor. Mr. Alexander is President of Alexander & Co., LLC, a direct marketing and retail consulting firm.

Jerry Gramaglia has served as a Director, as well as a member of the Board’s Compensation Committee and as a member of the Board’s Nominating Committee since June 2004. In May 2002, Mr. Gramaglia joined Arrowpath Venture Capital where he now serves as a Venture Partner. From June 1998 to May 2002, Mr. Gramaglia served as Chief Marketing Officer and subsequently as President and Chief Operations Officer for E*TRADE Group Inc., a leading provider of electronic financial services. Mr. Gramaglia began his career at Procter & Gamble and subsequently held marketing and general management positions for Nestle, PepsiCo, Imasco and Sprint.

Curt Hecker has served as a Director, as well as a member of the Board’s Audit Committee, since August 1995, as a member of the Board’s Executive Committee since July 2001, as Chairman of the Board’s Nominating Committee since June 2004 and as a member of that committee since April 2004. Mr. Hecker also served as Chairman of the Board’s Compensation Committee from July 2001 to June 2004. Since October 1997, Mr. Hecker has served as President, Chief Executive Officer and a Board member of publicly held Intermountain Community Bancorp as well as Chief Executive Officer and a Board member of Panhandle State Bank, Intermountain Community Bancorp’s wholly-owned subsidiary. From August 1995 to October 2001, Mr. Hecker also served as President of Panhandle State Bank. Prior to joining Panhandle State Bank, Mr. Hecker held various management positions with West One Bank.

Kay Isaacson-Leibowitz has served as a Director since February 2005 and as a member of the Board’s Compensation Committee since June 2005. Mrs. Isaacson-Leibowitz served as Executive Vice President of Beauty Niches for Victoria’s Secret Stores from July 2003 to February 2006. From 1995 to 2003, Mrs. Isaacson-Leibowitz served as Executive Vice President of Merchandising for Victoria’s Secret Stores. From 1994 to 1995, Mrs. Isaacson-Leibowitz served as acting President and Senior Vice President of Merchandising for Banana Republic. Mrs. Isaacson-Leibowitz also serves as Chairman of the Advisory Board for City University of New York Honors College and is a Board member for World of Children.

Robert H. McCall, a Certified Public Accountant, has served as a Director since 1994, as Chairman of the Board’s Audit Committee since February 1995, as a member of the Board’s Nominating Committee since April 2004, and as a member of the Board’s Compensation Committee since June 2005. Mr. McCall has also served as a member of the Board’s Executive Committee since its formation in May 2000. From February 1995 to July 2000, Mr. McCall also served as a member of the Board’s Compensation Committee. Since 1981, Mr. McCall has been President of McCall & Landwehr, P.A., a certified public accounting firm.

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PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES

Price Range of Common Stock and Dividend Policy

Our common stock has been quoted on the Nasdaq National Market under the symbol “CWTR” since our initial public offering on January 29, 1997. On January 28, 2006, we had 425 stockholders of record and 92,020,789 shares of $0.01 par value common stock outstanding. On December 10, 2005, our Board of Directors declared a 50% stock dividend having the effect of a 3-for-2 stock split, on our issued and outstanding common stock. The new shares were distributed on January 13, 2006. The stock prices below reflect the effect of this stock dividend.

The following table sets forth certain sales price data for our common stock for the periods indicated:

We have never paid any cash dividends on our common stock and do not expect to declare cash dividends in the foreseeable future. Additionally, we are currently restricted from paying cash dividends under our credit facility.

The information required by this item concerning equity compensations plans is incorporated by reference to “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K.

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Item 6. SELECTED FINANCIAL DATA

The selected financial and operating data in the following table sets forth:

(i) balance sheet data as of January 28, 2006 and January 29, 2005 and statement of operations data for the respective 12-month periods then ended, derived from our consolidated financial statements audited by KPMG LLP, independent registered public accountants, which are included elsewhere in this Annual Report on Form 10-K,

(ii) balance sheet data as of January 31, 2004, derived from our consolidated financial statements audited by KPMG LLP, independent registered public accountants, which are not included elsewhere in this Annual Report on Form 10-K,

(iii) statement of operations data for the 12-month period ended January 31, 2004, derived from our consolidated financial statements audited by KPMG LLP, independent registered public accountants, which are included elsewhere in this Annual Report on Form 10-K,

(iv) balance sheet data as of February 1, 2003 and statement of operations data for the 11-month transition period then ended, derived from our consolidated financial statements audited by KPMG LLP, independent registered public accountants, which are not included elsewhere in this Annual Report on Form 10-K,

(v) balance sheet data as of March 2, 2002, and statement of operations data for the 12-month period then ended, derived from our consolidated financial statements audited by Arthur Andersen LLP which are not included elsewhere in this Annual Report on Form 10-K, and

(vi) selected operating data as of and for the periods indicated.

The information below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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” elsewhere in this Annual Report on Form 10-K for the fiscal year ended January 28, 2006. We assume no future obligation to update our forward-looking statements or to provide periodic updates or guidance.

The following narrative is designed to provide readers of our financial statements with a detailed analysis of the business through the eyes of management. This includes an analysis of financial condition, results of operations, liquidity and capital resources and various other factors that may affect future results. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is comprised of the following sections:

References to a fiscal year refer to the calendar year in which the fiscal year commences. Our fiscal year ends on the Saturday nearest January 31^st. This reporting schedule is followed by the majority of national retail companies. This floating fiscal year-end typically results in thirteen-week fiscal quarters and a fifty-two week fiscal year, but will occasionally give rise to an additional week resulting in a fourteen-week fiscal fourth quarter and a fifty-three week fiscal year. The fiscal years ended January 28, 2006 (“fiscal 2005”), January 29, 2005 (“fiscal 2004”) and January 31, 2004 (“fiscal 2003”) consisted of 52 weeks. The fiscal year beginning in 2006 will be a fifty-three week fiscal year.

We encourage you to read the Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying 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 retailer generating $788.2 million in net sales in fiscal 2005. Our proprietary merchandise assortment reflects a sophisticated yet relaxed and casual lifestyle. Commitment to providing superior customer service is manifest in all aspects of our business. We reach customers through an expanding base of retail stores, as well as catalog and e-commerce channels. Our merchandise assortment, retail stores, catalogs and e-commerce website are designed to appeal to women who are 35 years and older with average household income in excess of $75,000.

The Company’s goal is to become one of the premier retailers of specialty women’s apparel in the United States. The strategy to realize this vision is to offer our customer a compelling merchandise assortment with superior customer service through all three sales channels.

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Several years ago, we began the evolution from a direct marketer to a multi-channel specialty retailer. During this evolution, we tested various scaleable retail store models, strengthened the retail management team, refined the merchandise assortment and integrated our retail and direct merchandise planning and inventory management functions. We intend to continue to build infrastructure in the coming years to support the planned growth of our retail business.

The catalog business is a significant sales channel and acts as an efficient marketing platform to cross-promote the website and retail stores. During fiscal 2005, we mailed 113 million catalogs. We use the e-commerce website, www.coldwatercreek.com, to cost-effectively expand our customer base and provide another convenient shopping alternative for customers. As of January 28, 2006, the database of e-mail addresses to which we regularly send customized e-mails totaled approximately 2.9 million.

Recent Developments and Strategic Initiatives

Retail Expansion. We expect the retail business to be the key driver of our growth strategy. As of January 28, 2006, we operated 174 full-line retail stores, as well as two resort stores and 22 merchandise clearance outlet stores in 133 markets. We currently plan to open a total of approximately 65 full-line retail stores in fiscal 2006. We either have signed, fully executed leases or are currently in lease agreement negotiations for the majority of those stores. The pace, scope and size of the retail store expansion will be influenced by the economic environment, available working capital, our ability to obtain favorable terms on suitable locations for stores and, if necessary, external financing.

National Magazine Advertising. One of the primary vehicles for attracting new customers to the Coldwater Creek brand has been the placement of multiple-page advertisements in national magazines. We significantly increased this national advertising campaign in 2005. These advertisements are designed to drive sales to all of our channels, while promoting a heightened awareness of the Coldwater Creek brand. We have placed our advertisements in high-circulation publications popular with our customer such as Oprah, Good Housekeeping, Better Homes & Gardens, Country Living, Southern Living, Martha Stewart and Woman’s Day. We plan to continue our national advertising campaign in 2006.

Direct Sourcing. Our merchandise has historically been purchased primarily through domestic importers who procured the merchandise on our behalf. While this practice has proved to be successful, we now believe we can benefit by working directly with foreign manufacturers. These benefits include improved control over the production, quality and transportation of our merchandise, which we believe will ultimately result in faster speed to market, improved quality and margins. In order to realize these benefits, we launched our direct sourcing initiative in the third quarter of fiscal 2004. During fiscal 2005 we imported approximately 15% of our total merchandise purchases. During fiscal 2006 we anticipate that we will be the importer of record on approximately 30% of our total merchandise purchases.

Coldwater Creek Catalog. In fiscal 2004, we began mailing “retail mailers,” which were similar to our regular catalogs, but with a significantly smaller page count. Retail mailers featured a limited assortment of merchandise and were targeted to customers who reside near our premium retail stores. At the same time, we began testing the response of these customers to a full-size catalog that featured a larger assortment of merchandise. These tests revealed that customers responded more positively to a full-size catalog and ultimately led to the introduction of our Coldwater Creek catalog in the first quarter of fiscal 2005.

Coldwater Creek ~ The Spa. In the fourth quarter of fiscal 2005, we announced plans to expand on our legacy of providing exceptional customer service as we test a new concept, Coldwater Creek ~ The Spa. Based on positive response to this concept from focus groups comprised of both customers and non-customers, we learned there is a strong familiarity with the Coldwater Creek brand and its focus on providing exceptional customer service, as well as a broad consensus that the Company is well-suited to provide this new service. The initial six spa locations in our test, each encompassing approximately 5,000 square feet, are scheduled to be opened during the first half of fiscal 2006.

Co-Branded Credit Card Program. In the second quarter of fiscal 2005, we introduced our co-branded credit card program. To encourage pre-approved customers to accept the credit card, we offer a one-time discount on merchandise purchased at the time of application. Credit card holders can earn points on purchases made with the credit card at Coldwater Creek and other businesses where the card is accepted. Cardholders who accumulate the requisite number of points are issued a coupon towards the purchase of Coldwater Creek merchandise. We also receive from the issuing bank a non-refundable, non-recurring marketing fee for each new account opened and activated. During fiscal 2005, approximately 153,000 cards were activated resulting in a fee of $12.3 million.

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West Virginia Distribution Center Expansion. During the fourth quarter of fiscal 2005, we entered into definitive agreements related to the expansion of our distribution and call center facility in Mineral Wells, West Virginia. Our existing distribution and call center facility, encompassing approximately 610,000 square feet on a 60 acre site, is leased from Wood County Development Authority (“WCDA”), the owner of the site, under an agreement originally entered into in June 1998. The approximately 350,000 square foot planned expansion of this facility on the existing site is expected to be completed by the end of fiscal 2006.

Based on the expected cost of the expansion, the anticipated completion date and expected interest rates for the notes issued by WCDA to finance the expansion, maximum future lease payments (undiscounted) under the amended lease are estimated to be $85.6 million. The original lease for our West Virginia facility has historically been accounted for as an operating lease for financial reporting purposes. The amended lease encompassing the entire expanded facility is also expected to be accounted for as an operating lease, subject to final confirmation of the accounting treatment upon completion of the expansion. See “Note 19. West Virginia Distribution Center Expansion” to the consolidated financial statements for further details.

Results of Operations

On December 10, 2005, a 50% stock dividend was declared by the Board of Directors. This dividend had the effect of a 3-for-2 stock split. Unless otherwise indicated, the common stock outstanding, retained earnings and net income per share amounts appearing in the financial statements included herein reflect this stock dividend.

Fiscal 2005 Summary

The following table sets forth certain information regarding the components of our consolidated statements of operations for the fiscal year ended January 28, 2006 compared with the fiscal year ended January 29, 2005. This table is provided to assist in assessing differences in our overall performance:

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Fiscal 2005 Compared With Fiscal 2004

Consolidated Net Sales. The increase in consolidated net sales during the fiscal year ended January 28, 2006, was primarily due to the opening of 60 premium retail stores, an expanded national magazine advertising campaign and the introduction of the Coldwater Creek catalog. We also saw an increase in Internet channel net sales, primarily as a result of an increase in both the size of our e-mail database and the frequency with which we e-mailed our customers. Revenue related to the introduction of a co-branded credit card program in the fiscal 2005 second quarter contributed $12.3 million to the increase.

These positive impacts were partially offset by decreased catalog channel net sales, which we believe resulted from customers choosing to order via the Internet or our premium retail stores. Discounts offered through a co-branded credit card program and national magazine advertising also decreased consolidated net sales.

Consolidated Gross Profit Dollars and Rate. The increase in consolidated gross profit dollars was primarily due to the increase in consolidated net sales. Also contributing to the increase in consolidated gross profit dollars, although to a lesser extent, were the factors discussed below that impacted the consolidated gross profit rate.

The increase in the consolidated gross profit rate was primarily attributable to improvements in overall merchandise margins of 1.7 percentage points. This improvement was primarily the result of lower merchandise costs due to higher purchase volumes relative to the prior year due to our retail expansion. To a lesser extent, our direct sourcing initiative, which enabled us to purchase merchandise directly from manufacturers, improved merchandise margins.

Also contributing to the improved consolidated gross profit rate was the co-branded credit card program, improved leveraging of premium retail store occupancy costs and an increase in full-price sales compared to disposition sales. The credit card program contributed revenues of $12.3 million. We estimate that this contribution was offset by the related discounts of approximately $4.6 million offered upon activation. The leveraging of premium retail store occupancy costs improved 0.7 percentage points as a result of improved premium retail store net sales and full-price sales compared to disposition sales increased 0.7 percentage points versus the prior year.

Our consolidated cost of sales includes vendor allowances of $6.7 million in fiscal 2005 and $5.0 million in fiscal 2004. These increases were due to higher purchase volumes relative to the prior year due to our retail expansion. These allowances were credited to cost of sales as the related merchandise was sold.

Consolidated Selling, General and Administrative Expenses. The increase in consolidated selling, general and administrative (“SG&A”) expenses was primarily the result of incremental personnel costs related to retail expansion, including retail administrative staff wages, store employee wages, related taxes and employee benefits. These personnel costs increased $33.4 million, or 49.9%, from fiscal 2004.

Also contributing to the increase in consolidated SG&A expenses were increases in national magazine advertising, catalog expenses and premium retail store advertising. National magazine advertising expense increased $8.9 million, or 281.6%, primarily due to a 75% increase in the number of magazines and page count per advertisement.

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Catalog expenses increased $7.9 million, or 12.7%. Approximately $3.9 million of this increase was attributed to the distribution of 6.7 million more catalogs than in the prior year. We mailed 5.4 million more catalogs to customers and distributed approximately 1.3 million more catalogs through an expanding base of retail stores. Approximately $3.0 million of the increase was attributed to incremental costs associated with printing and distributing catalogs, while approximately $1.0 million was due to promotional activities related to our co-branded credit card program.

An increase of $4.5 million, or 74.5%, in premium retail store advertising also impacted SG&A expenses. This increase was comprised of $3.4 million in retail promotional costs, including banners and other signage, and $1.1 million related to the cost of merchandise associated with the Gift with Purchase promotions. These expenses have increased as a result of retail expansion.

Consolidated Selling, General and Administrative Expenses Expressed as a Percentage of Consolidated Net Sales. Consolidated selling, general and administrative expenses expressed as a percentage of consolidated net sales (“SG&A rate”) increased primarily due to an increase of 1.0 percentage point in national magazine advertising.

Also contributing to the increase in SG&A rate was a reduction of 1.0 percentage point in the leveraging of personnel costs. We primarily attribute this to ongoing efforts to build the personnel infrastructure in anticipation of future growth related to retail expansion. Additionally, the investment in premium retail store advertising increased 0.3 percentage points as a result of increased retail promotional costs, including banners and other signage. We made this investment in an effort to increase store traffic and enhance the shopping experience.

Consolidated Interest, Net, and Other. The increase in consolidated interest, net and other was primarily due to increased interest income on the investment of our available cash. Also, in the prior year, we expensed approximately $0.3 million of unamortized origination fees associated with a previous credit agreement. We expensed these fees in anticipation of obtaining the current credit agreement. See “Note 6. Revolving Line of Credit” to the consolidated financial statements for further details.

Consolidated Provision for Income Taxes. The increase in consolidated provision for income taxes was the result of higher pre-tax income. The increase in consolidated provision for income taxes expressed as a percentage of pre-tax income was due to higher state income taxes.

Operating Segment Results

Net Sales. The following table summarizes our net sales by segment and is provided to assist in assessing differences in net sales by segment (in thousands):

Retail Segment. During fiscal 2005 we opened 60 premium retail stores. These new stores contributed $73.6 million in net sales. Additionally, premium retail stores that were open during only a portion of fiscal 2004, but were open during the entirety of fiscal 2005, contributed incremental net sales of $53.5 million. We believe expanded national magazine advertising and the introduction of Coldwater Creek catalog also contributed to the growth in premium retail store net sales.

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Retail segment net sales also increased as a result of a $7.0 million, or 23.9%, increase in outlet and resort store net sales. We primarily attribute this increase to the addition of three outlet stores during fiscal 2005.

Additionally, the non-refundable, non-recurring fee for each new pre-approved account opened and activated under the new co-branded credit card program contributed $7.4 million to retail segment net sales during fiscal 2005.

Direct Segment. The growth in Internet business net sales was primarily driven by an expanding database of e-mail addresses and an increase in the frequency of e-mails sent to customers in that database. Our database of e-mail addresses increased 22.2% during fiscal 2005, while the frequency of e-mails sent increased approximately 59%. Additionally, the co-branded credit card program contributed $3.3 million in fee revenues to the Internet business net sales.

Our catalog business net sales are derived from orders taken from customers over the phone or through the mail. Catalogs are used as a brand marketing vehicle to drive sales in all channels. 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 catalog net sales. We primarily attribute the decrease in the net sales of the catalog business to customers choosing to purchase merchandise through other channels. Partially offsetting this decrease were catalog net sales derived from both our expanded national magazine advertising and the introduction of our Coldwater Creek catalog. Additionally, the co-branded credit card program contributed fee revenues of $1.6 million to catalog business net sales.

Operating Contribution. The following table summarizes our operating contribution by segment for fiscal 2005 compared with fiscal 2004 (in thousands):

Retail Segment. We primarily attribute the increase in retail segment operating contribution to an increase of $49.7 million, or 68.1%, in premium retail stores operating contribution. Of this $49.7 million increase, we attribute $6.8 million to the credit card fee and $14.7 million to the 60 premium retail stores opened during fiscal 2005. The remaining increase was attributable to stores that were opened prior to fiscal 2005. This improvement was partially offset by a $12.2 million increase in premium retail store administrative and support expenses. These expenses increased primarily as a result of retail expansion.

We primarily attribute the increase in retail segment operating contribution rate to improved merchandise margins and improved leveraging of retail store occupancy expenses. Merchandise margins on net sales from premium retail stores increased 0.9 percentage points. This improvement was primarily the result of lower merchandise costs due to higher purchase volumes relative to the prior year. The increased purchase volume was due to retail expansion. To a lesser extent, the direct-sourcing initiative, which enabled us to purchase merchandise directly from manufacturers, improved merchandise margins. The leveraging of premium retail store occupancy expenses improved 0.7 percentage points during fiscal 2005. This increase in leveraging was the result of improved net sales.

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These positive impacts were partially offset by reduced leveraging of personnel costs associated with the retail expansion and increased investment in premium retail store advertising. The leveraging of personnel costs associated with retail expansion decreased by 1.1 percentage points. These personnel costs primarily included administrative and technical support salaries, store employee wages and related taxes and employee benefits. We primarily attribute this reduced leveraging to ongoing efforts to build personnel infrastructure in anticipation of future growth related to retail expansion. Investment in premium retail store advertising increased 0.3 percentage points as a result of increased retail promotional costs, including banners and other signage. We made this investment in an effort to increase store traffic and enhance the shopping experience.

Direct Segment. The increases in direct segment operating contribution dollars and rate were primarily due to the increase in direct segment net sales, which included credit card fee revenue of $5.0 million. Also contributing was a 3.2 percentage point improvement in merchandise margins on full-price sales from catalog and e-commerce businesses. This improvement was primarily the result of lower merchandise costs due to higher purchase volumes relative to the prior year. The increased purchase volume was due to retail expansion. To a lesser extent, the direct sourcing initiative also contributed to the improvement in merchandise margins.

Corporate and other. The decrease in corporate and other operating contribution dollars and rate was primarily due to an increase in national magazine advertising. This advertising increased $8.9 million, or 281.6%. We believe this advertising is an effective vehicle for increasing Coldwater Creek brand recognition and driving sales to all channels. Also contributing to these decreases was amortization expense of $0.3 million associated with the granting of 113,035 restricted stock units during fiscal 2005. No restricted stock units were granted during fiscal 2004. These negative impacts were partially offset by an improvement of 0.5 percentage points in the leveraging of administrative and technical support employee expenses. We believe we were able to leverage these expenses due to the increase in consolidated net sales.

Fiscal 2004 Compared With Fiscal 2003

The following table sets forth certain information regarding the components of our consolidated statements of operations for the fiscal year ended January 29, 2005 compared with the fiscal year ended January 31, 2004. This table is provided to assist in assessing differences in our overall performance (in thousands):

Consolidated Net Sales. Consolidated net sales increased primarily due to incremental net sales of $97.6 million contributed by the full-line retail stores and, to a lesser extent, to increases of $13.9 million, or 12.7%, in full-price Internet net sales and $4.0 million, or 15.6%, in outlet store net sales. These positive impacts were partially offset by decreases of $39.4 million, or 24.1%, in full-price catalog net sales and $4.7 million, or 37.0%, in clearance catalog net sales. Also negatively impacting net sales was an increase of approximately 0.8 percentage points in direct segment sales returns.

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Consolidated Gross Profit Dollars and Rate. The increase in consolidated gross profit dollars was primarily due to the increase in consolidated net sales. Also contributing to the increase in gross profit dollars were the factors discussed below that impacted consolidated gross profit rate.

The consolidated gross profit rate increased primarily due to an aggregate improvement in merchandise margins of 4.8 percentage points on sales in all channels in fiscal 2004. Merchandise margins on full-price direct segment sales improved approximately 3.7 percentage points in fiscal 2004. Merchandise margins on full-price retail sales increased 3.4 percentage points in fiscal 2004. The merchandise margins on clearance sales improved by 5.5 percentage points in fiscal 2004. Merchandise margins in all channels improved primarily due to lower merchandise prices resulting from higher purchase volumes relative to the prior year due to retail expansion and, to a lesser extent, the concentration of merchandise purchases with fewer, larger vendors. During fiscal 2004, we sourced approximately 72% of apparel from the top 20 vendors, compared with 52% in fiscal 2003.

Also positively impacting the gross profit dollars and rate was an improvement in the leveraging of full-line retail store occupancy costs and an increase in the percentage of total net sales contributed by full-price sales compared with clearance sales. Full-line retail store occupancy costs as a percentage of full-line retail store net sales improved 2.1 percentage points, primarily due to improved full-price retail store net sales. Additionally, gross profit rate was positively impacted by an increase in the percentage of total net sales contributed by full-price sales compared with clearance sales. Full-price sales comprised approximately 87% of total net sales in fiscal 2004, and approximately 85% of total net sales in fiscal 2003.

The consolidated cost of sales includes $5.0 million of vendor rebates in fiscal 2004 and includes $3.1 million in fiscal 2003. These rebates were credited to cost of sales as the related merchandise was sold.

Consolidated Selling, General and Administrative Expenses. The consolidated selling, general and administrative expenses increased primarily due to personnel costs associated with retail expansion. These personnel costs increased $21.3 million, or 46.8%, for fiscal 2004 from fiscal 2003. These personnel costs primarily included store employee wages, administrative and technical support salaries, related taxes and employee benefits. Also contributing to the increase in selling, general and administrative expenses were increased employee incentive compensation and increased retail-specific and brand advertising. In fiscal 2003, earnings fell short of targets and resulted in lower-than-anticipated incentive compensation, which was based on corporate performance, of $1.6 million. In fiscal 2004, earnings performance exceeded targets and resulted in incentive compensation of $8.4 million. Retail advertising increased $2.1 million, or 51.1%, in fiscal 2004 from fiscal 2003, and brand advertising increased $1.7 million, or 100.1%, in fiscal 2004 from fiscal 2003, as we increased national magazine advertising.

These negative impacts were partially offset primarily by decreased catalog expenses, increased customer list rental income (net of expense) and decreased Internet-specific advertising. Catalog expenses decreased $5.2 million, or 7.8%, in fiscal 2004 from fiscal 2003, primarily due to a decrease in catalogs mailed of 8.6% over the same periods. Customer list rental income (net of expense) increased $1.7 million, or 143.5%, primarily due to the decision to reduce catalog mailings to prospective customers. In fiscal 2004, approximately 17% of total catalogs mailed were to prospective customers versus approximately 27% in fiscal 2003. Internet-specific advertising decreased $1.2 million, or 38.4%, in fiscal 2004 from fiscal 2003. We were able to reduce Internet-specific advertising due to the combined effects of an increase in our e-mail database of 7.8% coupled with an initiative we undertook in fiscal 2004 to increase the frequency of the e-mails we send to customers.

Additionally, the fiscal 2003 selling, general and administrative expenses included a (pre-tax) sales tax accrual of approximately $1.0 million for expected tax liabilities resulting from an error in Canadian tax returns related to refunds of the Canadian Goods and Services Tax, known as GST. Please refer to “Note 18. Contingencies” in the Notes to the Consolidated Financial Statements for further information.

Consolidated Selling, General and Administrative Expenses Expressed as a Percentage of Consolidated Net Sales. Consolidated selling, general and administrative expenses were negatively impacted primarily by reduced leveraging of incremental personnel costs associated with retail expansion. As a percentage of total net sales, these costs increased 3.7 percentage points in fiscal 2004 from fiscal 2003. Also negatively impacting consolidated selling, general and administrative expenses was increased employee incentive compensation. As a percentage of total net sales, employee incentive compensation expense increased 1.1 percentage points in fiscal 2004 from fiscal 2003.

Partially offsetting these negative impacts was the strategic decision to mail more catalogs to existing customers relative to the total catalogs mailed during fiscal 2004, compared with fiscal 2003. We generally realize better response rates for mailings to existing customers than to prospecting catalog mailings and have observed falling response rates to prospecting catalog mailings. In fiscal 2004, approximately 83% of total catalogs mailed were to existing customers, versus approximately 73% in fiscal 2003.

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Other Operating Data. Our mailing list consisted of 15.6 million names at both January 29, 2005, and January 31, 2004. Also, the proprietary e-mail address database consisted of 2.4 million names at January 29, 2005, compared with 2.2 million names at January 31, 2004.

Consolidated Provision for Income Taxes. The increase in income tax expense was primarily the result of higher pre-tax income. The increase in the effective income tax rate was due to the nondeductibility for tax purposes of compensation amounts in excess of $1.0 million for certain executive officers.

Operating Segment Results

Net Sales. The following table summarizes our net sales by segment for the 12-month fiscal 2004, compared with the 12-month fiscal 2003 (in thousands):