Coldwater Creek Inc. is working to boost its operating margin by buying more of its womens apparel from overseas garment makers directly and is taking steps to keep tabs on conditions at its suppliers factories. Separately, it plans to launch a co-branded credit card soon and to begin a major expansion of its eastern U.S. distribution facility next year.


The Sandpoint, Idaho, specialty retailer more than doubled its operating margin in its 2004 fiscal year, which ended Jan. 29, says spokesman David Gunter.


Though fast-growing Coldwater Creek bought less than 5 percent of its apparel directly from clothing makers last year, its operating margin shot up to 8.1 percent from 3.9 percent in fiscal 2003, and it intends to push it far higher than that, Gunter says.


Thanks to its global sourcing initiative, through which its striving to buy as much clothing as it can directly from garment makers rather than middlemen, the fashion retailer plans in fiscal 2005 to buy about 15 percent of its womens fashions right from suppliers, Gunter says.


Our goal is in about two years that we will be at 50-plus percent direct purchases, he says. Without that third party, there is great potential to increase our margins. As we get to the point where we have hundreds of stores, we anticipate moving up to the mid-teens on margins.


The companys rapidly growing network of retail outletsit had just eight stores in 2000, but has 118 nowhas given it the buying clout necessary to negotiate discounts for volume purchases and has made its global sourcing initiative feasible, Gunter says. This year, Coldwater Creek plans to open 60 stores, and over the next five to seven years, says it will grow to a total of 450 to 500 stores in 300 markets.


Even though the company increased its operating margin sharply last year, it lagged such peers as Talbots Inc., Limited Brands Inc., Christopher & Banks Corp., and Chicos FAS Inc., which posted operating margins ranging from 8.5 percent to 21 percent.


Coldwater Creek opened its global sourcing department in the second quarter last year after hiring Ronn Hall, from Limited Brands, to serve as its vice president of sourcing and production, Gunter says. The company also has hired inspectors in Hong Kong and New Delhi who strive to make sure Coldwater Creeks suppliers live up to human rights, workplace-safety, and environmental standards, Gunter says.


The global sourcing initiative is one of several key focuses for Coldwater Creek in 2005. Also this year, the company plans to:


Launch, with Chase Manhattan Bank, of New York, a co-branded credit card that will bear the logo of both Coldwater Creek and the bank.


Increase by more than half the floor space at its 600,000-square-foot Mineral Wells, W.Va., distribution center so the facility will be able to handle the distribution needs of more stores.


Continue to streamline the design of its apparel, which extends down to helping design the fabrics from which its clothing is made.


For its 2004 fiscal year, Coldwater Creek reported net income of $29.1 million, or 48 cents a share, on sales of $590.3 million, up from earnings of $12.3 million, or 22 cents a share, on sales of $518.8 million the year earlier. The company now has about 1,870 full-time employees and roughly 3,650 part-time workers, Gunter says.


Coldwater Creek will introduce its credit card in the second quarter this year as the first step in a customer-loyalty program that will enable customers, as they make purchases at Coldwater Creek or elsewhere, to accumulate points or earn coupons to use when buying more items from the Sandpoint company.


One customary goal of a retailers credit-card program is to collect information about customers, but Coldwater Creek already had that information, Gunter says. Still, he says, having a credit-card program is an important competitive factor because for every purchase she makes, the customer likes to feel like shes getting a little something back.


Coldwater Creek had a well-received credit-card program several years ago, Gunter says.


I think we had in excess of 50,000 cardholders, and it really wasnt promoted by the financial institution at all, which is one of the reasons we canceled that program.


By early next year, the company will introduce another element of its customer-loyalty program, although he cant say what that will be, Gunter says.


Starting in 2006, Coldwater Creek will make a major investment to expand its distribution center, which is leased, Gunter says. The expansion will give the center a total of 950,000 square feet of spaceenough for it to handle distribution for 500 stores. No cost estimate on the project is available to release yet, Gunter says.


The companys store openings will continue this year at a pace of five in the first quarter, 20 in the second quarter, 25 in the third quarter, and 10 in the fourth quarter, Gunter says.


Were in a position to pay our way with the store openings because the companys Internet and catalog sales continue to generate healthy cash flow, he says. Last year, Coldwater Creek produced from operations $65.1 million in positive cash flow, up from $46.6 million the year before. As of Jan. 29, it had a cash horde of $111.2 million.


The company sells its apparel under its own name, and its clothing is designed by a team that includes President and chief merchandising officer Georgia Shonk-Simmons, Gunter says. He says Shonk-Simmons has a good eye for what Coldwater Creeks customer wantsspecifically, things that are pretty and on trend, but not trendyand also for what the companys customer doesnt want.


For example, a year or two ago military was very big in Europe in womens fashion, he says. Coldwater Creek decided against offering camo garments, but found things to lift from the military-style trend, including rolled-tab sleeves and epaulets on blouses, Gunter says. He says those features made its customer look contemporary, but not ridiculous.


Last June, the company opened a design center in New York City that center employs six people, and it already has reduced time to market for the companys products, Gunter says. He says it also taps into the knowledge of talented design people in New York, provides daily contact with the companys design people in Sandpoint, and is a feeding system for ideas for the companys global sourcing initiative.


As the company has moved toward buying more of its clothing directly from factories, it has established a task force, on which Chairman and CEO Dennis Pence, Gunter, and others sit, that keeps tabs on human rights, workplace-safety, and environmental issues at suppliers factories, Gunter says.


The task force also provides an enormous amount of scrutiny to those factories that we might do business with, he adds. We have people whose sole function is to provide that level of inspection and scrutiny. In addition to the Hong Kong and New Delhi inspectors offices, the company probably will open a third such office in Central or South America this year.


Though there are no published international standards on human rights, workplace-safety, and environmental issues, Coldwater Creek has internal standards that it expects its suppliers to meet, Gunter says. It also is a member of a consortium of large clothing companies that exerts leverage on overseas clothing makers to comply with such standards.