UPDATE 2-Inventory rebound, surprise profit lift Coldwater Creek

Wed Aug 25, 2010 1:34pm EDT

* Q2 EPS $0.02 vs est loss/shr $0.04

* Q2 sales up 13 pct

* Sees inventory flat y-o-y by end Q3

* Shares up as much as 30 pct (Recasts; adds details, analyst comment)

By NR Sethuraman

BANGALORE, Aug 25 (Reuters) - Deep markdowns to clear excess inventory at Coldwater Creek Inc CWTR.O have started to bear fruit as the women's apparel retailer posted a surprise quarterly profit, sending its shares soaring 30 percent Wednesday.

The company ended the second quarter with inventory being up 18 percent year-over-year, but said it expected inventory levels to be roughly flat by the end of the third quarter.

The retailer, which caters to women over 40 who prefer a more conservative clothing style, had seen its stock crash 15 percent in early June after it reported elevated inventory levels at the end of the first quarter and forecast a second-quarter loss. [ID:nSGE6510J2]

"Store level inventory looks very clean," Roth Capital Partners LLC analyst Elizabeth Pierce said.

Coldwater Creek, which had moved away from its core merchandise offerings to focus more on basics like T-shirts and denims, saw a 39 percent rise in direct sales in the second quarter, helping it post a second consecutive quarterly profit of 2 cents a share, compared with the 4-cent loss expected by analysts.

Direct sales involve business through e-commerce, phone and mail operations.

Sales rose 13 percent to $253.5 million for the company, began in 1984 as a home business with one phone and a closet stuffed with merchandise.

Sales at stores open for at least a year increased 4.8 percent, compared with a decline of 10.2 percent in the same period last year. [ID:nASA00OOX]

The Sandpoint, Idaho-based company reiterated its full-year outlook of 8-12 cents a share, ahead of the market consensus of 6 cents.

"The guidance is appropriate and it looks like they are taking a very conservative stance regarding the second half, which shouldn't be a shock given the kind of macro headwinds in terms of consumer spending," analyst Pierce said.

For the second quarter, larger rivals Chico's FAS (CHS.N) and Ann Taylor Stores Corp (ANN.N) reported higher-than-expected and in-line profit, respectively.

For the third quarter, the company expects consolidated net sales to increase year-over-year in the low single digit range and same-store sales to be flat.

Shares of the company, which have lost half of their value since touching a seven-month high of $8.75 on April 23, were trading 27 percent up at $4.25 on Nasdaq.

The wider S&P apparel retail sub-industry index was down 0.4 percent at 453.98 points Wednesday. (Reporting by NR Sethuraman in Bangalore)

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