Rule #1 Finance Blog

With Investor Phil Town


Every business that has stock owned and traded publicly is required to file a quarterly statement for the benefit of its owners — the shareholders (us).  The Securities Exchange Commission is one of those government agencies that is really quite important as a watch-dog to protect us little guys from lying dogs (and yet they still slip through the protective net and bite us from time to time.).

The 10K is the annual report and the 10Q is the quarterly report.

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Since these things are either written by lawyers or edited by lawyers,
they are imposing documents and can be intimidating at first.  You open
the thing up and it looks like you’re being sued.  They use little tiny
fonts (from the old days when these things were all printed on very
thin paper by specialty printing companies and the small font saved
pages) and never ever are written in conversational English.  They read
like corporate mission statements, which mostly just scream “BS” at us
on some subtle level.

But BSing isn’t what the 10Q is for.  It’s for laying it out there for
the investors to know what’s going on.
  And when they don’t lay it out
there they open themselves up to shareholder lawsuits.  That threat of
lawsuits gives the requirement to tell us what’s going on some real
clout — and if we pick our business because it has a great CEO, this
document should be very revealing and should teach us a lot about how
they are working their business.

For an example, let’s take a look at Coldwater Creek as if we didn’t
know anything about this business.  I can get the latest 10Q easiest by
going to the CWTR website investor relations page.

Then I click on the SEC documents button and I get a laundry list of
filings.  Look down the left hand “Form” column for “10Q”.  Their
latest one was filed last December.  (Which means another one is going
to get filed any day now, and that could affect the stock price because
when they file these 10Qs is when we all find out how the last quarter
did against the expectations.  Way better and often the stock will
shoot up on the news.  As expected or worse can cause sudden stock

Click on the 10Q button
and it opens up a couple of choices.  We want
to click on the one that says d10q.htm.  That will open the actual

Now we’re on the title page with the table of contents.  Part I, Item 1
is always the financials.  Ignore those.  You can scan the financials
on MSN or Investools a lot easier than reading the raw data.  I only
read the full financials if I have a question about something and need
to dig in — so I treat the 10Q financials like a resource in the
library, to be used as necessary but probably not all that often.  I
know you hard core researchers want to read every line and if you want
to, feel free.  I just don’t like numbers all that much.

Part 1, Item 2
is Management’s Discussion… This is the thing we’re going to read.  Click on that.

Most of the first part is boilerplate and if you read it at all you
only have to read it once.  It’s going to be more or less the same on
all the rest of the filings.

Skip down to “Coldwater Creek Profile”.  This is where the CEO, Dennis
Pence, explains what the plan is for your business.  (Remember — we
act as if we owned the whole thing and Dennis works for us.)

This section gives us an idea if we like Dennis much.  Is he telling us anything substantial or is it all hype?  Let’s see:

In a couple of sentences he tells us who our customers are with quite a
lot of exactness:  Women 35-60 who make over $75,000 a year, and we
have almost 3 million ladies like that in our database.  And then he
really gets into it — exactly how he’s going to sell them our stuff
via catalogs and stores and online.

As we read on Dennis tells us we’re going to make more money by cutting
out the middle men in the far east to reduce our costs and improve our
quality, by creating an credit card plan that works like an airline
mileage plan to create loyalty… and he warns us that the national ad
program he’s doing is going to cut into our profits for a while, but he
thinks it will pay off by building the brand.

Oh and this little tidbit is next — that we’re finishing a huge
distribution center that can handle 500 stores.  (And we only own 174
right now.  Cool.  That’s two doubles from now.  Wonder if the stock
price will go through two doubles, too?)

And then he gives us a brief overview of the 3rd quarter — basically
that we blew the doors off with sales and earnings going up over 30%.

And then he tells us how he did that via the retail stores, the catalog
and the website.  And what’s going to happen if retail sales slow
down.  (He’s going to not open more stores unless things remain

And so on.

Dennis is totally laying out the plan, the what ifs, and the results.
This is what you get with a great CEO.  (And it’s no coincidence that
many great CEOs like Dennis are also the business founders.  Remember
how we like a CEO who treats this business as if it were the only way
he could feed his family for the next 100 years?  Seems like Dennis is
that kinda guy.)

If you want to read more detail about all this stuff you just read, he
goes on and lays it out in excruciating detail that makes great reading
right before bed.  It will zone you out.  But that’s not Dennis’s
fault.  That’s just the nature of a legal filing.  The lawyers edit out
any enthusiasm.  For the hype you go read the Annual Report.

And then, just for grins, scroll down to Part II, where you can read
about the horrors of investing in this business.  This is what happens
when the lawyers sit down with the CEO and his staff and say, “Now tell
us everything that could possibly go wrong.”

This is a prime example of what happens when the letter of the law
overrules the spirit of the law.  The idea of this section is to tell
the investors what might go wrong.  But what the lawyers do is tell us
everything that could possibly go wrong.  I’m surprised they don’t put
in a disclosure that sales could go down in the event of a nuclear

The problem with the way they do it is that we can’t tell the
difference between something the CEO is actually worried about and the
BS that he isn’t at all concerned about.  But read it anyway.  Who
knows.  Maybe something is in there that is really an issue.  In this
one Dennis basically says he could screw up the business.  Yeah.
Well.  Don’t, okay?

And that’s about it, folks.  Just scan this thing (once you’ve read one
all the way through) for Dennis’s discussion to see what’s new
quarterly, and you’re good to go.  Any questions for the man and you
might be able to ask them live at one of the quarterly conference calls
if they have them.

Now go play!