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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended August 3, 2002
----------------------------------------------
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission file number 1-8899
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CLAIRE'S STORES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-0940416
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 S.W. 129th Avenue Pembroke Pines, Florida 33027
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(Address of principal executive offices) (Zip Code)
(954) 433-3900
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
- --------------------------------------------------------------------------------
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 .
--- ---
The number of shares of the registrant's Common Stock and Class A Common Stock
outstanding as of August 30, 2002 was 45,957,810 and 2,822,656, respectively,
excluding treasury shares.
CLAIRE'S STORES, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
- --------------------------------
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets at August 3, 2002 and
February 2, 2002. 3
Unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Three and Six Months Ended
August 3, 2002 and August 4, 2001. 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six
Months Ended August 3, 2002 and August 4, 2001. 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 14
PART II. OTHER INFORMATION
- ---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
2
PART I. FINANCIAL INFORMATION
CLAIRE'S STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AUG. 3, FEB. 2,
2002 2002
---------- ----------
(In thousands, except
share and per share
amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 117,420 $ 99,912
Short-term investments - 1,563
Inventories 83,470 78,596
Prepaid expenses and other current assets 52,913 34,353
---------- ----------
Total current assets 253,803 214,424
---------- ----------
Property and equipment:
Land and building 17,984 17,984
Furniture, fixtures and equipment 198,545 187,565
Leasehold improvements 144,017 136,422
---------- ----------
360,546 341,971
Less accumulated depreciation and amortization (194,195) (177,997)
---------- ----------
166,351 163,974
---------- ----------
Goodwill, net 196,074 193,140
Other assets 46,152 40,037
---------- ----------
242,226 233,177
---------- ----------
Total Assets $ 662,380 $ 611,575
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 27,811 $ 21,040
Trade accounts payable 37,127 30,874
Income taxes payable 5,172 4,800
Accrued expenses 33,666 25,822
---------- ----------
Total current liabilities 103,776 82,536
---------- ----------
Long term liabilities:
Long term debt 103,443 110,104
Deferred credits 15,265 14,747
---------- ----------
118,708 124,851
---------- ----------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock par value $1.00 per share; authorized
1,000,000 shares, issued and outstanding 0 shares - -
Class A common stock par value $.05 per share;
authorized 20,000,000 shares, issued 2,823,392
shares and 2,830,819 shares, respectively 141 142
Common stock par value $.05 per share; authorized
150,000,000 shares, issued 45,957,074 shares and
45,949,647 shares, respectively 2,298 2,297
Additional paid-in capital 29,871 29,871
Accumulated other comprehensive loss (2,370) (16,709)
Retained earnings 410,408 389,039
---------- ----------
440,348 404,640
Treasury stock, at cost (109,882 shares) (452) (452)
---------- ----------
439,896 404,188
---------- ----------
Total Liabilities and Stockholders' Equity $ 662,380 $ 611,575
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
3
CLAIRE'S STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- -------------------
AUG. 3, AUG. 4, AUG. 3, AUG. 4,
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands, except per share amounts)
Net sales $238,740 $221,312 $449,101 $434,189
Cost of sales, occupancy and buying expenses 121,110 127,009 228,890 233,687
--------- --------- --------- ---------
Gross profit 117,630 94,303 220,211 200,502
--------- --------- --------- ---------
Other expenses:
Selling, general and administrative 84,505 83,050 164,906 162,242
Depreciation and amortization 9,295 10,592 18,097 21,103
Interest expense, net 744 1,925 1,374 4,119
--------- --------- --------- ---------
94,544 95,567 184,377 187,464
--------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes 23,086 (1,264) 35,834 13,038
Income tax expense (benefit) 8,008 (246) 12,475 4,828
--------- --------- --------- ---------
Income (loss) from continuing operations 15,078 (1,018) 23,359 8,210
--------- --------- --------- ---------
Discontinued operation:
(Loss) from discontinued operation of Lux Corp., less
applicable income tax benefit of $0, $2,946, $0
and $3,833, respectively - (4,910) - (6,389)
Gain on disposal of Lux Corp., less applicable
income taxes of $(1,078), $0, $(1,078) and $0,
respectively 1,796 - 1,796 -
--------- --------- --------- ---------
Net gain (loss) from discontinued operation 1,796 (4,910) 1,796 (6,389)
--------- --------- --------- ---------
Net income (loss) 16,874 (5,928) 25,155 1,821
Foreign currency translation adjustments 10,604 (1,397) 14,339 (7,475)
--------- --------- --------- ---------
Comprehensive income (loss) $ 27,478 $ (7,325) $ 39,494 $ (5,654)
========= ========= ========= =========
Net income (loss) per share:
Basic:
Income (loss) from continuing operations $ 0.31 $ (0.02) $ 0.48 $ 0.17
--------- --------- --------- ---------
(Loss) from operations of discontinued operation - (0.10) - (0.13)
Gain from disposal of discontinued operation 0.04 - 0.04 -
--------- --------- --------- ---------
Net gain (loss) from discontinued operation 0.04 (0.10) 0.04 (0.13)
--------- --------- --------- ---------
Net income (loss) per share $ 0.35 $ (0.12) $ 0.52 $ 0.04
========= ========= ========= =========
Diluted:
Income (loss) from continuing operations $ 0.31 $ (0.02) $ 0.48 $ 0.17
--------- --------- --------- ---------
(Loss) from operations of discontinued operation - (0.10) - (0.13)
Gain from disposal of discontinued operation 0.04 - 0.04 -
--------- --------- --------- ---------
Net gain (loss) from discontinued operation 0.04 (0.10) 0.04 (0.13)
--------- --------- --------- ---------
Net income (loss) per share $ 0.35 $ (0.12) $ 0.52 $ 0.04
========= ========= ========= =========
Weighted average number of shares outstanding:
Basic 48,671 48,671 48,671 48,670
========= ========= ========= =========
Diluted 48,821 48,671 48,817 48,766
========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
4
CLAIRE'S STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
--------------------
AUG. 3, AUG. 4,
2002 2001
--------- ---------
(In thousands)
Cash flows from operating activities:
Net income $ 25,155 $ 1,821
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss from discontinued operation, net of tax benefit - 6,389
Gain on disposal of discontinued operation, net of tax expense (1,796) -
Depreciation and amortization 18,097 21,103
Loss on retirement of property and equipment 1,377 855
(Increase) decrease in -
Inventories (2,989) 7,904
Prepaid expenses and other assets (20,637) (12,279)
Increase (decrease) in -
Trade accounts payable 4,821 9,581
Income taxes payable 3,118 (2,057)
Accrued expenses 6,777 (2,360)
Deferred credits 256 (599)
--------- ---------
Net cash provided by continuing operations 34,179 30,358
Net cash provided by (used in) discontinued operations 2,147 (2,833)
--------- ---------
Net cash provided by operating activities 36,326 27,525
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (16,988) (16,390)
Sale of short-term investments 1,563 -
Capital expenditures of discontinued operations (352) (591)
--------- ---------
Net cash used in investing activities: (15,777) (16,981)
--------- ---------
Cash flows from financing activities:
Principal borrowings on lines of credit 111 9,379
Principal payments on term loan - (5,000)
Proceeds from stock options exercised - 45
Dividends paid (3,785) (3,784)
--------- ---------
Net cash (used in) provided by financing activities (3,674) 640
--------- ---------
Effect of foreign currency exchange rate changes on cash
and cash equivalents 633 (3,259)
--------- ---------
Net increase in cash and cash equivalents 17,508 7,925
Cash and cash equivalents at beginning of period 99,912 111,860
--------- ---------
Cash and cash equivalents at end of period $117,420 $119,785
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
5
CLAIRE'S STORES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company without audit, in accordance with the
instructions to Form 10-Q, and therefore do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. These statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Annual Report on Form 10-K for the year
ended February 2, 2002 filed with the Securities and Exchange Commission,
including Note 1 to the consolidated financial statements included therein
which discusses consolidation and financial statement presentation. The
preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets, liabilities, revenues, expenses and disclosure of gain and loss
contingencies at the date of the financial statements. Actual results could
differ from those estimates and assumptions. Due to the seasonal nature of
the Company's business, the results of operations for the first six months
of the year are not indicative of the results of operations on an
annualized basis. Certain prior period amounts have been reclassified to
conform to the current period presentation. See Note 4.
2. EARNINGS PER SHARE
Basic net income per share is computed based on the weighted average number
of shares of Class A Common Stock and Common Stock outstanding during the
period presented, while diluted net income per share includes the dilutive
effect of stock options. Options to purchase 450,500 shares and 524,870
shares of common stock, at prices ranging from $20.38 to $30.25 per share
and $18.63 to $30.25 per share, respectively, were outstanding for the
quarters ended August 3, 2002 and August 4, 2001, respectively, but were
not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares for the respective fiscal quarter. Options to purchase
451,419 shares and 532,120 shares of common stock, at prices ranging from
$20.38 to $30.25 per share and $18.63 to $30.25 per share, respectively,
were outstanding for the six months ended August 3, 2002 and August 4,
2001, respectively, but were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than
the average market price of the common shares for the respective six month
period.
3. NEW ACCOUNTING PRONOUNCEMENTS
Effective February 3, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets." In accordance with SFAS 142, the Company ceased amortizing its
goodwill effective February 3, 2002. The Company recorded $2.2 million and
$4.4 million of amortization during the second quarter and six months ended
August 4, 2001, respectively, and would have recorded $2.2 million and $4.4
million of amortization during the second quarter and six months ended
August 3, 2002, respectively. Net (loss) income for the three and six
months ended August 4, 2001 would have been $(4.5) million and $4.7 million
or ($0.09) and $0.10 per diluted share, respectively, without goodwill
amortization expense during those periods. The Company had $196.1 and
$193.1 million of unamortized goodwill at August 3, 2002 and February 2,
2002, respectively.
6
SFAS 142 required the Company upon its adoption to reassess the value of,
and useful lives assigned to, intangible assets including goodwill to
determine whether the value of one or more intangible assets is impaired.
The first step of this impairment test required the Company, within the
first six months of Fiscal 2003, to determine the fair value of the
reporting unit, as defined by SFAS 142, and compare it to the carrying
value of the net assets allocated to the reporting unit. If this fair value
exceeded the carrying value, no further analysis was required. If the fair
value of the reporting unit was less than the carrying value of the net
assets, the Company was required to perform step two of the impairment
test, which required the Company to allocate the implied fair value of the
reporting unit to all underlying assets and liabilities, including both
recognized and unrecognized tangible and intangible assets, based on their
fair value. The Company performed a transitional goodwill impairment test
as required and has determined that no goodwill impairment existed at
February 3, 2002. The Company has also evaluated the lives of all of its
intangible assets. As a result of this evaluation, the Company has
determined that none of its intangible assets, other than goodwill, have
indefinite lives and that the existing useful lives are appropriate.
SFAS 142 also requires the Company to perform a goodwill impairment test on
an annual basis. Any impairment charges resulting from the application of
this test in the future would be immediately recorded as a charge to
earnings in the Company's statement of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement retains the
requirements of SFAS No. 121 to (a) recognize an impairment loss only if
the carrying amount of a long lived asset is not recoverable from its
discounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and fair value of the asset. This statement
requires that a long-lived asset to be abandoned, exchanged for a similar
productive asset, or distributed to owners in a spin-off be considered held
and used until it is disposed of. This statement requires that the
depreciable life of a long-lived asset to be abandoned be revised and that
an impairment loss be recognized at the date a long-lived asset is
exchanged for a similar productive asset or distributed to owners in a
spin-off if the carrying amount of the asset exceeds its fair value. The
accounting model for long-lived assets to be disposed of by sale is used
for all long-lived assets, whether previously held and used or newly
acquired. That accounting model measures a long-lived asset classified as
held for sale at the lower of its carrying amount or fair value less cost
to sell and requires depreciation (amortization) to cease. Discontinued
operations are no longer measured on a net realizable value basis, and
future operating losses are no longer recognized before they occur. This
statement retains the basic provisions of Accounting Principles Board
Opinion 30 for the presentation of discontinued operations in the income
statement but broadens that presentation to include a component of an
entity (rather than a segment of a business). A component of an entity
comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the
entity. A component of an entity that is classified as held for sale or
that has been disposed of is presented as a discontinued operation if the
operations and cash flows of the component will be (or have been)
eliminated from the ongoing operations of the entity and the entity will
not have any significant continuing involvement in the operations of the
component. The Company adopted SFAS 144 on February 3, 2002. Management has
determined that the adoption of SFAS 144 did not have a material effect on
the Company's financial statements.
In June 2002, the FASB issued Statement No. 146 ("Costs Associated with
Exit or Disposal Activities"). This Statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred compared to prior literature, which recognized a
liability when the entity committed to an exit plan. Management believes
that this Statement will not have a material impact on the Company's
financial statements; however, the Statement will result in a change in
accounting policy associated with the recognition of liabilities in
connection with future restructuring charges.
7
4. DISCONTINUED OPERATION
In January 2002, the Company's Board of Directors authorized the
disposition of the Mr. Rags stores, which represented the Company's apparel
segment. In connection with the plan to dispose of Mr. Rags, the Company
recorded a loss on disposal of Lux Corp., net of tax of $12.9 million in
the consolidated financial statements as of February 2, 2002. Included in
the loss on disposal was an estimate of proceeds from the sale of closing
date inventory of $4.4 million, net of tax and an estimate of operating
losses of Mr. Rags during the six month phase out period of $2.5 million,
net of tax. On May 17, 2002, the Company sold the stock of Lux Corporation,
d/b/a Mr. Rags for (i) an initial payment of $5 million, (ii) deferred
payments to be paid aggregating $10 million payable as 1% of net sales
during the first year and 2% of net sales thereafter, and (iii) an amount
to be paid equal to approximately 48% of the gross sales of the inventory
of Mr. Rags as of the closing date. Through the date of disposition, the
operations of Mr. Rags were accounted for as a discontinued operation in
the Company's unaudited condensed consolidated financial statements. The
deferred payments aggregating $10 million were not included in the
Company's estimate of loss on disposition as the timing and amount could
not be reasonably estimated due to the uncertainty of the financial
condition of the acquired business. In order to conform to the separate
presentation of the net assets and operating results of Mr. Rags as a
discontinued operation, certain prior period amounts have been reclassified
to conform to current period presentation.
During the three months ended August 3, 2002, the Company recorded
approximately $1.8 million, net of tax, gain on disposal of Mr. Rags. This
gain represents proceeds in excess of the Company's original estimates for
the sale of the closing date inventory of Mr. Rags of $1.3 million, net of
tax, and $ .5 million net of tax, of operating losses of Mr. Rags during
the phase out period below the Company's original estimates
The Company remains as a guarantor on 12 operating leases for store
locations and $5.7 million in gross future lease payments on operating
leases for equipment and leasehold improvements of Lux Corp. The Company
has also entered into a service agreement with the new owner of Mr. Rags
under which the Company will perform certain administrative services for
the benefit of Mr. Rags, for an initial period of one year. The agreement
can be cancelled by either party upon written notice in accordance with the
terms of the service agreement. As of August 3, 2002, the Company has
received approximately $500,000 for these services and has included them in
its statement of operations as a reduction of selling, general and
administrative expenses.
5. SEGMENT INFORMATION
The Company is primarily organized based on the geographic markets in which
it operates. Under this organizational structure, the Company currently has
two reportable segments: North America and International. Net sales from
continuing operations for the periods presented were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ -------------------
AUG. 3, AUG. 4, AUG. 3, AUG. 4,
2002 2001 2002 2001
--------- --------- --------- --------
North America $177,014 $170,796 $339,968 $343,343
International 61,726 50,516 109,133 90,846
--------- --------- --------- ---------
Total $238,740 $221,312 $449,101 $434,189
========= ========= ========= =========
8
Income (loss) from continuing operations for the periods presented were as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
AUG. 3, AUG. 4, AUG. 3, AUG. 4,
2002 2001 2002 2001
--------- --------- --------- ---------
North America $ 10,601 $ (6,858) $ 18,925 $ 477
International 4,477 5,840 4,434 7,733
--------- --------- --------- ---------
Total $ 15,078 $ (1,018) $ 23,359 $ 8,210
========= ========= ========= =========
6. STATEMENTS OF CASH FLOWS
Payments of income taxes were $12.8 million and $12.0 million for the six
months ended August 3, 2002 and August 4, 2001, respectively. Payments of
interest were $2.0 million and $6.8 million for the six months ended August
3, 2002 and August 4, 2001, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
We are a leading mall-based retailer of popular-priced fashion accessories for
pre-teens and teenagers through our wholly-owned subsidiaries, Claire's
Boutiques, Inc., which also operates through its Icing by Claire's stores
(formerly Afterthoughts), Claire's Puerto Rico Corp., Claire's Canada Corp.,
Claire's Accessories UK Ltd., Bijoux One Trading AG (Bijoux), Claire's France
and through our 50%-owned joint venture Claire's Nippon Co., Ltd. We are
primarily organized based on our geographic markets, which include our North
American operations and our international operations.
As of August 3, 2002, we operated a total of 2,893 stores in all 50 states of
the United States, Canada, the Caribbean, the United Kingdom, Switzerland,
Austria, Germany, France, Ireland and Japan. The stores are operated mainly
under the trade names "Claire's Boutiques", "Claire's Accessories",
"Afterthoughts", "The Icing", "Icing by Claire's", and "Bijoux One". We are in
the process of transitioning our "Afterthoughts" stores to "Icing by Claire's"
stores to capitalize on the Claire's brand name.
Annually, our fiscal year ends on the Saturday closest to January 31. As a
result, both our current and prior fiscal years consist of four 13-week
quarters. We refer to the prior fiscal year ended February 2, 2002 as Fiscal
2002, and the current fiscal year ending February 1, 2003 as Fiscal 2003.
The following discussion and analysis provides information that management
believes is useful in understanding our operating results, cash flows, and
financial condition. The discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the unaudited condensed consolidated
financial statements and related notes thereto included elsewhere in this Form
10-Q. The discussions in Management's Discussion and Analysis of Financial
Condition and Results of Operations contain forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed under "Forward- Looking Statements" in this section, as well as
estimates and judgments used in preparing our financial statements.
9
The following table sets forth, for the periods indicated, percentages which
certain items reflected in the financial statements bear to our net sales:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------
AUG. 3, AUG. 4, AUG. 3, AUG. 4,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, occupancy and buying expenses 50.7 57.4 51.0 53.8
-------- -------- -------- --------
Gross profit 49.3 42.6 49.0 46.2
-------- -------- -------- --------
Other expenses:
Selling, general and administrative 35.4 37.5 36.7 37.4
Depreciation and amortization 3.9 4.8 4.0 4.9
Interest expense, net 0.3 0.9 0.3 0.9
-------- -------- -------- --------
39.6 43.2 41.1 43.2
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes 9.7 (0.6) 8.0 3.0
Income taxes 3.4 (0.1) 2.8 1.1
-------- -------- -------- --------
Income (loss) from continuing operations 6.3 (0.5) 5.2 1.9
======== ======== ======== ========
RESULTS OF OPERATIONS
The operating results of Claire's Nippon Co., Ltd. (Nippon) are accounted for
under the equity method. As a result, any losses incurred by Nippon in excess of
our investment and advances are not reflected in our income statement because
the operations are not part of our consolidated group. Accordingly the operating
results of Nippon are not included in the following analysis. In addition, the
assets and liabilities of Nippon are not included in our condensed consolidated
balance sheets. Under the equity method, our original investment in Nippon was
recorded at cost and had been adjusted periodically to recognize our
proportionate share of earnings or losses from Nippon since the acquisition
date. In May 2002, we made an additional investment in Nippon of approximately
$ .8 million.
Net sales for the three months ended August 3, 2002 increased approximately 8%,
or $17.4 million, over the comparable period ended August 4, 2001. The increase
for the period resulted primarily from a same-store sales increase during the
period of 4% and an increase in average sales per store for new stores. The
average sales per store in new stores increased during the quarter primarily due
to a higher percentage of our new stores being located in Europe, which
typically generate higher sales per store than our stores in North America. Net
sales for the six months ended August 3, 2002 increased approximately 3%, or
$14.9 million, over the comparable period ended August 4, 2001. The increase
for the period resulted primarily from a same-store sales increase of 1% and an
increase in average sales per store for new stores.
Gross profit for the three months ended August 3, 2002 increased 6.7% as a
percentage of sales, or $23.3 million, compared to the three months ended August
4, 2001. The increase as a percentage of sales was primarily caused by higher
merchandise margins. The higher merchandise margins were achieved by taking
fewer markdowns during the quarter as we maintained inventory levels in line
with expected customer demand. During the three months ended August 4, 2001, we
incurred approximately $15 million, at cost, of merchandise markdowns due to
slow moving inventory. Gross profit for the six months ended August 3, 2002
increased 2.8% as a percentage of sales, or $19.7 million, compared to the
comparable period ended August 4, 2001. The increase as a percentage of sales
was primarily caused by higher merchandise margins, resulting from fewer
markdowns during the six months ended August 3, 2002 as discussed above.
10
Selling, general and administrative expenses for the three months ended August
3, 2002 decreased 2.1% as a percentage of sales, compared to the three months
ended August 4, 2001. The decrease as a percentage of sales was caused
primarily by the effect of positive same-store sales during the quarter on our
corporate overhead. Selling, general and administrative expenses increased $1.5
million, or 2% over the comparable period. We achieved this limited increase
primarily as a result of expense management controls employed during the quarter
in areas such as store payroll and advertising partially offset by a non-tax
deductible bonus of $1 million paid to our chairman related to the disposition
of Mr. Rags. Selling, general and administrative expenses for the six months
ended August 3, 2002 decreased .7% as a percentage of sales, compared to the
comparable period ended August 4, 2001. These expenses increased by $2.7
million, or 1.6% over the comparable period. We achieved this limited increase
primarily as a result of expense management controls in areas such as store
payroll and advertising.
Depreciation and amortization for the three months ended August 3, 2002 was $9.3
million as compared to $10.6 million for the three months ended August 4, 2001
The decrease of $1.3 million was due to goodwill no longer being amortized in
accordance with the provisions of SFAS No. 142, offset by additional
depreciation on capital expenditures since August 4, 2001. We recorded $2.2
million of amortization of goodwill during the three months ended August 4,
2001. Our net loss would have been $4.5 million or $ .09 per diluted share
without goodwill amortization expense during that period. Depreciation and
amortization for the six months ended August 3, 2002 was $18.1 million as
compared to $21.1 million for the six months ended August 4, 2001. The decrease
of $3.0 million was due to goodwill no longer being amortized, offset by
additional depreciation on capital expenditures made since August 4, 2001. Our
net income would have been $4.7 million, or $.10 per diluted share without
goodwill amortization expense during that period.
Interest expense, net was $ .7 million and $1.4 million for the three and six
months ended August 3, 2002, respectively, as compared to $1.9 million and $4.1
million for the three and six months ended August 4, 2001, respectively. The
$1.2 million and $2.7 million decrease in interest expense, net was due
primarily to lower interest rates on our credit facilities and lower outstanding
debt balances during the period.
Our effective tax rate was 35% during the periods ended August 3, 2002 and
August 4, 2001.
In January 2002, we announced our decision to discontinue the operations of Lux
Corp. (Mr. Rags), which represented our apparel segment. In connection with the
plan to dispose of Mr. Rags, we recorded a loss, net of tax of $12.9 million in
our consolidated financial statements as of February 2, 2002. Included in our
loss on disposal was an estimate of proceeds from the sale of closing date
inventory of $4.4 million, net of tax and an estimate of operating losses of Mr.
Rags during the six month phase out period of $2.5 million, net of tax. On May
17, 2002, we completed the sale of Mr. Rags for (i) an initial payment of $5
million, (ii) deferred payments to be paid aggregating $10 million payable as 1%
of net sales during the first year and 2% of net sales thereafter, and (iii) an
amount to be paid equal to approximately 48% of the gross sales of the inventory
of Mr. Rags as of the closing date. Through the date of sale, the operations of
Mr. Rags were accounted for as a discontinued operation in our unaudited
condensed consolidated financial statements. The deferred payments aggregating
$10 million were not included in our estimate of loss on sale as the timing and
amount could not be reasonably estimated due to the uncertainty of the financial
condition of the acquired business. We recorded a net loss from the operation of
Mr. Rags of approximately $4.9 million, net of tax, for the three months ended
August 4, 2001. See Note 4 to our Condensed Consolidated Financial Statements.
During the three months ended August 3, 2002, we recorded approximately $1.8
million, net of tax, gain on disposal of Mr. Rags. This gain represents proceeds
in excess of our original estimates for the sale of the closing date inventory
of Mr. Rags of $1.3 million, net of tax, and $ .5 million net of tax, of
operating losses of Mr. Rags during the phase out period below our original
estimates.
11
We remain as a guarantor on 12 operating leases for store locations and $5.7
million in gross future lease payments on operating leases for equipment and
leasehold improvements of Mr. Rags. We have also entered into a service
agreement with the new owner of Mr. Rags under which we will perform certain
administrative services for the benefit of Mr. Rags, for an initial period of
one year. The agreement can be cancelled by either party upon written notice in
accordance with the terms of the service agreement. As of August 3, 2002, we
have received approximately $500,000 for these services and have included them
in our statement of operations as a reduction of selling, general and
administrative expenses.
QUARTERLY INFORMATION AND SEASONALITY
The specialty retail industry is seasonal in nature and a disproportionately
higher level of our revenues and earnings are generated in the fall and holiday
selling seasons. Our working capital requirements and inventories increase
substantially in the third quarter in anticipation of the holiday selling
season.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the acquisition of Afterthoughts in December of 1999, we
entered into a credit facility pursuant to which we financed $200 million of the
purchase price for Afterthoughts. The credit facility includes a $40 million
revolving line of credit which matures on December 1, 2004, and a $175 million
five year term loan, the first installment of which was paid on December 31,
2000, with future installments, thereafter, payable on a quarterly basis through
December 1, 2004. The credit facility is prepayable without penalty and bears
interest at a margin of 125 basis points over the London Interbank Borrowing
Rate. The margin is adjusted periodically based on our performance as it relates
to certain financial covenants. On August 3, 2002, approximately $25 million was
outstanding on this line of credit, while $105 million was outstanding under the
term loan. Also, on August 3, 2002, the borrowings under this credit facility
were in compliance with all debt covenants. We cannot re-borrow amounts repaid
under the term loan. As a result, we have no future availability under the term
loan. We can re-borrow amounts repaid under the revolving line of credit,
subject to the terms of the credit facility. As of August 3, 2002, we had $14
million of availability under the revolving line of credit.
We are required to maintain financial ratios under our credit facility. Required
financial ratios include fixed charge coverage ratio, consolidated leverage
ratio and current ratio. The credit facility also contains other restrictive
covenants which limit, among other things, our ability to make dividend
distributions and repurchase shares of our Common stock. If these financial
ratios and other restrictive covenants are not maintained, our bank will have
the option to require immediate repayment of all amounts outstanding under the
credit facility. The most likely result would require us to either renegotiate
certain terms of the credit agreement, obtain a waiver from the bank, or obtain
a new credit agreement with another bank, which may contain different terms.
Our cash flow from operations, together with our cash balances, provides
adequate liquidity to meet our operational needs and debt obligations. Cash and
cash equivalents totaled $117.4 million at August 3, 2002.
Net cash provided by operating activities from continuing operations was $34.2
million for the six months ended August 3, 2002 compared to $30.4 million for
the six months ended August 4, 2001. The primary sources of net cash provided by
operating activities from continuing operations was income from continuing
operations, adjusted for non-cash items. Included within net cash provided by
operating activities for the period was $20.6 million of cash used to fund an
increase in prepaid and other assets primarily due to the timing of rent and
property tax payments internationally.
12
Inventory at August 3, 2002 increased 6% compared to the inventory balance at
the end of our February 2, 2002 fiscal year. This increase is primarily a result
of the seasonally adjusted levels of inventory that we carry to meet expected
future sales demand.
Net cash used in investing activities of $15.8 million for the six months ended
August 3, 2002 was primarily as a result of capital expenditures of $17.3
million offset by the sale of short-term investments
Net cash used in financing activities was $3.7 million for the six months ended
August 3, 2002 as compared to $.6 million provided by financing activities for
the six months ended August 4, 2001. The cash used in financing activities
during the first six months of Fiscal 2003 was to fund dividends on our Class A
and Common stock. Included within the $.6 million during the first six months of
Fiscal 2002 was approximately $5.0 million of debt re-payments offset by $9.4
million of additional borrowings on our existing credit lines, in addition to
the dividends paid during that period.
For the six months ended August 3, 2002, we opened 91 stores and closed 73
stores ending the quarter with 2,893 stores.
We believe that our significant cash balances, consistent ability to generate
cash flow from operations and available funds under our credit facility will be
sufficient to fund our operations, debt and currently anticipated capital
expenditure plans for Fiscal 2003.
During the six months ended August 3, 2002, the U.S. dollar weakened against the
major currencies included in our consolidated financial statements. As a result,
the cumulative foreign currency translation adjustment increased shareholders'
equity by $14.3 million for the six months ended August 3, 2002.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995, or the Act, provides a
safe harbor for "forward-looking statements" made by or on our behalf. We and
our representatives may from time to time make written or verbal forward-looking
statements, including statements contained in this and other filings with the
Securities and Exchange Commission and in our press releases and reports to
shareholders. All statements which address operating performance, events or
developments that we expect or anticipate will occur in the future, including
statements relating to new store openings, customer demand and future operating
results, are forward-looking statements within the meaning of the Act and as
defined in Section 21E of the Securities Exchange Act of 1934, as amended. These
statements may also be identified by their use of forward-looking terminology,
such as "believes," "expects," "may," "should," "would," "will," "intends,"
"plans," "estimates," and "anticipates." Forward-looking statements are and will
be based on management's then current views and assumptions regarding future
events and operating performance, and we assume no obligation to update any
forward-looking statement. Forward-looking statements involve known or unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements, or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences include but are not limited to: fluctuations in sales and same-store
sales results, fashion trends, dependence on foreign suppliers, competition from
other retailers, relationships with mall developers and operators, general
economic conditions, success of joint ventures and relationships with and
reliance upon third parties, and uncertainties generally associated with
specialty retailing. Additional information concerning these risks and
uncertainties is contained in our filings with the Securities and Exchange
Commission, including our Annual Report on Form 10-K for the year ended February
2, 2002.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency
- -----------------
We are exposed to market risk from foreign currency exchange rate fluctuations
on the U.S. dollar value of foreign currency denominated transactions and our
investment in foreign subsidiaries. We manage this exposure to market risk
through our regular operating and financing activities, but currently do not use
foreign currency purchased put options or foreign exchange forward contracts.
During the first six months of Fiscal 2003, included in comprehensive income and
stockholders' equity is $14.3 million reflecting the unrealized gain on foreign
currency translation. Based on our average net currency positions at August 3,
2002, the potential gain or loss due to a 10% adverse change on foreign currency
exchange rates could be significant to our operations.
Interest Rates
- ---------------
Our exposure to market risk for changes in interest rates is limited to our
cash, cash equivalents and debt. Based on our average invested cash balances and
outstanding debt during the first six months of Fiscal 2003, a 10% increase in
the average effective interest rate during the remainder of Fiscal 2003 would
not have materially impacted our annual net interest expense.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2002 Annual Meeting of Shareholders (the "Annual Meeting") was
held on June 27, 2002 in New York City to act on the election of seven
directors to serve, each for a one-year term.
Proxies for the Annual Meeting were solicited pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended, and there was no solicitation
in opposition to the Company's solicitation.
At the Annual Meeting, each holder of record of Common Stock, $.05 par value
(the "Common Stock") and Class A Common Stock, $.05 par value (the "Class A
Common Stock"), of the Company at the close of business on April 26, 2002 (the
"Record Date") was entitled to vote, in person or by proxy, one vote for each
share of Common Stock and ten votes for each share of Class A Common Stock, as
the case may be, held by such holder. As of the Record Date, the Company had
outstanding 45,952,920 shares of Common Stock and 2,824,637 shares of Class A
Common Stock, which in the aggregate were entitled to 74,199,290 votes
The holders of record of shares of Common Stock and Class A Common Stock
entitled to 65,591,394 votes were either present in person or represented by
proxy, and constituted a quorum for the transaction of business at the Annual
Meeting.
All of the Company's nominees for directors were elected to serve a one-year
term by more than the required plurality of affirmative votes of the holders of
Common Stock (one vote per share) and Class A Common Stock (ten votes per
share), voting together as a single class:
DIRECTOR NOMINEE VOTES FOR VOTES WITHHELD
- ---------------- ---------- --------------
Rowland Schaefer 58,844,381 6,747,013
Ira D. Kaplan 58,881,266 6,710,128
Bruce G. Miller 63,583,380 2,008,014
Irwin L. Kellner, Ph.D. 64,139,245 1,452,149
Steven H. Tishman 64,147,588 1,443,806
Marla L. Schaefer 58,821,529 6,769,865
E. Bonnie Schaefer 59,158,521 6,432,873
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Form 8-K filed with the Securities and Exchange Commission
on June 3, 2002 to report an Item 2 event (Acquisition or
Disposition of Assets) relating to the sale of stock of Lux
Corp.
2. Form 8-K filed with the Securities and Exchange Commission
on June 27, 2002 to report an Item 9 event (Regulation FD
Disclosure).
3. Form 8-K filed with the Securities and Exchange Commission
on July 22, 2002 to report an Item 9 event (Regulation FD
Disclosure).
ITEMS 1, 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
15
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLAIRE'S STORES, INC.
-----------------------
(Registrant)
Date: September 13, 2002 /s/ Ira D. Kaplan
--------------------
Ira D. Kaplan
Senior Vice President and
Chief Financial Officer
CERTIFICATION
I, Rowland Schaefer, Chief Executive Officer of Claire's Stores, Inc.
(the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002 /S/ ROWLAND SCHAEFER
----------------------
Rowland Schaefer
Chief Executive Officer
CERTIFICATION
I, Ira D. Kaplan, Chief Financial Officer of Claire's Stores, Inc.
(the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002 /S/ IRA D. KAPLAN
--------------------
Ira D. Kaplan
Chief Financial Officer
EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5 and 6 of the
Certifications as set forth in this quarterly report have been omitted,
consistent with the Transition Provisions of SEC Exchange Act Release No.
34-46427.
16