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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 3, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __TO __
COMMISSION FILE NUMBER 001-08899
CLAIRE'S STORES, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-0940416
- ------------------------------------------- --------------------- ------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 S.W. 129TH AVENUE, PEMBROKE PINES, FLORIDA 33027
- -------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 433-3900
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ---------------------------- -----------------------------------------
Common Stock, $.05 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
------------------------------------------
Class A Common Stock, $.05 par value
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Exchange). Yes [X] No
The number of shares of the registrant's Common Stock and Class A Common
Stock outstanding as of May 31, 2003 was 46,195,997 and 2,688,690, respectively.
CLAIRE'S STORES, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
- --------------------------------
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets at May 3, 2003 and
February 1, 2003. 3
Unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income for the Three Months Ended May 3, 2003
and May 4, 2002. 4
Unaudited Condensed Consolidated Statements of Cash Flows for the
Three Months Ended May 3, 2003 and May 4, 2002. 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 14
ITEM 4. CONTROLS AND PROCEDURES 15
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURE PAGE AND CERTIFICATIONS 16
2
PART I. FINANCIAL INFORMATION
CLAIRE'S STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 3, 2003 FEB. 1, 2003
----------- ------------
(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $167,271 $195,482
Inventories 98,044 88,334
Prepaid expenses and other current assets 50,192 37,792
-------- --------
Total current assets 315,507 321,608
-------- --------
Property and equipment:
Land and building 18,091 18,041
Furniture, fixtures and equipment 210,238 206,529
Leasehold improvements 164,513 161,240
-------- --------
392,842 385,810
Less accumulated depreciation and amortization (219,487) (211,328)
-------- --------
173,355 174,482
-------- --------
Intangible assets, net 29,907 28,924
Other assets 14,385 15,240
Goodwill 198,142 197,875
-------- --------
242,434 242,039
-------- --------
Total Assets $731,296 $738,129
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 40,881 $ 40,916
Trade accounts payable 52,323 43,185
Income taxes payable 9,944 13,153
Accrued expenses 44,485 43,756
-------- --------
Total current liabilities 147,633 141,010
-------- --------
Long-term liabilities:
Long-term debt, excluding current portion 41,250 70,000
Deferred credits 16,073 16,263
Deferred tax liability 9,894 9,602
-------- --------
67,217 95,865
-------- --------
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 2,689,889
shares and 2,692,825 shares, respectively 135 135
Common stock par value $.05 per share; authorized
150,000,000 shares, issued 46,185,048 shares and
46,146,562 shares, respectively 2,309 2,307
Additional paid-in capital 33,198 32,834
Accumulated other comprehensive incom 8,386 7,219
Retained earnings 472,418 458,759
-------- --------
516,446 501,254
-------- --------
Total Liabilities and Stockholders' Equity $731,296 $738,129
======== ========
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
THREE MONTHS ENDED
--------------------------
MAY 3, 2003 MAY 4, 2002
----------- -------------
(In thousands, except per share amounts)
Net sales $239,756 $210,360
Cost of sales, occupancy and buying expenses 115,140 107,780
--------- ---------
Gross profit 124,616 102,580
--------- ---------
Other expenses (income):
Selling, general and administrative 90,991 80,401
Depreciation and amortization 9,854 8,802
Interest expense 772 1,091
Interest and other income (944) (461)
--------- ---------
100,673 89,833
--------- ---------
Income before income taxes 23,943 12,747
Income taxes 8,378 4,467
--------- ---------
Net income 15,565 8,280
--------- ---------
Foreign currency translation adjustments 1,167 3,735
--------- ---------
Comprehensive income $ 16,732 $ 12,015
========= =========
Net income per share:
Basic $ 0.32 $ 0.17
========= =========
Diluted $ 0.32 $ 0.17
========= =========
Weighted average number of shares outstanding:
Basic 48,848 48,671
========= =========
Diluted 49,042 48,813
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
4
CLAIRE'S STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
------------------------------
MAY 3, 2003 MAY 4, 2002
-------------- --------------
(In thousands)
Cash flows from operating activities:
Net income $ 15,565 $ 8,280
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,854 8,802
Amortization of intangible assets 209 214
Loss on retirement of property and equipment 248 1,054
(Increase) decrease in -
Inventories (9,727) (6,102)
Prepaid expenses and other assets (11,249) (11,071)
Increase (decrease) in -
Trade accounts payable 8,997 10,822
Income taxes payable (3,169) 1,724
Accrued expenses 909 (780)
Deferred tax liability 292 -
Deferred credits (121) (6)
--------- ---------
Net cash provided by continuing operations 11,808 12,937
Net cash used in discontinued operations - (4,669)
--------- ---------
Net cash provided by operating activities 11,808 8,268
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (9,976) (9,305)
Acquisition of intangible assets,
net of cash received from sale (478) (1,319)
Sale of short-term investments - 1,563
Capital expenditures of discontinued operations - (338)
--------- ---------
Net cash used in investing activities (10,454) (9,399)
--------- ---------
Cash flows from financing activities:
Principal payments on lines of credit (25,000) -
Principal payments on term loan (3,785) -
Proceeds from stock options exercised 375 -
Dividends paid (1,900) (1,892)
--------- ---------
Net cash used in financing activities (30,310) (1,892)
--------- ---------
Effect of foreign currency exchange rate changes
on cash and cash equivalents 745 (41)
--------- ---------
Net decrease in cash and cash equivalents (28,211) (3,064)
Cash and cash equivalents at beginning of period 195,482 99,912
--------- ---------
Cash and cash equivalents at end of period $167,271 $ 96,848
========= =========
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 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 1,
2003 filed with the Securities and Exchange Commission, including Note 1 to
the consolidated financial statements included therein which discusses
consolidation and financial statement presentation. These statements have
been prepared in accordance with accounting principles generally accepted
in the United States of America, which require management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates
include valuation of inventories, valuation of goodwill and intangible
assets, provisions for income taxes, financing operations, contingencies
and litigation. Actual results could differ from these estimates. Due to
the seasonal nature of the Company's business, the results of operations
for the first three 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.
2. EARNINGS PER SHARE
Basic net income per share is 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 16,841 shares and 462,337
shares of common stock, at prices ranging from $25.00 to $26.00 per share
and $19.91 to $30.25 per share, respectively, were outstanding for the
quarters ended May 3, 2003 and May 4, 2002, 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.
3. STOCK-BASED COMPENSATION
The Company accounts for its stock option plans under the recognition and
measurement principles of APB opinion No. 25, "Accounting for Stock Issued
to Employees". No stock-based employee compensation cost is reflected in
net income, as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation" to stock-based
employee compensation.
THREE MONTHS ENDED
----------------------------
MAY 3, 2003 MAY 4, 2002
------------- -------------
Net income, as reported $ 15,565 $ 8,280
Deduct:
Stock-based employee compensation
expense not included in reported net
income, net of tax (174) (284)
------------- -------------
Pro forma net income $ 15,391 $ 7,996
============= =============
Earnings per share:
Basic - as reported $ 0.32 $ 0.17
Basic - pro forma $ 0.32 $ 0.16
Diluted - as reported $ 0.32 $ 0.17
Diluted - pro forma $ 0.31 $ 0.16
6
4. NEW ACCOUNTING PRONOUNCEMENTS
On July 5, 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". That standard requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value
each period, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The standard is effective for the year ending January 31,
2004. Management has determined that SFAS No. 143 will not have a material
effect on our condensed consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities". The interpretation defines a variable interest
entity as a corporation, partnership, trust or any other legal structure
used for business purposes that either (a) does not have equity investors
with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the equity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may
be essentially passive or it may engage in research and development or
other activities on behalf of another company. This interpretation requires
a variable interest entity to be consolidated by a company if that company
is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's
residual returns or both. The interpretation also requires disclosures
about variable interest entities that the Company is not required to
consolidate but in which it has a significant variable interest. Management
has determined that the Company does not have any interests in
unconsolidated entities that qualify as variable interest entities.
5. DISCONTINUED OPERATIONS
In January 2002, the Company's Board of Directors authorized the
disposition of Lux Corp., which represented the Company's apparel segment.
On May 17, 2002, the Company sold the stock of Lux Corporation, d/b/a Mr.
Rags. Through the date of disposition, the operations of Lux Corp. were
accounted for as a discontinued operation in the Company's consolidated
financial statements. In January 2003, Lux Corp. filed a voluntary petition
for relief under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of California. In order to
conform to the separate presentation of the net assets and operating
results of Mr. Rags as a discontinued operations, certain prior period
amounts have been reclassified to conform to current period presentation.
As of May 3, 2003, the Company remains as a guarantor on 12 real estate
leases for Mr. Rags store locations with future rental payments of
approximately $6.2 million. As of May 3, 2003, the Company also had a
contingent liability as lessee under a master lease agreement on
approximately $3.5 million of gross future lease payments on operating
leases for equipment and leasehold improvements of Lux Corp. that were
assigned to Lux Corp. at the time of the sale. The Company entered into a
transitional services agreement with the new owner of Lux Corp. in May 2002
under which the Company performed certain transition services for the
benefit of Mr. Rags. The Company had no decision-making authority under the
terms of the agreement. The service agreement was for an initial period of
one year with two, three month renewal options. Lux Corp. has cancelled
these services effective May 31, 2003. During the three months ended May 3,
2003, the Company has received approximately $.4 million for these services
and has included this amount within interest and other income within the
Unaudited Condensed Consolidated Statement of Operations and Comprehensive
Income.
7
6. 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 for the
periods presented were as follows:
THREE MONTHS ENDED
------------------
MAY 3, MAY 4,
2003 2002
-------- --------
North America $176,822 $162,953
International 62,934 47,407
-------- --------
Total $239,756 $210,360
======== ========
Net income for the periods presented was as follows:
THREE MONTHS ENDED
------------------
MAY 3, MAY 4,
2003 2002
-------- --------
North America $13,597 $ 8,773
International 1,968 (493)
-------- --------
Total $15,565 $ 8,280
======== ========
7. STATEMENTS OF CASH FLOWS
Payments of income taxes were $12.0 million and $1.6 million for the three
months ended May 3, 2003 and May 4, 2002, respectively. Payments of
interest were $.7 million and $1.2 million for the three months ended May
3, 2003 and May 4, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
We are a leading mall-based retailer of value-priced fashion accessories for
pre-teens and teenagers as well as young adults through our wholly-owned
subsidiaries, Claire's Boutiques, Inc., which also operates through its Icing by
Claire's division, Claire's Puerto Rico Corp., Claire's Canada Corp., Claire's
Accessories UK Ltd., Bijoux One Trading GmbH, Claire's Switzerland GmbH,
Claire's Germany GmbH (Bijoux, which are our stores located in Switzerland,
Austria and Germany), Claire's France and Claire's Nippon Co. Ltd., which is our
50%-owned joint venture with Aeon Co, Ltd. (f/k/a Jusco Co., Ltd.). We are
primarily organized based on our geographic markets, which include our North
American operations and our International operations.
As of May 3, 2003 we operated a total of 2,939 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 1, 2003 as Fiscal
2003, and the current fiscal year ending January 31, 2004 as Fiscal 2004.
8
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.
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
--------------------------------------
MAY 3, MAY 4,
2003 2002
------------------ -----------------
Net sales $239,756 100.0% $210,360 100.0%
Cost of sales, occupancy and buying expenses 115,140 48.0 107,780 51.2
--------- ------- --------- ------
Gross profit 124,616 52.0 102,580 48.8
Other expenses (income):
Selling, general and administrative 90,991 38.0 80,401 38.2
Depreciation and amortization 9,854 4.1 8,802 4.2
Interest expense 772 0.3 1,091 0.5
Interest and other income (944) (0.4) (461) (0.2)
--------- ------- --------- -----
100,673 42.0 89,833 42.7
Income before income taxes 23,943 10.0 12,747 6.1
Income taxes 8,378 3.5 4,467 2.1
--------- ------- --------- ------
Net income $ 15,565 6.5% $ 8,280 3.9%
========= ======= ========= ======
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to inventories, valuation of goodwill and intangible assets, income
taxes, financing operations, contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes that the following accounting policies include a higher
degree of judgment and/or complexity and, thus, are considered to be critical
accounting policies. Management has discussed the development and selection of
these critical accounting policies with the Audit Committee of the Board of
Directors and the Audit Committee has reviewed our disclosures relating to them.
9
Inventory Valuation - We mark down our inventory for estimated unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory markdowns may be required, which could
reduce our margins and operating results. Management records these inventory
markdowns periodically based on the various assumptions, including customer
demand and preferences. Our success is largely dependent upon management's
ability to gauge the fashion tastes of our customers and provide merchandise
that satisfies customer demand. Any failure to provide appropriate merchandise
in quantities that mirror demand could increase future inventory write-downs.
Additionally, our inventories are valued using the retail method in North
America and Bijoux and average cost in UK and France. Fluctuations in demand
for inventory affect the value of our inventory.
Asset Impairment - We invest in property and equipment in connection with the
opening and remodeling of stores. We evaluate the recoverability of these assets
periodically and record an impairment charge when we believe the cash flow may
not be sufficient to recover the assets. Future adverse changes in market
conditions or poor operating results of underlying assets could result in losses
or an inability to recover the carrying value of the investments that may not be
reflected in an investment's current carrying value, thereby possibly requiring
an impairment charge in the future. During Fiscal 2003, we recorded impairment
charges of $2.7 million relating to fixed assets in our International segment
due to those assets not being recoverable by estimated discounted cash flows.
No impairment has been recorded during Fiscal 2004.
Goodwill Impairment - We continually evaluate whether events and changes in
circumstances warrant revised estimates of useful lives or recognition of an
impairment loss of unamortized goodwill. The conditions that would trigger an
impairment assessment of unamortized goodwill include a significant, sustained
negative trend in our operating results or cash flows, a decrease in demand for
our products, a change in the competitive environment and other industry and
economic factors. We measure impairment of unamortized goodwill utilizing the
discounted cash flow method. The estimated discounted cash flows are then
compared to our goodwill amounts. If the unamortized balance of the goodwill
exceeds the estimated discounted cash flows, the excess of the unamortized
balance is written off. Future cash flows may not meet projected amounts, which
could result in impairment.
Intangible Asset Impairment - We continually evaluate whether events and changes
in circumstances warrant revised estimates of the useful lives or recognition of
an impairment loss for intangible assets. Future adverse changes in market and
legal conditions, or poor operating results of underlying assets could result in
losses or an inability to recover the carrying value of the intangible asset,
thereby possibly requiring an impairment charge in the future. The Company has
concluded that certain intangible assets, comprised primarily of lease rights,
qualify as indefinite-life intangible assets. Fair market value of the lease
rights were determined through the use of third-party valuation. In addition,
we make investments through our international subsidiaries in intangible assets
upon the opening and acquisition of many of our store locations in Europe.
These other intangible assets which are subject to amortization are amortized
over the useful lives of the respective leases, not to exceed 25 years. We
evaluate the market value of these assets periodically and record the impairment
charge when we believe the asset has experienced a decline in value that is
other than temporary. We recorded impairment charges of approximately $1.0
million in Fiscal 2003 because the market value of certain lease rights included
in our international segment were determined to be less than their carrying
values. No impairment has been recorded during Fiscal 2004.
Accounting for Leases - We finance certain leasehold improvements and equipment
used in our stores through transactions accounted for as non-cancelable
operating leases. As a result, the rental expense for these leasehold
improvements and equipment is recorded during the term of the lease contract in
our consolidated financial statements, generally over four to seven years. In
the event that any of the real property leases where leasehold improvements or
equipment is located that are subject to these non-cancelable operating leases
is terminated by us or our landlord prior to the scheduled expiration date of
the real property lease, we will be required to accrue all future rent payments
under these operating leases as a charge against our earnings in the year of
termination.
10
Deferred Taxes - We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. The valuation
allowance is determined based on estimates by management of future taxable
income. Our estimates of future taxable income can be affected by a number of
factors, including possible tax audits or general economic conditions or
competitive pressures that could affect our future taxable income. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, in the
event we were to determine that we would not be able to realize our deferred tax
assets in the future, an adjustment to the valuation allowance would be made.
Likewise, should we determine that we would not be able to realize all or part
of a net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made.
Recorded within our financial statements is a valuation allowance of $12.6
million at May 3, 2003 due to uncertainties related to the ability to utilize
some of our deferred tax assets, consisting of net operating loss carryforwards
of $12.6 million relating to the operations of our foreign subsidiaries, $12.2
million of which have indefinite expiration, and $.4 million of which expire in
Fiscal 2006.
Although management believes that the estimates discussed above are reasonable
and the related calculations conform to generally accepted accounting
principles, actual results could differ from these estimates, and such
differences could be material.
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 in accordance with
generally accepted accounting principles. 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 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. As of May 3, 2003
and May 4, 2002, our investment in Nippon was carried at zero on our
consolidated balance sheet.
Our fiscal years end on the Saturday closest to January 31. As a result, our
Fiscal 2004 and Fiscal 2003 results consisted of 52 weeks.
Net sales for the three months ended May 3, 2003 increased approximately 14.0%,
or $29.4 million, over the comparable period ended May 4, 2002. The increase
for the period resulted primarily from a same-store sales increase during the
period of 8%, a weaker U.S. dollar and an increase in average sales per store
for new stores. Same-store sales in North America were in excess of those in
Europe during the period, driven by successful product offerings across several
departments. 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.
Gross profit for the three months ended May 3, 2003 increased 3.2% as a
percentage of sales, or $22.0 million, compared to the three months ended May 4,
2002. The increase as a percentage of sales was the result of improved
merchandise margins and leverage on occupancy costs, which are fixed in nature,
made possible by the same-store sales increases during the period. The higher
merchandise margins were achieved by taking fewer markdowns during the quarter
as customer demand exceeded our plans and higher initial mark-up at our Icing by
Claire's division.
Selling, general and administrative expenses for the three months ended May 3,
2003 decreased .2% as a percentage of sales, or an increase of $10.6 million,
compared to the three months ended May 4, 2002. The decrease as a percentage of
sales was caused primarily by the effect of positive same-store sales during the
quarter on our store payroll and corporate overhead, offset by higher bonus
expense in North America and higher expenses related to the building of our
infrastructure in our European division.
Depreciation and amortization for the three months ended May 3, 2003 was $9.9
million as compared to $8.8 million for the three months ended May 4, 2002. The
increase is primarily the result of higher foreign currency exchange rates due
to the weaker U.S. dollar during the period as compared to the prior period.
11
Interest expense was $.8 million for the three months ended May 3, 2003 as
compared to $1.1 million for the three months ended May 4, 2002. The $ .3
million decrease in interest expense was due primarily to lower interest rates
on our credit facilities and lower outstanding debt balances during the period.
Interest and other income was $.9 million for the three months ended May 3, 2003
as compared to $.5 million for the three months ended May 4, 2002. Included in
the current period was approximately $.4 million of service fees related to the
services provided to Lux Corp., which were terminated effective May 31, 2003.
Our effective tax rate was 35% during the periods ended May 3, 2003 and May 4,
2002.
In January 2002, our Board of Directors authorized the disposition of Lux Corp.,
which represented our apparel segment. On May 17, 2002, we sold the stock of
Lux Corporation, d/b/a Mr. Rags. Through the date of disposition, the
operations of Lux Corp. were accounted for as a discontinued operation in our
consolidated financial statements. In January 2003, Lux Corp. filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of California. In April 2003, Lux
Corp. advised the Bankruptcy Court that it intends to liquidate its assets.
As of May 3, 2003, we remain as a guarantor on 12 real estate leases for Mr.
Rags store locations with future rental payments of approximately $6.2 million.
As of May 3, 2003, we also had a contingent liability as lessee under a master
lease agreement on approximately $3.5 million of gross future lease payments on
operating leases for equipment and leasehold improvements of Lux Corp. that were
assigned to Lux Corp. at the time of the sale. We entered into a service
agreement with the new owner of Lux Corp. in May 2002 under which we performed
certain transition services for the benefit of Mr. Rags, with no decision making
authority. The service agreement was for an initial period of one year, with
two three-month renewal options. Lux Corp. has cancelled these services
effective May 31, 2003. As of May 3, 2003, we have received approximately $.4
million for these services and have included this amount in "interest and other
income" within our Unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income for the three months ended May 3, 2003.
In order to conform to the separate presentation of the net assets and operating
results of Lux Corp. as a discontinued operation, certain prior period amounts
have been reclassified to conform to current period presentation.
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 100 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 May 3, 2003 no amount was
outstanding on this line of credit, while $81.7 million was outstanding under
the term loan. Also, on May 3, 2003, we 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 May 3, 2003, we had $40 million of availability under
the revolving line of credit. We also had $2.0 million of issued letters of
credit which are supported by and considered drawn against our line of credit.
12
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. 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 $167.3 million at May 3, 2003.
Net cash provided by operating activities from continuing operations was $11.8
million for the three months ended May 3, 2003 compared to $12.9 million for the
three months ended May 4, 2002. The primary sources of net cash provided by
operating activities from continuing operations during the first quarter of
Fiscal 2004 was net income adjusted for non-cash items, the increase in accounts
payable of $9.0 million, offset by an increase in inventory, prepaid expenses
and other assets of $21.0 million.
Inventory at May 3, 2003 increased 11% compared to the inventory balance at the
end of Fiscal 2003. 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 $10.5 million for the three months
ended May 3, 2003 was primarily capital expenditures of $10.0 million and the
purchase of intangible assets in our international operations.
Net cash used in financing activities was $30.3 million for the three months
ended May 3, 2003 as compared to $1.9 million for the three months ended May 4,
2002. The cash used in financing activities during the first quarter of Fiscal
2004 was to fund $1.9 million of dividends on our Class A and Common stock, as
well as reduce our lines of credit balance and term loan on our Credit Facility
by $28.8 million.
For the three months ended May 3, 2003, we opened 58 stores and closed 31 stores
ending the quarter with 2,939 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 2004.
During the three months ended May 3, 2003, 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 $1.2 million for the three months ended May 3, 2003.
We finance certain leasehold improvements and equipment used in our stores
through transactions accounted for as non-cancelable operating leases. As a
result, the rental expense for these leasehold improvements and equipment is
recorded during the term of the lease contract in our financial statements,
generally over four to seven years. We have approximately $19.5 million of
future obligations related to these operating leases, including obligations for
equipment and leasehold improvement leases assigned to Lux Corp. In the event
that any of the real property leases where leasehold improvements or equipment
is located that are subject to these non-cancelable operating leases is
terminated by us or our landlord prior to the scheduled expiration date of the
real property lease, we may be required to pay all future rent payments under
these operating leases. At May 3, 2003, we had $433,000 accrued related to
future payment obligations on leasehold improvement leases for closed stores.
13
Working capital at May 3, 2003 was $167.9 million compared to $180.6 million at
February 1, 2003. The decrease in working capital was primarily attributable to
a decrease in cash and cash equivalents of $28.2 million as we reduced our
borrowings under our lines of credit.
In May 2003, our Board of Directors authorized us to increase our dividends on
our Class A common stock from $.02 per share to $.03 per share and from $.04 per
share to $.06 per share on our Common Stock.
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, 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. The
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, potential difficulties
or delays in identifying, attracting and retaining qualified individuals to
serve in senior management positions, uncertainties generally associated with
specialty retailing, and the other factors referred to herein. 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 1, 2003.
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 three months of Fiscal 2004, included in comprehensive income
and stockholders' equity is $1.2 million reflecting the unrealized gain on
foreign currency translation. Based on our average net currency positions at
May 3, 2003, 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 three months of Fiscal 2004, a 10%
increase in the average effective interest rate in Fiscal 2004 would not have
materially impacted our annual net interest expense.
14
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures
conducted within 90 days of the date of filing this report on Form 10-Q,
our acting co-Chief Executive Officers and our Chief Financial Officer have
concluded that our disclosure controls and procedures, as of the date of
their evaluation, have been designed and are being operated in a manner
that provides reasonable assurance that the information required to be
disclosed by us in reports filed under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Changes in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are, from time to time, involved in routine litigation incidental to the
conduct of our business, including proceedings to protect our trademark rights,
litigation instituted by persons injured upon premises under our control and
litigation with present and former employees. Although litigation with present
and former employees is routine and incidental to the conduct of our business,
like any business employing significant numbers of employees, such litigation
can result in large monetary awards when a civil jury is allowed to determine
compensatory and/or punitive damages for actions claiming discrimination on the
basis of age, gender, race, religion, disability of other legally protected
characteristic or for termination of employment that is wrongful or in violation
of implied contracts. We believe that currently pending litigation will not
have a material adverse effect on our financial position, earnings or cash
flows. We may also become involved with litigation for businesses that we have
acquired or businesses that we have disposed of, and we may be required to
pursue our indemnification rights, to the extent available, under agreements
with third parties for liabilities, if any, that might be assessed against us
for these claims. Potential claims may also be asserted against us by creditors
of Lux Corp. as a result of its recent bankruptcy filing. These potential
claims may include or relate to obligations under real estate leases guaranteed
by us, obligations under equipment and leasehold improvement leases assigned by
us to Lux Corp., and payments received by us under the stock purchase agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certifications pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
99.2 Certification pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
(b) Reports on Form 8-K
During the quarterly period ended May 3, 2003, the Company filed
the following Current Reports on Form 8-K:
Report on Form 8-K dated March 13, 2003 under Items 7
and 9.
ITEMS 2, 3, 4 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)
June 16, 2003 /s/ Marla L. Schaefer
------------------------
Marla L. Schaefer
Acting Co-Chairman and Co-
Chief Executive Officer
and Vice Chairman of
the Board
June 16, 2003 /s/ E. Bonnie Schaefer
-------------------------
E. Bonnie Schaefer
Acting Co-Chairman and Co-
Chief Executive Officer
and Vice Chairman of
the Board
June 16, 2003 /s/ Ira D. Kaplan
--------------------
Ira D. Kaplan
Senior Vice President
and Chief Financial
Officer
16
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION
- ------------ -----------
99.1 Certifications of Acting Co-Chief Executive Officers.
99.2 Certificates of Chief Financial Officer
17
CERTIFICATION
I, Marla Schaefer, acting co-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.
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
June 16, 2003 /s/ Marla Schaefer
--------------------
Marla Schaefer
Acting Co-Chief Executive
Officer
18
CERTIFICATION
I, E. Bonnie Schaefer, acting co-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 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.
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
June 16, 2003 /s/ E. Bonnie Schaefer
-------------------------
E. Bonnie Schaefer
Acting Co-Chief Executive
Officer
19
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 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.
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
June 16, 2003 /s/ Ira D. Kaplan
--------------------
Ira D. Kaplan
Chief Financial Officer
20