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UNITED STATES
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 NOVEMBER 1, 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 December 1, 2003 was 46,448,285 and 2,635,519,
respectively.
CLAIRE'S STORES, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
---------
PART I. FINANCIAL INFORMATION
- ----------------------------------
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets at
November 1, 2003 and February 1, 2003. 3
Unaudited Condensed Consolidated Statements of Operations
and Comprehensive Income for the Three Months and
Nine Months Ended November 1, 2003 and November 2, 2002. 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended November 1, 2003 and
November 2, 2002. 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 15
ITEM 4. CONTROLS AND PROCEDURES 15
PART II. OTHER INFORMATION
- -----------------------------
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE PAGE 17
2
PART I. FINANCIAL INFORMATION
CLAIRE'S STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
NOV. 1, 2003 FEB. 1, 2003
============== ==============
(In thousands, except share
and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 213,366 $ 195,482
Inventories 120,631 88,334
Prepaid expenses and other current assets 44,903 37,792
-------------- --------------
Total current assets 378,900 321,608
-------------- --------------
Property and equipment:
Land and building 18,151 18,041
Furniture, fixtures and equipment 221,481 206,529
Leasehold improvements 179,915 161,240
-------------- --------------
419,547 385,810
Less accumulated depreciation and amortization (235,628) (211,328)
-------------- --------------
183,919 174,482
-------------- --------------
Intangible assets, net 37,057 29,576
Other assets 13,221 14,588
Goodwill 199,143 197,875
-------------- --------------
249,421 242,039
-------------- --------------
Total Assets $ 812,240 $ 738,129
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 41,250 $ 40,916
Trade accounts payable 59,216 43,185
Income taxes payable 6,632 13,153
Accrued expenses 51,641 43,756
-------------- --------------
Total current liabilities 158,739 141,010
-------------- --------------
Long-term liabilities:
Long-term debt, excluding current portion 58,750 70,000
Deferred credits 16,911 16,263
Deferred tax liability 11,440 9,602
-------------- --------------
87,101 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 and outstanding
2,682,630 shares and 2,692,825 shares, respectively 134 135
Common stock par value $.05 per share; authorized
150,000,000 shares, issued and outstanding 46,294,859
shares and 46,146,562 shares, respectively 2,315 2,307
Additional paid-in capital 34,884 32,834
Accumulated other comprehensive income 14,917 7,219
Retained earnings 514,150 458,759
-------------- --------------
566,400 501,254
-------------- --------------
Total Liabilities and Stockholders' Equity $ 812,240 $ 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 NINE MONTHS ENDED
==================== ====================
NOV. 1, NOV. 2, NOV. 1, NOV. 2,
2003 2002 2003 2002
========= ========= ========= =========
(In thousands, except per share amounts)
Net sales $264,146 $230,043 $768,851 $679,143
Cost of sales, occupancy and buying expenses 124,934 114,978 367,158 343,868
--------- --------- --------- ---------
Gross profit 139,212 115,065 401,693 335,275
--------- --------- --------- ---------
Other expenses:
Selling, general and administrative 93,851 86,185 278,444 251,547
Depreciation and amortization 10,208 9,895 30,453 27,991
Interest expense 591 1,236 2,008 3,464
Interest and other income (1,210) (820) (3,055) (2,130)
--------- --------- --------- ---------
103,440 96,496 307,850 280,872
--------- --------- --------- ---------
Income from continuing operations before income taxes 35,772 18,569 93,843 54,403
Income taxes 10,519 6,488 30,844 18,963
--------- --------- --------- ---------
Income from continuing operations 25,253 12,081 62,999 35,440
--------- --------- --------- ---------
Discontinued operation:
Gain on disposal of Lux Corp., less applicable income
taxes of $169 and $1,246 - 281 - 2,077
--------- --------- --------- ---------
Net income 25,253 12,362 62,999 37,517
--------- --------- --------- ---------
Foreign currency translation adjustments 6,332 582 7,698 14,921
--------- --------- --------- ---------
Comprehensive income $ 31,585 $ 12,944 $ 70,697 $ 52,438
========= ========= ========= =========
Net income per share:
Basic:
Income from continuing operations $ 0.52 $ 0.25 $ 1.29 $ 0.73
Gain from disposal of discontinued operation - - - 0.04
--------- --------- --------- ---------
Net income per share $ 0.52 $ 0.25 $ 1.29 $ 0.77
========= ========= ========= =========
Diluted:
Income from continuing operations $ 0.51 $ 0.25 $ 1.28 $ 0.73
Gain from disposal of discontinued operation - - - 0.04
--------- --------- --------- ---------
Net income per share $ 0.51 $ 0.25 $ 1.28 $ 0.77
========= ========= ========= =========
Weighted average number of shares outstanding:
Basic 48,950 48,717 48,900 48,686
========= ========= ========= =========
Diluted 49,221 48,902 49,139 48,845
========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
4
CLAIRE'S STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
==============================
NOV. 1, 2003 NOV. 2, 2002
============== ==============
(In thousands)
Cash flows from operating activities:
Net income $ 62,999 $ 37,517
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal of discontinued operation, net of income taxes - (2,077)
(Gain) loss on sale of intangible assets (399) 50
Depreciation and amortization 30,453 27,991
Amortization of intangible assets 899 660
Loss on retirement of property and equipment 1,736 2,311
(Increase) decrease in -
Inventories (30,920) (26,045)
Prepaid expenses and other assets (3,669) (8,794)
Increase (decrease) in -
Trade accounts payable 15,009 23,569
Income taxes payable (6,573) 2,614
Accrued expenses 7,004 10,525
Deferred tax liability 679 -
Deferred credits 546 472
-------------- --------------
Net cash provided by continuing operations 77,764 68,793
Net cash provided by discontinued operations - 2,429
-------------- --------------
Net cash provided by operating activities 77,764 71,222
-------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (38,557) (36,233)
Acquisition of intangible assets (5,855) (5,860)
Sale of short-term investments - 1,563
Capital expenditures of discontinued operations - (352)
-------------- --------------
Net cash used in investing activities (44,412) (40,882)
-------------- --------------
Cash flows from financing activities:
Principal payments on term loan (10,932) (56)
Proceeds from stock options exercised 2,057 1,703
Dividends paid (7,607) (5,679)
-------------- --------------
Net cash used in financing activities (16,482) (4,032)
-------------- --------------
Effect of foreign currency exchange rate changes on cash
and cash equivalents 1,014 3,856
-------------- --------------
Net increase in cash and cash equivalents 17,884 30,164
Cash and cash equivalents at beginning of period 195,482 99,912
-------------- --------------
Cash and cash equivalents at end of period $ 213,366 $ 130,076
============== ==============
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 nine 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. All outstanding options for the quarter ended
November 1, 2003 were included in the computation of diluted earnings per
share. Options to purchase 60,905 shares of common stock, at prices ranging
from $25.00 to $30.25 per share were outstanding for the quarter ended
November 2, 2002, 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 period.
Options to purchase 75,560 and 231,130 shares of common stock, at prices
ranging from $33.86 and $21.25 to $30.25 per share, were outstanding for
the nine months ended November 1, 2003 and November 2, 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 nine month period.
3. STOCK-BASED COMPENSATION
The Company accounts for its stock option plans under the recognition and
measurement principles of Accounting Principles Board, "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 Company has adopted the disclosure provisions
required under Financial Accounting Standards Board, "FASB" Statement No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure".
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.
6
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- --------------------
NOV. 1, NOV. 2, NOV. 1, NOV. 2,
2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported $ 25,253 $ 12,362 $ 62,999 $ 37,517
Deduct:
Stock-based employee compensation
expense not included in reported net
income, net of tax (366) (96) (719) (665)
--------- --------- --------- ---------
Pro forma net income $ 24,887 $ 12,266 $ 62,280 $ 36,852
========= ========= ========= =========
Earnings per share:
Basic - as reported $ 0.52 $ 0.25 $ 1.29 $ 0.77
Basic - pro forma $ 0.51 $ 0.25 $ 1.27 $ 0.76
Diluted - as reported $ 0.51 $ 0.25 $ 1.28 $ 0.77
Diluted - pro forma $ 0.51 $ 0.25 $ 1.27 $ 0.75
4. NEW ACCOUNTING PRONOUNCEMENTS
On July 5, 2001, the FASB issued Statement 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 fiscal year ending
January 31, 2004. Management has determined that Statement No. 143 did 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 Central District of California. In April 2003, Lux
Corp. advised the Bankruptcy Court that it intended to liquidate its
assets. The Company has been advised that Lux Corp. has closed all of its
stores and liquidated its inventories. On November 7, 2003, the Official
Committee of Unsecured Creditors of Lux Corp. filed a complaint against the
Company, see "Legal Proceedings".
7
As of November 1, 2003, the Company remains as a guarantor on 12 real
estate leases for Mr. Rags store locations with future rental payments of
approximately $10.2 million. As of November 1, 2003, the Company also had a
contingent liability as lessee under a master lease agreement on
approximately $2.2 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 nine months ended
November 1, 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 Statements of Operations
and Comprehensive Income.
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 NINE MONTHS ENDED
------------------ ------------------
NOV. 1, NOV. 2, NOV. 1, NOV. 2,
2003 2002 2003 2002
-------- -------- -------- --------
North America $190,513 $166,975 $556,227 $506,942
International 73,633 63,068 212,624 172,201
-------- -------- -------- --------
Total $264,146 $230,043 $768,851 $679,143
======== ======== ======== ========
Income from continuing operations for the periods presented was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ------------------
NOV. 1, NOV. 2, NOV. 1, NOV. 2,
2003 2002 2003 2002
-------- -------- -------- --------
North America $ 19,936 $ 8,031 $ 48,499 $ 26,956
International 5,317 4,050 14,500 8,484
-------- -------- -------- --------
Total $ 25,253 $ 12,081 $ 62,999 $ 35,440
======== ======== ======== ========
7. STATEMENTS OF CASH FLOWS
Payments of income taxes were $36.3 million and $16.3 million for the nine
months ended November 1, 2003 and November 2, 2002, respectively. Payments
of interest were $2.0 million and $2.9 million for the nine months ended
November 1, 2003 and November 2, 2002.
8. SUBSEQUENT EVENTS
On November 3, 2003, the Company's Board of Directors declared a
two-for-one stock split on our Common and Class A common stock payable and
effective on December 19, 2003, and also authorized the Company maintain
its current dividend per share amounts.
On November 18, 2003, the Company's Board of Directors authorized a
retirement compensation package for the Company's Chairman of the Board.
Management estimates the retirement package to cost between $8.0 million
and $11.0 million, pending the outcome of certain actuarial information.
The Company intends to record this amount as an expense in the fourth
quarter of the fiscal year ending January 31, 2004.
8
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 November 1, 2003 we operated a total of 2,971 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.
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 NINE MONTHS ENDED
------------------ ------------------
NOV. 1, NOV. 2, NOV. 1, NOV. 2,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, occupancy and buying expenses 47.3 50.0 47.8 50.6
-------- -------- -------- --------
Gross profit 52.7 50.0 52.2 49.4
-------- -------- -------- --------
Other expenses (income):
Selling, general and administrative 35.5 37.5 36.2 37.0
Depreciation and amortization 3.9 4.3 4.0 4.1
Interest expense 0.2 0.5 0.3 0.5
Interest and other income (0.5) (0.4) (0.4) (0.3)
-------- -------- -------- --------
39.2 41.9 40.0 41.4
-------- -------- -------- --------
Income before income taxes 13.5 8.1 12.2 8.0
Income taxes 4.0 2.8 4.0 2.8
-------- -------- -------- --------
Income from continuing operations 9.6% 5.3% 8.2% 5.2%
======== ======== ======== ========
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.
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.
Goodwill Impairment - We periodically evaluate whether events and changes in
circumstances warrant 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 periodically 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.
10
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.
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 $5.2
million at November 1, 2003 due to uncertainties related to the ability to
utilize some of our deferred tax assets, consisting of net operating loss
carryforwards of $14.7 million relating to the operations of our foreign
subsidiaries, $14.2 million of which have indefinite expiration, and $ .5
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. Our portion of the earnings of Nippon
are included in our income statement within the caption "Interest and other
income". 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 has been adjusted periodically to
recognize our proportionate share of earnings or losses from Nippon since the
acquisition date. As of November 1, 2003 and November 2, 2002, our investment
in Nippon was carried at $ .8 million and zero, respectively 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 November 1, 2003 increased approximately
14.8%, or $34.1 million, over the comparable period ended November 2, 2002. Net
sales for the nine months ended November 1, 2003 increased approximately 13.2%,
or $89.7 million, over the comparable period ended November 2, 2002. The
increases for the three and nine month periods resulted primarily from
same-store sales increases of 8% and 7%, respectively, a weaker U.S. dollar and
an increase in average sales per store for new stores. Same-store sales for
both periods in North America were driven by successful product offerings across
several departments. Same-store sales in Europe decreased by 1% during the
three month period and were even during the nine month period primarily due to
unseasonably hot weather across Europe, which impacted consumer traffic and a
general weakness in the European retail environment. The average sales per store
in new stores increased during the three and nine month periods 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.
11
Gross profit for the three months ended November 1, 2003 increased 21.0%, or
$24.2 million, compared to the three months ended November 2, 2002. The 2.7%
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 a higher initial mark-up at our Icing by Claire's stores.
Gross profit for the nine months ended November 1, 2003 increased 19.8%, or
$66.4 million, compared to the comparable period ended November 2, 2002. The
2.8% increase as a percentage of sales was primarily caused by higher
merchandise margins, resulting from fewer markdowns during the nine months ended
November 1, 2003 as discussed above.
Selling, general and administrative expenses for the three months ended November
1, 2003 increased 8.9%, or $7.7 million, compared to the three months ended
November 2, 2002. The 2.0% 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, partially offset by higher bonus expense
in North America and higher expenses related to the building of our
infrastructure in our European division. Selling, general and administrative
expenses for the nine months ended November 1, 2003 increased 10.7%, or $26.9
million, compared to the comparable period ended November 2, 2002. The decrease
of .8% as a percentage of sales was primarily caused by the same factors
discussed for the three month period.
Depreciation and amortization for the three months ended November 1, 2003 was
$10.2 million as compared to $9.9 million for the three months ended November 2,
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. Depreciation and amortization for the nine months ended November 1,
2003 was $30.5 million as compared to $28.0 million for the nine months ended
November 2, 2002. The increase was also primarily due to the weaker U.S.
dollar.
Interest expense was $ .6 million and $2.0 million for the three and nine months
ended November 1, 2003 as compared to $1.2 million and $3.5 million for the
three and nine months ended November 2, 2002, respectively. The 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 $1.2 million and $3.1 million for the three and
nine months ended November 1, 2003 as compared to $ .8 million and $2.1 million
for the three and nine months ended November 2, 2002. Included in the three and
nine months ended November 1, 2003 was $ .5 million and $ .8 million,
respectively, of equity in the earnings of Nippon for the respective periods.
Our effective tax rate was 29.4% and 35% and 32.9% and 35% during the three and
nine month periods, respectively, ended November 1, 2003 and November 2, 2002.
The Fiscal 2004 periods include a one-time benefit of approximately $2.0 million
attributable to a recently concluded tax examination that was settled more
favorably than anticipated.
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 Central District of California. In April 2003, Lux
Corp. advised the Bankruptcy Court that it intended to liquidate its assets. We
have been advised that Lux Corp. has closed all of its stores and liquidated its
inventories. See "Legal Proceedings".
12
As of November 1, 2003, we remain as a guarantor on 12 real estate leases for
Mr. Rags store locations with future rental payments of approximately $10.2
million. As of November 1, 2003, we also had a contingent liability as lessee
under a master lease agreement on approximately $2.2 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. During the nine month period ended November 1,
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.
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 $175.0 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 November 1, 2003, $25.0 million was
outstanding on this line of credit, while $75.0 million was outstanding under
the term loan. 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 November 1, 2003, we had $15.0 million of availability
under the revolving line of credit. We also had $1.8 million of issued letters
of credit which are supported by and considered drawn against our 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. 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. Also, on November 1, 2003, we
were in compliance with all debt covenants.
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 $213.4 million at November 1, 2003.
Net cash provided by operating activities from continuing operations was $77.8
million for the nine months ended November 1, 2003 compared to $68.8 million for
the nine months ended November 2, 2002. The primary sources of net cash
provided by operating activities from continuing operations during the first
nine months of Fiscal 2004 was net income adjusted for non-cash items, the
increase in trade accounts payable of $15.0 million offset by an increase in
inventory of $30.9 million.
13
Inventory at November 1, 2003 increased 36.6% 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 $44.4 million for the nine months ended
November 1, 2003 was primarily capital expenditures of $38.6 million and the
purchase of intangible assets in our international operations.
Net cash used in financing activities was $16.5 million for the nine months
ended November 1, 2003 as compared to $4.0 million for the nine months ended
November 2, 2002. The cash used in financing activities during the first nine
months of Fiscal 2004 was primarily to fund $7.6 million of dividends on our
Class A Common stock and Common stock, as well as reduce our term loan on our
Credit Facility by $10.9 million.
For the nine months ended November 1, 2003, we opened 39 stores and closed 16
stores ending the quarter with 2,971 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, repay debt and fund currently anticipated
capital expenditure plans for the next twelve months.
During the nine months ended November 1, 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 $7.7 million for the nine months ended November 1, 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 November 1, 2003, we had $ .4 million accrued
related to future payment obligations on leasehold improvement leases for closed
Claire's Boutiques stores.
Working capital at November 1, 2003 was $220.2 million compared to $180.6
million at February 1, 2003. The increase in working capital was primarily
attributable to an increase in cash and cash equivalents of $17.9 million, an
increase in inventory, net of trade accounts payable, of $16.3 million and an
increase in prepaid expenses primarily in our International division mainly
consisting of occupancy costs which are paid quarterly and semi-annually in many
cases. The source of this working capital was our earnings during the first
nine months of the year.
In May 2003, our Board of Directors authorized us to increase our quarterly
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. In November 2003,
our Board of Directors declared a two-for-one stock split on our Common and
Class A common stock. The Board also authorized us to maintain our current
dividend per share amounts. As a result, our total cash dividend payments will
effectively be doubled, commencing with the dividend payment on December 19,
2003, to shareholders of record on December 5, 2003.
14
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, 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, currency fluctuations,
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 distribution of merchandise, 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. During the first nine
months of Fiscal 2004, included in comprehensive income and stockholders' equity
is $7.7 million reflecting the unrealized gain on foreign currency translation.
Based on our average net currency positions at November 1, 2003, the potential
gain or loss due to a 10% adverse change on foreign currency exchange rates
would 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 nine 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 or on our interest income.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, our acting Co-Chief
Executive Officers and our Chief Financial Officer (collectively, the
"certifying officers") have evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act). These disclosure controls and procedures are designed
to ensure that the information required to be disclosed by us in our periodic
reports filed with the Commission is recorded, processed, summarized and
reported within the time periods specified by the Commission's rules and forms,
and that the information is communicated to the certifying officers on a timely
basis.
The certifying officers concluded, based on their evaluation, that our
disclosure controls and procedures are effective, taking into consideration the
size and nature of our business and operations.
No change in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during
the last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 7, 2003, the Official Committee of Unsecured Creditors of Lux
Corporation, d/b/a Mr. Rags, filed a complaint against us in the United States
Bankruptcy Court for the Central District of California. The complaint alleges
that certain purchase price payments made to us in connection with the sale of
the stock of Lux Corporation in May 2002 should be repaid to the bankruptcy
estate because the payments were preferences or fraudulent transfers, as such
terms are used under general bankruptcy laws. We believe the claims are without
merit and intend to defend the litigation vigorously.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Acting Co-Chief Executive Officer pursuant
to Rule 13a-14(a) and 15d-14(a).
31.2 Certification of Acting Co-Chief Executive Officer pursuant
to Rule 13a-14(a) and 15d-14(a).
31.3 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and 15d-14(a).
32.1 Certification of Acting Co-Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Acting Co-Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification of Chief Financial Officer 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
Other than Current Reports on Form 8-K under Item 12, which are not
deemed to be "filed" for purposes of the Securities Exchange Act of
1934, as amended, the Company did not file any Current Reports on Form
8-K during the quarterly period ended November 1, 2003.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
16
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)
December 15, 2003 /s/ Marla L. Schaefer
---------------------
Marla L. Schaefer
Acting Co-Chairman and Co-Chief
Executive Officer and Vice Chairman of
the Board
December 15, 2003 /s/ E. Bonnie Schaefer
----------------------
E. Bonnie Schaefer
Acting Co-Chairman and Co-Chief
Executive Officer and Vice Chairman of
the Board
December 15, 2003 /s/ Ira D. Kaplan
-----------------
Ira D. Kaplan
Senior Vice President and Chief Financial
Officer
17
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION
- ------------ -----------
31.1 Certification of Acting Co-Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a).
31.2 Certification of Acting Co-Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a).
31.3 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and 15d-14(a).
32.1 Certification of Acting Co-Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Acting Co-Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
18