Attached files
file | filename |
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EX-31.2 - EX-31.2 - CLAIRES STORES INC | g21431exv31w2.htm |
EX-10.2 - EX-10.2 - CLAIRES STORES INC | g21431exv10w2.htm |
EX-10.1 - EX-10.1 - CLAIRES STORES INC | g21431exv10w1.htm |
EX-32.1 - EX-32.1 - CLAIRES STORES INC | g21431exv32w1.htm |
EX-32.2 - EX-32.2 - CLAIRES STORES INC | g21431exv32w2.htm |
EX-31.1 - EX-31.1 - CLAIRES STORES INC | g21431exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended October 31, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to __________
Commission File Nos. 1-8899 and 333-148108
Claires Stores, Inc.
(Exact name of registrant as specified in its charter)
Florida | 59-0940416 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3 S.W. 129th Avenue, Pembroke Pines, Florida | 33027 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (954) 433-3900
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 þ No o
Indicate by check mark whether registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files ) Yes o No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of December 1, 2009, 100 shares of the Registrants common stock, $0.001 par value, were
outstanding.
CLAIRES STORES, INC. AND SUBSIDIARIES
INDEX
INDEX
PAGE NO. | ||||||||
Item 1. Financial Statements |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
20 | ||||||||
31 | ||||||||
32 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
34 | ||||||||
EX-10.1 | ||||||||
EX-10.2 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
CLAIRES STORES, INC. AND SUBSIDIARIES
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, 2009 | January 31, 2009 | |||||||
(In thousands, except share | ||||||||
and per share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 165,159 | $ | 204,574 | ||||
Inventories |
138,817 | 103,691 | ||||||
Prepaid expenses |
40,417 | 31,837 | ||||||
Other current assets |
27,516 | 27,079 | ||||||
Total current assets |
371,909 | 367,181 | ||||||
Property and equipment: |
||||||||
Land and building |
22,288 | 22,288 | ||||||
Furniture, fixtures and equipment |
160,803 | 143,702 | ||||||
Leasehold improvements |
230,504 | 214,007 | ||||||
413,595 | 379,997 | |||||||
Less accumulated depreciation and amortization |
(169,969 | ) | (113,926 | ) | ||||
243,626 | 266,071 | |||||||
Intangible assets, net of accumulated amortization of $30,733 and
$19,371, respectively |
587,555 | 587,125 | ||||||
Deferred
financing costs, net of accumulated amortization of $27,101 and $17,646, respectively |
50,489 | 59,944 | ||||||
Other assets |
60,293 | 56,428 | ||||||
Goodwill |
1,544,346 | 1,544,346 | ||||||
2,242,683 | 2,247,843 | |||||||
Total assets |
$ | 2,858,218 | $ | 2,881,095 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 66,183 | $ | 53,237 | ||||
Current portion of long-term debt |
14,500 | 14,500 | ||||||
Income taxes payable |
6,186 | 6,477 | ||||||
Accrued interest payable |
28,436 | 13,316 | ||||||
Accrued expenses and other current liabilities |
105,727 | 107,974 | ||||||
Total current liabilities |
221,032 | 195,504 | ||||||
Long-term debt |
2,320,481 | 2,373,272 | ||||||
Revolving credit facility |
194,000 | 194,000 | ||||||
Deferred tax liability |
114,479 | 112,829 | ||||||
Deferred rent expense |
22,020 | 18,462 | ||||||
Unfavorable lease obligations and other long-term liabilities |
37,134 | 42,871 | ||||||
2,688,114 | 2,741,434 | |||||||
Commitments and contingencies |
| | ||||||
Stockholders deficit: |
||||||||
Common stock par value $0.001 per share; authorized 1,000
shares; issued and outstanding 100 shares |
| | ||||||
Additional paid-in capital |
613,759 | 609,427 | ||||||
Accumulated other comprehensive income (loss), net of tax |
8,131 | (22,319 | ) | |||||
Retained deficit |
(672,818 | ) | (642,951 | ) | ||||
(50,928 | ) | (55,843 | ) | |||||
Total liabilities and stockholders deficit |
$ | 2,858,218 | $ | 2,881,095 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of Contents
CLAIRES
STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
(in thousands)
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
October 31, 2009 | November 1, 2008 | October 31, 2009 | November 1, 2008 | |||||||||||||
Net sales |
$ | 324,404 | $ | 332,971 | $ | 931,698 | $ | 1,019,947 | ||||||||
Cost of sales, occupancy and buying
expenses |
158,294 | 170,979 | 467,561 | 523,228 | ||||||||||||
Gross profit |
166,110 | 161,992 | 464,137 | 496,719 | ||||||||||||
Other expenses (income): |
||||||||||||||||
Selling, general and administrative |
116,929 | 129,121 | 336,211 | 392,877 | ||||||||||||
Depreciation and amortization |
17,327 | 20,024 | 54,185 | 64,686 | ||||||||||||
Severance and transaction-related costs |
32 | (569 | ) | 406 | 5,695 | |||||||||||
Other (income) expense, net |
(874 | ) | (2,612 | ) | (1,182 | ) | (3,721 | ) | ||||||||
133,414 | 145,964 | 389,620 | 459,537 | |||||||||||||
Operating income |
32,696 | 16,028 | 74,517 | 37,182 | ||||||||||||
Gain on early debt extinguishment |
16,096 | | 33,200 | | ||||||||||||
Interest expense, net |
43,716 | 50,462 | 134,279 | 147,858 | ||||||||||||
Income (loss) before income tax expense
(benefit) |
5,076 | (34,434 | ) | (26,562 | ) | (110,676 | ) | |||||||||
Income tax expense (benefit) |
2,187 | (12,880 | ) | 3,305 | (36,621 | ) | ||||||||||
Net income (loss) |
$ | 2,889 | $ | (21,554 | ) | $ | (29,867 | ) | $ | (74,055 | ) | |||||
Net income (loss) |
$ | 2,889 | $ | (21,554 | ) | $ | (29,867 | ) | $ | (74,055 | ) | |||||
Foreign currency translation and interest
rate swap adjustments, net of tax |
4,851 | (42,827 | ) | 30,450 | (30,682 | ) | ||||||||||
Comprehensive income (loss) |
$ | 7,740 | $ | (64,381 | ) | $ | 583 | $ | (104,737 | ) | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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CLAIRES
STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(in thousands)
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
October 31, 2009 | November 1, 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (29,867 | ) | $ | (74,055 | ) | ||
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
54,185 | 64,686 | ||||||
Amortization of lease rights and other assets |
1,513 | 1,593 | ||||||
Amortization of debt issuance costs |
7,845 | 7,931 | ||||||
Payment in kind interest expense |
29,415 | 15,130 | ||||||
Net accretion of favorable (unfavorable) lease obligations |
(1,594 | ) | (1,114 | ) | ||||
Loss (gain) on sale/retirement of property and equipment, net |
39 | (215 | ) | |||||
Gain on early debt extinguishment |
(33,200 | ) | | |||||
Gain on sale of intangible assets/lease rights |
(598 | ) | (1,446 | ) | ||||
Stock compensation expense |
4,332 | 6,153 | ||||||
(Increase) decrease in: |
||||||||
Inventories |
(30,915 | ) | (37,704 | ) | ||||
Prepaid expenses |
(5,193 | ) | (4,989 | ) | ||||
Other assets |
(5,567 | ) | (3,600 | ) | ||||
Increase (decrease) in: |
||||||||
Trade accounts payable |
9,945 | 31,874 | ||||||
Income taxes payable |
1,749 | (14,551 | ) | |||||
Accrued expenses and other liabilities |
(954 | ) | 2,863 | |||||
Accrued interest payable |
15,121 | 18,867 | ||||||
Deferred income taxes |
1,578 | (38,204 | ) | |||||
Deferred rent expense |
2,895 | 7,337 | ||||||
Net cash provided by (used in) operating activities |
20,729 | (19,444 | ) | |||||
Cash flows from investing activities: |
||||||||
Acquisition of property and equipment, net |
(17,675 | ) | (45,267 | ) | ||||
Acquisition of intangible assets/lease rights |
(484 | ) | (1,273 | ) | ||||
Proceeds from sale of intangible assets/lease rights |
2,154 | | ||||||
Net cash used in investing activities |
(16,005 | ) | (46,540 | ) | ||||
Cash flows from financing activities: |
||||||||
Credit facility proceeds |
| 194,000 | ||||||
Credit facility payments |
(10,875 | ) | (10,875 | ) | ||||
Note purchases |
(36,521 | ) | | |||||
Net cash (used in) provided by financing activities |
(47,396 | ) | 183,125 | |||||
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
3,257 | (9,218 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(39,415 | ) | 107,923 | |||||
Cash and cash equivalents at beginning of period |
204,574 | 85,974 | ||||||
Cash and cash equivalents at end of period |
$ | 165,159 | $ | 193,897 | ||||
Supplemental disclosure of cash flow information:
Income taxes paid |
$ | 2,719 | $ | 15,251 | ||||
Interest paid |
81,927 | 107,186 |
See accompanying notes to unaudited condensed consolidated financial statements.
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CLAIRES STORES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair statement of the results for the interim periods
presented 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 January 31, 2009 filed with the Securities and Exchange Commission, including Note 2 to the
consolidated financial statements included therein which discusses principles of consolidation and
summary of significant accounting policies.
The unaudited condensed consolidated financial 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 about future events. These estimates and the underlying
assumptions affect the amounts of assets and liabilities reported, disclosures regarding contingent
assets and liabilities and reported amounts of revenues and expenses. Such estimates include, but
are not limited to, the value of inventories, goodwill, intangible assets, investment in joint
venture and other long-lived assets, legal contingencies and assumptions used in the calculation of
income taxes, retirement and other post-retirement benefits, stock-based compensation, derivative
and hedging activities, residual values and other items. These estimates and assumptions are based
on managements best estimates and judgment. Management evaluates its estimates and assumptions on
an ongoing basis using historical experience and other factors, including the current economic
environment, which management believes to be reasonable under the circumstances. Management
adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit
markets, volatile equity, foreign currency, energy markets and declines in consumer spending have
combined to increase the uncertainty inherent in such estimates and assumptions. As future events
and their effects cannot be determined with precision, actual results could differ significantly
from these estimates. Changes in those estimates will be reflected in the financial statements in
those future periods when the changes occur.
Due to the seasonal nature of the retail industry and the Companys business, the results of
operations for interim periods of the year are not necessarily indicative of the results of
operations on an annualized basis.
2. Significant Accounting Policies
Update to Significant Accounting Policies and Certain Financial Statement Disclosures
The Company has updated certain portions of its significant accounting policies and financial
statement disclosures since it published its annual report on Form 10-K as of and for the fiscal
year ended January 31, 2009. The portions updated include the following:
Impairment of Assets
The Company continually evaluates whether events and changes in circumstances warrant recognition
of an impairment of goodwill. The conditions that would trigger an impairment assessment of
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. The Company conducts its annual impairment test to determine whether an
impairment of the value of goodwill has occurred. The impairment test requires a two-step process
for determining goodwill impairment. The first step in this process compares the fair value of the
reporting unit to its carrying value. If the carrying value of the reporting unit exceeds its fair
value, the second step of the impairment
test is performed to measure the impairment. In the second step, the fair value of the reporting
unit is
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allocated to all of the assets and liabilities of the reporting unit to determine an
implied goodwill value. This allocation is similar to a purchase price allocation performed in
purchase accounting. If the carrying amount of the reporting units goodwill exceeds the implied
goodwill value, an impairment loss is recognized in an amount equal to that excess. The Company
has two reporting units. These reporting units are the North America segment and the Europe
segment.
Fair value is determined using appropriate valuation techniques. All valuation methodologies
applied in a valuation of any form of property can be broadly classified into one of three
approaches: the asset approach, the market approach and the income approach. The Company relies
on the income approach using discounted cash flows and market approach using comparable public
company entities in deriving the fair values for its reporting units. The asset approach is not
used as the reporting units have significant intangible assets, the value of which is dependent on
cash flow.
The fair value of each reporting unit determined under step 1 of the goodwill impairment test was
based on a three-fourths weighting of a discounted cash flow analysis under the income approach
using forward-looking projections of estimated future operating results and a one-fourth weighting
of a guideline company methodology under the market approach using an earnings before interest,
taxes, depreciation and amortization (EBITDA) multiples. The Companys determination of the fair
value of each reporting unit incorporates multiple assumptions and contains inherent uncertainties,
including significant estimates relating to future business growth, earnings projections and the
weighted average cost of capital used for purposes of discounting. Decreases in revenue growth,
decreases in earnings projections and increases in the weighted average cost of capital will all
cause the fair value of the reporting unit to decrease, which could require the Company to modify
future models and cash flow estimates, and could result in an impairment triggering event in the
future.
The Company has weighted the valuation of its reporting units at three-fourths using the income
approach and one-fourth using the market based approach. The Company believes that this weighting
is appropriate since it is difficult to find other comparable publicly traded companies that are
similar to our reporting units heavy penetration of jewelry and accessories sales and margin
structure. It is the Companys view that the future discounted cash flows are more reflective of
the value of the reporting units.
The projected cash flows used in the income approach cover the periods consisting of the fourth
quarter fiscal 2008 and fiscal years 2009 through 2013. Beyond fiscal year 2013, a terminal value
was calculated using the Gordon Growth Model. The Company developed the projected cash flows based
on estimates of forecasted same store sales, new store openings, operating margins and capital
expenditures. Due to the inherent judgment involved in making these estimates and assumptions,
actual results could differ from those estimates. The Companys projected cash flows reflect
projected same store sales increases representative of the Companys past performance
post-recession.
A weighted average cost of capital reflecting the risk associated with the projected cash flows was
calculated for each reporting unit and used to discount each reporting units cash flows and
terminal value. Key assumptions made in calculating a weighted average cost of capital include the
risk-free rate, market risk premium, volatility relative to the market, cost of debt, specific
company premium, small company premium, tax rate and debt to equity ratio.
The calculation of fair value is significantly impacted by the reporting units projected cash
flows and the discount interest rates used. Accordingly, any sustained volatility in the economic
environment could impact these assumptions and make it reasonably possible that another impairment
charge could be recorded sometime in the future. However, since the terminal value is a
significant portion of each reporting units fair value, the impact of any such near-term
volatility on our fair value would be lessened.
For the North American reporting unit, a change of 25 basis points in the same store sales
assumptions would result in a change to the intangible asset impairment of approximately $83
million. A change of 25 basis points in the discounted interest rate would result in a change to
the intangible impairment of
approximately $37 million. For the European reporting unit, a change of 25 basis points in the
same store
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sales assumption would result in a change to the intangible asset impairment of
approximately $45 million. A change of 25 basis points in the discounted interest rate would
result in a change to the intangible asset impairment of approximately $15 million.
Debt
The Company is not required to repay any of the Revolver until the due date of May 29, 2013;
therefore, the Revolver is classified as a long-term liability in the accompanying consolidated
balance sheets as of January 31, 2009.
Stock Options and Stock-Based Compensation
Options granted during the fiscal period ended February 2, 2008 include options to purchase an
aggregate of 312,500 BOGO options granted outside of the Plan to certain senior executive officers
and directors.
Income Taxes
U.S. income taxes have not been recognized on the balance of accumulated unremitted earnings from
the Companys foreign subsidiaries at January 31, 2009 of $187.8 million, as these accumulated
undistributed earnings are considered reinvested indefinitely. This amount is based on the balance
maintained in local currency of the Companys accumulated unremitted earnings from its foreign
subsidiaries at February 2, 2008 converted into U.S. dollars at foreign exchange rates in effect on
January 31, 2009.
Recent Accounting Pronouncements
In the third quarter of fiscal 2009, the Company adopted the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC). The ASC is the single official source of
authoritative, non-governmental U.S. generally accepted accounting principles, other than the
guidance issued by the Securities and Exchange Commission. The adoption of the ASC did not have any
substantive impact on the Companys condensed consolidated financial statements or related
footnotes.
In December 2006, the FASB issued guidance that established a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair value measurements.
Certain provisions of this guidance were effective for the Company on February 3, 2008, while the
effective date of other provisions relating to nonfinancial assets and liabilities were effective
for the Company as of February 1, 2009. The Companys adoption of this guidance on February 1,
2009 related to nonfinancial assets and nonfinancial liabilities did not have a material impact on
its financial position, results of operations or cash flows. See Note 7 for further discussion and
disclosure.
In April 2008, the FASB issued guidance that amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset. The Company adopted this guidance on February 1, 2009 which did not have a
material impact on its financial position, results of operations or cash flows.
In June 2008, the Emerging Issues Task Force (EITF) issued guidance that requires lessees to
account for nonrefundable maintenance deposits as deposits if it is probable that maintenance
activities will occur and the deposit is realizable. Amounts on deposit that are not probable of
being used to fund future maintenance activities should be charged to expense. This guidance is
effective for fiscal years beginning after December 15, 2008. The Company adopted this guidance on
February 1, 2009 which did not have a material impact on its financial position, results of
operations or cash flows.
In October 2008, the EITF issued guidance that addressed the potential effect of FASB ASC Topic
805, Business Combinations and FASB ASC 810-10-65, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 on equity-method accounting under FASB ASC Topic
323, Investments Equity Method and Joint Ventures. This guidance will not require the Company to
perform a separate impairment test on the underlying assets of our investment in Claires Nippon.
However, the
Company would be required to recognize its proportionate share of impairment charges recognized by
our
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joint venture with AEON Co. Ltd. It would also be required to perform an overall other than
temporary impairment test of its investment in accordance with FASB ASC Topic 323, Investments
Equity Method and Joint Ventures. This guidance is effective for fiscal years beginning on or after
December 15, 2008 and interim periods within those fiscal years and is to be applied on a
prospective basis. The Company adopted this guidance on February 1, 2009 which did not have a
material impact on its financial position, results of operations or cash flows.
In May 2009, the FASB issued guidance regarding subsequent events that established accounting and
reporting standards for events that occur after the balance sheet date but before financial
statements are issued or available to be issued. The guidance sets forth (i) the period after the
balance sheet date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the financial statements,
(ii) the circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements, and (iii) the disclosures that an entity
should make about events or transactions occurring after the balance sheet date in its financial
statements. The Company adopted the provisions of this guidance for the interim period ended
August 1, 2009. See Note 9 for further discussion and disclosure. The adoption of this guidance
had no impact on the Companys financial position, results of operations or cash flows.
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, Fair Value
Measurements and Disclosures Measuring Liabilities at Fair Value (amendments to FASB ASC Topic
820, Fair Value Measurements). ASU 2009-05 provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a reporting entity
is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when
estimating the fair value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction that prevents the
transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market
for the identical liability at the measurement date and the quoted price for the identical
liability when traded as an asset in an active market when no adjustments to the quoted price of
the asset are required are level 1 fair value measurements. ASU 2009-05 is effective for interim
and annual periods beginning after August 27, 2009. The Company does not expect adoption of ASU
2009-05 to have a material impact on the Companys financial position, results of operations or
cash flows.
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3. Segment Information
The Company is organized based on the geographic markets in which it operates. Under this
structure, the Company currently has two reportable segments: North America and Europe. The
Company accounts, within its North American division, for the goods it sells to third parties under
franchising agreements within Net sales and Cost of sales, occupancy and buying expenses in the
Companys Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(Loss). The franchise fees the Company charges, within its European division, under the
franchising agreements are reported in Other income, net in the Companys Unaudited Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss).
Net sales and operating income for the three and nine months ended October 31, 2009 and
November 1, 2008 are as follows (in thousands):
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
October 31, | November 1, | October 31, | November 1, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales: |
||||||||||||||||
North America |
$ | 199,867 | $ | 211,873 | $ | 589,476 | $ | 643,893 | ||||||||
Europe |
124,537 | 121,098 | 342,222 | 376,054 | ||||||||||||
Total net sales |
324,404 | 332,971 | 931,698 | 1,019,947 | ||||||||||||
Depreciation and amortization: |
||||||||||||||||
North America |
11,230 | 13,356 | 36,479 | 42,758 | ||||||||||||
Europe |
6,097 | 6,668 | 17,706 | 21,928 | ||||||||||||
Total depreciation and amortization |
17,327 | 20,024 | 54,185 | 64,686 | ||||||||||||
Operating income for reportable segments: |
||||||||||||||||
North America |
15,459 | 11,642 | 44,251 | 30,871 | ||||||||||||
Europe |
17,269 | 3,817 | 30,672 | 12,006 | ||||||||||||
Total operating income for reportable
segments |
32,728 | 15,459 | 74,923 | 42,877 | ||||||||||||
Severance and transaction-related costs |
32 | (569 | ) | 406 | 5,695 | |||||||||||
Net consolidated operating income |
32,696 | 16,028 | 74,517 | 37,182 | ||||||||||||
Gain on early debt extinguishment |
16,096 | | 33,200 | | ||||||||||||
Interest expense, net |
43,716 | 50,462 | 134,279 | 147,858 | ||||||||||||
Net consolidated income (loss) before
income tax expense (benefit) |
$ | 5,076 | $ | (34,434 | ) | $ | (26,562 | ) | $ | (110,676 | ) | |||||
Excluded from operating income for the North American segment are severance and transaction-related
costs of approximately $0 for the three months ended October 31, 2009, $0.4 million for the nine
months ended October 31, 2009, $(0.6) million for the three months ended November 1, 2008 and $3.7
million for the nine months ended November 1, 2008.
Excluded from operating income for the European segment are severance and transaction-related costs
of approximately $0 for the three months ended October 31, 2009, $0 for the nine months ended
October 31, 2009, $0 for the three months ended November 1, 2008 and $2.0 million for the nine
months ended November 1, 2008.
10
Table of Contents
4. Debt
The following is a summary of the Companys debt repurchase activity for the three and nine months
ended October 31, 2009 (in thousands):
Three Months | Nine Months | |||||||||||||||
Principal | Purchase | Principal | Purchase | |||||||||||||
Note Purchased | Amount | Price | Amount | Price | ||||||||||||
Senior Subordinated Notes |
$ | 15,000 | $ | 8,965 | $ | 42,838 | $ | 19,001 | ||||||||
Senior Toggle Notes |
27,500 | 17,520 | 27,500 | 17,520 | ||||||||||||
$ | 42,500 | $ | 26,485 | $ | 70,338 | $ | 36,521 | |||||||||
See Note 7 for related fair value disclosure on debt.
5. Stock Options and Stock-Based Compensation
The following is a summary of activity in the Companys stock option plan for the nine months ended
October 31, 2009:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Shares | Price | Life (Years) | Value | ||||||||||||
Outstanding at January 31, 2009 |
6,807,556 | $ | 10.00 | 4.6 | | |||||||||||
Options granted |
758,100 | $ | 10.00 | 6.6 | | |||||||||||
Options exercised |
| | ||||||||||||||
Options forfeited |
(1,270,424 | ) | $ | 10.00 | | | ||||||||||
Options expired |
| | ||||||||||||||
Outstanding at October 31, 2009 |
6,295,232 | $ | 10.00 | 4.7 | | |||||||||||
Exercisable at October 31, 2009 |
1,716,533 | $ | 10.00 | 4.7 | | |||||||||||
The weighted average grant date fair value of options granted during the nine months ended
October 31, 2009 and November 1, 2008 were $2.99 and $4.21, respectively.
During the three and nine months ended October 31, 2009 and November 1, 2008, the Company recorded
stock-based compensation and additional paid-in capital relating to stock-based compensation of
approximately $1.4 million, $4.3 million, $2.2 million and $6.1 million, respectively. Stock-based
compensation is recorded in selling, general and administrative expenses in the Unaudited Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss).
11
Table of Contents
6. Income Taxes
The effective income tax rate was 43.1% and (12.4)% for the three and nine months ended October 31,
2009, respectively. These effective income tax rates differed from the statutory federal tax rate
of 35% primarily from increases in the valuation allowance recorded for additional deferred tax
assets generated in the three and nine months ended October 31, 2009 by the Companys U.S.
operations.
The effective income tax rate was 37.4% and 33.1% for the three and nine months ended November 1,
2008, respectively. These effective income tax rates differed from the statutory federal tax rate
of 35% due to the overall geographic mix of losses in jurisdictions with higher tax rates and
income in jurisdictions with lower tax rates, offset by the accrual of U.S. tax expense on current
foreign earnings, and other factors.
7. Fair Value Measurements and Derivative Instruments
Disclosures of the fair value of certain financial instruments are required, whether or not
recognized in the balance sheet. Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date and in the principal or most advantageous market for that asset or liability.
There is a three-level valuation hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value.
Observable inputs are inputs market participants would use in valuing the asset or liability and
are developed based on market data obtained from sources independent of the Company. Unobservable
inputs are inputs that reflect the Companys assumptions about the factors market participants
would use in valuing the asset or liability.
The Companys financial instruments consist primarily of cash and cash equivalents, accounts
receivable, current liabilities, long-term debt, the revolving credit facility and interest rate
swaps. Cash and cash equivalents, accounts receivable and current liabilities approximate fair
market value due to the relatively short maturity of these financial instruments.
The Company considers all investments with a maturity of three months or less when acquired to be
cash equivalents. The Companys cash equivalent instruments are valued using quoted market prices
and are primarily U.S. Treasury securities. The fair value (estimated market value) of the debt is
based primarily on quoted prices for similar instruments.
The Company uses three interest rate swap agreements (the Swaps) to manage exposure to
fluctuations in interest rates. The Swaps represent contracts to exchange floating rate for fixed
interest payments periodically over the lives of the Swaps without exchange of the underlying
notional amount. At October 31, 2009, the Swaps cover an aggregate notional amount of $435.0
million of the $1,417 million outstanding principal balance of the senior secured term loan
facility. The fixed rates of the Swaps range from 4.96% to 5.25% and the Swaps expire on June 30,
2010. The Swaps have been designated and accounted for as cash flow hedges. For these Swaps, the
Company reports the effective portion of the change in fair value as a component of accumulated
other comprehensive income (loss), net of tax, and reclassifies it into earnings in the same
periods in which the hedged item affects earnings, and within the same income statement line item
as the impact of the hedged item. No ineffective portion was recorded to earnings for the three and
nine months ended October 31, 2009, and all components of the derivative gain or loss were included
in the assessment of hedge effectiveness.
The fair value of the Companys interest rate swaps represents the estimated amounts the Company
would receive or pay to terminate those contracts at the reporting date based upon pricing or
valuation models applied to current market information. The interest rate swaps are valued using
the market standard methodology of netting the discounted future fixed cash payments and the
discounted expected variable cash receipts. The variable cash receipts are based on an expectation
of future interest rates derived from observed market interest rate curves. The Company includes
credit valuation adjustment risk in the calculation of fair value. The Company mitigates
derivative credit risk by transacting with highly rated
12
Table of Contents
counterparties. The Company does not enter
into derivative financial instruments for trading or speculative purposes.
The following table summarizes the Companys assets (liabilities) measured at fair value on a
recurring basis segregated among the appropriate levels within the fair value hierarchy (in
thousands):
Fair Value Measurements at October 31, 2009 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant | Significant | ||||||||||||||
Identical Assets | Other Observable | Unobservable | ||||||||||||||
(Liabilities) | Inputs | Inputs | ||||||||||||||
Carrying Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Debt and Credit Facility |
$ | (2,528,981 | ) | $ | (1,931,037 | ) | $ | | $ | | ||||||
Interest rate swaps |
$ | (13,617 | ) | $ | | $ | (13,617 | ) | $ | |
Fair Value Measurements at January 31, 2009 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant | Significant | ||||||||||||||
Identical Assets | Other Observable | Unobservable | ||||||||||||||
(Liabilities) | Inputs | Inputs | ||||||||||||||
Carrying Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Debt and Credit Facility |
$ | (2,581,772 | ) | $ | (734,000 | ) | $ | | $ | | ||||||
Interest rate swaps |
$ | (19,734 | ) | $ | | $ | (19,734 | ) | $ | |
The fair value of the interest rate swaps are included in accrued expenses and other current
liabilities and is recorded, net of tax of approximately $5.0 million and $7.3 million, as a
component in accumulated other comprehensive income (loss) as of October 31, 2009 and January 31,
2009, respectively, in the accompanying Unaudited Condensed Consolidated Balance Sheets. The
following tables provide a summary of the financial statement effect of the Companys derivative
financial instruments designated as interest rate cash flow hedges during the three and nine months
ended October 31, 2009 and November 1, 2008 (in thousands):
Location of Gain | ||||||||||||||||||||
or (Loss) | Amount of Gain or (Loss) | |||||||||||||||||||
Amount of Gain or (Loss) | Reclassified from | Reclassified from | ||||||||||||||||||
Derivatives in Cash | Recognized in OCI on | Accumulated OCI | Accumulated OCI into | |||||||||||||||||
Flow Hedging | Derivative | into Income | Income | |||||||||||||||||
Relationships | (Effective Portion) | (Effective Portion) | (Effective Portion)(1) | |||||||||||||||||
Three months ended | Three months ended | |||||||||||||||||||
October | November | October | November | |||||||||||||||||
31, 2009 | 1, 2008 | 31, 2009 | 1, 2008 | |||||||||||||||||
Interest Rate Swaps |
$ | 2,266 | $ | (2,228 | ) | Interest Expense | $ | (5,275 | ) | $ | (2,180 | ) |
(1) | Represents reclassification of amounts from accumulated other comprehensive loss to earnings as interest expense is recognized on the senior term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges. |
13
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Location of Gain | ||||||||||||||||||||
or (Loss) | Amount of Gain or (Loss) | |||||||||||||||||||
Amount of Gain or (Loss) | Reclassified from | Reclassified from | ||||||||||||||||||
Derivatives in Cash | Recognized in OCI on | Accumulated OCI | Accumulated OCI into | |||||||||||||||||
Flow Hedging | Derivative | into Income | Income | |||||||||||||||||
Relationships | (Effective Portion) | (Effective Portion) | (Effective Portion)(1) | |||||||||||||||||
Nine months ended | Nine months ended | |||||||||||||||||||
October | November | October | November | |||||||||||||||||
31, 2009 | 1, 2008 | 31, 2009 | 1, 2008 | |||||||||||||||||
Interest Rate Swaps |
$ | 3,862 | $ | 2,793 | Interest Expense | $ | (13,920 | ) | $ | (6,070 | ) |
(1) | Represents reclassification of amounts from accumulated other comprehensive loss to earnings as interest expense is recognized on the senior term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges. |
As of October 31, 2009, the Company expects to reclassify net losses on the Companys interest
rates swaps recognized within accumulated other comprehensive income (loss) of $8.6 million, net of
tax, to interest expense by the time the swaps expire on June 30, 2010.
The Companys non-financial assets and liabilities, which include goodwill, intangible assets, and
long-lived-assets, are not required to be carried at fair value on a recurring basis. Fair value
measures of non-financial assets and liabilities are primarily used in the impairment analysis of
these assets. A resulting asset impairment would require that the non-financial asset be recorded
at its fair value. The Company reviews goodwill and intangible assets for impairment annually,
during the fourth quarter of each fiscal year, or as circumstances indicate the possibility of
impairment. The Company monitors the carrying value of long-lived assets for impairment whenever
events or changes in circumstances indicate its carrying amount may not be recoverable. During the
three and nine months ended October 31, 2009, the Company did not recognize any impairment charges
related to goodwill, intangible assets, or long-lived assets.
8. Commitments and Contingencies
The Company is, from time to time, involved in litigation incidental to the conduct of its
business, including personal injury litigation, litigation regarding merchandise sold, including
product and safety concerns regarding metal content in merchandise, litigation with respect to
various employment matters, including litigation with present and former employees, wage and hour
litigation, and litigation to protect trademark rights. The Company believes that current pending
litigation will not have a material adverse effect on its consolidated financial position, results
of operations or cash flows.
9. Subsequent Events
The Company has evaluated subsequent events and transactions for potential recognition and
disclosure in the financial statements through December 8, 2009, the day the financial statements
were issued.
10. Supplemental Financial Information
On May 29, 2007, Claires Stores, Inc. (the Issuer), issued $935.0 million in senior notes,
senior toggle notes and senior subordinated notes. These notes are irrevocably and unconditionally
guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of
Claires Stores, Inc. that guarantee the Companys senior secured credit facility (the
Guarantors). The Companys other subsidiaries, principally its international subsidiaries
including our European, Canadian and Asian subsidiaries (the Non-Guarantors), are not guarantors
of these notes.
14
Table of Contents
The following tables present the condensed consolidating financial information for the Issuer,
the Guarantors and the Non-Guarantors, together with eliminations, as of and for the periods
indicated. The consolidating financial information may not necessarily be indicative of the
financial position, results of operations or cash flows had the Issuer, Guarantors and
Non-Guarantors operated as independent entities.
Condensed Consolidating Balance Sheet
October 31, 2009
(in thousands)
October 31, 2009
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 92,873 | $ | (5,005 | ) | $ | 77,291 | $ | | $ | 165,159 | |||||||||
Inventories |
| 95,005 | 43,812 | | 138,817 | |||||||||||||||
Prepaid expenses |
592 | 15,316 | 24,509 | | 40,417 | |||||||||||||||
Other current assets |
2,414 | 16,042 | 9,060 | | 27,516 | |||||||||||||||
Total current assets |
95,879 | 121,358 | 154,672 | | 371,909 | |||||||||||||||
Property and equipment: |
||||||||||||||||||||
Land and building |
| 22,288 | | | 22,288 | |||||||||||||||
Furniture, fixtures and equipment |
2,178 | 108,409 | 50,216 | | 160,803 | |||||||||||||||
Leasehold improvements |
1,706 | 138,544 | 90,254 | | 230,504 | |||||||||||||||
3,884 | 269,241 | 140,470 | | 413,595 | ||||||||||||||||
Less accumulated depreciation and amortization |
(1,775 | ) | (107,692 | ) | (60,502 | ) | | (169,969 | ) | |||||||||||
2,109 | 161,549 | 79,968 | | 243,626 | ||||||||||||||||
Intercompany receivables |
| 77,969 | 90,833 | (168,802 | ) | | ||||||||||||||
Investment in subsidiaries |
2,250,561 | 3,407 | | (2,253,968 | ) | | ||||||||||||||
Intangible assets, net |
286,000 | 14,161 | 287,394 | | 587,555 | |||||||||||||||
Deferred financing costs, net |
50,489 | | | | 50,489 | |||||||||||||||
Other assets |
18,380 | 2,869 | 39,044 | | 60,293 | |||||||||||||||
Goodwill |
| 1,229,940 | 314,406 | | 1,544,346 | |||||||||||||||
2,605,430 | 1,328,346 | 731,677 | (2,422,770 | ) | 2,242,683 | |||||||||||||||
Total assets |
$ | 2,703,418 | $ | 1,611,253 | $ | 966,317 | $ | (2,422,770 | ) | $ | 2,858,218 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Trade accounts payable |
$ | 1,834 | $ | 21,850 | $ | 42,499 | $ | | $ | 66,183 | ||||||||||
Current portion of long-term debt |
14,500 | | | | 14,500 | |||||||||||||||
Income taxes payable |
| (322 | ) | 6,508 | | 6,186 | ||||||||||||||
Accrued interest payable |
28,436 | | | | 28,436 | |||||||||||||||
Accrued expenses and other current liabilities |
25,092 | 36,084 | 44,551 | | 105,727 | |||||||||||||||
Total current liabilities |
69,862 | 57,612 | 93,558 | | 221,032 | |||||||||||||||
Intercompany payables |
168,802 | | | (168,802 | ) | | ||||||||||||||
Long-term debt |
2,320,481 | | | | 2,320,481 | |||||||||||||||
Revolving credit facility |
194,000 | | | | 194,000 | |||||||||||||||
Deferred tax liability |
987 | 99,476 | 14,016 | | 114,479 | |||||||||||||||
Deferred rent expense |
214 | 14,879 | 6,927 | | 22,020 | |||||||||||||||
Unfavorable lease obligations and other long-term
liabilities |
| 34,420 | 2,714 | | 37,134 | |||||||||||||||
2,684,484 | 148,775 | 23,657 | (168,802 | ) | 2,688,114 | |||||||||||||||
Stockholders equity (deficit): |
||||||||||||||||||||
Common stock |
| 367 | 2 | (369 | ) | | ||||||||||||||
Additional paid in capital |
613,759 | 1,445,795 | 876,798 | (2,322,593 | ) | 613,759 | ||||||||||||||
Accumulated other comprehensive income, net of
tax |
8,131 | 1,529 | 6,894 | (8,423 | ) | 8,131 | ||||||||||||||
Retained deficit |
(672,818 | ) | (42,825 | ) | (34,592 | ) | 77,417 | (672,818 | ) | |||||||||||
(50,928 | ) | 1,404,866 | 849,102 | (2,253,968 | ) | (50,928 | ) | |||||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 2,703,418 | $ | 1,611,253 | $ | 966,317 | $ | (2,422,770 | ) | $ | 2,858,218 | |||||||||
15
Table of Contents
Condensed Consolidating Balance Sheet
January 31, 2009
(in thousands)
January 31, 2009
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 154,414 | $ | 211 | $ | 49,949 | $ | | $ | 204,574 | ||||||||||
Inventories |
| 73,445 | 30,246 | | 103,691 | |||||||||||||||
Prepaid expenses |
434 | 14,641 | 16,762 | | 31,837 | |||||||||||||||
Other current assets |
6 | 16,104 | 10,969 | | 27,079 | |||||||||||||||
Total current assets |
154,854 | 104,401 | 107,926 | | 367,181 | |||||||||||||||
Property and equipment: |
||||||||||||||||||||
Land and building |
| 22,288 | | | 22,288 | |||||||||||||||
Furniture, fixtures and equipment |
2,025 | 103,571 | 38,106 | | 143,702 | |||||||||||||||
Leasehold improvements |
1,704 | 136,554 | 75,749 | | 214,007 | |||||||||||||||
3,729 | 262,413 | 113,855 | | 379,997 | ||||||||||||||||
Less accumulated depreciation and amortization |
(1,250 | ) | (77,042 | ) | (35,634 | ) | | (113,926 | ) | |||||||||||
2,479 | 185,371 | 78,221 | | 266,071 | ||||||||||||||||
Intercompany receivables |
| 26,876 | 58,416 | (85,292 | ) | | ||||||||||||||
Investment in subsidiaries |
2,139,955 | (4,061 | ) | | (2,135,894 | ) | | |||||||||||||
Intangible assets, net |
286,750 | 17,960 | 282,415 | | 587,125 | |||||||||||||||
Deferred financing costs, net |
59,944 | | | | 59,944 | |||||||||||||||
Other assets |
19,392 | 2,602 | 34,434 | | 56,428 | |||||||||||||||
Goodwill |
| 1,229,940 | 314,406 | | 1,544,346 | |||||||||||||||
2,506,041 | 1,273,317 | 689,671 | (2,221,186 | ) | 2,247,843 | |||||||||||||||
Total assets |
$ | 2,663,374 | $ | 1,563,089 | $ | 875,818 | $ | (2,221,186 | ) | $ | 2,881,095 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Trade accounts payable |
$ | 2,347 | $ | 21,112 | $ | 29,778 | $ | | $ | 53,237 | ||||||||||
Current portion of long-term debt |
14,500 | | | 14,500 | ||||||||||||||||
Income taxes payable |
| | 6,477 | | 6,477 | |||||||||||||||
Accrued interest payable |
13,313 | | 3 | 13,316 | ||||||||||||||||
Accrued expenses and other current liabilities |
35,795 | 35,782 | 36,397 | | 107,974 | |||||||||||||||
Total current liabilities |
65,955 | 56,894 | 72,655 | | 195,504 | |||||||||||||||
Intercompany payables |
85,292 | | | (85,292 | ) | | ||||||||||||||
Long-term debt |
2,373,272 | | | | 2,373,272 | |||||||||||||||
Revolving credit facility |
194,000 | | | | 194,000 | |||||||||||||||
Deferred tax liability |
| 99,122 | 13,707 | | 112,829 | |||||||||||||||
Deferred rent expense |
698 | 12,532 | 5,232 | | 18,462 | |||||||||||||||
Unfavorable lease obligations and other long-term
liabilities |
| 39,074 | 3,797 | | 42,871 | |||||||||||||||
2,653,262 | 150,728 | 22,736 | (85,292 | ) | 2,741,434 | |||||||||||||||
Stockholders equity (deficit): |
||||||||||||||||||||
Common stock |
| 367 | 2 | (369 | ) | | ||||||||||||||
Additional paid in capital |
609,427 | 1,445,795 | 876,798 | (2,322,593 | ) | 609,427 | ||||||||||||||
Accumulated other comprehensive loss, net of tax |
(22,319 | ) | (2,326 | ) | (20,597 | ) | 22,923 | (22,319 | ) | |||||||||||
Retained deficit |
(642,951 | ) | (88,369 | ) | (75,776 | ) | 164,145 | (642,951 | ) | |||||||||||
(55,843 | ) | 1,355,467 | 780,427 | (2,135,894 | ) | (55,843 | ) | |||||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 2,663,374 | $ | 1,563,089 | $ | 875,818 | $ | (2,221,186 | ) | $ | 2,881,095 | |||||||||
16
Table of Contents
Condensed Consolidating Statement of Operations and Comprehensive Income
For The Three Months Ended October 31, 2009
(in thousands)
For The Three Months Ended October 31, 2009
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 381,633 | $ | 139,537 | $ | (196,766 | ) | $ | 324,404 | |||||||||
Cost of sales, occupancy and buying expenses |
| 289,173 | 65,887 | (196,766 | ) | 158,294 | ||||||||||||||
Gross profit |
| 92,460 | 73,650 | | 166,110 | |||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Selling, general and administrative |
6,970 | 64,904 | 45,055 | | 116,929 | |||||||||||||||
Depreciation and amortization |
163 | 10,374 | 6,790 | | 17,327 | |||||||||||||||
Severance and transaction-related costs |
32 | | | | 32 | |||||||||||||||
Other (income) expense |
(4,310 | ) | 4,328 | (892 | ) | | (874 | ) | ||||||||||||
2,855 | 79,606 | 50,953 | | 133,414 | ||||||||||||||||
Operating income (loss) |
(2,855 | ) | 12,854 | 22,697 | | 32,696 | ||||||||||||||
Gain on early debt extinguishment |
16,096 | | | | 16,096 | |||||||||||||||
Interest expense (income), net |
43,714 | 2 | | | 43,716 | |||||||||||||||
Income (loss) before income taxes |
(30,473 | ) | 12,852 | 22,697 | | 5,076 | ||||||||||||||
Income tax expense (benefit) |
174 | 440 | 1,573 | | 2,187 | |||||||||||||||
Income (loss) from continuing operations |
(30,647 | ) | 12,412 | 21,124 | | 2,889 | ||||||||||||||
Equity in earnings of subsidiaries |
33,536 | 2,100 | | (35,636 | ) | | ||||||||||||||
Net income |
2,899 | 14,512 | 21,124 | (35,636 | ) | 2,889 | ||||||||||||||
Foreign currency translation and interest rate swap
adjustments, net of tax |
4,851 | (194 | ) | 1,716 | (1,522 | ) | 4,851 | |||||||||||||
Comprehensive income |
$ | 7,740 | $ | 14,318 | $ | 22,840 | $ | (37,158 | ) | $ | 7,740 | |||||||||
Condensed Consolidating Statement of Operations and Comprehensive Loss
For The Three Months Ended November 1, 2008
(in thousands)
For The Three Months Ended November 1, 2008
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 422,260 | $ | 136,281 | $ | (225,570 | ) | $ | 332,971 | |||||||||
Cost of sales, occupancy and buying expenses |
| 330,020 | 66,529 | (225,570 | ) | 170,979 | ||||||||||||||
Gross profit |
| 92,240 | 69,752 | | 161,992 | |||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Selling, general and administrative |
8,108 | 66,553 | 54,460 | | 129,121 | |||||||||||||||
Depreciation and amortization |
733 | 11,735 | 7,556 | | 20,024 | |||||||||||||||
Severance and transaction-related costs |
(569 | ) | | | | (569 | ) | |||||||||||||
Other (income) expense |
(7,608 | ) | 6,857 | (1,861 | ) | | (2,612 | ) | ||||||||||||
664 | 85,145 | 60,155 | | 145,964 | ||||||||||||||||
Operating income (loss) |
(664 | ) | 7,095 | 9,597 | | 16,028 | ||||||||||||||
Interest expense (income), net |
50,703 | (46 | ) | (195 | ) | | 50,462 | |||||||||||||
Income (loss) before income taxes |
(51,367 | ) | 7,141 | 9,792 | | (34,434 | ) | |||||||||||||
Income tax expense (benefit) |
(26,135 | ) | 11,347 | 1,908 | | (12,880 | ) | |||||||||||||
Income (loss) from continuing operations |
(25,232 | ) | (4,206 | ) | 7,884 | | (21,554 | ) | ||||||||||||
Equity in earnings of subsidiaries |
3,678 | 2,646 | | (6,324 | ) | | ||||||||||||||
Net income (loss) |
(21,554 | ) | (1,560 | ) | 7,884 | (6,324 | ) | (21,554 | ) | |||||||||||
Foreign currency translation and interest rate swap
adjustments, net of tax |
(42,827 | ) | (5,124 | ) | (40,587 | ) | 45,711 | (42,827 | ) | |||||||||||
Comprehensive loss |
$ | (64,381 | ) | $ | (6,684 | ) | $ | (32,703 | ) | $ | 39,387 | $ | (64,381 | ) | ||||||
17
Table of Contents
Condensed Consolidating Statement of Operations and Comprehensive Income
For The Nine Months Ended October 31, 2009
(in thousands)
For The Nine Months Ended October 31, 2009
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 1,043,158 | $ | 380,734 | $ | (492,194 | ) | $ | 931,698 | |||||||||
Cost of sales, occupancy and buying expenses |
| 772,043 | 187,712 | (492,194 | ) | 467,561 | ||||||||||||||
Gross profit |
| 271,115 | 193,022 | | 464,137 | |||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Selling, general and administrative |
20,957 | 179,863 | 135,391 | | 336,211 | |||||||||||||||
Depreciation and amortization |
1,276 | 32,995 | 19,914 | | 54,185 | |||||||||||||||
Severance and transaction-related costs |
406 | | | 406 | ||||||||||||||||
Other (income) expense |
(10,548 | ) | 13,811 | (4,445 | ) | | (1,182 | ) | ||||||||||||
12,091 | 226,669 | 150,860 | | 389,620 | ||||||||||||||||
Operating income (loss) |
(12,091 | ) | 44,446 | 42,162 | | 74,517 | ||||||||||||||
Gain on early debt extinguishment |
33,200 | | | | 33,200 | |||||||||||||||
Interest expense (income), net |
134,332 | (11 | ) | (42 | ) | | 134,279 | |||||||||||||
Income (loss) before income taxes |
(113,223 | ) | 44,457 | 42,204 | | (26,562 | ) | |||||||||||||
Income tax expense (benefit) |
| 2,288 | 1,017 | | 3,305 | |||||||||||||||
Income (loss) from continuing operations |
(113,223 | ) | 42,169 | 41,187 | | (29,867 | ) | |||||||||||||
Equity in earnings of subsidiaries |
83,356 | 3,372 | | (86,728 | ) | | ||||||||||||||
Net income (loss) |
(29,867 | ) | 45,541 | 41,187 | (86,728 | ) | (29,867 | ) | ||||||||||||
Foreign currency translation and interest rate swap
adjustments, net of tax |
30,450 | 3,855 | 27,565 | (31,420 | ) | 30,450 | ||||||||||||||
Comprehensive income |
$ | 583 | $ | 49,396 | $ | 68,752 | $ | (118,148 | ) | $ | 583 | |||||||||
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Nine Months Ended November 1, 2008
(in thousands)
For The Nine Months Ended November 1, 2008
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 1,173,323 | $ | 420,993 | $ | (574,369 | ) | $ | 1,019,947 | |||||||||
Cost of sales, occupancy and buying expenses |
| 889,345 | 208,252 | (574,369 | ) | 523,228 | ||||||||||||||
Gross profit |
| 283,978 | 212,741 | | 496,719 | |||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Selling, general and administrative |
24,969 | 200,364 | 167,544 | | 392,877 | |||||||||||||||
Depreciation and amortization |
2,244 | 37,648 | 24,794 | | 64,686 | |||||||||||||||
Severance and transaction-related costs |
3,737 | | 1,958 | | 5,695 | |||||||||||||||
Other (income) expense |
(16,765 | ) | 15,189 | (2,145 | ) | | (3,721 | ) | ||||||||||||
14,185 | 253,201 | 192,151 | | 459,537 | ||||||||||||||||
Operating income (loss) |
(14,185 | ) | 30,777 | 20,590 | | 37,182 | ||||||||||||||
Interest expense (income), net |
148,922 | (300 | ) | (764 | ) | | 147,858 | |||||||||||||
Income (loss) before income taxes |
(163,107 | ) | 31,077 | 21,354 | | (110,676 | ) | |||||||||||||
Income tax expense (benefit) |
(64,201 | ) | 29,150 | (1,570 | ) | | (36,621 | ) | ||||||||||||
Income (loss) from continuing operations |
(98,906 | ) | 1,927 | 22,924 | | (74,055 | ) | |||||||||||||
Equity in earnings of subsidiaries |
24,851 | 4,878 | | (29,729 | ) | | ||||||||||||||
Net income (loss) |
(74,055 | ) | 6,805 | 22,924 | (29,729 | ) | (74,055 | ) | ||||||||||||
Foreign currency translation and interest rate swap
adjustments, net of tax |
(30,682 | ) | (5,085 | ) | (34,147 | ) | 39,232 | (30,682 | ) | |||||||||||
Comprehensive income (loss) |
$ | (104,737 | ) | $ | 1,720 | $ | (11,223 | ) | $ | 9,503 | $ | (104,737 | ) | |||||||
18
Table of Contents
Condensed Consolidating Statement of Cash Flows
Nine Months Ended October 31, 2009
(in thousands)
Nine Months Ended October 31, 2009
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | (29,867 | ) | $ | 45,541 | $ | 41,187 | $ | (86,728 | ) | $ | (29,867 | ) | |||||||
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(83,356 | ) | (3,372 | ) | | 86,728 | | |||||||||||||
Depreciation and amortization |
1,276 | 32,995 | 19,914 | | 54,185 | |||||||||||||||
Amortization of lease rights and other assets |
| 36 | 1,477 | | 1,513 | |||||||||||||||
Amortization of debt issuance costs |
7,845 | | | | 7,845 | |||||||||||||||
Payment in kind interest expense |
29,415 | | | | 29,415 | |||||||||||||||
Net accretion of favorable (unfavorable) lease
obligations |
| (1,885 | ) | 291 | | (1,594 | ) | |||||||||||||
Loss on sale/retirement of property and equipment and
other assets, net |
3 | 17 | 19 | | 39 | |||||||||||||||
Gain on early debt extinguishment |
(33,200 | ) | | | | (33,200 | ) | |||||||||||||
Gain on sale of intangible assets/lease rights |
| | (598 | ) | | (598 | ) | |||||||||||||
Stock compensation expense |
2,901 | | 1,431 | | 4,332 | |||||||||||||||
(Increase) decrease in: |
||||||||||||||||||||
Inventories |
| (21,560 | ) | (9,355 | ) | | (30,915 | ) | ||||||||||||
Prepaid expenses |
(158 | ) | (674 | ) | (4,361 | ) | | (5,193 | ) | |||||||||||
Other assets |
(1,487 | ) | (2,215 | ) | (1,865 | ) | | (5,567 | ) | |||||||||||
Increase (decrease) in: |
||||||||||||||||||||
Trade accounts payable |
(510 | ) | 1,319 | 9,136 | | 9,945 | ||||||||||||||
Income taxes payable |
| (216 | ) | 1,965 | | 1,749 | ||||||||||||||
Accrued expenses and other liabilities |
(4,585 | ) | 302 | 3,329 | | (954 | ) | |||||||||||||
Accrued interest payable |
15,124 | | (3 | ) | | 15,121 | ||||||||||||||
Deferred income taxes |
987 | 1,035 | (444 | ) | | 1,578 | ||||||||||||||
Deferred rent expense |
(486 | ) | 2,348 | 1,033 | | 2,895 | ||||||||||||||
Net cash provided by (used in) operating activities |
(96,098 | ) | 53,671 | 63,156 | | 20,729 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Acquisition of property and equipment, net |
(162 | ) | (9,723 | ) | (7,790 | ) | | (17,675 | ) | |||||||||||
Acquisition of intangible assets/lease rights |
| (87 | ) | (397 | ) | | (484 | ) | ||||||||||||
Proceeds from sale of intangible assets/lease rights |
| | 2,154 | | 2,154 | |||||||||||||||
Net cash used in investing activities |
(162 | ) | (9,810 | ) | (6,033 | ) | | (16,005 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Credit facility payments |
(10,875 | ) | | | | (10,875 | ) | |||||||||||||
Note purchases |
(36,521 | ) | | | | (36,521 | ) | |||||||||||||
Intercompany activity, net |
82,115 | (48,835 | ) | (33,280 | ) | | | |||||||||||||
Net cash provided by (used in) financing activities |
34,719 | (48,835 | ) | (33,280 | ) | | (47,396 | ) | ||||||||||||
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
| (242 | ) | 3,499 | | 3,257 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
(61,541 | ) | (5,216 | ) | 27,342 | | (39,415 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
154,414 | 211 | 49,949 | | 204,574 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 92,873 | $ | (5,005 | ) | $ | 77,291 | $ | | $ | 165,159 | |||||||||
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Condensed Consolidating Statement of Cash Flows
For The Nine Months Ended November 1, 2008
(in thousands)
For The Nine Months Ended November 1, 2008
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | (74,055 | ) | $ | 6,805 | $ | 22,924 | $ | (29,729 | ) | $ | (74,055 | ) | |||||||
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(24,851 | ) | (4,878 | ) | | 29,729 | | |||||||||||||
Depreciation and amortization |
2,244 | 37,648 | 24,794 | | 64,686 | |||||||||||||||
Amortization of lease rights and other assets |
| 41 | 1,552 | | 1,593 | |||||||||||||||
Amortization of debt issuance costs |
7,931 | | | | 7,931 | |||||||||||||||
Payment in kind interest expense |
15,130 | | | | 15,130 | |||||||||||||||
Net accretion of favorable (unfavorable) lease
obligations |
| (1,520 | ) | 406 | (1,114 | ) | ||||||||||||||
(Gain) loss on sale / retirement of property and
equipment and other assets, net |
| 7 | (222 | ) | | (215 | ) | |||||||||||||
Gain on sale of intangible assets/lease rights |
| | (1,446 | ) | | (1,446 | ) | |||||||||||||
Stock compensation expense |
4,516 | | 1,637 | | 6,153 | |||||||||||||||
(Increase) decrease in: |
||||||||||||||||||||
Inventories |
| (22,265 | ) | (15,439 | ) | | (37,704 | ) | ||||||||||||
Prepaid expenses |
(553 | ) | (79 | ) | (4,357 | ) | | (4,989 | ) | |||||||||||
Other assets |
(137 | ) | (3,232 | ) | (231 | ) | | (3,600 | ) | |||||||||||
Increase (decrease) in: |
||||||||||||||||||||
Trade accounts payable |
3,444 | 8,255 | 20,175 | | 31,874 | |||||||||||||||
Income taxes payable |
8,383 | (17,468 | ) | (5,466 | ) | | (14,551 | ) | ||||||||||||
Accrued expenses and other liabilities |
2,455 | (3,056 | ) | 3,464 | | 2,863 | ||||||||||||||
Accrued interest payable |
18,855 | | 12 | | 18,867 | |||||||||||||||
Deferred income taxes |
| (35,756 | ) | (2,448 | ) | | (38,204 | ) | ||||||||||||
Deferred rent expense |
(122 | ) | 5,621 | 1,838 | | 7,337 | ||||||||||||||
Net cash provided by (used in) operating activities |
(36,760 | ) | (29,877 | ) | 47,193 | | (19,444 | ) | ||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Acquisition of property and equipment, net |
(78 | ) | (31,307 | ) | (13,882 | ) | | (45,267 | ) | |||||||||||
Acquisition of intangible assets/lease rights |
| | (1,273 | ) | | (1,273 | ) | |||||||||||||
Net cash used in investing activities |
(78 | ) | (31,307 | ) | (15,155 | ) | | (46,540 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Credit facility proceeds |
194,000 | | | | 194,000 | |||||||||||||||
Credit facility payments |
(10,875 | ) | | | | (10,875 | ) | |||||||||||||
Intercompany activity, net |
(16,740 | ) | 57,413 | (40,673 | ) | | | |||||||||||||
Net cash provided by (used in) financing activities |
166,385 | 57,413 | (40,673 | ) | | 183,125 | ||||||||||||||
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
| (358 | ) | (8,860 | ) | | (9,218 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
129,547 | (4,129 | ) | (17,495 | ) | | 107,923 | |||||||||||||
Cash and cash equivalents at beginning of period |
25,835 | 1,892 | 58,247 | | 85,974 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 155,382 | $ | (2,237 | ) | $ | 40,752 | $ | | $ | 193,897 | |||||||||
Item2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations is designed
to provide the reader of the financial statements with a narrative on our results of operations,
financial position and liquidity, risk management activities, and significant accounting policies
and critical estimates. Managements Discussion and Analysis should be read in conjunction with
the Unaudited Condensed Consolidated Financial Statements and related notes thereto contained
elsewhere in this document.
We include a store in the calculation of same store sales once it has been in operation sixty weeks
after its initial opening. A store which is temporarily closed, such as for remodeling, is removed
from the same store sales computation if it is closed for nine consecutive weeks. The removal is
effective prospectively upon the completion of the ninth consecutive week of closure. A store
which is closed permanently, such as upon termination of the lease, is immediately removed from the
same store sales computation. We compute same store sales on a local currency basis, which
eliminates any impact for changes in foreign currency rates.
20
Table of Contents
Business Overview
We are a leading specialty retailer offering value-priced, fashion-right accessories and jewelry
for kids, tweens, teens, and young women in the 3 to 27 age range. We are organized based on our
geographic markets, which include our North American Division and our European Division. As of
October 31, 2009, we operated a total of 2,954 stores, of which 2,001 were located in all 50 states
of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American
Division) and 953 stores were located in the United Kingdom, France, Switzerland, Spain, Ireland,
Austria, Germany, Netherlands, Portugal, and Belgium (our European Division). Our stores operate
under the trade names Claires and Icing.
In addition, as of October 31, 2009, we franchised 192 stores in the Middle East, Turkey, Russia,
South Africa, Poland and Guatemala under franchising agreements. We account within our North
American Division for the goods we sell under the merchandising agreements with our franchisees
within Net sales and Cost of sales, occupancy and buying expenses. The royalty fees are
accounted for within our European Division in Other income in our unaudited condensed
consolidated financial statements included in this report.
We also operated, as of October 31, 2009, 215 stores in Japan through our Claires Nippon 50:50
joint venture with AEON Co. Ltd. We account for the results of operations of Claires Nippon under
the equity method. These results are included within our North American Division in Other income
in our unaudited condensed consolidated financial statements included in this report.
Our primary brand in North America and exclusively in Europe is Claires. Our Claires customers
are predominantly teens (ages 13 to 18), tweens (ages 7 to 12) and kids (ages 3 to 6), or known
internally to Claires as our Young, Younger and Youngest target customer groups.
Our second brand in North America is Icing, which targets a single edit point customer represented
by a 23 year old young woman just graduating from college and entering the workforce who dresses
consistent with the current fashion influences. We believe this niche strategy will enable us to
create a well defined merchandise point of view and attract a broad group of customers from 19 to
27 years of age.
We believe that we are the leading accessories and jewelry destination for our target customers,
which is embodied in our mission statement to be a fashion authority and fun destination
offering a compelling, focused assortment of value-priced accessories, jewelry and other emerging
fashion categories targeted to the lifestyles of kids, tweens, teens and young women.
We provide our target customer groups a significant selection of fashion right merchandise across a
wide range of categories, all with a compelling value proposition. Our two major categories of
business are:
| Accessories includes hair goods, handbags, small leather goods, and other fashion classifications, such as scarves, headwear, attitude glasses, leg wear and seasonal accessories, such as sunglasses, sandals, slippers and cold weather merchandise including hats, gloves, scarves and boots, as well as cosmetics | ||
| Jewelry includes earrings, ear piercing, necklaces, bracelets and rings |
In Fiscal 2008, we began shifting our merchandise assortment more towards accessory categories and
away from jewelry and more towards casual fashion and away from dress-up styling.
In North America, our stores are located primarily in shopping malls. The differentiation of our
Claires and Icing brands allows us to operate multiple store locations within a single mall. In
Europe and Japan, our stores are located primarily on high streets, in shopping malls and in high
traffic urban areas.
21
Table of Contents
Current Market Conditions
The current distress in the financial markets has resulted in declines in consumer confidence and
spending, extreme volatility in securities prices, and has had a negative impact on credit
availability and declining valuations of certain investments. We have assessed the implications of
these factors on our current business and have responded with our Cost Savings Initiative (CSI)
and Pan European Transformation (PET) projects, scaled back planned capital expenditures for
Fiscal 2009 and have implemented a conservative approach to discretionary spending. If the
national, or global, economies or credit market conditions in general were to deteriorate further
in the future, it is possible that such deterioration could put additional negative pressure on
consumer spending and negatively affect our cash flows or cause a tightening of trade credit that
may negatively affect our liquidity.
Consolidated Results of Operations
Summaries of our consolidated results of operations for the three and nine months ended October 31,
2009 and November 1, 2008 are as follows (dollars in thousands):
Three Months | Three Months | |||||||
Ended | Ended | |||||||
October 31, | November 1, | |||||||
2009 | 2008 | |||||||
Net sales |
$ | 324,404 | $ | 332,971 | ||||
Increase (decrease) in same store sales |
(0.3 | )% | (6.3 | )% | ||||
Gross profit percentage |
51.2 | % | 48.7 | % | ||||
Selling, general and administrative expenses as a percentage of
net sales |
36.0 | % | 38.8 | % | ||||
Depreciation and amortization as a percentage of net sales |
5.3 | % | 6.0 | % | ||||
Severance and transaction-related costs as percentage of net sales |
0.0 | % | (0.2 | )% | ||||
Operating income |
$ | 32,696 | $ | 16,028 | ||||
Gain on early debt extinguishment |
$ | 16,096 | $ | | ||||
Net income (loss) |
$ | 2,889 | $ | (21,554 | ) | |||
Number of stores at the end of the period (1) |
2,954 | 3,074 |
(1) | Number of stores excludes stores operated under franchise agreements and joint venture stores. |
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
October 31, | November 1, | |||||||
2009 | 2008 | |||||||
Net sales |
$ | 931,698 | $ | 1,019,947 | ||||
Increase (decrease) in same store sales |
(3.2 | )% | (6.8 | )% | ||||
Gross profit percentage |
49.8 | % | 48.7 | % | ||||
Selling, general and administrative expenses as a percentage of
net sales |
36.1 | % | 38.5 | % | ||||
Depreciation and amortization as a percentage of net sales |
5.8 | % | 6.3 | % | ||||
Severance and transaction-related costs as percentage of net sales |
0.0 | % | 0.6 | % | ||||
Operating income |
$ | 74,517 | $ | 37,182 | ||||
Gain on early debt extinguishment |
$ | 33,200 | $ | | ||||
Net loss |
$ | (29,867 | ) | $ | (74,055 | ) | ||
Number of stores at the end of the period (1) |
2,954 | 3,074 |
(1) | Number of stores excludes stores operated under franchise agreements and joint venture stores. |
22
Table of Contents
Net sales
Net sales for the three months ended October 31, 2009 decreased by $8.6 million, or 2.6%, from the
three months ended November 1, 2008. The decrease was attributable to the effect of stores closed
in North America and Europe at the end of fiscal 2008 and the first half of fiscal 2009 that
decreased sales by $7.1 million, decreases in shipments to franchisees of $2.7 million, foreign
currency translation effect of our foreign locations sales of $2.2 million, and a decrease in same
store sales of $1.1 million, partially offset by new store revenue of $4.5 million.
Net sales for the nine months ended October 31, 2009 decreased by $88.2 million, or 8.7%, from the
nine months ended November 1, 2008. The decrease was attributable to foreign currency translation
effect of our foreign locations sales of $49.2 million, the effect of stores closed in North
America and Europe at the end of fiscal 2008 that decreased sales by $21.5 million, decrease in
same store sales of $30.2 million, and decreases in shipments to franchisees of $3.2 million,
partially offset by new store revenue of $15.9 million.
During the three months ended October 31, 2009, the decrease in the average number of transactions
per store of 5.3% was offset by an increase in average transaction value of 5.3%; the aggregate of
which differs immaterially from the decrease in same store sales as the Company currently only
collects this data on an average rather than same store basis.
During the nine months ended October 31, 2009, the decrease in the average number of transactions
per store of 6.8% was offset by an increase in average transaction value of 3.2%; the aggregate of
which differs immaterially from the decrease in same store sales as the Company currently only
collects this data on an average rather than same store basis.
The following table compares our sales of each product category for each of the periods presented:
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
October 31, | November 1, | October 31, | November 1, | |||||||||||||
% of Total | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Accessories |
54.5 | 48.8 | 51.5 | 46.7 | ||||||||||||
Jewelry |
45.5 | 51.2 | 48.5 | 53.3 | ||||||||||||
100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||
Gross profit
In calculating gross profit and gross profit percentages, we exclude the costs related to our
distribution center. These costs are included instead in selling, general and administrative
expenses. Other retail companies may include these costs in cost of sales, so our gross profit
percentages may not be comparable to those retailers.
Gross profit percentage increased 250 basis points during the fiscal 2009 third quarter to 51.2%
compared to the fiscal 2008 third quarter of 48.7%. The increase consisted of a 240 basis point
improvement in merchandise margin and a 10 basis point decrease in buying cost. The improvement in
merchandise margin was due to increased initial mark-up on purchases, reduced markdowns and
decreased freight costs. Occupancy costs decreased approximately $2.0 million primarily due to
foreign currency translation effects. The fiscal 2008 third quarter included $0.5 million of PET
project costs, included in buying costs, that did not recur in the fiscal 2009 third quarter,
accounting for 10 basis points of the improvement in gross margin.
Gross profit percentage increased 110 basis points during the first nine months of fiscal 2009 to
49.8% compared to the first nine months of fiscal 2008 of 48.7%. The increase included a 150 basis
point improvement in merchandise margin and a 20 basis point decrease in buying cost, offset by a
60 basis point increase in occupancy costs. The improvement in merchandise margin was due to
increased initial
23
Table of Contents
mark-up on purchases, reduced markdowns and decreased freight and shrink related costs. Occupancy
costs decreased approximately $15.9 million primarily due to foreign currency translation effects. The first
nine months of fiscal 2008 included $3.1 million of PET project costs, included in buying costs,
that did not recur in the first nine months of fiscal 2009, accounting for 30 basis points of the
improvement in gross margin.
Selling, general and administrative expenses
During the three months ended October 31, 2009, selling, general and administrative expenses
decreased $12.2 million, or 9.4%, from the comparable prior year period. Excluding a decrease of
$5.0 million of non-recurring CSI and PET project costs and a $0.4 million foreign currency
translation effect, the net decrease in selling, general and administrative expenses would have
been $6.8 million or 5.5%. This net decrease was due primarily to reductions in payroll, benefits
and other indirect costs.
During the nine months ended October 31, 2009, selling, general and administrative expenses
decreased $56.7 million, or 14.4%, from the comparable prior year period. Excluding an $18.8
million foreign currency translation effect and a decrease of $10.1 million of non-recurring CSI
and PET project costs, the net decrease in selling, general and administrative expenses would have
been $27.8 million or 7.3%. This net decrease was due primarily to reductions in payroll, benefits
and other indirect costs.
Depreciation and amortization expense
Depreciation and amortization expense decreased $2.7 million to $17.3 million during the three
months ended October 31, 2009 compared to the three months ended November 1, 2008. The majority of
this decrease is due to the effect of assets becoming fully depreciated or amortized.
Depreciation and amortization expense decreased $10.5 million to $54.2 million during the nine
months ended October 31, 2009 compared to the nine months ended November 1, 2008. The majority of
this decrease is due to foreign currency translation effect and the effect of assets becoming fully
depreciated or amortized.
Severance and transaction-related costs
Since 2007, we have incurred costs related to the sale of the Company. These costs consisted
primarily of financial advisory fees, legal fees and change in control payments to employees. In
connection with our CSI and PET projects, we incurred severance costs for terminated employees.
The aggregate of these severance and transaction-related costs for the three and nine months ended
October 31, 2009 and November 1, 2008 were $0 million, $0.4 million, $(0.6) million and $5.7
million, respectively.
Other (income) expense
The following is a summary of other (income) expense activity for the three and nine months ended
October 31, 2009 and November 1, 2008 (in thousands):
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
October 31, | November 1, | October 31, | November 1, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Gain on sale of
intangible asset |
$ | | $ | (1,446 | ) | $ | (598 | ) | $ | (1,446 | ) | |||||
Equity (income) loss |
(411 | ) | (386 | ) | 777 | (285 | ) | |||||||||
Royalty income |
(334 | ) | (654 | ) | (1,141 | ) | (1,519 | ) | ||||||||
Other (income) expense |
(129 | ) | (126 | ) | (220 | ) | (471 | ) | ||||||||
$ | (874 | ) | $ | (2,612 | ) | $ | (1,182 | ) | $ | (3,721 | ) | |||||
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Interest expense, net
Net interest expense for the three months ended October 31, 2009 aggregated $43.7 million (of which
approximately $2.6 million consisted of amortization of deferred debt issuance costs) compared to
$50.5 million for the three months ended November 1, 2008. This decrease of $6.8 million is
primarily the result of reductions in interest rates on the floating portion of our debt.
Net interest expense for the nine months ended October 31, 2009 aggregated $134.3 million (of which
approximately $7.8 million consisted of amortization of deferred debt issuance costs) compared to
$147.9 million for the nine months ended November 1, 2008. This decrease of $13.6 million is
primarily the result of reductions in interest rates on the floating portion of our debt.
Income taxes
The effective income tax rate for the three and nine months ended October 31, 2009 were 43.1% and
(12.4)%, respectively, as compared to an income tax rate of 37.4% and 33.1% for the three and nine
months ended November 1, 2008, respectively. The change in the effective income tax rate was
primarily the result of an increase in our valuation allowance recorded for additional deferred tax
assets generated in the three months and nine months ended October 31, 2009 by our U.S. operations.
Segment Operations
We are organized into two business segments North America and Europe. The following is a
discussion of results of operations by business segment.
North America
Key statistics and results of operations for our North American division are as follows (dollars in
thousands):
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
October 31, | November 1, | October 31, | November 1, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales |
$ | 199,867 | $ | 211,873 | $ | 589,476 | $ | 643,893 | ||||||||
Increase (decrease) in same store sales |
(1.9 | )% | (8.7 | )% | (5.0 | )% | (9.7 | )% | ||||||||
Gross profit percentage |
51.2 | % | 48.1 | % | 50.0 | % | 48.2 | % | ||||||||
Number of stores at the end of the period (1) |
2,001 | 2,144 | 2,001 | 2,144 |
(1) | Number of stores excludes stores operated under franchise agreements and joint venture stores. |
Net sales in North America decreased by $12.0 million during the three months ended October
31, 2009, or 5.7%, from the three months ended November 1, 2008. This decrease was attributable to
the effect of stores closed in North America at the end of fiscal 2008 and the first half of fiscal
2009 that decreased sales by $6.8 million, decreases in same store sales of $3.7 million, and
decreases in shipments to franchisees of $2.7 million, partially offset by new store revenue of
$0.9 million.
Net sales in North America decreased by $54.4 million during the nine months ended October 31,
2009, or 8.5%, from the nine months ended November 1, 2008. This decrease was attributable to the
effect of stores closed in North America at the end of fiscal 2008 that decreased sales by $20.7
million, decrease in same store sales of $30.2 million, foreign currency translation effect of our
Canadian operations of $4.0 million, and decreases in shipments to franchisees of $3.2 million,
partially offset by new store revenue of $3.6 million.
Gross profit percentage increased 310 basis points for the three months ended October 31, 2009 to
51.2% compared to the gross profit percentage for the three months ended November 1, 2008 of 48.1%.
The increase was comprised of a 280 basis point improvement in merchandise margin and a 30 basis
point decrease in buying costs. The improvement in merchandise margin was due to increased initial
mark-up
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on purchases and reduced freight and shrink related costs. The fiscal 2008 third quarter included
$0.3 million of PET project costs, included in buying costs, that did not recur in the fiscal 2009
third quarter, accounting for 10 basis points of the improvement in gross margin.
Gross profit percentage increased 180 basis points during the first nine months of fiscal 2009 to
50.0% compared to the gross profit percentage for the first nine months of fiscal 2008 of 48.2%.
The increase included a 220 basis point improvement in merchandise margin and a 30 basis point
decrease in buying costs, partially offset by a 70 basis point increase in occupancy costs. The
improvement in merchandise margin was due to increased initial mark-up on purchases and reduced
freight and shrink related costs. The first nine months of fiscal 2008 included $1.1 million of
PET project costs, included in buying costs, that did not recur in the first nine months of fiscal
2009, accounting for 20 basis points of the improvement in gross margin.
The following table compares our sales of each product category in North America for the three and
nine months ended October 31, 2009 and November 1, 2008:
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
October 31, | November 1, | October 31, | November 1, | |||||||||||||
% of Total | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Accessories |
49.3 | 43.7 | 46.1 | 41.3 | ||||||||||||
Jewelry |
50.7 | 56.3 | 53.9 | 58.7 | ||||||||||||
100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||
Europe
Key statistics and results of operations for our European division are as follows (dollars in
thousands):
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
October 31, | November 1, | October 31, | November 1, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales |
$ | 124,537 | $ | 121,098 | $ | 342,222 | $ | 376,054 | ||||||||
Increase (decrease) in same store sales |
2.3 | % | (1.8 | )% | 0.0 | % | (1.3 | )% | ||||||||
Gross profit percentage |
51.2 | % | 49.7 | % | 49.5 | % | 49.6 | % | ||||||||
Number of stores at the end of the
period (1) |
953 | 930 | 953 | 930 |
(1) | Number of stores excludes stores operated under franchise agreements and joint venture stores. |
Net sales in our European division during the three months ended October 31, 2009 increased by
$3.4 million, or 2.8%, over the comparable prior year period. This increase was attributable to an
increase in same store sales of $2.6 million, or 2.3%, and new store revenue of $3.6 million offset
by a decrease of $0.3 million due to store closures and a decrease of $2.5 million resulting from
foreign currency translation of our European operations.
Net sales in our European division during the nine months ended October 31, 2009 decreased by $33.8
million, or 9.0%, over the comparable prior year period. This decrease was primarily attributable
to a decrease of $45.2 million resulting from foreign currency translation of our European
operations and a decrease of $0.8 million due to store closures partially offset by new store
revenue of $12.3 million.
Gross profit percentage increased 150 basis points for the three months ended October 31, 2009 to
51.2% compared to the gross profit percentage for the three months ended November 1, 2008 of 49.7%.
The increase was comprised of a 170 basis point improvement in merchandise margin, a 10 basis
point decrease in occupancy costs, offset by a 30 basis point increase in buying costs. The fiscal
2008 third quarter included $0.2 million of PET project costs, included in buying costs, that did
not recur in the fiscal 2009 third quarter, accounting for 10 basis points of the improvement in
gross margin.
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Gross profit percentage decreased 10 basis points during the first nine months of fiscal 2009 to
49.5% compared to the gross profit percentage for the first nine months of fiscal 2008 of 49.6%.
The decrease was comprised of a 30 basis point improvement in merchandise margin, offset by a 10
basis point increase in buying costs and a 30 basis point increase in occupancy costs. The first
nine months of fiscal 2008 included $2.0 million of PET project costs, included in buying costs,
that did not recur in the first nine months of fiscal 2009, accounting for 50 basis points
improvement in gross margin.
The following table compares our sales of each product category in Europe for the three and nine
months ended October 31, 2009 and November 1, 2008:
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
% of Total | October 31, 2009 | November 1, 2008 | October 31, 2009 | November 1, 2008 | ||||||||||||
Accessories |
62.9 | 57.6 | 60.6 | 55.9 | ||||||||||||
Jewelry |
37.1 | 42.4 | 39.4 | 44.1 | ||||||||||||
100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||
Financial Resources and Liquidity
A summary of cash flows provided by (used in) operating, investing and financing activities for the
nine months ended October 31, 2009 and November 1, 2008 is outlined in the table below (in
thousands):
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
October 31, 2009 | November 1, 2008 | |||||||
Operating activities |
$ | 20,729 | $ | (19,444 | ) | |||
Investing activities |
(16,005 | ) | (46,540 | ) | ||||
Financing activities |
(47,396 | ) | 183,125 |
Cash flows from operating activities
Cash provided by operating activities increased $40.2 during the nine months ended October 31, 2009
compared to the prior year period. The primary reasons for the increase were lower cash interest
payments of $25.3 million, lower cash tax payments of $12.5 million, and an increase in operating
income before depreciation and amortization expense of $26.8 million, offset slightly by an
increase in working capital of $25.6 million.
Cash flows from investing activities
Cash used in investing activities decreased by $30.5 million during the nine months ended October
31, 2009 compared to the prior year period. The primary reason for the decrease was less new
stores opened. During the remainder of Fiscal 2009, we expect to fund between $7 and $8 million of
capital expenditures.
Cash flows from financing activities
Cash used in financing activities decreased $230.5 million for the nine months ended October 31,
2009 compared to the prior year period. In both of these periods, we paid $10.9 million for the
scheduled principal payments on our credit facility. In the nine months ended October 31, 2009, we
paid $36.5 million to retire $27.5 million of Senior Toggle Notes and $42.8 million of Senior
Subordinated Notes. During the nine months ended November 1, 2008, we drew down the remaining
$194.0 million available under our Revolving Credit Facility.
As discussed in our Annual Report on Form 10-K for the year ended January 31, 2009, we elected to
pay interest in kind on our Senior Toggle Notes for the interest period of December 2, 2008 through
June 1, 2009, as permitted by the terms of the Notes. We continued that election for the interest
period of June 2,
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2009 through December 1, 2009. It is our current intention to pay interest in kind on the Senior
Toggle Notes for all interest periods through June 1, 2011.
We or our affiliates may, from time to time, purchase portions of our indebtedness.
Cash position
As of October 31, 2009, we had cash and cash equivalents of $165.2 million, and substantially all
of such cash equivalents consisted of U.S. Treasury Securities.
The current distress in the financial markets has resulted in extreme volatility in security prices
and has had a negative impact on credit availability, and there can be no assurance that our
liquidity will not be affected by changes in the financial markets and the global economy or that
our capital resources will at all times be sufficient to satisfy our liquidity needs. Although we
believe that our existing cash will provide us with sufficient liquidity through the current credit
crisis, tightening of the credit markets could make it more difficult for us to access funds,
refinance our existing indebtedness and enter into agreements for new indebtedness.
We have significant amounts of cash and cash equivalents at financial institutions that are in
excess of federally insured limits. With the current financial environment and the instability of
financial institutions, we cannot be assured that we will not experience losses on our deposits.
We anticipate that cash generated from operations will be sufficient to meet our future working
capital requirements, new store expenditures, and debt service requirements as they become due.
However, our ability to fund future operating expenses and capital expenditures and our ability to
make scheduled payments of interest on, to pay principal on, or refinance indebtedness and to
satisfy any other present or future debt obligations will depend on future operating performance.
Our future operating performance and liquidity may also be adversely affected by general economic,
financial, and other factors beyond the Companys control, including those disclosed in Risk
Factors in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.
Credit Facility and Notes
Although the Company did not need to do so, during the quarter ended November 1, 2008, we drew down
the remaining $194.0 million available under our Revolving Credit Facility (Revolver). An
affiliate of Lehman Brothers is a member of the facility syndicate, and so immediately after Lehman
Brothers filed for bankruptcy, in order to preserve the availability of the commitment, we drew
down the full available amount under the Revolver. We received the entire $194.0 million,
including the remaining portion of Lehman Brothers affiliates commitment of $33 million. Upon the
replacement of Lehman Brothers, or the assumption of its commitment by a creditworthy entity, we
will assess whether to pay down all or a portion of this outstanding balance based on various
factors, including the creditworthiness of other syndicate members and general economic conditions.
We believe it is unlikely that this matter will be resolved until some time following the
conclusion of the Lehman Brothers bankruptcy proceedings. The Company is not required to repay any
of the Revolver until the due date of May 29, 2013, therefore, the Revolver is classified as a
long-term liability in the accompanying unaudited condensed consolidated balance sheet as of
October 31, 2009.
Our Senior Notes, Senior Toggle Notes and Senior Subordinated Notes (collectively, the Notes)
contain certain covenants that, among other things, and subject to certain exceptions and other
basket amounts, restrict our ability and the ability of our subsidiaries to:
| incur additional indebtedness; | ||
| pay dividends or distributions on our capital stock, repurchase or retire our capital stock and redeem, repurchase or defease any subordinated indebtedness; | ||
| make certain investments; | ||
| create or incur certain liens; |
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| create restrictions on the payment of dividends or other distributions to us from our subsidiaries; | ||
| transfer or sell assets; | ||
| engage in certain transactions with our affiliates; and | ||
| merge or consolidate with other companies or transfer all or substantially all of our assets. |
Certain of these covenants, such as limitations on our ability to make certain payments such as
dividends, or incur debt, will no longer apply if our Notes have investment grade ratings from both
of the rating agencies of Moodys Investor Services, Inc. (Moodys) and Standard & Poors Ratings
Group (S&P) and no event of default has occurred. Since the date of issuance of the Notes in May
2007, the Notes have not received investment grade ratings from Moodys or S&P. Accordingly, all of
the covenants under the Notes currently apply to us. None of these covenants, however, require the
Company to maintain any particular financial ratio or other measure of financial performance. As of
October 31, 2009, we were in compliance with the covenants under our Notes.
Critical Accounting Policies and Estimates
Our Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with
U.S. generally accepted accounting principles. Preparation of these statements requires management
to make judgments and estimates. Some accounting policies have a significant impact on amounts
reported in these financial statements. A summary of significant accounting policies and a
description of accounting policies that are considered critical may be found in our Fiscal 2008
Annual Report on Form 10-K, filed on April 28, 2009, in the Notes to the Consolidated Financial
Statements, Note 2, and the Critical Accounting Policies and Estimates section contained in the
Managements Discussion and Analysis of Financial Condition and Results of Operations therein.
Recent Accounting Pronouncements
In the third quarter of fiscal 2009, we adopted the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC). The ASC is the single official source of authoritative,
non-governmental U.S. generally accepted accounting principles, other than the guidance issued by
the Securities and Exchange Commission. The adoption of the ASC did not have any substantive impact
on our condensed consolidated financial statements or related footnotes.
In December 2006, the FASB issued guidance that established a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair value measurements.
Certain provisions of this guidance were effective for us on February 3, 2008, while the effective
date of other provisions relating to nonfinancial assets and liabilities were effective for us as
of February 1, 2009. The adoption of this guidance on February 1, 2009 related to nonfinancial
assets and nonfinancial liabilities did not have a material impact on our financial position,
results of operations or cash flows. See Note 7 in the Notes to Unaudited Condensed Consolidated
Financial Statements for further discussion and disclosure.
In April 2008, the FASB issued guidance that amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset. The adoption of this guidance on February 1, 2009 did not have a material impact
on our financial position, results of operations or cash flows.
In June 2008, the Emerging Issues Task Force (EITF) issued guidance that requires lessees to
account for nonrefundable maintenance deposits as deposits if it is probable that maintenance
activities will occur and the deposit is realizable. Amounts on deposit that are not probable of
being used to fund future maintenance activities should be charged to expense. This guidance is
effective for fiscal years beginning after December 15, 2008. The adoption of this guidance on
February 1, 2009 did not have a material impact on our financial position, results of operations or
cash flows.
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In October 2008, the EITF issued guidance that addressed the potential effect of FASB ASC Topic
805, Business Combinations and FASB ASC 810-10-65, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 on equity-method accounting under FASB ASC Topic
323, Investments Equity Method and Joint Ventures. This guidance will not require us to perform
a separate impairment test on the underlying assets of our investment in Claires Nippon. However,
we would be required to recognize our proportionate share of impairment charges recognized by our
joint venture with AEON Co. Ltd. We would also be required to perform an overall other than
temporary impairment test of our investment in accordance with FASB ASC Topic 323, Investments
Equity Method and Joint Ventures. This guidance is effective for fiscal years beginning on or after
December 15, 2008 and interim periods within those fiscal years and is to be applied on a
prospective basis. The adoption of this guidance on February 1, 2009 did not have a material impact
on our financial position, results of operations or cash flows.
In May 2009, the FASB issued guidance regarding subsequent events that established accounting and
reporting standards for events that occur after the balance sheet date but before financial
statements are issued or available to be issued. The guidance sets forth (i) the period after the
balance sheet date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the financial statements,
(ii) the circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements, and (iii) the disclosures that an entity
should make about events or transactions occurring after the balance sheet date in its financial
statements. We adopted the provisions of this guidance for the interim period ended August 1,
2009. See Note 9 in the Notes to Unaudited Condensed Consolidated Financial Statements for further
discussion and disclosure. The adoption of this guidance had no impact on our financial position,
results of operations or cash flows.
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, Fair Value
Measurements and Disclosures Measuring Liabilities at Fair Value (amendments to FASB ASC Topic
820, Fair Value Measurements). ASU 2009-05 provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a reporting entity
is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when
estimating the fair value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction that prevents the
transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market
for the identical liability at the measurement date and the quoted price for the identical
liability when traded as an asset in an active market when no adjustments to the quoted price of
the asset are required are level 1 fair value measurements. ASU 2009-05 is effective for interim
and annual periods beginning after August 27, 2009. We do not expect the adoption of ASU 2009-05
to have a material impact on our financial position, results of operations or cash flows.
Cautionary Note Regarding Forward-Looking Statements and Risk Factors
We and our representatives may from time to time make written or oral forward-looking statements,
including statements contained in this and other filings with the Securities and Exchange
Commission and in our press releases and reports we issue publicly. All statements which address
operating performance, events or developments that we expect or anticipate will occur in the
future, including statements relating to our future financial performance, business strategy,
planned capital expenditures, ability to service our debt, and new store openings for future
periods, are forward-looking statements. The forward-looking statements are and will be based on
managements 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, including changes in estimates and
judgments discussed under Critical Accounting Policies and Estimates 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. The forward-looking statements may use the words expect, anticipate, plan,
intend, project, may, believe, forecasts and similar expressions. Some of these risks,
uncertainties and
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other factors are as follows: our level of indebtedness; general economic conditions; changes in
consumer preferences and consumer spending; competition; general political and social conditions
such as war, political unrest and terrorism; natural disasters or severe weather events; currency
fluctuations and exchange rate adjustments; uncertainties generally associated with the specialty
retailing business; disruptions in our supply of inventory; inability to increase same store sales;
inability to renew, replace or enter into new store leases on favorable terms; significant
increases in our merchandise markdowns; inability to grow our store base in Europe; inability to
design and implement new information systems; delays in anticipated store openings or renovations;
changes in applicable laws, rules and regulations, including changes in federal, state or local
regulations governing the sale of our products, particularly regulations relating to the content in
our products, and employment laws relating to overtime pay, tax laws and import laws; product
recalls; loss of key members of management; increases in the cost of labor; labor disputes;
unwillingness of vendors and service providers to supply goods or services pursuant to historical
customary credit arrangements; increases in the cost of borrowings; unavailability of additional
debt or equity capital; and the impact of our substantial indebtedness on our operating income and
our ability to grow. The Company undertakes no obligation to update or revise any forward-looking
statements to reflect subsequent events or circumstances. In addition, we typically earn a
disproportionate share of our operating income in the fourth quarter due to seasonal buying
patterns, which are difficult to forecast with certainty. Additional discussion of these and other
risks and uncertainties is contained elsewhere in this Item 2, in Item 3, Quantitative and
Qualitative Disclosures About Market Risk and in our Form 10-K for Fiscal 2008 under Statement
Regarding Forward-Looking Disclosures and Risk Factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Cash and cash equivalents
We have significant amounts of cash and cash equivalents at financial institutions that are in
excess of federally insured limits. With the current financial environment and the instability of
financial institutions, we cannot be assured that we will not experience losses on our deposits. We
mitigate this risk by investing in two money market funds that are invested exclusively in U.S.
Treasury securities and limiting the cash balance in any one bank account. As of October 31,
2009, approximately 94.9% of cash equivalents were maintained in two money market funds that were
invested exclusively in U.S. Treasury securities.
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, and may
from time to time, use foreign currency options. Exposure to market risk for changes in foreign
exchange rates relates primarily to foreign operations buying, selling, and financing in
currencies other than local currencies and to the carrying value of net investments in foreign
subsidiaries. At October 31, 2009, we maintained no foreign currency options. We do not generally
hedge the translation exposure related to our net investment in foreign subsidiaries. Included in
comprehensive income (loss) are $26.6 million and $(33.5) million, net of tax, reflecting the
unrealized gain on foreign currency translation during the nine months ended October 31, 2009 and
November 1, 2008, respectively.
Certain of our subsidiaries make significant U.S. dollar purchases from Asian suppliers
particularly in China. In July 2005, China revalued its currency 2.1%, changing the fixed exchange
rate from 8.28 to 8.11 Chinese Yuan to the U.S. Dollar. Since July 2005, the Chinese Yuan increased
by 18.6% as compared to the U.S. Dollar, based on continued pressure from the international
community. If China adjusts the exchange rate further or allows the value to float, we may
experience increases in our cost of merchandise imported from China, which could have a significant
effect on our results of operations.
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Interest Rates
Between July 20, 2007 and August 3, 2007, we entered into three interest rate swap agreements (the
Swaps) to manage exposure to fluctuations in interest rates. The Swaps represent contracts to
exchange floating rate for fixed interest payments periodically over the lives of the Swaps without
exchange of the underlying notional amount. At October 31, 2009, the Swaps cover an aggregate
notional amount of $435.0 million of the $1.42 billion outstanding principal balance of the senior
secured term loan facility. The fixed rates of the three swap agreements range from 4.96% to 5.25%
and each swap expires on June 30, 2010. The Swaps have been designated as cash flow hedges. At
October 31, 2009 and January 31, 2009, the estimated fair value of the Swaps were liabilities of
approximately $13.6 million and $19.7 million, respectively, and were recorded, net of tax, as a
component in accumulated other comprehensive income (loss).
At October 31, 2009, we had fixed rate debt of $917.6 million and variable rate debt of $1.61
billion. Based on our variable rate debt balance (less $435 million of interest rate swaps) as of
October 31, 2009, a 1% change in interest rates would increase or decrease our annual interest
expense by approximately $11.8 million, net.
General Market Risk
Our competitors include department stores, specialty stores, mass merchandisers, discount stores
and other retail and internet channels. Our operations are impacted by consumer spending levels,
which are affected by general economic conditions, consumer confidence, employment levels,
availability of consumer credit and interest rates on credit, consumer debt levels, consumption of
consumer staples including food and energy, consumption of other goods, adverse weather conditions
and other factors over which the company has little or no control. The increase in costs of such
staple items has reduced the amount of discretionary funds that consumers are willing and able to
spend for other goods, including our merchandise. Should there be continued volatility in food and
energy costs, sustained recession in the U.S. and Europe, rising unemployment and continued
declines in discretionary income, our revenue and margins could be significantly affected in the
future. We can not predict whether, when or the manner in which the economic conditions described
above will change.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly Report.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of the end of the period covered by this
Quarterly Report to ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities Exchange Commissions rules and forms,
and that such information is accumulated and communicated to our management, including each of such
officers as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting have been made during the quarter ended
October 31, 2009, that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
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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 litigation instituted by persons injured upon premises under our control,
litigation regarding the merchandise that we sell, including product and safety concerns regarding
metal content in our merchandise, litigation with respect to various employment matters, including
wage and hour litigation, litigation with present and former employees, and litigation regarding
intellectual property rights.
Although litigation is routine and incidental to the conduct of our business, like any business of
our size and employing a significant number of employees, such litigation can result in large
monetary awards when judges, juries or other finders of facts do not agree with managements
evaluation of possible liability or outcome of litigation. Accordingly, the consequences of these
matters cannot be finally determined by management. However, in the opinion of management, we
believe that current pending litigation will not have a material adverse effect on our financial
position, results of operations or cash flows.
Item 1A. Risk Factors
There have been no material changes in our risk factors disclosed in our Annual Report on Form 10-K
for the year ended January 31, 2009.
Item 6. Exhibits
10.1
|
Guarantee and Collateral Agreement, dated and effective as of May 29, 2007, among Bauble Holdings Corp., Bauble Acquisition Sub, Inc., and Credit Suisse, dated as of May 29, 2007 (re-filed with Schedules and Exhibit attached) | |
10.2
|
Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of May 29, 2007 (re-filed with Exhibit A legal description attached) | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). | |
32.1
|
Certification of 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Items 2, 3, 4 and 5 of Part II are not applicable and have been omitted.
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SIGNATURES
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.
CLAIRES STORES, INC. |
||||
December 8, 2009 | By: | /s/ Eugene S. Kahn | ||
Eugene S. Kahn, Chief Executive Officer (principal executive officer) | ||||
December 8, 2009 | By: | /s/ J. Per Brodin | ||
J. Per Brodin, Senior Vice President and Chief | ||||
Financial Officer (principal financial and accounting officer) |
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INDEX TO EXHIBITS
EXHIBIT NO. | DESCRIPTION | |
10.1
|
Guarantee and Collateral Agreement, dated and effective as of May 29, 2007, among Bauble Holdings Corp., Bauble Acquisition Sub, Inc., and Credit Suisse, dated as of May 29, 2007 (re-filed with Schedules and Exhibit attached) | |
10.2
|
Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of May 29, 2007 (re-filed with Exhibit A legal description attached) | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
35