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EX-32.1 - EX-32.1 - CLAIRES STORES INC | g22887exv32w1.htm |
EX-32.2 - EX-32.2 - CLAIRES STORES INC | g22887exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended January 30, 2010
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.) |
2400 West Central Road, | ||
Hoffman Estates, Illinois | 60195 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (847) 765-1100
Securities registered pursuant to Section 12(b) or 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act. Yes o No þ
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 the 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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a 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
The aggregate market value of the registrants voting and non-voting common equity held by
non-affiliates of the registrant is zero. The registrant is a privately held corporation.
As of April 1, 2010, 100 shares of the Registrants common stock, $.001 par value were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
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PART I.
Explanatory Notes
We refer to Claires Stores, Inc., a Florida corporation, as Claires, the Company, we, our
or similar terms, and typically these references include our subsidiaries.
In May 2007, the Company was acquired by Apollo Management VI, L.P. (Apollo), together with
certain affiliated co-investment partnerships (collectively the Sponsors), through a merger (the
Merger) and Claires Stores, Inc. became a wholly-owned subsidiary of Claires Inc. The Merger
was financed by the issuance of $250.0 million of 9.25% senior notes due 2015 (the Senior Fixed
Rate Notes), $350.0 million of 9.625%/10.375% senior toggle notes due 2015 (the Senior Toggle
Notes and together with the Senior Fixed Rate Notes, the Senior Notes), and $335.0 million of
10.50% senior subordinated notes due 2017 (the Senior Subordinated Notes and together with the
Senior Notes, the Notes). The aforementioned transactions, including the Merger and payment of
costs related to these transactions as well as the related borrowings, are collectively referred to
as the Transactions. The purchase of the Company by the Sponsors is referred to as the
Acquisition. As of January 30, 2010, our total debt, including the current portion, was
approximately $2.5 billion, consisting of $914.1 million of Notes and our $1.41 billion senior
secured term loan facility and $194.0 million senior secured revolving credit facility
(collectively the Credit Facility).
On May 14, 2008, we notified the holders of the Senior Toggle Notes of our intent to elect the
payment in kind (PIK) interest option to satisfy the December 1, 2008 interest payment
obligation. The PIK election is now the default election for interest periods through June 1,
2011, unless the Company notifies the note holders otherwise. The impact of this election
increased the principal amount of our Senior Toggle Notes by $18.2 million on December 1, 2008,
$19.1 million on June 1, 2009 and $19.8 million on December 1, 2009. The principal amount of the
Senior Toggle Notes will increase semi-annually as long as the PIK election remains in effect.
Purchases of Senior Toggle Notes partially offset these increases.
In connection with the consummation of the Transactions, the Company is sometimes referred to as
the Successor Entity for periods on or after May 29, 2007, and the Predecessor Entity for
periods prior to May 29, 2007.
Our fiscal year ends on the Saturday closest to January 31. We refer to our fiscal year end based
on the year in which the fiscal year begins.
An amendment to this Annual Report on Form 10-K to include Part III of the Form 10-K will be filed
with the Securities and Exchange Commission no later than 120 days after the end of Fiscal 2009.
Statement Regarding Forward-Looking Disclosures
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. 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 to stockholders. 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 fiscal years, 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. The forward-looking statements may use the words expect, anticipate,
plan, intend, project, may, believe, forecast, and similar expressions. 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. Some of these risks, uncertainties and other factors are as follows:
our level of indebtedness, general
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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 metal content in
jewelry, 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.
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Item 1. | Business |
The Company
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
January 30, 2010, we operated a total of 2,948 stores, of which 1,993 were located in all 50 states
of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American
division) and 955 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 January 30, 2010, we franchised 195 stores in the Middle East, Turkey, Russia,
South Africa, Poland, Greece, Guatemala and Malta under franchising agreements. Within our North
American division, we account for the goods we sell to third parties under franchising agreements
within Net sales and Cost of sales, occupancy and buying expenses in our Consolidated
Statements of Operations and Comprehensive Income (Loss). Within our European division, the
franchise fees we charge under the franchising agreements are reported in Other income, net in
our Consolidated Statements of Operations and Comprehensive Income (Loss) included in this Annual
Report.
We also operated 211 stores in Japan through our Claires Nippon 50:50 joint venture with AEON Co.
Ltd. as of January 30, 2010. Within our North American division, we account for the results of
operations of Claires Nippon under the equity method and include the results within Other income,
net in our Consolidated Statements of Operations and Comprehensive Income (Loss) included in this
Annual 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 work force who dresses
consistent with the current fashion influences. We believe this niche strategy enables 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. In addition
to age segmentation, we use multiple lifestyle aesthetics to further differentiate our merchandise
assortments for our Young and Younger target customer groups.
We provide our target customer groups with a significant selection of fashion-right merchandise
across a wide range of categories, all with a compelling value proposition. In Fiscal 2009, the
average global selling price of our merchandise increased 10% from the prior year to $5.65 and the
net average global transaction sales value increased 5% to $13.58. In Fiscal 2009, we successfully
continued to shift our merchandise assortment more toward accessories categories, which resulted in
accessories increasing to approximately 54% of our business.
Our major categories of business are:
| Accessories includes fashion accessories for year-round use, including legwear, armwear, headwear, scarves, attitude glasses, and belts, and seasonal use, including sunglasses, hats, scarves, sandals, boots and slippers; and other accessories, including hairgoods, handbags, and small leather goods, as well as cosmetics |
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| Jewelry includes earrings, necklaces, bracelets, body jewelry and rings, as well as ear piercing |
In North America, our stores are located primarily in shopping malls and average approximately 970
square feet of selling space. 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 and average
approximately 630 square feet of selling space.
Our Competitive Strengths
Strong Claires Name Brand Recognition Across the Globe. A Claires store is located in
approximately 92% of all major U.S. shopping malls and in 29 countries or territories outside of
the U.S., including stores that we franchise or operate through a joint venture. This global
presence provides us with strong brand recognition of the Claires name within our target customer
base. Our merchandise and the Claires brand name are featured in editorial coverage, press clips
in popular periodicals, and on the web, reinforcing our presence and allowing us to incur minimal
external media advertising expense.
Cost-Efficient Global Sourcing Capabilities. Our merchandising strategy is supported by
efficient, low-cost global sourcing capabilities diversified across approximately 700 suppliers
located primarily outside the United States. A significant portion of our product offering is
developed by our product development team and RSI, our global buying and sourcing group based in
Hong Kong, enabling us to buy and source merchandise rapidly and cost effectively.
Diversification Across Geographies and Merchandise Categories. As of January 30, 2010, we
operated a total of 2,948 stores, of which 1,993 were located in all 50 states of the United
States, Puerto Rico, Canada, and the U.S. Virgin Islands. As of January 30, 2010, we also operated
955 stores in 10 countries throughout Europe, 195 stores in 17 countries outside of Europe and
North America through our franchise operations, and 211 stores in Japan through a joint venture.
During Fiscal 2009, we generated approximately 63% of our net sales from the North American
division and 37% from the 10 countries in our European division. Our net sales are not dependent on
any one category, product or style and are diversified across approximately 8,000 ongoing
stock-keeping units. This multi-classification approach allows us to capitalize on many fashion
trends, while not being dependent on any one of them.
Compelling Unit Economics. Our stores realize a high return on invested capital. Our average
store has an initial investment of approximately $215,000, including leasehold improvements and
fixtures. Our minimal working capital requirements result from high merchandise margins, low unit
cost of our merchandise and the limited seasonality of our business. Over the past three fiscal
years, no single quarter represented less than 22% or more than 31% of annual net sales for the
respective year.
Strong and Experienced Senior Management Team. We have a strong and experienced senior management
team with extensive retail experience. Gene Kahn, our Chief Executive Officer
(CEO), has over 36 years of experience in the retail industry, including positions of Chairman,
Chief Executive Officer and President of The May Department Stores. Jim Conroy, our Corporate
President, collaborates with the CEO to oversee the Global business. Mr Conroy has over 19 years of retail experience, including as a management
consultant and retail executive. J. Per Brodin, our Senior Vice President and
Chief Financial Officer, has extensive financial accounting and management skills within and
outside of retail. Kenneth Wilson, our President of Europe, brings to the Company 18 years of
experience with Levi Strauss Corporation, and has extensive Pan-European experience across a broad
array of retail related responsibilities.
Business Strategy
The recent global financial crisis that began in 2008 broadened and intensified into 2009,
significantly impacting consumer confidence. Purchases of discretionary items, including our
merchandise, generally decline during recessionary periods and other periods where disposable
income is adversely affected. We assessed the implications of these factors on our current
business and responded with our Cost Savings
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Initiative and Pan-European Transformation projects in
late 2008 and early 2009, prudently planned capital expenditures in Fiscal 2009 and developed
growth objectives that were balanced against the current economic environment.
Recap of Fiscal 2009 Priorities
In Fiscal 2009, we developed five priorities to advance our global objectives. These five
priorities and the steps taken during Fiscal 2009 to execute on these priorities are summarized
below:
Deliver Same Store Sales with Commensurate Merchandise Margin. During Fiscal 2009, we drove sales
in both our Claires and Icing brands by accelerating the growth of accessories, maximizing
up-trending classifications and refining in-store presentation and marketing. Our focus on our
stores resulted in stronger plan-o-gram execution and capture of customer contact information in
North America. We also impacted margin by increasing initial mark-up, improving inventory flow
while decreasing freight costs, improving regular price sell through to reduce markdowns, and
reenergizing our shrink reduction efforts. We are operating with cleaner inventories enabled by
the monthly markdown cadence that we have established as the basis of our North American clearance
strategy and improved European mid-season and semi-annual clearance sales execution.
In addition to these common steps for both the Claires and Icing brands, we drove Claires sales
by focusing our merchandise selection based on our target customers of Young, Younger and Youngest,
specifically capitalizing on the growth opportunity in further developing our Young business. We
focused on delivering a compelling merchandise assortment for each target customer group by
upgrading the sophistication, styling and fashion sensibility of our merchandise. We achieved this
by improving our capabilities in fashion and trend forecasting and strengthening product
development capabilities while maintaining our compelling value proposition. We continue to focus
on both price tiering of good, better and best price ranges by merchandise classification as well
as the fashion sensibilities of basic, fashion core and trendy to provide a balanced product
offering.
We continued to differentiate the Icing brand as we focused on fashion accessories categories. We
created a balance of the assortment between more casual and dressier styles. We also upgraded
in-store collateral and sophisticated illustrations in our Icing stores to distinguish the look of
our Icing stores from Claires.
Achieve Expense Reduction Objectives and Build a Cost Conscious Culture. During Fiscal 2009, we
continued to execute our Cost Savings Initiative (CSI) program that began in 2008 and to identify
other cost reduction opportunities. We pursued expense saving opportunities, including reduction of
capital expenditures. We continued to refine the process of aligning our store labor expense to
variations in store revenue through our Store Service Delivery Program implemented in Fiscal 2008,
and expanded this implementation more broadly across Europe. We also continued our shrink
reduction efforts. As a result of CSI and other cost reduction opportunities, we decreased our
expenses year over year, both in real dollars and as a percentage of sales, and achieved our
planned savings.
We maintained our global focus on our lease renewal and rent reduction program. This effort is
part of our broader ongoing real estate plan to better control all components of our occupancy
costs globally. For example, in North America during Fiscal 2009, we closed 39 stores, adding to
the 118 stores that we closed in January 2009. The European division also focused on lease
renewals that resulted in rent reductions.
Refine and Strengthen our Merchandise Offense While Undertaking Other Supporting Initiatives.
During Fiscal 2009, our efforts continued to focus on our merchandise assortment by utilizing
ongoing research and fact gathering to refine our target customer profiles and making our product
more relevant to our target customer groups. This was facilitated through an improved assortment
planning process and a more dynamic buying cycle.
We continued to improve our merchandise cycle, increased the proportion of common assortment in
North American and European buying, and refined our vendor base to better leverage our global
buying power. We also further enhanced our inventory management, specifically as it relates to
allocation and
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replenishment. We better invested our inventory dollars on a store-by-store basis
by managing our stock at a lower level of detail.
To strengthen Claires brand relevance, particularly with the Young customer, we began to further
build our customer relationships. This included upgrading our in-store collateral to convey a
stronger fashion message; expanding in-store marketing activity at key times of the year; and in
North America, commencing digital marketing efforts to use social networks and achieve growth in
customer participation across our on-line channels, email, and mobile. We enhanced our position as
a gift authority with our Gift For You, Gift For Me global campaign focused on distinctive
giftable merchandise, seasonal categories and key items. We refreshed and enhanced our global
website to be more consistent with the improved store experience, understanding its significance as
a marketing tool and customer touchpoint for the brand. In Claires North America, we began to
capture customer contact information, both on claires.com and in store, to build a customer
database. To initiate viral marketing, we launched two interactive digital campaigns in Holiday
2009 which we believe provides a strong foundation upon which to build. We supported this effort
across our approximately 1,600 North American stores with complementary in-store collateral,
signage and sales associate participation.
Build on the Established Foundation to Further Develop our Pan-European Business. During Fiscal
2009, we continued to strive toward our goal of developing an assortment for Claires that is 50%
common across the globe, 25% common across all of Europe, with the remaining 25% specific to a
particular geographic zone of our business. We believe this philosophy allows our European
division to benefit from global purchasing economies of scale, while allowing sufficient
flexibility within each zone of business to remain relevant for specific fashion needs of
customers. In conjunction with these initiatives, we have benefited from the addition of a
Managing Director of Zones 2 and 3 encompassing Continental Europe, who brings a Pan-European
mentality to our stores function. We believe these initiatives, coupled with the foundation that was established with the Pan-European Transformation project, will enable us to
continue our expansion across Continental Europe.
Develop our Organization into Top Performers and Execute as a Management Team. In Fiscal 2009, we
focused on integrating the changes made to our management team during the past three years to allow
new reporting relationships to take hold. Through the guidance provided by our senior executive
leaders our Chief Executive Officer, Corporate President and President of Europe and working
with our broader senior management teams, we leveraged our executive development capabilities and
team building skills with the goal of improving our organization both individually and
collectively.
We strengthened our senior management team through the addition of several experienced retail
leaders, including a Senior Vice President of Global Marketing; a Senior Vice President of Global
Strategy, Initiatives and Implementation; and a Senior Vice President of North American Real Estate
and Global Construction.
Strategic Business Plan
Our overarching global business objective is to grow Claires earnings before interest, taxes,
depreciation and amortization (EBITDA) by generating incremental same store sales while pursuing
new store growth. Responding to the changes in the economic and retail environment since the May
2007 Acquisition, we have refined our strategic business plan and identified the following drivers
as key contributors to future success.
| Exploit opportunities to drive same store sales | ||
| Open new Company-owned stores in existing and adjacent markets | ||
| Open new stores through the growth of international franchising | ||
| Pursue targeted initiatives to deliver additional growth | ||
| Enhance our customer relationships through an integrated multi-channel customer experience, including e-commerce |
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The strategic plan and these five drivers serve as the foundation upon which our Fiscal 2010
priorities are built.
Fiscal 2010 Priorities
We have established six Company priorities for Fiscal 2010 to achieve our global business
objectives.
Deliver On-Trend Merchandise Assortment for Each Targeted Customer Group. We intend to build upon
our efforts to deliver a more on-trend merchandise assortment that is more relevant to our target
customers, especially the Young segment.
We believe the improvements we have made in our Fashion, Trend and Product Innovation functions and
Product Design and Development organization will enable us to better forecast fashion trends, and
develop exclusive and compelling merchandise that meets our target customers preferences. In
parallel, we will continue to strengthen our buying and sourcing team with the goal of delivering
more sophisticated and fashion-forward designs, while balancing quality and cost requirements.
In 2009, we began to improve our allocation and replenishment methodology, and plan to more fully
address the associated processes and supporting systems this year. Given the breadth of our
merchandise assortment and our global reach of stores, this focus should allow us to drive sales
and merchandise margin by optimizing inventory dollars on a store-by-store basis, maintaining a
strong in-stock position for the customer, and reducing markdowns.
Strengthen the In-Store Experience. We intend to enhance the selling skills of our store
associates and upgrade our level of customer service, through more comprehensive sales and service
training in order to meet our customers expectations. We believe this builds on improvements we
have made to our in-store performance and execution from an operational and in-store presentation
perspective.
In Fiscal 2009, we introduced a new store prototype that creates physical delineation between the
merchandise intended for our Young, Younger and Youngest assortments, which we believe enables a
more impactful merchandise presentation, and increases the store appeal for the Young customer. We
intend to utilize this prototype for all new stores as well as in selected top store remodels. We
are also developing a modified, scaled-back version of this prototype that should enable us to
refresh a larger number of stores on a cost effective basis.
Leverage the Foundational Improvements in Digital and Store Marketing. We intend to further build
our brand relevance through marketing both in and outside the store, and build more meaningful
customer relationships. We will continue to upgrade the quality, fashionability and relevance of
our in-store imagery and collateral, while keeping it in sync with our digital marketing efforts.
We are redesigning our claires.com website which will involve a new look and feel, expanded product
information, improved fashion content and better integration with other digital touchpoints
including Facebook and Twitter. We will continue to enhance two-way communication with our target
customers through email, mobile, and social networking outreach. These efforts will be bolstered
by select interactive campaigns and will be supported across our store network through signage,
in-store collateral and our sales associates.
Expand our Global Footprint. We intend to leverage our global infrastructure to continue
expansion in existing and new markets, through both owned and franchise store locations. In North
America, we will selectively pursue additional new store locations, including alternative store
formats, top-tier malls, and off-mall concepts. In Europe, we believe we have substantial growth
potential for new owned stores in many of our existing countries, as well as adjacent regions such
as Eastern Europe.
Although our brand and store concepts have translated globally with an owned model, we intend to
more aggressively leverage our franchising capabilities to introduce Claires into several new
geographies. We are expanding our franchise support team to provide optimal levels of buying,
planning, and operational expertise to each of our existing and future franchise partners.
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Maintain Strong Financial Discipline. We remain focused on prudent expense discipline. We
continue to refine store labor scheduling practices to optimize store hours relative to customer
traffic and sales by week and by day. In addition, we continue to work to reduce occupancy
expenses by seeking improved terms under our global lease renewal and rent reduction program.
While cost control is an on-going effort, we are making focused investments in recruiting top
talent, building the customer relationship, opening new stores, and improving franchise partner
support to position Claires for growth.
Develop our Team Members into a Top Performing Global Organization. In Fiscal 2010, we will
continue to integrate the management changes in our organization. We intend to leverage our
Corporate leadership team, as well as our Global Merchandise function, to help drive performance,
create consistency and build product leadership globally. Additionally, we will continue to
advance a Pan-European orientation to help position us for improved performance across Continental
Europe.
In summary, we believe these six priorities provide the appropriate structure to help us deliver on
our strategic business plan and global business objectives to grow Claires EBITDA through
incremental same store sales while pursuing new store growth.
Stores
Our stores in North America are located primarily in shopping malls and average approximately 970
square feet of selling space. Our stores in Europe are located primarily on high streets, in
shopping malls and in high traffic urban locations and average approximately 630 square feet of
selling space. Our store hours are dictated by shopping mall operators and our stores are
typically open from 10:00 a.m. to 9:00 p.m. Monday through Saturday and, where permitted by law,
from noon to 5:00 p.m. on Sunday. Approximately 80% of our sales in Fiscal 2009 were made in cash
(including checks and debit card transactions), with the balance made by credit cards. We permit,
with restrictions on certain items, returns for exchange or refund.
Store Management
Our stores are organized and controlled on a district level. We employ District Managers, each of
whom supervises store managers and the business in their respective geographic area and report to
Regional Managers.
In North America, each Regional Manager reports to Territorial Vice Presidents, who report to the
Senior Vice President of Store Operations. Each store is typically staffed by a Manager, an
Assistant Manager and one or more part-time employees.
In Europe, Regional Managers report to Managing Directors, who report to our President of Europe.
We now have three operating zones within Europe: (1) United Kingdom and Ireland (Zone 1); (2)
France, Spain, Portugal and Belgium (Zone 2); and (3) Switzerland, Austria, Netherlands and Germany
(Zone 3). Zone 1 is led by one Managing Director while both Zones 2 and 3 are led by a different
Managing Director.
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Store Openings, Closings and Future Growth
In Fiscal 2009, we opened 24 stores and closed 45 stores, for a net decrease of 21 stores. In
Europe, we increased our store count by 12 stores, net, resulting in a total of 955 stores. In
North America, we decreased our store count by 33 stores, net, to 1,993 stores. Stores, net
refers to stores opened, net of closings, if any.
Store Count as of: | January 30, 2010 |
January 31, 2009 |
February 2, 2008 |
|||||||||
North America |
1,993 | 2,026 | 2,135 | |||||||||
Europe |
955 | 943 | 905 | |||||||||
Subtotal Company-Owned |
2,948 | 2,969 | 3,040 | |||||||||
Joint Venture |
211 | 214 | 198 | |||||||||
Franchise |
195 | 196 | 166 | |||||||||
Subtotal Non-Owned |
406 | 410 | 364 | |||||||||
Total |
3,354 | 3,379 | 3,404 | |||||||||
We plan to open approximately 80 Company-owned stores globally in Fiscal 2010. We also plan to
continue opening stores when suitable locations are found and satisfactory lease negotiations are
concluded. Our initial investment in new stores opened during Fiscal 2009, which includes
leasehold improvements and fixtures, averaged approximately $215,000 per store globally. In
addition to the investment in leasehold improvements and fixtures, we may also purchase intangible
assets or incur initial direct costs for leases relating to certain store locations in our European
operations.
Purchasing and Distribution
We purchased our merchandise from approximately 700 suppliers in Fiscal 2009. Approximately 85% of
our merchandise in Fiscal 2009 was purchased from outside the United States, including
approximately 65% purchased from China. We are not dependent on any single supplier for
merchandise purchased. Merchandise for our North American stores and our franchisees is shipped
from our distribution facility in Hoffman Estates, Illinois, a suburb of Chicago. Our distribution
facility in Birmingham, United Kingdom services all of our stores in Europe. Merchandise is shipped
from our distribution centers by common carrier to our individual store locations. To keep our
assortment fresh and exciting, we typically ship merchandise to our stores three to five times a
week.
Trademarks and Service Marks
We are the owner in the United States of various marks, including Claires, Claires
Accessories, Icing, and Icing by Claires. We have also registered these marks outside of the
United States. We currently license certain of our marks under franchising arrangements in the
Middle East, Turkey, Russia, South Africa, Poland, Greece, Guatemala and Malta. We also license
our Claires mark under our joint venture arrangement in Japan. We believe our rights in our marks
are important to our business and intend to maintain our marks and the related registrations.
Information Technology
Information technology is important to our business success. Our information and operational
systems use a broad range of both purchased and internally developed applications to support our
retail operations, financial, real estate, merchandising, inventory management and marketing
processes. Sales information is generally collected from point of sale terminals in our stores on
a daily basis. We have developed proprietary software to support key decisions in various areas of
our business including merchandising, allocation and operations. We periodically review our
critical systems to evaluate disaster recovery plans and the security of our systems.
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Competition
The specialty retail business is highly competitive. We compete on a global, national, regional,
and local level with other specialty and discount store chains and independent retail stores. Our
competition also includes Internet, direct marketing to consumer, and catalog businesses. We also
compete with department stores, mass merchants, and other chain store concepts. We cannot estimate
the number of our competitors because of the large number of companies in the retail industry that
fall into one of these categories. We believe the main competitive factors in our business are
brand recognition, merchandise assortments for each target customer, compelling value, store
location and the shopping experience.
Seasonality
Sales of each category of merchandise vary from period to period depending on current trends. We
experience traditional retail patterns of peak sales during the Christmas, Easter, and
back-to-school periods. Sales as a percentage of total sales in each of the four quarters of
Fiscal 2009 were 22%, 23%, 24% and 31%, respectively.
Employees
On January 30, 2010, we employed approximately 16,400 employees, 59% of whom were part-time.
Part-time employees typically work up to 20 hours per week. We do not have collective bargaining
agreements with any labor unions, and we consider employee relations to be good.
Further Information
We make available free of charge through the Financial page of our website at www.clairestores.com
our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports as soon as reasonably practicable after such material is electronically
filed with or furnished to the Securities and Exchange Commission.
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Item 1A. Risk Factors
These risks could have a material adverse effect on our business, financial position or results of
operations. The following risk factors may not include all of the important factors that could
affect our business or our industry or that could cause our future financial results to differ
materially from historic or expected results.
Risks Relating to Current Economic Conditions
Current economic conditions may adversely impact demand for our merchandise, reduce access to
credit and cause our customers and others with whom we do business to suffer financial hardship,
all of which could adversely impact our business, results of operations, financial condition and
cash flows.
Consumer purchases of discretionary items, including our merchandise, generally decline during
recessionary periods and other periods where disposable income is adversely affected. Some of the
factors impacting discretionary consumer spending include general economic conditions, wages and
employment, consumer debt, the availability of customer credit, currency exchange rates, reductions
in net worth based on recent severe market declines, taxation, fuel and energy prices, interest
rates, consumer confidence and other macroeconomic factors. The downturn in the economy may
continue to affect consumer purchases of our merchandise and adversely impact our results of
operations and continued growth. It is difficult to predict how long the current economic, capital
and credit market conditions will continue and what impact they will have on our business.
In addition, the recent global financial crisis continues to have a negative impact on businesses
around the world, and the impact of this crisis on our suppliers cannot be predicted. The inability
of our suppliers to access liquidity or trade credit could lead to delays or failures in delivery
of merchandise to us.
The global economic crisis could have a material adverse effect on our liquidity and capital
resources.
The recent distress in the financial markets has resulted in 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, 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.
Risks Relating to Our Company
Fluctuations in consumer preference may adversely affect the demand for our products and result in
a decline in our sales.
Our retail value-priced jewelry and accessories business fluctuates according to changes in
consumer preferences. If we are unable to anticipate, identify or react to changing styles or
trends, our sales may decline, and we may be faced with excess inventories. If this occurs, we may
be forced to rely on additional markdowns or promotional sales to dispose of excess or slow moving
inventory, which could have a material adverse effect on our results of operations and adversely
affect our gross margins. In addition, if we miscalculate customer tastes and our customers come
to believe that we are no longer able to offer merchandise that appeals to them, our brand image
may suffer.
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Advance purchases of our merchandise make us vulnerable to changes in consumer preferences and
pricing shifts and may negatively affect our results of operations.
Fluctuations in the demand for retail jewelry and accessories especially affect the inventory we
sell because we usually order our merchandise in advance of the applicable season and sometimes
before trends are identified or evidenced by customer purchases. In addition, the cyclical nature
of the retail business requires us to carry a significant amount of inventory, especially prior to
peak selling seasons when we and other retailers generally build up inventory levels. We must
enter into contracts for the purchase and manufacture of merchandise with our suppliers in advance
of the applicable selling season. As a result, we are vulnerable to demand and pricing shifts and
it is more difficult for us to respond to new or changing customer needs. Our financial condition
could be materially adversely affected if we are unable to manage inventory levels and respond to
short-term shifts in client demand patterns. Inventory levels in excess of client demand may result
in excessive markdowns and, therefore, lower than planned margins. If we underestimate demand for
our merchandise, on the other hand, we may experience inventory shortages resulting in missed sales
and lost revenues. Either of these events could negatively affect our operating results and brand
image.
A disruption of imports from our foreign suppliers may increase our costs and reduce our supply of
merchandise.
We do not own or operate any manufacturing facilities. We purchased merchandise from approximately
700 suppliers in Fiscal 2009. Approximately 85% of our Fiscal 2009 merchandise was purchased from
suppliers outside the United States, including approximately 65% purchased from China. Any event
causing a sudden disruption of imports from China or other foreign countries, including political
and financial instability, would likely have a material adverse effect on our operations. We
cannot predict whether any of the countries in which our products currently are manufactured or may
be manufactured in the future will be subject to additional trade restrictions imposed by the
United States and other foreign governments, including the likelihood, type or effect of any such
restrictions. Trade restrictions, including increased tariffs or quotas, embargoes and customs
restrictions, on merchandise that we purchase could increase the cost or reduce the supply of
merchandise available to us and adversely affect our business, financial condition and results of
operations. The United States has previously imposed trade quotas on specific categories of goods
and apparel imported from China, and may impose additional quotas in the future. There has been
increased international pressure on China regarding revaluation of the Chinese yuan, including
recently proposed U.S. Federal legislation to place 25-40% tariffs on imports from China unless the
Chinese government revalues the Chinese yuan.
Fluctuations in foreign currency exchange rates could negatively impact our results of operations.
Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S.
dollars. As a result, our sourcing operations may be adversely affected by significant fluctuation
in the value of the U.S. dollar against foreign currencies. We are also exposed to the gains and
losses resulting from the effect that fluctuations in foreign currency exchange rates have on the
reported results in our Consolidated Financial Statements due to the translation of operating
results and financial position of our foreign subsidiaries. We purchased approximately 65% of our
merchandise from China in Fiscal 2009. The currency exchange rate from Chinese yuan to U.S.
dollars has historically been stable, in large part due to the economic policies of the Chinese
government. However, there are no assurances that this currency exchange rate will continue to be
as stable in the future. The U.S. government has stated that the Chinese government should reduce
its influence over the currency exchange rate and let market conditions control. Less influence by
the Chinese government will most likely result in the Chinese yuan strengthening against the U.S.
dollar. An increase in the Chinese yuan against the dollar means that we will have to pay more in
U.S. dollars for our purchases from China. If we are unable to negotiate commensurate price
decreases from our Chinese suppliers, these higher prices would eventually translate into higher
costs of sales.
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Our business depends on the willingness of vendors and service providers to supply us with goods
and services pursuant to customary credit arrangements which may not be available to us in the
future.
Like most companies in the retail sector, we purchase goods and services from trade creditors
pursuant to customary credit arrangements. If we are unable to maintain or obtain trade credit
from vendors and service providers on terms favorable to us, or at all, or if vendors and service
providers are unable to obtain trade credit or factor their receivables, then we may not be able to
execute our business plan, develop or enhance our products or services, take advantage of business
opportunities or respond to competitive pressures, any of which could have a material adverse
affect on our business. In addition, the tightening of trade credit could limit our available
liquidity.
The failure to grow our store base in Europe or expand our international franchising may adversely
affect our business.
Our growth plans include expanding our store base in Europe. Our ability to grow successfully
outside of North America depends in part on determining a sustainable formula to build customer
loyalty and gain market share in certain especially challenging international retail environments.
Additionally, the integration of our operations in foreign countries presents certain challenges
not necessarily presented in the integration of our North American operations.
We plan to expand into new countries through organic growth and by entering into franchising and
merchandising agreements with unaffiliated third parties who are familiar with the local retail
environment and have sufficient retail experience to operate stores in accordance with our business
model, which requires strict adherence to the guidelines established by us in our franchising
agreements. Failure to identify appropriate franchisees or negotiate acceptable terms in our
franchising and merchandising agreements that meet our financial targets would adversely affect our
international expansion goals, and could have a material adverse effect on our operating results
and impede our strategy of increasing our net sales through expansion. Additionally, future store
openings in Asia are currently subject to our 50:50 joint venture agreement with AEON Co. Ltd.
Our cost of doing business could increase as a result of changes in federal, state, local and
international regulations regarding the content of our merchandise.
On August 14, 2008, the Consumer Product Safety Improvement Act of 2008 (CPSIA) became law. In
general, the CPSIA bans the sale of childrens products containing lead in excess of certain
maximum standards, and imposes other restrictions and requirements on the sale of childrens
products, including importing, testing and labeling requirements. Accordingly, merchandise covered
by the CPSIA that is sold to our Younger and Youngest customers is subject to the CPSIA. Although
we had procedures in place prior to the adoption of the CPSIA to address many of the requirements
set forth in the CPSIA, our inability to timely comply with these regulatory changes, or other
existing or newly adopted regulatory changes, could increase our cost of doing business or result
in significant fines or penalties that could have a material adverse effect on our business,
results of operations, financial condition and cash flows.
In addition to regulations governing the sale of our merchandise in North America, we are also
subject to regulations governing the sale of our merchandise in our European stores. In June 2007,
the REACH European Union legislation became effective. The REACH legislation requires
identification and disclosure of harmful chemicals in consumer products, including chemicals that
might be in the merchandise that we sell. We are in the early stages of compliance with this
regulation. Our failure to comply with this new European Union legislation could result in
significant fines or penalties and increase our cost of doing business.
Recalls, product liability claims, and government, customer or consumer concerns about product
safety could harm our reputation, increase costs or reduce sales.
We are subject to regulation by the Consumer Product Safety Commission and similar state and
international regulatory authorities, and our products could be subject to involuntary recalls and
other actions by these authorities. Concerns about product safety, including but not limited to
concerns about the safety of products manufactured in China (where most of our products are
manufactured), could lead
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us to recall selected products. Recalls and government, customer or consumer concerns about
product safety could harm our reputation, increase costs or reduce sales, any of which could have a
material adverse effect on our financial results.
If we are unable to renew or replace our store leases or enter into leases for new stores on
favorable terms, or if any of our current leases are terminated prior to the expiration of their
stated term and we cannot find suitable alternate locations, our growth and profitability could be
adversely harmed.
All of our stores are leased. Our ability to renew any expired lease or, if such lease cannot be
renewed, our ability to lease a suitable alternate location, and our ability to enter into leases
for new stores on favorable terms will depend on many factors which are not within our control,
such as conditions in the local real estate market, competition for desirable properties, our
relationships with current and prospective landlords, and negotiating acceptable lease terms that
meet our financial targets. Our ability to operate stores on a profitable basis depends on various
factors, including whether we have to take additional merchandise markdowns due to excessive
inventory levels compared to sales trends, whether we can reduce the number of under-performing
stores which have a higher level of fixed costs in comparison to net sales, and our ability to
maintain a proportion of new stores to mature stores that does not harm existing sales. If we are
unable to renew existing leases or lease suitable alternate locations, enter into leases for new
stores on favorable terms, or increase our same store sales, our growth and our profitability could
be adversely affected.
Natural disasters or unusually adverse weather conditions or potential emergence of disease or
pandemic could adversely affect our net sales or supply of inventory.
Unusually adverse weather conditions, natural disasters, potential emergence of disease or pandemic
or similar disruptions, especially during the peak Christmas selling season, but also at other
times, could significantly reduce our net sales. In addition, these disruptions could also
adversely affect our supply chain efficiency and make it more difficult for us to obtain sufficient
quantities of merchandise from suppliers, which could have a material adverse effect on our
financial position, earnings, and cash flow.
Information technology systems changes may disrupt our supply of merchandise.
Our success depends, in large part, on our ability to source and distribute merchandise
efficiently. We continue to evaluate and leverage the best of both our North American and European
information systems to support our product supply chain, including merchandise planning and
allocation, inventory and price management. We continue to evaluate and implement modifications
and upgrades to our information technology systems focused on point of sale cash registers,
allocation, and replenishment. Modifications involve replacing legacy systems with successor
systems or making changes to the legacy systems and our ability to maintain effective internal
controls. We are aware of inherent risks associated with replacing and changing these core
systems, including accurately capturing data, and possibly encountering supply chain disruptions.
There can be no assurances that we will successfully launch these new systems as planned or that
they will occur without disruptions to our operations. Information technology system disruptions,
if not anticipated and appropriately mitigated, could have a material adverse effect on our
operations.
If we experience a data security breach and confidential customer information is disclosed, we may
be subject to penalties and experience negative publicity, which could affect our customer
relationships and have a material adverse effect on our business.
We and our customers could suffer harm if customer information were accessed by third
parties due to a security failure in our systems. The collection of data and processing of
transactions require us to receive and store a large amount of personally identifiable data. This
type of data is subject to legislation and regulation in various jurisdictions. Recently, data
security breaches suffered by well-known companies and institutions have attracted a substantial
amount of media attention, prompting state and federal legislative proposals addressing data
privacy and security. If some of the current proposals are adopted, we may be subject to more
extensive requirements to protect the customer information that we process in connection with the
purchases of our products. We may become exposed to potential liabilities with respect to the data
that we collect, manage and process, and may incur legal costs if our information
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security policies and procedures are not effective or if we are required to defend our methods of
collection, processing and storage of personal data. Future investigations, lawsuits or adverse
publicity relating to our methods of handling personal data could adversely affect our business,
results of operations, financial condition and cash flows due to the costs and negative market
reaction relating to such developments.
Changes in the anticipated seasonal business pattern could adversely affect our sales and profits
and our quarterly results may fluctuate due to a variety of factors.
Our business follows a seasonal pattern, peaking during the Christmas, Easter and back-to-school
periods. Any decrease in sales or margins during these periods would be likely to have a material
adverse effect on our business, financial condition and results of operations. Seasonal
fluctuations also affect inventory levels, because we usually order merchandise in advance of peak
selling periods. Our quarterly results of operations may also fluctuate significantly as a result
of a variety of factors, including the time of store openings, the amount of revenue contributed by
new stores, the timing and level of markdowns, the timing of store closings, expansions and
relocations, competitive factors and general economic conditions.
A decline in number of people who go to shopping malls, particularly in North America, could reduce
the number of our customers and reduce our net sales.
Substantially all of our North American stores are located in shopping malls. Our North American
sales are derived, in part, from the high volume of traffic in those shopping malls. We benefit
from the ability of the shopping malls anchor tenants, generally large department stores and
other area attractions, to generate consumer traffic around our stores. We also benefit from the
continuing popularity of shopping malls as shopping destinations for girls and young women. Sales
volume and shopping mall traffic may be adversely affected by economic downturns in a particular
area, competition from non-shopping mall retailers, other shopping malls where we do not have
stores and the closing of anchor tenants in a particular shopping mall. In addition, a decline in
the popularity of shopping malls among our target customers that may curtail customer visits to
shopping malls, could result in decreased sales that would have a material adverse affect on our
business, financial condition and results of operations.
Our industry is highly competitive.
The specialty retail business is highly competitive. We compete with international, national and
local department stores, specialty and discount store chains, independent retail stores, the
Internet, direct marketing to consumers and catalog businesses that market similar lines of
merchandise. Many of our competitors are companies with substantially greater financial, marketing
and other resources. Given the large number of companies in the retail industry, we cannot estimate
the number of our competitors. Also, a significant shift in customer buying patterns to
purchasing value-priced jewelry and accessories through channels other than traditional shopping
malls, such as the Internet, could have a material adverse effect on our financial results.
If the Employee Free Choice Act is adopted, it would be easier for our employees to obtain union
representation and our business could be adversely impacted.
Currently, none of our employees in North America are represented by unions. However, our employees
have the right at any time under the National Labor Relations Act to form or affiliate with a
union. If some or all of our workforce were to become unionized and the terms of the collective
bargaining agreement were significantly different from our current compensation arrangements, it
could increase our costs and adversely impact our profitability. The Employee Free Choice Act of
2009 was introduced in 2009 as H.R. 1409 and S. 560. President Obama and leaders of Congress have
made public statements in support of this bill. Accordingly, this bill or a variation of it could
be enacted in the future and the enactment of this bill could have an adverse impact on our
business, by making it easier for workers to obtain union representation and increasing the
penalties employers may incur if they engage in labor practices in violation of the National Labor
Relations Act.
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Higher health care costs and labor costs could adversely affect our business.
We will be impacted by the recent passage of the U.S. Patient Protection and Affordable Care Act.
Under this Act, we may be required to amend our health care plans to, among other things, provide
affordable coverage, as defined in the Act, to all employees, or otherwise be subject to a payment
per employee based on the affordability criteria in the Act: cover adult children of our employees
to age 26; delete lifetime limits; and delete pre-existing condition limitations. Many of these
requirements will be phased in over a period of time. Additionally, some states and localities
have passed state and local laws mandating the provision of certain levels of health benefits by
some employers. Increased health care costs could have a material adverse effect on our business,
financial condition and results of operations. In addition, changes in the federal or state minimum
wage or living wage requirements or changes in other workplace regulations could adversely affect
our ability to meet our financial targets.
Our profitability could be adversely affected by high petroleum prices.
The profitability of our business depends to a certain degree upon the price of petroleum products,
both as a component of the transportation costs for delivery of inventory from our vendors to our
stores and as a raw material used in the production of our merchandise. We are unable to predict
what the price of crude oil and the resulting petroleum products will be in the future. We may be
unable to pass along to our customers the increased costs that would result from higher petroleum
prices. Therefore, any such increase could have a material adverse impact on our business and
profitability.
The possibility of war and acts of terrorism could disrupt our information or distribution systems
and increase our costs of doing business.
A significant act of terrorism could have a material adverse impact on us by, among other things,
disrupting our information or distributions systems, causing dramatic increases in fuel prices,
thereby increasing the costs of doing business and affecting consumer spending, or impeding the
flow of imports or domestic products to us.
We depend on our key personnel.
Our ability to anticipate and effectively respond to changing trends and consumer preferences
depends in part on our ability to attract and retain key personnel in our design, merchandising,
marketing and other functions. We cannot be sure that we will be able to attract and retain a
sufficient number of qualified personnel in future periods. The loss of services of key members of
our senior management team or of certain other key employees could also negatively affect our
business.
Litigation matters incidental to our business could be adversely determined against us.
We are involved from time to time in litigation incidental to our business. Management believes
that the outcome of current litigation will not have a material adverse effect on our results of
operations or financial condition. Depending on the actual outcome of pending litigation, charges
would be recorded in the future that may have an adverse effect on our operating results.
Goodwill and indefinite-lived intangible assets comprise a significant portion of our total assets.
We must test goodwill and indefinite-lived intangible assets for impairment at least annually or
whenever events or changes in circumstances indicate that their carrying amounts may not be
recoverable; which could result in a material, non-cash write-down of goodwill or indefinite-lived
intangible assets and could have a material adverse impact on our results of operations.
Goodwill and indefinite-lived intangible assets are subject to impairment assessments at least
annually (or more frequently when events or circumstances indicate that an impairment may have
occurred) by applying a fair-value test. Our principal intangible assets are tradenames, franchise
agreements, and leases that existed at date of acquisition with terms that were favorable to market
at that date. We may be required to recognize additional impairment charges in the future.
Additional impairment losses could have a material adverse impact on our results of operations and
stockholders equity.
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There are factors that can affect our provision for income taxes.
We are subject to income taxes in numerous jurisdictions, including the United States, individual
states and localities, and internationally. Our provision for income taxes in the future could be
adversely affected by numerous factors including, but not limited to, the mix of income and losses
from our foreign and domestic operations that may be taxed at different rates, changes in the
valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting
principles or interpretations thereof, which could adversely impact earnings in future periods. In
addition, the estimates we make regarding domestic and foreign taxes are based on tax positions
that we believe are supportable, but could potentially be subject to successful challenge by the
Internal Revenue Service or other authoritative agencies. If we are required to settle matters in
excess of our established accruals for uncertain tax positions, it could result in a charge to our
earnings.
If our independent manufacturers or franchisees or joint venture partners do not use ethical
business practices or comply with applicable laws and regulations, our brand name could be harmed
due to negative publicity and our results of operations could be adversely affected.
While our internal and vendor operating guidelines promote ethical business practices, we do not
control our independent manufacturers, franchisees or joint venture partners, or their business
practices. Accordingly, we cannot guarantee their compliance with our guidelines. Violation of
labor or other laws, such as the Foreign Corrupt Practices Act, by our independent manufacturers,
franchisees or joint venture partners, or the divergence from labor practices generally accepted as
ethical in the United States, could diminish the value of our brand and reduce demand for our
merchandise if, as a result of such violation, we were to attract negative publicity. As a result,
our results of operations could be adversely affected.
We rely on third parties to deliver our merchandise and if these third parties do not adequately
perform this function, our business would be disrupted.
The efficient operation of our business depends on the ability of our third party carriers to ship
merchandise directly to our distribution facilities and individual stores. These carriers
typically employ personnel represented by labor unions and have experienced labor difficulties in
the past. Due to our reliance on these parties for our shipments, interruptions in the ability of
our vendors to ship our merchandise to our distribution facilities or the ability of carriers to
fulfill the distribution of merchandise to our stores could adversely affect our business,
financial condition and results of operations.
We depend on single North American and single European distribution facilities.
We handle merchandise distribution for all of our North American stores from a single facility in
Hoffman Estates, Illinois, a suburb of Chicago, Illinois. We handle merchandise distribution for
all of our operations outside of North America from a single facility in Birmingham, United
Kingdom. Independent third party transportation companies deliver our merchandise to our stores
and our clients. Any significant interruption in the operation of the distribution facility or the
domestic transportation infrastructure due to natural disasters, accidents, inclement weather,
system failures, work stoppages, slowdowns or strikes by employees of the transportation companies,
or other unforeseen causes could delay or impair our ability to distribute merchandise to our
stores, which could result in lower sales, a loss of loyalty to our brands and excess inventory and
would have a material adverse effect on our business, financial condition and results of
operations.
We may be unable to protect our tradenames and other intellectual property rights.
We believe that our tradenames and service marks are important to our success and our competitive
position due to their name recognition with our customers. There can be no assurance that the
actions we have taken to establish and protect our tradenames and service marks will be adequate to
prevent imitation of our products by others or to prevent others from seeking to block sales of our
products as a violation of the tradenames, service marks and proprietary rights of others. The
laws of some foreign countries may not protect proprietary rights to the same extent as do the laws
of the United States, and it may be more difficult for us to successfully challenge the use of our
proprietary rights by other parties in
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these countries. Also, others may assert rights in, or ownership of, our tradenames and other
proprietary rights, and we may be unable to successfully resolve those types of conflicts to our
satisfaction.
Our success depends on our ability to maintain the value of our brands.
Our success depends on the value of our Claires and Icings brands. The Claires and Icings names
are integral to our business as well as to the implementation of our strategies for expanding our
business. Maintaining, promoting and positioning our brands will depend largely on the success of
our design, merchandising, and marketing efforts and our ability to provide a consistent, enjoyable
quality client experience. Our brands could be adversely affected if we fail to achieve these
objectives for one or both of these brands and our public image and reputation could be tarnished
by negative publicity. Any of these events could negatively impact sales.
We may be unable to rely on liability indemnities given by foreign vendors which could adversely
affect our financial results.
The quality of our globally sourced products may vary from our expectations and sources of our
supply may prove to be unreliable. In the event we seek indemnification from our suppliers for
claims relating to the merchandise shipped to us, our ability to obtain indemnification may be
hindered by the suppliers lack of understanding of U.S. product liability laws. Our ability to
successfully pursue indemnification claims may also be adversely affected by the financial
condition of the supplier. Any of these circumstances could have a material adverse effect on our
business and financial results.
We are indirectly owned and controlled by Apollo, a private equity firm, and its interests as an
equity holder may conflict with the interest of our creditors.
Substantially all of the stock of our parent corporation is beneficially owned by Apollo, a private
equity firm. As a result, Apollo has the ability to elect all of the members of our board of
directors and thereby control our policies and operations, including the appointment of management,
future issuances of our common stock or other securities, the payments of dividends, if any, on our
common stock, the incurrence of debt by us, amendments to our articles of incorporation and bylaws
and the entering into of extraordinary transactions. The interests of Apollo may not in all cases
be aligned with the interests of our creditors. For example, if we encounter financial
difficulties or are unable to pay our indebtedness as it matures, the interests of the Apollo as an
equity holder might conflict with the interests of our creditors. In addition, Apollo may have an
interest in pursuing acquisitions, divestitures, financings or other transactions that, in its
judgment, could enhance its equity investments, even though such transactions might involve risks
to our creditors. Furthermore, Apollo may in the future own businesses that directly or indirectly
compete with us. Apollo also may pursue acquisition opportunities that may be complementary to our
business, and as a result, those acquisition opportunities may not be available to us. So long as
Apollo continues to own a significant amount of our combined voting power, even if such amount is
less than 50%, it will continue to be able to strongly influence or effectively control our
decisions. Because our equity securities are not registered under the Securities Exchange Act and
are not listed on any U.S. securities exchange, we are not subject to any of the corporate
governance requirements of any U.S. securities exchange.
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Risks Relating to Our Indebtedness
Our substantial leverage could adversely affect our ability to raise additional capital to fund our
operations, limit our ability to react to changes in the economy or our industry and prevent us
from meeting our obligations under the Notes and Credit Facility.
We are significantly leveraged. As of January 30, 2010, our total debt, including the current
portion, was approximately $2.5 billion, consisting of the Notes and borrowings under our Credit
Facility.
Our substantial leverage could adversely affect our ability to raise additional capital to fund our
operations, limit our ability to react to changes in the economy or our industry, expose us to
interest rate risk to the extent of our variable rate debt and prevent us from meeting our
obligations under the Notes and Credit Facility. Our high degree of leverage could have important
consequences, including:
| increasing our vulnerability to adverse economic, industry or competitive developments; | ||
| requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities; | ||
| exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our Credit Facility, will be at variable rates of interest; | ||
| making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the Notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indentures governing the Notes and the agreements governing such other indebtedness; | ||
| restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; | ||
| limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and | ||
| limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting. |
Despite our high indebtedness level, we and our subsidiaries are still able to incur significant
additional amounts of debt, which could further exacerbate the risks associated with our
substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future.
Although the indentures governing the Notes and the Credit Facility contain restrictions on the
incurrence of additional indebtedness, these restrictions are subject to a number of significant
qualifications and exceptions, and under certain circumstances, the amount of indebtedness that
could be incurred in compliance with these restrictions could be substantial. If new debt is added
to our and our subsidiaries existing debt levels, the related risks that we now face would
increase. In addition, the indentures governing the Notes do not prevent us from incurring
obligations that do not constitute indebtedness under those agreements.
On May 14, 2008, we notified the holders of the Senior Toggle Notes of our intent to elect the
payment in kind (PIK) interest option to satisfy the November 2008 interest payment obligation.
We continued the PIK election for the interest payment dates of June 1, 2009 and December 1, 2009.
The PIK election is now the default election for interest periods through June 1, 2011, unless the
Company notifies the holders otherwise. The impact of these elections increased the principal
amount of our Senior Toggle Notes by $38.9 million during Fiscal 2009 and $18.2 million during
Fiscal 2008, and will increase the principal amount of the Senior Toggle Notes semi-annually as
long as the PIK election remains in effect.
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Our debt agreements contain restrictions that limit our flexibility in operating our business.
Our Credit Facility and the indentures governing the Notes contain various covenants that limit our
ability to engage in specified types of transactions. These covenants limit our, our parents and
our restricted subsidiaries ability to, among other things:
| incur additional indebtedness or issue certain preferred shares; | ||
| pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments; | ||
| make certain investments; | ||
| sell certain assets; | ||
| create liens; | ||
| consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and | ||
| enter into certain transactions with our affiliates. |
A breach of any of these covenants could result in a default under one or more of these agreements,
including as a result of cross default provisions, and, in the case of our revolving Credit
Facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of
default under our Credit Facility, the lenders could elect to declare all amounts outstanding under
our Credit Facility to be immediately due and payable and terminate all commitments to extend
further credit. Such actions by those lenders could cause cross defaults under our other
indebtedness. If we were unable to repay those amounts, the lenders under our Credit Facility
could proceed against the collateral granted to them to secure that indebtedness. We have pledged
a significant portion of our assets as collateral under our Credit Facility. If the lenders under
our Credit Facility accelerate the repayment of borrowings, we may not have sufficient assets to
repay our Credit Facility as well as our unsecured indebtedness, including the Notes.
We may not be able to generate sufficient cash to service all of our indebtedness, and may be
forced to take other actions to satisfy our obligations under our indebtedness, which may not be
successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our
financial condition and operating performance, which is subject to prevailing economic and
competitive conditions and to certain financial, business and other factors beyond our control. We
may not be able to maintain a level of cash flows from operating activities sufficient to permit us
to pay the principal and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we
may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek
additional capital or restructure or refinance our indebtedness, including the Notes. Our ability
to restructure or refinance our debt will depend on the condition of the capital markets and our
financial condition at such time. Any refinancing of our debt could be at higher interest rates
and may require us to comply with more onerous covenants, which could further restrict our business
operations. The terms of existing or future debt instruments and the indentures governing the
Notes may restrict us from adopting some of these alternatives. In addition, any failure to make
payments of interest and principal on our outstanding indebtedness on a timely basis would likely
result in a reduction of our credit rating, which could harm our ability to incur additional
indebtedness. These alternative measures may not be successful and may not permit us to meet our
scheduled debt service obligations.
Repayment of our debt is dependent on cash flow generated by our subsidiaries.
Our subsidiaries own a significant portion of our assets and conduct a significant portion of our
operations. Accordingly, repayment of our indebtedness is dependent, to a significant extent, on
the generation of cash flow by our subsidiaries and their ability to make such cash available to
us, by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be
permitted to, make distributions to enable us to make payments in respect of our indebtedness.
Each subsidiary is a
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distinct legal entity and, under certain circumstances, legal and contractual restrictions may
limit our ability to obtain cash from our subsidiaries. While the indentures governing the Notes
limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay
dividends or make other intercompany payments to us, these limitations are subject to certain
qualifications and exceptions. In the event that we do not receive distributions from our
subsidiaries, we may be unable to make required principal and interest payments on our
indebtedness.
To service our debt obligations, we may need to increase the portion of the income of our foreign
subsidiaries that is expected to be remitted to the United States, which could increase our income
tax expense.
The amount of the income of our foreign subsidiaries that we expect to remit to the United States
may significantly impact our U.S. federal income tax expense. We record U.S. federal income taxes
on that portion of the income of our foreign subsidiaries that is expected to be remitted to the
United States and be taxable. In order to service our debt obligations, we may need to increase the
portion of the income of our foreign subsidiaries that we expect to remit to the United States,
which may significantly increase our income tax expense. Consequently, our income tax expense has
been, and will continue to be, impacted by our strategic initiative to make substantial capital
investments outside the United States.
If we default on our obligations to pay our other indebtedness, the holders of our debt could
exercise rights that could have a material effect on us.
If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds
necessary to meet required payments of principal and interest on our indebtedness, or if we
otherwise fail to comply with the various covenants in the instruments governing our indebtedness,
we could be in default under the terms of the agreements governing such indebtedness. In the event
of such default,
| the holders of such indebtedness may be able to cause all of our available cash flow to be used to pay such indebtedness and, in any event, could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest; | ||
| the lenders under our Credit Facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets; and | ||
| we could be forced into bankruptcy or liquidation. |
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our stores are located in all 50 states of the United States, Puerto Rico, Canada, the Virgin
Islands, the United Kingdom, Ireland, France, Spain, Portugal, Belgium, Switzerland, Austria, the
Netherlands and Germany. We lease all of our 2,948 store locations, generally for terms ranging
from five to approximately 25 years. Under the terms of the leases, we pay a fixed minimum rent
and/or rentals based on a percentage of net sales. We also pay certain other expenses (e.g.,
common area maintenance charges and real estate taxes) under the leases. The internal layout and
fixtures of each store are designed by management and constructed under contracts with third
parties.
Most of our stores in North American and the European divisions are located in enclosed shopping
malls, while other stores are located within central business districts, power centers, lifestyle
centers, open-air outlet malls or strip centers. Our criteria for opening new stores includes
geographic location, demographic aspects of communities surrounding the store site, quality of
anchor tenants, advantageous location within a mall or central business district, appropriate space
availability, and rental rates. We believe that sufficient desirable locations are available to
accommodate our expansion plans. We refurbish our existing stores on a regular basis.
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Prior to February 19, 2010, we owned central buying and store operations offices and the North
American distribution center located in Hoffman Estates, Illinois (the Property) which is on
approximately 28.4 acres of land. The Property has buildings with approximately 538,000 total
square feet of space, of which 373,000 square feet is devoted to receiving and distribution and
165,000 square feet is devoted to office space.
On February 19, 2010, we sold the Property to a third party. Net proceeds from the sale were $17.4
million. Contemporaneously with the sale of the Property, we entered into a lease agreement, dated
February 19, 2010. The lease agreement provides for (1) an initial expiration date of February 28,
2030 with two (2) five (5) year renewal periods, each at our option, and (2) basic rent of $2.1
million per annum (subject to annual increases). This transaction is accounted for as a capital
lease.
Our subsidiary, Claires Accessories UK Ltd., or Claires UK, leases distribution and office
space in Birmingham, United Kingdom. The facility consists of 24,000 square feet of office space
and 62,000 square feet of distribution space. The lease expires in December 2024, and Claires UK
has the right to assign or sublet this lease at any time during the term of the lease, subject to
landlord approval. The Birmingham, United Kingdom distribution center currently services our
stores outside of North America. We lease approximately 8,800 and 8,900 square feet of office
space in Paris, France and Zurich, Switzerland, respectively, where we maintain our human resource
and operating functions for these countries.
We lease approximately 36,000 square feet in Pembroke Pines, Florida, where we maintain our
accounting and finance offices.
Item 3. 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
content in our merchandise; litigation with respect to various employment matters, including wage
and hour litigation; litigation with present or 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 which employs a significant number of employees and sells a
significant amount of merchandise, 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 consolidated financial results.
Item 4. Reserved
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
There is no established public trading market for our common stock.
Holders
As of April 1, 2010, there was one holder of record of our common stock, our parent, Claires Inc.
Dividends
We have paid no cash dividends since the Merger. Our Credit Facility and indentures governing our
Notes restrict our ability to pay dividends.
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Item 6. Selected Financial Data
The balance sheet and statement of operations data set forth below is derived from our Consolidated
Financial Statements and should be read in conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and our Consolidated Financial Statements and the
related notes thereto appearing elsewhere in this Annual Report. The Consolidated Balance Sheet
data as of February 2, 2008, May 28, 2007, February 3, 2007 and January 28, 2006 and the
Consolidated Statement of Operations and Comprehensive Income (Loss) data for each of the fiscal
years ended February 3, 2007 and January 28, 2006 are derived from our Consolidated Financial
Statements which are not included herein.
As a result of the consummation of the Transactions, the Company is sometimes referred to as the
Successor Entity for periods on or after May 29, 2007, and the Predecessor Entity for periods
prior to May 29, 2007. The Consolidated Financial Statements for the period on or after May 29,
2007 are presented on a different basis than that for the periods before May 29, 2007, as a result
of the application of purchase accounting as of May 29, 2007 and therefore are not comparable. The
acquisition of Claires Stores, Inc. was accounted for as a business combination using the purchase
method of accounting, whereby the purchase price was allocated to the assets and liabilities based
on the estimated fair market values at the date of acquisition.
Successor Entity | Predecessor Entity | |||||||||||||||||||||||||
Fiscal Year Ended | Fiscal Year Ended | May 29, 2007 | Feb. 4, 2007 | Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||
January 30, | January 31, | Through | Through | February 3, | January 28, | |||||||||||||||||||||
2010 (1) | 2009 (1) | Feb. 2, 2008 | May 28, 2007 | 2007 (1) | 2006 (1) | |||||||||||||||||||||
(In thousands, except for ratios and store data) | ||||||||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||||
Net sales |
$ | 1,342,389 | $ | 1,412,960 | $ | 1,085,932 | $ | 424,899 | $ | 1,480,987 | $ | 1,369,752 | ||||||||||||||
Cost of sales, occupancy and buying expenses |
659,796 | 720,351 | 521,384 | 206,438 | 691,646 | 625,866 | ||||||||||||||||||||
Gross profit |
682,593 | 692,609 | 564,548 | 218,461 | 789,341 | 743,886 | ||||||||||||||||||||
Other expenses (income): |
||||||||||||||||||||||||||
Selling, general and administrative |
469,179 | 518,233 | 354,875 | 154,409 | 481,979 | 449,430 | ||||||||||||||||||||
Depreciation and amortization |
71,471 | 85,093 | 61,451 | 19,652 | 56,771 | 48,900 | ||||||||||||||||||||
Impairment of assets |
3,142 | 523,990 | 3,478 | 73 | | | ||||||||||||||||||||
Severance and transaction-related costs |
921 | 15,928 | 7,319 | 72,672 | | | ||||||||||||||||||||
Other income, net |
(4,234 | ) | (4,499 | ) | (3,088 | ) | (1,476 | ) | (3,484 | ) | (4,622 | ) | ||||||||||||||
540,479 | 1,138,745 | 424,035 | 245,330 | 535,266 | 493,708 | |||||||||||||||||||||
Operating income (loss) |
142,114 | (446,136 | ) | 140,513 | (26,869 | ) | 254,075 | 250,178 | ||||||||||||||||||
Gain on early debt extinguishment |
36,412 | | | | | | ||||||||||||||||||||
Interest expense (income), net |
177,418 | 195,947 | 147,892 | (4,876 | ) | (14,575 | ) | (9,493 | ) | |||||||||||||||||
Income (loss) from continuing operations before
income taxes |
1,108 | (642,083 | ) | (7,379 | ) | (21,993 | ) | 268,650 | 259,671 | |||||||||||||||||
Income tax expense (benefit) |
11,510 | 1,509 | (8,020 | ) | 21,779 | 79,888 | 87,328 | |||||||||||||||||||
Income (loss) from continuing operations |
$ | (10,402 | ) | $ | (643,592 | ) | $ | 641 | $ | (43,772 | ) | $ | 188,762 | $ | 172,343 | |||||||||||
Other Financial Data: |
||||||||||||||||||||||||||
Capital expenditures: |
||||||||||||||||||||||||||
New stores and remodels |
$ | 16,557 | $ | 36,270 | $ | 46,225 | $ | 24,231 | $ | 77,021 | $ | 64,275 | ||||||||||||||
Other |
8,395 | 23,135 | 12,259 | 3,757 | 18,171 | (2) | 9,169 | |||||||||||||||||||
Total capital expenditures |
24,952 | 59,405 | 58,484 | 27,988 | 95,192 | 73,444 | ||||||||||||||||||||
Cash interest expense (4) |
126,733 | 168,567 | 123,620 | 86 | 118 | 125 | ||||||||||||||||||||
Ratio of earnings to fixed charges (3) |
1.0 | x | | | | 5.2 | x | 5.3 | x | |||||||||||||||||
Store Data: |
||||||||||||||||||||||||||
Number of stores (at period end) |
||||||||||||||||||||||||||
North America |
1,993 | 2,026 | 2,135 | 2,124 | 2,133 | 2,106 | ||||||||||||||||||||
Europe |
955 | 943 | 905 | 879 | 859 | 772 | ||||||||||||||||||||
Total number of stores (at period end) |
2,948 | 2,969 | 3,040 | 3,003 | 2,992 | 2,878 | ||||||||||||||||||||
Total gross square footage (000s) (at period end) |
2,982 | 3,011 | 3,105 | 3,043 | 3,021 | 2,883 | ||||||||||||||||||||
Net sales per store (000s) (5) |
$ | 454 | $ | 461 | $ | 359 | $ | 142 | $ | 504 | $ | 479 | ||||||||||||||
Net sales per square foot (6) |
448 | 453 | 353 | 140 | 500 | 480 | ||||||||||||||||||||
Balance Sheet Data (at period end) |
||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 198,708 | $ | 204,574 | $ | 85,974 | $ | 350,476 | $ | 340,877 | $ | 431,122 | ||||||||||||||
Total assets |
2,834,105 | 2,881,095 | 3,348,497 | 1,119,047 | 1,091,266 | 1,090,701 | ||||||||||||||||||||
Total debt |
2,521,878 | 2,581,772 | 2,377,750 | | | | ||||||||||||||||||||
Total stockholders equity (deficit) |
(34,642 | ) | (55,843 | ) | 605,200 | 792,071 | 847,662 | 868,318 |
(1) | Fiscal 2006 was a fifty-three week period and Fiscal 2009, Fiscal 2008, Fiscal 2007 and Fiscal 2005 were fifty-two week periods. | |
(2) | Includes management information system expenditures of $5.2 million in Fiscal 2006 for strategic projects of POS, merchandising systems, business intelligence, technology and the logistics system for the new distribution center in the Netherlands. | |
(3) | For purposes of calculating the ratio of earnings to fixed charges, earnings represent income from continuing operations before income taxes plus fixed charges. Fixed charges include interest expense, including amortization of debt issuance costs, and the portion of rental expense which management believes is representative of the interest component of rental expense. Due to the Companys loss during Fiscal 2008 and the combined period from May 29, 2007 through February 2, 2008 and February 4, 2007 through May 28, 2007, the ratio coverage was less than 1:1. The Company must generate additional earnings of $642.4 million, $7.5 million and $22.7 million during Fiscal 2008, the period from May 29, 2007 through February 2, 2008 and the period from February 4, 2007 through May 28, 2007, respectively, to achieve coverage of 1:1. | |
(4) | Cash interest expense does not include amortization of debt issuance costs or interest expense paid in kind. | |
(5) | Net sales per store are calculated based on the average number of stores during the period. | |
(6) | Net sales per square foot are calculated based on the average gross square feet during the period. |
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Item 7. 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 Consolidated Financial Statements and related notes thereto contained elsewhere in this
document.
Our fiscal year ends on the Saturday closest to January 31, and we refer to the fiscal year by the
calendar year in which it began. Our Fiscal 2009, Fiscal 2008 and Fiscal 2007 results all
consisted of 52 weeks.
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.
Acquisition of the Company by Apollo Management VI, L.P.
As a result of the Merger on May 29, 2007, described under Explanatory Notes in this Annual
Report, there was a significant change in the Companys capital structure, including:
| the closing of the offering of the Notes; | ||
| the closing of our $1.65 billion Credit Facility; and | ||
| the equity investment of approximately $595.7 million by Apollo Management VI, L.P. on behalf of certain affiliated co-investment partnerships. |
We refer to aforementioned transactions, including the Merger and our payment of any costs related
to these transactions, collectively herein as the Transactions. In connection with the
Transactions, we incurred significant indebtedness and became highly leveraged.
Effect of the Transactions
In connection with the Transactions, the Company incurred significant indebtedness, including
$935.0 million aggregate principal amount of the Notes, and $1.45 billion under the Credit
Facility. In addition, a standby letter of credit, in the face amount of approximately $4.5
million, was issued under the Credit Facility.
The acquisition of Claires Stores, Inc. was accounted for as a business combination using the
purchase method of accounting, whereby the purchase price was allocated to the assets and
liabilities based on the estimated fair market values at the date of acquisition.
The following discussion and analysis of the Companys historical financial condition and results
of operations covers periods prior to the consummation of the Transactions. Accordingly, the
discussion and analysis of such periods does not reflect the significant impact the Transactions
have on the Company. After the Transactions, the Company became highly leveraged. See Analysis
of Consolidated Financial Condition.
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Results of Consolidated Operations
As a result of the Transactions, the financial results for Fiscal 2007 have been separately
presented in the Consolidated Statements of Operations and Comprehensive Income (Loss). The
results have been split between the Predecessor Entity, covering the period February 4, 2007
through May 28, 2007, and the Successor Entity, covering the period from May 29, 2007 (the date
the Transactions were consummated) through February 2, 2008. For comparative purposes, the Company
has combined the Predecessor Entity and Successor Entity periods in its discussion below related to
Fiscal 2007. This combination is not a generally accepted accounting principles presentation.
However, the Company believes this combination is useful to provide the reader a more accurate
comparison and is provided to enhance the readers understanding of the results of operations for
the fiscal year presented.
Management overview
Fiscal 2009 was a challenging year for the retail industry and for our Company. The severe
recession, which began in the latter part of 2007, continued throughout 2008 and into 2009, marking
these past few years as ones defined by low consumer confidence, rising unemployment levels and
declining consumer spending. To protect operating cash flow and position the business for
long-term success, we relied on the following initiatives in Fiscal 2009 that had begun in Fiscal
2008 and Fiscal 2007:
| We continued the implementation of our Cost Savings Initiative (CSI) project. This project identified areas for cost savings and implemented actions late Fiscal 2008 and early Fiscal 2009 to achieve significant savings. | ||
| We continued the implementation of our Pan European Transformation (PET) project. As the European market continues to grow and become an increasingly larger share of our operations, we believe we need to have the resources close at hand to the European operations. In Fiscal 2008, we transitioned an integrated merchandising team to Europe to focus solely on our European operations. This also allowed our North American merchandising team to focus on our North American operations. In Fiscal 2009, we centralized our European finance and operations into one central location in Birmingham, England. | ||
| We improved our inventory management. Notwithstanding the unprecedented level of promotional activity in the overall retail sector, we successfully managed our inventory levels throughout the year, carefully considering the desire to maximize sales with the potential cost (markdown risk). | ||
| We also focused on preserving cash and reduced our capital expenditures to $25 million in Fiscal 2009. We ended Fiscal 2009 with $198.7 million in cash and cash equivalents. |
Looking ahead to Fiscal 2010, we will focus on prudently implementing our sales growth strategies,
continuing to manage our cost structure, maintaining our cash position and strengthening and
evolving our brands to promote strong recognition among our customers and positioning our Company
for long-term success.
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A summary of our consolidated results of operations is as follows (dollars in thousands):
Successor Entity | Successor Entity | Combined | Successor Entity | Predecessor Entity | ||||||||||||||||
Fiscal Year | Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4, 2007 | ||||||||||||||||
Ended | Ended | Ended | Through | Through | ||||||||||||||||
Jan. 30, 2010 | Jan. 31, 2009 | Feb. 2, 2008 | Feb. 2, 2008 | May 28, 2007 | ||||||||||||||||
Net sales |
$ | 1,342,389 | $ | 1,412,960 | $ | 1,510,831 | $ | 1,085,932 | $ | 424,899 | ||||||||||
Increase (decrease) in same store sales |
(1.7 | )% | (6.9 | )% | (1.8 | )% | (2.8 | )% | 0.5 | % | ||||||||||
Gross profit percentage |
50.8 | % | 49.0 | % | 51.8 | % | 52.0 | % | 51.4 | % | ||||||||||
Selling, general and administrative expenses
as a percentage of net sales |
35.0 | % | 36.7 | % | 33.7 | % | 32.7 | % | 36.3 | % | ||||||||||
Depreciation and amortization as a
percentage of net sales |
5.3 | % | 6.0 | % | 5.4 | % | 5.7 | % | 4.6 | % | ||||||||||
Severance and transaction-related costs as
percentage of net sales |
0.1 | % | 1.1 | % | 5.3 | % | 0.7 | % | 17.1 | % | ||||||||||
Impairment of assets |
$ | 3,142 | $ | 523,990 | $ | 3,551 | $ | 3,478 | $ | 73 | ||||||||||
Operating income (loss) |
$ | 142,114 | $ | (446,136 | ) | $ | 113,644 | $ | 140,513 | $ | (26,869 | ) | ||||||||
Gain on early debt extinguishment |
$ | 36,412 | $ | | $ | | $ | | $ | | ||||||||||
Net income (loss) |
$ | (10,402 | ) | $ | (643,592 | ) | $ | (43,131 | ) | $ | 641 | $ | (43,772 | ) | ||||||
Number of stores at the end of the period (1) |
2,948 | 2,969 | 3,040 | 3,040 | 3,003 |
(1) | Number of stores excludes stores operated under franchise agreements and joint venture stores. |
Net sales
Net sales in Fiscal 2009 decreased $70.6 million, or 5.0%, from Fiscal 2008. This decrease was
attributable to $33.5 million of foreign currency translation effect of our foreign locations
sales, 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 $31.0 million, a decrease in same store sales of
$22.2 million, or 1.7%, and decreases in shipments to franchisees of $2.9 million, partially offset
by new store revenue of $19.1 million.
The decrease in same store sales was primarily attributable to a decrease in the average number of
transactions per store of 6.7%, partially offset by an increase in average transaction value of
4.7%.
Net sales in Fiscal 2008 decreased $97.9 million, or 6.5%, from Fiscal 2007. This decrease was
primarily attributable to a decrease in same store sales of $99.8 million, or 6.9%, and a decrease
of $17.1 million resulting from foreign currency translation of our foreign locations sales,
partially offset by new store revenue, net of store closures, of $17.3 million and a net increase
of $1.7 million from increased sales to franchises.
The decrease in 2008 same store sales was primarily attributable to a decrease in the average
number of transactions per store of 10.7%, partially offset by an increase in average transaction
value.
At the end of Fiscal 2008, we closed 118 stores in North America that were performing below our
expectations. These stores accounted for 1.7% of the net sales in Fiscal 2008 and had a combined
operating loss before depreciation and amortization of $0.7 million in Fiscal 2008.
The following table compares our sales of each product category for the last three fiscal years:
Fiscal Year Ended | Fiscal Year Ended | Fiscal Year Ended | ||||||||||
January 30, | January 31, | February 2, | ||||||||||
% of Total | 2010 | 2009 | 2008 | |||||||||
Accessories |
53.6 | 48.4 | 45.8 | |||||||||
Jewelry |
46.4 | 51.6 | 54.2 | |||||||||
100.0 | 100.0 | 100.0 | ||||||||||
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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 in our Consolidated Statements of Operations and Comprehensive Income (Loss). Other
retail companies may include these costs in cost of sales, so our gross profit percentages may not
be comparable to those retailers.
In Fiscal 2009, gross profit percentage increased 180 basis points to 50.8% compared to the prior
fiscal year of 49.0%. The increase consisted of a 200 basis point improvement in merchandise
margin and a 10 basis point decrease in buying costs, offset by a 30 basis point increase in
occupancy costs. The improvement in merchandise margin was due to increased initial mark-up on
purchases, reduced markdowns and decreased freight costs. Occupancy costs decreased approximately
$12.2 million primarily due to foreign currency translation effects, but increased as a percentage
of sales due to the deleveraging effect of lower sales. Fiscal 2008 included $3.1 million of PET
project costs, in buying costs, that did not recur in Fiscal 2009, accounting for 20 basis points
of the improvement in gross margin.
In Fiscal 2008, gross profit percentage decreased 280 basis points compared to the prior fiscal
year. This decrease was comprised of a 280 basis point loss of operating leverage in occupancy and
buying costs and a 20 basis point decline due to non-recurring PET project costs, partially offset
by a 20 basis point increase in merchandise margin.
Selling, general and administrative expenses
In Fiscal 2009, selling, general and administrative expenses decreased $49.1 million, or 9.5%, over
the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses
decreased 170 basis points compared to the prior year. Excluding a $13.3 million foreign currency
translation effect and a decrease of $10.0 million of non-recurring CSI and PET project costs, the
net decrease in selling, general and administrative expenses would have been $25.8 million, or
5.2%, compared to the prior fiscal year. Excluding the foreign currency translation effect and
non-recurring CSI and PET project costs, selling, general and administrative expenses as a
percentage of net sales decreased 10 basis points compared to the prior year.
In Fiscal 2008, selling, general and administrative expenses increased $8.9 million, or 1.8%, over
the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses
increased 300 basis points compared to the prior year. Excluding $5.9 million of CSI project
costs, $4.1 million of PET project costs, a $1.0 million increase in Sponsor management fees as a
result of a full year of ownership by our Sponsors after the Merger and a decrease due to the
effect of foreign currency translation of $3.2 million, selling, general and administrative
expenses increased $1.1 million, or 0.2%, compared to the prior fiscal year. Excluding these
items, selling, general and administrative expenses as a percentage of net sales increased 240
basis points compared to the prior year. The majority of this increase was due to the loss of
operating leverage in selling, general and administrative expenses.
Depreciation and amortization expense
Depreciation and amortization expense decreased $13.6 million to $71.5 million during Fiscal 2009
compared to Fiscal 2008. The majority of this decrease is due to foreign currency translation
effect and the effect of assets becoming fully depreciated or amortized.
Depreciation and amortization expense increased $4.0 million to $85.1 million for Fiscal 2008
compared to Fiscal 2007. This increase was due to the $1.8 million of the acceleration of
depreciation for store fixed assets for the 118 stores closed at the end of Fiscal 2008 and the
additional depreciation and amortization expense related to the purchase accounting adjustments
related to store leasehold improvements, franchise agreements and non-compete agreements that
resulted from the Acquisition for a full year in Fiscal 2008 compared to eight months in Fiscal
2007.
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Impairment of assets
The deterioration in the economy and resulting effect on consumer confidence and discretionary
spending that occurred during Fiscal 2009 and Fiscal 2008 had a significant impact on the retail
industry. We performed our tests for goodwill, intangible assets, property and equipment and other
asset impairment following relevant accounting standards pertaining to the particular asset being
tested. The impairment testing resulted in our recognition of non-cash impairment charges of $3.1
million related to property and equipment in Fiscal 2009. Similar testing conducted in Fiscal 2008
resulted in the recognition of non-cash impairment charges of $297.0 million related to goodwill
and $227.0 million related to intangible and other assets. Similar testing conducted in Fiscal
2007 resulted in the recognition of impairment charges aggregating $3.5 million related to other
assets. See Note 3 to our Consolidated Financial Statements for further discussion of the
impairment charges.
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. We
incurred $0.9 million of such costs in Fiscal 2009, $3.5 million in Fiscal 2008 and $80.0 million
in Fiscal 2007. In connection with our CSI and PET projects in Fiscal 2008, we incurred severance
costs of $12.4 million for terminated employees.
Gain on early debt extinguishment
The following is a summary of the Companys debt repurchase activity during Fiscal 2009 (in
thousands):
Principal | Purchase | Recognized | ||||||||||
Note Purchased | Amount | Price | Gain (1) | |||||||||
Senior Subordinated Notes |
$ | 52,763 | $ | 26,347 | $ | 25,115 | ||||||
Senior Toggle Notes |
30,500 | 19,744 | 11,297 | |||||||||
$ | 83,263 | $ | 46,091 | $ | 36,412 | |||||||
(1) | Net of deferred issuance cost write-offs of $1,301 and $603 for the Senior Subordinated Notes and Senior Toggle Notes, respectively, and accrued interest write-off of $1,144 for the Senior Toggle Notes. |
Other income, net
The following is a summary of other (income) expense activity for Fiscal 2009, Fiscal 2008, the
period from May 29, 2007 through February 2, 2008 and the period from February 4, 2007 through May
28, 2007 (in thousands):
Successor Entity | Successor Entity | Combined | Successor Entity | Predecessor Entity | ||||||||||||||||
Fiscal Year Ended | Fiscal Year Ended | Fiscal Year Ended | May 29, 2007 Through | Feb. 4, 2007 Through | ||||||||||||||||
January 30, | January 31, | February 2, | February 2, | May 28, | ||||||||||||||||
2010 | 2009 | 2008 | 2008 | 2007 | ||||||||||||||||
Gain on sale of assets |
$ | (1,935 | ) | $ | (1,287 | ) | $ | | $ | | $ | | ||||||||
Equity (income) loss |
1,014 | (320 | ) | (1,415 | ) | (751 | ) | (664 | ) | |||||||||||
Write down of JV investment |
| | 650 | 650 | | |||||||||||||||
Royalty income |
(1,943 | ) | (2,309 | ) | (2,309 | ) | (1,710 | ) | (599 | ) | ||||||||||
Other income |
(1,370 | ) | (583 | ) | (1,490 | ) | (1,277 | ) | (213 | ) | ||||||||||
$ | (4,234 | ) | $ | (4,499 | ) | $ | (4,564 | ) | $ | (3,088 | ) | $ | (1,476 | ) | ||||||
Interest expense (income), net
Interest income for Fiscal 2009 aggregated $0.2 million, a decrease of $1.3 million from the prior
year. This decrease was due to lower interest rates on our cash balances.
Interest income for Fiscal 2008 aggregated $1.5 million, a decrease of $5.9 million from the prior
year. This decrease was due to lower cash and cash equivalent balances resulting from cash used to
fund the acquisition of the Company and related expenses and lower interest rates on our cash
balances.
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Interest expense for Fiscal 2009 aggregated $177.6 million, a decrease of $19.8 million compared to
the prior year. This decrease is primarily the result of reductions in interest rates on the
floating portion of our debt and Note purchases. Included in interest expense for Fiscal 2009 is
approximately $10.4 million of amortization of deferred debt issuance costs and $39.0 million of
interest paid in kind.
Interest expense for Fiscal 2008 aggregated $197.4 million, an increase of $47.0 million compared
to the prior year. This increase was primarily the result of the incurrence of interest expense
associated with the financing of the acquisition of the Company for a full twelve months in Fiscal
2008 as compared to eight months in Fiscal 2007. Included in interest expense for Fiscal 2008 was
approximately $10.6 million of amortization of deferred debt issuance costs and $24.5 million of
interest paid in kind.
Income taxes
In Fiscal 2009, our income tax expense was $11.5 million and our effective income tax rate was
1,038.8%. Our effective income tax rate for Fiscal 2009 reflects tax expense of $18.6 million on
the repatriation of foreign earnings, plus tax expense of $17.5 million related to our valuation
allowance on deferred tax assets, offset by tax benefits of $21.4 million on income in our foreign
jurisdictions that are taxed at lower rates, and $4.7 million relating to other permanent tax
benefits. In Fiscal 2009, we made cash income tax payments of $3.2 million.
In Fiscal 2008, our income tax expense was $1.5 million and our effective tax rate was (0.2)%. Our
effective income tax rate for Fiscal 2008 reflected the non-deductible nature of the goodwill and
joint venture impairment charges aggregating $322.5 million, as well an increase of $95.8 million
to our valuation allowance on deferred tax assets generated by our U.S. operations. We increased
our valuation allowance due to a lack of sufficient accounting evidence that it was more likely
than not that our deferred tax assets would be realized. In Fiscal 2008, we made cash income tax
payments of $14.2 million.
In Fiscal 2007, our income tax expense was $13.8 million and our effective income tax rate was
(46.8)%. Our effective income tax rate for Fiscal 2007 reflected benefits due to the overall
geographic mix of losses in jurisdictions with higher tax rates and income in jurisdictions with
lower tax rates, partially offset by the additional tax expense of $10.6 million associated with
non-deductible transaction costs related to the Merger, and of $22.0 million related to the
repatriation of foreign earnings to fund, in part, the acquisition of the Company. In Fiscal 2007,
we made cash income tax payments of $33.3 million.
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):
Successor Entity | Successor Entity | Combined | Successor Entity | Predecessor Entity | ||||||||||||||||
Fiscal Year | Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4, 2007 | ||||||||||||||||
Ended | Ended | Ended | Through | Through | ||||||||||||||||
January 30, | January 31, | February 2, | February 2, | May 28, | ||||||||||||||||
2010 | 2009 | 2008 | 2008 | 2007 | ||||||||||||||||
Net sales |
$ | 850,313 | $ | 907,486 | $ | 995,469 | $ | 702,986 | $ | 292,483 | ||||||||||
Increase (decrease) in
same store sales |
(3.2 | )% | (9.2 | )% | (2.6 | )% | (4.2 | )% | 1.3 | % | ||||||||||
Gross profit percentage |
50.4 | % | 48.5 | % | 52.0 | % | 51.5 | % | 53.1 | % | ||||||||||
Number of stores at
the end of the period
(1) |
1,993 | 2,026 | 2,135 | 2,135 | 2,124 |
(1) | Number of stores excludes stores operated under franchise agreements and joint venture stores. |
Net sales
Net sales in North America during Fiscal 2009 decreased $57.2 million, or 6.3%, from Fiscal 2008.
This decrease was attributable to the effect of stores closed in North America at the end of Fiscal
2008 that
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decreased sales $29.8 million, decrease in same store sales of $27.2 million, or 3.2%, foreign
currency translation effect of our Canadian operations of $1.2 million, and decreases in shipments
to franchisees of $2.9 million, partially offset by new store revenue of $4.0 million.
The decrease in same store sales was primarily attributable to a decrease in the average number of
transactions per store of 8.1%, partially offset by an increase in average transaction value of
4.2%.
Net sales in North America during Fiscal 2008 decreased $88.0 million, or 8.8%, from Fiscal 2007.
This decrease was attributable to a decrease in same store sales of $87.6 million, or 9.2%, and a
decrease of $2.6 million resulting from foreign currency translation of our foreign operations,
partially offset by new store revenue, net of store closures, of $0.5 million and a net increase of
$1.7 million from increased sales to franchisees.
The decrease in same store sales in North America was primarily attributable to a decrease in the
average number of transactions per store of 14.6%, partially offset by an increase in average
transaction value.
At the end of Fiscal 2008, we closed 118 stores in North America that were performing below our
expectations. These stores accounted for 1.7% of the net sales in Fiscal 2008 and had a combined
operating loss before depreciation and amortization of $0.7 million in Fiscal 2008.
Gross profit
In Fiscal 2009, gross profit percentage increased 190 basis points to 50.4% compared to the gross
profit percentage for Fiscal 2008 of 48.5%. This increase included a 230 basis point improvement
in merchandise margin and a 20 basis point decrease in buying costs, partially offset by a 60 basis
point increase in occupancy costs. Fiscal 2008 included $1.1 million of non-recurring PET project
costs, which were included in buying costs and accounted for 10 basis points of the improvement in
gross margin.
In Fiscal 2008, gross profit percentage decreased by 350 basis points compared to the prior fiscal
year. This decrease was comprised of a 330 basis point loss of operating leverage in occupancy and
buying costs, a 10 basis point decline due to non-recurring PET project costs and a 20 basis point
decline due to the closure of 118 stores in January 2009, partially offset by a 10 basis point
increase in merchandise margin.
The following table compares our sales of each product category for the last three fiscal years:
Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
Ended | Ended | Ended | ||||||||||
January 30, | January 31, | February 2, | ||||||||||
% of Total | 2010 | 2009 | 2008 | |||||||||
Accessories |
48.5 | 43.3 | 41.8 | |||||||||
Jewelry |
51.5 | 56.7 | 58.2 | |||||||||
100.0 | 100.0 | 100.0 | ||||||||||
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Europe
Key statistics and results of operations for our European division are as follows (dollars in
thousands):
Successor Entity | Successor Entity | Combined | Successor Entity | Predecessor Entity | ||||||||||||||||
Fiscal Year | Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4, 2007 | ||||||||||||||||
Ended | Ended | Ended | Through | Through | ||||||||||||||||
January 30, | January 31, | February 2, | February 2, | May 28, | ||||||||||||||||
2010 | 2009 | 2008 | 2008 | 2007 | ||||||||||||||||
Net sales |
$ | 492,076 | $ | 505,474 | $ | 515,362 | $ | 382,946 | $ | 132,416 | ||||||||||
Increase (decrease) in
same store sales |
1.1 | % | (2.5 | )% | (0.2 | )% | 0.2 | % | (1.2 | )% | ||||||||||
Gross profit percentage |
51.6 | % | 50.0 | % | 51.5 | % | 52.8 | % | 47.8 | % | ||||||||||
Number of stores at
the end of the period
(1) |
955 | 943 | 905 | 905 | 879 |
(1) | Number of stores excludes stores operated under franchise agreements and joint venture stores. |
Net sales
Net sales in our European division during Fiscal 2009 decreased $13.4 million, or 2.7%, from Fiscal
2008. This decrease was attributable to a decrease of $32.3 million resulting from foreign
currency translation of our European operations and a decrease of $1.2 million due to store
closures, partially offset by new store revenue of $15.1 million and increases in same store sales
of $5.0 million, or 1.1%.
The increase in same store sales was primarily attributable to an increase in average transaction
value of 6.6%, partially offset by a decrease in average number of transactions per store of 5.2%.
Net sales in our European division during Fiscal 2008 decreased $9.9 million, or 1.9%, from Fiscal
2007. This decrease was attributable to a decrease in same store sales of $12.2 million, or 2.5%,
and a decrease of $14.5 million resulting from foreign currency translation of our European
operations, partially offset by new store revenue, net of store closures, of $16.8 million.
The decrease in same store sales was primarily attributable to a decrease in the average number of
transactions per store of 6.0%, partially offset by an increase in average transaction value.
Gross profit
In Fiscal 2009, gross profit percentage increased 160 basis points to 51.6% compared to the gross
profit percentage for Fiscal 2008 of 50.0%. This increase was comprised of a 140 basis point
improvement in merchandise margin and a 20 basis point decrease in occupancy costs. Fiscal 2008
included $2.1 million of non-recurring PET project costs, which were included in buying costs and
accounted for 40 basis points of the improvement in gross margin.
In Fiscal 2008, gross profit percentage decreased 150 basis points compared to the prior fiscal
year. This decrease was comprised of a 190 basis point loss of operating leverage in occupancy and
buying costs and a 40 basis point decrease due to non-recurring PET project costs, partially offset
by an 80 basis point increase in merchandise margin.
The following table compares our sales of each product category for the last three fiscal years:
Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
Ended | Ended | Ended | ||||||||||
January 30, | January 31, | February 2, | ||||||||||
% of Total | 2010 | 2009 | 2008 | |||||||||
Accessories |
62.2 | 57.3 | 53.5 | |||||||||
Jewelry |
37.8 | 42.7 | 46.5 | |||||||||
100.0 | 100.0 | 100.0 | ||||||||||
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Liquidity and Capital Resources
Our operating liquidity requirements are funded through internally generated cash flow from normal
sales and cash on hand. The Companys primary uses of cash are working capital requirements, new
store expenditures, and debt service requirements. Cash outlays for the payment of interest are
significantly higher in Fiscal 2009 and Fiscal 2008 than in prior years as a result of the Credit
Facility and Notes incurred in connection with the Transactions described below. Our current
capital structure generates losses in our U.S. operations because of debt service requirements.
Accordingly, we expect to pay minimal cash taxes in the U.S. in the near term, while our foreign
cash taxes are less affected by our capital structure and debt service requirements. The Company
anticipates that the existing cash and cash equivalents and cash generated from operations will be
sufficient to meet its future working capital requirements, new store expenditures, and debt
service requirements as they become due. However, the Companys ability to fund future operating
expenses and capital expenditures and its 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.
Credit Facility
Our Credit Facility provides senior secured financing of up to $1.65 billion, consisting of a $1.45
billion senior secured term loan facility and a $200.0 million senior secured revolving credit
facility. On May 29, 2007, upon closing of the Transactions, we borrowed $1.45 billion under our
senior secured term loan facility and were issued a $4.5 million letter of credit. As of January
30, 2010, we were in compliance with the covenants in our Credit Facility.
Borrowings under our Credit Facility bear interest at a rate equal to, at our option, either (a) an
alternate base rate determined by reference to the higher of (1) prime rate in effect on such day
and (2) the federal funds effective rate plus 0.50% or (b) a LIBOR rate, with respect to any
Eurodollar borrowing, determined by reference to the costs of funds for U.S. dollar deposits in the
London Interbank Market for the interest period relevant to such borrowing, adjusted for certain
additional costs, in each case plus an applicable margin. The initial applicable margin for
borrowings under our Credit Facility is 1.75% per annum with respect to the alternate base rate
borrowing and 2.75% per annum in the case of any LIBOR borrowings. The applicable margin for our
revolving credit loans under our Credit Facility will be subject to one or more stepdowns, in each
case based upon the ratio of our net senior secured debt to earnings before interest, taxes,
depreciation and amortization (EBITDA) for the period of four consecutive fiscal quarters most
recently ended as of such date (the Total Net Secured Leverage Ratio).
Between July 20, 2007 and August 3, 2007, the Company entered into three interest rate swap
agreements to manage exposure to interest rate changes related to the senior secured term loan
facility. The interest rate swaps result in the Company paying a fixed rate of 5.11%, plus the
applicable margin then in effect for LIBOR borrowings resulting in an interest rate of 7.86% at
January 30, 2010, on a notional amount of $435.0 million of the senior secured term loan. Each
swap expires on June 30, 2010.
In addition to paying interest on outstanding principal under our Credit Facility, we are required
to pay a commitment fee, initially 0.50% per annum, in respect of the revolving credit commitments
thereunder. The commitment fee will be subject to one stepdown, based upon our Total Net Secured
Leverage Ratio. We must also pay customary letter of credit fees and agency fees. At January 30,
2010, the weighted average interest rate for borrowings outstanding under our Credit Facility was
2.94% per annum.
Our senior secured term loan facility is amortized in equal quarterly installments of $3.625
million, beginning on September 30, 2007 and ending on March 31, 2014. The remaining balance of
$1,356 million is due on May 29, 2014. The principal amount outstanding of the loans under our
senior secured revolving Credit Facility, plus interest accrued and unpaid thereon, will be due and
payable in full at maturity on May 29, 2013.
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All obligations under our Credit Facility are unconditionally guaranteed by (i) Claires Inc., our
parent, prior to an initial public offering of Claires Stores, Inc. stock, and (ii) certain of our
existing and future wholly-owned domestic subsidiaries, subject to certain exceptions.
All obligations under our Credit Facility, and the guarantees of those obligations, are secured,
subject to certain exceptions, by (i) all of Claires Stores, Inc. capital stock, prior to an
initial public offering of Claires Stores, Inc. stock, and (ii) substantially all of our material
owned assets and the material owned assets of subsidiary guarantors, including:
| a perfected pledge of all the equity interests held by us or any subsidiary guarantor, which pledge, in the case of any foreign subsidiary, is limited to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by us and the subsidiary guarantors; and | ||
| perfected security interests in, and mortgages on, substantially all material tangible and intangible assets owned by us and each subsidiary guarantor, subject to certain exceptions. |
Our Credit Facility contains customary provisions relating to mandatory prepayments, voluntary
payments, affirmative and negative covenants, and events of default; however, it does not contain
any covenants that require the Company to maintain any particular financial ratio or other measure
of financial performance.
Although we 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 Consolidated Balance Sheet as of January 30, 2010. The interest rate
on the Revolver on January 30, 2010 was 2.5%.
Notes
In connection with the Transactions, we also issued a series of notes.
Our senior notes were issued in two series: (1) $250.0 million of 9.25% senior notes due 2015; and
(2) $350.0 million of 9.625%/10.375% senior toggle notes due 2015. The $250.0 million senior notes
are unsecured obligations, mature on June 1, 2015 and bear interest at a rate of 9.25% per annum.
The $350.0 million senior toggle notes are senior obligations and will mature on June 1, 2015. For
any interest period through June 1, 2011, we may, at our option, elect to pay interest on the
senior toggle notes (i) entirely in cash, (ii) entirely by increasing the principal amount of the
outstanding senior toggle notes or by issuing payment in kind (PIK) Notes, or (iii) 50% as cash
interest and 50% as PIK interest. After June 1, 2011, we will make all interest payments on the
senior toggle notes in cash. Cash interest on the senior toggle notes will accrue at the rate of
9.625% per annum and be payable in cash. PIK interest on the senior toggle notes will accrue at the
cash interest rate per annum plus 0.75% and be payable by issuing PIK notes. When we make a PIK
interest election, our debt increases by the amount of such interest and we issue PIK notes on the
scheduled semi-annual payment dates.
We also issued 10.50% senior subordinated notes due 2017 in an initial aggregate principal amount
of $335.0 million. The senior subordinated notes are senior subordinated obligations, will mature
on June 1, 2017 and bear interest at a rate of 10.50% per annum.
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Interest on the notes is payable semi-annually to holders of record at the close of business on May
15 or November 15 immediately preceding the interest payment date on June 1 and December 1 of each
year, commencing December 1, 2007. The notes are also subject to certain redemption and repurchase
rights as described in Note 5 to the Consolidated Financial Statements.
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; | ||
| 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 January 30, 2010, we were in compliance with the covenants under the Notes.
On May 14, 2008, we elected to pay interest in kind on our 9.625%/10.375% Senior Toggle Notes due
2015. The election was for the interest period from June 2, 2008 through December 1, 2008. On
December 1, 2008, we increased the principal amount on the outstanding Senior Toggle Notes by $18.2
million in satisfaction of interest paid in kind for the interest period from June 2, 2008 through
December 1, 2008. We continued the election to pay interest in kind for the interest period from
December 2, 2008 through June 1, 2009 and for the interest period from June 2, 2009 through
December 1, 2009. We increased the principal amount on the outstanding Senior Toggle Notes by
$19.1 million and $19.8 million on June 1, 2009 and December 1, 2009, respectively. Payment in
kind interest accrued for the period from December 2, 2009 through January 30, 2010 of
approximately $6.5 million is included in Long-term debt in the accompanying Consolidated Balance
Sheet as of January 30, 2010. It is our current intention to pay interest in kind on the Senior
Toggle Notes for all interest payments through June 1, 2011.
Pre-Transaction Credit Facilities
Our non-U.S. subsidiaries have bank credit facilities totaling $2.4 million. These facilities are
used for working capital requirements, letters of credit and various guarantees. These credit
facilities have been arranged in accordance with customary lending practices in their respective
countries of operation. At January 30, 2010, the entire amount of $2.4 million was available for
borrowing by us, subject to reduction for $2.0 million of outstanding bank guarantees.
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Analysis of Consolidated Financial Condition
A summary of cash flows provided by (used in) operating, investing and financing activities is
outlined in the table below (in thousands):
Successor Entity | Successor Entity | Combined | Successor Entity | Predecessor Entity | ||||||||||||||||
Fiscal Year | Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4, 2007 | ||||||||||||||||
Ended | Ended | Ended | Through | Through | ||||||||||||||||
January 30, | January 31, | February 2, | February 2, | May 28, | ||||||||||||||||
2010 | 2009 | 2008 | 2008 | 2007 | ||||||||||||||||
Operating activities |
$ | 75,476 | $ | 1,373 | $ | 6,795 | $ | (35,851 | ) | $ | 42,646 | |||||||||
Investing activities |
(21,259 | ) | (60,756 | ) | (3,140,441 | ) | (3,112,372 | ) | (28,069 | ) | ||||||||||
Financing activities |
(60,591 | ) | 179,500 | 2,874,807 | 2,880,810 | (6,003 | ) |
Our working capital at the end of Fiscal 2009 was $188.6 million compared to $171.7 million at
the end of Fiscal 2008, an increase of $17.0 million. The increase in working capital mainly
reflects the decrease in trade accounts payable of $7.6 million and the decrease in accrued
expenses and other current liabilities of $11.5 million.
Cash flows from operating activities
In Fiscal 2009, cash provided by operating activities increased $74.1 million compared to Fiscal
2008. The primary reasons for the increase were lower cash interest payments of $41.8 million,
lower cash tax payments of $11.1 million, and an increase in operating income before impairment of
assets and depreciation and amortization expense of $53.8 million, partially offset by an increase
in working capital, excluding cash and cash equivalents, of $22.8 million, an increase in other
assets of $4.6 million and a decrease in deferred rent expense of $5.8 million.
In Fiscal 2008, cash provided by operating activities decreased $5.4 million compared to Fiscal
2007. The primarily reasons for the decrease were an increase of $45.0 million of interest paid on
the debt related to the Acquisition for a full twelve month period compared to only eight months
during Fiscal 2007, and a reduction of $35.4 million of operating income before impairment of
assets and depreciation and amortization expense, offset by $75.0 million of working capital and
other balance sheet changes.
Cash flows from investing activities
In Fiscal 2009, cash used in investing activities decreased $39.5 million compared to Fiscal 2008.
The primary reason for the decrease was lower capital expenditures due to fewer store openings. We
reduced capital expenditures during 2009 to maximize cash flow in response to the distress in the
financial markets which has resulted in declines in consumer confidence and spending.
In Fiscal 2008, cash used in investing activities decreased $3.1 billion compared to Fiscal 2007.
The majority of the cash used in investing activities in Fiscal 2007 was directly attributable to
the cash and cash equivalents used to fund the Acquisition. We funded these investing activities
primarily from the financing activities discussed below.
Capital expenditures were $25.0 million, $59.4 million and $86.5 million in Fiscal 2009, Fiscal
2008 and Fiscal 2007, respectively, primarily to remodel existing stores, open new stores and to
improve technology systems. In Fiscal 2010, we currently expect to fund a total of between $45.0
million and $50.0 million of capital expenditures to remodel existing stores, open new stores and
to improve technology systems.
Cash flows from financing activities
During Fiscal 2009, we paid $46.1 million to retire $30.5 million of Senior Toggle Notes and $52.8
million of Senior Subordinated Notes. During Fiscal 2008, we drew down the remaining $194.0
million available under our Revolving Credit Facility. In both of these periods, we paid $14.5
million for the scheduled principal payments on our Credit Facility.
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In Fiscal 2007, we raised $1.45 billion from our Credit Facility and $935.0 million from our note
offerings, an aggregate of $2.4 billion from debt. As part of the Transactions, our Sponsors
contributed $595.7 million in capital. Therefore, the capital raised to fund the Acquisition was
$2.98 billion. We paid $77.4 million of debt issuance costs from these proceeds and used the
remainder from existing cash and cash equivalents to fund the Acquisition. We paid $7.9 million
upon the acquisition of the Company to holders of the predecessor entity stock options. We also
paid in Fiscal 2007 the first two quarterly installments of principal payments on our Credit
Facility aggregating $7.3 million.
On May 14, 2008, we elected to pay interest in kind on our 9.625%/10.375% Senior Toggle Notes due
2015. The election was for the interest period from June 2, 2008 through December 1, 2008. On
December 1, 2008, we increased the principal amount on the outstanding Senior Toggle Notes by $18.2
million in satisfaction of interest paid in kind for the interest period from June 2, 2008 through
December 1, 2008. We continued the election to pay interest in kind for the interest period from
December 2, 2008 through June 1, 2009 and for the interest period from June 2, 2009 through
December 1, 2009. We increased the principal amount on the outstanding Senior Toggle Notes by
$19.1 million and $19.8 million on June 1, 2009 and December 1, 2009, respectively. Payment in
kind interest accrued for the period from December 2, 2009 through January 30, 2010 of
approximately $6.5 million is included in Long-term debt in the accompanying Consolidated Balance
Sheet as of January 30, 2010. It is our current intention to pay interest in kind on the Senior
Toggle Notes for all interest payments through June 1, 2011.
We or our affiliates have purchased and may, from time to time, purchase portions of our
indebtedness.
Cash position
As of January 30, 2010, we had cash and cash equivalents of $198.7 million and substantially all of
the cash equivalents consisted of U.S. Treasury Securities.
We anticipate that cash generated from operations will be sufficient to meet our future working
capital requirements, new store expenditures, and debt service requirements for at least the next
twelve months. 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.
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 CSI and PET projects, scaled back
planned capital expenditures for Fiscal 2010 and are proceeding cautiously to support increased
sales. 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.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require us 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 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
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based on our best estimates and judgment. We evaluate our estimates and assumptions on an ongoing
basis using historical experience and other factors, including the current economic environment,
which we believe to be reasonable under the circumstances. We adjust 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.
Inventory Valuation
Our inventories in North America are valued at the lower of cost or market, with cost determined
using the retail method. Inherent in the retail inventory calculation are certain significant
management judgments and estimates including, among others, merchandise markups, markdowns and
shrinkage, which impact the ending inventory valuation at cost as well as resulting gross margins.
The methodologies used to value merchandise inventories include the development of the cost to
retail ratios, the groupings of homogeneous classes of merchandise, development of shrinkage
reserves and the accounting for retail price changes. The inventories in Europe are accounted for
under the lower of cost or market method, with cost determined using the average cost method at an
individual item level. Market is determined based on the estimated net realizable value, which is
generally the merchandise selling price. Inventory valuation is impacted by the estimation of slow
moving goods, shrinkage and markdowns. Merchandise inventory levels are monitored to identify
slow-moving items and markdowns are used to clear such inventories. Changes in consumer demand of
our products could affect our retail prices, and therefore impact the retail method and lower of
cost or market valuations.
Valuation of Long-Lived Assets
We evaluate the carrying value of long-lived assets whenever events or changes in circumstances
indicate that a potential impairment has occurred. A potential impairment has occurred if the
projected future undiscounted cash flows are less than the carrying value of the assets. The
estimate of cash flows includes managements assumptions of cash inflows and outflows directly
resulting from the use of the asset in operations. When a potential impairment has occurred, an
impairment charge is recorded if the carrying value of the long-lived asset exceeds its fair value.
Fair value is measured based on a projected discounted cash flow model using a discount rate we
feel is commensurate with the risk inherent in our business. A prolonged decrease in consumer
spending would require us to modify our models and cash flow estimates, with the risk of an
impairment triggering event in the future. Our impairment analyses contain estimates due to the
inherently judgmental nature of forecasting long-term estimated cash flows and determining the
ultimate useful lives of assets. Actual results may differ, which could materially impact our
impairment assessment. During Fiscal 2009, an impairment charge of approximately $3.1 million was
recorded related to our central buying and store operations offices and the North American
distribution center located in Hoffman Estates, Illinois. During Fiscal 2008, an impairment charge
of approximately $2.5 million was recorded related to store asset impairment. During Fiscal 2007,
an impairment charge of approximately $3.5 million was recorded relating to computer software
impairment.
Goodwill Impairment
We continually evaluate 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. We conduct our annual impairment test to determine whether an impairment of the
value of goodwill has occurred in accordance with the guidance set forth in ASC Topic 350,
Intangibles Goodwill and Other. ASC Topic 350 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 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
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exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that
excess. We have two reporting units as defined under ASC Topic 350. These reporting units are our
North American segment and our European 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. We rely on the
income approach using discounted cash flows and market approach using comparable public company
entities in deriving the fair values of our reporting units. The asset approach is not used as our
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 earnings before interest, taxes,
depreciation and amortization (EBITDA) multiples. Our 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 us to modify future models and
cash flow estimates, and could result in an impairment triggering event in the future.
We have weighted the valuation of our reporting units at three-fourths using the income approach
and one-fourth using the market based approach. We believe 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
our 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 2009 and the fiscal years 2010 through 2014. Beyond fiscal year 2014, a terminal
value was calculated using the Gordon Growth Model. We 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 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 some time 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.
Our annual impairment analysis did not result in any impairment of goodwill during Fiscal 2009. We
recognized a non-cash impairment charge of $297.0 million in Fiscal 2008. We also performed this
analysis during Fiscal 2007 and recorded no impairment charge. The excess of fair value over
carrying value for each of our reporting units as of November 1, 2009, the annual testing date for
Fiscal 2009, ranged from approximately $291.0 million to approximately $481.0 million. In order to
evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied
a hypothetical 10% decrease to the fair values of each reporting unit. This hypothetical 10%
decrease would result in excess fair value over carrying value ranging from approximately $91.0
million to approximately $361.0 million for each of our reporting units.
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Intangible Asset Impairment
Intangible assets include tradenames, franchise agreements, lease rights, non-compete agreements
and leases that existed at the date of acquisition with terms that were favorable to market at that
date. We continually evaluate whether events and changes in circumstances warrant revised
estimates of the useful lives, residual values or recognition of an impairment loss for intangible
assets. Future adverse changes in market and legal conditions or poor operating results of
underlying assets could result in losses or an inability to recover the carrying value of the
intangible asset, thereby possibly requiring an impairment charge in the future.
We evaluate the market value of the intangible assets periodically and record an impairment charge
when we believe the carrying amount of the asset is not recoverable. Indefinite-lived intangible
assets are tested for impairment annually or more frequently when events or circumstances indicate
that impairment may have occurred. Definite-lived intangible assets are tested for impairment when
events or circumstances indicate that the carrying amount may not be recoverable. We estimate the
fair value of these intangible assets primarily utilizing a discounted cash flow model. The
forecasted cash flows used in the model contain inherent uncertainties, including significant
estimates and assumptions related to growth rates, margins and cost of capital. Changes in any of
the assumptions utilized could affect the fair value of the intangible assets and result in an
impairment triggering event. A prolonged decrease in consumer spending would require us to modify
our models and cash flow estimates, with the risk of an impairment triggering event in the future.
As a result of our impairment analysis related to intangible assets, we did not recognize any
impairment charge during Fiscal 2009. We recognized a non-cash impairment charge of $199.0 million
in Fiscal 2008. We also performed this analysis during Fiscal 2007 and recorded no impairment
charge.
Income Taxes
We are subject to income taxes in many jurisdictions, including the United States, individual
states and localities and internationally. Our annual consolidated provision for income taxes is
determined based on our income, statutory tax rates and the tax implications of items treated
differently for tax purposes than for financial reporting purposes. Tax law requires certain items
to be included in the tax return at different times than the items are reflected on the financial
statements. Some of these differences are permanent, such as expenses that are not deductible in
our tax return, and some differences are temporary, reversing over time, such as depreciation
expense. We establish deferred tax assets and liabilities as a result of these temporary
differences.
Our judgment is required in determining any valuation allowance recorded against deferred tax
assets, specifically net operating loss carryforwards, tax credit carryforwards and deductible
temporary differences that may reduce taxable income in future periods. In assessing the need for
a valuation allowance, we consider all available evidence including past operating results,
estimates of future taxable income and tax planning opportunities. In the event we change our
determination as to the amount of deferred tax assets that can be realized, we will adjust our
valuation allowance with a corresponding impact to income tax expense in the period in which such
determination is made.
During Fiscal 2009, we reported an increase of $18.3 million in valuation allowance against our
U.S. deferred tax assets, and an increase of $2.1 million in valuation allowance against our
foreign deferred tax assets. The foreign increase primarily relates to foreign jurisdictions that
have a history of losses. Our conclusion regarding the need for a valuation allowance against U.S.
and foreign deferred tax assets could change in the future based on improvements in operating
performance, which may result in the full or partial reversal of the valuation allowance.
In the fourth quarter of Fiscal 2008, we recorded a charge of $95.8 million, respectively, to
establish a valuation allowance against our deferred tax assets in the U.S. We concluded that such
a valuation allowance was appropriate in light of the significant negative evidence, which was
objective and verifiable, such as the cumulative losses in recent fiscal years in our U.S.
operations. While our long-term financial outlook in the U.S. remains positive, we concluded that
our ability to rely on our long-term outlook as to future taxable income was limited due to the
relative weight of the negative evidence from our recent U.S. cumulative losses.
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We establish accruals for uncertain tax positions in our Consolidated Financial Statements based on
tax positions that we believe are supportable, but are potentially subject to successful challenge
by the taxing authorities. We believe these accruals are adequate for all open audit years based
on our assessment of many factors including past experience, progress of ongoing tax audits and
interpretations of tax law. If changing facts and circumstances cause us to adjust our accruals,
or if we prevail in tax matters for which accruals have been established, or we are required to
settle matters in excess of established accruals, our income tax expense for a particular period
will be affected.
Income tax expense also reflects our best estimate and assumptions regarding, among other things,
the geographic mix of income and losses from our foreign and domestic operations, interpretation of
tax laws and regulations of multiple jurisdictions, earnings repatriation plans, and resolution of
tax audits. Our effective income tax rates in future periods could be impacted by changes in the
geographic mix of income and losses from our foreign and domestic operations that may be taxed at
different rates, changes in tax laws, repatriation of foreign earnings, and the resolution of
unrecognized tax benefits for amounts different from our current estimates. Given our capital
structure, we will continue to experience volatility in our effective tax rate over the near term.
Stock-Based Compensation
We issue stock options and other stock-based awards to executive management, key employees and
directors under our stock-based compensation plans.
On January 29, 2006, we adopted ASC Topic 718, Compensation Stock Compensation, using the
modified prospective method. The calculation of stock-based compensation expense requires the input
of highly subjective assumptions, including the expected term of the stock-based awards, stock
price volatility and pre-vesting forfeitures. The assumptions used in calculating the fair value
of stock-based awards represent our best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if factors change and we
were to use different assumptions, our stock-based compensation expense could be materially
different in the future. In addition, we are required to estimate the expected forfeiture rate and
only recognize expense for those shares expected to vest. We estimate forfeitures based on our
historical experience of stock-based awards granted, exercised and cancelled, as well as
considering future expected behavior. If the actual forfeiture rate is materially different from
our estimate, stock-based compensation expense could be different from what we have recorded in the
current period. See Note 8 in the Notes to Consolidated Financial Statements for additional
information.
Under ASC Topic 718, time-vested stock awards are accounted for at fair value at date of grant.
The compensation expense is recorded over the requisite service period. Compensation expense for
time-vested stock awards granted in Fiscal 2009, Fiscal 2008 and Fiscal 2007 was recorded over the
requisite service period using the graded-vesting method.
The fair value of time and the buy one, get one (BOGO) options granted during Fiscal 2009, Fiscal
2008 and Fiscal 2007 were determined using the Black-Scholes option-pricing model. The fair value
of performance based stock options issued during Fiscal 2009, Fiscal 2008 and Fiscal 2007 was based
on the Monte Carlo model. Both models incorporate various assumptions such as expected dividend
yield, risk-free interest rate, expected life of the options and expected stock price volatility.
Other stock awards, such as long-term incentive plan awards, which qualified as equity plans under
ASC Topic 718, were accounted for based on fair value at date of grant. The compensation expense
was based on the number of shares expected to be issued when it became probable that performance
targets required to receive the award will be achieved. The expense was recorded over the
requisite service period.
Other long-term incentive plans accounted for as liabilities under ASC Topic 718 were recorded at
fair value at each reporting date until settlement. The compensation expense is based on the
number of performance units expected to be issued when it became probable that performance targets
required to receive the award will be achieved. The expense was recorded over the requisite
service period.
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Performance-based stock awards are accounted for at fair value at date of grant. The compensation
expense is recognized over the longer of the service period and the period derived from the market
conditions.
BOGO options, which are immediately vested and exercisable upon issuance, are accounted for at fair
value at date of grant. The compensation expense is recognized over a four year period due to the
terms of the option requiring forfeiture in certain cases including the grantees voluntary
resignation from the Companys employ prior to May 2011.
Our estimates of stock price volatility, interest rate, grant date fair value and expected life of
options and restricted stock are affected by illiquid credit markets, consumer spending and current
and future economic conditions. As future events and their effects can not be determined with
precision, actual results could differ significantly from our estimates.
Derivatives and Hedging
The Company accounts for derivative instruments in accordance with ASC Topic 815, Derivatives and
Hedging. In accordance with ASC Topic 815, the Company reports all derivative financial
instruments on its Consolidated Balance Sheet at fair value. The Company formally designates and
documents the financial instrument as a hedge of a specific underlying exposure, as well as the
risk management objectives and strategies for undertaking the hedge transaction. The Company
formally assesses both at inception and at least quarterly thereafter, whether the financial
instruments that are used in hedging transactions are effective at offsetting changes in either the
fair value or cash flows of the related underlying exposure.
The Company primarily employs derivative financial instruments to manage its exposure to market
risk from foreign exchange rates and interest rate changes and to limit the volatility and impact
of interest rate changes on earnings and cash flows. The Company does not enter into derivative
financial instruments for trading or speculative purposes. The Company faces credit risk if the
counterparties to the financial instruments are unable to perform their obligations. However, the
Company seeks to minimize this risk by entering into transactions with counterparties that are
significant and creditworthy financial institutions. The Company monitors the credit ratings of
the counterparties.
The Company records unrealized gains and losses on derivative financial instruments qualifying as
cash flow hedges in Accumulated other comprehensive income (loss), net of tax on the Consolidated
Balance Sheets, to the extent that hedges are effective. For derivative financial instruments
which do not qualify as cash flow hedges, any changes in fair value would be recorded in the
Consolidated Statements of Operations and Comprehensive Income (Loss). We adopted ASC Topic 820,
Fair Value Measurements and Disclosures, on February 3, 2008, which required the Company to include
credit valuation adjustment risk in the calculation of fair value.
The Company may at its discretion terminate or change the designation of any such hedging
instrument agreements prior to maturity. At that time, any gains or losses previously reported in
accumulated other comprehensive income (loss) on termination would amortize into interest expense
or interest income to correspond to the recognition of interest expense or interest income on the
hedged debt. If such debt instrument was also terminated, the gain or loss associated with the
terminated derivative included in accumulated other comprehensive income (loss) at the time of
termination of the debt would be recognized in the Consolidated Statements of Operations and
Comprehensive Income (Loss) at that time.
Contractual Obligations and Off Balance Sheet Arrangements
We finance certain equipment through transactions accounted for as non-cancelable operating leases.
As a result, the rental expense for this equipment is recorded during the term of the lease
contract in our Consolidated Financial Statements, generally over four to seven years. In the
event that we, or our landlord, terminate a real property lease prior to its scheduled expiration,
we will be required to accrue all future rent payments under any non-cancelable operating lease
with respect to leasehold improvements or equipment located thereon.
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The following table sets forth our contractual obligations requiring the use of cash as of January
30, 2010:
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | 2-3 | 4-5 | More than 5 | |||||||||||||||||
(in millions) | Total | 1 year | years | years | years | |||||||||||||||
Operating leases for stores,
distribution centers and
offices |
$ | 1,047.3 | $ | 190.1 | $ | 327.9 | $ | 248.5 | $ | 280.8 | ||||||||||
Operating leases for equipment |
1.9 | 0.9 | 0.7 | 0.3 | | |||||||||||||||
Long-term debt obligations |
2,576.7 | 14.5 | 29.0 | 1,564.3 | (1) | 968.9 | ||||||||||||||
Letters of credit |
6.0 | 6.0 | | | | |||||||||||||||
Interest (2) |
729.0 | 110.7 | 265.0 | 246.6 | 106.7 | |||||||||||||||
Total |
$ | 4,360.9 | $ | 322.2 | $ | 622.6 | $ | 2,059.7 | $ | 1,356.4 | ||||||||||
(1) | Includes $1,370.3 million under our senior secured term loan facility and $194.0 million under our senior secured revolving credit facility. | |
(2) | Represents interest expected to be paid on our debt and does not assume any debt repurchases or prepayments, other than scheduled amortization of our Credit Facility. Projected interest on variable rate debt is based on the 90 day LIBOR rate in effect on January 30, 2010, plus the applicable LIBOR margin of 2.75%, and the impact through June 2010 of interest rate swaps discussed in Note 9 to the Consolidated Financial Statements. |
We have no material off-balance sheet arrangements (as such term is defined in Item 303(a) (4) (ii)
under Regulation S-K of the Securities Exchange Act.
Seasonality and Quarterly Results
Sales of each category of merchandise vary from period to period depending on current trends. We
experience traditional retail patterns of peak sales during the Christmas, Easter and
back-to-school periods. Sales as a percentage of total sales in each of the four quarters of
Fiscal 2009 were 22%, 23%, 24% and 31%, respectively. See Note 13 of our Consolidated Financial
Statements for our quarterly results of operations.
Impact of Inflation
Inflation impacts our operating costs including, but not limited to, cost of goods and supplies,
occupancy costs and labor expenses. We seek to mitigate these effects by passing along
inflationary increases in costs through increased sales prices of our products where competitively
practical or by increasing sales volumes.
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 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 2 in the Notes to Consolidated Financial Statements
for further discussion and disclosure.
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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.
In October 2008, the EITF issued guidance that addressed the potential effect of ASC Topic 805,
Business Combinations, and ASC 810-10-65, Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51, on equity-method accounting under 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 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 2 in the Notes to 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 ASC Topic 820,
Fair Value Measurements and Disclosures). 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 adoption of this guidance on November 1, 2009 did not have a material impact on our financial position, results of
operations or cash flows.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures Improving
Disclosures about Fair Value Measurements (amendments to ASC Topic 820, Fair Value Measurements and
Disclosures). ASU 2010-06 amends the disclosure requirements related to recurring and nonrecurring
measurements. The guidance requires new disclosures on the transfer of assets and liabilities
between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2
(significant other observable inputs) of the fair value measurement hierarchy, including the
reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of
activities on purchases, sales, issuance, and settlements of the assets and liabilities measured
using significant unobservable inputs (Level 3 fair value measurements). The guidance is effective
for interim and annual periods
45
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beginning after December 15, 2009. We do not expect the adoption of
ASU 2010-06 to have a material impact on our financial position, results of operations or cash
flow.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition
and Disclosure Requirements (amendments to ASC Topic 855, Subsequent Events). ASU 2010-09
clarifies that subsequent events should be evaluated through the date the financial statements are
issued. In addition, this update no longer requires a filer to disclose the date through which
subsequent events have been evaluated. This guidance is effective for financial statements issued
subsequent to February 24, 2010. We adopted this guidance on this date. This guidance did not have
a material impact on our financial position, results of operations or cash flows.
Item 7A. 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 January 30, 2010,
all 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
currency exchange rates relates primarily to our foreign operations buying, selling, and financing
in currencies other than local currencies and to the carrying value of net investments in foreign
subsidiaries. At January 30, 2010, we maintained no foreign currency options. We generally do not
hedge the translation exposure related to our net investment in foreign subsidiaries. Included in
Comprehensive income (loss) are $15.5 million, $(27.1) million, $17.2 million and $8.4 million,
net of tax, reflecting the unrealized gain (loss) on foreign currency translations during Fiscal
2009, Fiscal 2008, the period from May 29, 2007 through February 2, 2008 and the period from
February 4, 2007 through May 28, 2007, respectively.
We purchased approximately 65% of our merchandise from China in Fiscal 2009. 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 18.8% as compared to the U.S. Dollar,
based on continued pressure from the international community. The currency exchange rate from
Chinese yuan to U.S. dollars has historically been stable, in large part due to the economic
policies of the Chinese government. However, there are no assurances that this currency exchange
rate will continue to be as stable in the future. The U.S. government has stated that the Chinese
government should reduce its influence over the currency exchange rate and let market conditions
control. Less influence by the Chinese government will most likely result in the Chinese yuan
strengthening against the U.S. dollar. An increase in the Chinese yuan against the dollar means
that we will have to pay more in U.S. dollars for our purchases from China. If we are unable to
negotiate commensurate price decreases from our Chinese suppliers, these higher prices would
eventually translate into higher costs of sales, which could have a significant effect on our
results of operations.
The results of operations of foreign subsidiaries, when translated into U.S. dollars, reflect the
average rates of exchange for the months that comprise the periods presented. As a result, similar
results in local currency can vary significantly upon translation into U.S. dollars if exchange
rates fluctuate significantly from one period to the next. Accordingly, fluctuations in foreign
currency rates, most notably the strengthening of the dollar against the euro, could have a
material impact on our revenue growth in future periods.
46
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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 January 30, 2010, the Swaps cover an aggregate
notional amount of $435.0 million of the $1.41 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
January 30, 2010 and January 31, 2009, the estimated fair value of the Swaps were liabilities of
approximately $8.8 million and $19.7 million, respectively, and were recorded, net of tax, as a
component in Accumulated other comprehensive income (loss), net of tax.
At January 30, 2010, we had fixed rate debt of $914.1 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
January 30, 2010, a 1% change in interest rates would increase or decrease our annual interest
expense by approximately $11.7 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.
47
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Item 8. Financial Statements and Supplementary Data
Page No. | ||||
49 | ||||
50 | ||||
51 | ||||
52 | ||||
53 | ||||
55 |
48
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
Claires Stores, Inc.:
Claires Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Claires Stores, Inc. and
subsidiaries as of January 30, 2010 (Successor Entity) and January 31, 2009 (Successor Entity), and
the related consolidated statements of operations and comprehensive income (loss), stockholders
equity (deficit), and cash flows for the fiscal years ended January 30, 2010 (Successor Entity) and
January 31, 2009 (Successor Entity), the period May 29, 2007 to February 2, 2008 (Successor
Entity), and the period February 4, 2007 to May 28, 2007 (Predecessor Entity). These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Claires Stores, Inc. and subsidiaries as of January
30, 2010 (Successor Entity) and January 31, 2009 (Successor Entity), and the related consolidated
statements of operations and comprehensive income (loss), stockholders equity (deficit), and cash
flows for the fiscal years ended January 30, 2010 (Successor Entity) and January 31, 2009
(Successor Entity), the period May 29, 2007 to February 2, 2008 (Successor Entity), and the period
February 4, 2007 to May 28, 2007 (Predecessor Entity) in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP |
April 13, 2010
Miami, Florida
Certified Public Accountants
Miami, Florida
Certified Public Accountants
49
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CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
January 30, 2010 | January 31, 2009 | |||||||
(In thousands, except share and per share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 198,708 | $ | 204,574 | ||||
Inventories |
110,338 | 103,691 | ||||||
Prepaid expenses |
32,873 | 31,837 | ||||||
Other current assets |
28,236 | 27,079 | ||||||
Total current assets |
370,155 | 367,181 | ||||||
Property and equipment: |
||||||||
Land and building |
19,318 | 22,288 | ||||||
Furniture, fixtures and equipment |
162,602 | 143,702 | ||||||
Leasehold improvements |
228,503 | 214,007 | ||||||
410,423 | 379,997 | |||||||
Less accumulated depreciation and amortization |
(182,439 | ) | (113,926 | ) | ||||
227,984 | 266,071 | |||||||
Intangible assets, net of accumulated amortization of $32,532 and
$19,371, respectively |
580,027 | 587,125 | ||||||
Deferred financing costs, net of accumulated amortization of
$29,949 and $17,646, respectively |
47,641 | 59,944 | ||||||
Other assets |
58,242 | 56,428 | ||||||
Goodwill |
1,550,056 | 1,544,346 | ||||||
2,235,966 | 2,247,843 | |||||||
Total assets |
$ | 2,834,105 | $ | 2,881,095 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 45,660 | $ | 53,237 | ||||
Current portion of long-term debt |
14,500 | 14,500 | ||||||
Income taxes payable |
10,272 | 6,477 | ||||||
Accrued interest payable |
14,644 | 13,316 | ||||||
Accrued expenses and other current liabilities |
96,436 | 107,974 | ||||||
Total current liabilities |
181,512 | 195,504 | ||||||
Long-term debt |
2,313,378 | 2,373,272 | ||||||
Revolving credit facility |
194,000 | 194,000 | ||||||
Deferred tax liability |
122,145 | 112,829 | ||||||
Deferred rent expense |
22,082 | 18,462 | ||||||
Unfavorable lease obligations and other long-term liabilities |
35,630 | 42,871 | ||||||
2,687,235 | 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 |
616,086 | 609,427 | ||||||
Accumulated other comprehensive income (loss), net of tax |
2,625 | (22,319 | ) | |||||
Retained deficit |
(653,353 | ) | (642,951 | ) | ||||
(34,642 | ) | (55,843 | ) | |||||
Total liabilities and stockholders deficit |
$ | 2,834,105 | $ | 2,881,095 | ||||
See accompanying notes to consolidated financial statements.
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CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Predecessor | |||||||||||||||||
Successor Entity | Entity | ||||||||||||||||
Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4, 2007 | ||||||||||||||
Ended | Ended | Through | Through | ||||||||||||||
January 30, | January 31, | February 2, | May 28, | ||||||||||||||
2010 | 2009 | 2008 | 2007 | ||||||||||||||
Net sales |
$ | 1,342,389 | $ | 1,412,960 | $ | 1,085,932 | $ | 424,899 | |||||||||
Cost of sales, occupancy and buying
expenses |
659,796 | 720,351 | 521,384 | 206,438 | |||||||||||||
Gross profit |
682,593 | 692,609 | 564,548 | 218,461 | |||||||||||||
Other expenses (income): |
|||||||||||||||||
Selling, general and administrative |
469,179 | 518,233 | 354,875 | 154,409 | |||||||||||||
Depreciation and amortization |
71,471 | 85,093 | 61,451 | 19,652 | |||||||||||||
Impairment of assets |
3,142 | 523,990 | 3,478 | 73 | |||||||||||||
Severance and transaction-related costs |
921 | 15,928 | 7,319 | 72,672 | |||||||||||||
Other income, net |
(4,234 | ) | (4,499 | ) | (3,088 | ) | (1,476 | ) | |||||||||
540,479 | 1,138,745 | 424,035 | 245,330 | ||||||||||||||
Operating income (loss) |
142,114 | (446,136 | ) | 140,513 | (26,869 | ) | |||||||||||
Gain on early debt extinguishment |
36,412 | | | | |||||||||||||
Interest expense (income), net |
177,418 | 195,947 | 147,892 | (4,876 | ) | ||||||||||||
Income (loss) before income tax expense
(benefit) |
1,108 | (642,083 | ) | (7,379 | ) | (21,993 | ) | ||||||||||
Income tax expense (benefit) |
11,510 | 1,509 | (8,020 | ) | 21,779 | ||||||||||||
Net income (loss) |
$ | (10,402 | ) | $ | (643,592 | ) | $ | 641 | $ | (43,772 | ) | ||||||
Net income (loss) |
$ | (10,402 | ) | $ | (643,592 | ) | $ | 641 | $ | (43,772 | ) | ||||||
Foreign currency
translation and interest
rate swap adjustments, net
of tax |
24,944 | (25,677 | ) | 3,358 | 8,440 | ||||||||||||
Comprehensive income (loss) |
$ | 14,542 | $ | (669,269 | ) | $ | 3,999 | $ | (35,332 | ) | |||||||
See accompanying notes to consolidated financial statements.
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CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(In thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(In thousands, except per share amounts)
Accumulated | ||||||||||||||||||||||||||||||||
Number of | Number of | other | ||||||||||||||||||||||||||||||
shares of | Class A | shares of | Additional | comprehensive | Retained | |||||||||||||||||||||||||||
Class A | common | common | Common | paid-in | income (loss), | earnings | ||||||||||||||||||||||||||
common stock | stock | stock | stock | capital | net | (deficit) | Total | |||||||||||||||||||||||||
Predecessor Entity |
||||||||||||||||||||||||||||||||
Balance: February 3, 2007 |
4,869 | 243 | 88,203 | 4,410 | 75,486 | 33,956 | 733,567 | 847,662 | ||||||||||||||||||||||||
Net loss for period from Feb. 4, 2007 to May 28, 2007 |
| | | | | | (43,772 | ) | (43,772 | ) | ||||||||||||||||||||||
Cash dividends ($0.18 per common share and $0.09 per
Class A common share) |
| | | | | | (16,317 | ) | (16,317 | ) | ||||||||||||||||||||||
Stock options exercised, including tax benefit |
| | | | 177 | | | 177 | ||||||||||||||||||||||||
Restricted stock |
| | | | 1,851 | | | 1,851 | ||||||||||||||||||||||||
Option conversion payment |
| | | | (7,924 | ) | | | (7,924 | ) | ||||||||||||||||||||||
Tax benefit options |
| | | | 2,885 | | | 2,885 | ||||||||||||||||||||||||
Long-term incentive plan, net of amount reclassified
as liabilities upon acquisition |
| | | 2 | (933 | ) | | | (931 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment, net of tax |
| | | | | 8,440 | | 8,440 | ||||||||||||||||||||||||
Balance: May 28, 2007 (prior to acquisition) |
4,869 | 243 | 88,203 | 4,412 | 71,542 | 42,396 | 673,478 | 792,071 | ||||||||||||||||||||||||
Successor Entity |
||||||||||||||||||||||||||||||||
Acquisition transaction |
(4,869 | ) | (243 | ) | (88,103 | ) | (4,412 | ) | 524,133 | (42,396 | ) | (673,478 | ) | (196,396 | ) | |||||||||||||||||
Capital contribution |
| | 100 | | 595,675 | | | 595,675 | ||||||||||||||||||||||||
Net income for period May 29, 2007 to February 2, 2008 |
| | | | | | 641 | 641 | ||||||||||||||||||||||||
Stock option expense |
| | | | 5,092 | | | 5,092 | ||||||||||||||||||||||||
Restricted stock, net of unearned compensation |
| | | | 434 | | | 434 | ||||||||||||||||||||||||
Foreign currency translation adjustment and
unrealized loss on interest rate swaps, net of tax |
| | | | | 3,358 | | 3,358 | ||||||||||||||||||||||||
Balance: February 2, 2008 |
| | 100 | | 601,201 | 3,358 | 641 | 605,200 | ||||||||||||||||||||||||
Net loss |
| | | | | | (643,592 | ) | (643,592 | ) | ||||||||||||||||||||||
Stock option expense |
| | | | 7,783 | | | 7,783 | ||||||||||||||||||||||||
Restricted stock, net of unearned compensation |
| | | | 443 | | | 443 | ||||||||||||||||||||||||
Foreign currency translation adjustment and
unrealized loss on interest rate swaps, net of tax |
| | | | | (25,677 | ) | | (25,677 | ) | ||||||||||||||||||||||
Balance: January 31, 2009 |
| | 100 | | 609,427 | (22,319 | ) | (642,951 | ) | (55,843 | ) | |||||||||||||||||||||
Net loss |
| | | | | | (10,402 | ) | (10,402 | ) | ||||||||||||||||||||||
Stock option expense |
| | | | 6,518 | | | 6,518 | ||||||||||||||||||||||||
Restricted stock, net of unearned compensation |
| | | | 141 | | | 141 | ||||||||||||||||||||||||
Foreign currency translation adjustment and
unrealized gain on interest rate swaps, net of tax |
| | | | | 24,944 | | 24,944 | ||||||||||||||||||||||||
Balance: January 30, 2010 |
| | 100 | | $ | 616,086 | $ | 2,625 | $ | (653,353 | ) | $ | (34,642 | ) | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
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CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Predecessor | |||||||||||||||||
Successor Entity | Entity | ||||||||||||||||
Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4. 2007 | ||||||||||||||
Ended | Ended | Through | Through | ||||||||||||||
January 30, 2010 | January 31, 2009 | Feb. 2, 2008 | May 28, 2007 | ||||||||||||||
Cash flows from operating activities: |
|||||||||||||||||
Net income (loss) |
$ | (10,402 | ) | $ | (643,592 | ) | $ | 641 | $ | (43,772 | ) | ||||||
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
|||||||||||||||||
Depreciation and amortization |
71,471 | 85,093 | 61,451 | 19,652 | |||||||||||||
Impairment of assets |
3,142 | 523,990 | 3,478 | 73 | |||||||||||||
Amortization of lease rights and other assets |
2,199 | 2,059 | 1,313 | 622 | |||||||||||||
Amortization of debt issuance costs |
10,398 | 10,567 | 7,079 | | |||||||||||||
Payment in kind interest expense |
39,013 | 24,522 | | | |||||||||||||
Net accretion of favorable (unfavorable) lease
obligations |
(2,151 | ) | (1,856 | ) | | | |||||||||||
(Gain) loss on sale/retirement of property and
equipment, net |
(1,389 | ) | (183 | ) | 592 | 1,201 | |||||||||||
Gain on early debt extinguishment |
(36,412 | ) | | | | ||||||||||||
Gain on sale of intangible assets/lease rights |
(506 | ) | (1,372 | ) | | | |||||||||||
Excess tax benefit from stock compensation |
| | | (2,885 | ) | ||||||||||||
Stock compensation expense |
6,659 | 8,226 | 5,526 | 8,946 | |||||||||||||
(Increase) decrease in: |
|||||||||||||||||
Inventories |
(4,081 | ) | 6,482 | 16,838 | (10,932 | ) | |||||||||||
Prepaid expenses |
1,797 | (1,087 | ) | (6,551 | ) | 6,389 | |||||||||||
Other assets |
(5,519 | ) | (9,085 | ) | (31,144 | ) | (2,941 | ) | |||||||||
Increase (decrease) in: |
|||||||||||||||||
Trade accounts payable |
(9,247 | ) | 7,372 | (32,987 | ) | 31,202 | |||||||||||
Income taxes payable |
5,510 | (10,710 | ) | 4,076 | (11,732 | ) | |||||||||||
Accrued interest payable |
1,328 | (6,219 | ) | 19,531 | | ||||||||||||
Accrued expenses and other liabilities |
(3,626 | ) | 3,032 | (73,060 | ) | 39,727 | |||||||||||
Deferred income taxes |
4,114 | (4,809 | ) | (18,508 | ) | 6,723 | |||||||||||
Deferred rent expense |
3,178 | 8,943 | 5,874 | 373 | |||||||||||||
Net cash provided by (used in) operating activities |
75,476 | 1,373 | (35,851 | ) | 42,646 | ||||||||||||
Cash flows from investing activities: |
|||||||||||||||||
Acquisition of property and equipment, net |
(24,952 | ) | (59,405 | ) | (58,484 | ) | (27,988 | ) | |||||||||
Acquisition of Predecessor Entity, net of cash
acquired |
| | (3,053,334 | ) | | ||||||||||||
Proceeds from sale of property and equipment |
1,830 | 104 | | | |||||||||||||
Acquisition of intangible assets/lease rights |
(546 | ) | (1,971 | ) | (554 | ) | (81 | ) | |||||||||
Proceeds from sale of intangible assets/lease rights |
2,409 | 516 | | | |||||||||||||
Net cash used in investing activities |
(21,259 | ) | (60,756 | ) | (3,112,372 | ) | (28,069 | ) | |||||||||
Cash flows from financing activities: |
|||||||||||||||||
Credit facility proceeds |
| 194,000 | 1,450,000 | | |||||||||||||
Credit facility payments |
(14,500 | ) | (14,500 | ) | (7,250 | ) | | ||||||||||
Note purchases |
(46,091 | ) | | | | ||||||||||||
Note offerings proceeds |
| | 935,000 | | |||||||||||||
Capital contribution |
| | 595,675 | | |||||||||||||
Exercised stock option proceeds |
| | | 177 | |||||||||||||
Excess tax benefit from stock compensation |
| | | 2,885 | |||||||||||||
Option conversion payment |
| | (7,924 | ) | | ||||||||||||
Financing fees paid |
| | (77,439 | ) | | ||||||||||||
Dividends paid |
| | (7,252 | ) | (9,065 | ) | |||||||||||
Net cash (used in) provided by financing activities: |
(60,591 | ) | 179,500 | 2,880,810 | (6,003 | ) | |||||||||||
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
508 | (1,517 | ) | 2,911 | 1,025 | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
(5,866 | ) | 118,600 | (264,502 | ) | 9,599 | |||||||||||
Cash and cash equivalents at beginning of period |
204,574 | 85,974 | 350,476 | 340,877 | |||||||||||||
Cash and cash equivalents at end of period |
$ | 198,708 | $ | 204,574 | $ | 85,974 | $ | 350,476 | |||||||||
53
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CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
Predecessor | ||||||||||||||||
Successor Entity | Entity | |||||||||||||||
Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4. 2007 | |||||||||||||
Ended | Ended | Through | Through | |||||||||||||
January 30, 2010 | January 31, 2009 | Feb. 2, 2008 | May 28, 2007 | |||||||||||||
Supplemental disclosure of cash flow information: |
||||||||||||||||
Income taxes paid |
$ | 3,159 | $ | 14,227 | $ | 10,464 | $ | 22,820 | ||||||||
Interest paid |
126,733 | 168,567 | 123,620 | 86 |
See accompanying notes to consolidated financial statements.
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CLAIRES STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND ACQUISITION OF CLAIRES STORES, INC.
Nature of Operations Claires Stores, Inc., a Florida corporation, and subsidiaries
(collectively the Company), is a leading retailer of value-priced fashion accessories targeted
towards pre-teens, teenagers, and young adults. The Company operates owned stores throughout the
United States, Puerto Rico, Canada, the Virgin Islands, the United Kingdom, Switzerland, Austria,
Germany, France, Ireland, Spain, Portugal, Netherlands and Belgium. The Company also operates
stores in Japan through a 50:50 joint venture.
Acquisition of Claires Stores, Inc. In May 2007, the Company was acquired by Apollo
Management VI, L.P. (Apollo), together with certain affiliated co-investment partnerships
(collectively the Sponsors), through a merger (the Merger) and Claires Stores, Inc. became a
wholly-owned subsidiary of Claires Inc.
The purchase of the Company and the related fees and expenses were financed through the issuance of
the Notes, borrowings under the Credit Facility, an equity investment by the Sponsors, and cash on
hand at the Company.
Accordingly, the closing of the Merger occurred simultaneously with:
| the closing of the Companys offering for the senior notes (Notes) in the aggregate principal amount of $935.0 million; | ||
| the closing of the Companys senior secured term loan facility and revolving Credit Facility (collectively the Credit Facility) of $1.65 billion; and | ||
| the equity investment by the Sponsors, collectively, of approximately $595.7 million. |
The aforementioned transactions, including the Merger and payment of costs related to these
transactions, are collectively referred to as the Transactions.
See Note 5 for a summary of the terms of the Notes and the Credit Facility.
Claires Inc. is an entity that was formed in connection with the Transactions and prior to the
Merger had no assets or liabilities other than the shares of Bauble Acquisition Sub, Inc. and its
rights and obligations under and in connection with the merger agreement. As a result of the
Merger, all of the Companys issued and outstanding capital stock is owned by Claires Inc.
The acquisition of Claires Stores, Inc. was accounted for as a business combination using the
purchase method of accounting, whereby the purchase price was allocated to the assets and
liabilities based on the estimated fair market values at the date of acquisition.
In connection with the consummation of the Transactions, the Company is sometimes referred to as
the Successor Entity for periods on or after May 29, 2007, and the Predecessor Entity for
periods prior to May 29, 2007. The Consolidated Financial Statements presented for the period from
February 4, 2007 through May 28, 2007, are shown under the Predecessor Entity caption. The
Consolidated Financial Statements for the Successor Entity as of January 30, 2010, January 31, 2009
and February 2, 2008, the fiscal years ended January 30, 2010 and January 31, 2009 and for the
period from May 29, 2007 to February 2, 2008 show the financial condition and results of operations
of the Successor Entity.
As a result of the allocation of purchase price to assets and liabilities based on estimated fair
market values at date of acquisition, the Company recognized approximately $809.1 million of
intangible assets.
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The value of these assets was determined by the Company based on appraisals.
The intangible assets and their estimated fair values recognized as of the acquisition date
consisted of:
| Tradenames $646.1 million. | ||
| Lease rights $73.6 million (including residual value of approximately $62 million). | ||
| Franchise agreements $53.0 million. | ||
| Favorable lease obligations $31.9 million. | ||
| Covenants not to compete $4.5 million. |
The unaudited pro forma results of operations provided below for the fiscal year ended February 2,
2008 are presented as though the Transactions had occurred at the beginning of the period
presented, after giving effect to purchase accounting adjustments relating to depreciation and
amortization of the revalued assets, interest expense associated with the Credit Facility and the
Notes and other acquisition-related adjustments in connection with the Transactions. The pro forma
results of operations are not necessarily indicative of the combined results that would have
occurred had the Transactions been consummated at the beginning of the period presented, nor are
they necessarily indicative of future operating results.
Fiscal Year Ended | ||||
February 2, 2008 | ||||
(in thousands) | ||||
(unaudited) | ||||
Net sales |
$ | 1,510,831 | ||
Depreciation and amortization |
92,177 | |||
Transaction-related costs |
7,319 | |||
Operating income |
175,682 | |||
Interest expense, net |
218,133 | |||
Income (loss) before income taxes |
(42,451 | ) | ||
Net income (loss) |
(18,054 | ) |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The Consolidated Financial Statements include the accounts of
the Company and its wholly owned subsidiaries. The Companys 50% ownership interest in its
Japanese joint venture (Claires Nippon) is accounted for under the equity method. All significant
intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates The 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
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differ significantly from these estimates. Changes in those estimates will be
reflected in the financial statements in those future periods when the changes occur.
Fiscal Year The Companys fiscal year ends on the Saturday closest to January 31. The Fiscal
year ended January 30, 2010 (Fiscal 2009) and January 31, 2009 (Fiscal 2008), consisted of 52
weeks. The Fiscal
year ended February 2, 2008 (Fiscal 2007) consisted of 52 weeks and is presented separately for
the period from February 4, 2007 through May 28, 2007 (Predecessor Entity) and for the period
from May 29, 2007 through February 2, 2008 (Successor Entity).
Cash and Cash Equivalents The Company considers all highly liquid instruments purchased
with an original maturity of 90 days or less to be cash equivalents. As of January 30, 2010, all
cash equivalents were maintained in two money market funds that were invested exclusively in U.S.
Treasury securities.
Approximately $0.2 million, $1.5 million, $2.4 million and $5.0 million of interest income for
Fiscal 2009, Fiscal 2008, the period from May 29, 2007 through February 2, 2008 and the period from
February 4, 2007 through May 28, 2007, respectively, is included in Interest expense (income),
net.
Inventories Merchandise inventories are stated at the lower of cost or market. As of
January 30, 2010, cost is determined by the first-in, first-out basis using the retail method in
North America and average cost method, at an individual item level for Europe. Merchandise
inventory value is reduced if the selling price is marked below cost.
Prepaid Expenses Prepaid expenses as of January 30, 2010 and January 31, 2009 included
the following components (in thousands):
January 30, | January 31, | |||||||
2010 | 2009 | |||||||
Prepaid rent and occupancy |
$ | 30,444 | $ | 28,183 | ||||
Prepaid insurance |
193 | 1,585 | ||||||
Other |
2,236 | 2,069 | ||||||
Total prepaid expenses |
$ | 32,873 | $ | 31,837 | ||||
Other Current Assets Other current assets as of January 30, 2010 and January 31, 2009
included the following components (in thousands):
January 30, | January 31, | |||||||
2010 | 2009 | |||||||
Credit card receivables |
$ | 4,617 | $ | 4,784 | ||||
Franchise receivables |
6,457 | 2,767 | ||||||
Store supplies |
6,794 | 6,533 | ||||||
Deferred tax assets, net of valuation allowance |
2,839 | 3,815 | ||||||
Income taxes receivable |
2,556 | 3,788 | ||||||
Other |
4,973 | 5,392 | ||||||
Total other current assets |
$ | 28,236 | $ | 27,079 | ||||
Property and Equipment Property and equipment are recorded at historical cost.
Depreciation is computed on the straight-line method over the estimated useful lives of the
buildings and the furniture, fixtures, and equipment, which range from three to twenty-five years.
Amortization of leasehold improvements is computed on the straight-line method based upon the
shorter of the estimated useful lives of the assets or the terms of the respective leases.
Maintenance and repair costs are charged to earnings while expenditures for major improvements are
capitalized. Upon the disposition of property and equipment, the accumulated depreciation is
deducted from the original cost and any gain or loss is reflected in current earnings.
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On February 19, 2010, the Company sold its North American distribution center/office building (the
Property) to a third party. Net proceeds from the sale were $17.4 million.
Contemporaneously with the sale of the Property, the Company entered into a lease agreement, dated
February 19, 2010. The lease agreement provides for (1) an initial expiration date of February 28,
2030 with two (2) five (5) year renewal periods, each at the option of the Company and (2) basic
rent of $2.1 million per annum (subject to annual increases). This transaction is accounted for as
a capital lease.
Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the net book value of an asset may not be
recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison
of the net book value of an asset or asset group to the future net undiscounted cash flows expected
to be generated by the asset or asset group. If these comparisons indicate that the asset or asset
group is not recoverable, an impairment loss is recognized for the excess of the carrying amount
over the fair value of the asset or asset group. The fair value is estimated based on discounted
future cash flows expected to result from the use and eventual disposition of the asset or asset
group using a rate that reflects the operating segments average cost of capital. Long-lived
assets to be disposed of are reported at the lower of the carrying amount or fair value less cost
to sell and are no longer depreciated. See Note 3 for details of impairment charges.
Goodwill As discussed in Note 1 above, the Company accounted for the acquisition of
Claires Stores, Inc. as a business combination using the purchase method of accounting. The
purchase price was allocated to assets and liabilities based on estimated fair market values at the
date of acquisition. The remaining $1.8 billion excess of cost over amounts assigned to assets
acquired and liabilities assumed was recognized as goodwill. The goodwill is not deductible for
tax purposes.
The Company performs a goodwill impairment test on an annual basis or more frequently when events
or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds
its fair value. Recoverability of goodwill is evaluated using a two-step process. The first step
involves a comparison of the fair value of each of our reporting units with its carrying value. If
a reporting units carrying value exceeds its fair value, the second step is performed to measure
the amount of impairment loss, if any. The second step involves a comparison of the implied fair
value and carrying value of that reporting units goodwill. To the extent that a reporting units
carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized.
See Note 3 for details of impairment charges.
Other Assets Other assets as of January 30, 2010 and January 31, 2009 included the
following components (in thousands):
January 30, | January 31, | |||||||
2010 | 2009 | |||||||
Investment in Claires Nippon joint venture |
$ | 17,758 | $ | 18,907 | ||||
Initial direct costs of leases |
16,905 | 16,047 | ||||||
Prepaid lease payments |
7,098 | 11,034 | ||||||
Deferred tax assets, non-current |
2,362 | 2,117 | ||||||
Other |
14,119 | 8,323 | ||||||
Total other assets |
$ | 58,242 | $ | 56,428 | ||||
The initial direct costs and prepaid lease payments are amortized on a straight-line basis over the
respective lease terms, typically ranging from four to 15 years. The Company accounts for the
results of operations of its 50:50 joint venture investment in Claires Nippon under the equity
method.
Included in Other income, net is the Companys share of Claires Nippons net income (loss)
approximating $(1.0) million, $0.3 million, $0.8 million and $0.6 million for Fiscal 2009, Fiscal
2008, the period from May 29, 2007 through February 2, 2008 and the period from February 4, 2007
through May 28, 2007, respectively.
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Intangible Assets Intangible assets include tradenames, franchise agreements, lease
rights, non-compete agreements and leases that existed at the date of acquisition with terms that
were favorable to market at that date. The Company makes investments through its European
subsidiaries in intangible assets upon the opening and acquisition of many of our store locations
in Europe. These intangible assets are amortized to residual value on a straight-line basis over
the useful lives of the respective leases, not to exceed 25 years. The Company evaluates the
residual value of its intangible assets periodically and adjusts the amortization period and/or
residual value when the Company believes the residual value of the asset is not recoverable.
Indefinite-lived intangible assets are tested for impairment annually or more frequently when
events or circumstances indicate that the carrying value more likely than not exceeds its
fair value. Definite-lived intangible assets are tested for impairment when events or
circumstances indicate that the carrying value may not be recoverable. Any impairment charges
resulting from the application of these tests are immediately recorded as a charge to earnings in
the Companys Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 3 for
details of impairment charges.
Deferred Financing Costs Costs incurred to issue debt are deferred and amortized as a
component of interest expense over the estimated term of the related debt using the effective
interest rate method. Amortization expense, recognized as a component of Interest expense
(income), net were $10.4 million, $10.6 million, $7.1 million and $0 for Fiscal 2009, Fiscal 2008,
the period from May 29, 2007 through February 2, 2008 and the period from February 4, 2007 through
May 28, 2007, respectively.
Accrued Expenses and Other Current Liabilities Accrued expenses and other current
liabilities as of January 30, 2010 and January 31, 2009 included the following components (in
thousands):
January 30, | January 31, | |||||||
2010 | 2009 | |||||||
Compensation and benefits |
$ | 40,517 | $ | 40,964 | ||||
Interest rate swaps |
8,752 | 19,734 | ||||||
Sales and local taxes |
8,036 | 9,639 | ||||||
Gift cards and certificates |
20,989 | 19,772 | ||||||
Store rent |
3,759 | 4,678 | ||||||
Other |
14,383 | 13,187 | ||||||
Total accrued expenses and other current liabilities |
$ | 96,436 | $ | 107,974 | ||||
Revenue Recognition The Company recognizes sales as the customer takes possession of the
merchandise. The estimated liability for sales returns is based on the historical return levels,
which is included in Accrued expenses and other current liabilities. The Company excludes sales
taxes collected from customers from Net sales in its Consolidated Statements of Operations and
Comprehensive Income (Loss).
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 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 Consolidated Statements of Operations and
Comprehensive Income (Loss).
Upon purchase of a gift card or gift certificate, a liability is established for the cash value.
The liability is included in Accrued expenses and other current liabilities. Revenue from gift
card and gift certificate sales is recognized at the time of redemption.
Cost of Sales Included within the Companys Consolidated Statements of Operations and
Comprehensive Income (Loss) line item Cost of sales, occupancy and buying expenses is the cost of
merchandise sold to our customers, inbound and outbound freight charges, purchasing costs, and
inspection costs. Also included in this line item are the occupancy costs of the Companys stores
and the
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Companys internal costs of facilitating the merchandise procurement process, both of which
are treated as period costs. All merchandise purchased by the Company is shipped to one of its two
distribution centers. As a result, the Company has no internal transfer costs. The cost of the
Companys distribution centers are included within the financial statement line item Selling,
general and administrative expenses, and not in Cost of sales, occupancy and buying expenses.
These distribution center costs were approximately $8.5 million, $13.7 million, $9.6 million and
$4.3 million, for Fiscal 2009, Fiscal 2008, the period from May 29, 2007 through February 2, 2008
and the period from February 4, 2007 through May 28, 2007, respectively.
Advertising Expenses The Company expenses advertising costs as incurred and include
in-store marketing, mall association dues and digital interactive media. Advertising expenses were
$11.3 million,
$12.5 million, $6.9 million and $3.6 million for Fiscal 2009, Fiscal 2008, the period from May 29,
2007 through February 2, 2008 and the period from February 4, 2007 through May 28, 2007,
respectively.
Leasing The Company recognizes rent expense for operating leases with periods of free
rent (including construction periods), step rent provisions, and escalation clauses on a
straight-line basis over the applicable lease term. The Company considers lease renewals in the
useful life of its leasehold improvements when such renewals are reasonably assured. The Company
takes these provisions into account when calculating minimum aggregate rental commitments under
non-cancelable operating leases set forth in Note 6 below. From time to time, the Company may
receive capital improvement funding from its lessors. These amounts are recorded as a Deferred
rent expense and amortized over the remaining lease term as a reduction of rent expense.
Income Taxes The Company accounts for income taxes under the provisions of ASC Topic 740,
Income Taxes, which generally requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement carrying amounts and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax laws or rates is
recognized in income in the period the new legislation is enacted. Valuation allowances are
recognized to reduce deferred tax assets to the amount that is more likely than not to be realized.
In assessing the likelihood of realization, the Company considers estimates of future taxable
income.
The Company is subject to tax audits in numerous jurisdictions, including the United States,
individual states and localities, and internationally. Tax audits by their very nature are often
complex and can require several years to complete. In the normal course of business, the Company
is subject to challenges from the Internal Revenue Service (IRS) and other tax authorities
regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income
or deductions, or the allocation of income among tax jurisdictions. In July 2006, the Financial
Accounting Standards Board (FASB) issued guidance which clarifies the accounting for income taxes
in the financial statements by prescribing a minimum probability recognition threshold and
measurement process for recording uncertain tax positions taken or expected to be taken in a tax
return. This guidance requires that the Company determine whether a tax position is more likely
than not of being sustained upon audit based on the technical merits of the tax position. For tax
positions that are at least more likely than not of being sustained upon audit, the Company
recognizes the largest amount of the benefit that is more likely than not of being sustained.
Additionally, the FASB provided guidance on de-recognition, classification, accounting and
disclosure requirements. The Company adopted this guidance on February 4, 2007. The adoption of
this guidance did not result in an adjustment to the Companys unrecognized tax benefits. See Note
11 for further information.
Foreign Currency Translation The financial statements of the Companys foreign operations
are translated into U.S. Dollars. Assets and liabilities are translated at fiscal year-end
exchange rates while income and expense accounts are translated at the average rates in effect
during the year. Equity accounts are translated at historical exchange rates. Resulting
translation adjustments are accumulated as a component of Accumulated other comprehensive income
(loss), net of tax in the Companys
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Consolidated Balance Sheets. Foreign currency gains and
losses resulting from transactions denominated in foreign currencies, including intercompany
transactions, except for intercompany loans of a long-term investment nature, are included in
results of operations.
Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income
(loss) consists of foreign currency translation adjustments and changes in the fair value of
interest rate swaps. Amounts included in accumulated other comprehensive income (loss) are recorded
net of the related income tax effects. A summary of the components of other comprehensive income
(loss) for Fiscal 2009, Fiscal 2008, the period of May 29, 2007 through February 2, 2008 and the
period from February 4, 2007 through May 28, 2007 is as follows (in thousands, net of tax):
Foreign Currency | Derivative | |||||||||||
Translation | Instruments | Total | ||||||||||
Predecessor Entity |
||||||||||||
Balance as of February 3, 2007 |
$ | 33,956 | $ | | $ | 33,956 | ||||||
Foreign currency translation adjustment |
8,440 | | 8,440 | |||||||||
Balance as of May 28, 2007 |
42,396 | | 42,396 | |||||||||
Acquisition transaction |
(42,396 | ) | | (42,396 | ) | |||||||
Successor Entity |
||||||||||||
Foreign currency translation adjustment |
17,191 | | 17,191 | |||||||||
Unrealized loss on interest rate swaps |
| (13,833 | ) | (13,833 | ) | |||||||
Balance as of February 2, 2008 |
17,191 | (13,833 | ) | 3,358 | ||||||||
Foreign currency translation adjustment |
(27,052 | ) | | (27,052 | ) | |||||||
Unrealized gain on interest rate swaps |
| 1,375 | 1,375 | |||||||||
Balance as of January 31, 2009 |
(9,861 | ) | (12,458 | ) | (22,319 | ) | ||||||
Foreign currency translation adjustment |
15,507 | | 15,507 | |||||||||
Unrealized gain on interest rate swaps |
| 9,437 | 9,437 | |||||||||
Balance as of January 30, 2010 |
$ | 5,646 | $ | (3,021 | ) | $ | 2,625 | |||||
Fair Value Measurements Disclosures of the fair value of certain financial
instruments are required, whether or not recognized in the Consolidated Balance Sheets. 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, 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 January 30, 2010, the Swaps cover an aggregate notional amount of $435.0
million of the $1,414 million
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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 in the Consolidated Balance Sheets 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 during Fiscal 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 (see Note 9). 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 counterparties. The Company does not enter
into derivative financial instruments for trading or speculative purposes. See Note 9 for further
information.
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 January 30, 2010 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 |
$ | (2,521,878 | ) | $ | (1,952,832 | ) | $ | | $ | | ||||||
Interest rate swaps |
$ | (8,752 | ) | $ | | $ | (8,752 | ) | $ | |
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 | ) | $ | |
On February 1, 2009, the Company adopted the provisions of the fair value measurement
accounting and disclosure guidance related to non-financial assets and liabilities recognized or
disclosed at fair value on a nonrecurring basis. Assets and liabilities subject to this new
guidance primarily include goodwill, intangible assets, long-lived assets and other assets measured
at fair value for impairment assessment. The following table summarizes the Companys assets
(liabilities) measured at fair value on a nonrecurring basis segregated among the appropriate
levels within the fair value hierarchy (in thousands):
Fair Value Measurements at January 30, 2010 Using | ||||||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||||||
Active Markets for | Other Observable | Unobservable | ||||||||||||||||||
Identical Assets | Inputs | Inputs | Impairment | |||||||||||||||||
Carrying Value | (Level 1) | (Level 2) | (Level 3) (1) | Charges | ||||||||||||||||
Long-lived assets |
$ | 17,000 | $ | | $ | | $ | 17,000 | $ | 3,142 |
(1) | See Note 3 for discussion of the valuation techniques used to measure fair value, the description of the inputs and information used to develop those inputs. |
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In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets
Subsections of ASC Subtopic 360-10, long-lived assets held and used with a carrying amount of $20.1
million were written down to their fair value of $17.0 million, resulting in an impairment charge
of $3.1 million, which was included in Impairment of assets on the Consolidated Statements of
Operations and Comprehensive Income (Loss).
Derivative Financial Instruments The Company recognizes the fair value of derivative
financial instruments on the Consolidated Balance Sheets. Gains and losses related to a hedge that
result from changes in the fair value of the hedge are either recognized in income to offset the
gain or loss on the hedged item, or deferred and reported as a component of Accumulated other
comprehensive income (loss), net of tax in the Consolidated Balance Sheets and subsequently
recognized in income when the hedged item affects net income. The ineffective portion of the
change in fair value of a hedge is recognized in income immediately.
Stock-Based Compensation The Company issues stock options and other stock-based awards to
executive management, key employees, and directors under its stock-based compensation plans.
Predecessor Entity
Under ASC Topic 718, Compensation Stock Compensation, time-vested stock awards are accounted for
at fair value at date of grant. The compensation expense was recorded over the requisite service
period.
Other stock awards, such as long-term incentive plan awards, which qualified as equity plans under
ASC Topic 718, were accounted for based on fair value at date of grant. The compensation expense
was based on the number of shares expected to be issued when it became probable that performance
targets required to receive the award will be achieved. The expense was recorded over the
requisite service period.
Other long-term incentive plans accounted for as liabilities under ASC Topic 718 were recorded at
fair value at each reporting date until settlement. The compensation expense was based on the
number of performance units expected to be issued when it became probable that performance targets
required to receive the award will be achieved. The expense was recorded over the requisite
service period.
Successor Entity
Time-vested stock awards, including stock options and restricted stock, are accounted for at fair
value at date of grant. The compensation expense is recorded over the requisite service period
using the graded-vesting method. Performance-based stock awards are accounted for at fair value at
date of grant. The compensation expense is recognized over the longer of the service period and
the period derived from the market conditions.
BOGO options, which are immediately vested and exercisable upon issuance, are accounted for at fair
value at date of grant. The compensation expense is recognized on a straight-line basis over a
four year period due to the terms of the option requiring forfeiture in certain cases including the
grantees voluntary resignation from the Companys employ prior to May 2011.
Subsequent Events Evaluation The Company has reviewed and evaluated material subsequent
events from the balance sheet date of January 30, 2010 through the financial statement issue date.
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 Consolidated Financial Statements or related footnotes.
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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 Fair Value Measurements above.
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 ASC Topic 805,
Business Combinations, and ASC 810-10-65, Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51, on equity-method accounting under 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 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 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 Subsequent Events Evaluation above. 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 ASC Topic 820,
Fair Value Measurements and Disclosures). 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 adopted
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this guidance on
November 1, 2009 which did not have a material impact on its financial position, results of
operations or cash flows.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures Improving
Disclosures about Fair Value Measurements (amendments to ASC Topic 820, Fair Value Measurements
and Disclosures). ASU 2010-06 amends the disclosure requirements related to recurring and
nonrecurring measurements. The guidance requires new disclosures on the transfer of assets and
liabilities between Level 1 (quoted prices in active market for identical assets or liabilities)
and Level 2 (significant other observable inputs) of the fair value measurement hierarchy,
including the reasons and the timing of the transfers. Additionally, the guidance requires a roll
forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value measurements). The guidance is
effective for interim and annual periods beginning after December 15, 2009. The adoption of ASU
2010-06 is not expected to have a material impact on the Companys financial position, results of
operations or cash flow.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition
and Disclosure Requirements (amendments to ASC Topic 855, Subsequent Events). ASU 2010-09
clarifies that subsequent events should be evaluated through the date the financial statements are
issued. In addition, this update no longer requires a filer to disclose the date through which
subsequent events have been evaluated. This guidance is effective for financial statements issued
subsequent to February 24, 2010. The Company adopted this guidance on this date, which did not have
a material impact on its financial position, results of operations or cash flows.
Reclassifications The Consolidated Financial Statements include certain reclassifications
of prior period amounts in order to conform to current year presentation.
3. IMPAIRMENT OF ASSETS
The Company recorded non-cash impairment charges for the fiscal years ended January 30, 2010,
January 31, 2009, the period from May 29, 2007 through February 2, 2008 and the period from
February 4, 2007 through May 28, 2007 as follows (in thousands):
Predecessor | ||||||||||||||||
Successor Entity | Entity | |||||||||||||||
Period From | Period From | |||||||||||||||
Fiscal Year | Fiscal Year | May 29, 2007 | February 4, 2007 | |||||||||||||
Ended | Ended | Through | Through | |||||||||||||
January 30, | January 31, | February 2, | May 28, | |||||||||||||
2010 | 2009 | 2008 | 2007 | |||||||||||||
Goodwill |
$ | | $ | 297,000 | $ | | $ | | ||||||||
Tradenames |
| 199,000 | | | ||||||||||||
Investment in Claires
Nippon (Note 2) |
| 25,500 | | | ||||||||||||
Long-lived assets |
3,142 | 2,490 | 3,478 | 73 | ||||||||||||
Total impairment charges |
$ | 3,142 | $ | 523,990 | $ | 3,478 | $ | 73 | ||||||||
Our principal indefinite-lived intangible assets include tradenames and lease rights which are
not subject to amortization. Goodwill and indefinite-lived intangible assets are tested for
impairment annually or more frequently when events or circumstances indicate that the carrying
value of a reporting unit more likely than not exceeds its fair value. The Company performs annual
impairment tests during the fourth quarter of its fiscal year.
Our principal definite-lived intangible assets include franchise agreements and lease rights which
are subject to amortization and leases that existed at date of acquisition with terms that were
favorable to market at that date. Definite-lived intangible assets are tested for impairment when
events or circumstances indicate that the carrying value of the asset may not be recoverable.
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The deterioration in the financial and housing markets and resulting effect on consumer confidence
and discretionary spending that occurred during Fiscal 2009 and Fiscal 2008 had a significant
impact on the retail industry. The Company tests assets for impairment annually as of the first
day of the fourth quarter of its fiscal year. On the first day of the fourth quarter of Fiscal
2009 and Fiscal 2008, the Company considered the impact the economic conditions had on its business
as an indicator under ASC Topic 350 that a reduction in its goodwill fair value may have occurred.
Accordingly, the Company performed its test for goodwill impairment following the two step process
defined in ASC Topic 350. 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
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 unit goodwill exceeds the implied goodwill
value, an impairment loss should be recognized in an amount equal to that excess. The Company has
two reporting units as defined under ASC Topic 350. These reporting units are its North American
segment and its European segment.
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 using forward-looking
projections of estimated future operating results and a one-fourth weighting of a guideline company
methodology under the market approach using revenue and earnings before interest, taxes,
depreciation and amortization (EBITDA) multiples. Managements determination of the fair value of
each reporting unit incorporates multiple assumptions, including future business growth, earnings
projections and the weighted average cost of capital used for purposes of discounting. Decreases in
business 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.
Based on this testing, no impairment charge was recognized during Fiscal 2009. In Fiscal 2008
management determined that the fair value of both reporting units determined under step 1, as
described above, was less than the carrying value of its reporting units. Accordingly, management
performed a step 2 analysis to determine the extent of the goodwill impairment and concluded that
the carrying value of the goodwill of the North America reporting unit was impaired by $180.0
million and that the carrying value of the goodwill of the Europe reporting unit was impaired by
$117.0 million. This resulted in combined non-cash impairment charges of $297.0 million in Fiscal
2008. There was no such goodwill impairment charge for the period from May 29, 2007 through
February 2, 2008 and the period from February 4, 2007 through May 28, 2007.
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The changes in the carrying amount of goodwill during Fiscal 2009, Fiscal 2008 and the period
from May 29, 2007 through February 2, 2008 by reporting unit are as follows (in thousands):
North America | Europe | Total | ||||||||||
Goodwill acquired through the
Acquisition |
$ | 1,401,959 | $ | 438,908 | $ | 1,840,867 | ||||||
Balance as of February 2, 2008: |
||||||||||||
Goodwill |
$ | 1,401,959 | $ | 438,908 | $ | 1,840,867 | ||||||
Accumulated impairment losses |
| | | |||||||||
$ | 1,401,959 | $ | 438,908 | $ | 1,840,867 | |||||||
Goodwill adjustments within one year |
$ | 7,982 | $ | (7,503 | ) | $ | 479 | |||||
Impairment of goodwill |
(180,000 | ) | (117,000 | ) | (297,000 | ) | ||||||
Balance as of January 31, 2009: |
||||||||||||
Goodwill |
$ | 1,409,941 | $ | 431,405 | $ | 1,841,346 | ||||||
Accumulated impairment losses |
(180,000 | ) | (117,000 | ) | (297,000 | ) | ||||||
$ | 1,229,941 | $ | 314,405 | $ | 1,544,346 | |||||||
Reclassification adjustment (1) |
5,710 | | 5,710 | |||||||||
Balance as of January 30, 2010: |
||||||||||||
Goodwill |
$ | 1,415,651 | $ | 431,405 | $ | 1,847,056 | ||||||
Accumulated impairment losses |
(180,000 | ) | (117,000 | ) | (297,000 | ) | ||||||
$ | 1,235,651 | $ | 314,405 | $ | 1,550,056 | |||||||
(1) | Reclassification of valuation allowance on deferred tax assets. |
The Company also performed similar impairment testing on its intangible assets during the fourth
quarter of Fiscal 2009 and Fiscal 2008. As a result of this impairment testing, no impairment
charge was recognized in Fiscal 2009. In Fiscal 2008, the Company determined that the tradenames
intangible assets in its North America reporting unit was impaired $134.0 million and that the
tradenames intangible assets in its Europe reporting unit was impaired $65.0 million. This
resulted in combined non-cash impairment charges related to intangible assets of $199.0 million in
Fiscal 2008. There was no such intangible asset impairment charge for the period from May 29, 2007
through February 2, 2008 and the period from February 4, 2007 through May 28, 2007.
The Company accounts for long-lived tangible assets under ASC Topic 360, Property, Plant, and
Equipment. Assessment for possible impairment is based on the Companys ability to recover the
carrying value of the long-lived asset from the expected undiscounted future operating cash flows
or managements determination that the long-lived asset has limited future use. If the expected
undiscounted future cash flows are less than the carrying value of such assets, an impairment loss
is recognized for the difference between estimated fair value and carrying value. Fair value is
measured based on a projected discounted cash flow model using a discount rate that is commensurate
with the risk inherent in the business. During Fiscal 2009, Fiscal 2008, the period from May 29,
2007 to February 2, 2008 and the period from February 4, 2007 through May 28, 2007, the Company
recognized non-cash impairment charges related to long-lived assets of $3.1 million, $2.5 million,
$3.5 million and $0.1 million, respectively.
4. INTANGIBLE ASSETS
In connection with the Transactions, the Companys intangible assets were revalued. As discussed
in Note 1, intangible assets aggregating $809.1 million were recognized at date of acquisition.
These assets included tradenames of $646.1 million, lease rights of $73.6 million, franchise
agreements of $53.0 million, favorable lease obligations of $31.9 million and covenants not to
compete of $4.5 million.
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The carrying amount and accumulated amortization of identifiable intangible assets at January 30,
2010 and January 31, 2009 were (in thousands):
January 30, 2010 | January 31, 2009 | |||||||||||||||||||
Estimated | Gross | Gross | ||||||||||||||||||
Life | Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||||
in Years | Amount | Amortization | Amount | Amortization | ||||||||||||||||
Intangible assets subject to amortization: |
||||||||||||||||||||
Lease rights (1) |
Lease terms ranging from 4.5 to 16.5 | $ | 77,074 | $ | (4,145 | ) | $ | 71,307 | $ | (2,245 | ) | |||||||||
Franchise agreements |
15 | 53,000 | (9,291 | ) | 53,000 | (5,758 | ) | |||||||||||||
Favorable lease obligations |
10 | 30,501 | (14,493 | ) | 30,332 | (7,580 | ) | |||||||||||||
Non-compete agreements |
2 | 4,500 | (4,500 | ) | 4,500 | (3,750 | ) | |||||||||||||
Other |
5 | 372 | (103 | ) | 261 | (38 | ) | |||||||||||||
Total intangible assets subject to
amortization |
165,447 | (32,532 | ) | 159,400 | (19,371 | ) | ||||||||||||||
Indefinite-lived tradenames |
447,112 | | 447,096 | | ||||||||||||||||
Total intangible assets |
$ | 612,559 | $ | (32,532 | ) | $ | 606,496 | $ | (19,371 | ) | ||||||||||
(1) | Amounts include lease rights not subject to amortization of $63,393 and $57,525 for Fiscal 2009 and Fiscal 2008, respectively. |
For Fiscal 2009, Fiscal 2008, the period from May 29, 2007 through February 2, 2008 and the
period from February 4, 2007 through May 28, 2007, amortization expense of $13.6 million, $14.9
million, $4.8 million and $0.5 million, respectively, was recognized by the Company. The weighted
average amortization period of amortizable intangible assets as of January 30, 2010 approximated
12.3 years. As discussed in Note 3, the Company recognized impairment charges related to
intangible assets in Fiscal 2008 of $199.0 million. There were no such impairment charges related
to intangible assets in Fiscal 2009 and the period from May 29, 2007 through February 2, 2008 and
the period from February 4, 2007 through May 28, 2007.
Weighted Average Amortization | ||||||||
Period for Amortizable | ||||||||
Intangible Asset Acquisitions (in 000's) | Amortizable | Intangible Asset Acquisitions | ||||||
Other: |
||||||||
Fiscal 2009 |
$ | 111 | 5.0 | |||||
Fiscal 2008 |
176 | 5.0 | ||||||
Lease rights: |
||||||||
Fiscal 2009 |
435 | 9.9 | ||||||
Fiscal 2008 |
1,794 | 8.7 | ||||||
Period from May 29, 2007 through February 2, 2008 |
554 | 9.2 | ||||||
Period from February 4, 2007 through May 28, 2007 |
81 | 9.0 |
The weighted average amortization period of amortizable intangible assets acquired in Fiscal
2009 was 7.6 years.
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The remaining net amortization as of January 30, 2010 of identifiable intangible assets with finite
lives by year is as follows (in thousands):
Fiscal Year | Amortization | |||
2010 |
$ | 10,488 | ||
2011 |
9,145 | |||
2012 |
7,546 | |||
2013 |
6,648 | |||
2014 |
5,972 | |||
2015 and thereafter |
29,723 | |||
Total |
$ | 69,522 | ||
5. DEBT
Debt as of January 30, 2010 and January 31, 2009 included the following components (in thousands):
January 30, 2010 | January 31, 2009 | |||||||
Senior secured term loan facility due 2014 |
$ | 1,413,750 | $ | 1,428,250 | ||||
Senior notes due 2015 |
250,000 | 250,000 | ||||||
Senior toggle notes due 2015 |
381,891 | 374,522 | ||||||
Senior subordinated notes due 2017 |
282,237 | 335,000 | ||||||
2,327,878 | 2,387,772 | |||||||
Less: current portion of long-term debt |
(14,500 | ) | (14,500 | ) | ||||
Long-term debt |
$ | 2,313,378 | $ | 2,373,272 | ||||
Senior secured revolving credit facility
due 2013 |
$ | 194,000 | $ | 194,000 | ||||
As of January 30, 2010, the Companys total debt principal maturities are as follows (in
thousands):
Term | Revolving | Senior | Senior | |||||||||||||||||||||
Loan | Credit | Senior | Toggle | Subordinated | ||||||||||||||||||||
Fiscal Year | Facility | Facility | Notes | Notes | Notes | Total | ||||||||||||||||||
2010 |
$ | 14,500 | $ | | $ | | $ | | $ | | $ | 14,500 | ||||||||||||
2011 |
14,500 | | | | | 14,500 | ||||||||||||||||||
2012 |
14,500 | | | | | 14,500 | ||||||||||||||||||
2013 |
14,500 | 194,000 | | | | 208,500 | ||||||||||||||||||
2014 |
1,355,750 | | | | | 1,355,750 | ||||||||||||||||||
Thereafter |
| | 250,000 | 381,891 | 282,237 | 914,128 | ||||||||||||||||||
Total maturities |
$ | 1,413,750 | $ | 194,000 | $ | 250,000 | $ | 381,891 | $ | 282,237 | $ | 2,521,878 | ||||||||||||
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The Companys net interest expense (income) for Fiscal 2009, Fiscal 2008, the period from May
29, 2007 through February 2, 2008 and the period from February 4, 2007 through May 28, 2007
included the following components (in thousands):
Successor Entity | Predecessor Entity | |||||||||||||||
Period From | Period From | |||||||||||||||
Fiscal Year | Fiscal Year | May 29, 2007 | February 4, 2007 | |||||||||||||
Ended | Ended | Through | Through | |||||||||||||
January 30, | January 31, | February 2, | May 28, | |||||||||||||
2010 | 2009 | 2008 | 2007 | |||||||||||||
Term loan facility |
$ | 66,348 | $ | 88,216 | $ | 81,021 | $ | | ||||||||
Revolving credit facility |
5,708 | 4,835 | | | ||||||||||||
Senior notes |
23,154 | 23,074 | 15,623 | | ||||||||||||
Senior toggle notes |
39,021 | 35,671 | 22,753 | | ||||||||||||
Senior subordinated notes |
32,913 | 35,090 | 23,757 | | ||||||||||||
Amortization of deferred
debt issue costs |
10,398 | 10,567 | 7,079 | | ||||||||||||
Other interest expense |
82 | (17 | ) | 83 | 86 | |||||||||||
Interest income |
(206 | ) | (1,489 | ) | (2,424 | ) | (4,962 | ) | ||||||||
Net interest expense (income) |
$ | 177,418 | $ | 195,947 | $ | 147,892 | $ | (4,876 | ) | |||||||
Accrued interest payable as of January 30, 2010 and January 31, 2009 consisted of the
following components (in thousands):
January 30, 2010 | January 31, 2009 | |||||||
Term loan facility |
$ | 5,474 | $ | 2,899 | ||||
Revolving credit facility |
328 | 697 | ||||||
Senior notes |
3,875 | 3,854 | ||||||
Senior subordinated notes |
4,966 | 5,863 | ||||||
Other |
1 | 3 | ||||||
Total accrued interest payable |
$ | 14,644 | $ | 13,316 | ||||
Credit Facility
The Credit Facility is with a syndication of lenders and consists of a $1.45 billion senior secured
term loan facility and a $200.0 million senior secured revolving credit facility. The Credit
Facility contains customary provisions relating to mandatory prepayments, voluntary prepayments,
affirmative covenants, negative covenants, and events of default. At the consummation of the
Merger, the Company drew the full amount of the senior secured term loan facility and was issued a
$4.5 million letter of credit. The letter of credit was subsequently increased to $5.9 million.
The Company drew down the remaining $194.0 million available under the revolving credit facility
(the Revolver) during Fiscal 2008. The Company may pay all or portions of the Revolver at its
discretion until the expiration of the facility on May 29, 2013, when the principal amount
outstanding of the loans under the Revolver, plus interest accrued and unpaid thereon, will become
due and payable in full. The interest rate on the Revolver on January 30, 2010 was 2.5%. 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 30, 2010 and January 31, 2009.
The senior secured term loan facility is amortized in equal quarterly installments of $3.625
million, which began on September 30, 2007 and end on March 31, 2014. The remaining balance of
$1,356 million is due on May 29, 2014.
All obligations under the Credit Facility are unconditionally guaranteed by (i) Claires Inc., our
parent, prior to an initial public offering of Claires Stores, Inc. stock, and (ii) certain of our
existing and future wholly-owned domestic subsidiaries, subject to certain exceptions.
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All obligations under the Credit Facility, and the guarantees of those obligations, are
secured, subject to certain exceptions, by (i) all of Claires Stores, Inc. capital stock, prior to
an initial public offering of Claires Stores, Inc. stock, and (ii) substantially all of our
material owned assets and the material owned assets of subsidiary guarantors, including:
| a perfected pledge of all the equity interests held by us or any subsidiary guarantor, which pledge, in the case of any foreign subsidiary, is limited to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by us and the subsidiary guarantors; and | ||
| perfected security interests in, and mortgages on, substantially all material tangible and intangible assets owned by us and each subsidiary guarantor, subject to certain exceptions. |
Borrowings under the Credit Facility bear interest at a rate equal to, at the Companys option,
either (a) an alternate base rate determined by reference to the higher of (1) prime rate in
effect on such day and (2) the federal funds effective rate plus 0.50% or (b) LIBOR rate, with
respect to any Eurodollar borrowing, determined by reference to the costs of funds for U.S. dollar
deposits in the London Interbank Market for the interest period relevant to such borrowing,
adjusted for certain additional costs, in each case plus an applicable margin. The initial
applicable margin for borrowings under the Credit Facility was 1.75% with respect to alternate base
rate borrowings and 2.75% with respect to LIBOR borrowings. The applicable margin for borrowings
under the Credit Facility will be subject to one or more stepdowns, in each case based upon the
ratio of our net senior secured debt to EBITDA for the period of four consecutive fiscal quarters
most recently ended as of such date (the Total Net Secured Leverage Ratio). In addition to
paying interest on outstanding principal under the Credit Facility, the Company is required to pay
a commitment fee, initially 0.50% per annum, in respect of the revolving credit commitments
thereunder. The commitment fee will be subject to one stepdown, based upon our Total Net Secured
Leverage Ratio. The Company must also pay customary letter of credit fees and agency fees. At
January 30, 2010 and January 31, 2009, the weighted average interest rate for borrowings
outstanding under the Credit Facility was 2.94% and 3.42%, respectively.
The Credit Facility does not contain any covenants that require the Company to maintain any
particular financial ratio or other measure of financial performance; however, it does contain
various covenants that limit our ability to engage in specified types of transactions. These
covenants limit our, our parents and our restricted subsidiaries ability to, among other things:
| incur additional indebtedness or issue certain preferred shares; | ||
| pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments; | ||
| make certain investments; | ||
| sell certain assets; | ||
| create liens; | ||
| consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and | ||
| enter into certain transactions with our affiliates. |
A breach of any of these covenants could result in an event of default. Upon the occurrence of an
event of default, the lenders could elect to declare all amounts outstanding under the Credit
Facility to be immediately due and payable and terminate all commitments to extend further credit.
Such actions by those lenders could cause cross defaults under our other indebtedness. If we were
unable to repay those amounts, the lenders under the Credit Facility could proceed against the
collateral granted to them to secure that indebtedness.
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Senior Notes
In connection with the Transactions, the Company issued $600 million of senior notes in two series:
1) | $250.0 million of 9.25% Senior Notes due 2015 (the Senior Cash Pay Notes), and | ||
2) | $350.0 million of 9.625%/10.375% Senior Toggle Notes due 2015 (the Senior Toggle Notes and together with the Senior Cash Pay Notes, the Senior Notes) |
The Senior Cash Pay Notes are unsecured obligations of the Company and mature on June 1, 2015.
Interest is payable semi-annually at 9.25% per annum, which commenced on December 1, 2007.
The Senior Toggle Notes are senior obligations of the Company and mature on June 1, 2015. Interest
is payable semi-annually commencing on December 1, 2007. For any interest period through June 1,
2011, the Company may, at its option, elect to pay interest on the Senior Toggle Notes (i) entirely
in cash (Cash Interest), (ii) entirely by increasing the principal amount of the outstanding
Senior Toggle Notes or by issuing PIK Notes (PIK Interest) or (iii) 50% as Cash Interest and 50%
of PIK Interest.
Cash Interest on the Senior Toggle Notes accrues at 9.625% per annum and is payable in cash. PIK
Interest on the Senior Toggle Notes accrues at the Cash Interest Rate per annum plus 0.75% and
increases the amount outstanding of the Senior Toggle Notes.
On May 14, 2008, the Company elected to pay interest in kind on its 9.625%/10.375% Senior Toggle
Notes due 2015. The election was for the interest period from June 2, 2008 through December 1,
2008. On December 1, 2008, the Company increased the principal amount on the outstanding Senior
Toggle Notes by $18.2 million in satisfaction of interest paid in kind for the interest period from
June 2, 2008 through December 1, 2008. The Company continued the election to pay interest in kind
for the interest period from December 2, 2008 through June 1, 2009 and for the interest period from
June 2, 2009 through December 1, 2009. The Company increased the principal amount on the
outstanding Senior Toggle Notes by $19.1 million and $19.8 million on June 1, 2009 and December 1,
2009, respectively. Payment in kind interest accrued for the period from December 2, 2009 through
January 30, 2010 of approximately $6.5 million is included in Long-term debt in the Consolidated
Balance Sheet as of January 30, 2010. It is the Companys current intention to pay interest in
kind on the Senior Toggle Notes for all interest payments through June 1, 2011.
Each of the Companys wholly-owned domestic subsidiaries that guarantee indebtedness under the
Credit Facility jointly and severally irrevocably and unconditionally guarantee on a senior basis
the performance and punctual payment when due, whether at stated maturity, by acceleration or
otherwise, of all obligations of the Company under the Senior Notes, expenses, indemnification or
otherwise.
On or after June 1, 2011, the Company may redeem the Senior Notes at its option, subject to certain
notice periods, at a price equal to 100% of the principal amount of the Senior Notes plus a premium
ranging from 102.313% to 104.813% if redeemed prior to June 1, 2013. In addition, prior to June 1,
2011, the Company may redeem the Senior Notes, subject to certain notice periods, at a price equal
to 100% of the principal amount of the Senior Notes redeemed plus an applicable premium. There are
also other specific provisions that allow for the Company to redeem Senior Notes prior to June 1,
2010, subject to certain notice periods and limitations, up to 35% of the original aggregate
principal amount, including any PIK additions to the Senior Toggle Notes, with the cash proceeds of
one more equity offerings, at a price equal to a range of 109.25% to 109.625% of the principal
balance of the redeemed Senior Notes.
Upon the occurrence of a change in control, each holder of the Senior Notes has the right to
require the Company to repurchase all or any part of such holders Senior Notes, at a price in cash
equal to 101% of the principal amount of the Senior Notes redeemed.
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Senior Subordinated Notes
In connection with the Transactions, the Company issued $335.0 million of Senior Subordinated
Notes. The Senior Subordinated Notes are senior subordinated obligations of the Company and will
mature on June 1, 2017. Interest is payable semi-annually at 10.50% per annum, which commenced on
December 1, 2007.
Each of the Companys wholly-owned domestic subsidiaries that guarantee indebtedness under the
Credit Facility jointly and severally irrevocably and unconditionally guarantee on a senior
subordinated basis the performance and punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of all obligations of the Company under the Senior Subordinated Notes,
expenses, indemnification or otherwise.
On or after June 1, 2012, the Company may redeem the Senior Subordinated Notes at its option,
subject to certain notice periods, at a price equal to 100% of the principal amount of the Senior
Notes plus a premium ranging from 101.75% to 105.25% if redeemed prior to June 1, 2015. In
addition, prior to June 1, 2012, the Company may redeem the Senior Subordinated Notes, subject to
certain notice periods, at a price equal to 100% of the principal amount of the Senior Notes
redeemed plus an applicable premium. There are also other specific provisions that allow for the
Company to redeem Senior Subordinated Notes prior to June 1, 2010, subject to certain notice
periods and limitations, up to 35% of the original aggregate principal amount with the cash
proceeds of one more equity offerings, at a redemption price equal to 110.50% of the principal
balance of the redeemed Senior Subordinated Notes.
Upon the occurrence of a change in control, each holder of the Senior Subordinated Notes has the
right to require the Company to repurchase all or any part of such holders Senior Subordinated
Notes, at a price in cash equal to 101% of the principal amount of the Senior Subordinated Notes
redeemed.
The 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 the Companys ability and the ability of its subsidiaries to:
| incur additional indebtedness; | ||
| pay dividends or distributions on capital stock, repurchase or retire capital stock and redeem, repurchase or defease any subordinated indebtedness; | ||
| make certain investments; | ||
| create or incur certain liens; | ||
| create restrictions on the payment of dividends or other distributions to the Company from its subsidiaries; | ||
| transfer or sell assets; | ||
| engage in certain transactions with its affiliates; and | ||
| merge or consolidate with other companies or transfer all or substantially all of its assets. |
Certain of these covenants, such as limitations on the Companys ability to make certain payments
such as dividends, or incur debt, will no longer apply if the 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 the Company. None of these
covenants, however, require the Company to maintain any particular financial ratio or other measure
of financial performance. As of January 30, 2010, the Company is in compliance with the covenants
under its Notes.
The Companys non-U.S. subsidiaries have bank credit facilities totaling approximately $2.4
million. The facilities are used for working capital requirements, letters of credit and various
guarantees. These credit facilities have been arranged in accordance with customary lending
practices in the respective
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country of operation. As of January 30, 2010, the entire amount of
$2.4 million was available for borrowing by the Company, subject to reduction for $2.0 million of
outstanding bank guarantees.
Note Purchases
The following is a summary of the Companys debt repurchase activity during Fiscal 2009 (in
thousands):
Principal | Purchase | |||||||
Note Purchased | Amount | Price | ||||||
Senior Subordinated Notes |
$ | 52,763 | $ | 26,347 | ||||
Senior Toggle Notes |
30,500 | 19,744 | ||||||
$ | 83,263 | $ | 46,091 | |||||
6. COMMITMENTS AND CONTINGENCIES
Leasing The Company leases its retail stores, certain offices and warehouse space, and
certain equipment under operating leases which expire at various dates through the year 2031 with
options to renew certain of such leases for additional periods. Most lease agreements contain
construction allowances and/or rent holidays. For purposes of recognizing landlord incentives and
minimum rental expense on a straight-line basis over the terms of the leases, the Company uses the
date of initial possession to begin amortization, which is generally when the Company enters the
space and begins to make improvements in preparation of intended use. The lease agreements covering
retail store space provide for minimum rentals and/or rentals based on a percentage of net sales.
Rental expense for Fiscal 2009, Fiscal 2008, the period from May 29, 2007 through February 2, 2008
and the period from February 4, 2007 through May 28, 2007 is set forth below (in thousands):
Successor Entity | Predecessor Entity | |||||||||||||||
Period From | Period From | |||||||||||||||
Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4, 2007 | |||||||||||||
Ended | Ended | Through | Through | |||||||||||||
January 30, | January 31, | February 2, | May 28, | |||||||||||||
2010 | 2009 | 2008 | 2007 | |||||||||||||
Minimum store rentals |
$ | 199,908 | $ | 205,807 | $ | 137,236 | $ | 60,751 | ||||||||
Store rentals based on net sales |
1,454 | 2,398 | 2,332 | 1,938 | ||||||||||||
Other rental expense |
13,181 | 16,745 | 7,929 | 4,078 | ||||||||||||
Total rental expense |
$ | 214,543 | $ | 224,950 | $ | 147,497 | $ | 66,767 | ||||||||
Minimum aggregate rental commitments as of January 30, 2010 under non-cancelable operating
leases are summarized by fiscal year ending as follows (in thousands):
2010 |
$ | 191,070 | ||
2011 |
173,398 | |||
2012 |
155,199 | |||
2013 |
134,839 | |||
2014 |
113,972 | |||
Thereafter |
280,724 | |||
Total |
$ | 1,049,202 | ||
Certain leases provide for payment of real estate taxes, insurance, and other operating expenses of
the properties. In other leases, some of these costs are included in the basic contractual rental
payments. In addition, certain leases contain escalation clauses resulting from the pass-through
of increases in operating costs, property taxes, and the effect on costs from changes in price
indexes.
ASC Topic 410, Asset Retirement and Environmental Obligations, requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made and that the associated asset retirement costs be
capitalized as part of the carrying amount of the long-lived asset. The retirement obligation
relates to costs
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associated with the retirement of leasehold improvements under store and warehouse
leases, within the European segment. The Company had retirement obligations of $3.2 million and
$2.8 million as of January 30, 2010 and January 31, 2009, respectively.
Legal 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.
Employment Agreements The Company has employment agreements with several members of
senior management. The agreements, with terms ranging from approximately two to three years,
provide for minimum salary levels, performance bonuses, and severance payments.
Other Approximately 65% of the merchandise purchased by the Company in Fiscal 2009 was
manufactured in China. Any event causing a sudden disruption of imports from China, or other
foreign countries, could have a material adverse effect on the Companys operations.
In November 2003, the Companys Board of Directors authorized a retirement compensation package for
the Companys founder and former Chairman of the Board. As of January 30, 2010, the Companys
estimated remaining liability relating to this package was approximately $0.6 million.
7. STOCKHOLDERS EQUITY
Predecessor Entity
Preferred Stock The Company had authorized 1,000,000 shares of $1 par value preferred
stock, none of which was issued.
Class A Common Stock The Class A common stock had only limited transferability and was
not traded on any stock exchange or any organized market. However, the Class A common stock was
convertible on a share-for-share basis into Common stock and could be sold, as Common stock, in
open market transactions. The Class A common stock had ten votes per share. Dividends declared on
the Class A common stock were limited to 50% of the dividends declared on the Common stock.
Rights to Purchase Series A Junior Participating Preferred Stock The Companys Board of
Directors adopted a stockholder rights plan (the Rights Plan) in May 2003. The Rights Plan had
certain anti-takeover provisions that could cause substantial dilution to a person or group that
attempted to acquire the Company on terms not approved by the Board of Directors. Under the Rights
Plan, each stockholder was issued one right to acquire one one-thousandth of a share of Series A
Junior Participating Preferred Stock at an exercise price of $130.00, subject to adjustment, for
each outstanding share of Common stock and Class A common stock they owned. These rights were only
exercisable if a single person or company acquired 15% or more of the outstanding shares of the
Companys common stock. If the Company was acquired, each right, except those of the acquirer,
would entitle its holder to purchase the number of shares of common stock having a then-current
market value of twice the exercise price. The Company could redeem the rights for $0.01 per right
at any time prior to a triggering acquisition and, unless redeemed earlier, the rights would expire
on May 30, 2013. The Rights Plan was amended in March 2007 in connection with the merger
agreement. The amendment provided that neither the execution of the merger agreement nor the
consummation of the merger or other transactions contemplated by the merger agreement would trigger
the separation or exercise of the shareholder rights plan or any adverse event under the Rights
Plan.
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8. STOCK OPTIONS AND STOCK-BASED COMPENSATION
Predecessor
The Claires Stores, Inc. Amended and Restated 2005 Incentive Plan (the 2005 Plan) was approved
by the Companys Board of Directors in March 2005 and by stockholders in June 2005. Under the 2005
Plan, the Company could grant incentive stock options, non-qualified stock options, restricted and
deferred stock awards, dividend equivalents, stock appreciation rights, bonus stock awards,
performance awards, and other stock based awards to purchase up to 2,000,000 shares of Common
stock, plus any shares unused or recaptured from previous plans. Incentive stock options available
for grant under the 2005 Plan were exercisable at prices equal to the fair market value of shares
at the date of the grant, except that incentive stock options available to any person holding 10%
or more of the total combined voting power or value of all classes of capital stock of the Company,
or any subsidiary of the Company, carried an exercise price equal to 110% of the fair market value
at the date of the grant. The aggregate number of shares granted to any one person could not
exceed 500,000 shares. Each incentive stock option or non-qualified stock option terminated ten
years after the date of grant (or such shorter period as specified in the grant) and could not be
exercised thereafter. The terms and conditions related to restricted and deferred stock awards,
dividend equivalents, stock appreciation rights, bonus stock awards, performance awards, and other
stock based awards were determined by the Compensation Committee of the Board of Directors (the
Compensation Committee).
The Company adopted ASC Topic 718, Compensation Stock Compensation, using the modified
prospective transition method. Under the modified prospective transition method, fair value
accounting and recognition provisions are applied to share-based awards granted or modified
subsequent to the date of adoption and prior periods presented are not restated. In addition, for
awards granted prior to the effective date, the unvested portion of the awards is recognized in
periods subsequent to the effective date based on the grant date fair value determined for pro
forma disclosure purposes.
Prior to adopting ASC Topic 718, the Company presented tax benefits resulting from the exercise of
stock options as operating cash flows in the statements of cash flows. ASC Topic 718 requires cash
flows resulting from excess tax benefits to be classified as a part of cash flows from financing
activities. Excess tax benefits are realized tax benefits from tax deductions for stock-based
compensation in excess of the deferred tax asset attributable to stock compensation costs.
During the period from February 4, 2007 through May 28, 2007, the Predecessor Entity recognized
$8.9 million of stock-based compensation expense. A related tax benefit of approximately $2.9
million was recognized in stockholders equity for this period. For the period from February 4,
2007 through May 28, 2007, cash flow from operating activities decreased $2.9 million and cash flow
from financing activities increased $2.9 million relating to classification of cash flows for the
tax benefits of stock compensation.
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Stock Options
A summary of the activity in the Companys stock option plans for the period from February 4, 2007
through May 28, 2007 is as follows:
Period from February 4, 2007 | ||||||||
through May 28, 2007 | ||||||||
Weighted | ||||||||
Average | ||||||||
Number of | Exercise | |||||||
Shares | Price | |||||||
Options Outstanding at beginning of period |
484,000 | $ | 16.31 | |||||
Options granted |
| | ||||||
Options exercised |
(10,000 | ) | 17.72 | |||||
Options canceled |
| | ||||||
Options converted |
(474,000 | ) | 16.28 | |||||
Options Outstanding at end of period |
| $ | | |||||
Options Exercisable at end of period |
| $ | | |||||
Upon the sale of the Company, the outstanding stock options were converted into the right to
receive the difference between $33.00 and the exercise price of the stock option. As a result, the
Company paid approximately $7.9 million related to the conversion of stock options.
Time-Vested Stock Awards
During June 2006, the Company issued 18,400 shares of restricted common stock to non-management
directors under the 2005 Plan. The weighted average grant date fair value was $24.38 per share.
The stock, which had an aggregate fair value at date of grant of approximately $449,000, was
subject to vesting provisions of one year based on continued service to the Company. There were no
other grants of restricted stock during the Fiscal 2006.
Compensation expense related to outstanding time-vested shares during the period from February 4,
2007 through May 28, 2007 was approximately $1.9 million. In connection with the Merger, remaining
unvested shares became fully vested. Accordingly, the Predecessor Entity recognized the remaining
compensation expense related to the acceleration of the vesting during the period from February 4,
2007 through May 28, 2007.
A summary of the activity during the period from February 4, 2007 through May 28, 2007 in the
time-vested stock is as follows:
Period From February 4, 2007 | ||||||||
Through May 28, 2007 | ||||||||
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Non-vested at beginning of period |
93,400 | $ | 22.64 | |||||
Granted |
| | ||||||
Vested |
(93,400 | ) | 22.64 | |||||
Forfeited |
| | ||||||
Non-vested at end of period |
| $ | | |||||
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Long-Term Incentive Stock Plans
During April 2006, the Compensation Committee approved the Fiscal 2006 Long-Term Incentive Program
(Fiscal 2006 LTIP). Under the Fiscal 2006 LTIP, Performance Units could be issued to certain
officers and employees upon the Companys achievement during Fiscal 2006, of specific measurable
performance criteria determined by the Compensation Committee, as adjusted by the Compensation
Committee. An aggregate maximum of approximately 1,035,000 Performance Units could be earned under
the Fiscal 2006 LTIP. The Performance Units were payable in cash, based on the closing price of
the Companys common stock at the end of each of the three fiscal years in the vesting period.
Performance Units earned vested over a three year period at the rate of 25%, 25%, and 50% during
the years ended February 3, 2007, February 2, 2008 and January 31, 2009, respectively. The Fiscal
2006 LTIP was accounted for as a liability under ASC Topic 718.
During the period from February 4, 2007 through May 28, 2007, the Company issued approximately
39,100 shares of Common stock representing shares earned through achievement of LTIP performance
targets for Fiscal 2006.
During the period from February 4, 2007 through May 28, 2007, the Company recorded approximately
$6.9 million of compensation expense relating to the Fiscal 2005 and Fiscal 2006 long-term
incentive plans. Included in this expense was approximately $6.1 million relating to the vesting
of previously unvested stock and performance units. The unvested stock and performance units
became fully vested as a result of the Merger.
Successor Entity
On June 29, 2007, the Board of Directors and stockholders of Claires Inc. adopted the Claires
Inc. Stock Incentive Plan (the Plan). The Plan provides employees and directors of Claires
Inc., the Company and its subsidiaries, who are in a position to contribute to the long-term
success of these entities, with shares or options to acquire shares in Claires Inc. to aid in
attracting, retaining, and motivating individuals of outstanding ability.
The Plan was amended on July 23, 2007 to increase the number of shares available for issuance to
6,860,000 to provide for equity investments by employees and directors of the Company through the
voluntary stock purchase program. The Board of Directors of Claires Inc. awarded certain
employees and directors the opportunity to purchase common stock at a price of $10.00 per share,
the estimated fair market value of the Companys common stock. With each share purchased, the
employee or director was granted a buy-one-get-one option, (the BOGO Option) to purchase an
additional share at an exercise price of $10.00 per share.
The total compensation expense recognized by the Company in Fiscal 2009, Fiscal 2008 and for the
period from May 29, 2007 to February 2, 2008 was $6.7 million, $8.2 million and $5.5 million,
respectively. Related tax benefits of approximately $2.3 million, $2.8 million and $1.6 million
were recognized in Fiscal 2009, Fiscal 2008 and for the period from May 29, 2007 to February 2,
2008, respectively. Stock-based compensation is recorded in Selling, general and administrative
expenses in the Companys Consolidated Statements of Operations and Comprehensive Income (Loss).
During the period from May 29, 2007 through February 2, 2008, the Board of Directors of Claires
Inc. approved the grant of a total of approximately 3,265,000 stock options under the Plan to
certain employees of the Company. In addition, the Board approved approximately 1,850,000 stock
options to certain senior executives. The stock options consist of a Time Option and
Performance Option as those terms are defined in the standard form of the option grant letter.
The stock options have an exercise price of $10.00 per share, the estimated fair market value of
the underlying shares at the date of grant, and expire seven years after the date of grant. Time
Options vest and become exercisable based on continued service to the Company. The Time Options
vest in four equal annual installments, commencing one year from date of grant. Performance
Options vest based on growth in the stock price between May 29, 2007 and specific quarterly
measurement dates commencing with the last day of the eighth full fiscal quarter after May 29,
2007. Upon achievement of the performance target, the Performance Options vest and
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become
exercisable in two equal annual installments on the first two anniversaries of the measurement date. During Fiscal 2009 and Fiscal 2008, the Board of Directors approved the grant of
approximately 828,000 and 2,170,000, respectively, of similar stock options. The Company
recognized compensation expense of $5.5 million, $6.9 million and $4.5 million in Fiscal 2009,
Fiscal 2008 and for the period from May 29, 2007 through February 2, 2008, respectively.
During the period from May 29, 2007 through February 2, 2008, the Board of Directors also granted
approximately 970,000 BOGO options which are immediately exercisable and expire in seven years.
The period from May 29, 2007 through February 2, 2008 included options to purchase an aggregate of
312,500 BOGO options granted outside of the Plan to certain senior executive officers and
directors. During Fiscal 2008, the Board of Directors granted 46,000 BOGO options with similar
terms. No BOGO options were granted during Fiscal 2009. The Company recognized compensation
expense of $1,039,000, $810,000 and $620,000 in Fiscal 2009, Fiscal 2008 and for the period from
May 29, 2007 through February 2, 2008, respectively, related to these options.
The following is a summary of activity in the Companys stock option plan since the date of
Acquisition of May 29, 2007 through January 30, 2010:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Shares | Price | Life (Years) | Value | |||||||||||||
Outstanding as of date of Acquisition |
| | | | ||||||||||||
Options granted |
6,204,872 | $ | 10.00 | 5.4 | | |||||||||||
Options exercised |
| | | | ||||||||||||
Options forfeited or expired |
(62,250 | ) | $ | 10.00 | 5.9 | | ||||||||||
Outstanding as of February 2, 2008 |
6,142,622 | $ | 10.00 | 5.4 | | |||||||||||
Options granted |
2,216,800 | $ | 10.00 | 5.4 | | |||||||||||
Options exercised |
| | | | ||||||||||||
Options forfeited or expired |
(1,551,866 | ) | $ | 10.00 | 5.3 | | ||||||||||
Outstanding as of January 31, 2009 |
6,807,556 | $ | 10.00 | 4.5 | | |||||||||||
Options granted |
827,600 | $ | 10.00 | 6.4 | | |||||||||||
Options exercised |
| | | | ||||||||||||
Options forfeited or expired |
(1,385,046 | ) | $ | 10.00 | 5.0 | | ||||||||||
Outstanding as of January 30, 2010 |
6,250,110 | $ | 10.00 | 4.5 | | |||||||||||
Exercisable at end of period |
1,697,844 | $ | 10.00 | 4.7 | |
The weighted average grant date fair value of options granted in Fiscal 2009, Fiscal 2008 and
during the period from May 29, 2007 through February 2, 2008 was $2.98, $3.87 and $4.73,
respectively.
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For options granted during Fiscal 2009, Fiscal 2008 and the period from May 29, 2007 through February 2, 2008, the fair value of each
option was estimated on the date of grant using the
Black-Scholes and Monte Carlo option pricing models with the following assumptions:
May 29, 2007 | ||||||||||||
Through | ||||||||||||
Time Options and BOGO Options (Black-Scholes) | Fiscal 2009 | Fiscal 2008 | February 2, 2008 | |||||||||
Expected dividend yield |
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Weighted average expected stock price
volatility |
55.53 | % | 45.26 | % | 47.56 | % | ||||||
Weighted average risk-free interest rate |
2.15 | % | 3.18 | % | 4.55 | % | ||||||
Range of risk-free interest rate |
1.38% - 2.98 | % | 2.50% - 3.44 | % | 2.99% - 5.01 | % | ||||||
Weighted average expected life of
options (years) |
4.39 | 4.75 | 4.92 |
May 29, 2007 | ||||||||||||
Through | ||||||||||||
Performance Options (Monte Carlo) | Fiscal 2009 | Fiscal 2008 | February 2, 2008 | |||||||||
Expected dividend yield |
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Weighted average expected stock price
volatility |
53.50 | % | 48.00 | % | 52.00 | % | ||||||
Weighted average risk-free interest rate |
2.05 | % | 3.21 | % | 4.71 | % | ||||||
Range of risk-free interest rate |
0.18% - 4.25 | % | 1.56% - 4.38 | % | 2.97% - 5.16 | % | ||||||
Weighted average expected life of
options (years) |
N/A | N/A | N/A |
The expected life of Time Options and BOGO Options has been based on the simplified method
in accordance with SEC Staff Accounting Bulletin, Share-Based Payment (SAB107), which is
acceptable under SEC Staff Accounting Bulletin 110 because the Company has no readily available
relevant historical data on option-hold-periods by employees. The Companys historical exercise
data does not provide a reasonable basis upon which to estimate an expected term due to the sale of
the Company resulting in new equity-based compensation arrangements and types of employees
receiving grants. The risk free rate for periods within the contractual life of the options is
based on the U.S. Treasury yield curve in effect at the time of the grant.
Stock price volatility was based on peer company data as of the date of each option grant.
Claires Inc. will issue new shares to satisfy exercise of stock options. During Fiscal 2009,
Fiscal 2008 and the period from May 29, 2007 through February 2, 2008, no cash was used to settle
equity instruments granted under share-based payment arrangements.
Time-Vested Stock Awards
On May 29, 2007, Claires Inc. issued 125,000 shares of restricted common stock to certain members
of executive management of the Company. The shares are subject to certain transfer restrictions
and the shares are forfeited if a recipient leaves the Company. The shares vest at the rate of 25%
on each of May 29, 2008, May 29, 2009, May 29, 2010, and May 29, 2011. Vesting is based on
continued service to the Company. The weighted average grant date fair value was $10.00 per share
and the shares had an aggregate fair value at date of grant of $1.25 million. Compensation expense
relating to these shares recorded in Fiscal 2009, Fiscal 2008 and during the period from May 29,
2007 to February 2, 2009 approximated $141,000, $443,000 and $434,000 respectively. At January 30,
2010 and January 31, 2009, unearned compensation related to these shares approximated $83,000 and
$373,000, respectively. The remaining unearned compensation as of January 30, 2010 is expected to
be recognized over a weighted average period of 1.3 years.
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A summary of the activity since the date of Acquisition of May 29, 2007 through January 30, 2010 in
the Companys restricted common stock is presented below:
Weighted Average | ||||||||
Shares | Grant Date Fair Value | |||||||
Nonvested at date of Acquisition of May 29, 2007 |
| | ||||||
Granted |
125,000 | $ | 10.00 | |||||
Vested |
| | ||||||
Forfeited |
| | ||||||
Nonvested as of February 2, 2008 |
125,000 | $ | 10.00 | |||||
Granted |
| | ||||||
Vested |
(31,250 | ) | $ | 10.00 | ||||
Forfeited |
| | ||||||
Nonvested as of January 31, 2009 |
93,750 | $ | 10.00 | |||||
Granted |
| | ||||||
Vested |
(31,250 | ) | $ | 10.00 | ||||
Forfeited |
| | ||||||
Cancelled |
(12,500 | ) | $ | 10.00 | ||||
Nonvested as of January 30, 2010 |
50,000 | $ | 10.00 | |||||
9. DERIVATIVES AND HEDGING ACTIVITIES
The Company formally designates and documents the financial instrument as a hedge of a specific
underlying exposure, as well as the risk management objectives and strategies for undertaking the
hedge transaction. The Company formally assesses both at inception and at least quarterly
thereafter, whether the financial instruments that are used in hedging transactions are effective
at offsetting changes in cash flows of the related underlying exposure. The Company measures the
effectiveness of its cash flow hedges by evaluating the following criteria: (i) the re-pricing
dates of the derivative instrument match those of the debt obligation; (ii) the interest rates of
the derivative instrument and the debt obligation are based on the same interest rate index and
tenor; (iii) the variable interest rate of the derivative instrument does not contain a floor or
cap, or other provisions that cause a basis difference with the debt obligation; and (iv) the
likelihood of the counterparty not defaulting is assessed as being probable.
The Company primarily employs derivative financial instruments to manage its exposure to interest
rate changes and to limit the volatility and impact of interest rate changes on earnings and cash
flows. The Company does not enter into derivative financial instruments for trading or speculative
purposes. The Company faces credit risk if the counterparties to the financial instruments are
unable to perform their obligations. However, the Company seeks to minimize this risk by entering
into transactions with counterparties that are significant and creditworthy financial institutions.
The Company monitors the credit ratings of the counterparties.
The Company records unrealized gains and losses on derivative financial instruments qualifying as
cash flow hedges in Accumulated other comprehensive income (loss), net of tax on the Consolidated
Balance Sheets, to the extent that hedges are effective. For derivative financial instruments
which do not qualify as cash flow hedges, any changes in fair value would be recorded in the
Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company may at its discretion change the designation of any such hedging instrument agreements
prior to maturity. At that time, any gains or losses previously reported in accumulated other
comprehensive income (loss) on termination would amortize into interest expense or interest income
to correspond to the recognition of interest expense or interest income on the hedged debt. If
such debt instrument was also terminated, the gain or loss associated with the terminated
derivative included in accumulated other comprehensive income (loss) at the time of termination of
the debt would be recognized in the Consolidated Statements of Operations and Comprehensive Income
(Loss) at that time.
Between July 20, 2007 and August 3, 2007, the Company entered into three interest rate swap
agreements (the Swaps) to manage exposure to interest rate changes related to the senior secured
term loan facility.
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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 January 30, 2010, the Swaps covered an aggregate notional amount of $435.0 million of
the 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. There was no hedge ineffectiveness during the period
from inception of the Swaps on July 20, 2007 to January 30, 2010. The Company includes credit
valuation adjustment risk in the calculation of fair value. At January 30, 2010 and January 31,
2009, the estimated fair value of the Swaps were liabilities of approximately $8.8 million and
$19.7 million, respectively, which was recorded in the Consolidated Balance Sheets classification
Accrued expenses and other current liabilities. These amounts were also recorded, net of tax of
approximately $5.7 million and $7.3 million, respectively, as a component in Accumulated other
comprehensive income (loss), net of tax in the Companys Consolidated Balance Sheets. See Note 2
for fair value disclosure of interest rate swaps.
The following table provides a summary of the financial statement effect of the Companys
derivative financial instruments designated as interest rate cash flow hedges during Fiscal 2009
and Fiscal 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) | |||||||||||||||||
Fiscal | Fiscal | Fiscal | Fiscal | |||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||
Interest Rate Swaps |
$ | 9,437 | $ | 1,375 | Interest expense, net | $ | (19,011 | ) | $ | (8,440 | ) |
(1) | Represents reclassification of amounts from accumulated other comprehensive income (loss) to earnings as interest expense is recognized on the senior secured term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges. |
As of January 30, 2010, the Company expects to reclassify net losses on the Companys interest
rate swaps recognized within Accumulated other comprehensive income (loss), net of tax of $3.0
million, net of tax, to interest expense by the time the swaps expire on June 30, 2010.
The Company is also exposed to market risk from foreign exchange rates. The Company continues to
evaluate these risks and takes measures to mitigate these risks, including, among other measures,
entering into derivative financial instruments to hedge risk exposures to currency rates. From
time to time, the Company may enter into foreign currency options to minimize and manage the
currency related to its import merchandise purchase program. The counter-party to these contracts
is a highly rated financial institution. There were no foreign currency options maintained at
January 30, 2010.
10. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan The Company has adopted a Profit Sharing Plan under Section 401(k) of the
Internal Revenue Code. This plan allows employees who serve more than 1,000 hours per year to
defer up to 18% of their income through contributions to the plan. In line with the provisions of
the plan, for every dollar the employee contributes the Company will contribute an additional
$0.50, up to 2% of the employees salary. In March 2009, the Company changed to an annual election
of discretionary matching contributions. During Fiscal 2009, Fiscal 2008, the period from May 29,
2007 through February 2, 2008 and the period from February 4, 2007 through May 28, 2007, the cost
of Company matching contributions was $152,000, $777,000, $554,000 and $258,000, respectively.
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Predecessor Entity
Deferred Compensation Plans In August 1999, the Company adopted a deferred compensation plan,
which was amended and restated, effective as of February 4, 2005, that enabled certain associates
of the Company to defer a specified percentage of their cash compensation. The plan generally
provided for payments upon retirement, death, or termination of employment. Participants could
elect to defer a percentage of their cash compensation while the Company contributed a specified
percentage of the participants cash compensation based on the participants number of years of
service. All contributions were immediately vested. The Companys obligations under this plan
were funded by contributions to a rabbi trust. Total Company contributions were $204,000 for the
period from February 4, 2007 through May 28, 2007. The deferred compensation plan was terminated
upon the sale of the Company in May 2007. Assets held in the rabbi trust were used to fund the
obligations due participants upon termination of the plan.
11. INCOME TAXES
The components of income (loss) before income taxes for Fiscal 2009, Fiscal 2008, the period from
May 29, 2007 through February 2, 2008 and the period from February 4, 2007 through May 28, 2007
were as follows (in thousands):
Predecessor | ||||||||||||||||
Successor Entity | Entity | |||||||||||||||
Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4, 2007 | |||||||||||||
Ended | Ended | Through | Through | |||||||||||||
Jan. 30, 2010 | Jan. 31, 2009 | Feb. 2, 2008 | May 28, 2007 | |||||||||||||
U.S. |
$ | (76,154 | ) | $ | (501,248 | ) | $ | (75,357 | ) | $ | (27,568 | ) | ||||
Foreign |
77,262 | (140,835 | ) | 67,978 | 5,575 | |||||||||||
Total income (loss)
before income taxes |
$ | 1,108 | $ | (642,083 | ) | $ | (7,379 | ) | $ | (21,993 | ) | |||||
The components of income tax expense (benefit) for Fiscal 2009, Fiscal 2008, the period from
May 29, 2007 through February 2, 2008 and the period from February 4, 2007 through May 28, 2007
were as follows (in thousands):
Predecessor | ||||||||||||||||
Successor Entity | Entity | |||||||||||||||
Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4, 2007 | |||||||||||||
Ended | Ended | Through | Through | |||||||||||||
Jan. 30, 2010 | Jan. 31, 2009 | Feb. 2, 2008 | May 28, 2007 | |||||||||||||
Federal: |
||||||||||||||||
Current |
$ | 378 | $ | 509 | $ | (460 | ) | $ | 16,408 | |||||||
Deferred |
3,541 | 12,440 | (10,838 | ) | 6,416 | |||||||||||
3,919 | 12,949 | (11,298 | ) | 22,824 | ||||||||||||
State |
||||||||||||||||
Current |
437 | 225 | (381 | ) | 314 | |||||||||||
Deferred |
63 | (11,413 | ) | (5,283 | ) | 599 | ||||||||||
500 | (11,188 | ) | (5,664 | ) | 913 | |||||||||||
Foreign |
||||||||||||||||
Current |
5,552 | 5,532 | 8,768 | (1,670 | ) | |||||||||||
Deferred |
1,539 | (5,784 | ) | 174 | (288 | ) | ||||||||||
7,091 | (252 | ) | 8,942 | (1,958 | ) | |||||||||||
Total income tax expense (benefit) |
$ | 11,510 | $ | 1,509 | $ | (8,020 | ) | $ | 21,779 | |||||||
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The provision for income taxes from continuing operations for Fiscal 2009, Fiscal 2008, the
period from May 29, 2007 through February 2, 2008 and the period from February 4, 2007 through May
28, 2007 differs from an amount computed at the statutory federal rate as follows:
Predecessor | ||||||||||||||||
Successor Entity | Entity | |||||||||||||||
Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4, 2007 | |||||||||||||
Ended | Ended | Through | Through | |||||||||||||
Jan. 30, 2010 | Jan. 31, 2009 | Feb. 2, 2008 | May 28, 2007 | |||||||||||||
U.S. income taxes at statutory federal rate |
35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||
Valuation allowance |
1,577.1 | (15.6 | ) | | | |||||||||||
Nondeductible impairment charges |
| (17.6 | ) | | | |||||||||||
Foreign rate differential |
(1,927.8 | ) | (0.4 | ) | 237.8 | 28.6 | ||||||||||
State and local income taxes, net of federal tax
benefit |
(92.1 | ) | 1.1 | 12.0 | (0.1 | ) | ||||||||||
Transaction related costs |
| | | (45.3 | ) | |||||||||||
Repatriation of foreign earnings |
1,674.7 | (2.1 | ) | (70.7 | ) | (100.1 | ) | |||||||||
Change in accrual for estimated tax contingencies |
199.6 | (0.4 | ) | (24.9 | ) | (5.3 | ) | |||||||||
Other, net |
(427.7 | ) | (0.2 | ) | (80.5 | ) | (11.8 | ) | ||||||||
1,038.8 | % | (0.2 | )% | 108.7 | % | (99.0 | )% | |||||||||
In Fiscal 2009, the Companys income tax expense was $11.5 million and its effective tax rate
was 1,038.8%, reflecting the impact of an increase to its valuation allowance on deferred tax
assets by $17.5 million. In Fiscal 2008, the Companys income tax expense was $1.5 million and its
effective tax rate was (0.2)%, reflecting the non-deductible nature of the goodwill and joint
venture impairment charges as well as the impact of an increase to its valuation allowance on
deferred tax assets in the U.S. by $95.8 million due to the increased uncertainties related to its
ability to utilize these deferred tax assets against future earnings. For the period from May 29,
2007 through February 2, 2008, the Companys income tax benefit was $8.0 million and its effective
tax rate was 108.7%.
The effective income tax rates for Fiscal 2009, Fiscal 2008 and the period from May 29, 2007
through February 2, 2008 also differ 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, the impact of the repatriation of foreign earnings to fund transaction related
interest, and other permanent book to tax return adjustments.
The Predecessor Entitys effective income tax rate was (99.0)% for the period from February 4, 2007
through May 28, 2007. The tax benefit that results from the application of the statutory federal
rate of 35% to the loss before income taxes for this period is offset by the tax expense associated
with non-deductible transaction costs and the repatriation of foreign earnings to fund, in part,
the acquisition of the Company. The net tax expense as a percentage of loss before income taxes
for this period resulted in a negative effective income tax rate.
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The tax effects on the significant components of the Companys net deferred tax asset (liability)
as of January 30, 2010 and January 31, 2009 are as follows (in thousands):
Jan. 30, 2010 | Jan. 31, 2009 | |||||||
Deferred tax assets: |
||||||||
Accrued expenses |
$ | 4,055 | $ | 4,770 | ||||
Deferred rent |
6,892 | 5,983 | ||||||
Compensation & benefits |
11,595 | 8,813 | ||||||
Depreciation |
2,874 | | ||||||
Inventory |
1,125 | 1,297 | ||||||
Gift cards |
2,064 | 1,740 | ||||||
Tax carry forwards |
85,737 | 89,774 | ||||||
Debt related |
15,812 | 7,126 | ||||||
Other |
4,106 | 8,105 | ||||||
Total gross deferred tax assets |
134,260 | 127,608 | ||||||
Valuation allowance |
(130,620 | ) | (110,228 | ) | ||||
Total deferred tax assets, net |
3,640 | 17,380 | ||||||
Deferred tax liabilities: |
||||||||
Depreciation |
| 3,229 | ||||||
Tradename intangibles |
110,359 | 109,713 | ||||||
Other |
10,225 | 11,335 | ||||||
Total deferred tax liabilities |
120,584 | 124,277 | ||||||
Net deferred tax liability |
$ | (116,944 | ) | $ | (106,897 | ) | ||
The deferred tax assets and deferred tax liabilities as of January 30, 2010 and January 31, 2009
are as follows (in thousands):
Jan. 30, 2010 | Jan. 31, 2009 | |||||||
Current deferred tax assets, net of
valuation allowance |
$ | 2,839 | $ | 3,815 | ||||
Current deferred tax liabilities |
| | ||||||
Non-current deferred tax assets, net of
valuation allowance |
2,362 | 2,117 | ||||||
Non-current deferred tax liabilities |
(122,145 | ) | (112,829 | ) | ||||
Net |
$ | (116,944 | ) | $ | (106,897 | ) | ||
The amount and expiration dates of operating loss and tax credit carryforwards as of January 30,
2010 are as follows (in thousands):
Amount | Expiration Date | |||||||
U.S. federal net operating loss carryforwards |
$ | 49,008 | 2028 - 2029 | |||||
Non-U.S. net operating loss carryforwards |
9,993 | Indefinite | ||||||
Non-U.S. net operating loss carryforwards |
6,127 | 2015 2025 | ||||||
State net operating loss carryforwards |
6,481 | 2013 2030 | ||||||
U.S. foreign tax credits |
14,128 | 2019 2020 | ||||||
Total |
$ | 85,737 | ||||||
In assessing the need for a valuation allowance recorded against deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Ultimately, the realization of deferred tax assets will depend on the
existence of future taxable income. In making this assessment, management considers the scheduled
reversal of deferred tax liabilities, past operating results, estimates of future taxable income
and tax planning opportunities.
In Fiscal 2009, the Company recorded an increase of $18.3 million in valuation allowance against
deferred tax assets in the U.S. In the fourth quarter of Fiscal 2008, the Company recorded a
charge of $95.8 million related to establishing a valuation allowance against deferred tax assets
in the U.S. In Fiscal 2008, the Company concluded that a valuation allowance was appropriate in
light of the significant
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negative evidence, which was objective and verifiable, such as cumulative
losses in recent fiscal years in our U.S. operations. While the Companys long-term financial
outlook in the U.S. remains positive, the Company concluded that its ability to rely on its
long-term outlook as to future taxable income was limited due to the relative weight of the
negative evidence from its recent U.S. cumulative losses. The Companys conclusion regarding the
need for a valuation allowance against U.S. deferred tax assets could change in the future based on
improvements in operating performance, which may result in the full or partial reversal of the
valuation allowance. The foreign valuation allowances relate to net operating loss carryforwards
that, in the opinion of management, are more likely than not to expire unutilized.
The net change in the total valuation allowances in Fiscal 2009, Fiscal 2008, the period from May
29, 2007 through February 2, 2008 and the period from February 4, 2007 through May 28, 2007 was an
increase of $20.4 million, $98.8 million, $1.8 million and $1.4 million, respectively.
U.S. income taxes have not been recognized on the balance of accumulated unremitted earnings from
the Companys foreign subsidiaries at January 30, 2010 of $204.9 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 30, 2010. Quantification of the deferred tax liability, if any, associated with
indefinitely reinvested earnings is not practicable. The Company recognized U.S. income tax
expense of $18.6 million on Fiscal 2009 earnings of its foreign subsidiaries. The Company expects
that future earnings from its foreign subsidiaries will be repatriated.
Accumulated other comprehensive income (loss), net of tax at January 30, 2010, January 31, 2009,
February 2, 2008 and May 28, 2007 includes $(1.1) million, $(1.9) million, $0.6 million and $5.7
million, respectively, related to the income tax effect of unrealized foreign currency translation
of certain long-term intercompany loans within the Companys foreign subsidiaries. The balance at
May 28, 2007 of $5.7 million was subsequently recorded to goodwill. This results in an increase of
$0.8 million for Fiscal 2009, a decrease of $2.5 million for Fiscal 2008, and increases of $0.6
million for the period from May 29, 2007 through February 2, 2008 and $0.1 million for the period
from February 4, 2007 through May 28, 2007. There was no income tax effect on accumulated other
comprehensive income (loss), net of tax related to unrealized gains on foreign currency translation
of Fiscal 2009 foreign earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in
thousands):
May 29, 2007 | Feb. 4, 2007 | |||||||||||||||
Through | Through | |||||||||||||||
Fiscal 2009 | Fiscal 2008 | Feb. 2, 2008 | May 28, 2007 | |||||||||||||
Beginning balance |
$ | 11,043 | $ | 9,617 | $ | 7,386 | $ | 6,481 | ||||||||
Additions based on tax positions related
to the current year |
1,987 | 2,070 | 1,418 | 748 | ||||||||||||
Additions for tax positions of prior years |
58 | 1 | 1,754 | 174 | ||||||||||||
Reductions for tax positions of prior
years |
| | (517 | ) | (17 | ) | ||||||||||
Statute expirations |
(351 | ) | (154 | ) | (239 | ) | | |||||||||
Settlements |
(494 | ) | (491 | ) | (185 | ) | | |||||||||
Ending balance |
$ | 12,243 | $ | 11,043 | $ | 9,617 | $ | 7,386 | ||||||||
The amount of unrecognized tax benefits at January 30, 2010 of $12.2 million, if recognized,
would favorably affect the Companys effective tax rate. These unrecognized tax benefits are
classified as Other long-term liabilities in the Companys Consolidated Balance Sheets.
Interest and penalties related to unrecognized tax benefits are included in income tax expense. The
Company had $2.4 million and $2.1 million for the payment of interest and penalties accrued at
January 30, 2010 and January 31, 2009, respectively. For Fiscal 2009, Fiscal 2008, the period from
May 29, 2007 through February 2, 2008 and the period from February 4, 2007 through May 28, 2007,
the Company
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recognized $0.3 million, $0.6 million, $(0.1) million and $0.2 million, respectively,
in interest and penalties.
We file income tax returns in the U.S. federal jurisdiction and various states and foreign
jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, and
local, or non-U.S. income tax examinations for years before Fiscal 2004. On January 31, 2007, the
Internal Revenue Service concluded its tax examination of our U.S. federal tax returns for Fiscal
2002 through 2005. We have also concluded tax examinations in our significant foreign tax
jurisdictions including the United Kingdom through Fiscal 2005, France through Fiscal 2004, and
Canada through Fiscal 2003.
Within the next 12 months, the Company estimates that the unrecognized tax benefits at January 30,
2010, could be reduced by approximately $1.1 million related to the settlement of federal, and
various state and local tax examinations for prior periods. Other than the expected settlement for
federal, state and local tax positions, the Company does not anticipate a significant change to the
total amount of unrecognized tax benefits within the next 12 months.
12. RELATED PARTY TRANSACTIONS
Upon consummation of the Merger, the Company entered into a management services agreement with
Apollo and the Sponsors. Under this management services agreement, Apollo and the Sponsors agreed
to provide to the Company certain investment banking, management, consulting, and financial
planning services on an ongoing basis for a fee of $3.0 million per year. Under this management
services agreement, Apollo and the Sponsors also agreed to provide to the Company certain financial
advisory and investment banking services from time to time in connection with major financial
transactions that may be undertaken by it or its subsidiaries in exchange for fees customary for
such services after taking into account expertise and relationships within the business and
financial community of Apollo and the Sponsors. Under this management services agreement, the
Company also agreed to provide customary indemnification. In addition, the Company paid a
transaction fee of $20.3 million in 2007 (including reimbursement of expenses) to Apollo and the
Sponsors for financial advisory services rendered in connection with the Merger, a portion of was
included as part of the purchase price. These services included assisting the Company in
structuring the Merger, taking into account tax considerations and optimal access to financing, and
assisting in the negotiation of the Companys material agreements and financing arrangements in
connection with the Merger. Upon consummation of the Merger, the Company paid Tri-Artisan Capital
Partners, LLC, a member of one of the Sponsors affiliated funds, an $8.9 million transaction fee
in 2007 in connection with certain advisory services rendered in connection with the Merger.
Included in Furniture, fixtures and equipment in the Companys Consolidated Balance Sheets and
Selling, general and administrative expenses in the Companys Consolidated Statements of
Operations and Comprehensive Income (Loss) are store planning and retail design consulting fees
paid to a company owned by a family member of one of the Companys executive officers. For Fiscal
2009, the Company paid fees of approximately $0.9 million, which included third party and
reimbursable charges of $0.1 million. The consulting arrangement was entered into during Fiscal
2008 and the fees paid during that period were not significant. This transaction was approved by
the Audit Committee of the Board of Directors.
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13. SELECTED QUARTERLY FINANCIAL DATA
(Unaudited, in thousands)
Fiscal Year Ended January 30, 2010 | ||||||||||||||||||||||||||
1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | Total Year | ||||||||||||||||||||||
Net sales |
$ | 293,098 | $ | 314,196 | $ | 324,404 | $ | 410,691 | $ | 1,342,389 | ||||||||||||||||
Gross profit |
141,919 | 156,108 | 166,110 | 218,456 | 682,593 | |||||||||||||||||||||
Impairment of assets (a) |
| | | 3,142 | 3,142 | |||||||||||||||||||||
Severance and transaction
related costs |
349 | 25 | 32 | 515 | 921 | |||||||||||||||||||||
Gain on early debt extinguishment |
| 17,104 | 16,096 | 3,212 | 36,412 | |||||||||||||||||||||
Interest expense, net |
45,234 | 45,329 | 43,716 | 43,139 | 177,418 | |||||||||||||||||||||
Income taxes (b) |
(1,679 | ) | 2,797 | 2,187 | 8,205 | 11,510 | ||||||||||||||||||||
Net Income (loss) |
(29,023 | ) | (3,733 | ) | 2,889 | 19,465 | (10,402 | ) |
(a) | Represents impairment charges related to long-lived assets. See Note 3 for detail of impairment charges. | |
(b) | Includes a $17.5 million charge for an increase in the valuation allowance related to deferred tax assets. |
Fiscal Year Ended January 31, 2009 | ||||||||||||||||||||||||||
1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | Total Year | ||||||||||||||||||||||
Net sales |
$ | 327,003 | $ | 359,973 | $ | 332,971 | $ | 393,013 | $ | 1,412,960 | ||||||||||||||||
Gross profit |
155,021 | 179,706 | 161,992 | 195,890 | 692,609 | |||||||||||||||||||||
Impairment of assets (a) |
| | | 523,990 | 523,990 | |||||||||||||||||||||
Severance and
transaction related
costs |
5,968 | 296 | (569 | ) | 10,233 | 15,928 | ||||||||||||||||||||
Interest expense (income) |
48,657 | 48,739 | 50,462 | 48,089 | 195,947 | |||||||||||||||||||||
Income taxes (b) |
(16,910 | ) | (6,831 | ) | (12,880 | ) | 38,130 | 1,509 | ||||||||||||||||||
Net loss |
(35,570 | ) | (16,931 | ) | (21,554 | ) | (569,537 | ) | (643,592 | ) |
(a) | Represents impairment charges related to goodwill, tradenames, investment in joint venture and long-lived assets. See Note 3 for detail of impairment charges. | |
(b) | Includes a $95.8 million charge for an increase in the valuation allowance related to deferred tax assets. |
14. SEGMENT REPORTING
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. Within its
North American division, the Company accounts 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 Consolidated Statements of Operations and Comprehensive Income (Loss). Within its
European division, the franchise fees the Company charges under the franchising agreements are
reported in Other income, net in the Companys Consolidated Statements of Operations and
Comprehensive Income (Loss). The Company accounts for the results of operations of Claires Nippon
under the equity method and includes the results within Other income, net in the Companys
Consolidated Statements of Operations and Comprehensive Income (Loss) within the Companys North
American division. Substantially all of interest expense on debt related to the Transactions is
recorded in the Companys North American division.
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x
Information about the Companys operations by segment is as follows (in thousands):
Successor Entity | Predecessor Entity | |||||||||||||||
Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4, 2007 | |||||||||||||
Ended | Ended | Through | Through | |||||||||||||
Jan. 30, 2010 | Jan. 31, 2009 | Feb. 2, 2008 | May 28, 2007 | |||||||||||||
Net sales: |
||||||||||||||||
North America |
$ | 850,313 | $ | 907,486 | $ | 702,986 | $ | 292,483 | ||||||||
Europe |
492,076 | 505,474 | 382,946 | 132,416 | ||||||||||||
Total net sales |
$ | 1,342,389 | $ | 1,412,960 | $ | 1,085,932 | $ | 424,899 | ||||||||
Depreciation and amortization: |
||||||||||||||||
North America |
$ | 47,574 | $ | 57,516 | $ | 42,846 | $ | 12,823 | ||||||||
Europe |
23,897 | 27,577 | 18,605 | 6,829 | ||||||||||||
Total depreciation and amortization |
$ | 71,471 | $ | 85,093 | $ | 61,451 | $ | 19,652 | ||||||||
Segment operating income (loss): |
||||||||||||||||
North America |
$ | 88,890 | $ | 63,490 | $ | 98,716 | $ | 46,569 | ||||||||
Europe |
57,287 | 30,292 | 52,594 | (693 | ) | |||||||||||
Total segment operating income (loss) |
$ | 146,177 | $ | 93,782 | $ | 151,310 | $ | 45,876 | ||||||||
Impairment of assets: |
||||||||||||||||
North America |
$ | 3,142 | $ | 339,500 | $ | 3,478 | $ | | ||||||||
Europe |
| 184,490 | | 73 | ||||||||||||
Total impairment charges |
$ | 3,142 | $ | 523,990 | $ | 3,478 | $ | 73 | ||||||||
Interest expense (income), net: |
||||||||||||||||
North America |
$ | 177,496 | $ | 196,732 | $ | 148,616 | $ | (3,898 | ) | |||||||
Europe |
(78 | ) | (785 | ) | (724 | ) | (978 | ) | ||||||||
Total interest expense (income), net |
$ | 177,418 | $ | 195,947 | $ | 147,892 | $ | (4,876 | ) | |||||||
Income (loss) before income taxes: |
||||||||||||||||
North America |
$ | (56,257 | ) | $ | (482,670 | ) | $ | (59,468 | ) | $ | (22,205 | ) | ||||
Europe |
57,365 | (159,413 | ) | 52,089 | 212 | |||||||||||
Total income (loss) before income taxes |
$ | 1,108 | $ | (642,083 | ) | $ | (7,379 | ) | $ | (21,993 | ) | |||||
Income taxes: |
||||||||||||||||
North America |
$ | 4,559 | $ | 1,613 | $ | (17,444 | ) | $ | 25,189 | |||||||
Europe |
6,951 | (104 | ) | 9,424 | (3,410 | ) | ||||||||||
Total income taxes |
$ | 11,510 | $ | 1,509 | $ | (8,020 | ) | $ | 21,779 | |||||||
Net income (loss): |
||||||||||||||||
North America |
$ | (60,816 | ) | $ | (484,283 | ) | $ | (42,024 | ) | $ | (47,394 | ) | ||||
Europe |
50,414 | (159,309 | ) | 42,665 | 3,622 | |||||||||||
Net income (loss) |
$ | (10,402 | ) | $ | (643,592 | ) | $ | 641 | $ | (43,772 | ) | |||||
Goodwill: |
||||||||||||||||
North America |
$ | 1,235,651 | $ | 1,229,941 | $ | 1,401,959 | $ | 170,650 | ||||||||
Europe |
314,405 | 314,405 | 438,908 | 30,902 | ||||||||||||
Total goodwill |
$ | 1,550,056 | $ | 1,544,346 | $ | 1,840,867 | $ | 201,552 | ||||||||
Long lived assets: |
||||||||||||||||
North America |
$ | 161,648 | $ | 197,839 | $ | 217,230 | $ | 189,226 | ||||||||
Europe |
66,336 | 68,232 | 92,379 | 87,249 | ||||||||||||
Total long lived assets |
$ | 227,984 | $ | 266,071 | $ | 309,609 | $ | 276,475 | ||||||||
Total assets: |
||||||||||||||||
North America |
$ | 1,505,727 | $ | 1,687,952 | $ | 2,600,540 | $ | 746,996 | ||||||||
Europe |
1,328,378 | 1,193,143 | 747,957 | 372,051 | ||||||||||||
Total assets |
$ | 2,834,105 | $ | 2,881,095 | $ | 3,348,497 | $ | 1,119,047 | ||||||||
89
Table of Contents
Successor Entity | Predecessor Entity | |||||||||||||||
Fiscal Year | Fiscal Year | May 29, 2007 | Feb. 4, 2007 | |||||||||||||
Ended | Ended | Through | Through | |||||||||||||
Jan. 30, 2010 | Jan. 31, 2009 | Feb. 2, 2008 | May 28, 2007 | |||||||||||||
Capital Expenditures |
||||||||||||||||
North America |
$ | 13,731 | $ | 42,623 | $ | 38,105 | $ | 19,697 | ||||||||
Europe |
11,221 | 16,782 | 20,379 | 8,291 | ||||||||||||
Total capital expenditures |
$ | 24,952 | $ | 59,405 | $ | 58,484 | $ | 27,988 | ||||||||
Identifiable assets are those assets that are identified with the operations of each segment.
Corporate assets consist mainly of cash and cash equivalents, investments in affiliated companies
and other assets. These assets are included within North America. The Predecessor Entity measured
segment operating income as gross profit less selling, general and administrative expenses. As a
result of the acquisition of the Company, the measure of segment operating income has been modified
to include other operating income and expenses, but exclude transaction-related costs. Segment
operating income for all periods presented above reflects the modified measure.
Excluded from operating income for the North American segment are impairment charges of $3.1
million, $339.5 million, $3.5 million, and $0 for Fiscal 2009, Fiscal 2008, the period from May 29,
2007 through February 2, 2008 and the period from February 4, 2007 through May 28, 2007,
respectively. Also excluded from operating income for the North American segment are severance and
transaction-related costs of $0.9 million, $9.9 million, $6.1 million and $72.7 million for Fiscal
2009, Fiscal 2008, the period from May 29, 2007 through February 2, 2008 and the period from
February 4, 2007 through May 28, 2007, respectively.
Excluded from operating income for the European segment are impairment charges of $0, $184.5
million, $0 and $0.1 million for Fiscal 2009, Fiscal 2008, the period from May 29, 2007 through
February 2, 2008 and the period from February 4, 2007 through May 28, 2007, respectively. Also
excluded from operating income for the European segment are severance and transaction-related costs
of $0, $6.0 million, $1.2 million and $0 for Fiscal 2009, Fiscal 2008, the period from May 29, 2007
through February 2, 2008 and the period from February 4, 2007 through May 28, 2007, respectively.
Approximately 16.9%, 18.1%, 19.6% and 17.3% of the Companys net sales were in the United Kingdom
in Fiscal 2009, Fiscal 2008, the period from May 29, 2007 through February 2, 2008 and the period
from February 4, 2007 through May 28, 2007, respectively. Approximately 12.1%, 11.6%, and 14.6% of
the Companys property and equipment, net, were located in the United Kingdom at January 30, 2010,
January 31, 2009 and February 2, 2008, respectively. Approximately 8.7%, 8.1%, 7.6% and 6.5% of
the Companys net sales were in France in Fiscal 2009, Fiscal 2008, the period from May 29, 2007
through February 2, 2008 and the period from February 4, 2007 through May 28, 2007, respectively.
Approximately 7.3%, 7.1% and 8.6% of the Companys property and equipment, net, were located in
France at January 30, 2010, January 31, 2009 and February 2, 2008, respectively.
15. 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 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.
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.
90
Table of Contents
Condensed Consolidating Balance Sheet
January 30, 2010
(in thousands)
January 30, 2010
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 109,138 | $ | (10,604 | ) | $ | 100,174 | $ | | $ | 198,708 | |||||||||
Inventories |
| 73,902 | 36,436 | | 110,338 | |||||||||||||||
Prepaid expenses |
509 | 14,217 | 18,147 | | 32,873 | |||||||||||||||
Other current assets |
1,030 | 19,527 | 7,679 | | 28,236 | |||||||||||||||
Total current assets |
110,677 | 97,042 | 162,436 | | 370,155 | |||||||||||||||
Property and equipment: |
||||||||||||||||||||
Land and building |
| 19,318 | | | 19,318 | |||||||||||||||
Furniture, fixtures and equipment |
2,137 | 109,405 | 51,060 | | 162,602 | |||||||||||||||
Leasehold improvements |
1,113 | 138,706 | 88,684 | | 228,503 | |||||||||||||||
3,250 | 267,429 | 139,744 | | 410,423 | ||||||||||||||||
Less accumulated depreciation and amortization |
(1,746 | ) | (117,101 | ) | (63,592 | ) | | (182,439 | ) | |||||||||||
1,504 | 150,328 | 76,152 | | 227,984 | ||||||||||||||||
Intercompany receivables |
| 148,072 | | (148,072 | ) | | ||||||||||||||
Investment in subsidiaries |
2,200,694 | (7,069 | ) | | (2,193,625 | ) | | |||||||||||||
Intangible assets, net |
286,000 | 13,017 | 281,010 | | 580,027 | |||||||||||||||
Deferred financing costs, net |
47,641 | | | | 47,641 | |||||||||||||||
Other assets |
18,099 | 3,230 | 36,913 | | 58,242 | |||||||||||||||
Goodwill |
| 1,235,651 | 314,405 | | 1,550,056 | |||||||||||||||
2,552,434 | 1,392,901 | 632,328 | (2,341,697 | ) | 2,235,966 | |||||||||||||||
Total assets |
$ | 2,664,615 | $ | 1,640,271 | $ | 870,916 | $ | (2,341,697 | ) | $ | 2,834,105 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Trade accounts payable |
$ | 2,335 | $ | 19,202 | $ | 24,123 | $ | | $ | 45,660 | ||||||||||
Current portion of long-term debt |
14,500 | | | | 14,500 | |||||||||||||||
Income taxes payable |
| 101 | 10,171 | | 10,272 | |||||||||||||||
Accrued interest payable |
14,644 | | | | 14,644 | |||||||||||||||
Accrued expenses and other current liabilities |
22,380 | 33,559 | 40,497 | | 96,436 | |||||||||||||||
Total current liabilities |
53,859 | 52,862 | 74,791 | | 181,512 | |||||||||||||||
Intercompany payables |
137,913 | | 10,159 | (148,072 | ) | | ||||||||||||||
Long-term debt |
2,313,378 | | | | 2,313,378 | |||||||||||||||
Revolving Credit Facility |
194,000 | | | | 194,000 | |||||||||||||||
Deferred tax liability |
| 106,386 | 15,759 | | 122,145 | |||||||||||||||
Deferred rent expense |
107 | 14,957 | 7,018 | | 22,082 | |||||||||||||||
Unfavorable lease obligations and other long-term
liabilities |
| 33,347 | 2,283 | | 35,630 | |||||||||||||||
2,645,398 | 154,690 | 35,219 | (148,072 | ) | 2,687,235 | |||||||||||||||
Stockholders equity (deficit): |
||||||||||||||||||||
Common stock |
| 367 | 2 | (369 | ) | | ||||||||||||||
Additional paid in capital |
616,086 | 1,445,795 | 876,798 | (2,322,593 | ) | 616,086 | ||||||||||||||
Accumulated other comprehensive income (loss),
net of tax |
2,625 | 2,101 | (4,134 | ) | 2,033 | 2,625 | ||||||||||||||
Retained deficit |
(653,353 | ) | (15,544 | ) | (111,760 | ) | 127,304 | (653,353 | ) | |||||||||||
(34,642 | ) | 1,432,719 | 760,906 | (2,193,625 | ) | (34,642 | ) | |||||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 2,664,615 | $ | 1,640,271 | $ | 870,916 | $ | (2,341,697 | ) | $ | 2,834,105 | |||||||||
91
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 |
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 | |||||||||
92
Table of Contents
Successor Entity
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Fiscal Year Ended January 30, 2010
(in thousands)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Fiscal Year Ended January 30, 2010
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 1,449,168 | $ | 550,199 | $ | (656,978 | ) | $ | 1,342,389 | |||||||||
Cost of sales, occupancy and buying expenses |
| 1,056,048 | 260,726 | (656,978 | ) | 659,796 | ||||||||||||||
Gross profit |
| 393,120 | 289,473 | | 682,593 | |||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Selling, general and administrative |
31,786 | 244,750 | 192,643 | | 469,179 | |||||||||||||||
Depreciation and amortization |
1,439 | 43,182 | 26,850 | | 71,471 | |||||||||||||||
Impairment of assets |
| 3,142 | | | 3,142 | |||||||||||||||
Severance and transaction-related costs |
921 | | | | 921 | |||||||||||||||
Other (income) expense |
(16,756 | ) | 19,714 | (7,192 | ) | | (4,234 | ) | ||||||||||||
17,390 | 310,788 | 212,301 | | 540,479 | ||||||||||||||||
Operating income (loss) |
(17,390 | ) | 82,332 | 77,172 | | 142,114 | ||||||||||||||
Gain on early debt extinguishment |
36,412 | | | | 36,412 | |||||||||||||||
Interest expense (income), net |
177,518 | (11 | ) | (89 | ) | | 177,418 | |||||||||||||
Income (loss) before income taxes |
(158,496 | ) | 82,343 | 77,261 | | 1,108 | ||||||||||||||
Income tax expense (benefit) |
2,503 | 1,916 | 7,091 | | 11,510 | |||||||||||||||
Income (loss) from continuing operations |
(160,999 | ) | 80,427 | 70,170 | | (10,402 | ) | |||||||||||||
Equity in earnings (loss) of subsidiaries |
150,597 | 7,101 | | (157,698 | ) | | ||||||||||||||
Net income (loss) |
(10,402 | ) | 87,528 | 70,170 | (157,698 | ) | (10,402 | ) | ||||||||||||
Foreign currency translation adjustments and
interest rate swap adjustments, net |
24,944 | 4,426 | 16,457 | (20,883 | ) | 24,944 | ||||||||||||||
Comprehensive income |
$ | 14,542 | $ | 91,954 | $ | 86,627 | $ | (178,581 | ) | $ | 14,542 | |||||||||
Successor Entity
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Fiscal Year Ended January 31, 2009
(in thousands)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Fiscal Year Ended January 31, 2009
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 1,482,874 | $ | 567,530 | $ | (637,444 | ) | $ | 1,412,960 | |||||||||
Cost of sales, occupancy and buying expenses |
| 1,078,308 | 279,487 | (637,444 | ) | 720,351 | ||||||||||||||
Gross profit |
| 404,566 | 288,043 | | 692,609 | |||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Selling, general and administrative |
32,720 | 271,281 | 214,232 | | 518,233 | |||||||||||||||
Depreciation and amortization |
3,013 | 50,584 | 31,496 | | 85,093 | |||||||||||||||
Impairment of assets |
159,500 | 180,000 | 184,490 | | 523,990 | |||||||||||||||
Severance and transaction-related costs |
2,374 | 7,553 | 6,001 | | 15,928 | |||||||||||||||
Other (income) expense |
(19,778 | ) | 21,740 | (6,461 | ) | | (4,499 | ) | ||||||||||||
177,829 | 531,158 | 429,758 | | 1,138,745 | ||||||||||||||||
Operating loss |
(177,829 | ) | (126,592 | ) | (141,715 | ) | | (446,136 | ) | |||||||||||
Interest expense (income), net |
197,089 | (261 | ) | (881 | ) | | 195,947 | |||||||||||||
Loss before income taxes |
(374,918 | ) | (126,331 | ) | (140,834 | ) | | (642,083 | ) | |||||||||||
Income tax expense (benefit) |
(18,143 | ) | 19,904 | (252 | ) | | 1,509 | |||||||||||||
Loss from continuing operations |
(356,775 | ) | (146,235 | ) | (140,582 | ) | | (643,592 | ) | |||||||||||
Equity in earnings (loss) of subsidiaries |
(286,817 | ) | 7,706 | | 279,111 | | ||||||||||||||
Net loss |
(643,592 | ) | (138,529 | ) | (140,582 | ) | 279,111 | (643,592 | ) | |||||||||||
Foreign currency translation adjustments and
interest rate swap adjustments, net |
(25,677 | ) | (5,285 | ) | (38,137 | ) | 43,422 | (25,677 | ) | |||||||||||
Comprehensive loss |
$ | (669,269 | ) | $ | (143,814 | ) | $ | (178,719 | ) | $ | 322,533 | $ | (669,269 | ) | ||||||
93
Table of Contents
Successor Entity
Condensed Consolidating Statement of Operations and Comprehensive Income
For The Period May 29, 2007 Through February 2, 2008
(in thousands)
Condensed Consolidating Statement of Operations and Comprehensive Income
For The Period May 29, 2007 Through February 2, 2008
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 1,224,858 | $ | 431,615 | $ | (570,541 | ) | $ | 1,085,932 | |||||||||
Cost of sales, occupancy and buying expenses |
| 893,847 | 198,078 | (570,541 | ) | 521,384 | ||||||||||||||
Gross profit |
| 331,011 | 233,537 | | 564,548 | |||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Selling, general and administrative |
18,897 | 188,066 | 147,912 | | 354,875 | |||||||||||||||
Depreciation and amortization |
2,136 | 37,930 | 21,385 | | 61,451 | |||||||||||||||
Impairment of assets |
| 3,478 | | | 3,478 | |||||||||||||||
Severance and transaction-related costs |
6,090 | | 1,229 | | 7,319 | |||||||||||||||
Other (income) expense |
(8,570 | ) | 9,595 | (4,113 | ) | | (3,088 | ) | ||||||||||||
18,553 | 239,069 | 166,413 | | 424,035 | ||||||||||||||||
Operating income (loss) |
(18,553 | ) | 91,942 | 67,124 | | 140,513 | ||||||||||||||
Interest expense (income), net |
149,527 | (711 | ) | (924 | ) | | 147,892 | |||||||||||||
Income (loss) before income taxes |
(168,080 | ) | 92,653 | 68,048 | | (7,379 | ) | |||||||||||||
Income tax expense (benefit) |
(56,335 | ) | 38,035 | 10,280 | | (8,020 | ) | |||||||||||||
Income (loss) from continuing operations |
(111,745 | ) | 54,618 | 57,768 | | 641 | ||||||||||||||
Equity in earnings of subsidiaries |
112,386 | 6,371 | | (118,757 | ) | | ||||||||||||||
Net income |
641 | 60,989 | 57,768 | (118,757 | ) | 641 | ||||||||||||||
Foreign currency translation adjustments and
interest rate swap
adjustments, net |
3,358 | 2,959 | 17,513 | (20,472 | ) | 3,358 | ||||||||||||||
Comprehensive income |
$ | 3,999 | $ | 63,948 | $ | 75,281 | $ | (139,229 | ) | $ | 3,999 | |||||||||
Predecessor Entity
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Period February 4, 2007 Through May 28, 2007
(in thousands)
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Period February 4, 2007 Through May 28, 2007
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 540,394 | $ | 149,666 | $ | (265,161 | ) | $ | 424,899 | |||||||||
Cost of sales, occupancy and buying expenses |
| 397,435 | 74,164 | (265,161 | ) | 206,438 | ||||||||||||||
Gross profit |
| 142,959 | 75,502 | | 218,461 | |||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Selling, general and administrative |
7,021 | 84,633 | 62,755 | | 154,409 | |||||||||||||||
Depreciation and amortization |
367 | 11,504 | 7,781 | | 19,652 | |||||||||||||||
Impairment of assets |
| | 73 | | 73 | |||||||||||||||
Severance and transaction-related costs |
72,672 | | | | 72,672 | |||||||||||||||
Other (income) expense |
(8,054 | ) | 5,926 | 652 | | (1,476 | ) | |||||||||||||
72,006 | 102,063 | 71,261 | | 245,330 | ||||||||||||||||
Operating income (loss) |
(72,006 | ) | 40,896 | 4,241 | | (26,869 | ) | |||||||||||||
Interest expense (income), net |
(3,235 | ) | (376 | ) | (1,265 | ) | | (4,876 | ) | |||||||||||
Income (loss) before income taxes |
(68,771 | ) | 41,272 | 5,506 | | (21,993 | ) | |||||||||||||
Income tax expense (benefit) |
8,369 | 15,361 | (1,951 | ) | | 21,779 | ||||||||||||||
Income (loss) from continuing operations |
(77,140 | ) | 25,911 | 7,457 | | (43,772 | ) | |||||||||||||
Equity in earnings of subsidiaries |
33,368 | 2,775 | | (36,143 | ) | | ||||||||||||||
Net income (loss) |
(43,772 | ) | 28,686 | 7,457 | (36,143 | ) | (43,772 | ) | ||||||||||||
Foreign currency translation adjustments |
8,440 | 2,861 | 8,478 | (11,339 | ) | 8,440 | ||||||||||||||
Comprehensive income (loss) |
$ | (35,332 | ) | $ | 31,547 | $ | 15,935 | $ | (47,482 | ) | $ | (35,332 | ) | |||||||
94
Table of Contents
Successor Entity
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended January 30, 2010
(in thousands)
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended January 30, 2010
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | (10,402 | ) | $ | 87,528 | $ | 70,170 | $ | (157,698 | ) | $ | (10,402 | ) | |||||||
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Equity in (earnings) loss of subsidiaries |
(150,597 | ) | (7,101 | ) | | 157,698 | | |||||||||||||
Depreciation and amortization |
1,439 | 43,182 | 26,850 | | 71,471 | |||||||||||||||
Impairment of assets |
| 3,142 | | | 3,142 | |||||||||||||||
Amortization of lease rights and other assets |
| 49 | 2,150 | | 2,199 | |||||||||||||||
Amortization of debt issuance costs |
10,398 | | | | 10,398 | |||||||||||||||
Payment in kind interest expense |
39,013 | | | | 39,013 | |||||||||||||||
Net accretion of favorable (unfavorable) lease obligations |
| (2,550 | ) | 399 | | (2,151 | ) | |||||||||||||
(Gain) loss on sale/retirement of property and equipment,
net |
(1,430 | ) | 20 | 21 | | (1,389 | ) | |||||||||||||
Gain on early debt extinguishment |
(36,412 | ) | | | | (36,412 | ) | |||||||||||||
Gain on sale of intangible assets/lease rights |
| | (506 | ) | | (506 | ) | |||||||||||||
Stock compensation expense |
4,942 | | 1,717 | | 6,659 | |||||||||||||||
(Increase) decrease in: |
||||||||||||||||||||
Inventories |
| (457 | ) | (3,624 | ) | | (4,081 | ) | ||||||||||||
Prepaid expenses |
(76 | ) | 425 | 1,448 | | 1,797 | ||||||||||||||
Other assets |
134 | (4,926 | ) | (727 | ) | | (5,519 | ) | ||||||||||||
Increase (decrease) in: |
||||||||||||||||||||
Trade accounts payable |
(8 | ) | (937 | ) | (8,302 | ) | | (9,247 | ) | |||||||||||
Income taxes payable |
| 248 | 5,262 | | 5,510 | |||||||||||||||
Accrued interest payable |
1,331 | | (3 | ) | | 1,328 | ||||||||||||||
Accrued expenses and other current liabilities |
(2,432 | ) | (2,223 | ) | 1,029 | | (3,626 | ) | ||||||||||||
Deferred income taxes |
2,483 | 13 | 1,618 | | 4,114 | |||||||||||||||
Deferred rent expense |
(591 | ) | 2,425 | 1,344 | | 3,178 | ||||||||||||||
Net cash provided by (used in) operating activities |
(142,208 | ) | 118,838 | 98,846 | | 75,476 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Acquisition of property and equipment, net |
(120 | ) | (12,209 | ) | (12,623 | ) | | (24,952 | ) | |||||||||||
Proceeds from sale of property and equipment |
1,830 | | | | 1,830 | |||||||||||||||
Acquisition of intangible assets/lease rights |
| (111 | ) | (435 | ) | | (546 | ) | ||||||||||||
Proceeds from sale of intangible assets/lease rights |
| | 2,409 | | 2,409 | |||||||||||||||
Net cash provided by (used in) investing activities |
1,710 | (12,320 | ) | (10,649 | ) | | (21,259 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Credit Facility payments |
(14,500 | ) | | | | (14,500 | ) | |||||||||||||
Purchase of senior subordinated notes |
(46,091 | ) | | | | (46,091 | ) | |||||||||||||
Intercompany activity, net |
155,813 | (117,125 | ) | (38,688 | ) | | | |||||||||||||
Net cash provided by (used in) financing activities |
95,222 | (117,125 | ) | (38,688 | ) | | (60,591 | ) | ||||||||||||
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
| (208 | ) | 716 | | 508 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
(45,276 | ) | (10,815 | ) | 50,225 | | (5,866 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
154,414 | 211 | 49,949 | | 204,574 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 109,138 | $ | (10,604 | ) | $ | 100,174 | $ | | $ | 198,708 | |||||||||
95
Table of Contents
Successor Entity
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended January 31, 2009
(in thousands)
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended January 31, 2009
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net loss |
$ | (643,592 | ) | $ | (138,529 | ) | $ | (140,582 | ) | $ | 279,111 | $ | (643,592 | ) | ||||||
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Equity in (earnings) loss of subsidiaries |
286,817 | (7,706 | ) | | (279,111 | ) | | |||||||||||||
Depreciation and amortization |
3,013 | 50,584 | 31,496 | | 85,093 | |||||||||||||||
Impairment of assets |
159,500 | 180,000 | 184,490 | | 523,990 | |||||||||||||||
Amortization of lease rights and other assets |
| 54 | 2,005 | | 2,059 | |||||||||||||||
Amortization of debt issuance costs |
10,567 | | | | 10,567 | |||||||||||||||
Payment in kind interest expense |
24,522 | | | | 24,522 | |||||||||||||||
Net accretion of favorable (unfavorable) lease
obligations |
| (2,424 | ) | 568 | | (1,856 | ) | |||||||||||||
Gain on sale/retirement of property and equipment, net |
(23 | ) | (55 | ) | (105 | ) | | (183 | ) | |||||||||||
Gain on sale of intangible assets/lease rights |
| | (1,372 | ) | | (1,372 | ) | |||||||||||||
Stock compensation expense |
6,203 | | 2,023 | | 8,226 | |||||||||||||||
(Increase) decrease in: |
||||||||||||||||||||
Inventories |
| 11,506 | (5,024 | ) | | 6,482 | ||||||||||||||
Prepaid expenses |
(31 | ) | 624 | (1,680 | ) | | (1,087 | ) | ||||||||||||
Other assets |
(358 | ) | (822 | ) | (7,905 | ) | | (9,085 | ) | |||||||||||
Increase (decrease) in: |
||||||||||||||||||||
Trade accounts payable |
1,582 | 3,225 | 2,565 | | 7,372 | |||||||||||||||
Income taxes payable |
8,383 | (16,239 | ) | (2,854 | ) | | (10,710 | ) | ||||||||||||
Accrued interest payable |
(6,222 | ) | | 3 | | (6,219 | ) | |||||||||||||
Accrued expenses and other current liabilities |
4,507 | (3,271 | ) | 1,796 | | 3,032 | ||||||||||||||
Deferred income taxes |
| 716 | (5,525 | ) | | (4,809 | ) | |||||||||||||
Deferred rent expense |
(558 | ) | 7,182 | 2,319 | | 8,943 | ||||||||||||||
Net cash provided by (used in) operating activities |
(145,690 | ) | 84,845 | 62,218 | | 1,373 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Acquisition of property and equipment, net |
(248 | ) | (41,013 | ) | (18,144 | ) | | (59,405 | ) | |||||||||||
Proceeds from sale of property and equipment |
104 | | | | 104 | |||||||||||||||
Acquisition of intangible assets/lease rights |
| (177 | ) | (1,794 | ) | | (1,971 | ) | ||||||||||||
Proceeds from sale of intangible assets/lease rights |
| | 516 | | 516 | |||||||||||||||
Net cash used in investing activities |
(144 | ) | (41,190 | ) | (19,422 | ) | | (60,756 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Credit Facility proceeds |
194,000 | | | | 194,000 | |||||||||||||||
Credit Facility payments |
(14,500 | ) | | | | (14,500 | ) | |||||||||||||
Intercompany activity, net |
94,913 | (45,557 | ) | (49,356 | ) | | | |||||||||||||
Net cash provided by (used in) financing activities |
274,413 | (45,557 | ) | (49,356 | ) | | 179,500 | |||||||||||||
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
| 221 | (1,738 | ) | | (1,517 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents |
128,579 | (1,681 | ) | (8,298 | ) | | 118,600 | |||||||||||||
Cash and cash equivalents at beginning of period |
25,835 | 1,892 | 58,247 | | 85,974 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 154,414 | $ | 211 | $ | 49,949 | $ | | $ | 204,574 | ||||||||||
96
Table of Contents
Successor Entity
Condensed Consolidating Statement of Cash Flows
For The Period May 29, 2007 through February 2, 2008
(in thousands)
Condensed Consolidating Statement of Cash Flows
For The Period May 29, 2007 through February 2, 2008
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 641 | $ | 60,989 | $ | 57,768 | $ | (118,757 | ) | $ | 641 | |||||||||
Adjustments to reconcile net income to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(112,386 | ) | (6,371 | ) | | 118,757 | | |||||||||||||
Depreciation and amortization |
2,136 | 37,930 | 21,385 | | 61,451 | |||||||||||||||
Impairment of assets |
| 3,478 | | | 3,478 | |||||||||||||||
Amortization of lease rights and other assets |
| 37 | 1,276 | | 1,313 | |||||||||||||||
Amortization of debt issuance costs |
7,079 | | | | 7,079 | |||||||||||||||
Loss on sale/retirement of property and
equipment, net |
23 | 368 | 201 | | 592 | |||||||||||||||
Stock compensation expense |
5,526 | | | | 5,526 | |||||||||||||||
(Increase) decrease in: |
||||||||||||||||||||
Inventories |
| 13,057 | 3,781 | | 16,838 | |||||||||||||||
Prepaid expenses |
596 | (13,403 | ) | 6,256 | | (6,551 | ) | |||||||||||||
Other assets |
18,942 | (12,039 | ) | (38,047 | ) | | (31,144 | ) | ||||||||||||
Increase (decrease) in: |
||||||||||||||||||||
Trade accounts payable |
(570 | ) | (10,579 | ) | (21,838 | ) | | (32,987 | ) | |||||||||||
Income taxes payable |
(9,252 | ) | 11,508 | 1,820 | | 4,076 | ||||||||||||||
Accrued interest payable |
19,534 | | (3 | ) | | 19,531 | ||||||||||||||
Accrued expenses and other current liabilities |
(87,819 | ) | 4,624 | 10,135 | | (73,060 | ) | |||||||||||||
Deferred income taxes |
| (24,684 | ) | 6,176 | | (18,508 | ) | |||||||||||||
Deferred rent expense |
(372 | ) | 4,971 | 1,275 | | 5,874 | ||||||||||||||
Net cash provided by (used in) operating activities |
(155,922 | ) | 69,886 | 50,185 | | (35,851 | ) | |||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Acquisition of property and equipment, net |
(160 | ) | (40,224 | ) | (18,100 | ) | | (58,484 | ) | |||||||||||
Acquisition of Predecessor Entity |
(2,857,411 | ) | (79,065 | ) | (116,858 | ) | | (3,053,334 | ) | |||||||||||
Acquisition of intangible assets/lease rights |
| 20 | (574 | ) | | (554 | ) | |||||||||||||
Net cash used in investing activities |
(2,857,571 | ) | (119,269 | ) | (135,532 | ) | | (3,112,372 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Credit Facility proceeds |
1,450,000 | | | | 1,450,000 | |||||||||||||||
Credit Facility payments |
(7,250 | ) | | | | (7,250 | ) | |||||||||||||
Note offerings proceeds |
935,000 | | | | 935,000 | |||||||||||||||
Capital contribution |
595,675 | | | | 595,675 | |||||||||||||||
Option conversion payment |
(7,924 | ) | | | | (7,924 | ) | |||||||||||||
Financing fees paid |
(77,439 | ) | | | | (77,439 | ) | |||||||||||||
Dividends paid |
(7,252 | ) | | | | (7,252 | ) | |||||||||||||
Intercompany activity, net |
(29,636 | ) | (79,809 | ) | 109,445 | | | |||||||||||||
Net cash provided by (used in) financing activities |
2,851,174 | (79,809 | ) | 109,445 | | 2,880,810 | ||||||||||||||
Effect of foreign currency exchange rate changes on
cash and cash equivalents |
(253 | ) | (126 | ) | 3,290 | | 2,911 | |||||||||||||
Net increase (decrease) in cash and cash equivalents |
(162,572 | ) | (129,318 | ) | 27,388 | | (264,502 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
188,407 | 131,210 | 30,859 | | 350,476 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 25,835 | $ | 1,892 | $ | 58,247 | $ | | $ | 85,974 | ||||||||||
97
Table of Contents
Predecessor Entity
Condensed Consolidating Statement of Cash Flows
For The Period February 4, 2007 Through May 28, 2007
(in thousands)
Condensed Consolidating Statement of Cash Flows
For The Period February 4, 2007 Through May 28, 2007
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | (43,772 | ) | $ | 28,686 | $ | 7,457 | $ | (36,143 | ) | $ | (43,772 | ) | |||||||
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(33,368 | ) | (2,775 | ) | | 36,143 | | |||||||||||||
Depreciation and amortization |
367 | 11,504 | 7,781 | | 19,652 | |||||||||||||||
Impairment of assets |
| | 73 | | 73 | |||||||||||||||
Amortization of lease rights and other assets |
| 39 | 583 | | 622 | |||||||||||||||
Loss on sale / retirement of property and
equipment, net |
| 873 | 328 | | 1,201 | |||||||||||||||
Excess tax benefit from stock compensation |
(2,885 | ) | | | | (2,885 | ) | |||||||||||||
Stock compensation expense |
8,946 | | | | 8,946 | |||||||||||||||
(Increase) decrease in: |
||||||||||||||||||||
Inventories |
| (9,551 | ) | (1,381 | ) | | (10,932 | ) | ||||||||||||
Prepaid expenses |
465 | 11,266 | (5,342 | ) | | 6,389 | ||||||||||||||
Other assets |
(941 | ) | 1,164 | (3,164 | ) | | (2,941 | ) | ||||||||||||
Increase (decrease) in: |
||||||||||||||||||||
Trade accounts payable |
(90 | ) | 7,490 | 23,802 | | 31,202 | ||||||||||||||
Income taxes payable |
3,754 | (9,903 | ) | (5,583 | ) | | (11,732 | ) | ||||||||||||
Accrued expenses and other current liabilities |
54,909 | (8,666 | ) | (6,516 | ) | | 39,727 | |||||||||||||
Deferred income taxes |
| 7,015 | (292 | ) | | 6,723 | ||||||||||||||
Deferred rent expense |
| 634 | (261 | ) | | 373 | ||||||||||||||
Net cash provided by (used in) operating activities |
(12,615 | ) | 37,776 | 17,485 | | 42,646 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Acquisition
of property and equipment, net |
(171 | ) | (18,822 | ) | (8,995 | ) | | (27,988 | ) | |||||||||||
Acquisition
of intangible assets/lease rights |
| (20 | ) | (61 | ) | | (81 | ) | ||||||||||||
Net cash used in investing activities |
(171 | ) | (18,842 | ) | (9,056 | ) | | (28,069 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Exercised stock option proceeds |
177 | | | | 177 | |||||||||||||||
Excess tax benefit from stock compensation |
2,885 | | | | 2,885 | |||||||||||||||
Dividends paid |
(9,065 | ) | | | | (9,065 | ) | |||||||||||||
Intercompany
activity, net |
13,118 | 96,485 | (109,603 | ) | | | ||||||||||||||
Net cash provided by (used in) financing activities |
7,115 | 96,485 | (109,603 | ) | | (6,003 | ) | |||||||||||||
Effect of foreign currency exchange rate changes on
cash and cash equivalents |
(20 | ) | (16 | ) | 1,061 | | 1,025 | |||||||||||||
Net increase (decrease) in cash and cash equivalents |
(5,691 | ) | 115,403 | (100,113 | ) | | 9,599 | |||||||||||||
Cash and cash equivalents at beginning of period |
194,098 | 15,807 | 130,972 | | 340,877 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 188,407 | $ | 131,210 | $ | 30,859 | $ | | $ | 350,476 | ||||||||||
98
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A(T). Controls and Procedures
Disclosure Controls and Procedures
The Companys management, including its Chief Executive Officer and its Chief Financial Officer,
performed an evaluation of the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act ) as of January 30, 2010.
Disclosure controls and procedures are designed to provide reasonable assurance that the
information required to be disclosed by the Company in the reports that it files or submits under
the Securities Exchange Act of 1934, as amended, has been appropriately recorded, processed,
summarized, and reported on a timely basis and are effective in ensuring that such information is
accumulated and communicated to the Companys management, including the Companys Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Based upon that evaluation, the Companys management, including the Chief Executive Officer and the
Chief Financial Officer, concluded that the Companys disclosure controls and procedures were
effective as of January 30, 2010.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f), and 15d 15(f) under the
Exchange Act. Under the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal controls over financial reporting based on the framework in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control Integrated
Framework, our management concluded that our internal control over financial reporting was
effective as of January 30, 2010.
This Annual Report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permits the Company to provide only
managements report in this Annual Report.
Changes in Internal Controls over Financial Reporting
There were no changes in the Companys internal control over financial reporting during our last
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information
None.
PART III.
An amendment to this Annual Report on Form 10-K to include Part III of the Form 10-K will be filed
with the Securities and Exchange Commission no later than 120 days after the end of Fiscal 2009.
99
Table of Contents
PART IV.
Item 15. Exhibits, Financial Statement Schedules
(a) List of documents filed as part of this report.
1. | Financial Statements |
Page No. | ||||
49 | ||||
50 | ||||
51 | ||||
52 | ||||
53 | ||||
55 |
2. | Financial Statement Schedules |
All schedules have been omitted because the required information is included in the Consolidated
Financial Statements or the notes thereto, or the omitted schedules are not applicable.
3. | Exhibits |
3.1
|
Articles of Incorporation of Claires Stores, Inc.* | |
3.2
|
By-laws of Claires Stores, Inc.* | |
3.3
|
Certificate of Incorporation of Afterthoughts Merchandising Corp.* | |
3.4
|
By-laws of Afterthoughts Merchandising Corp.* | |
3.5
|
Certificate of Incorporation of BMS Distributing Corp.* | |
3.6
|
By-laws of BMS Distributing Corp.* | |
3.7
|
Certificate of Incorporation of CBI Distributing Corp.* | |
3.8
|
By-laws of CBI Distributing Corp.* | |
3.9
|
Articles of Incorporation of Claires Boutiques, Inc.* |
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3.10
|
By-laws of Claires Boutiques, Inc.* | |
3.11
|
Certificate of Incorporation of Claires Canada Corp.* | |
3.12
|
By-laws of Claires Canada Corp.* | |
3.13
|
Certificate of Incorporation of Claires Puerto Rico Corp.* | |
3.14
|
By-laws of Claires Puerto Rico Corp.* | |
3.15
|
Certificate of Incorporation of Sassy Doo!, Inc.* | |
3.16
|
By-laws of Sassy Doo!, Inc.* | |
4.1
|
Senior Notes Indenture, dated as of May 29, 2007, between Bauble Acquisition Sub, Inc. and The Bank of New York, as Trustee* | |
4.2
|
Senior Toggle Notes Indenture, dated as of May 29, 2007, between Bauble Acquisition Sub, Inc. and The Bank of New York, as Trustee* | |
4.3
|
Senior Subordinated Notes Indenture, dated as of May 29, 2007, between Bauble Acquisition Sub, Inc. and The Bank of New York, as Trustee* | |
4.4
|
Senior Notes Supplemental Indenture, dated as of May 29, 2007, by and among Claires Stores, Inc., the guarantors listed on Exhibit A thereto and The Bank of New York, as Trustee, to the Senior Notes Indenture, dated as of May 29, 2007, between Bauble Acquisition Sub, Inc. and The Bank of New York, as Trustee* | |
4.5
|
Senior Toggle Notes Supplemental Indenture, dated as of May 29, 2007, by and among Claires Stores, Inc., the guarantors listed on Exhibit A thereto and The Bank of New York, as Trustee, to the Senior Toggle Notes Indenture, dated as of May 29, 2007, between Bauble Acquisition Sub, Inc. and The Bank of New York, as Trustee* | |
4.6
|
Senior Subordinated Notes Supplemental Indenture, dated as of May 29, 2007, by and among Claires Stores, Inc., the guarantors listed on Exhibit A thereto and The Bank of New York, as Trustee, to the Senior Subordinated Notes Indenture, dated as of May 29, 2007, between Bauble Acquisition Sub, Inc. and The Bank of New York, as Trustee* | |
4.7
|
Form of 9.25% Senior Notes due 2015* | |
4.8
|
Form of 9.625%/10.375% Senior Toggle Notes due 2015* | |
4.9
|
Form of 10.50% Senior Subordinated Notes due 2017* | |
4.10
|
Senior Notes Registration Rights Agreement, dated May 29, 2007, by and among Claires Stores, Inc., the Guarantors listed on Schedule I thereto and Bear, Stearns & Co. Inc., Credit Suisse Securities (USA) LLC, Lehman Brothers Inc., ABN AMRO Incorporated, Mizuho Securities USA Inc. and Natexis Bleichroeder Inc.* | |
4.11
|
Senior Subordinated Notes Registration Rights Agreement, dated May 29, 2007, by and among Claires Stores, Inc., the Guarantors listed on Schedule I thereto and Bear, Stearns & Co. Inc., Credit Suisse Securities (USA) LLC, Lehman Brothers Inc., ABN AMRO Incorporated, Mizuho Securities USA Inc. and Natexis Bleichroeder Inc.* | |
10.1
|
Credit Agreement, dated as of May 29, 2007, among Bauble Holdings Corp., Bauble Acquisition Sub, Inc. (to be merged with and into Claires Stores, Inc.), as |
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Borrower, the Lenders party thereto, Credit Suisse, as Administrative Agent, Bear Stearns Corporate Lending Inc. and Mizuho Corporate Bank, Ltd., as Co-Syndication Agents, Lehman Commercial Paper Inc. and LaSalle Bank National Association, as Co-Documentation Agents, and Bear, Stearns & Co. Inc., Credit Suisse Securities (USA) LLC, and Lehman Brothers Inc., as Joint Bookrunners and Joint Lead Arrangers* | ||
10.2
|
Management Services Agreement, dated as of May 29, 2007, among Claires Stores, Inc., Bauble Holdings Corp. and Apollo Management VI, L.P. and Tri-Artisan Capital Partners, LLC and TACP Investments Claires LLC* | |
10.3
|
Claires Inc. Amended and Restated Stock Incentive Plan, dated June 29, 2007* | |
10.4
|
Standard Form of Option Grant Letter (Target Performance Option and Stretch Performance Option)* | |
10.5
|
Standard Form of Option Grant Letter (Target Performance Option)* | |
10.6
|
Standard Form of Director Option Grant Letter* | |
10.7
|
Employment Agreement with Eugene S. Kahn* | |
10.8
|
Employment Agreement with James Conroy* | |
10.9
|
Amendment to Employment Agreement with James Conroy** | |
10.10
|
Employment Agreement with Kenny Wilson*** | |
10.11
|
Lease Agreement, dated as of February 19, 2010, by and between AGNL Bling, L.L.C. and Claires Boutiques, Inc. **** | |
21.1
|
Subsidiaries of Claires Stores, Inc.***** | |
24
|
Power of Attorney (included on signature page) | |
31.1
|
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)***** | |
31.2
|
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 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****** |
(*) | Filed previously as exhibit to the Registration Statement on Form S-4 (File No. 333-148108) by the Company on December 17, 2007. | |
(**) | Filed previously as exhibit to Form 8-K by the Company on April 22, 2009. | |
(***) | Filed previously as exhibit to Form 10-K/A by the Company on May 27, 2009. | |
(****) | Filed previously as exhibit to Form 8-K by the Company date February 25, 2010. | |
(*****) | Filed herewith. | |
(******) | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) 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. |
||||
April 13, 2010 | By: | /s/ Eugene S. Kahn | ||
Eugene S. Kahn, Chief Executive Officer (principal executive officer) | ||||
April 13, 2010 | By: | /s/ J. Per Brodin | ||
J. Per Brodin, Senior Vice President and Chief Financial Officer (principal financial and accounting officer) | ||||
POWER OF ATTORNEY
We, the undersigned, hereby constitute J. Per Brodin and Greg Hackman, or either of them, our
true and lawful attorneys-in-fact with full power to sign for us in our name and in the capacity
indicated below any and all amendments and supplements to this report, and to file the same, with
exhibits thereto, and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or their substitutes,
each acting alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
April 13, 2010 | /s/ Peter Copses | |||
Peter Copses, Chairman of the Board of Directors | ||||
April 13, 2010 | /s/ Eugene S. Kahn | |||
Eugene S. Kahn, Chief Executive Officer and Director | ||||
April 13, 2010 | /s/ Lance Milken | |||
Lance Milken, Director | ||||
April 13, 2010 | /s/ George Golleher | |||
George Golleher, Director | ||||
April 13, 2010 | /s/ Robert J. DiNicola | |||
Robert J. DiNicola, Director | ||||
April 13, 2010 | /s/ Rohit Manocha | |||
Rohit Manocha, Director | ||||
April 13, 2010 | /s/ Ron Marshall | |||
Ron Marshall, Director | ||||
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INDEX TO EXHIBITS
EXHIBIT NO. | DESCRIPTION | |
21.1
|
Claires Stores, Inc. Subsidiaries. | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a). | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 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. |
104