Attached files
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EX-32.1 - EX-32.1 - CLAIRES STORES INC | g24563exv32w1.htm |
EX-31.2 - EX-31.2 - CLAIRES STORES INC | g24563exv31w2.htm |
EX-31.1 - EX-31.1 - CLAIRES STORES INC | g24563exv31w1.htm |
EX-32.2 - EX-32.2 - CLAIRES STORES INC | g24563exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended July 31, 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
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files ) Yes o No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of September 1, 2010, 100 shares of the Registrants common stock, $0.001 par value, were
outstanding.
CLAIRES STORES, INC. AND SUBSIDIARIES
INDEX
INDEX
PAGE NO. | ||||||||
3 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
19 | ||||||||
29 | ||||||||
30 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
33 | ||||||||
Ex-31.1 Section 302 Certification of CEO |
35 | |||||||
Ex-31.2 Section 302 Certification of CFO |
36 | |||||||
Ex-32.1 Section 906 Certification of CEO |
37 | |||||||
Ex-32.2 Section 906 Certification of CFO |
38 | |||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 2010 | January 30, 2010 | |||||||
(In thousands, except share and per share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 160,132 | $ | 198,708 | ||||
Inventories |
127,768 | 110,338 | ||||||
Prepaid expenses |
32,383 | 32,873 | ||||||
Other current assets |
23,298 | 28,236 | ||||||
Total current assets |
343,581 | 370,155 | ||||||
Property and equipment: |
||||||||
Land and building |
| 19,318 | ||||||
Furniture, fixtures and equipment |
171,796 | 162,602 | ||||||
Leasehold improvements |
231,676 | 228,503 | ||||||
403,472 | 410,423 | |||||||
Less accumulated depreciation and amortization |
(204,350 | ) | (182,439 | ) | ||||
199,122 | 227,984 | |||||||
Leased property under capital leases: |
||||||||
Building |
18,055 | | ||||||
Less accumulated depreciation and amortization |
(451 | ) | | |||||
17,604 | | |||||||
Intangible assets, net of accumulated amortization of $38,063 and
$32,532, respectively |
570,357 | 580,027 | ||||||
Deferred financing costs, net of accumulated amortization of $36,282
and $29,949, respectively |
41,308 | 47,641 | ||||||
Other assets |
40,601 | 58,242 | ||||||
Goodwill |
1,550,056 | 1,550,056 | ||||||
2,202,322 | 2,235,966 | |||||||
Total assets |
$ | 2,762,629 | $ | 2,834,105 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 56,336 | $ | 45,660 | ||||
Current portion of long-term debt |
14,500 | 14,500 | ||||||
Income taxes payable |
7,258 | 10,272 | ||||||
Accrued interest payable |
9,032 | 14,644 | ||||||
Accrued expenses and other current liabilities |
96,246 | 96,436 | ||||||
Total current liabilities |
183,372 | 181,512 | ||||||
Long-term debt |
2,253,989 | 2,313,378 | ||||||
Revolving credit facility |
194,000 | 194,000 | ||||||
Obligations under capital leases |
17,290 | | ||||||
Deferred tax liability |
120,815 | 122,145 | ||||||
Deferred rent expense |
23,842 | 22,082 | ||||||
Unfavorable lease obligations and other long-term liabilities |
31,648 | 35,630 | ||||||
2,641,584 | 2,687,235 | |||||||
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 |
618,627 | 616,086 | ||||||
Accumulated other comprehensive income (loss), net of tax |
(6,956 | ) | 2,625 | |||||
Retained deficit |
(673,998 | ) | (653,353 | ) | ||||
(62,327 | ) | (34,642 | ) | |||||
Total liabilities and stockholders deficit |
$ | 2,762,629 | $ | 2,834,105 | ||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
Table of Contents
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(in thousands)
COMPREHENSIVE INCOME (LOSS)
(in thousands)
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
July 31, 2010 | August 1, 2009 | July 31, 2010 | August 1, 2009 | |||||||||||||
Net sales |
$ | 334,233 | $ | 314,196 | $ | 656,310 | $ | 607,294 | ||||||||
Cost of sales, occupancy and buying
expenses |
159,220 | 159,140 | 317,971 | 311,495 | ||||||||||||
Gross profit |
175,013 | 155,056 | 338,339 | 295,799 | ||||||||||||
Other expenses (income): |
||||||||||||||||
Selling, general and administrative |
124,257 | 109,761 | 243,061 | 217,054 | ||||||||||||
Depreciation and amortization |
15,856 | 18,703 | 32,222 | 36,858 | ||||||||||||
Severance and transaction-related costs |
212 | 25 | 314 | 374 | ||||||||||||
Other expense (income), net |
1,072 | (722 | ) | 1,517 | (308 | ) | ||||||||||
141,397 | 127,767 | 277,114 | 253,978 | |||||||||||||
Operating income |
33,616 | 27,289 | 61,225 | 41,821 | ||||||||||||
Gain on early debt extinguishment |
6,249 | 17,104 | 10,736 | 17,104 | ||||||||||||
Impairment of equity investment |
6,030 | | 6,030 | | ||||||||||||
Interest expense, net |
40,573 | 45,329 | 83,336 | 90,563 | ||||||||||||
Loss before income tax expense |
(6,738 | ) | (936 | ) | (17,405 | ) | (31,638 | ) | ||||||||
Income tax expense |
1,607 | 2,797 | 3,240 | 1,118 | ||||||||||||
Net loss |
$ | (8,345 | ) | $ | (3,733 | ) | $ | (20,645 | ) | $ | (32,756 | ) | ||||
Net loss |
$ | (8,345 | ) | $ | (3,733 | ) | $ | (20,645 | ) | $ | (32,756 | ) | ||||
Foreign currency translation and interest
rate
swap adjustments, net of tax |
2,513 | 20,414 | (9 | ) | 25,599 | |||||||||||
Reclassification of foreign currency
translation adjustments in net loss |
(9,572 | ) | | (9,572 | ) | | ||||||||||
Comprehensive income (loss) |
$ | (15,404 | ) | $ | 16,681 | $ | (30,226 | ) | $ | (7,157 | ) | |||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
Table of Contents
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(in thousands)
Six Months | Six Months | |||||||
Ended | Ended | |||||||
July 31, 2010 | August 1, 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (20,645 | ) | $ | (32,756 | ) | ||
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
32,222 | 36,858 | ||||||
Impairment |
6,030 | | ||||||
Amortization of lease rights and other assets |
1,610 | 1,008 | ||||||
Amortization of debt issuance costs |
5,038 | 5,256 | ||||||
Payment in kind interest expense |
19,003 | 19,576 | ||||||
Net accretion of favorable (unfavorable) lease obligations |
(786 | ) | (1,103 | ) | ||||
Loss on sale/retirement of property and equipment, net |
366 | 8 | ||||||
Gain on early debt extinguishment |
(10,736 | ) | (17,104 | ) | ||||
Gain on sale of intangible assets/lease rights |
| (598 | ) | |||||
Stock compensation expense |
2,541 | 2,892 | ||||||
(Increase) decrease in: |
||||||||
Inventories |
(18,501 | ) | (763 | ) | ||||
Prepaid expenses |
917 | (8,958 | ) | |||||
Other assets |
3,945 | 996 | ||||||
Increase (decrease) in: |
||||||||
Trade accounts payable |
10,074 | (1,280 | ) | |||||
Income taxes payable |
(2,590 | ) | (1,347 | ) | ||||
Accrued interest payable |
(5,612 | ) | (266 | ) | ||||
Accrued expenses and other liabilities |
8,974 | (7,021 | ) | |||||
Deferred income taxes |
(352 | ) | 2,087 | |||||
Deferred rent expense |
1,878 | 2,029 | ||||||
Net cash provided by (used in) operating activities |
33,376 | (486 | ) | |||||
Cash flows from investing activities: |
||||||||
Acquisition of property and equipment, net |
(19,556 | ) | (11,101 | ) | ||||
Acquisition of intangible assets/lease rights |
(524 | ) | (419 | ) | ||||
Proceeds from sale of intangible assets/lease rights |
| 1,638 | ||||||
Proceeds from sale of property |
16,765 | | ||||||
Net cash used in investing activities |
(3,315 | ) | (9,882 | ) | ||||
Cash flows from financing activities: |
||||||||
Credit facility payments |
(7,250 | ) | (7,250 | ) | ||||
Note purchases |
(59,112 | ) | (10,036 | ) | ||||
Principal payments on capital leases |
(765 | ) | | |||||
Net cash used in financing activities |
(67,127 | ) | (17,286 | ) | ||||
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
(1,510 | ) | 5,430 | |||||
Net decrease in cash and cash equivalents |
(38,576 | ) | (22,224 | ) | ||||
Cash and cash equivalents at beginning of period |
198,708 | 204,574 | ||||||
Cash and cash equivalents at end of period |
$ | 160,132 | $ | 182,350 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Income taxes paid |
$ | 5,829 | $ | 1,981 | ||||
Interest paid |
65,232 | 66,033 | ||||||
Property acquired under capital lease |
18,055 | |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
Table of Contents
CLAIRES STORES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair statement of the results for the interim periods
presented have been included. These statements should be read in conjunction with the Consolidated
Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year
ended January 30, 2010 filed with the Securities and Exchange Commission, including Note 2 to the
Consolidated Financial Statements included therein which discusses principles of consolidation and
summary of significant accounting policies.
The Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which require management
to make certain estimates and assumptions about future events. These estimates and the underlying
assumptions affect the amounts of assets and liabilities reported, disclosures regarding contingent
assets and liabilities and reported amounts of revenues and expenses. Such estimates include, but
are not limited to, the value of inventories, goodwill, intangible assets, investment in joint
venture and other long-lived assets, legal contingencies and assumptions used in the calculation of
income taxes, retirement and other post-retirement benefits, stock-based compensation, derivative
and hedging activities, residual values and other items. These estimates and assumptions are based
on managements best estimates and judgment. Management evaluates its estimates and assumptions on
an ongoing basis using historical experience and other factors, including the current economic
environment, which management believes to be reasonable under the circumstances. Management
adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit
markets, volatile equity, foreign currency, energy markets and declines in consumer spending have
combined to increase the uncertainty inherent in such estimates and assumptions. As future events
and their effects cannot be determined with precision, actual results could differ significantly
from these estimates. Changes in those estimates will be reflected in the financial statements in
those future periods when the changes occur.
Due to the seasonal nature of the retail industry and the Companys business, the results of
operations for interim periods of the year are not necessarily indicative of the results of
operations on an annualized basis.
The Company has evaluated subsequent events and transactions for potential recognition and
disclosure in the financial statements through the day the financial statements were issued. On
September 2, 2010, the Company converted its 50:50 joint venture with Aeon Co., Ltd. (Aeon) into
a license arrangement for stores in Japan only. As a result, the Company now owns the full and
exclusive rights to operate Claires stores in all of Asia excluding Japan. The parties also
agreed to operate Claires Nippon under a new license agreement, to replace the existing
merchandising agreement and to amend the buying agency agreement. See Note 7 for related fair
value and impairment charge disclosure on the investment in Claires Nippon.
2. Significant Accounting Policies
Update to Significant Accounting Policies
The Company has updated certain portions of its significant accounting policies since it published
its Annual Report on Form 10-K as of and for the fiscal year ended January 30, 2010. The portions
updated include the following:
6
Table of Contents
Capital Leases
Leased property meeting certain capital lease criteria is capitalized and the present value of the
related lease payments is recorded as a liability. Amortization of capitalized leased assets is
recorded using the straight-line method over the shorter of the estimated useful life or the
initial lease term and is included in Depreciation and amortization. Interest expense is
recognized on the outstanding capital lease obligation using the effective interest method and is
recorded in Interest expense, net.
The Unaudited Condensed Consolidated Financial Statements include certain reclassifications of
prior period amounts in order to conform to current period presentation.
3. Segment Information
The Company is organized based on the geographic markets in which it operates. Under this
structure, the Company currently has two reportable segments: North America and Europe. 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
accompanying Unaudited Condensed 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 accompanying Unaudited Condensed Consolidated
Statements of Operations and Comprehensive Income (Loss). Until September 2, 2010, the Company
accounted for the results of operations of Claires Nippon under the equity method and included the
results within Other income, net in the accompanying Unaudited Condensed Consolidated Statements
of Operations and Comprehensive Income (Loss) within the Companys North American division. These
stores will now operate as licensed stores. Substantially all of the interest expense on the
Companys outstanding debt is recorded in the Companys North American division.
Net sales and operating income for the three and six months ended July 31, 2010 and August 1,
2009 are as follows (in thousands):
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
July 31, 2010 | August 1, 2009 | July 31, 2010 | August 1, 2009 | |||||||||||||
Net sales: |
||||||||||||||||
North America |
$ | 210,087 | $ | 193,165 | $ | 422,686 | $ | 389,609 | ||||||||
Europe |
124,146 | 121,031 | 233,624 | 217,685 | ||||||||||||
Total net sales |
334,233 | 314,196 | 656,310 | 607,294 | ||||||||||||
Depreciation and amortization: |
||||||||||||||||
North America |
10,402 | 12,682 | 20,909 | 25,249 | ||||||||||||
Europe |
5,454 | 6,021 | 11,313 | 11,609 | ||||||||||||
Total depreciation and amortization |
15,856 | 18,703 | 32,222 | 36,858 | ||||||||||||
Operating income for reportable segments: |
||||||||||||||||
North America |
19,368 | 12,663 | 43,771 | 28,792 | ||||||||||||
Europe |
14,460 | 14,651 | 17,768 | 13,403 | ||||||||||||
Total operating income for reportable segments |
33,828 | 27,314 | 61,539 | 42,195 | ||||||||||||
Severance and transaction-related costs |
212 | 25 | 314 | 374 | ||||||||||||
Net consolidated operating income |
33,616 | 27,289 | 61,225 | 41,821 | ||||||||||||
Gain on early debt extinguishment |
6,249 | 17,104 | 10,736 | 17,104 | ||||||||||||
Impairment of equity investment |
6,030 | | 6,030 | | ||||||||||||
Interest expense, net |
40,573 | 45,329 | 83,336 | 90,563 | ||||||||||||
Net consolidated loss before income tax expense |
$ | (6,738 | ) | $ | (936 | ) | $ | (17,405 | ) | $ | (31,638 | ) | ||||
7
Table of Contents
Excluded from operating income for the North American segment are severance and transaction-related
costs of approximately $0.2 million and $0 million for the three months ended July 31, 2010 and
August 1, 2009, respectively, and $0.3 million and $0.4 million for the six months ended July 31,
2010 and August 1, 2009, respectively.
4. Debt
Capital Leases
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 $16.8 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 lease term through 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). Based on the terms of the lease agreement, the
Company has accounted for the lease as a capital lease and has recorded an asset equal to the fair
value of the Property at lease inception of $18.1 million and a corresponding capital lease
obligation.
Note Purchases
The following is a summary of the Companys debt repurchase activity for the three and six months
ended July 31, 2010 and August 1, 2009 (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
July 31, 2010 | July 31, 2010 | |||||||||||||||
Principal | Purchase | Principal | Purchase | |||||||||||||
Note Purchased | Amount | Price | Amount | Price | ||||||||||||
Senior Subordinated Notes |
$ | 7,000 | $ | 5,935 | $ | 22,625 | $ | 17,799 | ||||||||
Senior Toggle Notes |
41,623 | 36,328 | 47,623 | 41,313 | ||||||||||||
$ | 48,623 | $ | 42,263 | $ | 70,248 | $ | 59,112 | |||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
August 1, 2009 | August 1, 2009 | |||||||||||||||
Principal | Purchase | Principal | Purchase | |||||||||||||
Note Purchased | Amount | Price | Amount | Price | ||||||||||||
Senior Subordinated Notes |
$ | 27,838 | $ | 10,036 | $ | 27,838 | $ | 10,036 | ||||||||
See Note 7 for related fair value disclosure on debt.
8
Table of Contents
5. Stock Options and Stock-Based Compensation
The following is a summary of activity in the Companys stock option plan for the six months ended
July 31, 2010:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Shares | Price | Life (Years) | Value | ||||||||||||
Outstanding at January 30,
2010 |
6,272,110 | $ | 10.00 | 3.8 | | |||||||||||
Options granted |
564,000 | $ | 10.00 | 6.8 | | |||||||||||
Options exercised |
| | ||||||||||||||
Options forfeited or expired |
(270,097 | ) | $ | 10.00 | 4.0 | | ||||||||||
Outstanding at July 31, 2010 |
6,566,013 | $ | 10.00 | 4.1 | | |||||||||||
Exercisable at July 31, 2010 |
2,211,069 | $ | 10.00 | 4.1 | | |||||||||||
The weighted average grant date fair value of options granted during the six months ended July
31, 2010 and August 1, 2009 was $3.00 and $2.92, respectively.
During the three and six months ended July 31, 2010 and August 1, 2009, the Company recorded
stock-based compensation and additional paid-in capital relating to stock-based compensation of
approximately $1.3 million, $2.5 million, $2.4 million and $2.9 million, respectively. Stock-based
compensation is recorded in Selling, general and administrative expenses in the accompanying
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
6. Income Taxes
The effective income tax rate was (23.8)% and (18.6)% for the three and six months ended July 31,
2010, respectively. These effective income tax rates differed from the statutory federal tax rate
of 35% primarily from increases in the valuation allowance recorded for additional deferred tax
assets generated in the three and six months ended July 31, 2010 by the Companys U.S. operations.
The effective income tax rate was (298.8)% and (3.5)% for the three and six months ended August 1,
2009, respectively. These effective income tax rates differed from the statutory federal tax rate
of 35% primarily from increases in the valuation allowance recorded for additional deferred tax
assets generated in the three and six months ended August 1, 2009 by the Companys U.S. operations.
7. Fair Value Measurements and Derivative Instruments
Disclosures of the fair value of certain financial instruments are required, whether or not
recognized in the Unaudited Condensed 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.
9
Table of Contents
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.
On July 28, 2010, the Company entered into an interest rate swap agreement (the Swap) to manage
exposure to fluctuations in interest rates. The Swap expires on July 30, 2013. The Swap
represents a contract to exchange floating rate for fixed interest payments periodically over the
life of the Swap without exchange of the underlying notional amount. The Swap covers an aggregate
notional amount of $200.0 million of the outstanding principal balance of the senior secured term
loan facility. The fixed rate of the Swap is 1.2235% and has been designated and accounted for as
a cash flow hedge.
The Company entered into three interest rate swap agreements in July 2007 (the Swaps) to manage
exposure to fluctuations in interest rates. Those Swaps expired on June 30, 2010. The Swaps
represented contracts to exchange floating rate for fixed interest payments periodically over the
lives of the Swaps without exchange of the underlying notional amount. 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 Swaps ranged from 4.96% to 5.25%. The Swaps
were designated and accounted for as cash flow hedges.
For derivatives that qualify as cash flow hedges, 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 accompanying Unaudited Condensed 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. The ineffective portion of the change in fair
value of a cash flow hedge is recognized in income immediately. No ineffective portion was recorded
to earnings for the three and six months ended July 31, 2010, 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 represent the estimated amounts the Company
would receive or pay to terminate those contracts at the reporting date based upon pricing or
valuation models applied to current market information. The interest rate swaps are valued using
the market standard methodology of netting the discounted future fixed cash payments and the
discounted expected variable cash receipts. The variable cash receipts are based on an expectation
of future interest rates derived from observed market interest rate curves. The Company included
credit valuation adjustment risk in the calculation of fair value for the Swaps entered into in July 2007. The Swap entered into on July 28, 2010 is collateralized
by cash and thus the Company does not make any credit-related valuation adjustments. A 10 basis
point decline in the three year LIBOR below 1.2235% would require the Company to increase the
collateral posted by approximately $0.6 million in addition to the $2.0 million initial collateral
requirement. Any future increases in the three year LIBOR would result in the release of
collateral. 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.
The following tables summarize 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 July 31, 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 |
$ | (2,462,489 | ) | $ | (2,077,959 | ) | $ | | $ | | ||||||
Interest rate swap |
$ | (1,002 | ) | $ | | $ | (1,002 | ) | $ | |
10
Table of Contents
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 | ) | $ | |
The fair value of the interest rate swaps is included in Accrued expenses and other current
liabilities and is recorded, net of tax of approximately $0 and $5.7 million, as a component in
Accumulated other comprehensive income (loss), net of tax as of July 31, 2010 and January 30,
2010, respectively, in the accompanying Unaudited Condensed Consolidated Balance Sheets. The
following tables provide a summary of the financial statement effect of the Companys derivative
financial instruments designated as interest rate cash flow hedges during the three and six months
ended July 31, 2010 and August 1, 2009 (in thousands):
Location of Gain or | ||||||||||||||||||||
(Loss) Reclassified | Amount of Gain or (Loss) | |||||||||||||||||||
Derivatives in | Amount of Gain or (Loss) | from Accumulated | Reclassified from Accumulated | |||||||||||||||||
Cash Flow Hedging | Recognized in OCI on Derivative | OCI into Income | OCI into Income | |||||||||||||||||
Relationships | (Effective Portion) | (Effective Portion) | (Effective Portion) (1) | |||||||||||||||||
Three months ended | Three months ended | |||||||||||||||||||
July 31, 2010 | August 1, 2009 | July 31, 2010 | August 1, 2009 | |||||||||||||||||
Interest rate swaps |
$ | 2,590 | $ | 1,163 | Interest expense, net | $ | (3,447 | ) | $ | (4,595 | ) |
(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. |
Location of Gain or | ||||||||||||||||||||
(Loss) Reclassified | Amount of Gain or (Loss) | |||||||||||||||||||
Derivatives in Cash | Amount of Gain or (Loss) | from Accumulated | Reclassified from Accumulated | |||||||||||||||||
Flow Hedging | Recognized in OCI on Derivative | OCI into Income | OCI into Income | |||||||||||||||||
Relationships | (Effective Portion) | (Effective Portion) | (Effective Portion) (1) | |||||||||||||||||
Six months ended | Six months ended | |||||||||||||||||||
July 31, 2010 | August 1, 2009 | July 31, 2010 | August 1, 2009 | |||||||||||||||||
Interest rate swaps |
$ | 7,749 | $ | 1,596 | Interest expense, net | $ | (8,779 | ) | $ | (8,645 | ) |
(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. |
Over the next twelve months, the Company expects to reclassify net losses on the Companys
interest rate swaps recognized within Accumulated other comprehensive income (loss), net of tax
of $1.5 million to interest expense.
11
Table of Contents
The Companys non-financial assets and liabilities, which include goodwill, intangible assets, and
long-lived tangible assets, are not adjusted to fair value on a recurring basis. Fair value
measures of non-financial assets and liabilities are primarily used in the impairment analysis of
these assets. Any resulting asset impairment would require that the non-financial asset be recorded
at its fair value. The Company reviews goodwill and indefinite-lived intangible assets for
impairment annually, during the fourth quarter of each fiscal year, or as circumstances indicate
the possibility of impairment. The Company monitors the carrying value of definite-lived
intangible assets and long-lived tangible assets for impairment whenever events or changes in
circumstances indicate its carrying amount may not be recoverable.
The following table summarizes the Companys assets (liabilities) evaluated using fair value on a
nonrecurring basis segregated among the appropriate levels within the fair value hierarchy (in
thousands):
Fair Value Measurements at July 31, 2010 Using | ||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||
Active Markets for | Significant | Significant | ||||||||||||||||||
Identical Assets | Other Observable | Unobservable | ||||||||||||||||||
(Liabilities) | Inputs | Inputs | Impairment | |||||||||||||||||
Carrying Value | (Level 1) | (Level 2) | (Level 3) | Charges (1) | ||||||||||||||||
Investment in Claires Nippon |
$ | 600 | $ | | $ | | $ | 600 | $ | 6,030 |
(1) | Includes legal, tax and valuation costs and reclassification of cumulative translation adjustments from accumulated other comprehensive income (loss) to earnings as impairment charges. |
In accordance with Accounting Standards Codification (ASC) Subtopic 323-10, Investments
Equity Method and Joint Ventures, the Company is required to perform an assessment of overall other
than temporary decrease in investment value when events or circumstances indicate that the carrying
value may not be recoverable. The fair value of Claires Nippon is based on a discounted cash flow
analysis of estimated future operating results. A decrease in business growth, decrease in
earnings projections or increase in the discount factor will cause the fair value to decrease. The
2010 precipitous decline in sales, lower margin rates due to markdowns on slow-moving merchandise,
and difficulty in cost reduction efforts, coupled with an inability to generate positive cash flow
to pay royalties or dividends since inception, prompted the Company to perform a valuation of
Claires Nippon. Because the expected future cash flows were less than the net carrying value of
the investment in Claires Nippon, an impairment loss was recognized for the excess of the net
carrying value over the estimated fair value. The Company recorded a $6.0 million non-cash
impairment charge related to the investment in Claires Nippon during the three and six months
ended July 31, 2010.
On September 2, 2010, the Company converted its 50:50 joint venture with Aeon into a license
arrangement for stores in Japan only. As a result, the Company now owns the full and exclusive
rights to operate Claires stores in all of Asia excluding Japan. The parties also agreed to
operate Claires Nippon under a new license agreement, to replace the existing merchandising
agreement and to amend the buying agency agreement. In accordance with ASC Subtopic 845-10,
Nonmonetary Transactions, the Company measured the conversion based on the fair value of the asset
surrendered.
8. Commitments and Contingencies
The Company is, from time to time, involved in litigation incidental to the conduct of its
business, including personal injury litigation, litigation regarding merchandise sold, including
product and safety concerns regarding 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.
12
Table of Contents
9. Related Party Transactions
Included in Furniture, fixtures and equipment in the accompanying Unaudited Condensed
Consolidated Balance Sheets and Selling, general and administrative expenses in the accompanying
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) are store
architectural planning and retail design fees paid to a company owned by a family member of one of
the Companys executive officers. For the three months ended July 31, 2010 and August 1, 2009,
fees of approximately $0.4 million and $0.2 million, respectively, were paid to this company. For
the six months ended July 31, 2010 and August 1, 2009, the Company paid fees of approximately $0.6
million and $0.4 million, respectively. The arrangement was entered into during Fiscal 2008. This
arrangement was approved by the Audit Committee of the Board of Directors.
10. Supplemental Financial Information
On May 29, 2007, Claires Stores, Inc. (the Issuer), issued $935.0 million in Senior Notes,
Senior Toggle Notes and Senior Subordinated Notes. These Notes are irrevocably and unconditionally
guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of
Claires Stores, Inc. that guarantee the Companys Credit Facility (the Guarantors). The
Companys other subsidiaries, principally its international subsidiaries including its European,
Canadian and Asian subsidiaries (the Non-Guarantors), are not guarantors of these Notes.
The tables in the following pages 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.
13
Table of Contents
Condensed Consolidating Balance Sheet
July 31, 2010
(in thousands)
July 31, 2010
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 109,625 | $ | (5,877 | ) | $ | 56,384 | $ | | $ | 160,132 | |||||||||
Inventories |
| 84,905 | 42,863 | | 127,768 | |||||||||||||||
Prepaid expenses |
1,071 | 14,082 | 17,230 | | 32,383 | |||||||||||||||
Other current assets |
27 | 15,791 | 7,480 | | 23,298 | |||||||||||||||
Total current assets |
110,723 | 108,901 | 123,957 | | 343,581 | |||||||||||||||
Property and equipment: |
||||||||||||||||||||
Land and building |
| | | | | |||||||||||||||
Furniture, fixtures and equipment |
2,780 | 113,292 | 55,724 | | 171,796 | |||||||||||||||
Leasehold improvements |
1,048 | 139,897 | 90,731 | | 231,676 | |||||||||||||||
3,828 | 253,189 | 146,455 | | 403,472 | ||||||||||||||||
Less accumulated depreciation and amortization |
(1,870 | ) | (130,998 | ) | (71,482 | ) | | (204,350 | ) | |||||||||||
1,958 | 122,191 | 74,973 | | 199,122 | ||||||||||||||||
Leased property under capital leases: |
||||||||||||||||||||
Building |
| 18,055 | | | 18,055 | |||||||||||||||
Less accumulated depreciation and amortization |
| (451 | ) | | | (451 | ) | |||||||||||||
| 17,604 | | | 17,604 | ||||||||||||||||
Intercompany receivables |
| 276,120 | | (276,120 | ) | | ||||||||||||||
Investment in subsidiaries |
2,251,576 | (67,213 | ) | | (2,184,363 | ) | | |||||||||||||
Intangible assets, net |
286,000 | 11,020 | 273,337 | | 570,357 | |||||||||||||||
Deferred financing costs, net |
41,308 | | | | 41,308 | |||||||||||||||
Other assets |
125 | 4,584 | 35,892 | | 40,601 | |||||||||||||||
Goodwill |
| 1,235,650 | 314,406 | | 1,550,056 | |||||||||||||||
2,579,009 | 1,460,161 | 623,635 | (2,460,483 | ) | 2,202,322 | |||||||||||||||
Total assets |
$ | 2,691,690 | $ | 1,708,857 | $ | 822,565 | $ | (2,460,483 | ) | $ | 2,762,629 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Trade accounts payable |
$ | 2,710 | $ | 25,653 | $ | 27,973 | $ | | $ | 56,336 | ||||||||||
Current portion of long-term debt |
14,500 | | | | 14,500 | |||||||||||||||
Income taxes payable |
| (237 | ) | 7,495 | | 7,258 | ||||||||||||||
Accrued interest payable |
9,032 | | | | 9,032 | |||||||||||||||
Accrued expenses and other current liabilities |
16,187 | 35,856 | 44,203 | | 96,246 | |||||||||||||||
Total current liabilities |
42,429 | 61,272 | 79,671 | | 183,372 | |||||||||||||||
Intercompany payables |
263,599 | | 12,521 | (276,120 | ) | | ||||||||||||||
Long-term debt |
2,253,989 | | | | 2,253,989 | |||||||||||||||
Revolving credit facility |
194,000 | | | | 194,000 | |||||||||||||||
Obligations under capital leases |
| 17,290 | | | 17,290 | |||||||||||||||
Deferred tax liability |
| 106,069 | 14,746 | | 120,815 | |||||||||||||||
Deferred rent expense |
| 16,211 | 7,631 | | 23,842 | |||||||||||||||
Unfavorable lease obligations and other long-term
liabilities |
| 29,924 | 1,724 | | 31,648 | |||||||||||||||
2,711,588 | 169,494 | 36,622 | (276,120 | ) | 2,641,584 | |||||||||||||||
Stockholders equity (deficit): |
||||||||||||||||||||
Common stock |
| 367 | 2 | (369 | ) | | ||||||||||||||
Additional paid in capital |
618,627 | 1,445,795 | 876,798 | (2,322,593 | ) | 618,627 | ||||||||||||||
Accumulated other comprehensive income (loss),
net of tax |
(6,956 | ) | 3,011 | (14,029 | ) | 11,018 | (6,956 | ) | ||||||||||||
Retained earnings (deficit) |
(673,998 | ) | 28,918 | (156,499 | ) | 127,581 | (673,998 | ) | ||||||||||||
(62,327 | ) | 1,478,091 | 706,272 | (2,184,363 | ) | (62,327 | ) | |||||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 2,691,690 | $ | 1,708,857 | $ | 822,565 | $ | (2,460,483 | ) | $ | 2,762,629 | |||||||||
14
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 | |||||||||
15
Table of Contents
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended July 31, 2010
(in thousands)
For The Three Months Ended July 31, 2010
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 370,817 | $ | 139,401 | $ | (175,985 | ) | $ | 334,233 | |||||||||
Cost of sales, occupancy and buying expenses |
1,382 | 269,932 | 63,891 | (175,985 | ) | 159,220 | ||||||||||||||
Gross profit |
(1,382 | ) | 100,885 | 75,510 | | 175,013 | ||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Selling, general and administrative |
9,054 | 64,422 | 50,781 | | 124,257 | |||||||||||||||
Depreciation and amortization |
155 | 9,576 | 6,125 | | 15,856 | |||||||||||||||
Severance and transaction-related costs |
212 | | | | 212 | |||||||||||||||
Other (income) expense |
(7,322 | ) | 6,054 | 2,340 | | 1,072 | ||||||||||||||
2,099 | 80,052 | 59,246 | | 141,397 | ||||||||||||||||
Operating income (loss) |
(3,481 | ) | 20,833 | 16,264 | | 33,616 | ||||||||||||||
Gain on early debt extinguishment |
6,249 | | | | 6,249 | |||||||||||||||
Impairment of equity investment |
| 6,030 | | | 6,030 | |||||||||||||||
Interest expense, net |
40,418 | 175 | (20 | ) | | 40,573 | ||||||||||||||
Income (loss) before income taxes |
(37,650 | ) | 14,628 | 16,284 | | (6,738 | ) | |||||||||||||
Income tax expense (benefit) |
| (932 | ) | 2,539 | | 1,607 | ||||||||||||||
Income (loss) from continuing operations |
(37,650 | ) | 15,560 | 13,745 | | (8,345 | ) | |||||||||||||
Equity in earnings of subsidiaries |
29,305 | 282 | | (29,587 | ) | | ||||||||||||||
Net income (loss) |
(8,345 | ) | 15,842 | 13,745 | (29,587 | ) | (8,345 | ) | ||||||||||||
Foreign currency translation and interest rate swap
adjustments, net of tax |
2,513 | (8,521 | ) | (644 | ) | 9,165 | 2,513 | |||||||||||||
Reclassification of foreign currency translation
adjustments in net income (loss) |
(9,572 | ) | (9,572 | ) | | 9,572 | (9,572 | ) | ||||||||||||
Comprehensive income (loss) |
$ | (15,404 | ) | $ | (2,251 | ) | $ | 13,101 | $ | (10,850 | ) | $ | (15,404 | ) | ||||||
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended August 1, 2009
(in thousands)
For The Three Months Ended August 1, 2009
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 335,542 | $ | 133,730 | $ | (155,076 | ) | $ | 314,196 | |||||||||
Cost of sales, occupancy and buying expenses |
| 249,900 | 64,316 | (155,076 | ) | 159,140 | ||||||||||||||
Gross profit |
| 85,642 | 69,414 | | 155,056 | |||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Selling, general and administrative |
7,717 | 55,417 | 46,627 | | 109,761 | |||||||||||||||
Depreciation and amortization |
369 | 11,548 | 6,786 | | 18,703 | |||||||||||||||
Severance and transaction-related costs |
25 | | | | 25 | |||||||||||||||
Other (income) expense |
(3,571 | ) | 4,881 | (2,032 | ) | | (722 | ) | ||||||||||||
4,540 | 71,846 | 51,381 | | 127,767 | ||||||||||||||||
Operating income (loss) |
(4,540 | ) | 13,796 | 18,033 | | 27,289 | ||||||||||||||
Gain on early debt extinguishment |
17,104 | | | | 17,104 | |||||||||||||||
Interest expense (income), net |
45,338 | (13 | ) | 4 | | 45,329 | ||||||||||||||
Income (loss) before income taxes |
(32,774 | ) | 13,809 | 18,029 | | (936 | ) | |||||||||||||
Income tax expense (benefit) |
(174 | ) | 1,470 | 1,501 | | 2,797 | ||||||||||||||
Income (loss) from continuing operations |
(32,600 | ) | 12,339 | 16,528 | | (3,733 | ) | |||||||||||||
Equity in earnings of subsidiaries |
28,867 | 706 | | (29,573 | ) | | ||||||||||||||
Net income (loss) |
(3,733 | ) | 13,045 | 16,528 | (29,573 | ) | (3,733 | ) | ||||||||||||
Foreign currency translation and interest rate swap
adjustments, net of tax |
20,414 | 2,315 | 18,339 | (20,654 | ) | 20,414 | ||||||||||||||
Comprehensive income |
$ | 16,681 | $ | 15,360 | $ | 34,867 | $ | (50,227 | ) | $ | 16,681 | |||||||||
16
Table of Contents
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Six Months Ended July 31, 2010
(in thousands)
For The Six Months Ended July 31, 2010
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 726,606 | $ | 262,886 | $ | (333,182 | ) | $ | 656,310 | |||||||||
Cost of sales, occupancy and buying expenses |
2,657 | 523,116 | 125,380 | (333,182 | ) | 317,971 | ||||||||||||||
Gross profit |
(2,657 | ) | 203,490 | 137,506 | | 338,339 | ||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Selling, general and administrative |
17,486 | 125,787 | 99,788 | | 243,061 | |||||||||||||||
Depreciation and amortization |
287 | 19,214 | 12,721 | | 32,222 | |||||||||||||||
Severance and transaction-related costs |
314 | | | | 314 | |||||||||||||||
Other (income) expense |
(13,197 | ) | 8,366 | 6,348 | | 1,517 | ||||||||||||||
4,890 | 153,367 | 118,857 | | 277,114 | ||||||||||||||||
Operating income (loss) |
(7,547 | ) | 50,123 | 18,649 | | 61,225 | ||||||||||||||
Gain on early debt extinguishment |
10,736 | | | | 10,736 | |||||||||||||||
Impairment of equity investment |
| 6,030 | | | 6,030 | |||||||||||||||
Interest expense, net |
83,163 | 182 | (9 | ) | | 83,336 | ||||||||||||||
Income (loss) before income taxes |
(79,974 | ) | 43,911 | 18,658 | | (17,405 | ) | |||||||||||||
Income tax expense (benefit) |
23 | (316 | ) | 3,533 | | 3,240 | ||||||||||||||
Income (loss) from continuing operations |
(79,997 | ) | 44,227 | 15,125 | | (20,645 | ) | |||||||||||||
Equity in earnings of subsidiaries |
59,352 | 235 | | (59,587 | ) | | ||||||||||||||
Net income (loss) |
(20,645 | ) | 44,462 | 15,125 | (59,587 | ) | (20,645 | ) | ||||||||||||
Foreign currency translation and interest rate swap
adjustments, net of tax |
(9 | ) | 911 | (9,895 | ) | 8,984 | (9 | ) | ||||||||||||
Reclassification of foreign currency translation
adjustments in net income (loss) |
(9,572 | ) | (9,572 | ) | | 9,572 | (9,572 | ) | ||||||||||||
Comprehensive income (loss) |
$ | (30,226 | ) | $ | 35,801 | $ | 5,230 | $ | (41,031 | ) | $ | (30,226 | ) | |||||||
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Six Months Ended August 1, 2009
(in thousands)
For The Six Months Ended August 1, 2009
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 661,525 | $ | 241,197 | $ | (295,428 | ) | $ | 607,294 | |||||||||
Cost of sales, occupancy and buying expenses |
| 485,080 | 121,843 | (295,428 | ) | 311,495 | ||||||||||||||
Gross profit |
| 176,445 | 119,354 | | 295,799 | |||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Selling, general and administrative |
13,987 | 112,749 | 90,318 | | 217,054 | |||||||||||||||
Depreciation and amortization |
1,113 | 22,621 | 13,124 | | 36,858 | |||||||||||||||
Severance and transaction-related costs |
374 | | | | 374 | |||||||||||||||
Other (income) expense |
(6,238 | ) | 9,483 | (3,553 | ) | | (308 | ) | ||||||||||||
9,236 | 144,853 | 99,889 | | 253,978 | ||||||||||||||||
Operating income (loss) |
(9,236 | ) | 31,592 | 19,465 | | 41,821 | ||||||||||||||
Gain on early debt extinguishment |
17,104 | | | | 17,104 | |||||||||||||||
Interest expense (income), net |
90,618 | (13 | ) | (42 | ) | | 90,563 | |||||||||||||
Income (loss) before income taxes |
(82,750 | ) | 31,605 | 19,507 | | (31,638 | ) | |||||||||||||
Income tax expense (benefit) |
(174 | ) | 1,848 | (556 | ) | | 1,118 | |||||||||||||
Income (loss) from continuing operations |
(82,576 | ) | 29,757 | 20,063 | | (32,756 | ) | |||||||||||||
Equity in earnings of subsidiaries |
49,820 | 1,272 | | (51,092 | ) | | ||||||||||||||
Net income (loss) |
(32,756 | ) | 31,029 | 20,063 | (51,092 | ) | (32,756 | ) | ||||||||||||
Foreign currency translation and interest rate swap
adjustments, net of tax |
25,599 | 4,049 | 25,849 | (29,898 | ) | 25,599 | ||||||||||||||
Comprehensive income (loss) |
$ | (7,157 | ) | $ | 35,078 | $ | 45,912 | $ | (80,990 | ) | $ | (7,157 | ) | |||||||
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Table of Contents
Condensed Consolidating Statement of Cash Flows
Six Months Ended July 31, 2010
(in thousands)
Six Months Ended July 31, 2010
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | (20,645 | ) | $ | 44,462 | $ | 15,125 | $ | (59,587 | ) | $ | (20,645 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(59,352 | ) | (235 | ) | | 59,587 | | |||||||||||||
Depreciation and amortization |
287 | 19,214 | 12,721 | | 32,222 | |||||||||||||||
Impairment |
| 6,030 | | | 6,030 | |||||||||||||||
Amortization of lease rights and other assets |
| 25 | 1,585 | | 1,610 | |||||||||||||||
Amortization of debt issuance costs |
5,038 | | | | 5,038 | |||||||||||||||
Payment in kind interest expense |
19,003 | | | | 19,003 | |||||||||||||||
Net accretion of favorable (unfavorable) lease
obligations |
| (1,023 | ) | 237 | | (786 | ) | |||||||||||||
Loss on sale/retirement of property and equipment, net |
| 366 | | | 366 | |||||||||||||||
Gain on early debt extinguishment |
(10,736 | ) | | | | (10,736 | ) | |||||||||||||
Stock compensation expense |
1,924 | | 617 | | 2,541 | |||||||||||||||
(Increase) decrease in: |
||||||||||||||||||||
Inventories |
| (11,003 | ) | (7,498 | ) | | (18,501 | ) | ||||||||||||
Prepaid expenses |
(561 | ) | 133 | 1,345 | | 917 | ||||||||||||||
Other assets |
1,220 | 5,110 | (2,385 | ) | | 3,945 | ||||||||||||||
Increase (decrease) in: |
||||||||||||||||||||
Trade accounts payable |
374 | 5,867 | 3,833 | | 10,074 | |||||||||||||||
Income taxes payable |
| (255 | ) | (2,335 | ) | | (2,590 | ) | ||||||||||||
Accrued interest payable |
(5,612 | ) | | | | (5,612 | ) | |||||||||||||
Accrued expenses and other liabilities |
1,556 | 2,298 | 5,120 | | 8,974 | |||||||||||||||
Deferred income taxes |
| (407 | ) | 55 | | (352 | ) | |||||||||||||
Deferred rent expense |
(107 | ) | 1,254 | 731 | | 1,878 | ||||||||||||||
Net cash provided by (used in) operating activities |
(67,611 | ) | 71,836 | 29,151 | | 33,376 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Acquisition of property and equipment, net |
(740 | ) | (7,394 | ) | (11,422 | ) | | (19,556 | ) | |||||||||||
Acquisition of intangible assets/lease rights |
| (63 | ) | (461 | ) | | (524 | ) | ||||||||||||
Proceeds from sale of property |
| 16,765 | | | 16,765 | |||||||||||||||
Net cash provided by (used in) investing activities |
(740 | ) | 9,308 | (11,883 | ) | | (3,315 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Credit facility payments |
(7,250 | ) | | | | (7,250 | ) | |||||||||||||
Note purchases |
(59,112 | ) | | | | (59,112 | ) | |||||||||||||
Principal payments on capital leases |
| (765 | ) | | | (765 | ) | |||||||||||||
Intercompany activity, net |
135,200 | (77,080 | ) | (58,120 | ) | | | |||||||||||||
Net cash provided by (used in) financing activities |
68,838 | (77,845 | ) | (58,120 | ) | | (67,127 | ) | ||||||||||||
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
| 1,428 | (2,938 | ) | | (1,510 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents |
487 | 4,727 | (43,790 | ) | | (38,576 | ) | |||||||||||||
Cash and cash equivalents at beginning of period |
109,138 | (10,604 | ) | 100,174 | | 198,708 | ||||||||||||||
Cash and cash equivalents at end of period |
$ | 109,625 | $ | (5,877 | ) | $ | 56,384 | $ | | $ | 160,132 | |||||||||
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Condensed Consolidating Statement of Cash Flows
Six Months Ended August 1, 2009
(in thousands)
Six Months Ended August 1, 2009
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | (32,756 | ) | $ | 31,029 | $ | 20,063 | $ | (51,092 | ) | $ | (32,756 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(49,820 | ) | (1,272 | ) | | 51,092 | | |||||||||||||
Depreciation and amortization |
1,113 | 22,621 | 13,124 | | 36,858 | |||||||||||||||
Amortization of lease rights and other assets |
| 24 | 984 | | 1,008 | |||||||||||||||
Amortization of debt issuance costs |
5,256 | | | | 5,256 | |||||||||||||||
Payment in kind interest expense |
19,576 | | | | 19,576 | |||||||||||||||
Net accretion of favorable (unfavorable) lease
obligations |
| (1,322 | ) | 219 | | (1,103 | ) | |||||||||||||
(Gain) loss on sale / retirement of property and
equipment, net |
| 8 | | | 8 | |||||||||||||||
Gain on early debt extinguishment |
(17,104 | ) | | | | (17,104 | ) | |||||||||||||
Gain on sale of intangible assets/lease rights |
| | (598 | ) | | (598 | ) | |||||||||||||
Stock compensation expense |
1,882 | | 1,010 | | 2,892 | |||||||||||||||
(Increase) decrease in: |
||||||||||||||||||||
Inventories |
| (2,766 | ) | 2,003 | | (763 | ) | |||||||||||||
Prepaid expenses |
(305 | ) | (1,101 | ) | (7,552 | ) | | (8,958 | ) | |||||||||||
Other assets |
1,132 | (529 | ) | 393 | | 996 | ||||||||||||||
Increase (decrease) in: |
||||||||||||||||||||
Trade accounts payable |
(1,096 | ) | (1,392 | ) | 1,208 | | (1,280 | ) | ||||||||||||
Income taxes payable |
| (164 | ) | (1,183 | ) | | (1,347 | ) | ||||||||||||
Accrued interest payable |
(263 | ) | | (3 | ) | | (266 | ) | ||||||||||||
Accrued expenses and other liabilities |
(7,870 | ) | (143 | ) | 992 | | (7,021 | ) | ||||||||||||
Deferred income taxes |
| 1,307 | 780 | | 2,087 | |||||||||||||||
Deferred rent expense |
(279 | ) | 1,620 | 688 | | 2,029 | ||||||||||||||
Net cash provided by (used in) operating activities |
(80,534 | ) | 47,920 | 32,128 | | (486 | ) | |||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Acquisition of property and equipment, net |
(143 | ) | (6,666 | ) | (4,292 | ) | | (11,101 | ) | |||||||||||
Acquisition of intangible assets/lease rights |
(13 | ) | (58 | ) | (348 | ) | | (419 | ) | |||||||||||
Proceeds from sale of intangible assets/lease rights |
| | 1,638 | | 1,638 | |||||||||||||||
Net cash used in investing activities |
(156 | ) | (6,724 | ) | (3,002 | ) | | (9,882 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Credit facility payments |
(7,250 | ) | | | | (7,250 | ) | |||||||||||||
Note purchases |
(10,036 | ) | | | | (10,036 | ) | |||||||||||||
Intercompany activity, net |
41,774 | (22,145 | ) | (19,629 | ) | | | |||||||||||||
Net cash provided by (used in) financing activities |
24,488 | (22,145 | ) | (19,629 | ) | | (17,286 | ) | ||||||||||||
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
| (150 | ) | 5,580 | | 5,430 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
(56,202 | ) | 18,901 | 15,077 | | (22,224 | ) | |||||||||||||
Cash and cash equivalents at beginning of period |
154,414 | 211 | 49,949 | | 204,574 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 98,212 | $ | 19,112 | $ | 65,026 | $ | | $ | 182,350 | ||||||||||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations is designed
to provide the reader of the financial statements with a narrative on our results of operations,
financial position and liquidity, risk management activities, and significant accounting policies
and critical estimates. Managements Discussion and Analysis should be read in conjunction with
the Unaudited Condensed Consolidated Financial Statements and related notes thereto contained
elsewhere in this document.
We include a store in the calculation of same store sales once it has been in operation sixty weeks
after its initial opening. A store which is temporarily closed, such as for remodeling, is removed
from the same store sales computation if it is closed for nine consecutive weeks. The removal is
effective prospectively upon the completion of the ninth consecutive week of closure. A store
which is closed permanently, such as upon termination of the lease, is immediately removed from the
same store sales computation. We compute same store sales on a local currency basis, which
eliminates any impact for changes in foreign currency rates.
19
Table of Contents
Business Overview
We are one of the worlds leading specialty retailers of fashionable accessories and jewelry at
affordable prices for young women, teens, tweens, and girls ages 3 to 27. We are organized based on
our geographic markets, which include our North American division and our European division. As of
July 31, 2010, we operated a total of 2,954 stores, of which 1,984 were located in all 50 states of
the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American division)
and 970 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 July 31, 2010, we franchised 201 stores in the Middle East, Turkey, Russia,
South Africa, Poland, Greece, Malta and Guatemala 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 Unaudited Condensed
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 Unaudited Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) included in this Quarterly Report.
We also operated 207 stores in Japan through our Claires Nippon 50:50 joint venture with Aeon Co.,
Ltd., as of July 31, 2010. Within our North American division, we accounted for the results of
operations of Claires Nippon under the equity method and included the results within Other
income, net in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) included in this Quarterly Report. Beginning September 2, 2010, these stores will
operate as licensed stores.
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 fashionable merchandise
across a wide range of categories, all with a compelling value proposition. Our major categories of
business are:
| Accessories includes fashion accessories for year-round use, including headwear, legwear, attitude glasses, scarves, armwear, and belts, and seasonal use, including sunglasses, sandals, boots, scarves and slippers; and other accessories, including hairgoods, handbags, and small leather goods, as well as cosmetics | ||
| 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. 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.
20
Table of Contents
Current Market Conditions
The current distress in the financial markets has resulted in declines in consumer confidence and
spending, extreme volatility in securities prices, and has had a negative impact on credit
availability and declining valuations of certain investments. We have assessed the implications of
these factors on our current business and have responded with pursuit of cost reduction
opportunities 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.
Consolidated Results of Operations
A summary of our consolidated results of operations for the three and six months ended July 31,
2010 and August 1, 2009 are as follows (dollars in thousands):
Three Months | Three Months | |||||||
Ended | Ended | |||||||
July 31, 2010 | August 1, 2009 | |||||||
Net sales |
$ | 334,233 | $ | 314,196 | ||||
Increase (decrease) in same store sales |
8.9 | % | (6.9 | )% | ||||
Gross profit percentage |
52.4 | % | 49.4 | % | ||||
Selling, general and administrative expenses as a percentage of net sales |
37.2 | % | 34.9 | % | ||||
Depreciation and amortization as a percentage of net sales |
4.7 | % | 6.0 | % | ||||
Operating income |
$ | 33,616 | $ | 27,289 | ||||
Gain on early debt extinguishment |
$ | 6,249 | $ | 17,104 | ||||
Impairment of equity investment |
$ | 6,030 | $ | | ||||
Net loss |
$ | (8,345 | ) | $ | (3,733 | ) | ||
Number of stores at the end of the period (1) |
2,954 | 2,948 |
(1) | Number of stores excludes stores operated under franchise agreements and joint venture stores. |
Six Months | Six Months | |||||||
Ended | Ended | |||||||
July 31, 2010 | August 1, 2009 | |||||||
Net sales |
$ | 656,310 | $ | 607,294 | ||||
Increase (decrease) in same store sales |
8.2 | % | (4.7 | )% | ||||
Gross profit percentage |
51.6 | % | 48.7 | % | ||||
Selling, general and administrative expenses as a percentage of net sales |
37.0 | % | 35.7 | % | ||||
Depreciation and amortization as a percentage of net sales |
4.9 | % | 6.1 | % | ||||
Operating income |
$ | 61,225 | $ | 41,821 | ||||
Gain on early debt extinguishment |
$ | 10,736 | $ | 17,104 | ||||
Impairment of equity investment |
$ | 6,030 | $ | | ||||
Net loss |
$ | (20,645 | ) | $ | (32,756 | ) | ||
Number of stores at the end of the period (1) |
2,954 | 2,948 |
(1) | Number of stores excludes stores operated under franchise agreements and joint venture stores. |
Net sales
Net sales for the three months ended July 31, 2010 increased $20.0 million, or 6.4%, from the three
months ended August 1, 2009. This increase was attributable to an increase in same store sales and
new store sales, partially offset by foreign currency translation effect of our foreign locations
sales and closed stores. Sales would have increased 9.5% excluding the impact from foreign
currency rate changes.
21
Table of Contents
Net sales for the six months ended July 31, 2010 increased $49.0 million, or 8.1%, from the six
months ended August 1, 2009. This increase was attributable to an increase in same store sales and
new store sales, partially offset by closed stores, reduced shipments to franchisees and foreign
currency translation effect of our foreign locations sales. Sales would have increased 8.4%
excluding the impact from foreign currency rate changes.
For the three months ended July 31, 2010, the increase in same store sales was primarily
attributable to an increase in average transaction value of 6.9% and an increase in average number
of transactions per store of 2.4%.
For the six months ended July 31, 2010, the increase in same store sales was primarily attributable
to an increase in average transaction value of 8.2% and an increase in average number of
transactions per store of 0.8%.
The following table compares our sales of each product category for each of the periods presented:
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
% of Total | July 31, 2010 | August 1, 2009 | July 31, 2010 | August 1, 2009 | ||||||||||||
Accessories |
51.8 | 50.2 | 51.9 | 49.5 | ||||||||||||
Jewelry |
48.2 | 49.8 | 48.1 | 50.5 | ||||||||||||
100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||
Gross profit
In calculating gross profit and gross profit percentages, we exclude the costs related to our
distribution center. These costs are included instead in Selling, general and administrative
expenses in our Unaudited Condensed 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.
During the fiscal 2010 second quarter, gross profit percentage increased 300 basis points to 52.4%
compared to the fiscal 2009 second quarter of 49.4%. This increase consisted of a 150 basis point
improvement in merchandise margin and a 210 basis point decrease in occupancy costs, offset by a 60
basis point increase in buying and buying-related costs. Merchandise margin benefited by 90 basis
points based on the results of our all store North America inventory observation. Merchandise
margin also benefited from increased initial mark up and reduced mark downs partially offset by
increases in freight. Occupancy costs decreased approximately $2.2 million, but decreased
approximately $0.1 million net of foreign currency translation effect. The improvement in
occupancy rate is due to the leveraging effect of higher sales.
During the first six months of fiscal 2010, gross profit percentage increased 290 basis points to
51.6% compared to the first six months of fiscal 2009 of 48.7%. This increase consisted of a 130
basis point improvement in merchandise margin and a 190 basis point decrease in occupancy costs,
offset by a 30 basis point increase in buying and buying-related costs. Merchandise margin
benefited by 50 basis points based on the results of our all store North America inventory
observation. Merchandise margin also benefited from increased initial mark up and reduced mark
downs partially offset by increases in freight. Occupancy costs decreased approximately $0.4
million with immaterial foreign currency translation effect. The improvement in occupancy rate is
due to the leveraging effect of higher sales.
Selling, general and administrative expenses
During the three months ended July 31, 2010, selling, general and administrative expenses increased
$14.5 million, or 13.2%, compared to the three months ended August 1, 2009. As a percentage of net
sales, selling, general and administrative expenses increased 230 basis points compared to the
three months ended August 1, 2009. The majority of this increase was for store expenses, including
the all
22
Table of Contents
store inventory observation in North America, and increased bonus accruals partially offset by
foreign currency exchange rate change effects.
During the six months ended July 31, 2010, selling, general and administrative expenses increased
$26.0 million, or 12.0%, compared to the six months ended August 1, 2009. As a percentage of net
sales, selling, general and administrative expenses increased 130 basis points compared to the six
months ended August 1, 2009. The majority of this increase was for store expenses, including the
all store inventory observation in North America, and increased bonus accruals partially offset by
foreign currency exchange rate change effects.
Depreciation and amortization expense
Depreciation and amortization expense decreased $2.8 million to $15.9 million during the three
months ended July 31, 2010 compared to the three months ended August 1, 2009. The majority of this
decrease is due to the effect of assets becoming fully depreciated or amortized.
Depreciation and amortization expense decreased $4.6 million to $32.2 million during the six months
ended July 31, 2010 compared to the six months ended August 1, 2009. The majority of this decrease
is due to the effect of assets becoming fully depreciated or amortized.
Other (income) expense, net
The following is a summary of other (income) expense activity for the three and six months ended
July 31, 2010 and August 1, 2009 (in thousands):
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
July 31, 2010 | August 1, 2009 | July 31, 2010 | August 1, 2009 | |||||||||||||
Equity loss |
$ | 1,413 | $ | 323 | $ | 2,529 | $ | 1,188 | ||||||||
Royalty income |
(341 | ) | (360 | ) | (532 | ) | (806 | ) | ||||||||
Gain on sale of assets |
| (598 | ) | | (598 | ) | ||||||||||
Other income |
| (87 | ) | (480 | ) | (92 | ) | |||||||||
$ | 1,072 | $ | (722 | ) | $ | 1,517 | $ | (308 | ) | |||||||
Impairment of equity investment
During the second quarter of 2010, the Company recorded a non-cash impairment charge related to the
investment in Claires Nippon of $6.0 million. There were no other impairment charges recorded
during the six months ended July 31, 2010. Recent operating losses prompted us to perform a
valuation of Claires Nippon.
Interest expense, net
Net interest expense for the three months ended July 31, 2010 aggregated $40.6 million (of which
approximately $2.5 million consisted of amortization of deferred debt issuance costs) compared to
$45.3 million for the three months ended August 1, 2009. This decrease of $4.8 million is
primarily the result of Note purchases and reductions in interest rates on the floating portion of
our debt.
Net interest expense for the six months ended July 31, 2010 aggregated $83.3 million (of which
approximately $5.0 million consisted of amortization of deferred debt issuance costs) compared to
$90.6 million for the six months ended August 1, 2009. This decrease of $7.2 million is primarily
the result of Note purchases and reductions in interest rates on the floating portion of our debt.
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Income taxes
The effective income tax rate for the three and six months ended July 31, 2010 was (23.8)% and
(18.6)%, respectively, compared to (298.8)% and (3.5)% for the three and six months ended August 1,
2009, respectively. These effective income tax rates differed from the statutory federal tax rate
of 35% primarily from increases in the valuation allowance recorded for additional deferred tax
assets generated in the three and six months ended July 31, 2010 and August 1, 2009, respectively,
by our U.S. operations.
Segment Operations
We are organized into two business segments North America and Europe. The following is a
discussion of results of operations by business segment.
North America
Key statistics and results of operations for our North American division are as follows (dollars in
thousands):
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
July 31, 2010 | August 1, 2009 | July 31, 2010 | August 1, 2009 | |||||||||||||
Net sales |
$ | 210,087 | $ | 193,165 | $ | 422,686 | $ | 389,609 | ||||||||
Increase (decrease) in same store sales |
9.0 | % | (9.9 | )% | 8.9 | % | (6.5 | )% | ||||||||
Gross profit percentage |
52.0 | % | 48.1 | % | 51.8 | % | 48.8 | % | ||||||||
Number of stores at the end of the period (1) |
1,984 | 2,001 | 1,984 | 2,001 |
(1) | Number of stores excludes stores operated under franchise agreements and joint venture stores. |
During the three months ended July 31, 2010, net sales in North America increased $16.9
million, or 8.8%, from the three months ended August 1, 2009. This increase was attributable to an
increase in same store sales, foreign currency translation effect of our Canadian operations sales
and new store sales, partially offset by closed stores and reduced shipments to franchisees. Sales
would have increased 8.1% excluding the impact from foreign currency rate changes.
During the six months ended July 31, 2010, net sales in North America increased $33.1 million, or
8.5%, from the six months ended August 1, 2009. This increase was attributable to an increase in
same store sales, foreign currency translation effect of our Canadian operations sales and new
store sales, partially offset by closed stores and reduced shipments to franchisees. Sales would
have increased 7.6% excluding the impact from foreign currency rate changes.
For the three months ended July 31, 2010, the increase in same store sales was primarily
attributable to an increase in average transaction value of 6.1% and an increase in average number
of transactions per store of 3.2%.
For the six months ended July 31, 2010, the increase in same store sales was primarily attributable
to an increase in average transaction value of 6.8% and an increase in average number of
transactions per store of 2.8%.
During the fiscal 2010 second quarter, gross profit percentage increased 390 basis points to 52.0%
compared to the fiscal 2009 second quarter of 48.1%. This increase consisted of a 220 basis point
improvement in merchandise margin and a 230 basis point decrease in occupancy costs, offset by a 60
basis point increase in buying and buying-related costs. Merchandise margin benefited by 140 basis
points based on the results of our all store North America inventory observation. The improvement
in occupancy rate is due to the leveraging effect of higher sales.
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During the first six months of fiscal 2010, gross profit percentage increased 300 basis points to
51.8% compared to the first six months of fiscal 2009 of 48.8%. This increase consisted of a 150
basis point improvement in merchandise margin and a 200 basis point decrease in occupancy costs,
offset by a 50 basis point increase in buying and buying-related costs. Merchandise margin
benefited by 70 basis points based on the results of our all store North America inventory
observation. The improvement in occupancy rate is due to the leveraging effect of higher sales
partially offset by foreign currency translation effect.
The following table compares our sales of each product category in North America for the three and
six months ended July 31, 2010 and August 1, 2009:
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
% of Total | July 31, 2010 | August 1, 2009 | July 31, 2010 | August 1, 2009 | ||||||||||||
Accessories |
46.4 | 44.6 | 46.9 | 43.9 | ||||||||||||
Jewelry |
53.6 | 55.4 | 53.1 | 56.1 | ||||||||||||
100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||
Europe
Key statistics and results of operations for our European division are as follows (dollars in
thousands):
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
July 31, 2010 | August 1, 2009 | July 31, 2010 | August 1, 2009 | |||||||||||||
Net sales |
$ | 124,146 | $ | 121,031 | $ | 233,624 | $ | 217,685 | ||||||||
Increase (decrease) in same store sales |
8.7 | % | (1.6 | )% | 7.0 | % | (1.3 | )% | ||||||||
Gross profit percentage |
53.0 | % | 51.3 | % | 51.1 | % | 48.6 | % | ||||||||
Number of stores at the end of the
period (1) |
970 | 947 | 970 | 947 |
(1) | Number of stores excludes stores operated under franchise agreements and joint venture stores. |
During the three months ended July 31, 2010, net sales in Europe increased $3.1 million, or
2.6%, from the three months ended August 1, 2009. This increase was attributable to an increase in
same store sales and new store sales, partially offset by foreign currency translation of our
European operations sales and closed stores. Sales would have increased 11.9% excluding the
impact from foreign currency rate changes.
During the six months ended July 31, 2010, net sales in Europe increased $15.9 million, or 7.3%,
from the six months ended August 1, 2009. This increase was attributable to an increase in same
store sales and new store sales, partially offset by foreign currency translation of our European
operations sales and closed stores. Sales would have increased 9.8% excluding the impact from
foreign currency rate changes.
For the three months ended July 31, 2010, the increase in same store sales was primarily
attributable to an increase in average transaction value of 8.4% and an increase in average number
of transactions per store of 0.8%.
For the six months ended July 31, 2010, the increase in same store sales was primarily attributable
to an increase in average transaction value of 9.9%, partially offset by a decrease in average
number of transactions per store of 2.1%.
During the fiscal 2010 second quarter, gross profit percentage increased 170 basis points to 53.0%
compared to the fiscal 2009 second quarter of 51.3%. This increase consisted of a 40 basis point
improvement in merchandise margin and a 180 basis point decrease in occupancy costs, offset by a 50
basis point increase in buying and buying-related costs. The improvement in occupancy rate is due
to the leveraging effect of higher sales partially offset by foreign currency translation effect.
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During the first six months of fiscal 2010, gross profit percentage increased 250 basis points to
51.1% compared to the first six months of fiscal 2009 of 48.6%. This increase consisted of an 80
basis point improvement in merchandise margin and a 170 basis point decrease in occupancy costs.
The improvement in occupancy rate is due to the leveraging effect of higher sales partially offset
by foreign currency translation effect.
The following table compares our sales of each product category in Europe for the three and six
months ended July 31, 2010 and August 1, 2009:
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
% of Total | July 31, 2010 | August 1, 2009 | July 31, 2010 | August 1, 2009 | ||||||||||||
Accessories |
60.7 | 59.0 | 61.0 | 59.3 | ||||||||||||
Jewelry |
39.3 | 41.0 | 39.0 | 40.7 | ||||||||||||
100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||
Financial Resources and Liquidity
A summary of cash flows provided by (used in) operating, investing and financing activities for the
six months ended July 31, 2010 and August 1, 2009 is outlined in the table below (in thousands):
Six Months | Six Months | |||||||
Ended | Ended | |||||||
July 31, 2010 | August 1, 2009 | |||||||
Operating activities |
$ | 33,376 | $ | (486 | ) | |||
Investing activities |
(3,315 | ) | (9,882 | ) | ||||
Financing activities |
(67,127 | ) | (17,286 | ) |
Cash flows from operating activities
Cash provided by operating activities increased $33.9 million for the six months ended July 31,
2010 compared to the prior year period. The primary reasons for the increase were a decrease in
working capital, excluding cash and cash equivalents, of $22.4 million; an increase in operating
income before depreciation and amortization expense of $14.8 million; and lower cash interest
payments of $0.8 million; partially offset by higher cash tax payments of $3.8 million.
Cash flows from investing activities
Cash used in investing activities decreased $6.6 million for the six months ended July 31, 2010
compared to the prior year period. In February 2010, we completed a sale-leaseback transaction
that generated proceeds of approximately $16.8 million, offset by increased capital expenditures of
$8.5 million for the remodeling of existing stores, new store openings, and improvements to
technology systems and last year we received $1.6 million from the sale of intangible assets.
During the remainder of Fiscal 2010, we expect to fund between $28.0 and $30.0 million of capital
expenditures.
Cash flows from financing activities
Cash used in financing activities increased $49.8 million for the six months ended July 31, 2010
compared to the prior year period. In both of these periods, we paid $7.3 million for the
scheduled principal payments on our Credit Facility. In the six months ended July 31, 2010, we
paid $59.1 million to retire $47.6 million of Senior Toggle Notes and $22.6 million of Senior
Subordinated Notes. In the six months ended August 1, 2009, we paid $10.0 million to retire $27.8
million of Senior Subordinated Notes. We also paid $0.8 million in capital lease payments during
the six months ended July 31, 2010.
As discussed in our Annual Report on Form 10-K for the year ended January 30, 2010, we elected to
pay interest in kind on our Senior Toggle Notes 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
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through June 1, 2009, the interest period from June 2, 2009 through December 1, 2009, the interest
period from December 2, 2009 through June 1, 2010 and the interest period from June 2, 2010 through
December 1, 2010. It is our current intention to pay interest in kind on the Senior Toggle Notes
for all interest periods through June 1, 2011.
We or our affiliates have purchased and may, from time to time, purchase portions of our
indebtedness. All of our purchases have been privately-negotiated, open market transactions.
Cash position
As of July 31, 2010, we had cash and cash equivalents of $160.1 million and substantially all of
such 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 in our Annual Report on Form 10-K for the fiscal year ended
January 30, 2010.
Credit Facility and Notes
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 Unaudited Condensed Consolidated Balance Sheets as of July 31, 2010.
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
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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
July 31, 2010, we were in compliance with the covenants under our Notes.
Critical Accounting Policies and Estimates
Our Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with
U.S. generally accepted accounting principles. Preparation of these statements requires management
to make judgments and estimates. Some accounting policies have a significant impact on amounts
reported in these financial statements. A summary of significant accounting policies and a
description of accounting policies that are considered critical may be found in our Fiscal 2009
Annual Report on Form 10-K, filed on April 13, 2010, in the Notes to Consolidated Financial
Statements, Note 2, and the Critical Accounting Policies and Estimates section contained in the
Managements Discussion and Analysis of Financial Condition and Results of Operations therein.
Cautionary Note Regarding Forward-Looking Statements and Risk Factors
We and our representatives may from time to time make written or oral forward-looking statements,
including statements contained in this and other filings with the Securities and Exchange
Commission and in our press releases and reports we issue publicly. All statements which address
operating performance, events or developments that we expect or anticipate will occur in the
future, including statements relating to our future financial performance, business strategy,
planned capital expenditures, ability to service our debt, and new store openings for future
periods, are forward-looking statements. The forward-looking statements are and will be based on
managements then current views and assumptions regarding future events and operating performance,
and we assume no obligation to update any forward-looking statement. Forward-looking statements
involve known or unknown risks, uncertainties and other factors, including changes in estimates and
judgments discussed under Critical Accounting Policies and Estimates which may cause our actual
results, performance or achievements, or industry results to be materially different from any
future results, performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements may use the words expect, anticipate, plan,
intend, project, may, believe, forecasts and similar expressions. Some of these risks,
uncertainties and other factors are as follows: our level of indebtedness; general economic
conditions; changes in consumer preferences and consumer spending; competition; general political
and social conditions such as war, political unrest and terrorism; natural disasters or severe
weather events; currency fluctuations and exchange rate adjustments; uncertainties generally
associated with the specialty retailing business; disruptions in our supply of inventory; inability
to increase same store sales; inability to renew, replace or enter into new store leases on
favorable terms; significant increases in our merchandise markdowns; inability to grow our store
base in Europe or expand our international franchising operations; inability to design and
implement new information systems; delays in anticipated store openings or renovations; results
from any future asset impairment analysis; changes in applicable laws, rules and regulations,
including changes in federal, state or local regulations governing the sale of our products,
particularly regulations relating to the content in our products, general employment laws,
including laws relating to overtime pay and employee benefits, health care laws, tax laws and
import laws; product recalls; loss of key members of management; increases in the cost of labor;
labor disputes; unwillingness of vendors and service providers to supply goods or services pursuant
to historical customary credit arrangements; increases in the cost of borrowings; unavailability of
additional debt or equity capital; and the impact of our substantial indebtedness on our operating
income and our ability to grow. The Company undertakes no obligation to update or revise any
forward-looking statements to reflect subsequent events or circumstances. In addition, we
typically earn a disproportionate share of our operating income in the fourth quarter due to
seasonal buying patterns, which are difficult to forecast with certainty. Additional discussion of
these and other risks and uncertainties is contained elsewhere in this Item 2, in Item 3,
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Quantitative and Qualitative Disclosures About Market Risk and in our Form 10-K for Fiscal 2009
under Statement Regarding Forward-Looking Disclosures and Risk Factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Cash and Cash Equivalents
We have significant amounts of cash and cash equivalents at financial institutions that are in
excess of federally insured limits. With the current financial environment and the instability of
financial institutions, we cannot be assured that we will not experience losses on our deposits.
We mitigate this risk by investing in two money market funds that are invested exclusively in U.S.
Treasury securities and limiting the cash balance in any one bank account. As of July 31, 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 United States
dollar (USD or dollar) value of foreign currency denominated transactions and our investments
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 July 31, 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 $(7.8) million and $24.0
million, net of tax, reflecting the unrealized gain (loss) on foreign currency translations during
the six months ended July 31, 2010 and August 1, 2009, respectively.
Certain of our subsidiaries make significant USD purchases from Asian suppliers, particularly in
China. Until July 2005, the Chinese government pegged its currency, the yuan renminbi (RMB), to
the USD, adjusting the relative value only slightly and on infrequent occasion. Many people viewed
this practice as leading to a substantial undervaluation of the RMB relative to the USD and other
major currencies, providing China with a competitive advantage in international trade. China now
allows the RMB to float to a limited degree against a basket of major international currencies,
including the USD, the euro and the Japanese yen. The official exchange rate has historically
remained stable; however, there are no assurances that this currency exchange rate will continue to
be as stable in the future due to the Chinese governments adoption of a floating rate with respect
to the value of the RMB against foreign currencies. While the international reaction to the RMB
revaluation has generally been positive, there remains significant international pressure on China
to adopt an even more flexible and more market-oriented currency policy that allows a greater
fluctuation in the exchange rate between the RMB and the USD. This floating exchange rate, and any
appreciation of the RMB that may result from such rate, could have various effects on our business,
which include making our purchases of Chinese products more expensive. 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 USD, 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 USD 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.
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Interest Rates
On July 28, 2010, we entered into an interest rate swap agreement (the Swap) to manage exposure
to fluctuations in interest rates. The Swap expires on July 30, 2013. The Swap represents a
contract to exchange floating rate for fixed interest payments periodically over the life of the
Swap without exchange of the underlying notional amount. The Swap covers an aggregate notional
amount of $200.0 million of the outstanding principal balance of the senior secured term loan
facility. The fixed rate of the Swap is 1.2235% and has been designated and accounted for as a
cash flow hedge. At July 31, 2010, the estimated fair value of the Swap was a liability of
approximately $1.0 million and was recorded, net of tax, as a component of Accumulated other
comprehensive income (loss), net of tax in our Unaudited Condensed Consolidated Balance Sheets.
We entered into three interest rate swap agreements in July 2007 (the Swaps) to manage exposure
to fluctuations in interest rates. Those Swaps expired on June 30, 2010. The Swaps represented
contracts to exchange floating rate for fixed interest payments periodically over the lives of the
Swaps without exchange of the underlying notional amount. 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 Swaps ranged from 4.96% to 5.25%. The Swaps were
designated and accounted for as cash flow hedges. At January 30, 2010, the estimated fair value of
the Swaps were liabilities of approximately $8.8 million and were recorded, net of tax, as a
component of Accumulated other comprehensive income (loss), net of tax in our Unaudited Condensed
Consolidated Balance Sheets.
At July 31, 2010, we had fixed rate debt of $879.3 million and variable rate debt of $1.60 billion.
Based on our variable rate debt balance (less $200.0 million of interest rate swap) as of July 31,
2010, a 1% change in interest rates would increase or decrease our annual interest expense by
approximately $14.0 million, net.
General Market Risk
Our competitors include department stores, specialty stores, mass merchandisers, discount stores
and other retail and internet channels. Our operations are impacted by consumer spending levels,
which are affected by general economic conditions, consumer confidence, employment levels,
availability of consumer credit and interest rates on credit, consumer debt levels, consumption of
consumer staples including food and energy, consumption of other goods, adverse weather conditions
and other factors over which the Company has little or no control. The increase in costs of such
staple items has reduced the amount of discretionary funds that consumers are willing and able to
spend for other goods, including our merchandise. Should there be continued volatility in food and
energy costs, sustained recession in the U.S. and Europe, rising unemployment and continued
declines in discretionary income, our revenue and margins could be significantly affected in the
future. We can not predict whether, when or the manner in which the economic conditions described
above will change.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly Report.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of the end of the period covered by this
Quarterly Report to ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities Exchange Commissions rules and forms,
and that such information is accumulated and communicated to our management, including each of such
officers as appropriate to allow timely decisions regarding required disclosure.
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Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting have been made during the quarter ended
July 31, 2010, that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, involved in routine litigation incidental to the conduct of our
business, including litigation instituted by persons injured upon premises under our control;
litigation regarding the merchandise that we sell, including product and safety concerns regarding
content in our merchandise; litigation with respect to various employment matters, including wage
and hour litigation; litigation with present and former employees; and litigation regarding
intellectual property rights. Although litigation is routine and incidental to the conduct of our
business, like any business of our size 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 financial results.
Item 1A. Risk Factors
There have been no material changes in our risk factors disclosed in our Annual Report on Form 10-K
for the year ended January 30, 2010.
Item 6. Exhibits
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). | ||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). | ||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Items 2, 3, 4 and 5 of Part II are not applicable and have been omitted.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
CLAIRES STORES, INC. |
||||
September 3, 2010 | By: | /s/Eugene S. Kahn | ||
Eugene S. Kahn, Chief Executive Officer | ||||
(principal executive officer) | ||||
September 3, 2010 | By: | /s/J. Per Brodin | ||
J. Per Brodin, Executive Vice President and Chief | ||||
Financial Officer (principal financial and accounting officer) |
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INDEX TO EXHIBITS
EXHIBIT NO. | DESCRIPTION | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
34