CLAIRES STORES INC - FORM 10-Q

Attached files

file	filename
EX-31.2 - EX-31.2 - CLAIRES STORES INC	g25454exv31w2.htm
EX-31.1 - EX-31.1 - CLAIRES STORES INC	g25454exv31w1.htm
EX-32.2 - EX-32.2 - CLAIRES STORES INC	g25454exv32w2.htm
EX-32.1 - EX-32.1 - CLAIRES STORES INC	g25454exv32w1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended October 30, 2010


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

Claire’s 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		60192

(Address of principal executive offices)		(Zip Code)

Registrant’s 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 December 1, 2010, 100 shares of the Registrant’s common stock, $0.001 par value, were outstanding.

CLAIRE’S STORES, INC. AND SUBSIDIARIES
INDEX


		PAGE NO.
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements		3

Unaudited Condensed Consolidated Balance Sheets as of October 30, 2010 and January 30, 2010		3

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended October 30, 2010 and October 31, 2009		4

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 30, 2010 and October 31, 2009		5

Notes to Unaudited Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3. Quantitative and Qualitative Disclosures About Market Risk		29

Item 4. Controls and Procedures		30

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		31

Item 1A. Risk Factors		31

Item 6. Exhibits		31

SIGNATURE PAGE		32

Ex-31.1 Section 302 Certification of CEO		34
Ex-31.2 Section 302 Certification of CFO		35
Ex-32.1 Section 906 Certification of CEO		36
Ex-32.2 Section 906 Certification of CFO		37
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION
CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	October 30, 2010			January 30, 2010
	(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	154,055		$	198,708
Inventories		160,247			110,338
Prepaid expenses		32,396			32,873
Other current assets		27,278			28,236

Total current assets		373,976			370,155

Property and equipment:
Land and building		—			19,318
Furniture, fixtures and equipment		177,919			162,602
Leasehold improvements		242,020			228,503

		419,939			410,423
Less accumulated depreciation and amortization		(221,219	)		(182,439	)

		198,720			227,984

Leased property under capital leases:
Land and building		18,055			—
Less accumulated depreciation and amortization		(677	)		—

		17,378			—

Intangible assets, net of accumulated amortization of $40,916 and $32,532, respectively		573,389			580,027
Deferred financing costs, net of accumulated amortization of $39,160 and $29,949, respectively		38,430			47,641
Other assets		43,822			58,242
Goodwill		1,550,056			1,550,056

		2,205,697			2,235,966


Total assets	$	2,795,771		$	2,834,105


LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Trade accounts payable	$	64,547		$	45,660
Current portion of long-term debt		14,500			14,500
Income taxes payable		8,321			10,272
Accrued interest payable		27,032			14,644
Accrued expenses and other current liabilities		104,465			96,436

Total current liabilities		218,865			181,512


Long-term debt		2,235,384			2,313,378
Revolving credit facility		194,000			194,000
Obligations under capital leases		17,290			—
Deferred tax liability		122,075			122,145
Deferred rent expense		25,205			22,082
Unfavorable lease obligations and other long-term liabilities		30,837			35,630

		2,624,791			2,687,235


Commitments and contingencies

Stockholder’s deficit:
Common stock par value $0.001 per share; authorized 1,000 shares; issued and outstanding 100 shares		—			—
Additional paid-in capital		619,675			616,086
Accumulated other comprehensive income, net of tax		2,791			2,625
Retained deficit		(670,351	)		(653,353	)

		(47,885	)		(34,642	)

Total liabilities and stockholder’s deficit	$	2,795,771		$	2,834,105

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(in thousands)


	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	October 30, 2010			October 31, 2009			October 30, 2010			October 31, 2009
Net sales	$	348,175		$	324,404		$	1,004,485		$	931,698
Cost of sales, occupancy and buying expenses		167,573			159,400			485,544			470,895

Gross profit		180,602			165,004			518,941			460,803

Other expenses:
Selling, general and administrative		123,432			115,823			366,493			332,877
Depreciation and amortization		16,106			17,327			48,328			54,185
Severance and transaction-related costs		121			32			435			406
Other expense (income), net		(553	)		(874	)		964			(1,182	)

		139,106			132,308			416,220			386,286

Operating income		41,496			32,696			102,721			74,517
Gain on early debt extinguishment		2,652			16,096			13,388			33,200
Impairment of equity investment		—			—			6,030			—
Interest expense, net		37,132			43,716			120,468			134,279

Income (loss) before income tax expense		7,016			5,076			(10,389	)		(26,562	)
Income tax expense		3,369			2,187			6,609			3,305

Net income (loss)	$	3,647		$	2,889		$	(16,998	)	$	(29,867	)



Net income (loss)	$	3,647		$	2,889		$	(16,998	)	$	(29,867	)
Foreign currency translation and interest rate swap adjustments, net of tax		9,747			4,851			9,738			30,450
Reclassification of foreign currency translation adjustments in net loss		—			—			(9,572	)		—

Comprehensive income (loss)	$	13,394		$	7,740		$	(16,832	)	$	583

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


	Nine Months			Nine Months
	Ended			Ended
	October 30, 2010			October 31, 2009
Cash flows from operating activities:
Net loss	$	(16,998	)	$	(29,867	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		48,328			54,185
Impairment		6,030			—
Amortization of lease rights and other assets		2,246			1,513
Amortization of debt issuance costs		7,507			7,845
Payment in kind interest expense		27,837			29,415
Net unfavorable accretion of lease obligations		(1,236	)		(1,594	)
Loss on sale/retirement of property and equipment, net		632			39
Gain on early debt extinguishment		(13,388	)		(33,200	)
Gain on sale of intangible assets/lease rights		—			(598	)
Stock compensation expense		3,589			4,332
(Increase) decrease in:
Inventories		(48,463	)		(30,915	)
Prepaid expenses		1,698			(5,193	)
Other assets		(3,251	)		(5,567	)
Increase (decrease) in:
Trade accounts payable		16,505			9,945
Income taxes payable		313			1,749
Accrued interest payable		12,389			15,121
Accrued expenses and other liabilities		12,877			(954	)
Deferred income taxes		512			1,578
Deferred rent expense		2,957			2,895

Net cash provided by operating activities		60,084			20,729

Cash flows from investing activities:
Acquisition of property and equipment, net		(29,803	)		(17,675	)
Acquisition of intangible assets/lease rights		(919	)		(484	)
Proceeds from sale of intangible assets/lease rights		—			2,154
Proceeds from sale of property		16,765			—

Net cash used in investing activities		(13,957	)		(16,005	)

Cash flows from financing activities:
Credit facility payments		(10,875	)		(10,875	)
Note purchases		(79,865	)		(36,521	)
Principal payments on capital leases		(765	)		—

Net cash used in financing activities		(91,505	)		(47,396	)

Effect of foreign currency exchange rate changes on cash and cash equivalents		725			3,257

Net decrease in cash and cash equivalents		(44,653	)		(39,415	)
Cash and cash equivalents at beginning of period		198,708			204,574

Cash and cash equivalents at end of period	$	154,055		$	165,159


Supplemental disclosure of cash flow information:

Income taxes paid	$	5,095		$	2,719
Interest paid		72,997			81,927
Property acquired under capital lease		18,055			—

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CLAIRE’S STORES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results for the interim periods presented have been included. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended January 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 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 management’s 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 Company’s 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.

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:

Capital Leases

Leased property meeting certain capital lease criteria is capitalized as an asset 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 of the leased asset or the initial lease term and is included in “Depreciation and amortization” in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Interest expense is recognized on the outstanding capital lease obligation using the effective interest method and is recorded

in “Interest expense, net” in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

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 and licensing 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 expense (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 Claire’s Nippon under the equity method and included the results within “Other expense (income), net” in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) within the Company’s North American division. These former joint venture stores now operate as licensed stores. Substantially all of the interest expense on the Company’s outstanding debt is recorded in the Company’s North American division.

Net sales and operating income for the three and nine months ended October 30, 2010 and October 31, 2009 are as follows (in thousands):


	Three Months		Three Months		Nine Months			Nine Months
	Ended		Ended		Ended			Ended
	October 30, 2010		October 31, 2009		October 30, 2010			October 31, 2009
Net sales:
North America	$	220,672	$	199,867	$	643,358		$	589,476
Europe		127,503		124,537		361,127			342,222

Total net sales		348,175		324,404		1,004,485			931,698


Depreciation and amortization:
North America		10,344		11,230		31,253			36,479
Europe		5,762		6,097		17,075			17,706

Total depreciation and amortization		16,106		17,327		48,328			54,185


Operating income for reportable segments:
North America		28,449		15,459		72,220			44,251
Europe		13,168		17,269		30,936			30,672

Total operating income for reportable segments		41,617		32,728		103,156			74,923
Severance and transaction-related costs		121		32		435			406

Net consolidated operating income		41,496		32,696		102,721			74,517
Gain on early debt extinguishment		2,652		16,096		13,388			33,200
Impairment of equity investment		—		—		6,030			—
Interest expense, net		37,132		43,716		120,468			134,279


Net consolidated income (loss) before income tax expense	$	7,016	$	5,076	$	(10,389	)	$	(26,562	)

Excluded from operating income for the North American segment are severance and transaction-related costs of approximately $0 and $0 for the three months ended October 30, 2010 and October 31, 2009, respectively, and $0.3 million and $0.4 million for the nine months ended October 30, 2010 and October 31, 2009, respectively.

Excluded from operating income for the European segment are severance and transaction-related costs of approximately $0.1 million and $0 for the three months ended October 30, 2010 and October 31, 2009, respectively, and $0.1 million and $0 for the nine months ended October 30, 2010 and October 31, 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 Company’s debt repurchase activity for the three and nine months ended October 30, 2010 and October 31, 2009 (in thousands):


	Three Months Ended				Nine Months Ended
	October 30, 2010				October 30, 2010
	Principal		Purchase		Principal		Purchase
Note Purchased	Amount		Price		Amount		Price
Senior Notes	$	14,000	$	12,268	$	14,000	$	12,268
Senior Toggle Notes		9,550		8,486		57,173		49,798
Senior Subordinated Notes		—		—		22,625		17,799

	$	23,550	$	20,754	$	93,798	$	79,865


	Three Months Ended				Nine Months Ended
	October 31, 2009				October 31, 2009
	Principal		Purchase		Principal		Purchase
Note Purchased	Amount		Price		Amount		Price
Senior Toggle Notes	$	27,500	$	17,520	$	27,500	$	17,520
Senior Subordinated Notes		15,000		8,965		42,838		19,001

	$	42,500	$	26,485	$	70,338	$	36,521

See Note 7 for related fair value disclosure on debt.

5. Stock Options and Stock-Based Compensation

The following is a summary of activity in the Company’s stock option plan for the nine months ended October 30, 2010:


						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
Options	Shares			Price		Term (Years)		Value
Outstanding at January 30, 2010		6,275,110		$	10.00
Options granted		592,500		$	10.00
Options exercised		—
Options forfeited or expired		(339,315	)	$	10.00

Outstanding at October 30, 2010		6,528,295		$	10.00		4.5	$	—


Exercisable at October 30, 2010		2,106,711		$	10.00		4.1	$	—

The weighted average grant date fair value of options granted during the nine months ended October 30, 2010 and October 31, 2009 was $3.97 and $2.99, respectively.

During the three and nine months ended October 30, 2010 and October 31, 2009, the Company recorded stock-based compensation expense and additional paid-in capital relating to stock-based compensation of approximately $1.1 million, $1.4 million, $3.6 million and $4.3 million, respectively. Stock-based compensation expense 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 48.0% and (63.6)% for the three and nine months ended October 30, 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 nine months ended October 30, 2010 by the Company’s U.S. operations.

The effective income tax rate was 43.1% and (12.4)% for the three and nine months ended October 31, 2009, respectively. These effective income tax rates differed from the statutory federal tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated in the three and nine months ended October 31, 2009 by the Company’s 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 Company’s assumptions about the factors market participants would use in valuing the asset or liability.

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, current liabilities, debt, the revolving credit facility and interest rate swaps. Cash and cash equivalents, accounts receivable and current liabilities approximate fair market value due to the relatively short maturity of these financial instruments.

The Company considers all investments with a maturity of three months or less when acquired to be cash equivalents. The Company’s 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 nine months ended October 30, 2010, and all components of the derivative gain or loss were included in the assessment of hedge effectiveness.

The fair value of the Company’s 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 Company does not make any credit-related valuation adjustments to the Swap entered into on July 28, 2010 because it is collateralized by cash, the balance of which is $5.6 million at October 30, 2010. The collateral requirement increases for declines in the three year LIBOR rate below 1.2235%. As of October 30, 2010, the three year LIBOR rate was 0.64% and each further 10 basis point decline in rate would result in an additional collateral requirement of $0.6 million. Any subsequent increases in the three year LIBOR rate will result in a release of the 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 Company’s assets (liabilities) measured at fair value on a recurring basis segregated among the appropriate levels within the fair value hierarchy (in thousands):


				Fair Value Measurements at October 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	$	(2,443,884	)	$	(2,173,558	)	$	—		$	—
Interest rate swap	$	(3,088	)	$	—		$	(3,088	)	$	—


				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 October 30, 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 Company’s derivative financial instruments designated as interest rate cash flow hedges during the three and nine months ended October 30, 2010 and October 31, 2009 (in thousands):


Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)					Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (1)
	Three months ended						Three months ended
	October 30, 2010			October 31, 2009			October 30, 2010			October 31, 2009
Interest rate swaps	$	(2,086	)	$	2,266	Interest expense, net	$	(378	)	$	(5,275	)


(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.


Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)				Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (1)
	Nine months ended					Nine months ended
	October 30, 2010		October 31, 2009			October 30, 2010			October 31, 2009
Interest rate swaps	$	5,663	$	3,862	Interest expense, net	$	(9,157	)	$	(13,920	)


(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 Company’s interest rate swaps recognized within “Accumulated other comprehensive income (loss), net of tax” of $1.9 million to interest expense.

The Company’s 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 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 Claire’s Nippon. 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 Claire’s 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. Because the expected future cash flows were less than the net carrying value of the investment in Claire’s 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 Claire’s Nippon during the fiscal 2010 second quarter.

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 Claire’s stores in all of Asia excluding Japan. The parties also agreed to operate Claire’s 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.

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 Company’s executive officers. For the three months ended October 30, 2010 and October 31, 2009, fees of approximately $0.3 million and $0.3 million, respectively, were paid to this company. For the nine months ended October 30, 2010 and October 31, 2009, the Company paid fees of approximately $0.9 million and $0.6 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, Claire’s 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 Claire’s Stores, Inc. that guarantee the Company’s Credit Facility (the “Guarantors”). The Company’s 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.

Condensed Consolidating Balance Sheet
October 30, 2010
(in thousands)


							Non-
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	95,976		$	(8,615	)	$	66,694		$	—		$	154,055
Inventories		—			103,330			56,917			—			160,247
Prepaid expenses		1,536			15,019			15,841			—			32,396
Other current assets		27			18,307			8,944			—			27,278

Total current assets		97,539			128,041			148,396			—			373,976

Property and equipment:
Land and building		—			—			—			—			—
Furniture, fixtures and equipment		3,143			114,668			60,108			—			177,919
Leasehold improvements		1,050			141,161			99,809			—			242,020

		4,193			255,829			159,917			—			419,939
Less accumulated depreciation and amortization		(2,031	)		(139,448	)		(79,740	)		—			(221,219	)

		2,162			116,381			80,177			—			198,720

Leased property under capital leases:
Land and building		—			18,055			—			—			18,055
Less accumulated depreciation and amortization		—			(677	)		—			—			(677	)

		—			17,378			—			—			17,378

Intercompany receivables		—			293,500			—			(293,500	)		—
Investment in subsidiaries		2,304,841			(66,132	)		—			(2,238,709	)		—
Intangible assets, net		285,999			10,752			276,638			—			573,389
Deferred financing costs, net		38,430			—			—			—			38,430
Other assets		127			4,131			39,564			—			43,822
Goodwill		—			1,235,650			314,406			—			1,550,056

		2,629,397			1,477,901			630,608			(2,532,209	)		2,205,697

Total assets	$	2,729,098		$	1,739,701		$	859,181		$	(2,532,209	)		2,795,771


LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable	$	2,988		$	29,463		$	32,096		$	—		$	64,547
Current portion of long-term debt		14,500			—			—			—			14,500
Income taxes payable		—			(330	)		8,651			—			8,321
Accrued interest payable		27,032			—			—			—			27,032
Accrued expenses and other current liabilities		20,341			34,991			49,133			—			104,465

Total current liabilities		64,861			64,124			89,880			—			218,865

Intercompany payables		282,738			—			10,762			(293,500	)		—
Long-term debt		2,235,384			—			—			—			2,235,384
Revolving credit facility		194,000			—			—			—			194,000
Obligations under capital leases		—			17,290			—			—			17,290
Deferred tax liability		—			106,613			15,462			—			122,075
Deferred rent expense		—			16,726			8,479			—			25,205
Unfavorable lease obligations and other long-term liabilities		—			29,286			1,551			—			30,837

		2,712,122			169,915			36,254			(293,500	)		2,624,791

Stockholder’s equity (deficit):
Common stock		—			367			2			(369	)		—
Additional paid in capital		619,675			1,445,795			876,798			(2,322,593	)		619,675
Accumulated other comprehensive income (loss), net of tax		2,791			3,094			(2,564	)		(530	)		2,791
Retained earnings (deficit)		(670,351	)		56,406			(141,189	)		84,783			(670,351	)

		(47,885	)		1,505,662			733,047			(2,238,709	)		(47,885	)

Total liabilities and stockholder’s equity (deficit)	$	2,729,098		$	1,739,701		$	859,181		$	(2,532,209	)	$	2,795,771

Condensed Consolidating Balance Sheet
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 STOCKHOLDER’S 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

Stockholder’s 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 stockholder’s equity (deficit)	$	2,664,615		$	1,640,271		$	870,916		$	(2,341,697	)	$	2,834,105

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended October 30, 2010
(in thousands)


						Non-
	Issuer			Guarantors		Guarantors			Eliminations			Consolidated
Net sales	$	—		$	418,244	$	144,237		$	(214,306	)	$	348,175
Cost of sales, occupancy and buying expenses		1,088			313,787		67,004			(214,306	)		167,573

Gross profit		(1,088	)		104,457		77,233			—			180,602

Other expenses:
Selling, general and administrative		8,739			62,757		51,936			—			123,432
Depreciation and amortization		162			9,485		6,459			—			16,106
Severance and transaction-related costs		41			—		80			—			121
Other (income) expense		(6,259	)		4,797		909			—			(553	)

		2,683			77,039		59,384			—			139,106

Operating income (loss)		(3,771	)		27,418		17,849			—			41,496
Gain on early debt extinguishment		2,652			—		—			—			2,652
Interest expense, net		36,667			473		(8	)		—			37,132

Income (loss) before income taxes		(37,786	)		26,945		17,857			—			7,016
Income tax expense (benefit)		—			822		2,547			—			3,369

Income (loss) from continuing operations		(37,786	)		26,123		15,310			—			3,647
Equity in earnings of subsidiaries		41,433			1,365		—			(42,798	)		—

Net income		3,647			27,488		15,310			(42,798	)		3,647
Foreign currency translation and interest rate swap adjustments, net of tax		9,747			83		11,465			(11,548	)		9,747

Comprehensive income	$	13,394		$	27,571	$	26,775		$	(54,346	)	$	13,394

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended October 31, 2009
(in thousands)


							Non-
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Net sales	$	—		$	381,633		$	139,537		$	(196,766	)	$	324,404
Cost of sales, occupancy and buying expenses		—			290,248			65,918			(196,766	)		159,400

Gross profit		—			91,385			73,619			—			165,004

Other expenses:
Selling, general and administrative		6,970			63,829			45,024			—			115,823
Depreciation and amortization		163			10,374			6,790			—			17,327
Severance and transaction-related costs		32			—			—			—			32
Other (income) expense		(4,310	)		4,328			(892	)		—			(874	)

		2,855			78,531			50,922			—			132,308

Operating income (loss)		(2,855	)		12,854			22,697			—			32,696
Gain on early debt extinguishment		16,096			—			—			—			16,096
Interest expense (income), net		43,714			2			—			—			43,716

Income (loss) before income taxes		(30,473	)		12,852			22,697			—			5,076
Income tax expense (benefit)		174			440			1,573			—			2,187

Income (loss) from continuing operations		(30,647	)		12,412			21,124			—			2,889
Equity in earnings of subsidiaries		33,536			2,100			—			(35,636	)		—

Net income		2,899			14,512			21,124			(35,636	)		2,889
Foreign currency translation and interest rate swap adjustments, net of tax		4,851			(194	)		1,716			(1,522	)		4,851

Comprehensive income	$	7,740		$	14,318		$	22,840		$	(37,158	)	$	7,740

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Nine Months Ended October 30, 2010
(in thousands)


							Non-
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Net sales	$	—		$	1,144,850		$	407,123		$	(547,488	)	$	1,004,485
Cost of sales, occupancy and buying expenses		3,745			836,903			192,384			(547,488	)		485,544

Gross profit		(3,745	)		307,947			214,739			—			518,941

Other expenses:
Selling, general and administrative		26,225			188,544			151,724			—			366,493
Depreciation and amortization		449			28,699			19,180			—			48,328
Severance and transaction-related costs		355			—			80			—			435
Other (income) expense		(19,456	)		13,163			7,257			—			964

		7,573			230,406			178,241			—			416,220

Operating income (loss)		(11,318	)		77,541			36,498			—			102,721
Gain on early debt extinguishment		13,388			—			—			—			13,388
Impairment of equity investment		—			6,030			—			—			6,030
Interest expense, net		119,830			655			(17	)		—			120,468

Income (loss) before income taxes		(117,760	)		70,856			36,515			—			(10,389	)
Income tax expense		23			506			6,080			—			6,609

Income (loss) from continuing operations		(117,783	)		70,350			30,435			—			(16,998	)
Equity in earnings of subsidiaries		100,785			1,600			—			(102,385	)		—

Net income (loss)		(16,998	)		71,950			30,435			(102,385	)		(16,998	)
Foreign currency translation and interest rate swap adjustments, net of tax		9,738			994			1,570			(2,564	)		9,738
Reclassification of foreign currency translation adjustments in net income (loss)		(9,572	)		(9,572	)		—			9,572			(9,572	)

Comprehensive income (loss)	$	(16,832	)	$	63,372		$	32,005		$	(95,377	)	$	(16,832	)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Nine Months Ended October 31, 2009
(in thousands)


							Non-
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Net sales	$	—		$	1,043,158		$	380,734		$	(492,194	)	$	931,698
Cost of sales, occupancy and buying expenses		—			775,328			187,761			(492,194	)		470,895

Gross profit		—			267,830			192,973			—			460,803

Other expenses:
Selling, general and administrative		20,957			176,578			135,342			—			332,877
Depreciation and amortization		1,276			32,995			19,914			—			54,185
Severance and transaction-related costs		406			—			—			—			406
Other (income) expense		(10,548	)		13,811			(4,445	)		—			(1,182	)

		12,091			223,384			150,811			—			386,286

Operating income (loss)		(12,091	)		44,446			42,162			—			74,517
Gain on early debt extinguishment		33,200			—			—			—			33,200
Interest expense (income), net		134,332			(11	)		(42	)		—			134,279

Income (loss) before income taxes		(113,223	)		44,457			42,204			—			(26,562	)
Income tax expense		—			2,288			1,017			—			3,305

Income (loss) from continuing operations		(113,223	)		42,169			41,187			—			(29,867	)
Equity in earnings of subsidiaries		83,356			3,372			—			(86,728	)		—

Net income (loss)		(29,867	)		45,541			41,187			(86,728	)		(29,867	)
Foreign currency translation and interest rate swap adjustments, net of tax		30,450			3,855			27,565			(31,420	)		30,450

Comprehensive income	$	583		$	49,396		$	68,752		$	(118,148	)	$	583

Condensed Consolidating Statement of Cash Flows
Nine Months Ended October 30, 2010
(in thousands)


							Non-
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(16,998	)	$	71,950		$	30,435		$	(102,385	)	$	(16,998	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in earnings of subsidiaries		(100,785	)		(1,600	)		—			102,385			—
Depreciation and amortization		449			28,699			19,180			—			48,328
Impairment		—			6,030			—			—			6,030
Amortization of lease rights and other assets		—			29			2,217			—			2,246
Amortization of debt issuance costs		7,507			—			—			—			7,507
Payment in kind interest expense		27,837			—			—			—			27,837
Net accretion of favorable (unfavorable) lease obligations		—			(1,624	)		388			—			(1,236	)
Loss on sale/retirement of property and equipment, net		—			632			—			—			632
Gain on early debt extinguishment		(13,388	)		—			—			—			(13,388	)
Stock compensation expense		2,757			—			832			—			3,589
(Increase) decrease in:
Inventories		—			(29,428	)		(19,035	)		—			(48,463	)
Prepaid expenses		(1,026	)		(803	)		3,527			—			1,698
Other assets		1,216			1,299			(5,766	)		—			(3,251	)
Increase (decrease) in:
Trade accounts payable		653			9,072			6,780			—			16,505
Income taxes payable		—			1,346			(1,033	)		—			313
Accrued interest payable		12,389			—			—			—			12,389
Accrued expenses and other liabilities		3,625			1,334			7,918			—			12,877
Deferred income taxes		—			424			88			—			512
Deferred rent expense		(107	)		1,770			1,294			—			2,957

Net cash provided by (used in) operating activities		(75,871	)		89,130			46,825			—			60,084

Cash flows from investing activities:
Acquisition of property and equipment, net		(1,104	)		(10,386	)		(18,313	)		—			(29,803	)
Acquisition of intangible assets/lease rights		—			(89	)		(830	)		—			(919	)
Proceeds from sale of property		—			16,765			—			—			16,765

Net cash provided by (used in) investing activities		(1,104	)		6,290			(19,143	)		—			(13,957	)

Cash flows from financing activities:
Credit facility payments		(10,875	)		—			—			—			(10,875	)
Note purchases		(79,865	)		—			—			—			(79,865	)
Principal payments on capital leases		—			(765	)		—			—			(765	)
Intercompany activity, net		154,553			(94,473	)		(60,080	)		—			—

Net cash provided by (used in) financing activities		63,813			(95,238	)		(60,080	)		—			(91,505	)

Effect of foreign currency exchange rate changes on cash and cash equivalents		—			1,807			(1,082	)		—			725

Net increase (decrease) in cash and cash equivalents		(13,162	)		1,989			(33,480	)		—			(44,653	)
Cash and cash equivalents at beginning of period		109,138			(10,604	)		100,174			—			198,708

Cash and cash equivalents at end of period	$	95,976		$	(8,615	)	$	66,694		$	—		$	154,055

Condensed Consolidating Statement of Cash Flows
Nine Months Ended October 31, 2009
(in thousands)


							Non-
	Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(29,867	)	$	45,541		$	41,187		$	(86,728	)	$	(29,867	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in earnings of subsidiaries		(83,356	)		(3,372	)		—			86,728			—
Depreciation and amortization		1,276			32,995			19,914			—			54,185
Amortization of lease rights and other assets		—			36			1,477			—			1,513
Amortization of debt issuance costs		7,845			—			—			—			7,845
Payment in kind interest expense		29,415			—			—			—			29,415
Net accretion of favorable (unfavorable) lease obligations		—			(1,885	)		291			—			(1,594	)
Loss on sale / retirement of property and equipment, net		3			17			19			—			39
Gain on early debt extinguishment		(33,200	)		—			—			—			(33,200	)
Gain on sale of intangible assets/lease rights		—			—			(598	)		—			(598	)
Stock compensation expense		2,901			—			1,431			—			4,332
(Increase) decrease in:
Inventories		—			(21,560	)		(9,355	)		—			(30,915	)
Prepaid expenses		(158	)		(674	)		(4,361	)		—			(5,193	)
Other assets		(1,487	)		(2,215	)		(1,865	)		—			(5,567	)
Increase (decrease) in:
Trade accounts payable		(510	)		1,319			9,136			—			9,945
Income taxes payable		—			(216	)		1,965			—			1,749
Accrued interest payable		15,124			—			(3	)		—			15,121
Accrued expenses and other liabilities		(4,585	)		302			3,329			—			(954	)
Deferred income taxes		987			1,035			(444	)		—			1,578
Deferred rent expense		(486	)		2,348			1,033			—			2,895

Net cash provided by (used in) operating activities		(96,098	)		53,671			63,156			—			20,729

Cash flows from investing activities:
Acquisition of property and equipment, net		(162	)		(9,723	)		(7,790	)		—			(17,675	)
Acquisition of intangible assets/lease rights		—			(87	)		(397	)		—			(484	)
Proceeds from sale of intangible assets/lease rights		—			—			2,154			—			2,154

Net cash used in investing activities		(162	)		(9,810	)		(6,033	)		—			(16,005	)

Cash flows from financing activities:
Credit facility payments		(10,875	)		—			—			—			(10,875	)
Note purchases		(36,521	)		—			—			—			(36,521	)
Intercompany activity, net		82,115			(48,835	)		(33,280	)		—			—

Net cash provided by (used in) financing activities		34,719			(48,835	)		(33,280	)		—			(47,396	)

Effect of foreign currency exchange rate changes on cash and cash equivalents		—			(242	)		3,499			—			3,257

Net increase (decrease) in cash and cash equivalents		(61,541	)		(5,216	)		27,342			—			(39,415	)
Cash and cash equivalents at beginning of period		154,414			211			49,949			—			204,574

Cash and cash equivalents at end of period	$	92,873		$	(5,005	)	$	77,291		$	—		$	165,159

Item2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s 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. Management’s 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.

Business Overview

We are one of the world’s 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 October 30, 2010, we operated a total of 2,971 stores, of which 1,983 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American division) and 988 stores were located in the United Kingdom, France, Switzerland, Spain, Ireland, Austria, Germany, Netherlands, Portugal, Belgium and Poland (our European division). Our stores operate under the trade names “Claire’s” and “Icing.”

In addition, as of October 30, 2010, we franchised or licensed 398 stores in Japan, the Middle East, Turkey, Russia, South Africa, Greece, Guatemala and Malta under franchising agreements. Within our North American division, we account for the goods we sell to third parties under franchising agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” in our 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 expense (income), net” in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) included in this Quarterly Report.

Until September 2, 2010, we also operated stores in Japan through our Claire’s Nippon 50:50 joint venture with Aeon Co., Ltd. Within our North American division, we accounted for the results of operations of Claire’s Nippon under the equity method and included the results within “Other expense (income), net” in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) included in this Quarterly Report. Beginning September 2, 2010, these former joint venture stores now operate as licensed stores.

Our primary brand in North America and exclusively in Europe is Claire’s. Our Claire’s customers are predominantly teens (ages 13 to 18), tweens (ages 7 to 12) and kids (ages 3 to 6), or known internally to Claire’s 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 legwear, headwear, attitude glasses, armwear, scarves and belts, and seasonal use, including sunglasses, sandals, hats, boots, scarves, gloves, earmuffs 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 Claire’s and Icing brands allows us to operate multiple store locations within a single mall. In Europe our stores are located primarily on high streets, in shopping malls and in high traffic urban areas.

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 nine months ended October 30, 2010 and October 31, 2009 are as follows (dollars in thousands):


	Three Months			Three Months
	Ended			Ended
	October 30, 2010			October 31, 2009
Net sales	$	348,175		$	324,404
Increase (decrease) in same store sales		7.5	%		(0.3	)%
Gross profit percentage		51.9	%		50.9	%
Selling, general and administrative expenses as a percentage of net sales		35.5	%		35.7	%
Depreciation and amortization as a percentage of net sales		4.6	%		5.3	%
Operating income	$	41,496		$	32,696
Gain on early debt extinguishment	$	2,652		$	16,096
Net income	$	3,647		$	2,889
Number of stores at the end of the period (1)		2,971			2,954


(1)		Number of stores excludes stores operated under franchise and licensing agreements.


	Nine Months			Nine Months
	Ended			Ended
	October 30, 2010			October 31, 2009
Net sales	$	1,004,485		$	931,698
Increase (decrease) in same store sales		8.0	%		(3.2	)%
Gross profit percentage		51.7	%		49.5	%
Selling, general and administrative expenses as a percentage of net sales		36.5	%		35.7	%
Depreciation and amortization as a percentage of net sales		4.8	%		5.8	%
Operating income	$	102,721		$	74,517
Gain on early debt extinguishment	$	13,388		$	33,200
Impairment of equity investment	$	6,030		$	—
Net loss	$	(16,988	)	$	(29,867	)
Number of stores at the end of the period (1)		2,971			2,954


(1)		Number of stores excludes stores operated under franchise and licensing agreements.

Net sales

Net sales for the three months ended October 30, 2010 increased $23.8 million, or 7.3%, from the three months ended October 31, 2009. This increase was attributable to an increase in same store sales, new store sales and an increase in shipments to franchisees, partially offset by foreign currency translation effect of our foreign locations’ sales and closed stores. Sales would have increased 9.4% excluding the impact from foreign currency rate changes.

Net sales for the nine months ended October 30, 2010 increased $72.8 million, or 7.8%, from the nine months ended October 31, 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 8.7% excluding the impact from foreign currency rate changes.

For the three months ended October 30, 2010, the increase in same store sales was primarily attributable to an increase in average transaction value of 5.3% and an increase in average number of transactions per store of 3.0%.

For the nine months ended October 30, 2010, the increase in same store sales was primarily attributable to an increase in average transaction value of 7.2% and an increase in average number of transactions per store of 1.1%.

The following table compares our sales of each product category for each of the periods presented:


	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
% of Total	October 30, 2010		October 31, 2009		October 30, 2010		October 31, 2009
Accessories		54.3		54.3		52.7		51.2
Jewelry		45.7		45.7		47.3		48.8

		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 third quarter, gross profit percentage increased 100 basis points to 51.9% compared to 50.9% during the comparable prior year quarter. The increase consisted of a 180 basis point decrease in occupancy costs, partially offset by an 80 basis point decrease in merchandise margin. The improvement in occupancy rate is due to the leveraging effect of higher sales. The decrease in merchandise margin was primarily due to an increase in markdowns and freight expense.

During the first nine months of fiscal 2010, gross profit percentage increased 220 basis points to 51.7% compared to 49.5% during the comparable prior year period. The increase consisted of a 50 basis point improvement in merchandise margin and a 190 basis point decrease in occupancy costs, partially offset by a 20 basis point increase in buying and buying-related costs. Merchandise margin benefited by 30 basis points based on the results of our all store North America inventory observation during the fiscal 2010 second quarter. Merchandise margin also benefited from increased initial mark up and reduced markdowns partially offset by increases in freight expense. The improvement in occupancy rate is due to the leveraging effect of higher sales.

Selling, general and administrative expenses

During the three months ended October 30, 2010, selling, general and administrative expenses increased $7.6 million, or 6.6%, compared to the three months ended October 31, 2009. As a percentage of net sales, selling, general and administrative expenses decreased 20 basis points compared to the three months ended October 31, 2009. The majority of the increase was for store-related expenses resulting from increased sales.

During the nine months ended October 30, 2010, selling, general and administrative expenses increased $33.6 million, or 10.1%, compared to the nine months ended October 31, 2009. As a percentage of net sales, selling, general and administrative expenses increased 80 basis points compared to the nine months ended October 31, 2009. The majority of the increase was for store-related expenses resulting from

increased sales, including the all store inventory observation in North America during the fiscal 2010 second quarter.

Depreciation and amortization expense

Depreciation and amortization expense decreased $1.2 million to $16.1 million during the three months ended October 30, 2010 compared to the three months ended October 31, 2009. The majority of this decrease is due to the effect of assets becoming fully depreciated or amortized.

Depreciation and amortization expense decreased $5.9 million to $48.3 million during the nine months ended October 30, 2010 compared to the nine months ended October 31, 2009. The majority of this decrease is due to the effect of assets becoming fully depreciated or amortized.

Other expense (income), net

The following is a summary of other expense (income) activity for the three and nine months ended October 30, 2010 and October 31, 2009 (in thousands):


	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	October 30, 2010			October 31, 2009			October 30, 2010			October 31, 2009
Equity (income) loss	$	—		$	(411	)	$	2,529		$	777
Royalty income		(553	)		(334	)		(1,085	)		(1,141	)
Gain on sale of assets		—			—			—			(598	)
Other income		—			(129	)		(480	)		(220	)

	$	(553	)	$	(874	)	$	964		$	(1,182	)

Impairment of equity investment

During the second quarter of 2010, the Company recorded a non-cash impairment charge related to the investment in Claire’s Nippon of $6.0 million. There were no other impairment charges recorded during the three and nine months ended October 30, 2010. Recent operating losses prompted us to perform a valuation of Claire’s Nippon during the second fiscal quarter of 2010.

Interest expense, net

Net interest expense for the three months ended October 30, 2010 aggregated $37.1 million compared to $43.7 million for the three months ended October 31, 2009. This decrease of $6.6 million is primarily the result of reductions in interest rates on the floating portion of our debt and Note purchases.

Net interest expense for the nine months ended October 30, 2010 aggregated $120.5 million compared to $134.3 million for the nine months ended October 31, 2009. This decrease of $13.8 million is primarily the result of reductions in interest rates on the floating portion of our debt and Note purchases.

Income taxes

The effective income tax rate for the three and nine months ended October 30, 2010 was 48.0% and (63.6)%, respectively, compared to 43.1% and (12.4)% for the three and nine months ended October 31, 2009, respectively. These effective income tax rates differed from the statutory federal tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated in the three and nine months ended October 30, 2010 and October 31, 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			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	October 30, 2010			October 31, 2009			October 30, 2010			October 31, 2009
Net sales	$	220,672		$	199,867		$	643,358		$	589,476
Increase (decrease) in same store sales		9.6	%		(1.9	)%		9.1	%		(5.0	)%
Gross profit percentage		52.1	%		50.6	%		51.9	%		49.4	%
Number of stores at the end of the period (1)		1,983			2,001			1,983			2,001


(1)		Number of stores excludes stores operated under franchise and licensing agreements.

During the three months ended October 30, 2010, net sales in North America increased $20.8 million, or 10.4%, from the three months ended October 31, 2009. This increase was attributable to an increase in same store sales, an increase in shipments to franchisees, new store sales and foreign currency translation effect of our Canadian operations’ sales, partially offset by closed stores. Sales would have increased 10.1% excluding the impact from foreign currency rate changes.

During the nine months ended October 30, 2010, net sales in North America increased $53.9 million, or 9.1%, from the nine months ended October 31, 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. Sales would have increased 8.4% excluding the impact from foreign currency rate changes.

For the three months ended October 30, 2010, the increase in same store sales was primarily attributable to an increase in average transaction value of 5.2% and an increase in average number of transactions per store of 4.7%.

For the nine months ended October 30, 2010, the increase in same store sales was primarily attributable to an increase in average transaction value of 6.2% and an increase in average number of transactions per store of 2.8%.

During the fiscal 2010 third quarter, gross profit percentage increased 150 basis points to 52.1% compared to 50.6% during the comparable prior year quarter. The increase consisted of a 220 basis point decrease in occupancy costs, partially offset by a 50 basis point decrease in merchandise margin and a 20 basis point increase in buying and buying-related costs. The improvement in occupancy rate is due to the leveraging effect of higher sales. The decrease in merchandise margin was primarily due to an increase in markdowns and freight expense.

During the first nine months of fiscal 2010, gross profit percentage increased 250 basis points to 51.9% compared to 49.4% during the comparable prior year period. The increase consisted of an 80 basis point improvement in merchandise margin and a 210 basis point decrease in occupancy costs, partially offset by a 40 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 during the fiscal 2010 second quarter. The improvement in occupancy rate is due to the leveraging effect of higher sales.

The following table compares our sales of each product category in North America for each of the periods presented:


	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
% of Total	October 30, 2010		October 31, 2009		October 30, 2010		October 31, 2009
Accessories		49.4		48.8		47.7		45.5
Jewelry		50.6		51.2		52.3		54.5

		100.0		100.0		100.0		100.0

Europe

Key statistics and results of operations for our European division are as follows (dollars in thousands):


	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	October 30, 2010			October 31, 2009			October 30, 2010			October 31, 2009
Net sales	$	127,503		$	124,537		$	361,127		$	342,222
Increase in same store sales		3.9	%		2.3	%		5.9	%		0.0	%
Gross profit percentage		51.5	%		51.3	%		51.2	%		49.6	%
Number of stores at the end of the period (1)		988			953			988			953


(1)		Number of stores excludes stores operated under franchise and licensing agreements.

During the three months ended October 30, 2010, net sales in Europe increased $3.0 million, or 2.4%, from the three months ended October 31, 2009. This increase was attributable to an increase in new store sales and same store sales, partially offset by foreign currency translation of our European operations’ sales and closed stores. Sales would have increased 8.3% excluding the impact from foreign currency rate changes.

During the nine months ended October 30, 2010, net sales in Europe increased $18.9 million, or 5.5%, from the nine months ended October 31, 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 9.3% excluding the impact from foreign currency rate changes.

For the three months ended October 30, 2010, the increase in same store sales was primarily attributable to an increase in average transaction value of 5.1%, partially offset by a decrease in average number of transactions per store.

For the nine months ended October 30, 2010, the increase in same store sales was primarily attributable to an increase in average transaction value of 8.4%, partially offset by a decrease in average number of transactions per store.

During the fiscal 2010 third quarter, gross profit percentage increased 20 basis points to 51.5% compared to 51.3% during the comparable prior year quarter. The increase consisted of a 100 basis point decrease in occupancy costs and a 30 basis point decrease in buying and buying-related costs, partially offset by a 110 basis point decrease in merchandise margin. The improvement in occupancy rate is due to the leveraging effect of higher sales. The decrease in merchandise margin was primarily due to an increase in markdowns and freight expense.

During the first nine months of fiscal 2010, gross profit percentage increased 160 basis points to 51.2% compared to 49.6% during the comparable prior year period. The increase consisted of a 10 basis point improvement in merchandise margin, a 140 basis point decrease in occupancy costs and a 10 basis point decrease in buying and buying-related costs. The improvement in occupancy rate is due to the leveraging effect of higher sales.

The following table compares our sales of each product category in Europe for each of the periods presented:


	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
% of Total	October 30, 2010		October 31, 2009		October 30, 2010		October 31, 2009
Accessories		62.6		62.9		61.6		60.6
Jewelry		37.4		37.1		38.4		39.4

		100.0		100.0		100.0		100.0

Financial Resources and Liquidity

A summary of cash flows provided by (used in) operating, investing and financing activities for the nine months ended October 30, 2010 and October 31, 2009 is outlined in the table below (in thousands):


	Nine Months			Nine Months
	Ended			Ended
	October 30, 2010			October 31, 2009
Operating activities	$	60,084		$	20,729
Investing activities		(13,957	)		(16,005	)
Financing activities		(91,505	)		(47,396	)

Cash flows from operating activities

Cash provided by operating activities increased $39.4 million for the nine months ended October 30, 2010 compared to the prior year period. The primary reasons for the increase were an increase in operating income before depreciation and amortization expense of $22.3 million; a decrease in working capital, excluding cash and cash equivalents, of $12.1 million; and lower cash interest payments of $8.9 million; partially offset by higher cash tax payments of $2.4 million.

Cash flows from investing activities

Cash used in investing activities decreased $2.0 million for the nine months ended October 30, 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 $12.6 million for the remodeling of existing stores, new store openings, and improvements to technology systems and last year we received $2.2 million from the sale of intangible assets. During the remainder of Fiscal 2010, we expect to fund between $15.0 million and $20.0 million of capital expenditures.

Cash flows from financing activities

Cash used in financing activities increased $44.1 million for the nine months ended October 30, 2010 compared to the prior year period. In both of these periods, we paid $10.9 million for the scheduled principal payments on our Credit Facility. In the nine months ended October 30, 2010, we paid $79.9 million to retire $14.0 million of Senior Notes, $57.2 million of Senior Toggle Notes and $22.6 million of Senior Subordinated Notes. In the nine months ended October 31, 2009, we paid $36.5 million to retire $27.5 million of Senior Toggle Notes and $42.8 million of Senior Subordinated Notes. We also paid $0.8 million in capital lease payments during the nine months ended October 30, 2010.

As discussed in our Annual Report on Form 10-K for the year ended January 30, 2010, we have elected to pay interest in kind on our Senior Toggle Notes for the interest periods beginning June 2, 2008 and 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 October 30, 2010, we had cash and cash equivalents of $154.1 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 Company’s 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 affiliate’s 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 October 30, 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 agencies of Moody’s Investor Services, Inc. (“Moody’s”) and Standard & Poor’s 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 Moody’s or S&P. Accordingly, all of the covenants under the Notes currently apply to us. None of these covenants, however, require the Company to maintain any particular financial ratio or other measure of financial performance. As of October 30, 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 (i) Note 2 Significant Accounting Policies in this Quarterly Report on Form 10-Q and (ii) 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 Management’s 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 management’s then current views and assumptions regarding future events and operating performance, and we assume no obligation to update any forward-looking statement. Forward-looking statements involve known or unknown risks, uncertainties and other factors, 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, “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 October 30, 2010, all cash equivalents were maintained in two money market funds that were invested exclusively in U.S. Treasury securities.

Foreign Currency

We are exposed to market risk from foreign currency exchange rate fluctuations on the 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 October 30, 2010, we maintained no foreign currency options. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries. Included in “Comprehensive income (loss)” are $4.1 million and $26.6 million, net of tax, reflecting the unrealized gain (loss) on foreign currency translations during the nine months ended October 30, 2010 and October 31, 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 government’s 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.

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 October 30, 2010, the estimated fair value of the Swap was a liability of approximately $3.1 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 October 30, 2010, we had fixed rate debt of $864.3 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 October 30, 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 Commission’s rules and forms, and that such information is accumulated and communicated to our management, including each of such officers as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting have been made during the quarter ended October 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 management’s 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.

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.


	CLAIRE’S STORES, INC.
December 6, 2010	By:	/s/ Eugene S. Kahn
		Eugene S. Kahn, Chief Executive Officer
		(principal executive officer)

December 6, 2010	By:	/s/ J. Per Brodin
		J. Per Brodin, Executive Vice President and
		Chief Financial Officer (principal financial and accounting officer)

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.

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CLAIRES STORES INC Reports

CLAIRES STORES INC - FORM 10-Q - December 6, 2010

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CLAIRES STORES INC Reports