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EX-32.2 - EX-32.2 - CLAIRES STORES INC | g26915exv32w2.htm |
EX-21.1 - EX-21.1 - CLAIRES STORES INC | g26915exv21w1.htm |
EX-32.1 - EX-32.1 - CLAIRES STORES INC | g26915exv32w1.htm |
EX-31.2 - EX-31.2 - CLAIRES STORES INC | g26915exv31w2.htm |
EX-10.8 - EX-10.8 - CLAIRES STORES INC | g26915exv10w8.htm |
EX-31.1 - EX-31.1 - CLAIRES STORES INC | g26915exv31w1.htm |
EX-10.17 - EX-10.17 - CLAIRES STORES INC | g26915exv10w17.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 29, 2011
OR
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission File Nos. 1-8899 and 333-148108
Commission File Nos. 1-8899 and 333-148108
Claires Stores, Inc.
(Exact name of registrant as specified in its charter)
Florida | 59-0940416 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2400 West Central Road, Hoffman Estates, Illinois |
60192 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (847) 765-1100
Securities registered pursuant to Section 12(b) or 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act.
Yes o No x
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No x
The aggregate market value of the registrants voting and non-voting common equity held by
non-affiliates of the registrant is zero. The registrant is a privately held corporation.
As of April 1, 2011, 100 shares of the Registrants common stock, $.001 par value were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Table of Contents
PART I.
Explanatory Notes
We refer to Claires Stores, Inc., a Florida corporation, as Claires, the Company, we, our
or similar terms, and typically these references include our subsidiaries.
In May 2007, the Company was acquired by Apollo Management VI, L.P. (Apollo Management), together
with certain affiliated co-investment partnerships (collectively the Sponsors), through a merger
(the Merger) and Claires Stores, Inc. became a wholly-owned subsidiary of Claires Inc. The
Merger was financed by the issuance of $250.0 million of 9.25% senior notes due 2015 (the Senior
Fixed Rate Notes), $350.0 million of 9.625%/10.375% senior toggle notes due 2015 (the Senior
Toggle Notes and together with the Senior Fixed Rate Notes, the Senior Notes), $335.0 million of
10.50% senior subordinated notes due 2017 (the Senior Subordinated Notes and together with the
Senior Notes, the Notes) and borrowings under the senior secured term loan facility and revolving
credit facility (collectively the Credit Facility) of $1.65 billion. The aforementioned
transactions, including the Merger and payment of costs related to these transactions as well as
the related borrowings, are collectively referred to as the Transactions. The purchase of the
Company by the Sponsors is referred to as the Acquisition.
On March 4, 2011, we issued $450.0 million aggregate principal amount of 8.875% senior secured
second lien notes that mature on March 15, 2019 (the Senior Secured Second Lien Notes). We used
the net proceeds of the offering of the Senior Secured Second Lien Notes to reduce the entire
amount outstanding under our revolving Credit Facility (without terminating the commitment) and
indebtedness under our senior secured term loan.
Our fiscal year ends on the Saturday closest to January 31. We refer to our fiscal year end based
on the year in which the fiscal year begins.
An amendment to this Annual Report on Form 10-K to include Part III of the Form 10-K will be filed
with the Securities and Exchange Commission no later than 120 days after the end of Fiscal 2010.
Statement Regarding Forward-Looking Disclosures
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. We and our representatives may from time to time make written or oral
forward-looking statements, including statements contained in this and other filings with the
Securities and Exchange Commission and in our press releases and reports to stockholders. All
statements which address operating performance, events or developments that we expect or anticipate
will occur in the future, including statements relating to our future financial performance,
business strategy, planned capital expenditures, ability to service our debt, and new store
openings for future fiscal years, are forward-looking statements. The forward-looking statements
are and will be based on managements then current views and assumptions regarding future events
and operating performance, and we assume no obligation to update any forward-looking statement. The
forward-looking statements may use the words expect, anticipate, plan, intend, project,
may, believe, forecast, and similar expressions. Forward-looking statements involve known or
unknown risks, uncertainties and other factors, including changes in estimates and judgments
discussed under Critical Accounting Policies and Estimates which may cause our actual results,
performance or achievements, or industry results to be materially different from any future
results, performance or achievements expressed or implied by such forward-looking statements. Some
of these risks, uncertainties and other factors are as follows: our level of indebtedness; general
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; failure to maintain our
favorable brand recognition; failure to successfully market our products through new channels, such
as e-commerce; 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
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Table of Contents
in Europe; inability to grow our international store base through franchise or similar licensing
arrangements; inability to design and implement new information systems; delays in anticipated
store openings or renovations; changes in applicable laws, rules and regulations, including changes
in North America, European or other international laws and regulations governing the sale of our
products, particularly regulations relating to heavy metal and chemical content in our products;
changes in employment laws relating to overtime pay, tax laws and import laws; product recalls;
loss of key members of management; increase in the costs of healthcare for our employees; increases
in the cost of labor; labor disputes; unwillingness of vendors and service providers to supply
goods or services pursuant to historical customary credit arrangements; increases in the cost of
borrowings; unavailability of additional debt or equity capital; and the impact of our substantial
indebtedness on our operating income and our ability to grow. The Company undertakes no obligation
to update or revise any forward-looking statements to reflect subsequent events or circumstances.
In addition, we typically earn a disproportionate share of our operating income in the fourth
quarter due to seasonal
buying patterns, which are difficult to forecast with certainty.
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Item 1. Business
The Company
We are one of the worlds leading specialty retailers of fashionable accessories and jewelry at
affordable prices for young women, teens, tweens, and girls ages 3 to 27. We are organized based
on our geographic markets, which include our North American division and our European division. As
of January 29, 2011, we operated a total of 2,981 stores, of which 1,972 were located in all 50
states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American
division) and 1,009 stores were located in the United Kingdom, France, Switzerland, Spain, Ireland,
Austria, Germany, Netherlands, Portugal, Belgium, Poland, Czech Republic and Hungary (our European
division). Our stores operate under the trade names Claires and Icing.
As of January 29, 2011, we also franchised or licensed 395 stores in Japan, the Middle East,
Turkey, Russia, Greece, South Africa, Guatemala, Malta and Ukraine. We account for the goods we
sell to third parties under franchising agreements within Net sales and Cost of sales, occupancy
and buying expenses in our Consolidated Statements of Operations and Comprehensive Income (Loss).
The franchise fees we charge under the franchising agreements are reported in Other expense
(income), net in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Until September 2, 2010, we operated the stores in Japan through our former Claires Nippon 50:50
joint venture with Aeon Co., Ltd. We accounted for the results of operations of Claires Nippon
under the equity method and included the results within Other expense (income), net in our
Consolidated Statements of Operations and Comprehensive Income (Loss). Beginning September 2,
2010, these stores began to operate as licensed stores.
Our primary brand in North America and exclusively in Europe is Claires. Our Claires customers
are predominantly teens (ages 13 to 18), tweens (ages 7 to 12) and kids (ages 3 to 6), or referred
to 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. In Fiscal 2010, the
average global selling price of our merchandise increased 6% from the prior year to $5.91 and the
net average global transaction sales value increased 7% to $14.38. In Fiscal 2010, we continued to
successfully shift our merchandise assortment more toward accessories categories, which resulted in
accessories increasing to approximately 55% of our business.
Our major categories of business are:
| Accessories includes fashion accessories for year-round use, including legwear, headwear, attitude glasses, scarves, armwear and belts, and seasonal use, including sunglasses, hats, fall footwear, sandals, scarves, gloves, boots, slippers and earmuffs; 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 |
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In North America, our stores are located primarily in shopping malls and average approximately 970
square feet of selling space. The differentiation of our Claires and Icing brands allows us to
operate multiple store locations within a single mall. In Europe, our stores are located primarily
on high streets, in shopping malls and in high traffic urban areas and average approximately 638
square feet of selling space.
Our Competitive Strengths
Strong Claires Name Brand Recognition Across the Globe. A Claires store is located in
approximately 90% of all major U.S. shopping malls and in 32 countries outside of the U.S.,
including stores that we franchise or license. This global presence provides us with strong brand
recognition of the Claires brand within our target customer base. The focus of our website is to
showcase the merchandise, provide a platform for the brand and to create an interactive environment
for our target customer groups in order to build greater awareness and increase customer
engagement. Claires brand name is also featured in editorial coverage, press clips in relevant
fashion periodicals, and on the internet, reinforcing our message to our target customers.
Diversification Across Geographies and Merchandise Categories. As of January 29, 2011, we
operated a total of 2,981 stores, of which 1,972 were located across all 50 states of the United
States, plus Puerto Rico, Canada, and the U.S. Virgin Islands. As of January 29, 2011, we also
operated 1,009 stores in 13 countries throughout Europe, 199 stores in 17 countries outside of
Europe and North America through our franchise operations, and 196 stores in Japan via a license
arrangement.
During Fiscal 2010 and Fiscal 2009, we generated approximately 64% and 63%, respectively, of our
net sales from the North American division with the balance being delivered by our European
division. Our net sales are not dependent on any one category, product or style and are diversified
across approximately 8,000 ongoing stock-keeping units (SKUs) in our stores. This
multi-classification approach allows us to capitalize on many fashion trends, ideas and merchandise
concepts, while not being dependent on any one of them.
Cost-Efficient Global Sourcing Capabilities. Our merchandising strategy is supported by
efficient, low-cost global sourcing capabilities diversified across approximately 700 suppliers
located primarily outside the United States. Our contracts with vendors are short-term in nature
and do not require a significant lead time. A significant portion of our product offering is
developed by our product development team as well as our vertically-integrated global buying and
sourcing group based in Hong Kong, enabling us to buy and source merchandise rapidly and cost
effectively. Approximately 90% of our merchandise offering is proprietary.
Improved Cost Structure and Streamlined Operations. Our cost conscious culture serves as the
basis for the improvements we have made to the cost structure since the acquisition. Through our
Cost Savings Initiative (CSI), which we began in late fiscal 2008 and completed in fiscal 2009,
we were able to achieve $60 million of annual cost reductions. CSI primarily focused on
implementing a new field management structure and global store labor planning model while improving
our centralization and simplifying processes across functions. In addition to CSI, we have
successfully renegotiated over 700 leases and closed over 200 underperforming stores which enhanced
the profitability of our store portfolio. We also completed our Pan-European Transformation
project in 2008 and it is the underpinning for the way we operate across Europe. We consolidated
three regional distribution centers into a single European distribution center co-located with a
centralized Buying and Planning office for Europe.
Substantial Free Cash Flow Generation. We generate substantial free cash flow, which we believe
is driven by our strong gross margins, efficient operating structure, low annual maintenance
capital expenditures and flexible growth capital expenditure initiatives. Our minimal working
capital requirements result from high merchandise margins, low unit cost of our merchandise and the
limited seasonality of our business. Over the past three fiscal years, no single quarter
represented less than 22% or more than 31% of annual net sales for the respective year.
Strong and Experienced Senior Management Team. We have a strong and experienced senior management
team with extensive retail experience. Gene Kahn, our Chief Executive Officer (CEO), has over 36
years of experience in the retail industry, including positions of Chairman, CEO and President of
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The May Department Stores. Jim Conroy, our Corporate President, collaborates with the CEO to
oversee the Global business and has direct responsibility for Global Merchandise and the
International Division. Mr. Conroy has over 19 years of retail experience, including positions as
a management consultant and retail executive. J. Per Brodin, our Executive Vice President and
Chief Financial Officer, has over 20 years of financial accounting and management experience within
and outside of the retail industry. Mr. Brodin has responsibility for Finance and Information
Technology. Jay Friedman, President of our North American Division, has over 25 years of
experience in operating and managing major divisions of several large-scale, multi-unit retail and
apparel businesses, including, most recently, Jones Apparel Group, and, previously Footlocker and
Etienne Aigner. Kenny Wilson, President of our European Division, brings to the Company 18 years
of experience with Levi Strauss Corporation, and has extensive Pan-European experience across a
broad array of retail related responsibilities. In addition, we have added 16 seasoned executives
to key roles since the Merger.
Business Strategy
Our business strategy is built on two key components:
Drive organic growth through our merchandise, stores, and customer offense. In order to maximize
our organic growth potential, drive same store sales improvement and sustain margins, our efforts
are focused on three foundational areas of the business:
| Merchandise: We continue to enhance the fashion-orientation and quality of our product offering to deliver a unique, proprietary assortment that is highly relevant to our target customers, particularly the Claires Young (teenage) customer. We continue to focus on our multi-classification Accessories assortment, while maintaining our market leadership position in Jewelry, to capitalize on the evolving largest market opportunities. We are enabling these improvements through investments in fashion and trend forecasting, global product design and development, and in the enhancement of our Hong Kong-based sourcing capabilities to leverage our global purchasing economy of scale. Simultaneously, we are identifying product source alternatives. | ||
| Stores: In our almost 3,400 stores worldwide, our objective is to provide a consistent, engaging, and brand-right customer experience. We are continually improving our in-store presentation of merchandise and marketing collateral through a rigorous planning and communication process, resulting in improved execution and increased consistency across the chain and, ultimately, a superior shopping experience. We are also commencing efforts to heighten the selling orientation of our store teams specific to each brand and country. | ||
| Customer: In the past year, we have made significant strides to build deeper customer relationships and support our brands. We launched a new, innovative claires.com website that uses customer-generated content, conveys a real-life interaction with our customers, and presents an authoritative fashion position. We further drive brand awareness and relevance with our ongoing social media, email, and text campaigns, which leverage our Facebook fan base and proprietary customer database. Lastly, in parallel with our digital efforts, we have significantly upgraded our in-store marketing collateral in order to present a much more fashionable brand image that appeals to our target customers. |
Increase our global reach through new store expansion (owned and franchise) and new distribution
channels. We believe significant opportunities exist to grow our distribution worldwide. Our
Claires concept has proven to be portable across diverse geographies and approximately 95% of our
stores worldwide are cash flow positive. In addition, the moderate up-front investment
requirements per store enable us to achieve an attractive return on investment.
We will extend our global reach in four primary ways:
| Build New Company-owned Claires Stores: We opened 82 new stores in 2010; 69 in Europe and 13 in North America. In addition, we have plans to open approximately 140 new stores in 2011, the majority of which will be in Europe. | ||
| Build New Company-owned Icing Stores: As we refine the Icing brand concept, we believe there is significant opportunity to increase the store penetration in North America, as well as to roll out the concept on a global basis to markets where we can leverage the existing Claires infrastructure. |
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| Open New International Markets with Franchise Partners: Building on our refined franchising model, which is present in multiple geographies worldwide, we will pursue high potential white space opportunities in new markets globally. In 2011, we intend to enter Mexico, India and possibly Australia. We are currently studying our brand entrance strategy for China and Southeast Asia for the ensuing years. | ||
| Add Alternative Distribution Channels: We will seek new opportunities globally to market and distribute our brands, beginning with the launch of E-Commerce in the Claires North America Division which is targeted to debut in mid-2011. |
This business strategy will allow us to maximize our sales opportunities, while driving our
earnings with commensurate flow through and cash flow.
Fiscal 2011 Priorities
For Fiscal 2011, we have developed seven priorities that are designed to help advance our global
business objectives. These seven priorities are as follows:
Deliver An Exceptional Highly Relevant Assortment for the Young Customer. We define the Young
customer as girls between the ages of 13 and 18. During Fiscal 2011, we will continue to focus our
efforts on delivering a fashion-right merchandise assortment that appeals to this important
customer demographic that offers significant sales growth opportunities and enhances our brand
perception.
Sustain Merchandise Margin. We have achieved significant merchandise margin improvement since
2007. During Fiscal 2011, we will leverage our global merchandise function to help drive
performance, create greater consistency and establish product leadership globally. We intend to
sustain our merchandise margin improvements while simultaneously pursuing select opportunities to
further improve margin. We will focus our attention on reducing markdowns through improvements in
merchandise selection, store allocation and replenishment as well as rationalizing our SKU count on
an on-going basis. In addition, we will continue to pursue lower cost of merchandise purchases.
Enhance the In-Store Experience, Especially for the Young Customer. We intend to sharpen the
focus of our planograms globally which should yield an even more consistent in-store presentation
and an improved visually appealing product placement within the store. We intend to redefine the
selling orientation of our store associates, particularly towards the Young customer. The
redefined selling orientation, together with our pursuit of flawless in-store execution, will facilitate an
improved customer experience.
Heighten Brand Relevance. We intend to further build our brand relevance through increasing the
fashion orientation of all marketing and expanding our digital/interactive presence. We also
intend to launch an E-Commerce site beginning with our North America Claires brand and continue to
pursue selective partnerships with relevant, high-profile media and entertainment personalities and
properties.
Extend Global Reach. During Fiscal 2011, we intend to significantly expand our company-owned
store network in Europe and, in North America, selectively pursue additional new store locations,
including potential new or understored markets as well as top-tier malls. We plan to position the
Icing brand for global growth by revising the brand strategy and testing a new store environment
to better appeal to the Icing customer. Internationally, we intend to pursue franchise partners for
expansion into new non-owned markets.
Maintain Strong Financial Discipline. We will remain focused on prudent expense discipline. We
intend to continue to invest selectively to propel growth while rigorously pursuing ongoing cost
control. Such investments include infrastructure for global web presence, E-Commerce and our
International division.
Develop our Team Members into a Top Performing Global Organization. During Fiscal 2011, we will
work with the strong executive team in place to foster greater team spirit, an improved sense of
community and focus on executive leadership development capabilities.
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In summary, we believe these seven priorities serve as the basis for individual division goals that
translate to specific objectives that focus on the achievement of division specific metrics that
support the Companys global financial objectives.
Stores
Our stores in North America are located primarily in shopping malls and average approximately 970
square feet of selling space. Our stores in Europe are located primarily on high streets, in
shopping malls and in high traffic urban locations and average approximately 638 square feet of
selling space. Our store hours are dictated by shopping mall operators and our stores are
typically open from 10:00 a.m. to 9:00 p.m. Monday through Saturday and, where permitted by law,
from noon to 5:00 p.m. on Sunday. Approximately 76% of our sales in Fiscal 2010 were made in cash
(including checks and debit card transactions), with the balance made by credit cards. We permit,
with restrictions on certain items, returns for exchange or refund.
Store Management
Our stores are organized and controlled on a district level. We employ District Managers, each of
whom supervises store managers and the business in their respective geographic area and report to
Regional Managers.
In North America, each Regional Manager reports to Territorial Vice Presidents, who report to the
Senior Vice President of Stores. Each store is typically staffed by a Manager, an Assistant
Manager and one or more part-time employees.
In Europe, District Sales Managers report to Regional Sales Managers who report to either Country
Managers or directly to two Managing Sales Directors. We now have four operating zones within
Europe: (Zone 1) United Kingdom and Ireland; (Zone 2) France, Spain, Portugal and Belgium; (Zone 3)
Switzerland, Austria, Netherlands and Germany; and (Zone 4) Poland, Czech Republic and Hungary.
Store Openings, Closings and Future Growth
In Fiscal 2010, we opened 82 stores and closed 49 underperforming stores, for a net increase of 33
stores. In Europe, we increased our store count by 54 stores, net, resulting in a total of 1,009
stores. In North America, we decreased our store count by 21 stores, net, to 1,972 stores.
Stores, net refers to stores opened, net of closings.
January 29, | January 30, | January 31, | ||||||||||
Store Count as of: | 2011 | 2010 | 2009 | |||||||||
North America |
1,972 | 1,993 | 2,026 | |||||||||
Europe |
1,009 | 955 | 943 | |||||||||
Subtotal Company-Owned |
2,981 | 2,948 | 2,969 | |||||||||
Joint Venture |
| 211 | 214 | |||||||||
Franchise and License |
395 | 195 | 196 | |||||||||
Subtotal Non-Owned |
395 | 406 | 410 | |||||||||
Total |
3,376 | 3,354 | 3,379 | |||||||||
We plan to open approximately 140 Company-owned stores globally in Fiscal 2011. We also plan to
continue opening stores when suitable locations are found and satisfactory lease negotiations are
concluded. Our initial investment in new stores opened during Fiscal 2010, which includes
leasehold improvements and fixtures, averaged approximately $215,000 per store globally. In
addition to the investment in leasehold improvements and fixtures, we may also purchase intangible
assets or incur initial direct costs for leases relating to certain store locations in our European
operations.
Purchasing and Distribution
We purchased our merchandise from approximately 700 suppliers in Fiscal 2010. Approximately 86% of
our merchandise in Fiscal 2010 was purchased from vendors based outside the United States,
including
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approximately 69% purchased from China. We are not dependent on any single supplier for
merchandise purchased. Merchandise for our North American stores is shipped from our distribution
facility in Hoffman Estates, Illinois, a suburb of Chicago. Our distribution facility in
Birmingham, United Kingdom services all of our stores in Europe. We distribute merchandise to our
franchisees and licensee from a third party operated distribution center in Hong Kong. Merchandise
is shipped from our distribution centers by common carrier to our individual store locations. To
keep our assortment fresh and exciting, we typically ship merchandise to our stores three to five
times a week.
Trademarks and Service Marks
We are the owner in the United States of various marks, including Claires, Claires
Accessories, Icing, and Icing by Claires. We have also registered these marks outside of the
United States. We currently license certain of our marks under franchising and licensing
arrangements in Japan, the Middle East, Turkey, Russia, South Africa, Greece, Guatemala, Malta and
Ukraine. We believe our rights in our marks are important to our business and intend to maintain
our marks and the related registrations.
Information Technology
Information technology is important to our business success. Our information and operational
systems use a broad range of both purchased and internally developed applications to support our
retail operations, financial, real estate, merchandising, inventory management and marketing
processes. Sales information is generally collected from point of sale terminals in our stores on
a daily basis. We have developed proprietary software to support key decisions in various areas of
our business including merchandising, allocation and operations. We periodically review our
critical systems to evaluate disaster recovery plans and the security of our systems.
Competition
The specialty retail business is highly competitive. We compete on a global, national, regional,
and local level with other specialty and discount store chains and independent retail stores. Our
competition also includes Internet, direct marketing to consumer, and catalog businesses. We also
compete with department stores, mass merchants, and other chain store concepts. We cannot estimate
the number of our competitors because of the large number of companies in the retail industry that
fall into one of these categories. We believe the main competitive factors in our business are
brand recognition, merchandise assortments for each target customer, compelling value, store
location and the shopping experience.
Seasonality
Sales of each category of merchandise vary from period to period depending on current trends. We
experience traditional retail patterns of peak sales during the Christmas, Easter, and
back-to-school periods. Sales as a percentage of total sales in each of the four quarters of
Fiscal 2010 were 23%, 23%, 24% and 30%, respectively.
Employees
On January 29, 2011, we employed approximately 18,400 employees, 62% of whom were part-time.
Part-time employees typically work up to 20 hours per week. We do not have collective bargaining
agreements with any labor unions, and we consider employee relations to be good.
Further Information
We make available free of charge through the financial page of our website at www.clairestores.com
our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports as soon as reasonably practicable after such material is electronically
filed with or furnished to the Securities and Exchange Commission.
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Item 1A. Risk Factors
These risks could have a material adverse effect on our business, financial position or results of
operations. The following risk factors may not include all of the important factors that could
affect our business or our industry or that could cause our future financial results to differ
materially from historic or expected results.
Risks Relating to Economic Conditions
Economic conditions may adversely impact demand for our merchandise, reduce access to credit and
cause our customers and others with whom we do business to suffer financial hardship, all of which
could adversely impact our business, results of operations, financial condition and cash flows.
Consumer purchases of discretionary items, including our merchandise, generally decline during
recessionary periods and other periods where disposable income is adversely affected. Some of the
factors impacting discretionary consumer spending include general economic conditions, wages and
employment, consumer debt, the availability of customer credit, currency exchange rates, taxation,
fuel and energy prices, interest rates, consumer confidence and other macroeconomic factors.
Downturns in the economy typically affect consumer purchases of merchandise and could adversely
impact our results of operations and continued growth.
The distress in the financial markets experienced in the last several years resulted in volatility
in security prices and has had a negative impact on credit availability, and there can be no
assurance that our liquidity will not be affected by future changes in the financial markets and
the global economy or that our capital resources will at all times be sufficient to satisfy our
liquidity needs. Distress in the financial markets also had a negative impact on businesses around
the world, and the future impact to our suppliers cannot be predicted. The inability of our
suppliers to access liquidity or trade credit could lead to delays or failures in delivery of
merchandise to us.
We have significant amounts of cash and cash equivalents at financial institutions that are in
excess of federally insured limits. With the current financial environment and the instability of
financial institutions, we cannot be assured that we will not experience losses on our deposits.
Risks Relating to Our Company
Fluctuations in consumer preference may adversely affect the demand for our products and result in
a decline in our sales.
Our retail fashion accessories and jewelry business fluctuates according to changes in consumer
preferences. If we are unable to anticipate, identify or react to changing styles or trends, our
sales may decline, and we may be faced with excess inventories. If this occurs, we may be forced
to rely on additional markdowns or promotional sales to dispose of excess or slow moving inventory,
which could have a material adverse effect on our results of operations and adversely affect our
gross margins. In addition, if we miscalculate customer tastes and our customers come to believe
that we are no longer able to offer merchandise that appeals to them, our brand image may suffer.
Advance purchases of our merchandise make us vulnerable to changes in consumer preferences and
pricing shifts and may negatively affect our results of operations.
Fluctuations in the demand for retail accessories and jewelry especially affect the inventory we
sell because we order our merchandise in advance of the applicable season and sometimes before
trends are identified or evidenced by customer purchases. In addition, the cyclical nature of the
retail business requires us to carry a significant amount of inventory, especially prior to peak
selling seasons when we and other retailers generally build up inventory levels. We must enter
into contracts for the purchase and manufacture of merchandise with our suppliers in advance of the
applicable selling season. As a result, we are vulnerable to demand and pricing shifts and it is
more difficult for us to respond to new or changing customer needs. Our financial condition could
be materially adversely affected if we are unable to manage
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inventory levels and respond to short-term shifts in client demand patterns. Inventory levels in
excess of client demand may result in excessive markdowns and, therefore, lower than planned
margins. If we underestimate demand for our merchandise, on the other hand, we may experience
inventory shortages resulting in missed sales and lost revenues. Either of these events could
negatively affect our operating results and brand image.
A disruption of imports from our foreign suppliers may increase our costs and reduce our supply of
merchandise.
We do not own or operate any manufacturing facilities. We purchased merchandise from approximately
700 suppliers in Fiscal 2010. Approximately 86% of our Fiscal 2010 merchandise was purchased from
suppliers outside the United States, including approximately 69% purchased from China. Any event
causing a sudden disruption of imports from China or other foreign countries, including political
and financial instability, would likely have a material adverse effect on our operations. We
cannot predict whether any of the countries in which our products currently are manufactured or may
be manufactured in the future will be subject to additional trade restrictions imposed by the
United States and other foreign governments, including the likelihood, type or effect of any such
restrictions. Trade restrictions, including increased tariffs or quotas, embargoes and customs
restrictions, on merchandise that we purchase could increase the cost or reduce the supply of
merchandise available to us and adversely affect our business, financial condition and results of
operations. The United States has previously imposed trade quotas on specific categories of goods
and apparel imported from China, and may impose additional quotas in the future. There has been
increased international pressure on China regarding revaluation of the Chinese yuan, including U.S.
Federal legislation to impose tariffs on imports from China unless the Chinese government revalues
the Chinese yuan.
Fluctuations in foreign currency exchange rates could negatively impact our results of operations.
Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S.
dollars. As a result, our sourcing operations may be adversely affected by significant fluctuation
in the value of the U.S. dollar against foreign currencies. We are also exposed to the gains and
losses resulting from the effect that fluctuations in foreign currency exchange rates have on the
reported results in our Consolidated Financial Statements due to the translation of operating
results and financial position of our foreign subsidiaries. We purchased approximately 69% of our
merchandise from China in Fiscal 2010. During Fiscal 2010, the Chinese yuan strengthened against
the U.S. dollar, and this trend may continue in Fiscal 2011. An increase in the Chinese yuan
against the dollar means that we will have to pay more in U.S. dollars for our purchases from
China. If we are unable to negotiate commensurate price decreases from our Chinese suppliers,
these higher prices would eventually translate into higher costs of sales, which could have a
material adverse effect on our operating results.
Our business depends on the willingness of vendors and service providers to supply us with goods
and services pursuant to customary credit arrangements which may not be available to us in the
future.
Like most companies in the retail sector, we purchase goods and services from trade creditors
pursuant to customary credit arrangements. If we are unable to maintain or obtain trade credit
from vendors and service providers on terms favorable to us, or at all, or if vendors and service
providers are unable to obtain trade credit or factor their receivables, then we may not be able to
execute our business plan, develop or enhance our products or services, take advantage of business
opportunities or respond to competitive pressures, any of which could have a material adverse
affect on our business. In addition, the tightening of trade credit could limit our available
liquidity.
The failure to grow our store base in Europe or expand our international franchising may adversely
affect our business.
Our growth plans include expanding our store base in Europe. Our ability to grow successfully
outside of North America depends in part on determining a sustainable formula to build customer
loyalty and gain market share in certain especially challenging international retail environments.
Additionally, the integration of our operations in foreign countries presents certain challenges
not necessarily presented in the integration of our North American operations.
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We plan to expand into new countries through organic growth and by entering into franchising and
licensing agreements with unaffiliated third parties who are familiar with the local retail
environment and have sufficient retail experience to operate stores in accordance with our business
model, which requires strict adherence to the guidelines established by us in our franchising
agreements. Failure to identify appropriate franchisees or negotiate acceptable terms in our
franchising and licensing agreements that meet our financial targets would adversely affect our
international expansion goals, and could have a material adverse effect on our operating results
and impede our strategy of increasing our net sales through expansion.
Our cost of doing business could increase as a result of changes in federal, state, local and
international regulations regarding the content of our merchandise.
The Consumer Product Safety Improvement Act of 2008 (CPSIA), in general, bans the sale of
childrens products containing lead in excess of certain maximum standards, and imposes other
restrictions and requirements on the sale of childrens products, including importing, testing and
labeling requirements. Accordingly, merchandise covered by the CPSIA that is sold to our Younger
and Youngest customers is subject to the CPSIA. In addition, various states, from time to time,
propose or enact legislation regarding heavy metals or chemicals in products that differ from
federal laws. We are also subject to various other health and safety rules and regulations, such
as the Federal Food Drug and Cosmetic Act and the Federal Hazardous Substance Act. Our inability
to comply with these regulatory requirements, or other existing or newly adopted regulatory
requirements, could increase our cost of doing business or result in significant fines or penalties
that could have a material adverse effect on our business, results of operations, financial
condition and cash flows.
In addition to regulations governing the sale of our merchandise in the United States and Canada,
we are also subject to regulations governing the sale of our merchandise in our European stores.
The European Union REACH legislation requires identification and disclosure of chemicals in
consumer products, including chemicals that might be in the merchandise that we sell. Over time,
this regulation, among other items, may require us to substitute certain chemicals contained in our
products with substances the EU considers safer. Our failure to comply with this European Union
legislation could result in significant fines or penalties and increase our cost of doing business.
Recalls, product liability claims, and government, customer or consumer concerns about product
safety could harm our reputation, increase costs or reduce sales.
We are subject to regulation by the Consumer Product Safety Commission and similar state and
international regulatory authorities, and our products could be subject to involuntary recalls and
other actions by these authorities. Concerns about product safety, including but not limited to
concerns about the safety of products manufactured in China (where most of our products are
manufactured), could lead us to recall selected products. Recalls and government, customer or
consumer concerns about product safety could harm our reputation, increase costs or reduce sales,
any of which could have a material adverse effect on our financial results.
If we are unable to renew or replace our store leases or enter into leases for new stores on
favorable terms, or if any of our current leases are terminated prior to the expiration of their
stated term and we cannot find suitable alternate locations, our growth and profitability could be
adversely harmed.
All of our stores are leased. Our ability to renew any expired lease or, if such lease cannot be
renewed, our ability to lease a suitable alternate location, and our ability to enter into leases
for new stores on favorable terms will depend on many factors which are not within our control,
such as conditions in the local real estate market, competition for desirable properties, our
relationships with current and prospective landlords, and negotiating acceptable lease terms that
meet our financial targets. Our ability to operate stores on a profitable basis depends on various
factors, including whether we have to take additional merchandise markdowns due to excessive
inventory levels compared to sales trends, whether we can reduce the number of under-performing
stores which have a higher level of fixed costs in comparison to net sales, and our ability to
maintain a proportion of new stores to mature stores that does not harm existing sales. If we are
unable to renew existing leases or lease suitable alternate locations, enter into
leases for new stores on favorable terms, or increase our same store sales, our growth and our
profitability could be adversely affected.
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Natural disasters or unusually adverse weather conditions or potential emergence of disease or
pandemic could adversely affect our net sales or supply of inventory.
Unusually adverse weather conditions, natural disasters, potential emergence of disease or pandemic
or similar disruptions, especially during peak holiday selling seasons, but also at other times,
could significantly reduce our net sales. In addition, these disruptions could also adversely
affect our supply chain efficiency and make it more difficult for us to obtain sufficient
quantities of merchandise from suppliers, which could have a material adverse effect on our
financial position, earnings, and cash flow.
Information technology systems changes may disrupt our supply of merchandise.
Our success depends, in large part, on our ability to source and distribute merchandise
efficiently. We continue to evaluate and leverage the best of both our North American and European
information systems to support our product supply chain, including merchandise planning and
allocation, inventory and price management. We also continue to evaluate and implement
modifications and upgrades to our information technology systems. Modifications involve replacing
legacy systems with successor systems or making changes to the legacy systems and our ability to
maintain effective internal controls. We are also modifying our information systems to allow for
e-commerce sales in Fiscal 2011. We are aware of inherent risks associated with replacing and
changing these core systems, including accurately capturing data, and possibly encountering supply
chain disruptions. There can be no assurances that we will successfully launch these new systems
as planned or that they will occur without disruptions to our operations. Information technology
system disruptions, if not anticipated and appropriately mitigated, could have a material adverse
effect on our operations.
If we experience a data security breach and confidential customer information is disclosed, we may
be subject to penalties and experience negative publicity, which could affect our customer
relationships and have a material adverse effect on our business.
We and our customers could suffer harm if customer information were accessed by third parties due
to a security failure in our systems. The collection of data and processing of transactions require
us to receive and store a large amount of personally identifiable data. This type of data is
subject to legislation and regulation in various jurisdictions. Data security breaches suffered by
well-known companies and institutions have attracted a substantial amount of media attention,
prompting state and federal legislative proposals addressing data privacy and security. We may
become exposed to potential liabilities with respect to the data that we collect, manage and
process, and may incur legal costs if our information security policies and procedures are not
effective or if we are required to defend our methods of collection, processing and storage of
personal data. Future investigations, lawsuits or adverse publicity relating to our methods of
handling personal data could adversely affect our business, results of operations, financial
condition and cash flows due to the costs and negative market reaction relating to such
developments.
Changes in the anticipated seasonal business pattern could adversely affect our sales and profits
and our quarterly results may fluctuate due to a variety of factors.
Our business typically follows a seasonal pattern, peaking during the Christmas, Easter and
back-to-school periods. Seasonal fluctuations also affect inventory levels, because we usually
order merchandise in advance of peak selling periods. Our quarterly results of operations may also
fluctuate significantly as a result of a variety of factors, including the time of store openings,
the amount of revenue contributed by new stores, the timing and level of markdowns, the timing of
store closings, expansions and relocations, competitive factors and general economic conditions.
A decline in number of people who go to shopping malls, particularly in North America, could reduce
the number of our customers and reduce our net sales.
Substantially all of our North American stores are located in shopping malls. Our North American
sales are derived, in part, from the high volume of traffic in those shopping malls. We benefit
from the ability of the shopping malls anchor tenants, generally large department stores and
other area attractions, to
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generate consumer traffic around our stores. We also benefit from the continuing popularity of
shopping malls as shopping destinations for girls and young women. Sales volume and shopping mall
traffic may be adversely affected by economic downturns in a particular area, competition from
non-shopping mall retailers, other shopping malls where we do not have stores and the closing of
anchor tenants in a particular shopping mall. In addition, a decline in the popularity of shopping
malls among our target customers that may curtail customer visits to shopping malls, could result
in decreased sales that would have a material adverse affect on our business, financial condition
and results of operations.
Our industry is highly competitive.
The specialty retail business is highly competitive. We compete with international, national and
local department stores, specialty and discount store chains, independent retail stores, e-commerce
services, digital content and digital media devices, web services, direct marketing to consumers
and catalog businesses that market similar lines of merchandise. Many of our competitors are
companies with substantially greater financial, marketing and other resources. Given the large
number of companies in the retail industry, we cannot estimate the number of our competitors.
Although we are developing an e-commerce site that we intend to launch in 2011, a significant shift
in customer buying patterns to purchasing fashionable accessories and jewelry at affordable prices
through channels other than traditional shopping malls, such as e-commerce, could have a material
adverse effect on our financial results.
Adoption of new or revised employment and labor laws and regulations could make it easier for our
employees to obtain union representation and our business could be adversely impacted.
Currently, none of our employees in North America are represented by unions. However, our employees
have the right at any time under the National Labor Relations Act to form or affiliate with a
union. If some or all of our workforce were to become unionized and the terms of the collective
bargaining agreement were significantly different from our current compensation arrangements, it
could increase our costs and adversely impact our profitability. Any changes in regulations, the
imposition of new regulations, or the enactment of new legislation could have an adverse impact on
our business, to the extent it becomes easier for workers to obtain union representation.
Higher health care costs and labor costs could adversely affect our business.
With the passage in 2010 of the U.S. Patient Protection and Affordable Care Act, we will be
required to amend our health care plans to, among other things, provide affordable coverage, as
defined in the Act, to all employees, or otherwise be subject to a payment per employee based on
the affordability criteria in the Act: cover adult children of our employees to age 26; delete
lifetime limits; and delete pre-existing condition limitations. Many of these requirements, some
of which have been challenged on legal grounds, will be phased in over a period of time.
Additionally, some states and localities have passed state and local laws mandating the provision
of certain levels of health benefits by some employers. Increased health care and insurance costs
could have a material adverse effect on our business, financial condition and results of
operations. In addition, changes in the federal or state minimum wage or living wage requirements
or changes in other workplace regulations could adversely affect our ability to meet our financial
targets.
Our profitability could be adversely affected by high petroleum prices.
The profitability of our business depends to a certain degree upon the price of petroleum products,
both as a component of the transportation costs for delivery of inventory from our vendors to our
stores and as a raw material used in the production of our merchandise. We are unable to predict
what the price of crude oil and the resulting petroleum products will be in the future. We may be
unable to pass along to our customers the increased costs that would result from higher petroleum
prices. Therefore, any such increase could have a material adverse impact on our business and
profitability.
The possibility of war and acts of terrorism could disrupt our information or distribution systems
and increase our costs of doing business.
A significant act of terrorism could have a material adverse impact on us by, among other things,
disrupting our information or distributions systems, causing dramatic increases in fuel prices,
thereby
increasing the costs of doing business and affecting consumer spending, or impeding the flow of
imports or domestic products to us.
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We depend on our key personnel.
Our ability to anticipate and effectively respond to changing trends and consumer preferences
depends in part on our ability to attract and retain key personnel in our design, merchandising,
marketing and other functions. We cannot be sure that we will be able to attract and retain a
sufficient number of qualified personnel in future periods. The loss of services of key members of
our senior management team or of certain other key employees could also negatively affect our
business.
Litigation matters incidental to our business could be adversely determined against us.
We are involved from time to time in litigation incidental to our business. Management believes
that the outcome of current litigation will not have a material adverse effect on our results of
operations or financial condition. Depending on the actual outcome of pending litigation, charges
would be recorded in the future that may have an adverse effect on our operating results.
Goodwill and indefinite-lived intangible assets comprise a significant portion of our total assets.
We must test goodwill and indefinite-lived intangible assets for impairment at least annually or
whenever events or changes in circumstances indicate that their carrying amounts may not be
recoverable; which could result in a material, non-cash write-down of goodwill or indefinite-lived
intangible assets and could have a material adverse impact on our results of operations.
Goodwill and indefinite-lived intangible assets are subject to impairment assessments at least
annually (or more frequently when events or circumstances indicate that an impairment may have
occurred) by applying a fair-value test. Our principal intangible assets, other than goodwill, are
tradenames, franchise agreements, and leases that existed at date of acquisition with terms that
were favorable to market at that date. We may be required to recognize additional impairment
charges in the future. Additional impairment losses could have a material adverse impact on our
results of operations and stockholders equity (deficit).
There are factors that can affect our provision for income taxes.
We are subject to income taxes in numerous jurisdictions, including the United States, individual
states and localities, and internationally. Our provision for income taxes in the future could be
adversely affected by numerous factors including, but not limited to, the mix of income and losses
from our foreign and domestic operations that may be taxed at different rates, changes in the
valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting
principles or interpretations thereof, which could adversely impact earnings in future periods. In
addition, the estimates we make regarding domestic and foreign taxes are based on tax positions
that we believe are supportable, but could potentially be subject to successful challenge by the
Internal Revenue Service or other authoritative agencies. If we are required to settle matters in
excess of our established accruals for uncertain tax positions, it could result in a charge to our
earnings.
If our independent manufacturers, franchisees or licensees do not use ethical business practices or
comply with applicable laws and regulations, our brand name could be harmed due to negative
publicity and our results of operations could be adversely affected.
While our internal and vendor operating guidelines promote ethical business practices, we do not
control our independent manufacturers, franchisees or licensees, or their business practices.
Accordingly, we cannot guarantee their compliance with our guidelines. Violation of labor or other
laws, such as the Foreign Corrupt Practices Act, by our independent manufacturers, franchisees or
licensees, or the divergence from labor practices generally accepted as ethical in the United
States, could diminish the value of our brand and reduce demand for our merchandise if, as a result
of such violation, we were to attract negative publicity. As a result, our results of operations
could be adversely affected.
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We rely on third parties to deliver our merchandise and if these third parties do not adequately
perform this function, our business would be disrupted.
The efficient operation of our business depends on the ability of our third party carriers to ship
merchandise directly to our distribution facilities and individual stores. These carriers
typically employ personnel represented by labor unions and have experienced labor difficulties in
the past. Due to our reliance on these parties for our shipments, interruptions in the ability of
our vendors to ship our merchandise to our distribution facilities or the ability of carriers to
fulfill the distribution of merchandise to our stores could adversely affect our business,
financial condition and results of operations.
We depend on single North American, European and International distribution facilities.
We handle merchandise distribution for all of our North American stores from a single facility in
Hoffman Estates, Illinois, a suburb of Chicago, Illinois. We handle merchandise distribution for
all of our European operations from a single facility in Birmingham, United Kingdom. We handle
merchandise distribution for all of our international franchise operations from a single facility
in Hong Kong. Independent third party transportation companies deliver our merchandise to our
stores and our clients. Any significant interruption in the operation of our distribution
facilities or the domestic transportation infrastructure due to natural disasters, accidents,
inclement weather, system failures, work stoppages, slowdowns or strikes by employees of the
transportation companies, or other unforeseen causes could delay or impair our ability to
distribute merchandise to our stores, which could result in lower sales, a loss of loyalty to our
brands and excess inventory and would have a material adverse effect on our business, financial
condition and results of operations.
We may be unable to protect our tradenames and other intellectual property rights.
We believe that our tradenames and service marks are important to our success and our competitive
position due to their name recognition with our customers. There can be no assurance that the
actions we have taken to establish and protect our tradenames and service marks will be adequate to
prevent imitation of our products by others or to prevent others from seeking to block sales of our
products as a violation of the tradenames, service marks and proprietary rights of others. The
laws of some foreign countries may not protect proprietary rights to the same extent as do the laws
of the United States, and it may be more difficult for us to successfully challenge the use of our
proprietary rights by other parties in these countries. Also, others may assert rights in, or
ownership of, our tradenames and other proprietary rights, and we may be unable to successfully
resolve those types of conflicts to our satisfaction.
Our success depends on our ability to maintain the value of our brands.
Our success depends on the value of our Claires and Icing brands. The Claires and Icing names are
integral to our business as well as to the implementation of our strategies for expanding our
business. Maintaining, promoting and positioning our brands will depend largely on the success of
our design, merchandising, and marketing efforts and our ability to provide a consistent, enjoyable
quality client experience. Our brands could be adversely affected if we fail to achieve these
objectives for one or both of these brands and our public image and reputation could be tarnished
by negative publicity. Any of these events could negatively impact sales.
We may be unable to rely on liability indemnities given by foreign vendors which could adversely
affect our financial results.
The quality of our globally sourced products may vary from our expectations and sources of our
supply may prove to be unreliable. In the event we seek indemnification from our suppliers for
claims relating to the merchandise shipped to us, our ability to obtain indemnification may be
hindered by the suppliers lack of understanding of U.S. and European product liability laws. Our
ability to successfully pursue indemnification claims may also be adversely affected by the
financial condition of the supplier. Any of these circumstances could have a material adverse
effect on our business and financial results.
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We are controlled by Affiliates of Apollo, and its interests as an equity holder may conflict with
the interest of our creditors.
We are controlled by Affiliates of Apollo Global Management, LLC and its subsidiaries, including
Apollo Management (collectively, Apollo), and Apollo has the ability to elect all of the members
of our board of directors and thereby control our policies and operations, including the
appointment of management, future issuances of our common stock or other securities, the payments
of dividends, if any, on our common stock, the incurrence of debt by us, amendments to our articles
of incorporation and bylaws and the entering into of extraordinary transactions. The interests of
Apollo may not in all cases be aligned with the interests of our creditors. For example, if we
encounter financial difficulties or are unable to pay our indebtedness as it matures, the interests
of Apollo as an equity holder might conflict with the interests of our creditors. In addition,
Apollo may have an interest in pursuing acquisitions, divestitures, financings or other
transactions that, in its judgment, could enhance its equity investments, even though such
transactions might involve risks to our creditors. Furthermore, Apollo may in the future own
businesses that directly or indirectly compete with us. Apollo also may pursue acquisition
opportunities that may be complementary to our business, and as a result, those acquisition
opportunities may not be available to us. So long as Apollo continues to own a significant amount
of our combined voting power, even if such amount is less than 50%, it will continue to be able to
strongly influence or effectively control our decisions. Because our equity securities are not
registered under the Exchange Act and are not listed on any U.S. securities exchange, we are not
subject to any of the corporate governance requirements of any U.S. securities exchange.
Risks Relating to Our Indebtedness
Our substantial leverage could adversely affect our ability to raise additional capital to fund our
operations, limit our ability to react to changes in the economy or our industry and prevent us
from meeting our obligations under the Credit Facility and Notes.
We are significantly leveraged. As of January 29, 2011, our total debt, including the current
portion, was approximately $2.52 billion, consisting of borrowings under our Credit Facility, the
Notes, short-term note payable and a capital lease obligation. In March 2011, we issued $450.0
million aggregate principal amount of the Senior Secured Second Lien Notes. We used the net
proceeds from the note offering to reduce the entire $194.0 million outstanding under our revolving
credit facility (without terminating the commitment) and $241.0 million of indebtedness under our
senior secured term loan. As a result of our prepayment under the senior secured term loan Credit
Facility, we are no longer required to make any quarterly payments through the maturity date. Our
revolving Credit Facility matures in May 2013 and our senior secured term loan Credit Facility
matures in May 2014. We cannot assure you that we will have the financial resources required, or
that the conditions of the capital markets will support, any future refinancing or restructuring of
those facilities or other indebtedness.
Our substantial leverage could adversely affect our ability to raise additional capital to fund our
operations, limit our ability to react to changes in the economy or our industry, expose us to
interest rate risk to the extent of our variable rate debt and prevent us from meeting our
obligations under the Credit Facility and Notes. Our high degree of leverage could have important
consequences, including:
| increasing our vulnerability to adverse economic, industry or competitive developments; | ||
| requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities; | ||
| exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our Credit Facility, will be at variable rates of interest; | ||
| making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the Notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indentures governing the Notes and the agreements governing such other indebtedness; |
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| restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; | ||
| limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and | ||
| limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting. |
Despite our high indebtedness level, we and our subsidiaries are still able to incur significant
additional amounts of debt, which could further exacerbate the risks associated with our
substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future.
Although the indentures governing the Notes and the Senior Secured Second Lien Notes and the Credit
Facility each contain restrictions on the incurrence of additional indebtedness, however, these
restrictions are subject to a number of significant qualifications and exceptions, and under
certain circumstances, the amount of indebtedness that could be incurred in compliance with these
restrictions could be substantial. Accordingly, we and our subsidiaries may be able to incur
substantial additional indebtedness in the future. If new debt is added to our and our
subsidiaries existing debt levels, the related risks that we now face would increase. In
addition, the indentures governing the Notes and the Senior Secured Second Lien Notes do not
prevent us from incurring obligations that do not constitute indebtedness under those agreements.
On May 14, 2008, we notified the holders of the Senior Toggle Notes of our intent to elect the
payment in kind (PIK) interest option to satisfy interest payment obligations. The PIK election
is in effect through June 1, 2011, and has the effect of increasing the amount of Senior Toggle
Notes. This election, net of reductions for note repurchases, increased the principal amount of our
Senior Toggle Notes by $98.1 million and $62.4 million as of January 29, 2011 and January 30, 2010,
respectively. The accrued payment in kind interest is included in Long-term debt in the
Consolidated Balance Sheets.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
Our Credit Facility and the indentures governing the Notes and the Senior Secured Second Lien Notes
contain various covenants that limit our ability to engage in specified types of transactions.
These covenants limit our, our parents and our restricted subsidiaries ability to, among other
things:
| incur additional indebtedness or issue certain preferred shares; | ||
| pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments; | ||
| make certain investments; | ||
| transfer or sell certain assets; | ||
| create liens; | ||
| consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and | ||
| enter into certain transactions with our affiliates. |
A breach of any of these covenants could result in a default under one or more of these agreements,
including as a result of cross default provisions, and, in the case of our revolving Credit
Facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of
default under our Credit Facility, the lenders could elect to declare all amounts outstanding under
our Credit Facility to be immediately due and payable and terminate all commitments to extend
further credit. Such actions by those lenders could cause cross defaults under our other
indebtedness. If we were unable to repay those amounts, the lenders under our Credit Facility
could proceed against the collateral granted to them to secure that indebtedness. We have pledged
a significant portion of our assets as collateral under our Credit Facility. Our obligations under
the Senior Secured Second Lien Notes are secured by a second-priority lien on substantially all of
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the assets pledged as collateral under the Credit Facility. If the lenders under our Credit
Facility accelerate the repayment of borrowings, we may not have sufficient assets to repay our
Credit Facility as well as our other indebtedness, including the Notes and the Senior Secured
Second Lien Notes.
We may not be able to generate sufficient cash to service all of our indebtedness, and may be
forced to take other actions to satisfy our obligations under our indebtedness, which may not be
successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our
financial condition and operating performance, which is subject to prevailing economic and
competitive conditions and to certain financial, business and other factors beyond our control. We
may not be able to maintain a level of cash flows from operating activities sufficient to permit us
to pay the principal and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we
may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek
additional capital or restructure or refinance our indebtedness, including the Notes. Our ability
to restructure or refinance our debt will depend on the condition of the capital markets and our
financial condition at such time. Any refinancing of our debt could be at higher interest rates
and may require us to comply with more onerous covenants, which could further restrict our business
operations. The terms of the indentures governing our Credit Facility and the Notes and the Senior
Secured Second Lien Notes and or any future debt instruments that we may enter into may restrict us
from adopting some of these alternatives. In addition, any failure to make payments of interest
and principal on our outstanding indebtedness on a timely basis would likely result in a reduction
of our credit rating, which could harm our ability to incur additional indebtedness. These
alternative measures may not be successful and may not permit us to meet our scheduled debt service
obligations.
Repayment of our debt is dependent on cash flow generated by our subsidiaries.
Our subsidiaries own a significant portion of our assets and conduct a significant portion of our
operations. Accordingly, repayment of our indebtedness is dependent, to a significant extent, on
the generation of cash flow by our subsidiaries and their ability to make such cash available to
us, by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be
permitted to, make distributions to enable us to make payments in respect of our indebtedness.
Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual
restrictions may limit our ability to obtain cash from our subsidiaries. While the indentures
governing the Notes and the Senior Secured Second Lien Notes limit the ability of our subsidiaries
to incur consensual restrictions on their ability to pay dividends or make other intercompany
payments to us, these limitations are subject to certain qualifications and exceptions. In the
event that we do not receive distributions from our subsidiaries, we may be unable to make required
principal and interest payments on our indebtedness.
To service our debt obligations, we may need to increase the portion of the income of our foreign
subsidiaries that is expected to be remitted to the United States, which could increase our income
tax expense.
The amount of the income of our foreign subsidiaries that we expect to remit to the United States
may significantly impact our U.S. federal income tax expense. We record U.S. federal income taxes
on that portion of the income of our foreign subsidiaries that is expected to be remitted to the
United States and be taxable. In order to service our debt obligations, we may need to increase the
portion of the income of our foreign subsidiaries that we expect to remit to the United States,
which may significantly increase our income tax expense. Consequently, our income tax expense has
been, and will continue to be, impacted by our strategic initiative to make substantial capital
investments outside the United States.
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If we default on our obligations to pay our other indebtedness, the holders of our debt could
exercise rights that could have a material effect on us.
If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds
necessary to meet required payments of principal and interest on our indebtedness, or if we
otherwise fail to comply
with the various covenants in the instruments governing our indebtedness, we could be in default
under the terms of the agreements governing such indebtedness. In the event of such default,
| the holders of such indebtedness may be able to cause all of our available cash flow to be used to pay such indebtedness and, in any event, could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest; | ||
| the lenders under our Credit Facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets; and | ||
| we could be forced into bankruptcy or liquidation. |
If our operating performance declines, we may in the future need to obtain waivers from the
required lenders under our Credit Facility to avoid being in default. If we breach our covenants
under our Credit Facility and seek a waiver, we may not be able to obtain a waiver from the
required lenders. If this occurs, we would be in default under our Credit Facility, the lenders
could exercise their rights, as described above, and we could be forced into bankruptcy or
liquidation.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our stores are located in all 50 states of the United States, Puerto Rico, Canada, the Virgin
Islands, the United Kingdom, Ireland, France, Spain, Portugal, Belgium, Switzerland, Austria,
Netherlands, Germany, Poland, Czech Republic and Hungary. We lease all of our 2,981 store
locations, generally for terms ranging from five to approximately 10 years. Under the terms of the
leases, we pay a fixed minimum rent and/or rentals based on a percentage of net sales. We also pay
certain other expenses (e.g., common area maintenance charges and real estate taxes) under the
leases. The internal layout and fixtures of each store are designed by management and third
parties and constructed by external contractors.
Most of our stores in North American and the European divisions are located in enclosed shopping
malls, while other stores are located within central business districts, power centers, lifestyle
centers, open-air outlet malls or strip centers. Our criteria for opening new stores includes
geographic location, demographic aspects of communities surrounding the store site, quality of
anchor tenants, advantageous location within a mall or central business district, appropriate space
availability, and rental rates. We believe that sufficient desirable locations are available to
accommodate our expansion plans. We refurbish our existing stores on a regular basis.
The following table sets forth the location, use and size of our distribution, sourcing, buying,
merchandising, and corporate facilities as of January 29, 2011. The properties are leased with the
leases expiring at various times through 2030, subject to renewal options.
Approximate Square | ||||||||||||
Location | Use | Footage | ||||||||||
Hoffman Estates, Illinois |
Corporate and North America management and distribution center | 538,000 | (1 | ) | ||||||||
Birmingham, United Kingdom |
Europe management and distribution center | 105,600 | (2 | ) | ||||||||
Pembroke Pines, Florida |
Accounting and finance | 36,000 | ||||||||||
Hong Kong |
Sourcing and buying | 11,100 | ||||||||||
Paris, France |
Zone support | 8,800 | (3 | ) | ||||||||
Zurich, Switzerland |
Zone support | 3,800 | (3 | ) |
(1) | On February 19, 2010, we sold the Property to a third party. Contemporaneously with the sale of the Property, we entered into a lease agreement that provides for (a) an initial expiration date of February 28, 2030 with two (2) five (5) year renewal periods, each at our option, and (b) basic rent of $2.1 million per |
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annum (subject to annual increases). This transaction is accounted for as a capital lease. Prior to February 19, 2010, we owned central buying and store operations offices and the North American distribution center located in Hoffman Estates, Illinois (the Property) which is on approximately 28.4 acres of land. The Property has buildings with approximately 538,000 total square feet of space, of which 373,000 square feet is devoted to receiving and distribution and 165,000 square feet is devoted to office space. | ||
(2) | Our subsidiary, Claires Accessories UK Ltd., or Claires UK, leases distribution and office space in Birmingham, United Kingdom. The facility consists of approximately 23,900 square feet of office space and approximately 81,700 square feet of distribution space. The lease expires in December 2024, and Claires UK has the right to assign or sublet this lease at any time during the term of the lease, subject to landlord approval. The Birmingham, United Kingdom distribution center currently services our owned stores in Europe. | |
(3) | We maintain our human resource and select operating functions for these countries. |
In addition, we have contracted a third party vendor in Hong Kong to provide distribution center
services for our franchise stores.
Item 3. Legal Proceedings
We are, from time to time, involved in routine litigation incidental to the conduct of our
business, including litigation instituted by persons injured upon premises under our control;
litigation regarding the merchandise that we sell, including product and safety concerns regarding
heavy metal and chemical content in our merchandise; litigation with respect to various employment
matters, including wage and hour litigation; litigation with present or former employees; and
litigation regarding intellectual property rights. Although litigation is routine and incidental
to the conduct of our business, like any business of our size which employs a significant number of
employees and sells a significant amount of merchandise, such litigation can result in large
monetary awards when judges, juries or other finders of facts do not agree with managements
evaluation of possible liability or outcome of litigation. Accordingly, the consequences of these
matters cannot be finally determined by management. However, in the opinion of management, we
believe that current pending litigation will not have a material adverse effect on our consolidated
financial results.
Item 4. Removed and Reserved
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
There is no established public trading market for our common stock.
Holders
As of April 1, 2011, there was one holder of record of our common stock, our parent, Claires Inc.
Dividends
We have paid no cash dividends since the Merger. Our Credit Facility and the indentures governing
the Notes and the Senior Secured Second Lien Notes restrict our ability to pay dividends.
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Item 6. Selected Financial Data
The balance sheet and statement of operations data set forth below is derived from our Consolidated
Financial Statements and should be read in conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and our Consolidated Financial Statements and the
related notes thereto appearing elsewhere in this Annual Report. The Consolidated Balance Sheet
data as of January 31, 2009, February 2, 2008, May 28, 2007, and February 3, 2007 and the
Consolidated Statement of Operations and Comprehensive Income (Loss) data for the period May 29,
2007 through February 2, 2008 and the period February 4, 2007 through May 28, 2007 and the fiscal
year ended February 3, 2007 are derived from our Consolidated Financial Statements which are not
included herein.
As a result of the consummation of the Transactions, the Company is sometimes referred to as the
Successor Entity for periods on or after May 29, 2007, and the Predecessor Entity for periods
prior to May 29, 2007. The Consolidated Financial Statements for the period on or after May 29,
2007 are presented on a different basis than for the periods before May 29, 2007, as a result of
the application of purchase accounting as of May 29, 2007 and therefore are not comparable. The
acquisition of Claires Stores, Inc. was accounted for as a business combination using the purchase
method of accounting, whereby the purchase price was allocated to the assets and liabilities based
on the estimated fair market values at the date of acquisition.
Successor Entity | Predecessor Entity | ||||||||||||||||||||||||
Fiscal Year Ended | Fiscal Year Ended | Fiscal Year Ended | May 29, 2007 | Feb. 4, 2007 | Fiscal Year Ended | ||||||||||||||||||||
January 29, | January 30, | January 31, | Through | Through | February 3, | ||||||||||||||||||||
2011 (1) | 2010 (1) | 2009 (1) | Feb. 2, 2008 | May 28, 2007 | 2007 (1) | ||||||||||||||||||||
(In thousands, except for ratios and store data) | |||||||||||||||||||||||||
Statement of Operations Data: |
|||||||||||||||||||||||||
Net sales |
$ | 1,426,397 | $ | 1,342,389 | $ | 1,412,960 | $ | 1,085,932 | $ | 424,899 | $ | 1,480,987 | |||||||||||||
Cost of sales, occupancy and buying expenses |
685,111 | 663,269 | 724,832 | 521,384 | 206,438 | 691,646 | |||||||||||||||||||
Gross profit |
741,286 | 679,120 | 688,128 | 564,548 | 218,461 | 789,341 | |||||||||||||||||||
Other expenses: |
|||||||||||||||||||||||||
Selling, general and administrative |
498,212 | 465,706 | 513,752 | 354,875 | 154,409 | 481,979 | |||||||||||||||||||
Depreciation and amortization |
65,198 | 71,471 | 85,093 | 61,451 | 19,652 | 56,771 | |||||||||||||||||||
Impairment of assets |
12,262 | 3,142 | 498,490 | 3,478 | 73 | | |||||||||||||||||||
Severance and transaction-related costs |
741 | 921 | 15,928 | 7,319 | 72,672 | | |||||||||||||||||||
Other expense (income), net |
411 | (4,234 | ) | (4,499 | ) | (3,088 | ) | (1,476 | ) | (3,484 | ) | ||||||||||||||
576,824 | 537,006 | 1,108,764 | 424,035 | 245,330 | 535,266 | ||||||||||||||||||||
Operating income (loss) |
164,462 | 142,114 | (420,636 | ) | 140,513 | (26,869 | ) | 254,075 | |||||||||||||||||
Gain on early debt extinguishment |
13,388 | 36,412 | | | | | |||||||||||||||||||
Impairment of equity investment |
6,030 | | 25,500 | | | | |||||||||||||||||||
Interest expense (income), net |
157,706 | 177,418 | 195,947 | 147,892 | (4,876 | ) | (14,575 | ) | |||||||||||||||||
Income (loss) from continuing operations before
income taxes |
14,114 | 1,108 | (642,083 | ) | (7,379 | ) | (21,993 | ) | 268,650 | ||||||||||||||||
Income tax expense (benefit) |
9,791 | 11,510 | 1,509 | (8,020 | ) | 21,779 | 79,888 | ||||||||||||||||||
Income (loss) from continuing operations |
$ | 4,323 | $ | (10,402 | ) | $ | (643,592 | ) | $ | 641 | $ | (43,772 | ) | $ | 188,762 | ||||||||||
Other Financial Data: |
|||||||||||||||||||||||||
Capital expenditures: |
|||||||||||||||||||||||||
New stores and remodels |
$ | 39,022 | $ | 16,557 | $ | 36,270 | $ | 46,225 | $ | 24,231 | $ | 77,021 | |||||||||||||
Other |
9,689 | 8,395 | 23,135 | 12,259 | 3,757 | 18,171 | (2) | ||||||||||||||||||
Total capital expenditures |
48,711 | 24,952 | 59,405 | 58,484 | 27,988 | 95,192 | |||||||||||||||||||
Cash interest expense (3) |
108,923 | 126,733 | 168,567 | 123,620 | 86 | 118 | |||||||||||||||||||
Store Data: |
|||||||||||||||||||||||||
Number of stores (at period end)
North America |
1,972 | 1,993 | 2,026 | 2,135 | 2,124 | 2,133 | |||||||||||||||||||
Europe |
1,009 | 955 | 943 | 905 | 879 | 859 | |||||||||||||||||||
Total number of stores (at period end) |
2,981 | 2,948 | 2,969 | 3,040 | 3,003 | 2,992 | |||||||||||||||||||
Total gross square footage (000s) (at period end) |
3,012 | 2,982 | 3,011 | 3,105 | 3,043 | 3,021 | |||||||||||||||||||
Net sales per store (000s) (4) |
$ | 481 | $ | 454 | $ | 461 | $ | 359 | $ | 142 | $ | 504 | |||||||||||||
Net sales per square foot (5) |
476 | 448 | 453 | 353 | 140 | 500 | |||||||||||||||||||
Balance Sheet Data (at period end) |
|||||||||||||||||||||||||
Cash and cash equivalents (6) |
$ | 279,766 | $ | 198,708 | $ | 204,574 | $ | 85,974 | $ | 350,476 | $ | 340,877 | |||||||||||||
Total assets |
2,866,449 | 2,834,105 | 2,881,095 | 3,348,497 | 1,119,047 | 1,091,266 | |||||||||||||||||||
Total debt |
2,524,286 | 2,521,878 | 2,581,772 | 2,377,750 | | | |||||||||||||||||||
Total stockholders equity (deficit) |
(26,515 | ) | (34,642 | ) | (55,843 | ) | 605,200 | 792,071 | 847,662 |
(1) | Fiscal 2006 was a fifty-three week period and Fiscal 2010, Fiscal 2009, Fiscal 2008 and Fiscal 2007 were fifty-two week periods. | |
(2) | Includes management information system expenditures of $5.2 million in Fiscal 2006 for strategic projects of POS, merchandising systems, business intelligence, technology and the logistics system for the new distribution center in the Netherlands. | |
(3) | Cash interest expense does not include amortization of debt issuance costs or interest expense paid in kind. | |
(4) | Net sales per store are calculated based on the average number of stores during the period. | |
(5) | Net sales per square foot are calculated based on the average gross square feet during the period. | |
(6) | At January 29, 2011, cash and cash equivalents included restricted cash of $23.9 million. |
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations is designed
to provide the reader of the financial statements with a narrative on our results of operations,
financial position and liquidity, risk management activities, and significant accounting policies
and critical estimates. Managements Discussion and Analysis should be read in conjunction with
the Consolidated Financial Statements and related notes thereto contained elsewhere in this
document.
Our fiscal year ends on the Saturday closest to January 31, and we refer to the fiscal year by the
calendar year in which it began. Our fiscal year ended January 29, 2011 (Fiscal 2010), January
30, 2010 (Fiscal 2009) and January 31, 2009 (Fiscal 2008) consisted of 52 weeks, respectively.
We include a store in the calculation of same store sales once it has been in operation sixty weeks
after its initial opening. A store which is temporarily closed, such as for remodeling, is removed
from the same store sales computation if it is closed for nine consecutive weeks. The removal is
effective prospectively upon the completion of the ninth consecutive week of closure. A store
which is closed permanently, such as upon termination of the lease, is immediately removed from the
same store sales computation. We compute same store sales on a local currency basis, which
eliminates any impact for changes in foreign currency rates.
Acquisition of the Company by Apollo Management VI, L.P.
As a result of the Merger on May 29, 2007, described under Explanatory Notes in this Annual
Report, there was a significant change in the Companys capital structure, including:
| the closing of the Companys senior secured term loan facility and revolving Credit Facility (collectively the Credit Facility) of $1.65 billion; | ||
| the closing of the Companys senior notes offering (the Notes) in the aggregate principal amount of $935.0 million; and | ||
| the equity investment by Apollo Management VI, L.P. (Apollo Management), together with certain affiliated co-investment partnerships (collectively the Sponsors), of approximately $595.7 million. |
The purchase of the Company and the related fees and expenses were financed through the issuance of
the Notes, borrowing under the Credit Facility, equity investment by the Sponsors, and cash on hand
at the Company.
The aforementioned transactions, including the Merger and payment of costs related to these
transactions, are collectively referred to as the Transactions.
The acquisition of Claires Stores, Inc. was accounted for as a business combination using the
purchase method of accounting, whereby the purchase price was allocated to the assets and
liabilities based on the estimated fair market values at the date of acquisition.
See Note 1
Nature of Operations and Acquisition of Claires Stores,
Inc. and Note 5 Debt,
respectively, in the Notes to Consolidated Financial Statements for details of the acquisition and
current indebtedness.
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Table of Contents
Results of Consolidated Operations
Management overview
We are one of the worlds leading specialty retailers of fashionable accessories and jewelry at
affordable prices for young women, teens, tweens, and girls ages 3 to 27. We are organized into
two operating segments: North America and Europe. We identify our operating segments by how we
manage and evaluate our business activities. We operate owned stores throughout the United States,
Puerto Rico, Canada, and the U.S. Virgin Islands (North American segment) and the United Kingdom,
Switzerland, Austria, Germany, France, Ireland, Spain, Portugal, Netherlands, Belgium, Poland,
Czech Republic and Hungary (European segment). Until September 2, 2010, the Company operated
stores in Japan through a 50:50 joint venture. Beginning September 2, 2010, these stores began to
operate as licensed stores.
Financial highlights for 2010 include the following:
| Same store sales performance: |
Fiscal 2010 | ||||
Consolidated |
6.5 | % | ||
North America |
7.8 | % | ||
Europe |
4.3 | % |
| Operating income increase of $22.3 million or 15.7% to $164.5 million. | ||
| Net income increase of $14.7 million to $4.3 million from $(10.4) million. | ||
| Cash flow from operating activities increase of $75.8 million or 100.4% to $151.3 million. | ||
| Paid $79.9 million to retire $93.8 million of Notes. | ||
| Cash and cash equivalents and restricted cash increase to $279.8 million. |
In March 2011, after our fiscal year end, we issued $450.0 million aggregate principal amount of
the Senior Secured Second Lien Notes and the net proceeds were used to pay down existing
indebtedness under our senior secured Credit Facility.
Operational highlights for 2010 include the following:
| Opened 82 new company-owned stores including stores in three new markets | ||
| Reacquired exclusive territory rights for all of Asia, outside of Japan | ||
| Executed license agreement with former joint venture partner to operate Claires Nippon stores as licensed stores in Japan | ||
| Increased the average transaction value and average number of transactions per store | ||
| Increased sales mix of our accessories product category | ||
| Attained positive operating cash flow in approximately 95% of our stores. |
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A summary of our consolidated results of operations is as follows (dollars in thousands):
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Net sales |
$ | 1,426,397 | $ | 1,342,389 | $ | 1,412,960 | ||||||
Increase (decrease) in same store sales |
6.5 | % | (1.7 | )% | (6.9 | )% | ||||||
Gross profit percentage |
52.0 | % | 50.6 | % | 48.7 | % | ||||||
Selling, general and administrative expenses as a percentage of
net sales |
34.9 | % | 34.7 | % | 36.4 | % | ||||||
Depreciation and amortization as a percentage of net sales |
4.6 | % | 5.3 | % | 6.0 | % | ||||||
Severance and transaction-related costs as percentage of net sales |
0.1 | % | 0.1 | % | 1.1 | % | ||||||
Impairment of assets |
$ | 12,262 | $ | 3,142 | $ | 498,490 | ||||||
Operating income (loss) |
$ | 164,462 | $ | 142,114 | $ | (420,636 | ) | |||||
Gain on early debt extinguishment |
$ | 13,388 | $ | 36,412 | $ | | ||||||
Impairment of equity investment |
$ | 6,030 | $ | | $ | 25,500 | ||||||
Net income (loss) |
$ | 4,323 | $ | (10,402 | ) | $ | (643,592 | ) | ||||
Number of stores at the end of the period (1) |
2,981 | 2,948 | 2,969 |
(1) | Number of stores excludes stores operated under franchise and license agreements. |
Net sales
Net sales in Fiscal 2010 increased $84.0 million, or 6.3%, from Fiscal 2009. This increase was
attributable to an increase in same store sales of $84.8 million, or 6.5%, and new store sales of
$27.2 million, partially offset by an unfavorable $14.8 million of foreign currency translation
effect of our foreign locations sales, a decrease of $11.2 million due to the effect of store
closures and reduced shipments to franchisees of $2.0 million. Sales would have increased 7.4%
excluding the impact from foreign currency rate changes.
The increase in same store sales was primarily attributable to an increase in average transaction
value of 6.7% and an increase in average number of transactions per store of 0.9%.
Net sales in Fiscal 2009 decreased $70.6 million, or 5.0%, from Fiscal 2008. This decrease was
attributable to an unfavorable $33.5 million of foreign currency translation effect of our foreign
locations sales, a decrease of $31.0 million due to the effect of store closures in North America
and Europe at the end of Fiscal 2008 and the first half of Fiscal 2009, a decrease in same store
sales of $22.2 million, or 1.7%, and decreases in shipments to franchisees of $2.9 million,
partially offset by new store sales of $19.0 million.
The decrease in same store sales was primarily attributable to a decrease in the average number of
transactions per store of 6.7%, partially offset by an increase in average transaction value of
4.7%.
The following table compares our sales of each product category for the last three fiscal years:
Percentage of Total | ||||||||||||
Product Category | Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | |||||||||
Accessories |
54.5 | 53.6 | 48.4 | |||||||||
Jewelry |
45.5 | 46.4 | 51.6 | |||||||||
100.0 | 100.0 | 100.0 | ||||||||||
Gross profit
In calculating gross profit and gross profit percentages, we exclude our distribution center costs.
These costs are included instead in Selling, general and administrative expenses in our
Consolidated Statements of Operations and Comprehensive Income (Loss). Other retail companies may
include these costs in cost of sales, so our gross profit percentages may not be comparable to
those retailers.
In Fiscal 2010, gross profit percentage increased 140 basis points to 52.0% compared to the prior
fiscal year of 50.6%. This increase consisted of a 30 basis point improvement in merchandise margin
and a 130 basis point decrease in occupancy costs, offset by a 20 basis point increase in buying
and buying-related costs. Merchandise margin benefited by 30 basis points from reduced inventory
shrink. Occupancy costs increased approximately $0.6 million, but increased approximately $3.5
million including foreign currency translation effect.
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In Fiscal 2009, gross profit percentage increased 190 basis points to 50.6% compared to the prior
fiscal year of 48.7%. The increase consisted of a 200 basis point improvement in merchandise
margin and a 10 basis point decrease in buying and buying-related costs, offset by a 20 basis point
increase in occupancy costs. The improvement in merchandise margin was due to increased initial
mark-up on purchases, reduced markdowns and decreased freight costs. Occupancy costs decreased
approximately $13.3 million primarily due to foreign currency translation effects, but increased as
a percentage of sales due to the deleveraging effect of lower sales. Fiscal 2008 included $3.1
million of PET project costs, in buying and buying-related costs, that did not recur in Fiscal
2009, accounting for 20 basis points of the improvement in gross margin.
Selling, general and administrative expenses
In Fiscal 2010, selling, general and administrative expenses increased $32.5 million, or 7.0%, over
the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses
increased 20 basis points compared to the prior year. The majority of this increase was for
store-related expenses resulting from increased sales and increases in foreign currency transaction
losses. Excluding a favorable $5.6 million foreign currency translation effect, the net increase in
selling, general and administrative expenses would have been $38.1 million, or 8.3%.
In Fiscal 2009, selling, general and administrative expenses decreased $48.0 million, or 9.4%, over
the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses
decreased 170 basis points compared to the prior year. Excluding a favorable $13.2 million foreign
currency translation effect and a decrease of $10.0 million of non-recurring CSI and PET project
costs, the net decrease in selling, general and administrative expenses would have been $24.8
million, or 5.1%, compared to the prior fiscal year. Excluding the foreign currency translation
effect and non-recurring CSI and PET project costs, selling, general and administrative expenses as
a percentage of net sales decreased 90 basis points compared to the prior year.
Depreciation and amortization expense
Depreciation and amortization expense decreased $6.3 million to $65.2 million during Fiscal 2010
compared to Fiscal 2009. The majority of this decrease is due to a favorable foreign currency
translation effect and the effect of assets becoming fully depreciated or amortized.
Depreciation and amortization expense decreased $13.6 million to $71.5 million during Fiscal 2009
compared to Fiscal 2008. The majority of this decrease is due to a favorable foreign currency
translation effect and the effect of assets becoming fully depreciated or amortized.
Impairment charges
During the fourth quarter of Fiscal 2010, management performed a strategic review of its
franchising business. The inability of certain franchisees to achieve store development
expectations in select markets prompted us to reevaluate our franchise development strategy and to
perform a valuation of the franchise agreements, which are definite-lived intangible assets. We
utilized a discounted cash flow model and determined the franchise agreements intangible assets
were impaired. This resulted in us recording a non-cash impairment charge of $12.3 million in
Fiscal 2010, which was included in Impairment of assets on the Companys Consolidated Statements
of Operations and Comprehensive Income (Loss).
During the second quarter of Fiscal 2010, we recorded a non-cash impairment charge related to the
investment in Claires Nippon of $6.0 million. The joint ventures continuing operating losses
prompted us to perform a valuation of our investment in Claires Nippon.
The deterioration in the economy and resulting effect on consumer confidence and discretionary
spending that occurred during Fiscal 2009 and Fiscal 2008 had a significant impact on the retail
industry. We performed our tests for goodwill, intangible assets, property and equipment and other
asset impairment following relevant accounting standards pertaining to the particular asset being
tested. The impairment testing conducted in Fiscal 2009 resulted in the recognition of non-cash
impairment charges of $3.1 million related to property and equipment. The testing conducted in
Fiscal 2008 resulted in the recognition of non-cash impairment charges of $297.0 million for
goodwill and $227.0 million for intangible and other
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assets. See Note 3 Impairment Charges in the Notes to Consolidated Financial Statements for
further discussion of the impairment charges.
Severance and transaction-related costs
Since 2007, we have incurred various transaction-related costs. These costs consisted primarily of
financial advisory fees, legal fees and change in control payments to employees. We incurred $0.7
million of such costs in Fiscal 2010, $0.9 million in Fiscal 2009 and $3.5 million in Fiscal 2008.
In connection with our CSI and PET projects in Fiscal 2008, we incurred severance costs of $12.4
million for terminated employees.
Gain on early debt extinguishment
The following is a summary of our note repurchase activity during Fiscal 2010 and Fiscal 2009 (in
thousands):
Fiscal 2010 | ||||||||||||
Principal | Repurchase | Recognized | ||||||||||
Notes Repurchased | Amount | Price | Gain (1) | |||||||||
Senior Notes |
$ | 14,000 | $ | 12,268 | $ | 1,467 | ||||||
Senior Toggle Notes |
57,173 | 49,798 | 7,612 | |||||||||
Senior Subordinated Notes |
22,625 | 17,799 | 4,309 | |||||||||
$ | 93,798 | $ | 79,865 | $ | 13,388 | |||||||
(1) | Net of deferred issuance cost write-offs of $265 for the Senior Notes, $922 for the Senior Toggle Notes and $517 for the Senior Subordinated Notes, and accrued interest write-off of $1,159 for the Senior Toggle Notes. |
Fiscal 2009 | ||||||||||||
Principal | Repurchase | Recognized | ||||||||||
Notes Repurchased | Amount | Price | Gain (1) | |||||||||
Senior Toggle Notes |
$ | 30,500 | $ | 19,744 | $ | 11,297 | ||||||
Senior Subordinated Notes |
52,763 | 26,347 | 25,115 | |||||||||
$ | 83,263 | $ | 46,091 | $ | 36,412 | |||||||
(1) | Net of deferred issuance cost write-offs of $603 and $1,301 for the Senior Toggle Notes and Senior Subordinated Notes, respectively, and accrued interest write-off of $1,144 for the Senior Toggle Notes. |
Other expense (income), net
The following is a summary of other expense (income) activity for Fiscal 2010, Fiscal 2009 and
Fiscal 2008 (in thousands):
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Equity loss (income) |
$ | 2,529 | $ | 1,014 | $ | (320 | ) | |||||
Franchise fees |
(1,638 | ) | (1,943 | ) | (2,309 | ) | ||||||
Gain on sale of assets |
| (1,935 | ) | (1,287 | ) | |||||||
Other income |
(480 | ) | (1,370 | ) | (583 | ) | ||||||
$ | 411 | $ | (4,234 | ) | $ | (4,499 | ) | |||||
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Interest expense (income), net
Interest expense for Fiscal 2010 aggregated $157.9 million, a decrease of $19.8 million compared to
the prior year. This decrease is primarily the result of Note repurchases. Included in interest
expense for Fiscal 2010 is approximately $10.0 million of amortization of deferred debt issuance
costs and $36.9 million of paid in kind interest.
Interest expense for Fiscal 2009 aggregated $177.6 million, a decrease of $19.8 million compared to
the prior year. This decrease is primarily the result of reductions in interest rates on the
floating portion of our debt and Note purchases. Included in interest expense for Fiscal 2009 is
approximately $10.4 million of amortization of deferred debt issuance costs and $39.0 million of
interest paid in kind.
See Note 5 Debt in the Notes to Consolidated Financial Statements for components of interest
expense (income), net.
Income taxes
In Fiscal 2010, our income tax expense was $9.8 million and our effective income tax rate was
69.4%. Our effective income tax rate for Fiscal 2010 reflects tax expense of $0.4 million on the
repatriation of foreign earnings, plus tax expense of $12.7 million related to the effect of
changes to our valuation allowance on deferred tax assets, plus tax expense of $2.6 million
relating to other permanent items, offset by tax benefits of $11.6 million on income in our foreign
jurisdictions that are taxed at lower rates. In Fiscal 2010, we made net cash income tax payments
of $6.3 million.
In Fiscal 2009, our income tax expense was $11.5 million and our effective income tax rate was
1,038.8%. Our effective income tax rate for Fiscal 2009 reflects tax expense of $18.6 million on
the repatriation of foreign earnings, plus tax expense of $17.5 million related to the effect of
changes to our valuation allowance on deferred tax assets, offset by tax benefits of $21.4 million
on income in our foreign jurisdictions that are taxed at lower rates, and $4.7 million relating to
other permanent tax benefits. In Fiscal 2009, we made net cash income tax payments of $3.2
million.
In Fiscal 2008, our income tax expense was $1.5 million and our effective tax rate was (0.2)%. Our
effective income tax rate for Fiscal 2008 reflected the non-deductible nature of the goodwill and
joint venture impairment charges aggregating $322.5 million, as well an increase of $95.8 million
to our valuation allowance on deferred tax assets generated by our U.S. operations. We increased
our valuation allowance due to a lack of sufficient accounting evidence that it was more likely
than not that our deferred tax assets would be realized. In Fiscal 2008, we made net cash income
tax payments of $14.2 million.
See Note 11 Income Taxes in the Notes to Consolidated Financial Statements for further details.
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):
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Net sales |
$ | 914,149 | $ | 850,313 | $ | 907,486 | ||||||
Increase (decrease) in same store sales |
7.8 | % | (3.2 | )% | (9.2 | )% | ||||||
Gross profit percentage |
52.1 | % | 50.0 | % | 47.9 | % | ||||||
Number of stores at the end of the period (1) |
1,972 | 1,993 | 2,026 |
(1) | Number of stores excludes stores operated under franchise and licensing agreements. |
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Net sales
Net sales in North America during Fiscal 2010 increased $63.8 million, or 7.5%, from Fiscal 2009.
This increase was attributable to an increase in same store sales of $64.8 million, or 7.8%, a
favorable foreign currency translation effect of our Canadian operations sales of $4.9 million and
new store sales of $3.6 million, partially offset by a decrease of $6.8 million due to the effect
of store closures and reduced shipments to franchisees of $2.7 million.
The increase in same store sales was primarily attributable to an increase in average transaction
value of 5.8% and an increase in average number of transactions per store of 2.9%.
Net sales in North America during Fiscal 2009 decreased $57.2 million, or 6.3%, from Fiscal 2008.
This decrease was attributable to a decrease of $29.8 million due to the effect of store closures
in North America at the end of Fiscal 2008, decrease in same store sales of $27.2 million, or 3.2%,
an unfavorable foreign currency translation effect of our Canadian operations of $1.2 million, and
decreases in shipments to franchisees of $2.9 million, partially offset by new store revenue of
$3.9 million.
The decrease in same store sales was primarily attributable to a decrease in the average number of
transactions per store of 8.1%, partially offset by an increase in average transaction value of
4.2%.
Gross profit
In Fiscal 2010, gross profit percentage increased 210 basis points to 52.1% compared to the gross
profit percentage for Fiscal 2009 of 50.0%. This increase consisted of a 90 basis point
improvement in merchandise margin and a 150 basis point decrease in occupancy costs, partially
offset by a 30 basis point increase in buying and buying-related costs. Merchandise margin
benefited by 30 basis points from reduced inventory shrink. The 150 basis point improvement in
occupancy costs is due to the leveraging effect of higher sales partially offset by an unfavorable
foreign currency translation effect.
In Fiscal 2009, gross profit percentage increased 210 basis points to 50.0% compared to the gross
profit percentage for Fiscal 2008 of 47.9%. This increase included a 230 basis point improvement
in merchandise margin and a 20 basis point decrease in buying and buying-related costs, partially
offset by a 40 basis point increase in occupancy costs. Fiscal 2008 included $1.1 million of
non-recurring PET project costs, which were included in buying and buying-related costs and
accounted for 20 basis points of the improvement in gross margin.
The following table compares our sales of each product category for the last three fiscal years:
Percentage of Total | ||||||||||||
Product Category | Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | |||||||||
Accessories |
49.8 | 48.5 | 43.3 | |||||||||
Jewelry |
50.2 | 51.5 | 56.7 | |||||||||
100.0 | 100.0 | 100.0 | ||||||||||
Europe
Key statistics and results of operations for our European division are as follows (dollars in
thousands):
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Net sales
|
$ | 512,248 | $ | 492,076 | $ | 505,474 | ||||||
Increase (decrease) in same store sales
|
4.3 | % | 1.1 | % | (2.5 | )% | ||||||
Gross profit percentage
|
51.7 | % | 51.7 | % | 50.1 | % | ||||||
Number of stores at the end of the period (1)
|
1,009 | 955 | 943 |
(1) | Number of stores excludes stores operated under franchise and licensing agreements. |
Net sales
Net sales in our European division during Fiscal 2010 increased $20.2 million, or 4.1%, from Fiscal
2009. This increase was attributable to new store sales of $23.6 million, an increase in same
store sales of $20.0 million, or 4.3%, and an increase in shipments to franchisees of $0.7 million,
partially offset by an
unfavorable foreign currency translation of our European operations sales of $19.6 million and a
decrease of $4.5 million due to the effect of store closures.
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The increase in same store sales was primarily attributable to an increase in average transaction
value of 7.8% partially offset by a decrease in average number of transaction per store of 2.4%.
Net sales in our European division during Fiscal 2009 decreased $13.4 million, or 2.7%, from Fiscal
2008. This decrease was attributable to a decrease of $32.3 million resulting from an unfavorable
foreign currency translation of our European operations and a decrease of $1.2 million due to the
effect of store closures, partially offset by new store sales of $15.1 million and increases in
same store sales of $5.0 million, or 1.1%.
The increase in same store sales was primarily attributable to an increase in average transaction
value of 6.6%, partially offset by a decrease in average number of transactions per store of 5.2%.
Gross profit
In Fiscal 2010, gross profit percentage remained consistent with Fiscal 2009 at 51.7%. Although
the gross profit percentage did not change, our European division saw an 80 basis point decrease in
occupancy costs and a 10 basis point decrease in buying and buying-related costs, offset by a 90
basis point decrease in merchandise margin. The 80 basis point improvement in occupancy costs is
due to the leveraging effect of higher sales and a favorable foreign currency translation effect.
In Fiscal 2009, gross profit percentage increased 160 basis points to 51.7% compared to the gross
profit percentage for Fiscal 2008 of 50.1%. This increase was comprised of a 140 basis point
improvement in merchandise margin and a 30 basis point decrease in occupancy costs, partially
offset by a 10 basis point increase in buying and buying-related costs. Fiscal 2008 included $2.1
million of non-recurring PET project costs, which were included in buying and buying-related costs,
and accounted for 40 basis points of the improvement in gross margin.
The following table compares our sales of each product category for the last three fiscal years:
Percentage of Total | ||||||||||||
Product Category | Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | |||||||||
Accessories |
62.7 | 62.2 | 57.3 | |||||||||
Jewelry |
37.3 | 37.8 | 42.7 | |||||||||
100.0 | 100.0 | 100.0 | ||||||||||
Liquidity and Capital Resources
Our operating liquidity requirements are funded through internally generated cash flow from net
sales and cash on hand. Our primary uses of cash are working capital requirements, new store
expenditures, and debt service requirements. Cash outlays for the payment of interest are
significantly higher in Fiscal 2010, Fiscal 2009 and Fiscal 2008 than in prior years as a result of
the Credit Facility and Notes incurred in connection with the Transactions described below. Our
current capital structure generates tax losses in our U.S. operations because of debt service
requirements. Accordingly, we expect to pay minimal cash taxes in the U.S. in the near term, while
our foreign cash taxes are less affected by our capital structure and debt service requirements.
We anticipate that the existing cash and cash equivalents and cash generated from operations will
be sufficient to meet our future working capital requirements, new store expenditures, and debt
service requirements as they become due. However, our ability to fund future operating expenses
and capital expenditures and our ability to make scheduled payments of interest on, to pay
principal on, or refinance indebtedness and to satisfy any other present or future debt obligations
will depend on future operating performance. Our future operating performance and liquidity may
also be adversely affected by general economic, financial, and other factors beyond the Companys
control, including those disclosed in Part I, Item 1A Risk Factors.
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Short-term Debt
On January 24, 2011, we entered into a Euro () denominated loan (the Euro loan) in the amount
of 42.4 million that is due on January 24, 2012. The Euro loan bears interest at the three month
Euro Interbank Offered Rate (EURIBOR) rate plus 8.00% per year and is payable quarterly. As of
January 29, 2011, there was 42.4 million, or the equivalent of $57.7 million, outstanding under
the Euro loan, and the weighted-average interest rate for borrowings outstanding was 9.02%. We
intend to use the net proceeds of the borrowings for general corporate purposes.
The obligations under the Euro loan are secured by a cash deposit in the amount of 15.0 million,
or the equivalent of $20.4 million at January 29, 2011, and a perfected first lien security
interest in all of the issued and outstanding equity interest of one of our international
subsidiaries, Claires Holdings S.a.r.l. The cash deposit is classified as Cash and cash
equivalents and restricted cash in our Consolidated Balance Sheet. See Note 2 Summary of
Significant Accounting Policies in the Notes to Consolidated Financial Statements for further
details.
Credit Facility
Our Credit Facility provides senior secured financing of up to $1.65 billion, consisting of a $1.45
billion senior secured term loan facility and a $200.0 million senior secured revolving credit
facility. On May 29, 2007, upon closing of the Transactions, we borrowed $1.45 billion under our
senior secured term loan facility and were issued a $4.5 million letter of credit. The letter of
credit was subsequently increased to $6.0 million. As of January 29, 2011, we were in compliance
with the covenants in our Credit Facility.
Borrowings under our Credit Facility bear interest at a rate equal to, at our option, either (a) an
alternate base rate determined by reference to the higher of (1) prime rate in effect on such day
and (2) the federal funds effective rate plus 0.50% or (b) a LIBOR rate, with respect to any
Eurodollar borrowing, determined by reference to the costs of funds for U.S. dollar deposits in the
London Interbank Market for the interest period relevant to such borrowing, adjusted for certain
additional costs, in each case plus an applicable margin. The initial applicable margin for
borrowings under our Credit Facility is 1.75% per annum with respect to the alternate base rate
borrowing and 2.75% per annum in the case of any LIBOR borrowings. The applicable margin for our
revolving credit loans under our Credit Facility will be subject to one or more stepdowns, in each
case based upon the ratio of our net senior secured debt to earnings before interest, taxes,
depreciation and amortization (EBITDA) for the period of four consecutive fiscal quarters most
recently ended as of such date (the Total Net Secured Leverage Ratio).
On July 28, 2010, we entered into an interest rate swap agreement (the Swap) to manage exposure
to fluctuations in interest rate changes related to the senior secured term loan facility. The
Swap has been designated and accounted for as a cash flow hedge and 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 and has a fixed rate of 1.2235%. The interest rate Swap results in the
Company paying a fixed rate plus the applicable margin then in effect for LIBOR borrowings
resulting in an interest rate of 3.97% at January 29, 2011, on a notional amount of $200.0 million
of the senior secured term loan.
We entered into three interest rate swap agreements in July 2007 (the Swaps) to manage exposure
to fluctuations in interest rate changes related to the senior secured term loan facility. The
Swaps were designated and accounted for as cash flow hedges and expired on June 30, 2010. The Swaps
covered an aggregate notional amount of $435.0 million of the outstanding principal balance of the
senior secured term loan facility. The fixed rates of the three Swaps ranged from 4.96% to 5.25%.
In addition to paying interest on outstanding principal under our Credit Facility, we are required
to pay a commitment fee, initially 0.50% per annum, in respect of the revolving credit commitments
thereunder. The commitment fee will be subject to one stepdown, based upon our Total Net Secured
Leverage Ratio. We must also pay customary letter of credit fees and agency fees. At January 29,
2011, the weighted average interest rate for borrowings outstanding under our Credit Facility was
2.98% per annum. Any
principal amount outstanding of the loans under our senior secured revolving credit facility, plus
interest accrued and unpaid thereon, will be due and payable in full at maturity on May 29, 2013.
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All obligations under our Credit Facility are unconditionally guaranteed by (i) Claires Inc., our
parent, prior to an initial public offering of Claires Stores, Inc. stock, and (ii) certain of our
existing and future wholly-owned domestic subsidiaries, subject to certain exceptions.
All obligations under our Credit Facility, and the guarantees of those obligations, are secured,
subject to certain exceptions, by (i) all of Claires Stores, Inc. capital stock, prior to an
initial public offering of Claires Stores, Inc. stock, and (ii) substantially all of our material
owned assets and the material owned assets of subsidiary guarantors, including:
| a perfected pledge of all the equity interests held by us or any subsidiary guarantor, which pledge, in the case of any foreign subsidiary, is limited to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by us and the subsidiary guarantors; and | ||
| perfected security interests in, and mortgages on, substantially all material tangible and intangible assets owned by us and each subsidiary guarantor, subject to certain exceptions. |
Our Credit Facility contains customary provisions relating to mandatory prepayments, voluntary
payments, affirmative and negative covenants, and events of default; however, it does not contain
any covenants that require the Company to maintain any particular financial ratio or other measure
of financial performance.
Although we did not need to do so, during the quarter ended November 1, 2008, we drew down the
remaining $194.0 million available under our Revolving Credit Facility (Revolver). An affiliate
of Lehman Brothers is a member of the facility syndicate, and so immediately after Lehman Brothers
filed for bankruptcy, in order to preserve the availability of the commitment, we drew down the
full available amount under the Revolver. We received the entire $194.0 million, including the
remaining portion of Lehman Brothers affiliates commitment of $33 million. We were not required
to repay any of the Revolver until the due date of May 29, 2013, therefore, the Revolver was
classified as a long-term liability in the accompanying Consolidated Balance Sheet as of January
29, 2011. The interest rate on the Revolver on January 29, 2011 was 2.5%. Subsequent to January
29, 2011, we paid down the entire $194.0 million of the Revolver (without terminating the
commitment) and $241.0 million of indebtedness under the senior secured term loan with the net
proceeds from our Senior Secured Second Lien Notes offering. As a result of our prepayment under
the senior secured term loan facility, we are no longer required to make any quarterly payments and
have a final payment of $1,154 million due May 29, 2014. See Senior Secured Second Lien Notes
below and Note 16 Subsequent Events in the Notes to Consolidated Financial Statements.
Senior Notes and Senior Subordinated Notes
In connection with the Transactions, we also issued a series of notes.
Our senior notes were issued in two series: (1) $250.0 million of 9.25% senior notes due 2015; and
(2) $350.0 million of 9.625%/10.375% senior toggle notes due 2015. The $250.0 million senior notes
are unsecured obligations, mature on June 1, 2015 and bear interest at a rate of 9.25% per annum.
The $350.0 million senior toggle notes are senior obligations and will mature on June 1, 2015. For
any interest period through June 1, 2011, we may, at our option, elect to pay interest on the
senior toggle notes (i) entirely in cash, (ii) entirely by increasing the principal amount of the
outstanding senior toggle notes or by issuing payment in kind (PIK) Notes, or (iii) 50% as cash
interest and 50% as PIK interest. After June 1, 2011, we will make all interest payments on the
senior toggle notes in cash. Cash interest on the senior toggle notes will accrue at the rate of
9.625% per annum and be payable in cash. PIK interest on the senior toggle notes will accrue at
the cash interest rate per annum plus 0.75% and be payable by issuing PIK notes. When we make a
PIK interest election, our debt increases by the amount of such interest and we issue PIK notes on
the scheduled semi-annual payment dates.
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We also issued 10.50% senior subordinated notes due 2017 in an initial aggregate principal amount
of $335.0 million. The senior subordinated notes are senior subordinated obligations, will mature
on June 1, 2017 and bear interest at a rate of 10.50% per annum.
Interest on the notes is payable semi-annually to holders of record at the close of business on May
15 or November 15 immediately preceding the interest payment date on June 1 and December 1 of each
year, commencing December 1, 2007. The notes are also subject to certain redemption and repurchase
rights as described in Note 5 Debt in the Notes to Consolidated Financial Statements.
Senior Secured Second Lien Notes
On March 4, 2011, we issued $450.0 million aggregate principal amount of 8.875% senior secured
second lien notes that mature on March 15, 2019 (the Senior Secured Second Lien Notes). Interest
on the Senior Secured Second Lien Notes is payable semi-annually to holders of record at the close
of business on March 1 or September 1 immediately preceding the interest payment date on March 15
and September 15 of each year, commencing on September 15, 2011. The Senior Secured Second Lien
Notes are guaranteed on a second-priority senior secured basis by all of our existing and future
direct or indirect wholly-owned domestic subsidiaries that guarantee the Credit Facility. The
Senior Secured Second Lien Notes and related guarantees are secured by a second-priority lien on
substantially all of the assets that secure our and our subsidiarys guarantors obligations under
the Credit Facility. We used the net proceeds of the offering of the Senior Secured Second Lien
Notes to reduce the entire amount outstanding under our revolving Credit Facility (without
terminating the commitment) and indebtedness under our senior secured term loan. See Note 16
Subsequent Events in the Notes to Consolidated Financial Statements.
Our Senior Notes, Senior Toggle Notes, Senior Subordinated Notes and Senior Secured Second Lien
Notes (collectively, the Notes) contain certain covenants that, among other things, and subject
to certain exceptions and other basket amounts, restrict our ability and the ability of our
subsidiaries to:
| incur additional indebtedness; | ||
| pay dividends or distributions on our capital stock, repurchase or retire our capital stock and redeem, repurchase or defease any subordinated indebtedness; | ||
| make certain investments; | ||
| create or incur certain liens; | ||
| create restrictions on the payment of dividends or other distributions to us from our subsidiaries; | ||
| transfer or sell assets; | ||
| engage in certain transactions with our affiliates; and | ||
| merge or consolidate with other companies or transfer all or substantially all of our assets. |
Certain of these covenants, such as limitations on our ability to make certain payments such as
dividends, or incur debt, will no longer apply if our Notes have investment grade ratings from both
of the rating agencies of Moodys Investor Services, Inc. (Moodys) and Standard & Poors Ratings
Group (S&P) and no event of default has occurred. Since the date of issuance of the Notes in May
2007, the Notes have not received investment grade ratings from Moodys or S&P. Accordingly, all
of the covenants under the Notes currently apply to us. None of these covenants, however, require
the Company to maintain any particular financial ratio or other measure of financial performance.
As of January 29, 2011, we were in compliance with the covenants under the Notes.
We elected to pay interest in kind on our 9.625%/10.375% Senior Toggle Notes for the interest
periods beginning June 2, 2008 through June 1, 2011. This election, net of reductions for note
repurchases, increased the principal amount on the Senior Toggle Notes by $98.1 million and $62.4
million as of January 29, 2011 and January 30, 2010, respectively. The accrued payment in kind
interest is included in Long-term debt in the Consolidated Balance Sheets.
European Credit Facilities
Our non-U.S. subsidiaries have bank credit facilities totaling $2.6 million. These facilities are
used for working capital requirements, letters of credit and various guarantees. These credit
facilities have been
arranged in accordance with customary lending practices in their respective countries of operation.
At January 29, 2011, the entire amount of $2.6 million was available for borrowing by us, subject
to a reduction of $2.3 million for outstanding bank guarantees.
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Analysis of Consolidated Financial Condition
A summary of cash flows provided by (used in) operating, investing and financing activities is
outlined in the table below (in thousands):
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Operating activities |
$ | 151,259 | $ | 75,476 | $ | 1,373 | ||||||
Investing activities |
(56,952 | ) | (21,259 | ) | (60,756 | ) | ||||||
Financing activities |
(38,139 | ) | (60,591 | ) | 179,500 |
Our working capital at the end of Fiscal 2010 was $195.9 million compared to $188.6 million at the
end of Fiscal 2009, an increase of $7.3 million. The increase in working capital mainly reflects
the increase in inventories of $25.8 million, partially offset by the decrease in prepaid expenses
of $11.4 million and the increase in trade accounts payable of $12.2 million.
Cash flows from operating activities
In Fiscal 2010, cash provided by operating activities increased $75.8 million compared to Fiscal
2009. The primary reasons for the increase were an increase in operating income before impairment
of assets and depreciation and amortization expense of $25.2 million; a decrease in working
capital, excluding cash and cash equivalents and restricted cash, of $34.8 million; and lower cash
interest payments of $17.8 million; partially offset by higher cash tax payments of $3.2 million.
In Fiscal 2009, cash provided by operating activities increased $74.1 million compared to Fiscal
2008. The primary reasons for the increase were lower cash interest payments of $41.8 million,
lower cash tax payments of $11.1 million, and an increase in operating income before impairment of
assets and depreciation and amortization expense of $53.8 million, partially offset by an increase
in working capital, excluding cash and cash equivalents and restricted cash, of $22.8 million, an
increase in other assets of $4.6 million and a decrease in deferred rent expense of $5.8 million.
Cash flows from investing activities
In Fiscal 2010, cash used in investing activities increased $35.7 million compared to Fiscal 2009.
In Fiscal 2010, restricted cash increased $23.9 million for deposits securing certain debt
obligations. In February 2010, we completed a sale-leaseback transaction that generated proceeds of
approximately $16.8 million, offset by increased capital expenditures of $24.4 million for the
remodeling of existing stores, new store openings, and improvements to technology systems. In
Fiscal 2009, we received $1.8 million from the sale of property and $2.4 million from the sale of
intangible assets.
In Fiscal 2009, cash used in investing activities decreased $39.5 million compared to Fiscal 2008.
The primary reasons for the decrease were lower capital expenditures of $35.9 million due to fewer
store openings and increased proceeds of $1.7 million from the sale of property and $1.9 million
from the sale of intangible assets. We reduced capital expenditures during 2009 to preserve cash in
response to the distress in the financial markets which has resulted in declines in consumer
confidence and spending.
Capital expenditures were $49.8 million, $25.5 million and $61.4 million in Fiscal 2010, Fiscal
2009 and Fiscal 2008, respectively, primarily to remodel existing stores, open new stores and to
improve technology systems. In Fiscal 2011, we currently expect to incur approximately $75.0
million to $80.0 million of capital expenditures to open new stores, remodel existing stores and to
improve technology systems.
Cash flows from financing activities
In Fiscal 2010, cash used in financing activities decreased $22.5 million compared to Fiscal 2009.
In Fiscal 2010, we received $57.5 million from a short-term bank loan and paid $0.5 million of debt
issuance costs. In both Fiscal 2010 and Fiscal 2009, we paid $14.5 million for the scheduled
principal payments on our Credit Facility. In Fiscal 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. We also paid $0.7 million in
capital lease payments during Fiscal 2010. During Fiscal 2009, we paid $46.1 million to retire
$30.5 million of Senior Toggle Notes and $52.8 million of Senior Subordinated Notes.
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During Fiscal 2008, we drew down the remaining $194.0 million available under our Revolving Credit
Facility and paid $14.5 million for the scheduled principal payments on our Credit Facility.
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 January 29, 2011, we had cash and cash equivalents and restricted cash of $279.8 million and
substantially all of the cash equivalents consisted of money market funds invested in U.S. Treasury
Securities.
We anticipate that cash generated from operations will be sufficient to meet our future working
capital requirements, new store expenditures, and debt service requirements for at least the next
twelve months. However, our ability to fund future operating expenses and capital expenditures and
our ability to make scheduled payments of interest on, to pay principal on, or refinance
indebtedness and to satisfy any other present or future debt obligations will depend on future
operating performance. Our future operating performance and liquidity may also be adversely
affected by general economic, financial, and other factors beyond the Companys control, including
those disclosed in Part I, Item 1A Risk Factors.
Current market conditions
Continued 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.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require us to make certain estimates and
assumptions about future events. These estimates and the underlying assumptions affect the amounts
of assets and liabilities reported, disclosures regarding contingent assets and liabilities and
reported amounts of revenues and expenses. Such estimates include, but are not limited to, the
value of inventories, goodwill, intangible assets and other long-lived assets, legal contingencies
and assumptions used in the calculation of income taxes, retirement and other post-retirement
benefits, stock-based compensation, derivative and hedging activities, residual values and other
items. These estimates and assumptions are based on our best estimates and judgment. We evaluate
our estimates and assumptions on an ongoing basis using historical experience and other factors,
including the current economic environment, which we believe to be reasonable under the
circumstances. We adjust such estimates and assumptions when facts and circumstances dictate.
Illiquidity in credit markets, volatility in each of the equity, foreign currency, and 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.
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Inventory Valuation
Our inventories in North America are valued at the lower of cost or market, with cost determined
using the retail method. Inherent in the retail inventory calculation are certain significant
management judgments and estimates including, among others, merchandise markups, markdowns and
shrinkage, which impact
the ending inventory valuation at cost as well as resulting gross margins. The methodologies used
to value merchandise inventories include the development of the cost-to-retail ratios, the
groupings of homogeneous classes of merchandise, development of shrinkage reserves and the
accounting for retail price changes. Our inventories in Europe are accounted for under the lower
of cost or market method, with cost determined using the average cost method at an individual item
level. Market is determined based on the estimated net realizable value, which is generally the
merchandise selling price. Inventory valuation is impacted by the estimation of slow moving goods,
shrinkage and markdowns. Management monitors merchandise inventory levels to identify slow-moving
items and uses markdowns to clear such inventories. Changes in consumer demand of our products
could affect our retail prices, and therefore impact the retail method and lower of cost or market
valuations.
Valuation of Long-Lived Assets
We evaluate the carrying value of long-lived assets whenever events or changes in circumstances
indicate that a potential impairment has occurred. A potential impairment has occurred if the
projected future undiscounted cash flows are less than the carrying value of the assets. The
estimate of cash flows includes managements assumptions of cash inflows and outflows directly
resulting from the use of the asset in operations. When a potential impairment has occurred, an
impairment charge is recorded if the carrying value of the long-lived asset exceeds its fair value.
Fair value is measured based on a projected discounted cash flow model using a discount rate we
feel is commensurate with the risk inherent in our business. A prolonged decrease in consumer
spending would require us to modify our models and cash flow estimates, and could create a risk of
an impairment triggering event in the future. Our impairment analyses contain estimates due to the
inherently judgmental nature of forecasting long-term estimated cash flows and determining the
ultimate useful lives of assets. Actual results may differ, which could materially impact our
impairment assessment.
During Fiscal 2010, we recorded a non-cash impairment charge of $6.0 million related to our former
investment in our joint venture, Claires Nippon. During Fiscal 2008, the Company recorded a
non-cash impairment charge of $25.5 million for its former investment in Claires Nippon.
During Fiscal 2009, an impairment charge of approximately $3.1 million was recorded related to our
central buying and store operations offices and the North American distribution center located in
Hoffman Estates, Illinois. During Fiscal 2008, an impairment charge of approximately $2.5 million
was recorded related to store asset impairment.
Goodwill Impairment
We continually evaluate whether events and changes in circumstances warrant recognition of an
impairment of goodwill. The conditions that would trigger an impairment assessment of goodwill
include a significant, sustained negative trend in our operating results or cash flows, a decrease
in demand for our products, a change in the competitive environment, and other industry and
economic factors. We conduct our annual impairment test to determine whether an impairment of the
value of goodwill has occurred in accordance with the guidance set forth in Accounting Standards
Codification (ASC) Topic 350, Intangibles Goodwill and Other. ASC Topic 350 requires a
two-step process for determining goodwill impairment. The first step in this process compares the
fair value of the reporting unit to its carrying value. If the carrying value of the reporting
unit exceeds its fair value, the second step of the impairment test is performed to measure the
impairment. In the second step, the fair value of the reporting unit is allocated to all of the
assets and liabilities of the reporting unit to determine an implied goodwill value. This
allocation is similar to a purchase price allocation performed in purchase accounting. If the
carrying amount of the reporting units goodwill exceeds the implied goodwill value, an impairment
loss is recognized in an amount equal to that excess. We have two reporting units as defined under
ASC Topic 350. These reporting units are our North American segment and our European segment.
Fair value is determined using appropriate valuation techniques. All valuation methodologies
applied in a valuation of any form of property can be broadly classified into one of three
approaches: the asset approach, the market approach and the income approach. We rely on the
income approach using discounted cash flows and market approach using comparable public company
entities in deriving the fair
values of our reporting units. The asset approach is not used as our reporting units have
significant intangible assets, the value of which is dependent on cash flow.
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The fair value of each reporting unit determined under Step 1 of the goodwill impairment test was
based on a three-fourths weighting of a discounted cash flow analysis under the income approach
using forward-looking projections of estimated future operating results and a one-fourth weighting
of a guideline company methodology under the market approach using earnings before interest, taxes,
depreciation and amortization (EBITDA) multiples. Our determination of the fair value of each
reporting unit incorporates multiple assumptions and contains inherent uncertainties, including
significant estimates relating to future business growth, earnings projections, and the weighted
average cost of capital used for purposes of discounting. Decreases in revenue growth, decreases
in earnings projections and increases in the weighted average cost of capital will all cause the
fair value of the reporting unit to decrease, which could require us to modify future models and
cash flow estimates, and could result in an impairment triggering event in the future.
We have weighted the valuation of our reporting units at three-fourths using the income approach
and one-fourth using the market based approach. We believe that this weighting is appropriate
since it is difficult to find other comparable publicly traded companies that are similar to our
reporting units heavy penetration of jewelry and accessories sales and margin structure. It is
our view that the future discounted cash flows are more reflective of the value of the reporting
units.
The projected cash flows used in the income approach cover the periods consisting of the fourth
quarter fiscal 2010 and the fiscal years 2011 through 2015. Beyond fiscal year 2015, a terminal
value was calculated using the Gordon Growth Model. We developed the projected cash flows based on
estimates of forecasted same store sales, new store openings, operating margins and capital
expenditures. Due to the inherent judgment involved in making these estimates and assumptions,
actual results could differ from those estimates. The projected cash flows reflect projected same
store sales increases representative of the Companys past performance post-recession.
A weighted average cost of capital reflecting the risk associated with the projected cash flows was
calculated for each reporting unit and used to discount each reporting units cash flows and
terminal value. Key assumptions made in calculating a weighted average cost of capital include the
risk-free rate, market risk premium, volatility relative to the market, cost of debt, specific
company premium, small company premium, tax rate and debt-to-equity ratio.
The calculation of fair value is significantly impacted by the reporting units projected cash
flows and the discount interest rates used. Accordingly, any sustained volatility in the economic
environment could impact these assumptions and make it reasonably possible that another impairment
charge could be recorded some time in the future. However, since the terminal value is a
significant portion of each reporting units fair value, the impact of any such near-term
volatility on our fair value would be lessened.
Our annual impairment analysis did not result in any impairment of goodwill during Fiscal 2010 and
Fiscal 2009. We recognized a non-cash impairment charge of $297.0 million in Fiscal 2008. The
excess of fair value over carrying value for each of our reporting units as of October 30, 2010,
the annual testing date for Fiscal 2010, ranged from approximately $420.0 million to approximately
$508.0 million. In order to evaluate the sensitivity of the fair value calculations on the
goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of each
reporting unit. This hypothetical 10% decrease would result in excess fair value over carrying
value ranging from approximately $210.0 million to approximately $388.0 million for each of our
reporting units.
Intangible Asset Impairment
Intangible assets include tradenames, franchise agreements, lease rights, non-compete agreements
and leases that existed at the date of acquisition with terms that were favorable to market at that
date. We continually evaluate whether events and changes in circumstances warrant revised
estimates of the useful lives, residual values or recognition of an impairment loss for intangible
assets. Future adverse changes in market and legal conditions or poor operating results of
underlying assets could result in losses or an
inability to recover the carrying value of the intangible asset, thereby possibly requiring an
impairment charge in the future.
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We evaluate the market value of the intangible assets periodically and record an impairment charge
when we believe the carrying amount of the asset is not recoverable. Indefinite-lived intangible
assets are tested for impairment annually or more frequently when events or circumstances indicate
that impairment may have occurred. Definite-lived intangible assets are tested for impairment when
events or circumstances indicate that the carrying amount may not be recoverable. We estimate the
fair value of these intangible assets primarily utilizing a discounted cash flow model. The
forecasted cash flows used in the model contain inherent uncertainties, including significant
estimates and assumptions related to growth rates, margins and cost of capital. Changes in any of
the assumptions utilized could affect the fair value of the intangible assets and result in an
impairment triggering event. A prolonged decrease in consumer spending would require us to modify
our models and cash flow estimates, with the risk of an impairment triggering event in the future.
During Fiscal 2010, we recorded a non-cash impairment charge of $12.3 million related to certain
franchise agreements which are definite-lived intangible assets. We did not recognize any
impairment charge during Fiscal 2009. We recognized a non-cash impairment charge of $199.0 million
in Fiscal 2008.
Income Taxes
We are subject to income taxes in many jurisdictions, including the United States, individual
states and localities and internationally. Our annual consolidated provision for income taxes is
determined based on our income, statutory tax rates and the tax implications of items treated
differently for tax purposes than for financial reporting purposes. Tax law requires certain items
to be included in the tax return at different times than the items are reflected on the financial
statements. Some of these differences are permanent, such as expenses that are not deductible in
our tax return, and some differences are temporary, reversing over time, such as depreciation
expense. We establish deferred tax assets and liabilities as a result of these temporary
differences.
Our judgment is required in determining any valuation allowance recorded against deferred tax
assets, specifically net operating loss carryforwards, tax credit carryforwards and deductible
temporary differences that may reduce taxable income in future periods. In assessing the need for
a valuation allowance, we consider all available evidence including past operating results,
estimates of future taxable income and tax planning opportunities. In the event we change our
determination as to the amount of deferred tax assets that can be realized, we will adjust our
valuation allowance with a corresponding impact to income tax expense in the period in which such
determination is made.
During Fiscal 2010, we reported a decrease of $11.8 million in valuation allowance against our U.S.
deferred tax assets, and an increase of $1.5 million in valuation allowance against our foreign
deferred tax assets. The foreign increase primarily relates to foreign jurisdictions that have a
history of losses. Our conclusion regarding the need for a valuation allowance against U.S. and
foreign deferred tax assets could change in the future based on improvements in operating
performance, which may result in the full or partial reversal of the valuation allowance.
During Fiscal 2009, we reported an increase of $18.3 million in valuation allowance against our
U.S. deferred tax assets, and an increase of $2.1 million in valuation allowance against our
foreign deferred tax assets. The foreign increase primarily relates to foreign jurisdictions that
have a history of losses.
In the fourth quarter of Fiscal 2008, we recorded a charge of $95.8 million, respectively, to
establish a valuation allowance against our deferred tax assets in the U.S. We concluded that such
a valuation allowance was appropriate in light of the significant negative evidence, which was
objective and verifiable, such as the cumulative losses in recent fiscal years in our U.S.
operations. While our long-term financial outlook in the U.S. remains positive, we concluded that
our ability to rely on our long-term outlook as to future taxable income was limited due to the
relative weight of the negative evidence from our recent U.S. cumulative losses.
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We establish accruals for uncertain tax positions in our Consolidated Financial Statements based on
tax positions that we believe are supportable, but are potentially subject to successful challenge
by the taxing
authorities. We believe these accruals are adequate for all open audit years based on our
assessment of many factors including past experience, progress of ongoing tax audits and
interpretations of tax law. If changing facts and circumstances cause us to adjust our accruals,
or if we prevail in tax matters for which accruals have been established, or we are required to
settle matters in excess of established accruals, our income tax expense for a particular period
will be affected.
Income tax expense also reflects our best estimate and assumptions regarding, among other things,
the geographic mix of income and losses from our foreign and domestic operations, interpretation of
tax laws and regulations of multiple jurisdictions, earnings repatriation plans, and resolution of
tax audits. Our effective income tax rates in future periods could be impacted by changes in the
geographic mix of income and losses from our foreign and domestic operations that may be taxed at
different rates, changes in tax laws, repatriation of foreign earnings, and the resolution of
unrecognized tax benefits for amounts different from our current estimates. Given our capital
structure, we will continue to experience volatility in our effective tax rate over the near term.
Stock-Based Compensation
We issue stock options and other stock-based awards to executive management, key employees and
directors under our stock-based compensation plans.
On January 29, 2006, we adopted ASC Topic 718, Compensation Stock Compensation, using the
modified prospective method. The calculation of stock-based compensation expense requires the input
of highly subjective assumptions, including the expected term of the stock-based awards, stock
price volatility and pre-vesting forfeitures. The assumptions used in calculating the fair value
of stock-based awards represent our best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if factors change and we
were to use different assumptions, our stock-based compensation expense could be materially
different in the future. In addition, we are required to estimate the expected forfeiture rate and
only recognize expense for those shares expected to vest. We estimate forfeitures based on our
historical experience of stock-based awards granted, exercised and cancelled, as well as
considering future expected behavior. If the actual forfeiture rate is materially different from
our estimate, stock-based compensation expense could be different from what we have recorded in the
current period.
Under ASC Topic 718, time-vested stock awards are accounted for at fair value at date of grant.
The compensation expense is recorded over the requisite service period. Stock-based compensation
expense for time-vested stock awards granted in Fiscal 2010, Fiscal 2009 and Fiscal 2008 was
recorded over the requisite service period using the graded-vesting method for the entire award.
Performance-vested awards, which qualified as equity plans under ASC Topic 718, were accounted for
based on fair value at date of grant. The stock-based compensation expense was based on the number
of shares expected to be issued when it became probable that performance targets required to
receive the award would be achieved. The expense was recorded over the requisite service period.
BOGO options, which are immediately vested and exercisable upon issuance, are accounted for at fair
value at date of grant. The compensation expense is recognized over a four year period due to the
terms of the option requiring forfeiture in certain cases including the grantees voluntary
resignation from the Companys employ prior to May 2011.
The fair value of time-vested stock options and the buy one, get one (BOGO) options granted
during Fiscal 2010, Fiscal 2009 and Fiscal 2008 were determined using the Black-Scholes
option-pricing model. The fair value of performance based stock options issued during Fiscal 2010,
Fiscal 2009 and Fiscal 2008 was based on the Monte Carlo model. Both models incorporate various
assumptions such as expected dividend yield, risk-free interest rate, expected life of the options
and expected stock price volatility.
Our estimates of stock price volatility, interest rate, grant date fair value and expected term of
options and restricted stock are affected by illiquid credit markets, consumer spending and current
and future economic conditions. As future events and their effects can not be determined with
precision, actual results could
differ significantly from our estimates. See Note 9 Stock Options and Stock-Based Compensation
in the Notes to Consolidated Financial Statements.
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Derivatives and Hedging
We account for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging.
In accordance with ASC Topic 815, we report all derivative financial instruments on our
Consolidated Balance Sheet at fair value. We formally designate and document the financial
instrument as a hedge of a specific underlying exposure, as well as the risk management objectives
and strategies for undertaking the hedge transaction. We formally assess both at inception and
at least quarterly thereafter, whether the financial instruments that are used in hedging
transactions are effective at offsetting changes in either the fair value or cash flows of the
related underlying exposure. We measure the effectiveness of our cash flow hedges by evaluating
the following criteria: (i) the re-pricing dates of the derivative instrument match those of the
debt obligation; (ii) the interest rates of the derivative instrument and the debt obligation are
based on the same interest rate index and tenor; (iii) the variable interest rate of the derivative
instrument does not contain a floor or cap, or other provisions that cause a basis difference with
the debt obligation; and (iv) the likelihood of the counterparty not defaulting is assessed as
being probable.
We primarily employ derivative financial instruments to manage our exposure to market risk from
interest rate changes and to limit the volatility and impact of interest rate changes on earnings
and cash flows. We do not enter into derivative financial instruments for trading or speculative
purposes. We face credit risk if the counterparties to the financial instruments are unable to
perform their obligations. However, we seek to mitigate credit derivative risk by entering into
transactions with counterparties that are significant and creditworthy financial institutions. We
monitor the credit ratings of the counterparties.
For derivatives that qualify as cash flow hedges, we report the effective portion of the change in
fair value as a component of Accumulated other comprehensive income (loss), net of tax in the
Consolidated Balance Sheets and reclassifies it into earnings in the same periods in which the
hedged item affects earnings, and within the same income statement line item as the impact of the
hedged item. The ineffective portion of the change in fair value of a cash flow hedge is
recognized into income immediately. For derivative financial instruments which do not qualify as
cash flow hedges, any changes in fair value would be recorded in the Consolidated Statements of
Operations and Comprehensive Income (Loss). We adopted ASC Topic 820, Fair Value Measurements and
Disclosures, on February 3, 2008, which required the Company to include credit valuation adjustment
risk in the calculation of fair value.
We may at our discretion terminate or change the designation of any such hedging instrument
agreements prior to maturity. At that time, any gains or losses previously reported in accumulated
other comprehensive income (loss) on termination would amortize into interest expense or interest
income to correspond to the recognition of interest expense or interest income on the hedged debt.
If such debt instrument was also terminated, the gain or loss associated with the terminated
derivative included in accumulated other comprehensive income (loss) at the time of termination of
the debt would be recognized in the Consolidated Statements of Operations and Comprehensive Income
(Loss) at that time.
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Contractual Obligations and Off Balance Sheet Arrangements
We finance certain equipment through transactions accounted for as non-cancelable operating leases.
As a result, the rental expense for this equipment is recorded during the term of the lease
contract in our Consolidated Financial Statements, generally over four to seven years. In the
event that we, or our landlord, terminate a real property lease prior to its scheduled expiration,
we will be required to accrue all future rent payments under any non-cancelable operating lease
with respect to leasehold improvements or equipment located thereon. The following table sets
forth our contractual obligations requiring the use of cash as of January 29, 2011:
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | 2-3 | 4-5 | More than 5 | |||||||||||||||||
(in millions) | Total | 1 year | years | years | years | |||||||||||||||
Recorded Contractual Obligations: |
||||||||||||||||||||
Debt (1) |
$ | 2,519.0 | $ | 76.2 | $ | 223.0 | $ | 1,960.3 | (2) | $ | 259.5 | |||||||||
Capital lease obligation |
48.7 | 2.2 | 4.5 | 4.6 | 37.4 | |||||||||||||||
Unrecorded Contractual Obligations: |
||||||||||||||||||||
Operating lease obligations (3) |
1,053.9 | 202.2 | 338.7 | 246.9 | 266.1 | |||||||||||||||
Interest (4) |
584.2 | 122.8 | 265.5 | 155.0 | 40.9 | |||||||||||||||
Letters of credit |
7.1 | 7.1 | | | | |||||||||||||||
Total |
$ | 4,212.9 | $ | 410.5 | $ | 831.7 | $ | 2,366.8 | $ | 603.9 | ||||||||||
(1) | Represents debt expected to be paid and does not assume any note repurchases or prepayments other than scheduled debt payments under our Credit Facility. | |
(2) | Includes $1,351.8 million under our senior secured term loan facility, $372.5 million under our Senior Toggle Notes and $236.0 million under our Senior Subordinated Notes. | |
(3) | Operating lease obligations consists of future minimum lease commitments related to store operating leases, distribution center leases, office leases and equipment leases. Operating lease obligations do not include common area maintenance (CAM), contingent rent, insurance, marketing or tax payments for which the Company is also obligated. | |
(4) | Represents interest expected to be paid on our debt and does not assume any note repurchases or prepayments, other than scheduled debt payments under our Credit Facility. Projected interest on variable rate debt is calculated using the applicable interest rate at January 29, 2011, and the effect of the interest rate swap through July 2013 as discussed in Note 6 Derivatives and Hedging Activities in the Notes to Consolidated Financial Statements. |
We have no material off-balance sheet arrangements (as such term is defined in Item 303(a) (4) (ii)
under Regulation S-K of the Securities Exchange Act) other than disclosed herein.
Seasonality and Quarterly Results
Sales of each category of merchandise vary from period to period depending on current trends. We
experience traditional retail patterns of peak sales during the Christmas, Easter and
back-to-school periods. Sales as a percentage of total sales in each of the four quarters of
Fiscal 2010 were 23%, 23%, 24% and 30%, respectively. See Note 13 Selected Quarterly Financial
Data in the Notes to Consolidated Financial Statements for our quarterly results of operations.
Impact of Inflation
Inflation impacts our operating costs including, but not limited to, cost of goods and supplies,
occupancy costs and labor expenses. We seek to mitigate these effects by passing along
inflationary increases in costs through increased sales prices of our products where competitively
practical or by increasing sales volumes.
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Recent Accounting Pronouncements
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures Improving
Disclosures about Fair Value Measurements (amendments to ASC Topic 820, Fair Value Measurements and
Disclosures). ASU 2010-06 amends the disclosure requirements related to recurring and nonrecurring
measurements. The guidance requires new disclosures on the transfer of assets and liabilities
between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2
(significant other observable inputs) of the fair value measurement hierarchy, including the
reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of
activities on purchases, sales, issuance, and settlements of the assets and liabilities measured
using significant unobservable inputs (Level 3 fair value measurements). We adopted this guidance
during our first fiscal quarter of Fiscal 2010 and it did not have a material impact on our
financial position, results of operations or cash flow.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition
and Disclosure Requirements (amendments to ASC Topic 855, Subsequent Events). ASU 2010-09
clarifies that subsequent events should be evaluated through the date the financial statements are
issued. In addition, this update no longer requires a filer to disclose the date through which
subsequent events have been evaluated. This guidance is effective for financial statements issued
subsequent to February 24, 2010. We adopted this guidance on this date. This guidance did not have
a material impact on our financial position, results of operations or cash flows.
There are no recently issued accounting standards that are expected to have a material effect on
our financial condition, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Cash and Cash Equivalents
We have significant amounts of cash and cash equivalents, excluding restricted cash, at financial
institutions that are in excess of federally insured limits. With the current financial environment
and the instability of financial institutions, we cannot be assured that we will not experience
losses on our deposits. We mitigate this risk by investing in two money market funds that are
invested exclusively in U.S. Treasury securities and limiting the cash balance in any one bank
account. As of January 29, 2011, all cash equivalents, excluding restricted cash, were maintained
in two money market funds that were invested exclusively in U.S. Treasury securities and our
restricted cash was deposited with significant and credit worthy financial institutions.
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 January 29, 2011, the estimated fair value of the Swap was a liability of
approximately $1.2 million and was recorded, net of tax, as a component of Accumulated other
comprehensive income (loss), net of tax in our 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 in Accumulated other comprehensive income (loss), net of tax in our Consolidated
Balance Sheets.
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At January 29, 2011, we had fixed rate debt of $873.3 million and variable rate debt of $1.65
billion. Based on our variable rate debt balance (less $200 million hedged by interest rate swaps)
as of January 29, 2011, a 1% change in interest rates would increase or decrease our annual
interest expense by approximately $14.5 million.
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 January 29, 2011, 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 $0.8 million, $15.5 million
and $(27.1) million, net of tax, reflecting the unrealized gain (loss) on foreign currency
translations during Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively.
Certain of our subsidiaries make significant USD purchases from Asian suppliers, particularly in
China. Until July 2005, the Chinese government pegged its currency, the yuan renminbi (RMB), to
the USD, adjusting the relative value only slightly and on infrequent occasion. Many people viewed
this practice as leading to a substantial undervaluation of the RMB relative to the USD and other
major currencies, providing China with a competitive advantage in international trade. China now
allows the RMB to float to a limited degree against a basket of major international currencies,
including the USD, the euro and the Japanese yen. The official exchange rate has historically
remained stable; however, there are no assurances that this currency exchange rate will continue to
be as stable in the future due to the Chinese governments adoption of a floating rate with respect
to the value of the RMB against foreign currencies. While the international reaction to the RMB
revaluation has generally been positive, there remains significant international pressure on China
to adopt an even more flexible and more market-oriented currency policy that allows a greater
fluctuation in the exchange rate between the RMB and the USD. This floating exchange rate, and any
appreciation of the RMB that may result from such rate, could have various effects on our business,
which include making our purchases of Chinese products more expensive. If we are unable to
negotiate commensurate price decreases from our Chinese suppliers, these higher prices would
eventually translate into higher costs of sales, which could have a material adverse effect on our
results of operations.
The results of operations of foreign subsidiaries, when translated into U.S. dollars, reflect the
average rates of exchange for the months that comprise the periods presented. As a result, similar
results in local currency can vary significantly upon translation into U.S. dollars if exchange
rates fluctuate significantly from one period to the next. Accordingly, fluctuations in foreign
currency rates, most notably the strengthening of the dollar against the euro, could have a
material impact on our revenue growth in future periods.
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.
44
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Item 8. Financial Statements and Supplementary Data
Page No. | ||||
46 | ||||
47 | ||||
48 | ||||
49 | ||||
50 | ||||
51 |
45
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
Claires Stores, Inc.:
Claires Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Claires Stores, Inc. and
subsidiaries as of January 29, 2011 and January 30, 2010, and the related consolidated statements
of operations and comprehensive income (loss), stockholders equity (deficit), and cash flows for
the fiscal years ended January 29, 2011, January 30, 2010 and January 31, 2009. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Claires Stores, Inc. and subsidiaries as of January
29, 2011 and January 30, 2010, and the related consolidated statements of operations and
comprehensive income (loss), stockholders equity (deficit), and cash flows for the fiscal years
ended January 29, 2011, January 30, 2010 and January 31, 2009 in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
April 21, 2011
Miami, Florida
Certified Public Accountants
Miami, Florida
Certified Public Accountants
46
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CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
January 29, 2011 | January 30, 2010 | |||||||
(In thousands, except share and per share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents and restricted cash of $23,864 and $0,
respectively |
$ | 279,766 | $ | 198,708 | ||||
Inventories |
136,148 | 110,338 | ||||||
Prepaid expenses |
21,449 | 32,873 | ||||||
Other current assets |
24,658 | 28,236 | ||||||
Total current assets |
462,021 | 370,155 | ||||||
Property and equipment: |
||||||||
Land and building |
| 19,318 | ||||||
Furniture, fixtures and equipment |
186,514 | 162,602 | ||||||
Leasehold improvements |
248,030 | 228,503 | ||||||
434,544 | 410,423 | |||||||
Less accumulated depreciation and amortization |
(233,511 | ) | (182,439 | ) | ||||
201,033 | 227,984 | |||||||
Leased property under capital lease: |
||||||||
Land and building |
18,055 | | ||||||
Less accumulated depreciation and amortization |
(903 | ) | | |||||
17,152 | | |||||||
Goodwill |
1,550,056 | 1,550,056 | ||||||
Intangible assets, net of accumulated amortization of $38,747 and
$28,032, respectively |
557,466 | 580,027 | ||||||
Deferred financing costs, net of accumulated amortization of
$41,659 and $29,949, respectively |
36,434 | 47,641 | ||||||
Other assets |
42,287 | 58,242 | ||||||
2,186,243 | 2,235,966 | |||||||
Total assets |
$ | 2,866,449 | $ | 2,834,105 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Current liabilities: |
||||||||
Short-term debt and current portion of long-term debt |
$ | 76,154 | $ | 14,500 | ||||
Trade accounts payable |
54,355 | 42,163 | ||||||
Income taxes payable |
11,744 | 10,272 | ||||||
Accrued interest payable |
16,783 | 14,644 | ||||||
Accrued expenses and other current liabilities |
107,115 | 99,933 | ||||||
Total current liabilities |
266,151 | 181,512 | ||||||
Long-term debt |
2,236,842 | 2,313,378 | ||||||
Revolving credit facility |
194,000 | 194,000 | ||||||
Obligation under capital lease |
17,290 | | ||||||
Deferred tax liability |
121,776 | 122,145 | ||||||
Deferred rent expense |
26,637 | 22,082 | ||||||
Unfavorable lease obligations and other long-term liabilities |
30,268 | 35,630 | ||||||
2,626,813 | 2,687,235 | |||||||
Commitments and contingencies |
||||||||
Stockholders deficit: |
||||||||
Common stock par value $0.001 per share; authorized 1,000 shares; issued and outstanding 100 shares |
| | ||||||
Additional paid-in capital |
621,099 | 616,086 | ||||||
Accumulated other comprehensive income, net of tax |
1,416 | 2,625 | ||||||
Accumulated deficit |
(649,030 | ) | (653,353 | ) | ||||
(26,515 | ) | (34,642 | ) | |||||
Total liabilities and stockholders deficit |
$ | 2,866,449 | $ | 2,834,105 | ||||
See accompanying notes to consolidated financial statements.
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CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||
Ended | Ended | Ended | ||||||||||
January 29, | January 30, | January 31, | ||||||||||
2011 | 2010 | 2009 | ||||||||||
Net sales |
$ | 1,426,397 | $ | 1,342,389 | $ | 1,412,960 | ||||||
Cost of sales, occupancy and buying expenses |
685,111 | 663,269 | 724,832 | |||||||||
Gross profit |
741,286 | 679,120 | 688,128 | |||||||||
Other expenses: |
||||||||||||
Selling, general and administrative |
498,212 | 465,706 | 513,752 | |||||||||
Depreciation and amortization |
65,198 | 71,471 | 85,093 | |||||||||
Impairment of assets |
12,262 | 3,142 | 498,490 | |||||||||
Severance and transaction-related costs |
741 | 921 | 15,928 | |||||||||
Other expense (income), net |
411 | (4,234 | ) | (4,499 | ) | |||||||
576,824 | 537,006 | 1,108,764 | ||||||||||
Operating income (loss) |
164,462 | 142,114 | (420,636 | ) | ||||||||
Gain on early debt extinguishment |
13,388 | 36,412 | | |||||||||
Impairment of equity investment |
6,030 | | 25,500 | |||||||||
Interest expense, net |
157,706 | 177,418 | 195,947 | |||||||||
Income (loss) before income tax expense |
14,114 | 1,108 | (642,083 | ) | ||||||||
Income tax expense |
9,791 | 11,510 | 1,509 | |||||||||
Net income (loss) |
$ | 4,323 | $ | (10,402 | ) | $ | (643,592 | ) | ||||
Net income (loss) |
$ | 4,323 | $ | (10,402 | ) | $ | (643,592 | ) | ||||
Foreign currency translation and interest rate
swap adjustments, net of tax |
8,363 | 24,944 | (25,677 | ) | ||||||||
Reclassification of foreign currency
translation adjustments into net income (loss) |
(9,572 | ) | | | ||||||||
Comprehensive income (loss) |
$ | 3,114 | $ | 14,542 | $ | (669,269 | ) | |||||
See accompanying notes to consolidated financial statements.
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CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(In thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(In thousands, except per share amounts)
Number of | Accumulated | Retained | ||||||||||||||||||||||
shares of | Additional | other | earnings | |||||||||||||||||||||
common | Common | paid-in | comprehensive | (Accumulated | ||||||||||||||||||||
stock | stock | capital | income (loss), net | deficit) | Total | |||||||||||||||||||
Balance: February 2, 2008 |
100 | $ | | $ | 601,201 | $ | 3,358 | $ | 641 | $ | 605,200 | |||||||||||||
Net loss |
| | | | (643,592 | ) | (643,592 | ) | ||||||||||||||||
Stock option expense |
| | 7,783 | | | 7,783 | ||||||||||||||||||
Restricted stock expense, net of unearned compensation |
| | 443 | | | 443 | ||||||||||||||||||
Foreign currency translation adjustment and unrealized
loss on interest rate swaps, net of tax |
| | | (25,677 | ) | | (25,677 | ) | ||||||||||||||||
Balance: January 31, 2009 |
100 | | 609,427 | (22,319 | ) | (642,951 | ) | (55,843 | ) | |||||||||||||||
Net loss |
| | | | (10,402 | ) | (10,402 | ) | ||||||||||||||||
Stock option expense |
| | 6,518 | | | 6,518 | ||||||||||||||||||
Restricted stock expense, net of unearned compensation |
| | 141 | | | 141 | ||||||||||||||||||
Foreign currency translation adjustment and unrealized
gain on interest rate swaps, net of tax |
| | | 24,944 | | 24,944 | ||||||||||||||||||
Balance: January 30, 2010 |
100 | | 616,086 | 2,625 | (653,353 | ) | (34,642 | ) | ||||||||||||||||
Net income |
| | | | 4,323 | 4,323 | ||||||||||||||||||
Stock option expense |
| | 4,946 | | | 4,946 | ||||||||||||||||||
Restricted stock expense, net of unearned compensation |
| | 67 | | | 67 | ||||||||||||||||||
Foreign currency translation adjustment and unrealized
gain on interest rate swaps, net of tax |
| | | 8,363 | | 8,363 | ||||||||||||||||||
Reclassification of foreign currency translation
adjustments into net income |
| | | (9,572 | ) | | (9,572 | ) | ||||||||||||||||
Balance: January 29, 2011 |
100 | $ | | $ | 621,099 | $ | 1,416 | $ | (649,030 | ) | $ | (26,515 | ) | |||||||||||
See accompanying notes to consolidated financial statements.
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CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year | Fiscal Year | Fiscal Year | |||||||||||
Ended | Ended | Ended | |||||||||||
January 29, | January 30, | January 31, | |||||||||||
2011 | 2010 | 2009 | |||||||||||
Cash flows from operating activities: |
|||||||||||||
Net income (loss) |
$ | 4,323 | $ | (10,402 | ) | $ | (643,592 | ) | |||||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|||||||||||||
Depreciation and amortization |
65,198 | 71,471 | 85,093 | ||||||||||
Impairment |
18,292 | 3,142 | 523,990 | ||||||||||
Amortization of lease rights and other assets |
3,204 | 2,199 | 2,059 | ||||||||||
Amortization of debt issuance costs |
10,005 | 10,398 | 10,567 | ||||||||||
Payment of in kind interest expense |
36,872 | 39,013 | 24,522 | ||||||||||
Net unfavorable accretion of lease obligations |
(1,490 | ) | (2,151 | ) | (1,856 | ) | |||||||
Loss (gain) on sale/retirement of property and equipment, net |
672 | (1,389 | ) | (183 | ) | ||||||||
Gain on early debt extinguishment |
(13,388 | ) | (36,412 | ) | | ||||||||
Gain on sale of intangible assets/lease rights |
| (506 | ) | (1,372 | ) | ||||||||
Stock compensation expense |
5,013 | 6,659 | 8,226 | ||||||||||
(Increase) decrease in: |
|||||||||||||
Inventories |
(25,374 | ) | (4,081 | ) | 6,482 | ||||||||
Prepaid expenses |
12,658 | 1,797 | (1,087 | ) | |||||||||
Other assets |
751 | (5,519 | ) | (9,085 | ) | ||||||||
Increase (decrease) in: |
|||||||||||||
Trade accounts payable |
10,314 | (12,744 | ) | 7,372 | |||||||||
Income taxes payable |
3,667 | 5,510 | (10,710 | ) | |||||||||
Accrued interest payable |
2,139 | 1,328 | (6,219 | ) | |||||||||
Accrued expenses and other liabilities |
14,575 | (129 | ) | 3,032 | |||||||||
Deferred income taxes |
(595 | ) | 4,114 | (4,809 | ) | ||||||||
Deferred rent expense |
4,423 | 3,178 | 8,943 | ||||||||||
Net cash provided by operating activities |
151,259 | 75,476 | 1,373 | ||||||||||
Cash flows from investing activities: |
|||||||||||||
Acquisition of property and equipment, net |
(48,711 | ) | (24,952 | ) | (59,405 | ) | |||||||
Proceeds from sale of property and equipment |
16,765 | 1,830 | 104 | ||||||||||
Acquisition of intangible assets/lease rights |
(1,104 | ) | (546 | ) | (1,971 | ) | |||||||
Proceeds from sale of intangible assets/lease rights |
| 2,409 | 516 | ||||||||||
Changes in restricted cash |
(23,902 | ) | | | |||||||||
Net cash used in investing activities |
(56,952 | ) | (21,259 | ) | (60,756 | ) | |||||||
Cash flows from financing activities: |
|||||||||||||
Proceeds from Credit facility |
| | 194,000 | ||||||||||
Payments of Credit facility |
(14,500 | ) | (14,500 | ) | (14,500 | ) | |||||||
Proceeds from Short-term debt |
57,494 | | | ||||||||||
Repurchases of Notes |
(79,865 | ) | (46,091 | ) | | ||||||||
Payment of debt issuance costs |
(503 | ) | | | |||||||||
Principal payments of capital lease |
(765 | ) | | | |||||||||
Net cash (used in) provided by financing activities: |
(38,139 | ) | (60,591 | ) | 179,500 | ||||||||
Effect of foreign currency exchange rate changes on cash and cash
equivalents |
1,026 | 508 | (1,517 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents |
57,194 | (5,866 | ) | 118,600 | |||||||||
Cash and cash equivalents, at beginning of period |
198,708 | 204,574 | 85,974 | ||||||||||
Cash and cash equivalents, at end of period |
255,902 | 198,708 | 204,574 | ||||||||||
Restricted cash, at end of period |
23,864 | | | ||||||||||
Cash and cash equivalents and restricted cash, at end of period |
$ | 279,766 | $ | 198,708 | $ | 204,574 | |||||||
Supplemental disclosure of cash flow information: |
|||||||||||||
Income taxes paid |
$ | 6,332 | $ | 3,159 | $ | 14,227 | |||||||
Interest paid |
108,923 | 126,733 | 168,567 | ||||||||||
Non-cash investing and financing activities: |
|||||||||||||
Property acquired under capital lease |
18,055 | | |
See accompanying notes to consolidated financial statements.
50
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CLAIRES STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND ACQUISITION OF CLAIRES STORES, INC.
Nature of Operations Claires Stores, Inc., a Florida corporation, and subsidiaries
(collectively the Company), is a leading retailer of value-priced fashion accessories targeted
towards pre-teens, teenagers, and young adults. The Company is organized into two segments: North
America and Europe. The Company operates owned stores throughout the United States, Puerto Rico,
Canada, and the U.S. Virgin Islands (North American segment) and the United Kingdom, Switzerland,
Austria, Germany, France, Ireland, Spain, Portugal, Netherlands, Belgium, Poland, Czech Republic
and Hungary (European segment). Until September 2, 2010, the Company operated stores in Japan
through a former 50:50 joint venture. Beginning September 2, 2010, these stores began to operate
as licensed stores.
Acquisition of Claires Stores, Inc. In May 2007, the Company was acquired by Apollo
Management VI, L.P. (Apollo Management), together with certain affiliated co-investment
partnerships (collectively the Sponsors), through a merger (the Merger) and Claires Stores,
Inc. became a wholly-owned subsidiary of Claires Inc.
The purchase of the Company and the related fees and expenses were financed through the issuance of
the Notes, borrowings under the Credit Facility, an equity investment by the Sponsors, and cash on
hand at the Company.
The closing of the Merger occurred simultaneously with:
| the closing of the Companys senior secured term loan facility and revolving Credit Facility (collectively the Credit Facility) of $1.65 billion; | ||
| the closing of the Companys senior notes offering (the Notes) in the aggregate principal amount of $935.0 million; and | ||
| the equity investment by the Sponsors, collectively, of approximately $595.7 million. |
The aforementioned transactions, including the Merger and payment of costs related to these
transactions, are collectively referred to as the Transactions.
Claires Inc. is an entity that was formed in connection with the Transactions and prior to the
Merger had no assets or liabilities other than the shares of Bauble Acquisition Sub, Inc. and its
rights and obligations under and in connection with the merger agreement. As a result of the
Merger, all of the Companys issued and outstanding capital stock is owned by Claires Inc.
The acquisition of Claires Stores, Inc. was accounted for as a business combination using the
purchase method of accounting, whereby the purchase price was allocated to the assets and
liabilities based on the estimated fair market values at the date of acquisition.
See Note 5 Debt for a summary of the terms of the Notes and the Credit Facility.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The Consolidated Financial Statements include the accounts of
the Company and its wholly owned subsidiaries. Until September 2, 2010, the Company accounted for
the results of operations of its former 50% ownership interest in Claires Nippon under the equity
method and included the results within Other expenses (income), net in its Consolidated
Statements of Operations and Comprehensive Income (Loss). On September 2, 2010, the Company no
longer had an ownership interest in Claires Nippon. All significant intercompany balances and
transactions have been eliminated in consolidation.
51
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Fiscal Year The Companys fiscal year ends on the Saturday closest to January 31. The
fiscal year ended January 29, 2011 (Fiscal 2010), January 30, 2010 (Fiscal 2009) and January
31, 2009 (Fiscal 2008) consisted of 52 weeks, respectively.
Use of Estimates The Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States of America, which require
management to make certain estimates and assumptions about future events. These estimates and the
underlying assumptions affect the amounts of assets and liabilities reported, disclosures regarding
contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates
include, but are not limited to, the value of inventories, goodwill, intangible assets and other
long-lived assets, legal contingencies and assumptions used in the calculation of income taxes,
retirement and other post-retirement benefits, stock-based compensation, derivative and hedging
activities, residual values and other items. These estimates and assumptions are based on
managements best estimates and judgment. Management evaluates its estimates and assumptions on an
ongoing basis using historical experience and other factors, including the current economic
environment, which management believes to be reasonable under the circumstances. Management
adjusts such estimates and assumptions when facts and circumstances dictate. Illiquidity in credit
markets, volatility in each of the equity, foreign currency, and 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.
Reclassifications The Consolidated Financial Statements include certain reclassifications
of prior period amounts in order to conform to current year presentation.
Cash and Cash Equivalents and Restricted Cash The Company considers all highly liquid
instruments purchased with an original maturity of 90 days or less to be cash equivalents. As of
January 29, 2011, all cash equivalents were maintained in two money market funds that were invested
exclusively in U.S. Treasury securities. Restricted cash is not available to the Company for
general corporate purposes. Restricted cash consists of a security deposit in the amount of 15.0
million Euros () ($20.4 million) for the outstanding short-term note payable and collateral in
the amount of $3.5 million for the interest rate swap. The restricted cash amount is classified as
a current asset in the accompanying Consolidated Balance Sheets since the items it secures are
classified as current liabilities. See Note 5 Debt and Note 6 Derivatives and Hedging
Activities, respectively, for further details.
Inventories Merchandise inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out basis using the retail method in North America and average
cost method, at an individual item level for Europe.
Prepaid Expenses Prepaid expenses as of January 29, 2011 and January 30, 2010 included
the following components (in thousands):
January 29, | January 30, | |||||||
2011 | 2010 | |||||||
Prepaid rent and occupancy |
$ | 19,532 | $ | 30,444 | ||||
Prepaid insurance |
577 | 193 | ||||||
Other |
1,340 | 2,236 | ||||||
Total prepaid expenses |
$ | 21,449 | $ | 32,873 | ||||
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Other Current Assets Other current assets as of January 29, 2011 and January 30, 2010
included the following components (in thousands):
January 29, | January 30, | |||||||
2011 | 2010 | |||||||
Credit card receivables |
$ | 5,209 | $ | 4,617 | ||||
Franchise receivables |
4,139 | 6,457 | ||||||
Store supplies |
6,567 | 6,794 | ||||||
Deferred tax assets, net of valuation allowance |
4,064 | 2,839 | ||||||
Income taxes receivable |
69 | 2,556 | ||||||
Other |
4,610 | 4,973 | ||||||
Total other current assets |
$ | 24,658 | $ | 28,236 | ||||
Property and Equipment Property and equipment are recorded at historical cost.
Depreciation is computed on the straight-line method over the estimated useful lives of the
buildings and the furniture, fixtures, and equipment, which range from five to ten years.
Amortization of leasehold improvements is computed on the straight-line method based upon the
shorter of the estimated useful lives of the assets or the terms of the respective leases.
Maintenance and repair costs are charged to earnings while expenditures for major improvements are
capitalized. Upon the disposition of property and equipment, the accumulated depreciation is
deducted from the original cost and any gain or loss is reflected in current earnings.
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 Companys 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
Companys Consolidated Statements of Operations and Comprehensive Income (Loss). On February 19,
2010, the Company sold its North American distribution center/office building (the Property) to a
third party. The Company received net proceeds of $16.8 million from the sale of the Property.
Contemporaneously with the sale of the Property, the Company entered into a lease agreement, dated
February 19, 2010. The lease agreement provides for (1) an initial expiration date of February 28,
2030 with two (2) five (5) year renewal periods, each at the option of the Company and (2) basic
rent of $2.1 million per annum (subject to annual increases). This transaction is accounted for as
a capital lease. The Company has a $1.1 million letter of credit to secure lease payments for the
Property.
Goodwill - As discussed in Note 1 Nature of Operations and Acquisition of Claires
Stores, Inc. above, the Company accounted for the acquisition of Claires Stores, Inc. as a
business combination using the purchase method of accounting. The purchase price was allocated to
assets and liabilities based on estimated fair market values at the date of acquisition. The
remaining $1.8 billion excess of cost over amounts assigned to assets acquired and liabilities
assumed was recognized as goodwill. The goodwill is not deductible for tax purposes.
The Company performs a goodwill impairment test on an annual basis or more frequently when events
or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds
its fair value. Recoverability of goodwill is evaluated using a two-step process. The first step
involves a comparison of the fair value of each of our reporting units with its carrying value. If
a reporting units carrying value exceeds its fair value, the second step is performed to measure
the amount of impairment loss, if any. The second step involves a comparison of the implied fair
value and carrying value of that reporting units goodwill. To the extent that a reporting units
carrying value exceeds the implied fair value of its goodwill, an impairment loss is recognized.
See Note 3 Impairment Charges for results of impairment testing and Note 4 Goodwill and Other
Intangible Assets, respectively, for more details.
53
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Intangible Assets Intangible assets include tradenames, franchise agreements, lease
rights, territory rights and leases that existed at the date of acquisition with terms that were
favorable to market at that date. The Company makes investments through its European subsidiaries
in intangible assets upon the opening and acquisition of many of our store locations in Europe.
These intangible assets are amortized to residual value on a straight-line basis over the useful
lives of the respective leases, not to exceed 25 years. The Company evaluates the residual value
of its intangible assets periodically and adjusts the amortization period and/or residual value
when the Company believes the residual value of the asset is not recoverable. Indefinite-lived
intangible assets are tested for impairment annually or more frequently when events or
circumstances indicate that the carrying value more likely than not exceeds its fair value.
Definite-lived intangible assets are tested for impairment when events or circumstances indicate
that the carrying value may not be recoverable. Any impairment charges resulting from the
application of these tests are immediately recorded as a charge to earnings in the Companys
Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 3 Impairment
Charges for results of impairment testing and Note 4 Goodwill and Other Intangible Assets,
respectively, for more details.
Deferred Financing Costs Costs incurred to issue debt are deferred and amortized as a
component of interest expense over the estimated term of the related debt using the effective
interest rate method. Amortization expense, recognized as a component of Interest expense, net in
the Companys Consolidated Statements of Operations and Comprehensive Income (Loss), were $10.0
million, $10.4 million and $10.6 million for Fiscal 2010, Fiscal 2009 and Fiscal 2008,
respectively.
Other Assets Other assets as of January 29, 2011 and January 30, 2010 included the
following components (in thousands):
January 29, | January 30, | |||||||
2011 | 2010 | |||||||
Investment in Claires Nippon joint venture |
$ | | $ | 17,758 | ||||
Initial direct costs of leases |
16,358 | 16,905 | ||||||
Prepaid lease payments |
6,856 | 7,098 | ||||||
Deferred tax assets, non-current |
2,726 | 2,362 | ||||||
Other |
16,347 | 14,119 | ||||||
Total other assets |
$ | 42,287 | $ | 58,242 | ||||
On September 2, 2010, the Company converted its former 50% ownership interest in the Claires
Nippon joint venture into the full and exclusive rights to operate Claires stores in all of Asia
excluding Japan. The former joint venture partner acquired the right to operate Claires stores
exclusively in Japan. The Company and the former joint venture partner also agreed to operate
Claires Nippon under a new license agreement, to replace the existing merchandising agreement and
to amend the buying agency agreement. In accordance with Accounting Standards Codification (ASC)
Subtopic 845-10, Nonmonetary Transactions, the Company measured the conversion based on the fair
value of the asset surrendered. The Company recorded the exclusive territory rights as an
indefinite-lived intangible asset in the amount of $0.6 million. See Note 4 Goodwill and Other
Intangibles.
The Company recorded its 50% ownership interest of Claires Nippons net income (loss) in the
amounts of $(2.5) million, $(1.0) million and $0.3 million for Fiscal 2010, Fiscal 2009 and Fiscal
2008, respectively, in Other expense (income), net in the Consolidated Statements of Operations
and Comprehensive Income (Loss).
The initial direct costs of leases and prepaid lease payments are amortized on a straight-line
basis over the respective lease terms, typically ranging from four to 15 years.
Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the net book value of an asset may not be
recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison
of the net book value of an asset or asset group to the future net undiscounted cash flows expected
to be generated by the asset or asset group. If these comparisons indicate that the asset or asset
group is not recoverable, an
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impairment loss is recognized for the excess of the carrying amount over the fair value of the
asset or asset group. The fair value is estimated based on discounted future cash flows expected
to result from the use and eventual disposition of the asset or asset group using a rate that
reflects the operating segments average cost of capital. Long-lived assets to be disposed of are
reported at the lower of the carrying amount or fair value less cost to sell and are no longer
depreciated. See Note 3 Impairment Charges for results of impairment testing.
Accrued Expenses and Other Current Liabilities Accrued expenses and other current
liabilities as of January 29, 2011 and January 30, 2010 included the following components (in
thousands):
January 29, | January 30, | |||||||
2011 | 2010 | |||||||
Compensation and benefits |
$ | 46,121 | $ | 41,861 | ||||
Gift cards and certificates |
21,917 | 20,989 | ||||||
Sales and local taxes |
14,321 | 8,036 | ||||||
Store rent |
3,753 | 4,873 | ||||||
Interest rate swaps |
1,165 | 8,752 | ||||||
Other |
19,838 | 15,422 | ||||||
Total accrued expenses and other current liabilities |
$ | 107,115 | $ | 99,933 | ||||
Revenue Recognition The Company recognizes sales as the customer takes possession of the
merchandise. The estimated liability for sales returns is based on the historical return levels,
which is included in Accrued expenses and other current liabilities. The Company excludes sales
taxes collected from customers from Net sales in its Consolidated Statements of Operations and
Comprehensive Income (Loss).
The Company accounts 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 Companys
Consolidated Statements of Operations and Comprehensive Income (Loss). The franchise fees the
Company charges under the franchising agreements are reported in Other expense (income), net in
the Companys Consolidated Statements of Operations and Comprehensive Income (Loss).
Upon purchase of a gift card or gift certificate, a liability is established for the cash value.
The liability is included in Accrued expenses and other current liabilities. Revenue from gift
card and gift certificate sales is recognized at the time of redemption.
Cost of Sales Included within the Companys Consolidated Statements of Operations and
Comprehensive Income (Loss) line item Cost of sales, occupancy and buying expenses is the cost of
merchandise sold to our customers, inbound and outbound freight charges, purchasing costs, and
inspection costs. Also included in this line item are the occupancy costs of the Companys stores
and the Companys internal costs of facilitating the merchandise procurement process, both of which
are treated as period costs. All merchandise purchased by the Company is shipped to one of its two
distribution centers. As a result, the Company has no internal transfer costs. The cost of the
Companys distribution centers are included within the financial statement line item Selling,
general and administrative expenses, and not in Cost of sales, occupancy and buying expenses.
These distribution center costs were approximately $10.0 million, $8.5 million and $13.7 million,
for Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively.
Advertising Expenses The Company expenses advertising costs as incurred and include
in-store marketing, mall association dues and digital interactive media. Advertising expenses were
$12.8 million, $11.3 million and $12.5 million for Fiscal 2010, Fiscal 2009 and Fiscal 2008,
respectively.
Rent Expense The Company recognizes rent expense for operating leases with periods of
free rent (including construction periods), step rent provisions, and escalation clauses on a
straight-line basis over the applicable lease term. From time to time, the Company may receive
capital improvement funding
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from its lessors. These amounts are recorded as a Deferred rent expense and amortized over the
remaining lease term as a reduction of rent expense. The Company considers lease renewals in the
determination of the applicable lease term when such renewals are reasonably assured. The Company
takes this factor into account when calculating minimum aggregate rental commitments under
non-cancelable operating leases set forth in Note 7 Commitments and Contingencies.
Stock-Based Compensation The Company issues stock options and other stock-based awards to
executive management, key employees, and directors under its stock-based compensation plans.
Time-vested stock awards, including stock options and restricted stock, are accounted for at fair
value at date of grant. The stock-based compensation expense is recorded on a straight-line basis
over the requisite service period using the graded-vesting method for the entire award.
Performance-based stock awards are accounted for at fair value at date of grant. The stock-based
expense was based upon the number of shares expected to be issued when it became probable that
performance targets required to receive the awards would be achieved. The stock-based compensation
expense is recognized over the requisite service period.
Buy-one-get-one (the BOGO) options, which are immediately vested and exercisable upon issuance,
are accounted for at fair value at date of grant. The compensation expense is recognized on a
straight-line basis over a four year period due to the terms of the option requiring forfeiture in
certain cases including the grantees voluntary resignation from the Companys employ prior to May
2011.
Income Taxes The Company accounts for income taxes under the provisions of ASC Topic 740,
Income Taxes, which generally requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement carrying amounts and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax laws or rates is
recognized in income in the period the new legislation is enacted. Valuation allowances are
recognized to reduce deferred tax assets to the amount that is more likely than not to be realized.
In assessing the likelihood of realization, the Company considers estimates of future taxable
income.
The Company is subject to tax audits in numerous jurisdictions, including the United States,
individual states and localities, and internationally. Tax audits by their very nature are often
complex and can require several years to complete. In the normal course of business, the Company
is subject to challenges from the Internal Revenue Service (IRS) and other tax authorities
regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income
or deductions, or the allocation of income among tax jurisdictions. In July 2006, the Financial
Accounting Standards Board (FASB) issued guidance which clarifies the accounting for income taxes
in the financial statements by prescribing a minimum probability recognition threshold and
measurement process for recording uncertain tax positions taken or expected to be taken in a tax
return. This guidance requires that the Company determine whether a tax position is more likely
than not of being sustained upon audit based on the technical merits of the tax position. For tax
positions that are at least more likely than not of being sustained upon audit, the Company
recognizes the largest amount of the benefit that is more likely than not of being sustained.
Additionally, the FASB provided guidance on de-recognition, classification, accounting and
disclosure requirements. The Company adopted this guidance on February 4, 2007. The adoption of
this guidance did not result in an adjustment to the Companys unrecognized tax benefits. See Note
11 Income Taxes for further information.
Foreign Currency Translation The financial statements of the Companys foreign operations
are translated into U.S. Dollars. Assets and liabilities are translated at fiscal year-end
exchange rates while income and expense accounts are translated at the average rates in effect
during the year. Equity accounts are translated at historical exchange rates. Resulting
translation adjustments are accumulated as a component of Accumulated other comprehensive income
(loss), net of tax in the Companys Consolidated Balance Sheets. Foreign currency gains and
losses resulting from transactions denominated
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in foreign currencies, including intercompany transactions, except for intercompany loans of a
long-term investment nature, are included in results of operations. These foreign currency
transaction losses (gains) were approximately $5.1 million, $(1.2) million and $0.6 million, for
Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively.
Comprehensive Income (Loss) Comprehensive income (loss) represents a measure of all
changes in shareholders equity (deficit) except for changes resulting from transactions with
shareholders in their capacity as shareholders. The Companys total comprehensive income (loss)
consists of net income (loss), foreign currency translation adjustments, reclassification of
foreign currency translation adjustments into net income (loss) and adjustments for derivative
instruments accounted for as cash flow hedges. Amounts included in Comprehensive income (loss)
are recorded net of income taxes.
Derivative Financial Instruments The Company recognizes the fair value of derivative
financial instruments on the Consolidated Balance Sheets. Gain and losses related to a hedge that
result from changes in the fair value of the hedge are either recognized in income to offset the
gain or loss on the hedged item, or deferred and reported as a component of Accumulated other
comprehensive income (loss), net of tax in the Consolidated Balance Sheets and subsequently
recognized in income when the hedged item affects net income. The ineffective portion of the
change in fair value of a hedge is recognized in income immediately.
Fair Value Measurements ASC 820, Fair Value Measurement Disclosures defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. Disclosures of the fair value of certain financial instruments are required, whether
or not recognized in the Consolidated Balance Sheets. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date and in the principal or most advantageous
market for that asset or liability. There is a three-level valuation hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. Observable inputs are inputs market participants would use in valuing the
asset or liability and are developed based on market data obtained from sources independent of the
Company. Unobservable inputs are inputs that reflect the Companys assumptions about the factors
market participants would use in valuing the asset or liability.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the Companys assets (liabilities) measured at fair value on a
recurring basis segregated among the appropriate levels within the fair value hierarchy (in
thousands):
Fair Value Measurements at January 29, 2011 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) | |||||||||||||
Interest rate swap |
$ | (1,165 | ) | $ | | $ | (1,165 | ) | $ | |
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) | |||||||||||||
Interest rate swaps |
$ | (8,752 | ) | $ | | $ | (8,752 | ) | $ | |
The fair value of the Companys interest rate swaps represents the estimated amounts the Company
would receive or pay to terminate those contracts at the reporting date based upon pricing or
valuation models applied to current market information. The interest rate swaps are valued using
the market standard methodology of netting the discounted future fixed cash payments and the
discounted expected variable
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cash receipts. The variable cash receipts are based on an expectation of future interest rates
derived from observed market interest rate curves. The Company included credit valuation
adjustment risk in the calculation of fair value for the Swaps entered into in July 2007. The Swap
entered into on July 28, 2010 is collateralized by cash and thus the Company does not make any
credit-related valuation adjustments. The Company mitigates derivative credit risk by transacting
with highly rated counterparties. The Company does not enter into derivative financial instruments
for trading or speculative purposes. See Note 6 Derivatives and Hedging Activities for further
information.
Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
The Companys non-financial assets, 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 are primarily used in the impairment analysis of these assets. Any resulting
asset impairment would require that the non-financial asset be recorded at its fair value. The
Company reviews goodwill and indefinite-lived intangible assets for impairment annually, during the
fourth quarter of each fiscal year, or as circumstances indicate the possibility of impairment. The
Company monitors the carrying value of definite-lived intangible assets and long-lived tangible
assets for impairment whenever events or changes in circumstances indicate its carrying amount may
not be recoverable.
The following tables summarize the Companys assets measured at fair value on a nonrecurring basis
segregated among the appropriate levels within the fair value hierarchy (in thousands):
Fair Value Measurements at January 29, 2011 Using | ||||||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||||||
Active Markets for | Other Observable | Unobservable | Impairment | |||||||||||||||||
Identical Assets | Inputs | Inputs | Charges | |||||||||||||||||
Carrying Value | (Level 1) | (Level 2) | (Level 3) (1) | Fiscal 2010 | ||||||||||||||||
Intangible assets |
$ | 28,180 | $ | | $ | | $ | 28,180 | $ | 12,262 |
(1) | See Note 3 Impairment Charges for discussion of the valuation techniques used to measure fair value, the description of the inputs and information used to develop those inputs. |
Fair Value Measurements at January 30, 2010 Using | ||||||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||||||
Active Markets for | Other Observable | Unobservable | Impairment | |||||||||||||||||
Identical Assets | Inputs | Inputs | Charges | |||||||||||||||||
Carrying Value | (Level 1) | (Level 2) | (Level 3) (1) | Fiscal 2009 | ||||||||||||||||
Long-lived assets |
$ | 17,000 | $ | | $ | | $ | 17,000 | $ | 3,142 |
(1) | See Note 3 Impairment Charges for discussion of the valuation techniques used to measure fair value, the description of the inputs and information used to develop those inputs. |
During Fiscal 2010, franchise agreements with a carrying amount of $40.5 million were written down
to their fair value of $28.2 million, resulting in an impairment charge of $12.3 million, which was
included in Impairment of assets on the Consolidated Statements of Operations and Comprehensive
Income (Loss).
During Fiscal 2009, long-lived assets held and used with a carrying amount of $20.1 million were
written down to their fair value of $17.0 million, resulting in an impairment charge of $3.1
million, which was included in Impairment of assets on the Consolidated Statements of Operations
and Comprehensive Income (Loss).
Financial Instruments Not Measured at Fair Value
The Companys financial instruments consist primarily of cash and cash equivalents, restricted
cash, accounts receivable, current liabilities, short-term debt, long-term debt, and the revolving
credit facility.
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Cash and cash equivalents, restricted cash, accounts receivable, short-term debt and current
liabilities approximate fair market value due to the relatively short maturity of these financial
instruments.
The Company considers all investments with a maturity of three months or less when acquired to be
cash equivalents. The Companys cash equivalent instruments are valued using quoted market prices
and are primarily U.S. Treasury securities. The estimated fair value of the Companys long-term
debt, including the current portion, and the revolving credit facility was approximately $2.36
billion at January 29, 2011, compared to a carrying value of $2.45 billion at that date. The
estimated fair value of the Companys debt was approximately $1.95 billion at January 30, 2010,
compared to a carrying value of $2.52 billion at that date. For publicly-traded debt, the fair
value (estimated market value) is based on market prices. For other debt, fair value is estimated
based on quoted prices for similar instruments.
Recent Accounting Pronouncements In January 2010, the FASB issued ASU 2010-06, Fair
Value Measurements and Disclosures Improving Disclosures about Fair Value Measurements
(amendments to ASC Topic 820, Fair Value Measurements and Disclosures). ASU 2010-06 amends the
disclosure requirements related to recurring and nonrecurring measurements. The guidance requires
new disclosures on the transfer of assets and liabilities between Level 1 (quoted prices in active
market for identical assets or liabilities) and Level 2 (significant other observable inputs) of
the fair value measurement hierarchy, including the reasons and the timing of the transfers.
Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and
settlements of the assets and liabilities measured using significant unobservable inputs (Level 3
fair value measurements). The Company adopted this guidance during its first fiscal quarter of
Fiscal 2010 and it did not have a material impact on the Companys financial position, results of
operations or cash flow.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition
and Disclosure Requirements (amendments to ASC Topic 855, Subsequent Events). ASU 2010-09
clarifies that subsequent events should be evaluated through the date the financial statements are
issued. In addition, this update no longer requires a filer to disclose the date through which
subsequent events have been evaluated. This guidance is effective for financial statements issued
subsequent to February 24, 2010. The Company adopted this guidance on this date. This guidance did
not have a material impact on the Companys financial position, results of operations or cash
flows.
There are no recently issued accounting standards that are expected to have a material effect on
the Companys financial condition, results of operations or cash flows.
3. IMPAIRMENT CHARGES
The Company recorded non-cash impairment charges for the fiscal years ended January 29, 2011,
January 30, 2010 and January 31, 2009 as follows (in thousands):
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Goodwill |
$ | | $ | | $ | 297,000 | ||||||
Tradenames |
| | 199,000 | |||||||||
Franchise agreements |
12,262 | | | |||||||||
Investment in Claires Nippon |
6,030 | | 25,500 | |||||||||
Long-lived assets |
| 3,142 | 2,490 | |||||||||
Total impairment charges |
$ | 18,292 | $ | 3,142 | $ | 523,990 | ||||||
The Companys principal indefinite-lived intangible assets, other than goodwill, include tradenames
and lease rights which are not subject to amortization. Goodwill and other indefinite-lived
intangible assets are tested for impairment annually or more frequently when events or
circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its
fair value. The Company performs annual impairment tests during the fourth quarter of its fiscal
year.
The Companys principal definite-lived intangible assets include franchise agreements and lease
rights which are subject to amortization and leases that existed at date of acquisition with terms
that were
favorable to market at that date. Definite-lived intangible assets are tested for impairment when
events or circumstances indicate that the carrying value of the asset may not be recoverable.
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The deterioration in the financial and housing markets and resulting effect on consumer confidence
and discretionary spending that occurred during Fiscal 2010, Fiscal 2009 and Fiscal 2008 had a
significant impact on the retail industry. The Company tests assets for impairment annually as of
the first day of the fourth quarter of its fiscal year. On the first day of the fourth quarter of
Fiscal 2010, Fiscal 2009 and Fiscal 2008, the Company considered the impact the economic conditions
had on its business as an indicator under ASC Topic 350, Intangibles Goodwill and Other, that a
reduction in its goodwill fair value may have occurred. Accordingly, the Company performed its test
for goodwill impairment following the two step process defined in ASC Topic 350. The first step in
this process compares the fair value of the reporting unit to its carrying value. If the carrying
value of the reporting unit exceeds its fair value, the second step of the impairment test is
performed to measure the impairment. In the second step, the fair value of the reporting unit is
allocated to all of the assets and liabilities of the reporting unit to determine an implied
goodwill value. This allocation is similar to a purchase price allocation performed in purchase
accounting. If the carrying amount of the reporting unit goodwill exceeds the implied goodwill
value, an impairment loss should be recognized in an amount equal to that excess. The Company has
two reporting units as defined under ASC Topic 350. These reporting units are its North American
segment and its European segment.
The fair value of each reporting unit determined under step 1 of the goodwill impairment test was
based on a three-fourths weighting of a discounted cash flow analysis using forward-looking
projections of estimated future operating results and a one-fourth weighting of a guideline company
methodology under the market approach using revenue and earnings before interest, taxes,
depreciation and amortization (EBITDA) multiples. Managements determination of the fair value of
each reporting unit incorporates multiple assumptions, including future business growth, earnings
projections and the weighted average cost of capital used for purposes of discounting. Decreases in
business growth, decreases in earnings projections and increases in the weighted average cost of
capital will all cause the fair value of the reporting unit to decrease.
Based on this testing under step 1, no impairment charge was recognized during Fiscal 2010 and
Fiscal 2009. In Fiscal 2008, during testing under step 1, management determined the fair value of
each reporting unit was less than its respective carrying value. Accordingly, management performed
a step 2 of the test to determine the extent of the goodwill impairment and concluded the carrying
value of the goodwill of the North America reporting unit was impaired by $180.0 million and the
carrying value of the goodwill of the Europe reporting unit was impaired by $117.0 million. This
resulted in the Company recording total non-cash impairment charges of $297.0 million in Fiscal
2008, which was included in Impairment of assets on the Companys Consolidated Statements of
Operations and Comprehensive Income (Loss).
The Company also performed similar impairment testing on its other indefinite lived intangible
assets during the fourth quarter of Fiscal 2010, Fiscal 2009 and Fiscal 2008. The Company
estimates the fair value of these intangible assets primarily utilizing a discounted cash flow
model. The forecasted cash flows used in the model contain inherent uncertainties, including
significant estimates and assumptions related to growth rates, margins and cost of capital.
Changes in any of the assumptions utilized could affect the fair value of the intangible assets and
result in an impairment triggering event. No impairment charge was recognized in Fiscal 2010 and
Fiscal 2009. In Fiscal 2008, the Company determined that the tradenames intangible assets in its
North America reporting unit was impaired $134.0 million and that the tradenames intangible assets
in its Europe reporting unit was impaired $65.0 million. This resulted in combined non-cash
impairment charges related to intangible assets of $199.0 million in Fiscal 2008. These intangible
asset impairment charges were recorded in Impairment of assets on the Companys Consolidated
Statements of Operations and Comprehensive Income (Loss).
During the fourth quarter of Fiscal 2010, management performed a strategic review of its franchise
business. The franchisees continued inability to meet store development expectations prompted the
Company to reevaluate its franchise development strategy and to perform a valuation of the
franchise agreements, which are definite-lived intangible assets. The Company utilized a discounted
cash flow
model and determined the franchise agreements intangible assets were impaired. This resulted in
the Company recording a non-cash impairment charge of $12.3 million in Fiscal 2010, which was
included in Impairment of assets on the Companys Consolidated Statements of Operations and
Comprehensive Income (Loss).
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In accordance with ASC Subtopic 323-10, Investments Equity Method and Joint Ventures, the
Company is required to perform an assessment of overall other than temporary decrease in investment
value when events or circumstances indicate that the carrying value may not be recoverable. The
fair value of Claires Nippon is based on a discounted cash flow analysis of estimated future
operating results. A decrease in business growth, decrease in earnings projections or increase in
the discount factor will cause the fair value to decrease. The 2010 precipitous decline in sales,
lower margin rates due to markdowns on slow-moving merchandise, and difficulty in cost reduction
efforts, coupled with an inability to generate positive cash flow to pay royalties or dividends
since inception, prompted the Company to perform a valuation of Claires Nippon. Because the
expected future cash flows were less than the net carrying value of the investment in Claires
Nippon, during Fiscal 2010, a non-cash impairment charge of $6.0 million was recognized for the
excess of the net carrying value of the investment over the estimated fair value of $0.6 million.
During Fiscal 2008, the Company recorded a non-cash impairment charge of $25.5 million for its
former investment in Claires Nippon.
The Company accounts for long-lived tangible assets under ASC Topic 360, Property, Plant, and
Equipment. Assessment for possible impairment is based on the Companys ability to recover the
carrying value of the long-lived asset from the expected undiscounted future operating cash flows
or managements determination that the long-lived asset has limited future use. If the expected
undiscounted future cash flows are less than the carrying value of such assets, an impairment loss
is recognized for the difference between estimated fair value and carrying value. Fair value is
measured based on a projected discounted cash flow model using a discount rate that is commensurate
with the risk inherent in the business. During Fiscal 2010, no impairment charges were recognized
with regards to long-lived assets. During Fiscal 2009 and Fiscal 2008, the Company recognized
non-cash impairment charges related to long-lived assets of $3.1 million and $2.5 million,
respectively, recorded in Impairment of assets in the Companys Consolidated Statements of
Operations and Comprehensive Income (Loss).
4. GOODWILL AND OTHER INTANGIBLE ASSETS
In connection with the Transactions, the Company recorded goodwill and other intangible assets at
date of acquisition. The Companys principal indefinite-lived intangible assets include tradenames
and lease rights which are not subject to amortization. The Companys principal definite-lived
intangible assets include franchise agreements and lease rights which are subject to amortization
and leases that existed at date of acquisition with terms that were favorable to market at that
date.
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The changes in the carrying amount of goodwill during Fiscal 2010 and Fiscal 2009 by reporting unit
are as follows (in thousands):
North America | Europe | Total | ||||||||||
Balance as of January 31, 2009: |
||||||||||||
Goodwill |
$ | 1,409,941 | $ | 431,405 | $ | 1,841,346 | ||||||
Accumulated impairment losses |
(180,000 | ) | (117,000 | ) | (297,000 | ) | ||||||
$ | 1,229,941 | $ | 314,405 | $ | 1,544,346 | |||||||
Reclassification adjustment in
Fiscal 2009 (1) |
5,710 | | 5,710 | |||||||||
Balance as of January 29, 2011 and
January 30, 2010: |
||||||||||||
Goodwill |
$ | 1,415,651 | $ | 431,405 | $ | 1,847,056 | ||||||
Accumulated impairment losses |
(180,000 | ) | (117,000 | ) | (297,000 | ) | ||||||
$ | 1,235,651 | $ | 314,405 | $ | 1,550,056 | |||||||
(1) | Reclassification of valuation allowance on deferred tax assets. |
The carrying amount and accumulated amortization of identifiable intangible assets at January 29,
2011 and January 30, 2010 were (in thousands):
January 29, 2011 | January 30, 2010 | |||||||||||||||||||
Estimated | Gross | Gross | ||||||||||||||||||
Life | Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||||
in Years | Amount | Amortization | Amount | Amortization | ||||||||||||||||
Intangible assets subject to amortization: |
||||||||||||||||||||
Lease rights |
Lease terms ranging from 4.5 to 16.5 |
$ | 24,757 | $ | (5,996 | ) | $ | 13,681 | $ | (4,145 | ) | |||||||||
Franchise agreements |
1 to 9 | 40,738 | (12,558 | ) | 53,000 | (9,291 | ) | |||||||||||||
Favorable lease obligations |
10 | 30,859 | (20,000 | ) | 30,501 | (14,493 | ) | |||||||||||||
Other |
5 | 499 | (193 | ) | 372 | (103 | ) | |||||||||||||
Total intangible assets subject to
amortization |
96,853 | (38,747 | ) | 97,554 | (28,032 | ) | ||||||||||||||
Indefinite-lived intangible assets: |
||||||||||||||||||||
Indefinite-lived tradenames |
$ | 447,108 | $ | | $ | 447,112 | $ | | ||||||||||||
Indefinite-lived lease rights |
51,652 | | 63,393 | | ||||||||||||||||
Indefinite-lived territory rights |
600 | | | | ||||||||||||||||
Total indefinite-lived intangible assets |
499,360 | | 510,505 | | ||||||||||||||||
Total intangible assets |
$ | 596,213 | $ | (38,747 | ) | $ | 608,059 | $ | (28,032 | ) | ||||||||||
For Fiscal 2010, Fiscal 2009 and Fiscal 2008, amortization expense of $10.9 million, $13.6 million
and $14.9 million, respectively, was recognized by the Company. In conjunction with the valuation
of the franchise agreements, the Company considered many factors including the appropriateness of
their useful lives. The Company determined an appropriate remaining useful life for each franchise
agreement. Collectively, the remaining useful lives of the franchise agreements fall within the
range of approximately one to nine years. As discussed in Note 3 Impairment Charges, the Company
recognized impairment charges related to intangible assets of $12.3 million in Fiscal 2010 and
$199.0 million in Fiscal 2008. There were no such impairment charges for intangible assets in
Fiscal 2009.
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Weighted Average Amortization | ||||||||
Period for Amortizable | ||||||||
Intangible Asset Acquisitions (in 000s) | Amortizable | Intangible Asset Acquisitions | ||||||
Lease rights: |
||||||||
Fiscal 2010 |
$ | 978 | 9.9 | |||||
Fiscal 2009 |
435 | 9.9 | ||||||
Fiscal 2008 |
1,794 | 8.7 | ||||||
Other: |
||||||||
Fiscal 2010 |
126 | 5.0 | ||||||
Fiscal 2009 |
111 | 5.0 | ||||||
Fiscal 2008 |
176 | 5.0 |
The weighted average amortization period of amortizable intangible assets acquired in Fiscal 2010
was 9.4 years.
The remaining net amortization as of January 29, 2011 of identifiable intangible assets with finite
lives by year is as follows (in thousands):
Fiscal Year | Amortization | |||
2011 |
$ | 10,609 | ||
2012 |
8,057 | |||
2013 |
7,202 | |||
2014 |
6,406 | |||
2015 |
5,211 | |||
2016 and thereafter |
20,621 | |||
Total |
$ | 58,106 | ||
5. DEBT
Debt as of January 29, 2011 and January 30, 2010 included the following components (in thousands):
January 29, 2011 | January 30, 2010 | |||||||
Short-term debt and current portion of long-term debt: |
||||||||
Note payable to bank due 2012 |
$ | 57,703 | $ | | ||||
Current portion of long-term debt |
18,451 | 14,500 | ||||||
Total short-term debt and current portion of long-term debt |
$ | 76,154 | $ | 14,500 | ||||
Long-term debt: |
||||||||
Senior secured term loan facility due 2014 |
$ | 1,399,250 | $ | 1,413,750 | ||||
Senior notes due 2015 |
236,000 | 250,000 | ||||||
Senior toggle notes due 2015 |
360,431 | 381,891 | ||||||
Senior subordinated notes due 2017 |
259,612 | 282,237 | ||||||
2,255,293 | 2,327,878 | |||||||
Less: current portion of long-term debt |
(18,451 | ) | (14,500 | ) | ||||
Long-term debt |
$ | 2,236,842 | $ | 2,313,378 | ||||
Senior secured revolving credit facility due 2013 |
$ | 194,000 | $ | 194,000 | ||||
Obligations under capital leases |
$ | 17,290 | $ | | ||||
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As of January 29, 2011, the Companys total debt maturities are as follows for each of the
following fiscal years (in thousands):
Capital Leases | Debt | |||||||
2011 |
$ | 2,165 | $ | 76,154 | ||||
2012 |
2,209 | 14,500 | ||||||
2013 |
2,253 | 208,500 | ||||||
2014 |
2,298 | 1,351,799 | ||||||
2015 |
2,344 | 596,431 | ||||||
Thereafter |
37,407 | 259,612 | ||||||
Total |
48,676 | $ | 2,506,996 | |||||
Imputed interest |
(31,386 | ) | ||||||
Present value of minimum capital lease principal payments |
17,290 | |||||||
Current portion |
| |||||||
Long-term capital lease obligation |
$ | 17,290 | ||||||
The Companys interest expense, net for Fiscal 2010, Fiscal 2009 and Fiscal 2008 included the
following components (in thousands):
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Term loan facility |
$ | 53,255 | $ | 66,348 | $ | 88,216 | ||||||
Revolving credit facility |
6,110 | 5,708 | 4,835 | |||||||||
Senior notes |
22,605 | 23,154 | 23,074 | |||||||||
Senior toggle notes |
36,881 | 39,021 | 35,671 | |||||||||
Senior subordinated notes |
27,620 | 32,913 | 35,090 | |||||||||
Note payable to bank |
85 | | | |||||||||
Capital lease obligation |
1,232 | | | |||||||||
Amortization of deferred debt issue costs |
10,005 | 10,398 | 10,567 | |||||||||
Other interest expense |
57 | 82 | (17 | ) | ||||||||
Interest income |
(144 | ) | (206 | ) | (1,489 | ) | ||||||
Interest expense, net |
$ | 157,706 | $ | 177,418 | $ | 195,947 | ||||||
Accrued interest payable as of January 29, 2011 and January 30, 2010 consisted of the following
components (in thousands):
January 29, 2011 | January 30, 2010 | |||||||
Term loan facility |
$ | 8,239 | $ | 5,474 | ||||
Revolving credit facility |
231 | 328 | ||||||
Senior notes |
3,658 | 3,875 | ||||||
Senior subordinated notes |
4,568 | 4,966 | ||||||
Note payable to bank |
87 | | ||||||
Other |
| 1 | ||||||
Total accrued interest payable |
$ | 16,783 | $ | 14,644 | ||||
SHORT-TERM DEBT
On January 24, 2011, the Company entered into a Euro denominated loan (the Euro loan) in the
amount of 42.4 million that is due on January 24, 2012. The Euro loan bears interest at the three
month Euro Interbank Offered Rate (EURIBOR) rate plus 8.00% per year and is payable quarterly.
As of January 29, 2011, there was 42.4 million, or the equivalent of $57.7 million, outstanding
under the Euro loan, and the weighted-average interest rate for borrowings outstanding was 9.02%.
The Company intends to use the net proceeds of the borrowings for general corporate purposes.
The obligation under the Euro loan is secured by a cash deposit in the amount of 15.0 million
($20.4 million) at January 29, 2011, and a perfected first lien security interest in all of the
issued and outstanding
equity interest of one the Companys international subsidiaries, Claires Holdings S.a.r.l. The
cash deposit is classified as Cash and cash equivalents and restricted cash in the Companys
Consolidated Balance Sheet. See Note 2 Summary of Significant Accounting Policies for further
details.
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LONG-TERM DEBT
Credit Facility
The Credit Facility is with a syndication of lenders and consists of a $1.45 billion senior secured
term loan facility and a $200.0 million senior secured revolving credit facility. The Credit
Facility contains customary provisions relating to mandatory prepayments, voluntary prepayments,
affirmative covenants, negative covenants, and events of default. At the consummation of the
Merger, the Company drew the full amount of the senior secured term loan facility and was issued a
$4.5 million letter of credit. The letter of credit was subsequently increased to $6.0 million.
The Company drew down the remaining $194.0 million available under the revolving credit facility
(the Revolver) during Fiscal 2008. The Company was not required to repay any of the Revolver
until the due date of May 29, 2013, therefore, the Revolver was classified as a long-term liability
in the accompanying Consolidated Balance Sheet as of January 29, 2011. The interest rate on the
Revolver on January 29, 2011 was 2.5%. Subsequent to January 29, 2011, we paid down the entire
$194.0 million of the Revolver and $241.0 million of indebtedness under the senior secured term
loan from proceeds from our Senior Secured Second Lien Notes offering. As a result of the
prepayment under the senior secured term loan facility, the Company is no longer required to make
any quarterly payments and has a final payment of $1,154 million due on May 29, 2014. See Note 16
Subsequent Events to our Consolidated Financial Statements.
All obligations under the Credit Facility are unconditionally guaranteed by (i) Claires Inc., our
parent, prior to an initial public offering of Claires Stores, Inc. stock, and (ii) certain of our
existing and future wholly-owned domestic subsidiaries, subject to certain exceptions.
All obligations under the Credit Facility, and the guarantees of those obligations, are secured,
subject to certain exceptions, by (i) all of Claires Stores, Inc. capital stock, prior to an
initial public offering of Claires Stores, Inc. stock, and (ii) substantially all of our material
owned assets and the material owned assets of subsidiary guarantors, including:
| a perfected pledge of all the equity interests held by us or any subsidiary guarantor, which pledge, in the case of any foreign subsidiary, is limited to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by us and the subsidiary guarantors; and | ||
| perfected security interests in, and mortgages on, substantially all material tangible and intangible assets owned by us and each subsidiary guarantor, subject to certain exceptions. |
Borrowings under the Credit Facility bear interest at a rate equal to, at the Companys option,
either (a) an alternate base rate determined by reference to the higher of (1) prime rate in
effect on such day and (2) the federal funds effective rate plus 0.50% or (b) LIBOR rate, with
respect to any Eurodollar borrowing, determined by reference to the costs of funds for U.S. dollar
deposits in the London Interbank Market for the interest period relevant to such borrowing,
adjusted for certain additional costs, in each case plus an applicable margin. The initial
applicable margin for borrowings under the Credit Facility was 1.75% with respect to alternate base
rate borrowings and 2.75% with respect to LIBOR borrowings. The applicable margin for borrowings
under the Credit Facility will be subject to one or more stepdowns, in each case based upon the
ratio of our net senior secured debt to EBITDA for the period of four consecutive fiscal quarters
most recently ended as of such date (the Total Net Secured Leverage Ratio). In addition to
paying interest on outstanding principal under the Credit Facility, the Company is required to pay
a commitment fee, initially 0.50% per annum, in respect of the revolving credit commitments
thereunder. The commitment fee will be subject to one stepdown, based upon our Total Net Secured
Leverage Ratio. The Company must also pay customary letter of credit fees and agency fees. At
January 29, 2011 and
January 30, 2010, the weighted average interest rate for borrowings outstanding under the Credit
Facility was 2.98% and 2.94%, respectively.
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The Credit Facility does not contain any covenants that require the Company to maintain any
particular financial ratio or other measure of financial performance; however, it does contain
various covenants that limit our ability to engage in specified types of transactions. These
covenants limit our, our parents and our restricted subsidiaries ability to, among other things:
| incur additional indebtedness or issue certain preferred shares; | ||
| pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments; | ||
| make certain investments; | ||
| sell certain assets; | ||
| create liens; | ||
| consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and | ||
| enter into certain transactions with our affiliates. |
A breach of any of these covenants could result in an event of default. Upon the occurrence of an
event of default, the lenders could elect to declare all amounts outstanding under the Credit
Facility to be immediately due and payable and terminate all commitments to extend further credit.
Such actions by those lenders could cause cross defaults under our other indebtedness. If we were
unable to repay those amounts, the lenders under the Credit Facility could proceed against the
collateral granted to them to secure that indebtedness.
Senior Notes
In connection with the Transactions, the Company issued $600 million of senior notes in two series:
1) | $250.0 million of 9.25% Senior Notes due 2015 (the Senior Cash Pay Notes), and | ||
2) | $350.0 million of 9.625%/10.375% Senior Toggle Notes due 2015 (the Senior Toggle Notes and together with the Senior Cash Pay Notes, the Senior Notes) |
The Senior Cash Pay Notes are unsecured obligations of the Company and mature on June 1, 2015.
Interest is payable semi-annually at 9.25% per annum, which commenced on December 1, 2007.
The Senior Toggle Notes are unsecured obligations of the Company and mature on June 1, 2015.
Interest is payable semi-annually commencing on December 1, 2007. For any interest period through
June 1, 2011, the Company may, at its option, elect to pay interest on the Senior Toggle Notes (i)
entirely in cash (Cash Interest), (ii) entirely by increasing the principal amount of the
outstanding Senior Toggle Notes or by issuing PIK Notes (PIK Interest) or (iii) 50% as Cash
Interest and 50% of PIK Interest.
Cash Interest on the Senior Toggle Notes accrues at 9.625% per annum and is payable in cash. PIK
Interest on the Senior Toggle Notes accrues at the Cash Interest Rate per annum plus 0.75% and
increases the amount outstanding of the Senior Toggle Notes.
The Company elected to pay interest in kind on its Senior Toggle Notes for the interest periods
beginning June 2, 2008 through June 1, 2011. This election, net of reductions for note repurchases,
increased the principal amount on the Senior Toggle Notes by $98.1 million and $62.4 million as of
January 29, 2011 and January 30, 2010, respectively. The accrued payment in kind interest is
included in Long-term debt in the Consolidated Balance Sheets.
Each of the Companys wholly-owned domestic subsidiaries that guarantee indebtedness under the
Credit Facility jointly and severally irrevocably and unconditionally guarantee on a senior basis
the performance
and punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all
obligations of the Company under the Senior Notes, expenses, indemnification or otherwise.
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On or after June 1, 2011, the Company may redeem the Senior Notes at its option, subject to certain
notice provisions at the following redemption prices (expressed as percentage of principal amount),
plus accrued and unpaid interest to the redemption date (subject to the right of holders of record
on the relevant record date to receive interest due on the relevant interest payment date), if
redeemed during the twelve-month period commencing on June 1 of the years set forth below:
Period | Senior Cash Pay Notes | Senior Toggle Notes | ||||||
2011 |
104.625 | % | 104.813 | % | ||||
2012 |
102.313 | % | 102.406 | % | ||||
2013 and thereafter |
100.000 | % | 100.000 | % |
In addition, prior to June 1, 2011, the Company may redeem the Senior Notes, subject to certain
notice periods, at a price equal to 100% of the principal amount of the Senior Notes redeemed plus
an applicable premium and accrued an unpaid interest, if any.
Upon the occurrence of a change in control, each holder of the Senior Notes has the right to
require the Company to repurchase all or any part of such holders Senior Notes, at a price in cash
equal to 101% of the principal amount of the Senior Notes redeemed.
Senior Subordinated Notes
In connection with the Transactions, the Company issued $335.0 million of Senior Subordinated
Notes. The Senior Subordinated Notes are senior subordinated obligations of the Company and will
mature on June 1, 2017. Interest is payable semi-annually at 10.50% per annum, which commenced on
December 1, 2007.
Each of the Companys wholly-owned domestic subsidiaries that guarantee indebtedness under the
Credit Facility jointly and severally irrevocably and unconditionally guarantee on a senior
subordinated basis the performance and punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of all obligations of the Company under the Senior Subordinated Notes,
expenses, indemnification or otherwise.
On or after June 1, 2012, the Company may redeem the Senior Subordinated Notes at its option,
subject to certain notice provisions, at the following redemption prices (expressed as a percentage
of principal amount), plus accrued and unpaid interest to the redemption date (subject to the right
of holders of record on the relevant record date to receive interest due on the relevant interest
payment date), if redeemed during the twelve-month period commencing on June 1 of the years set
forth below:
Period | Redemption Price | |||
2012 |
105.25 | % | ||
2013 |
103.50 | % | ||
2014 |
101.75 | % | ||
2015 and thereafter |
100.00 | % |
In addition, prior to June 1, 2012, the Company may redeem the Senior Subordinated Notes, subject
to certain notice periods, at a price equal to 100% of the principal amount of the Senior Notes
redeemed plus an applicable premium and accrued an unpaid interest, if any.
Upon the occurrence of a change in control, each holder of the Senior Subordinated Notes has the
right to require the Company to repurchase all or any part of such holders Senior Subordinated
Notes, at a price in cash equal to 101% of the principal amount of the Senior Subordinated Notes
redeemed.
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The Senior Notes, Senior Toggle Notes and Senior Subordinated Notes (collectively, the Notes)
contain certain covenants that, among other things, and subject to certain exceptions and other
basket amounts, restrict the Companys ability and the ability of its subsidiaries to:
| incur additional indebtedness; | ||
| pay dividends or distributions on capital stock, repurchase or retire capital stock and redeem, repurchase or defease any subordinated indebtedness; | ||
| make certain investments; | ||
| create or incur certain liens; | ||
| create restrictions on the payment of dividends or other distributions to the Company from its subsidiaries; | ||
| transfer or sell assets; | ||
| engage in certain transactions with its affiliates; and | ||
| merge or consolidate with other companies or transfer all or substantially all of its assets. |
Certain of these covenants, such as limitations on the Companys ability to make certain payments
such as dividends, or incur debt, will no longer apply if the Notes have investment grade ratings
from both of the rating agencies of Moodys Investor Services, Inc. (Moodys) and Standard &
Poors Ratings Group (S&P) and no event of default has occurred. Since the date of issuance of
the Notes in May 2007, the Notes have not received investment grade ratings from Moodys or S&P.
Accordingly, all of the covenants under the Notes currently apply to the Company. None of these
covenants, however, require the Company to maintain any particular financial ratio or other measure
of financial performance. As of January 29, 2011, the Company is in compliance with the covenants
under its Notes.
European Credit Facilities
The Companys non-U.S. subsidiaries have bank credit facilities totaling approximately $2.6
million. The facilities are used for working capital requirements, letters of credit and various
guarantees. These credit facilities have been arranged in accordance with customary lending
practices in the respective country of operation. As of January 29, 2011, the entire amount of
$2.6 million was available for borrowing by the Company, subject to a reduction of $2.3 million for
outstanding bank guarantees.
Note Repurchases
The following is a summary of the Companys note repurchase activity during Fiscal 2010 and Fiscal
2009 (in thousands):
Fiscal 2010 | ||||||||||||
Principal | Repurchase | Recognized | ||||||||||
Notes Repurchased | Amount | Price | Gain (1) | |||||||||
Senior Notes |
$ | 14,000 | $ | 12,268 | $ | 1,467 | ||||||
Senior Toggle Notes |
57,173 | 49,798 | 7,612 | |||||||||
Senior Subordinated Notes |
22,625 | 17,799 | 4,309 | |||||||||
$ | 93,798 | $ | 79,865 | $ | 13,388 | |||||||
(1) | Net of deferred issuance cost write-offs of $265 for the Senior Notes, $922 for the Senior Toggle Notes and $517 for the Senior Subordinated Notes, and accrued interest write-off of $1,159 for the Senior Toggle Notes |
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Fiscal 2009 | ||||||||||||
Principal | Repurchase | Recognized | ||||||||||
Notes Repurchased | Amount | Price | Gain (1) | |||||||||
Senior Toggle Notes |
$ | 30,500 | $ | 19,744 | $ | 11,297 | ||||||
Senior Subordinated Notes |
52,763 | 26,347 | 25,115 | |||||||||
$ | 83,263 | $ | 46,091 | $ | 36,412 | |||||||
(1) | Net of deferred issuance cost write-offs of $603 and $1,301 for the Senior Toggle Notes and Senior Subordinated Notes, respectively, and accrued interest write-off of $1,144 for the Senior Toggle Notes. |
6. DERIVATIVES AND HEDGING ACTIVITIES
The Company formally designates and documents the financial instrument as a hedge of a specific
underlying exposure, as well as the risk management objectives and strategies for undertaking the
hedge transaction. The Company formally assesses both at inception and at least quarterly
thereafter, whether the financial instruments that are used in hedging transactions are effective
at offsetting changes in cash flows of the related underlying exposure. The Company measures the
effectiveness of its cash flow hedges by evaluating the following criteria: (i) the re-pricing
dates of the derivative instrument match those of the debt obligation; (ii) the interest rates of
the derivative instrument and the debt obligation are based on the same interest rate index and
tenor; (iii) the variable interest rate of the derivative instrument does not contain a floor or
cap, or other provisions that cause a basis difference with the debt obligation; and (iv) the
likelihood of the counterparty not defaulting is assessed as being probable.
The Company primarily employs derivative financial instruments to manage its exposure to interest
rate changes and to limit the volatility and impact of interest rate changes on earnings and cash
flows. The Company does not enter into derivative financial instruments for trading or speculative
purposes. The Company faces credit risk if the counterparties to the financial instruments are
unable to perform their obligations. However, the Company seeks to mitigate derivative credit risk
by entering into transactions with counterparties that are significant and creditworthy financial
institutions. The Company monitors the credit ratings of the counterparties.
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 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 during Fiscal
2010, Fiscal 2009 and Fiscal 2008, respectively, and all components of the derivative gain or loss
were included in the assessment of hedge effectiveness. For derivative financial instruments which
do not qualify as cash flow hedges, any changes in fair value would be recorded in the Consolidated
Statements of Operations and Comprehensive Income (Loss).
The Company may at its discretion change the designation of any such hedging instrument agreements
prior to maturity. At that time, any gains or losses previously reported in accumulated other
comprehensive income (loss) on termination would amortize into interest expense or interest income
to correspond to the recognition of interest expense or interest income on the hedged debt. If
such debt instrument was also terminated, the gain or loss associated with the terminated
derivative included in accumulated other comprehensive income (loss) at the time of termination of
the debt would be recognized in the Consolidated Statements of Operations and Comprehensive Income
(Loss) at that time.
On July 28, 2010, the Company entered into an interest rate swap agreement (the Swap) to manage
exposure to fluctuations in interest rate changes related to the senior secured term loan facility.
The Swap has been designated and accounted for as a cash flow hedge and 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
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amount of $200.0 million of the outstanding principal balance of the senior secured term loan
facility and has a fixed rate of 1.2235%. The interest rate Swap results in the Company paying a
fixed rate plus the applicable margin then in effect for LIBOR borrowings resulting in an interest
rate of 3.97% at January 29, 2011, on a notional amount of $200.0 million of the senior secured
term loan.
The Company entered into three interest rate swap agreements in July 2007 (the Swaps) to manage
exposure to interest rate changes related to the senior secured term loan facility. The Swaps were
designated and accounted for as cash flow hedges. Those Swaps expired on June 30, 2010. The Swaps
covered an aggregate notional amount of $435.0 million of the outstanding principal balance of the
senior secured term loan facility. The fixed rates of the Swaps ranged from 4.96% to 5.25%. The
Swaps were designated and accounted for as cash flow hedges.
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 $3.5 million at January 29,
2011. The collateral requirement increases for declines in the three year LIBOR rate below
1.2235%. As of January 29, 2011, the three year LIBOR rate was 0.92% 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 included credit-related valuation adjustments in the calculation of fair value for the
Swaps.
At January 29, 2011 and January 30, 2010, the estimated fair values of the Companys derivative
financial instruments designated as interest rate cash flow hedges were liabilities of
approximately $1.2 million and $8.8 million, respectively, which were recorded in Accrued expenses
and other current liabilities in the Consolidated Balance Sheets. These amounts were also
recorded, net of tax of approximately $5.7 million and $5.7 million, respectively, as a component
in Accumulated other comprehensive income (loss), net of tax in the Consolidated Balance Sheets.
See Note 2 Summary of Significant Accounting Policies for fair value measurement of interest
rate swaps.
The following tables provide a summary of the financial statement effect of the Companys
derivative financial instruments designated as interest rate cash flow hedges during Fiscal 2010,
Fiscal 2009 and Fiscal 2008 (in thousands):
Amount of Gain or (Loss) Recognized in OCI on | ||||||||||||
Derivative | ||||||||||||
Derivatives in Cash Flow Hedging Relationships | (Effective Portion) | |||||||||||
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Interest Rate Swaps |
$ | 7,587 | $ | 9,437 | $ | 1,375 |
Amount of Gain or (Loss) Reclassified from | ||||||||||||
Location of Gain or (Loss) Reclassified from | Accumulated OCI into Income | |||||||||||
Accumulated OCI into Income (Effective Portion) | (Effective Portion)(1) | |||||||||||
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Interest expense, net |
$ | (9,630 | ) | $ | (19,011 | ) | $ | (8,440 | ) |
(1) | Represents reclassification of amounts from accumulated other comprehensive income (loss) into earnings as interest expense is recognized on the senior secured term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges. |
Over the next twelve months, the Company expects to reclassify net losses on the Companys interest
rate swaps recognized within Accumulated other comprehensive income (loss), net of tax of $1.9
million into interest expense.
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7. COMMITMENTS AND CONTINGENCIES
Leases The Company leases its retail stores, certain offices and warehouse space, and
certain equipment under operating leases which expire at various dates through the year 2031 with
options to renew certain of such leases for additional periods. Most lease agreements contain
construction allowances and/or rent holidays. For purposes of recognizing landlord incentives and
minimum rental expense on a straight-line basis over the terms of the leases, the Company uses the
date of initial possession to begin amortization, which is generally when the Company enters the
space and begins to make improvements in preparation of intended use. The lease agreements covering
retail store space provide for minimum rentals and/or rentals based on a percentage of net sales.
Rental expense for Fiscal 2010, Fiscal 2009 and Fiscal 2008 is set forth below (in thousands):
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Minimum store rentals |
$ | 199,304 | $ | 199,908 | $ | 205,807 | ||||||
Store rentals based on net sales |
2,990 | 1,454 | 2,398 | |||||||||
Other rental expense |
11,751 | 13,181 | 16,745 | |||||||||
Total rental expense |
$ | 214,045 | $ | 214,543 | $ | 224,950 | ||||||
Minimum aggregate rental commitments as of January 29, 2011 under non-cancelable operating leases
are summarized by fiscal year ending as follows (in thousands):
2011 |
$ | 202,197 | ||
2012 |
180,734 | |||
2013 |
157,969 | |||
2014 |
135,364 | |||
2015 |
111,560 | |||
Thereafter |
266,064 | |||
Total |
$ | 1,053,888 | ||
Certain leases provide for payment of real estate taxes, insurance, and other operating expenses of
the properties. In other leases, some of these costs are included in the basic contractual rental
payments. In addition, certain leases contain escalation clauses resulting from the pass-through
of increases in operating costs, property taxes, and the effect on costs from changes in price
indexes.
ASC Topic 410, Asset Retirement and Environmental Obligations, requires the fair value of a
liability for an asset retirement obligation be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made and that the associated asset retirement costs be
capitalized as part of the carrying amount of the long-lived asset. The retirement obligation
relates to costs associated with the retirement of leasehold improvements under store and warehouse
leases, within the European segment. The Company had retirement obligations of $3.6 million and
$3.2 million as of January 29, 2011 and January 30, 2010, respectively. These retirement
obligations are classified as Deferred rent expense in the Companys Consolidated Balance Sheets.
Legal The Company is, from time to time, involved in litigation incidental to the
conduct of its business, including personal injury litigation, litigation regarding merchandise
sold, including product and safety concerns regarding heavy metal and chemical 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 intellectual
property rights.
The Company believes that current pending litigation will not have a material adverse effect on its
consolidated financial position, results of operations or cash flows.
Employment Agreements The Company has employment agreements with several members of
senior management. The agreements, with terms ranging from approximately two to three years,
provide for minimum salary levels, performance bonuses, and severance payments.
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Other Approximately 69% of the merchandise purchased by the Company in Fiscal 2010 was
manufactured in China. Any event causing a sudden disruption of imports from China, or other
foreign countries, could have a material adverse effect on the Companys consolidated financial
position, results of operations or cash flows.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following summary sets forth the components of accumulated other comprehensive income (loss),
net of tax for Fiscal 2010, Fiscal 2009 and Fiscal 2008 (in thousands, net of tax):
Foreign | ||||||||||||
Currency | Derivative | |||||||||||
Translation | Instruments | Total | ||||||||||
Balance as of February 2, 2008 |
$ | 17,191 | $ | (13,833 | ) | $ | 3,358 | |||||
Foreign currency translation adjustment, net of tax of $0 |
(27,052 | ) | | (27,052 | ) | |||||||
Unrealized
gain on interest rate swaps, net of tax of $1,531 |
| 1,375 | 1,375 | |||||||||
Balance as of January 31, 2009 |
(9,861 | ) | (12,458 | ) | (22,319 | ) | ||||||
Foreign currency translation adjustment, net of tax of $0 |
15,507 | | 15,507 | |||||||||
Unrealized
gain on interest rate swaps, net of tax of $1,546 |
| 9,437 | 9,437 | |||||||||
Balance as of January 30, 2010 |
5,646 | (3,021 | ) | 2,625 | ||||||||
Foreign currency translation adjustment, net of tax of $0 |
776 | | 776 | |||||||||
Unrealized gain on interest rate swaps, net of tax of $0 |
| 7,587 | 7,587 | |||||||||
Reclassification of foreign currency translation
adjustments into net income, net of tax of $0 |
(9,572 | ) | | (9,572 | ) | |||||||
Balance as of January 29, 2011 |
$ | (3,150 | ) | $ | 4,566 | $ | 1,416 | |||||
9. STOCK OPTIONS AND STOCK-BASED COMPENSATION
On June 29, 2007, the Board of Directors and stockholders of Claires Inc. adopted the Claires
Inc. Stock Incentive Plan (the Plan). The Plan provides employees and directors of Claires
Inc., the Company and its subsidiaries, who are in a position to contribute to the long-term
success of these entities, with shares or options to acquire shares in Claires Inc. to aid in
attracting, retaining, and motivating individuals of outstanding ability.
The Plan was amended on July 23, 2007 and September 9, 2008 to increase the number of shares
available for issuance to 6,860,000 and 8,200,000, respectively, and to provide for equity
investments by employees and directors of the Company through the voluntary stock purchase program.
As of January 29, 2011, 1,339,986 shares were available for future grants. The Board of Directors
of Claires Inc. awarded certain employees and directors the opportunity to purchase common stock
at a price of $10.00 per share, the estimated fair market value of the Companys common stock.
With each share purchased, the employee or director was granted a buy-one-get-one option, (the
BOGO Option) to purchase an additional share at an exercise price of $10.00 per share.
The total stock-based compensation expense recognized by the Company in Fiscal 2010, Fiscal 2009
and Fiscal 2008 was $5.0 million, $6.7 million and $8.2 million, respectively. Related income tax
benefits of approximately $1.7 million, $2.3 million and $2.8 million were recognized in Fiscal
2010, Fiscal 2009 and Fiscal 2008, respectively. Stock-based compensation is recorded in Selling,
general and administrative expenses in the Companys Consolidated Statements of Operations and
Comprehensive Income (Loss).
During the period from May 29, 2007 through February 2, 2008, the Board of Directors of Claires
Inc. approved the grant of a total of approximately 3,265,000 stock options under the Plan to
certain employees of the Company. In addition, the Board approved approximately 1,850,000 stock
options to certain senior executives. The stock options consist of a Time Option and
Performance Option as those terms are defined in the standard form of the option grant letter.
The stock options have an exercise
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price of $10.00 per share, the estimated fair market value of the underlying shares at the date of
grant, and expire seven years after the date of grant. Time Options vest and become exercisable
based on continued service to the Company. The Time Options vest in four equal annual
installments, commencing one year from date of grant. Performance Options vest based on growth in
the stock price between May 29, 2007 and specific quarterly measurement dates commencing with the
last day of the eighth full fiscal quarter after May 29, 2007. Upon achievement of the performance
target, the Performance Options vest and become exercisable in two equal annual installments on the
first two anniversaries of the measurement date. During Fiscal 2010, Fiscal 2009 and Fiscal 2008,
the Board of Directors approved the grant of approximately 995,000, 828,000 and 2,170,000,
respectively, of similar stock options. The Company recognized stock-based compensation expense of
$4.2 million, $5.5 million and $6.9 million in Fiscal 2010, Fiscal 2009 and Fiscal 2008,
respectively, related to Time and Performance Options.
During the period from May 29, 2007 through February 2, 2008, the Board of Directors also granted
approximately 970,000 BOGO options which are immediately exercisable and expire in seven years.
The period from May 29, 2007 through February 2, 2008 included options to purchase an aggregate of
312,500 BOGO options granted outside of the Plan to certain senior executive officers and
directors. During Fiscal 2010 and Fiscal 2008, the Board of Directors granted 6,000 and 46,000,
respectively, BOGO options with similar terms. No BOGO options were granted during Fiscal 2009.
The Company recognized stock-based compensation expense of $702,000, $1,039,000 and $810,000 in
Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively, related to these options.
The following is a summary of activity in the Companys stock option plan from January 30, 2010
through January 29, 2011:
Weighted | ||||||||||||
Weighted | Average | |||||||||||
Average | Remaining | |||||||||||
Number of | Exercise | Contractual | ||||||||||
Shares | Price | Term (Years) | ||||||||||
Outstanding as of January 30, 2010 |
6,279,360 | $ | 10.00 | |||||||||
Options granted |
1,000,750 | $ | 10.00 | |||||||||
Options exercised |
| | ||||||||||
Options forfeited or expired |
(420,096 | ) | $ | 10.00 | ||||||||
Outstanding as of January 29, 2011 |
6,860,014 | $ | 10.00 | 4.4 | ||||||||
Options vested and expected to
vest at January 29, 2011 |
6,703,258 | $ | 10.00 | 4.3 | ||||||||
Exercisable at end of period |
2,195,119 | $ | 10.00 | 3.8 | ||||||||
The weighted average grant date fair value of options granted in Fiscal 2010, Fiscal 2009 and
Fiscal 2008 was $3.35, $2.98 and $3.87, respectively.
As of January 29, 2011, there was $4.3 million of unrecognized stock-based compensation expense,
net of estimated forfeitures, related to non-vested stock options that is expected to be recognized
over a weighted-average period of approximately 2.3 years.
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For options granted during Fiscal 2010, Fiscal 2009 and Fiscal 2008, the fair value of each option
was estimated on the date of grant using the Black-Scholes and Monte Carlo option pricing models
with the following assumptions:
Time Options and BOGO Options (Black-Scholes) | Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | |||||||||
Expected dividend yield |
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Weighted average expected stock price volatility |
59.25 | % | 55.53 | % | 45.26 | % | ||||||
Weighted average risk-free interest rate |
2.04 | % | 2.15 | % | 3.18 | % | ||||||
Range of risk-free interest rate |
1.05% - 2.54 | % | 1.38% - 2.98 | % | 2.50% - 3.44 | % | ||||||
Weighted average expected term (years) |
4.74 | 4.39 | 4.75 |
Performance Options (Monte Carlo) | Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | |||||||||
Expected dividend yield |
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Weighted average expected stock price volatility |
58.66 | % | 53.50 | % | 48.00 | % | ||||||
Weighted average risk-free interest rate |
2.45 | % | 2.05 | % | 3.21 | % | ||||||
Range of risk-free interest rate |
1.42% - 2.93 | % | 0.18% - 4.25 | % | 1.56% - 4.38 | % | ||||||
Weighted average expected term (years) |
N/A | N/A | N/A |
The expected term of Time Options and BOGO Options has been based on the simplified method in
accordance with SEC Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, as amended by
SEC SAB No. 110, because the Company has no readily available relevant historical data on
option-hold-periods by employees. The Companys historical option exercise data does not provide a
reasonable basis upon which to estimate an expected term of an option due to new ownership of the
Company establishing new equity-based compensation arrangements and different classifications of
employees receiving grants. The risk-free interest rate for periods within the contractual life of
the options is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected
stock price volatility was based on peer company data as of the date of each option grant.
Claires Inc. will issue new shares to satisfy exercise of stock options. During Fiscal 2010,
Fiscal 2009 and Fiscal 2008, no options were exercised and no cash was used to settle equity
instruments granted under share-based payment arrangements.
Time-Vested Restricted Stock Awards
On May 29, 2007, Claires Inc. issued 125,000 shares of restricted common stock to certain members
of executive management of the Company. The shares are subject to certain transfer restrictions
and the shares are forfeited if a recipient leaves the Company. The shares vest at the rate of 25%
on each of May 29, 2008, May 29, 2009, May 29, 2010, and May 29, 2011. Vesting is based on
continued service to the Company. The weighted average grant date fair value was $10.00 per share
and the shares had an aggregate fair value at date of grant of $1.25 million. Stock-based
compensation expense relating to these shares recorded in Fiscal 2010, Fiscal 2009 and Fiscal 2008
approximated $67,000, $141,000 and $443,000, respectively. At January 29, 2011 and January 30,
2010, unearned stock-based compensation related to these shares approximated $15,000 and $83,000,
respectively. The remaining unearned stock-based compensation of $15,000 as of January 29, 2011 is
expected to be recognized over a weighted average period of 0.3 years.
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A summary of the activity from January 30, 2010 through January 29, 2011 in the Companys
restricted common stock is presented below:
Weighted Average | ||||||||
Shares | Grant Date Fair Value | |||||||
Nonvested as of January 30, 2010 |
50,000 | $ | 10.00 | |||||
Granted |
| | ||||||
Vested |
(25,000 | ) | $ | 10.00 | ||||
Forfeited |
| | ||||||
Nonvested as of January 29, 2011 |
25,000 | $ | 10.00 | |||||
10. EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution plan under 401(k) of the Internal Revenue Code that
covers substantially all United States employees meeting certain service requirements. The
Company, at its sole discretion, may make matching cash contributions up to specified percentages
of employees contributions. In March 2009, the Company changed to an annual election of
discretionary matching contributions. The Company elected not to make any matching contributions
during Fiscal 2010. During Fiscal 2009 and Fiscal 2008, the cost of Company matching contributions
was $152,000 and $777,000, respectively.
11. INCOME TAXES
The components of income (loss) before income taxes for Fiscal 2010, Fiscal 2009 and Fiscal 2008
were as follows (in thousands):
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
U.S. |
$ | (34,663 | ) | $ | (76,154 | ) | $ | (501,248 | ) | |||
Foreign |
48,777 | 77,262 | (140,835 | ) | ||||||||
Total income (loss) before income taxes |
$ | 14,114 | $ | 1,108 | $ | (642,083 | ) | |||||
The components of income tax expense (benefit) for Fiscal 2010, Fiscal 2009 and Fiscal 2008 were as
follows (in thousands):
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Federal: |
||||||||||||
Current |
$ | 22 | $ | 378 | $ | 509 | ||||||
Deferred |
1,098 | 3,541 | 12,440 | |||||||||
1,120 | 3,919 | 12,949 | ||||||||||
State |
||||||||||||
Current |
1,622 | 437 | 225 | |||||||||
Deferred |
(779 | ) | 63 | (11,413 | ) | |||||||
843 | 500 | (11,188 | ) | |||||||||
Foreign |
||||||||||||
Current |
8,737 | 5,552 | 5,532 | |||||||||
Deferred |
(909 | ) | 1,539 | (5,784 | ) | |||||||
7,828 | 7,091 | (252 | ) | |||||||||
Total income tax expense |
$ | 9,791 | $ | 11,510 | $ | 1,509 | ||||||
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The provision for income taxes for Fiscal 2010, Fiscal 2009 and Fiscal 2008 differs from an amount
computed at the statutory federal rate as follows:
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
U.S. income taxes at statutory federal rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Valuation allowance |
90.1 | 1,577.1 | (15.6 | ) | ||||||||
Nondeductible impairment charges |
| | (17.6 | ) | ||||||||
Foreign rate differential |
(82.5 | ) | (1,927.8 | ) | (0.4 | ) | ||||||
State and local income taxes, net of federal tax benefit |
(2.5 | ) | (92.1 | ) | 1.1 | |||||||
Repatriation of foreign earnings |
3.0 | 1,674.7 | (2.1 | ) | ||||||||
Change in accrual for estimated tax contingencies |
7.9 | 199.6 | (0.4 | ) | ||||||||
Other, net |
18.4 | (427.7 | ) | (0.2 | ) | |||||||
69.4 | % | 1,038.8 | % | (0.2 | )% | |||||||
In Fiscal 2010, the Companys income tax expense was $9.8 million and its effective tax rate was
69.4%, including tax expense of $12.7 million related to the effect of changes to its valuation
allowance on deferred tax assets. In Fiscal 2009, the Companys income tax expense was $11.5
million and its effective tax rate was 1,038.8%, including tax expense of $17.5 million related to
the effect of changes to its valuation allowance on deferred tax assets. In Fiscal 2008, the
Companys income tax expense was $1.5 million and its effective tax rate was (0.2)%, including the
non-deductible nature of the goodwill and joint venture impairment charges as well as the impact of
an increase to its valuation allowance on deferred tax assets in the U.S. by $95.8 million due to
the increased uncertainties related to its ability to utilize these deferred tax assets against
future earnings.
The effective income tax rates for Fiscal 2010, Fiscal 2009 and Fiscal 2008 also differ from the
statutory federal tax rate of 35% due to the overall geographic mix of losses in jurisdictions with
higher tax rates and income in jurisdictions with lower tax rates, the impact of the repatriation
of foreign earnings to fund transaction related interest, and other permanent book to tax return
adjustments.
The tax effects on the significant components of the Companys net deferred tax asset (liability)
as of January 29, 2011 and January 30, 2010 are as follows (in thousands):
Jan. 29, 2011 | Jan. 30, 2010 | |||||||
Deferred tax assets: |
||||||||
Tax carryforwards |
$ | 69,306 | $ | 85,737 | ||||
Debt related |
19,708 | 15,812 | ||||||
Compensation & benefits |
15,009 | 11,595 | ||||||
Deferred rent |
7,415 | 6,892 | ||||||
Depreciation |
6,053 | 2,874 | ||||||
Accrued expenses |
4,802 | 4,055 | ||||||
Gift cards |
2,726 | 2,064 | ||||||
Other |
2,198 | 4,106 | ||||||
Inventory |
1,376 | 1,125 | ||||||
Total gross deferred tax assets |
128,593 | 134,260 | ||||||
Valuation allowance |
(120,286 | ) | (130,620 | ) | ||||
Total deferred tax assets, net |
8,307 | 3,640 | ||||||
Deferred tax liabilities: |
||||||||
Tradename intangibles |
110,569 | 110,359 | ||||||
Lease rights |
8,555 | 8,865 | ||||||
Other |
4,169 | 1,360 | ||||||
Total deferred tax liabilities |
123,293 | 120,584 | ||||||
Net deferred tax liability |
$ | (114,986 | ) | $ | (116,944 | ) | ||
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The deferred tax assets and deferred tax liabilities as of January 29, 2011 and January 30, 2010
are as follows (in thousands):
Jan. 29, 2011 | Jan. 30, 2010 | ||||||||
Current deferred tax assets, net of valuation allowance |
$ | 4,064 | $ | 2,839 | |||||
Current deferred tax liabilities |
| | |||||||
Non-current deferred tax assets |
2,726 | 2,362 | |||||||
Non-current deferred tax liabilities, net of
valuation allowance |
(121,776 | ) | (122,145 | ) | |||||
Net |
$ | (114,986 | ) | $ | (116,944 | ) | |||
The amount and expiration dates of operating loss and tax credit carryforwards as of January 29,
2011 are as follows (in thousands):
Amount | Expiration Date | |||||||
U.S. federal net operating loss carryforwards |
$ | 26,936 | 2028 2030 | |||||
Non-U.S. net operating loss carryforwards |
9,810 | Indefinite | ||||||
Non-U.S. net operating loss carryforwards |
7,589 | 2015 2025 | ||||||
State net operating loss carryforwards |
3,339 | 2013 2030 | ||||||
U.S. foreign tax credits |
21,632 | 2019 2021 | ||||||
Total |
$ | 69,306 | ||||||
In assessing the need for a valuation allowance recorded against deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Ultimately, the realization of deferred tax assets will depend on the
existence of future taxable income. In making this assessment, management considers the scheduled
reversal of deferred tax liabilities, past operating results, estimates of future taxable income
and tax planning opportunities.
In Fiscal 2010, the Company recorded a decrease of $11.8 million in valuation allowance against
deferred tax assets in the U.S. In Fiscal 2009, the Company recorded an increase of $18.3 million
in valuation allowance against deferred tax assets in the U.S. In the fourth quarter of Fiscal
2008, the Company recorded a charge of $95.8 million related to establishing a valuation allowance
against deferred tax assets in the U.S. In Fiscal 2008, the Company concluded that a valuation
allowance was appropriate in light of the significant negative evidence, which was objective and
verifiable, such as cumulative losses in recent fiscal years in our U.S. operations. While the
Companys long-term financial outlook in the U.S. remains positive, the Company concluded that its
ability to rely on its long-term outlook as to future taxable income was limited due to the
relative weight of the negative evidence from its recent U.S. cumulative losses. The Companys
conclusion regarding the need for a valuation allowance against U.S. deferred tax assets could
change in the future based on improvements in operating performance, which may result in the full
or partial reversal of the valuation allowance. The foreign valuation allowances relate to net
operating loss carryforwards that, in the opinion of management, are more likely than not to expire
unutilized.
The net change in the total valuation allowances in Fiscal 2010, Fiscal 2009 and Fiscal 2008 was a
decrease of $10.3 million, an increase of $20.4 million and an increase of $98.8 million,
respectively.
U.S. income taxes have not been recognized on the balance of accumulated unremitted earnings from
the Companys foreign subsidiaries at January 29, 2011 of $209.7 million, as these accumulated
undistributed earnings are considered reinvested indefinitely. For European subsidiaries, this
amount is based on the balance maintained in local currency of the Companys accumulated unremitted
earnings at February 2, 2008 converted into U.S. dollars at foreign exchange rates in effect on
January 29, 2011. Quantification of the deferred tax liability, if any, associated with
indefinitely reinvested earnings is not practicable. The Company recognized U.S. income tax
expense of $0.4 million on Fiscal 2010 earnings of its foreign subsidiaries. The Company expects
that future earnings from its foreign subsidiaries will be repatriated.
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Accumulated other comprehensive income (loss), net of income tax at January 29, 2011, January 30,
2010 and January 31, 2009 includes $(1.2) million, $(1.1) million and $(1.9) million, respectively,
related to
the income tax effect of unrealized foreign currency translation adjustments of certain long-term
intercompany loans within the Companys foreign subsidiaries. This results in a decrease of $0.1
million for Fiscal 2010, an increase of $0.8 million for Fiscal 2009 and a decrease of $2.5 million
for Fiscal 2008. There was no income tax effect on accumulated other comprehensive income (loss),
net of income tax related to unrealized gains on foreign currency translation adjustments of Fiscal
2010 foreign earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in
thousands):
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Beginning balance |
$ | 12,243 | $ | 11,043 | $ | 9,617 | ||||||
Additions based on tax positions related
to the current year |
1,694 | 1,987 | 2,070 | |||||||||
Additions for tax positions of prior years |
| 58 | 1 | |||||||||
Reductions for tax positions of prior years |
(1,133 | ) | | | ||||||||
Statute expirations |
(134 | ) | (351 | ) | (154 | ) | ||||||
Settlements |
| (494 | ) | (491 | ) | |||||||
Ending balance |
$ | 12,670 | $ | 12,243 | $ | 11,043 | ||||||
The amount of unrecognized tax benefits at January 29, 2011 of $12.7 million, if recognized, would
favorably affect the Companys effective tax rate. These unrecognized tax benefits are classified
as Unfavorable lease obligations and other long-term liabilities in the Companys Consolidated
Balance Sheets.
Interest and penalties related to unrecognized tax benefits are included in income tax expense.
The Company had $3.1 million and $2.4 million for the payment of interest and penalties accrued at
January 29, 2011 and January 30, 2010, respectively, and are classified as Unfavorable lease
obligations and other long-term liabilities in the Companys Consolidated Balance Sheets. For
Fiscal 2010, Fiscal 2009 and Fiscal 2008, the Company recognized $0.7 million, $0.3 million and
$0.6 million, respectively, in interest and penalties.
The Company files income tax returns in the U.S. federal jurisdiction and various states and
foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal,
state, and local, or non-U.S. income tax examinations for years before Fiscal 2005. We have also
concluded tax examinations in our significant foreign tax jurisdictions including the United
Kingdom through Fiscal 2005, France through Fiscal 2004, and Canada through Fiscal 2003.
Within the next 12 months, the Company estimates that the unrecognized tax benefits at January 29,
2011, could be reduced by approximately $0.6 million related to the settlement of various state and
local tax examinations for prior periods. Other than the expected settlement for state and local
tax positions, the Company does not anticipate a significant change to the total amount of
unrecognized tax benefits within the next 12 months. See Note 16 Subsequent Events for other
tax matters.
12. RELATED PARTY TRANSACTIONS
Upon consummation of the Merger, the Company entered into a management services agreement with
Apollo Management and the Sponsors. Under this management services agreement, Apollo Management
and the Sponsors agreed to provide to the Company certain investment banking, management,
consulting, and financial planning services on an ongoing basis for a fee of $3.0 million per year.
Under this management services agreement, Apollo Management and the Sponsors also agreed to
provide to the Company certain financial advisory and investment banking services from time to time
in connection with major financial transactions that may be undertaken by it or its subsidiaries in
exchange for fees customary for such services after taking into account expertise and relationships
within the business and financial community of Apollo Management and the Sponsors. Under this
management services agreement, the Company also agreed to provide customary indemnification. The
Company paid Apollo Management and Sponsors $3.0 million for fees in each of Fiscal 2010, Fiscal
2009 and Fiscal 2008, respectively. These amounts are included in Selling, general and
administrative expenses in the Companys Consolidated Statements of Operations and Comprehensive
income (Loss).
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The Company paid store planning and retail design fees to a Company owned by a member of one of the
Companys executive officers. These fee are included in Furniture, fixtures and equipment in the
Companys Consolidated Balance Sheets and Selling, general and administrative expenses in the
Companys Consolidated Statements of Operations and Comprehensive Income (Loss). For Fiscal 2010
and Fiscal 2009, the Company paid fees of approximately $1.2 million and $0.9 million,
respectively. The arrangement was entered into during Fiscal 2008 and the fees paid during that
fiscal period were not significant. This arrangement was approved by the Audit Committee of the
Board of Directors.
See Note 16 Subsequent Events for a related party transaction.
13. SELECTED QUARTERLY FINANCIAL DATA
(Unaudited, in thousands)
Fiscal 2010 | ||||||||||||||||||||
1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | Total Year | ||||||||||||||||
Net sales |
$ | 322,077 | $ | 334,233 | $ | 348,175 | $ | 421,912 | $ | 1,426,397 | ||||||||||
Gross profit |
163,326 | 175,013 | 180,602 | 222,345 | 741,286 | |||||||||||||||
Impairment of assets (a) |
| | | 12,262 | 12,262 | |||||||||||||||
Severance and transaction related costs |
102 | 212 | 121 | 306 | 741 | |||||||||||||||
Gain on early debt extinguishment |
4,487 | 6,249 | 2,652 | | 13,388 | |||||||||||||||
Impairment of equity investment (b) |
| 6,030 | | | 6,030 | |||||||||||||||
Interest expense, net |
42,763 | 40,573 | 37,132 | 37,238 | 157,706 | |||||||||||||||
Income tax expense (c) |
1,633 | 1,607 | 3,369 | 3,182 | 9,791 | |||||||||||||||
Net income (loss) |
(12,300 | ) | (8,345 | ) | 3,647 | 21,321 | 4,323 |
(a) | Represents impairment charge related to franchise agreements. See Note 3 Impairment Charges for detail of impairment charges. | |
(b) | Represents impairment charge related to equity investment in Claires Nippon. See Note 3 Impairment Charges for detail of impairment charges. | |
(c) | Includes a $12.7 million charge for an increase in the valuation allowance related to deferred tax assets. |
Fiscal 2009 | ||||||||||||||||||||
1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | Total Year | ||||||||||||||||
Net sales |
$ | 293,098 | $ | 314,196 | $ | 324,404 | $ | 410,691 | $ | 1,342,389 | ||||||||||
Gross profit |
140,743 | 155,056 | 165,004 | 218,317 | 679,120 | |||||||||||||||
Impairment of assets (a) |
| | | 3,142 | 3,142 | |||||||||||||||
Severance and transaction related costs |
349 | 25 | 32 | 515 | 921 | |||||||||||||||
Gain on early debt extinguishment |
| 17,104 | 16,096 | 3,212 | 36,412 | |||||||||||||||
Interest expense, net |
45,234 | 45,329 | 43,716 | 43,139 | 177,418 | |||||||||||||||
Income tax expense (benefit) (b) |
(1,679 | ) | 2,797 | 2,187 | 8,205 | 11,510 | ||||||||||||||
Net income (loss) |
(29,023 | ) | (3,733 | ) | 2,889 | 19,465 | (10,402 | ) |
(a) | Represents impairment charges related to long-lived assets. See Note 3 Impairment Charges for detail of impairment charges. | |
(b) | Includes a $17.5 million charge for an increase in the valuation allowance related to deferred tax assets. |
79
Table of Contents
14. SEGMENT REPORTING
The Company is organized based on the geographic markets in which it operates. Under this
structure, the Company currently has two reportable segments: North America and Europe. 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 Companys Consolidated
Statements of Operations and Comprehensive Income (Loss) within its North American division. The
franchise fees the Company charges under the franchising agreements are reported in Other expense
(income), net in the Companys Consolidated Statements of Operations and Comprehensive Income
(Loss) within its European division. Until September 2, 2010, the Company accounted for the
results of operations of Claires Nippon under the equity method and included the results within
Other expense (income), net in the Companys Consolidated Statements of Operations and
Comprehensive Income (Loss) within the Companys North American division. After September 2, 2010,
these former joint venture stores began to operate as licensed stores. Substantially all of the
interest expense on the Companys outstanding debt is recorded in the Companys North American
division.
Information about the Companys operations by segment is as follows (in thousands):
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Net sales: |
||||||||||||
North America |
$ | 914,149 | $ | 850,313 | $ | 907,486 | ||||||
Europe |
512,248 | 492,076 | 505,474 | |||||||||
Total net sales |
$ | 1,426,397 | $ | 1,342,389 | $ | 1,412,960 | ||||||
Depreciation and amortization: |
||||||||||||
North America |
$ | 42,169 | $ | 47,574 | $ | 57,516 | ||||||
Europe |
23,029 | 23,897 | 27,577 | |||||||||
Total depreciation and amortization |
$ | 65,198 | $ | 71,471 | $ | 85,093 | ||||||
Segment operating income: |
||||||||||||
North America |
$ | 124,606 | $ | 88,890 | $ | 63,490 | ||||||
Europe |
52,859 | 57,287 | 30,292 | |||||||||
Total segment operating income |
$ | 177,465 | $ | 146,177 | $ | 93,782 | ||||||
Impairment of assets: |
||||||||||||
North America |
$ | | $ | 3,142 | $ | 314,000 | ||||||
Europe |
12,262 | | 184,490 | |||||||||
Total impairment charges |
$ | 12,262 | $ | 3,142 | $ | 498,490 | ||||||
Impairment of equity investment: |
||||||||||||
North America |
$ | 6,030 | $ | | $ | 25,500 | ||||||
Europe |
| | | |||||||||
Total impairment of equity investment |
$ | 6,030 | $ | | $ | 25,500 | ||||||
Interest expense (income), net: |
||||||||||||
North America |
$ | 157,595 | $ | 177,496 | $ | 196,732 | ||||||
Europe |
111 | (78 | ) | (785 | ) | |||||||
Total interest expense (income), net |
$ | 157,706 | $ | 177,418 | $ | 195,947 | ||||||
Income (loss) before income taxes: |
||||||||||||
North America |
$ | (26,003 | ) | $ | (56,257 | ) | $ | (482,670 | ) | |||
Europe |
40,117 | 57,365 | (159,413 | ) | ||||||||
Total income (loss) before income taxes |
$ | 14,114 | $ | 1,108 | $ | (642,083 | ) | |||||
Income tax expense (benefit): |
||||||||||||
North America |
$ | 2,694 | $ | 4,559 | $ | 1,613 | ||||||
Europe |
7,097 | 6,951 | (104 | ) | ||||||||
Total income tax expense |
$ | 9,791 | $ | 11,510 | $ | 1,509 | ||||||
Net income (loss): |
||||||||||||
North America |
$ | (28,697 | ) | $ | (60,816 | ) | $ | (484,283 | ) | |||
Europe |
33,020 | 50,414 | (159,309 | ) | ||||||||
Net income (loss) |
$ | 4,323 | $ | (10,402 | ) | $ | (643,592 | ) | ||||
80
Table of Contents
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Goodwill: |
||||||||||||
North America |
$ | 1,235,651 | $ | 1,235,651 | $ | 1,229,941 | ||||||
Europe |
314,405 | 314,405 | 314,405 | |||||||||
Total goodwill |
$ | 1,550,056 | $ | 1,550,056 | $ | 1,544,346 | ||||||
Long-lived assets: |
||||||||||||
North America |
$ | 142,090 | $ | 161,648 | $ | 197,839 | ||||||
Europe |
76,095 | 66,336 | 68,232 | |||||||||
Total long lived assets |
$ | 218,185 | $ | 227,984 | $ | 266,071 | ||||||
Total assets: |
||||||||||||
North America |
$ | 1,493,210 | $ | 1,505,727 | $ | 1,687,952 | ||||||
Europe |
1,373,239 | 1,328,378 | 1,193,143 | |||||||||
Total assets |
$ | 2,866,449 | $ | 2,834,105 | $ | 2,881,095 | ||||||
Capital Expenditures |
||||||||||||
North America |
$ | 20,353 | $ | 13,731 | $ | 42,623 | ||||||
Europe |
28,358 | 11,221 | 16,782 | |||||||||
Total capital expenditures |
$ | 48,711 | $ | 24,952 | $ | 59,405 | ||||||
The Company measures segment operating income as gross profit less selling, general and
administrative expenses and depreciation and amortization expense, including other operating income
and expense, but excluding impairment of assets and severance and transaction-related costs. A
reconciliation of total segment operating income to consolidated operating income is as follows (in
thousands).
Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
Total segment operating income
|
$ | 177,465 | $ | 146,177 | $ | 93,782 | ||||||
Impairment of assets
|
12,262 | 3,142 | 498,490 | |||||||||
Severance and transaction-related costs
|
741 | 921 | 15,928 | |||||||||
Consolidated operating income
|
$ | 164,462 | $ | 142,114 | $ | (420,636 | ) | |||||
Excluded from operating income are impairment charges of $12.3 million, $3.1 million and $498.5
million for Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively. For Fiscal 2010, Fiscal 2009
and Fiscal 2008, segment operating income also excludes severance and transaction-related costs for
North America of $0.4 million, $0.9 million and $9.9 million, respectively, and Europe of $0.3
million, $0 and $6.0 million, respectively. See Note 3 Impairment Charges.
Identifiable assets are those assets that are identified with the operations of each segment.
Corporate assets consist mainly of cash and cash equivalents, investments in affiliated companies
and other assets. These assets are included within North America.
The following table compares the Companys sales of each product category by segment for the last
three fiscal years:
Percentage of Total | ||||||||||||
Product Category | Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | |||||||||
Accessories: |
||||||||||||
North America |
31.8 | 30.5 | 27.6 | |||||||||
Europe |
22.7 | 23.1 | 20.8 | |||||||||
54.5 | 53.6 | 48.4 | ||||||||||
Jewelry: |
||||||||||||
North America |
32.0 | 32.3 | 36.0 | |||||||||
Europe |
13.5 | 14.1 | 15.6 | |||||||||
45.5 | 46.4 | 51.6 | ||||||||||
100.0 | 100.0 | 100.0 | ||||||||||
81
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The following table provides data for selected geographical areas.
Percentage of Total Net Sales | |||||||||||||
Net Sales: | Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
United Kingdom |
15.0 | 16.9 | 18.1 | ||||||||||
France |
9.1 | 8.7 | 8.1 | ||||||||||
Percentage of Total Long-lived Assets | |||||||||||||
Long-lived Assets: |
January 29, 2011 | January 30, 2010 | |||||||||||
United Kingdom |
10.4 | 12.1 | |||||||||||
France |
5.7 | 7.3 | |||||||||||
15. SUPPLEMENTAL FINANCIAL INFORMATION
On May 29, 2007, Claires Stores, Inc. (the Issuer), issued $935.0 million in Senior Notes,
Senior Toggle Notes and Senior Subordinated Notes. These Notes are irrevocably and unconditionally
guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of
Claires Stores, Inc. that guarantee the Companys Credit Facility (the Guarantors). The
Companys other subsidiaries, principally its international subsidiaries including 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.
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Condensed Consolidating Balance Sheet
January 29, 2011
(in thousands)
January 29, 2011
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents and restricted cash (1) |
$ | 179,529 | $ | 3,587 | $ | 96,650 | $ | | $ | 279,766 | ||||||||||
Inventories |
| 84,868 | 51,280 | | 136,148 | |||||||||||||||
Prepaid expenses |
851 | 1,680 | 18,918 | | 21,449 | |||||||||||||||
Other current assets |
| 16,547 | 8,111 | | 24,658 | |||||||||||||||
Total current assets |
180,380 | 106,682 | 174,959 | | 462,021 | |||||||||||||||
Property and equipment: |
||||||||||||||||||||
Land and building |
| | | | | |||||||||||||||
Furniture, fixtures and equipment |
3,276 | 119,228 | 64,010 | | 186,514 | |||||||||||||||
Leasehold improvements |
1,052 | 143,072 | 103,906 | | 248,030 | |||||||||||||||
4,328 | 262,300 | 167,916 | | 434,544 | ||||||||||||||||
Less accumulated depreciation and amortization |
(2,205 | ) | (147,857 | ) | (83,449 | ) | | (233,511 | ) | |||||||||||
2,123 | 114,443 | 84,467 | | 201,033 | ||||||||||||||||
Leased property under capital lease: |
||||||||||||||||||||
Land and building |
| 18,055 | | | 18,055 | |||||||||||||||
Less accumulated depreciation and amortization |
| (903 | ) | | | (903 | ) | |||||||||||||
| 17,152 | | | 17,152 | ||||||||||||||||
Intercompany receivables |
| 366,929 | | (366,929 | ) | | ||||||||||||||
Investment in subsidiaries |
2,303,333 | (63,535 | ) | | (2,239,798 | ) | | |||||||||||||
Goodwill |
| 1,235,651 | 314,405 | | 1,550,056 | |||||||||||||||
Intangible assets, net |
286,000 | 9,294 | 262,172 | | 557,466 | |||||||||||||||
Deferred financing costs, net |
35,973 | | 461 | | 36,434 | |||||||||||||||
Other assets |
130 | 3,842 | 38,315 | | 42,287 | |||||||||||||||
2,625,436 | 1,552,181 | 615,353 | (2,606,727 | ) | 2,186,243 | |||||||||||||||
Total assets |
$ | 2,807,939 | $ | 1,790,458 | $ | 874,779 | $ | (2,606,727 | ) | $ | 2,866,449 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Short-term debt and current portion of long-term
debt |
$ | 18,451 | $ | | $ | 57,703 | $ | | $ | 76,154 | ||||||||||
Trade accounts payable |
1,199 | 24,545 | 28,611 | | 54,355 | |||||||||||||||
Income taxes payable |
| 644 | 11,100 | | 11,744 | |||||||||||||||
Accrued interest payable |
16,696 | | 87 | | 16,783 | |||||||||||||||
Accrued expenses and other current liabilities |
20,630 | 37,910 | 48,575 | | 107,115 | |||||||||||||||
Total current liabilities |
56,976 | 63,099 | 146,076 | | 266,151 | |||||||||||||||
Intercompany payables |
346,636 | | 20,293 | (366,929 | ) | | ||||||||||||||
Long-term debt |
2,236,842 | | | | 2,236,842 | |||||||||||||||
Revolving credit facility |
194,000 | | | | 194,000 | |||||||||||||||
Obligation under capital lease |
| 17,290 | | | 17,290 | |||||||||||||||
Deferred tax liability |
| 106,797 | 14,979 | | 121,776 | |||||||||||||||
Deferred rent expense |
| 17,230 | 9,407 | | 26,637 | |||||||||||||||
Unfavorable lease obligations and other long-term
liabilities |
| 28,889 | 1,379 | | 30,268 | |||||||||||||||
2,777,478 | 170,206 | 46,058 | (366,929 | ) | 2,626,813 | |||||||||||||||
Stockholders equity (deficit): |
||||||||||||||||||||
Common stock |
| 367 | 2 | (369 | ) | | ||||||||||||||
Additional paid in capital |
621,099 | 1,435,909 | 815,866 | (2,251,775 | ) | 621,099 | ||||||||||||||
Accumulated other comprehensive income (loss),
net of tax |
1,416 | 3,663 | (7,080 | ) | 3,417 | 1,416 | ||||||||||||||
Retained earnings (accumulated deficit) |
(649,030 | ) | 117,214 | (126,143 | ) | 8,929 | (649,030 | ) | ||||||||||||
(26,515 | ) | 1,557,153 | 682,645 | (2,239,798 | ) | (26,515 | ) | |||||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 2,807,939 | $ | 1,790,458 | $ | 874,779 | $ | (2,606,727 | ) | $ | 2,866,449 | |||||||||
(1) | Cash and cash equivalents includes restricted cash of $3,450 for Issuer and $20,414 for Non-Guarantors |
83
Table of Contents
Condensed Consolidating Balance Sheet
January 30, 2010
(in thousands)
January 30, 2010
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 109,138 | $ | (10,604 | ) | $ | 100,174 | $ | | $ | 198,708 | |||||||||
Inventories |
| 73,902 | 36,436 | | 110,338 | |||||||||||||||
Prepaid expenses |
509 | 14,217 | 18,147 | | 32,873 | |||||||||||||||
Other current assets |
1,030 | 19,527 | 7,679 | | 28,236 | |||||||||||||||
Total current assets |
110,677 | 97,042 | 162,436 | | 370,155 | |||||||||||||||
Property and equipment: |
||||||||||||||||||||
Land and building |
| 19,318 | | | 19,318 | |||||||||||||||
Furniture, fixtures and equipment |
2,137 | 109,405 | 51,060 | | 162,602 | |||||||||||||||
Leasehold improvements |
1,113 | 138,706 | 88,684 | | 228,503 | |||||||||||||||
3,250 | 267,429 | 139,744 | | 410,423 | ||||||||||||||||
Less accumulated depreciation and amortization |
(1,746 | ) | (117,101 | ) | (63,592 | ) | | (182,439 | ) | |||||||||||
1,504 | 150,328 | 76,152 | | 227,984 | ||||||||||||||||
Intercompany receivables |
| 148,072 | | (148,072 | ) | | ||||||||||||||
Investment in subsidiaries |
2,200,694 | (7,069 | ) | | (2,193,625 | ) | | |||||||||||||
Goodwill |
| 1,235,651 | 314,405 | | 1,550,056 | |||||||||||||||
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 | |||||||||||||||
2,552,434 | 1,392,901 | 632,328 | (2,341,697 | ) | 2,235,966 | |||||||||||||||
Total assets |
$ | 2,664,615 | $ | 1,640,271 | $ | 870,916 | $ | (2,341,697 | ) | $ | 2,834,105 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current portion of long-term debt |
$ | 14,500 | $ | | $ | | $ | | $ | 14,500 | ||||||||||
Trade accounts payable |
1,327 | 16,750 | 24,086 | | 42,163 | |||||||||||||||
Income taxes payable |
| 101 | 10,171 | | 10,272 | |||||||||||||||
Accrued interest payable |
14,644 | | | | 14,644 | |||||||||||||||
Accrued expenses and other current liabilities |
23,388 | 36,011 | 40,534 | | 99,933 | |||||||||||||||
Total current liabilities |
53,859 | 52,862 | 74,791 | | 181,512 | |||||||||||||||
Intercompany payables |
137,913 | | 10,159 | (148,072 | ) | | ||||||||||||||
Long-term debt |
2,313,378 | | | | 2,313,378 | |||||||||||||||
Revolving credit facility |
194,000 | | | | 194,000 | |||||||||||||||
Deferred tax liability |
| 106,386 | 15,759 | | 122,145 | |||||||||||||||
Deferred rent expense |
107 | 14,957 | 7,018 | | 22,082 | |||||||||||||||
Unfavorable lease obligations and other long-term
liabilities |
| 33,347 | 2,283 | | 35,630 | |||||||||||||||
2,645,398 | 154,690 | 35,219 | (148,072 | ) | 2,687,235 | |||||||||||||||
Stockholders equity (deficit): |
||||||||||||||||||||
Common stock |
| 367 | 2 | (369 | ) | | ||||||||||||||
Additional paid in capital |
616,086 | 1,445,795 | 876,798 | (2,322,593 | ) | 616,086 | ||||||||||||||
Accumulated other comprehensive income (loss),
net of tax |
2,625 | 2,101 | (4,134 | ) | 2,033 | 2,625 | ||||||||||||||
Accumulated deficit |
(653,353 | ) | (15,544 | ) | (111,760 | ) | 127,304 | (653,353 | ) | |||||||||||
(34,642 | ) | 1,432,719 | 760,906 | (2,193,625 | ) | (34,642 | ) | |||||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 2,664,615 | $ | 1,640,271 | $ | 870,916 | $ | (2,341,697 | ) | $ | 2,834,105 | |||||||||
84
Table of Contents
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Fiscal 2010
(in thousands)
Fiscal 2010
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 847,048 | $ | 579,349 | $ | | $ | 1,426,397 | ||||||||||
Cost of sales, occupancy and buying expenses |
5,222 | 408,851 | 271,038 | | 685,111 | |||||||||||||||
Gross (deficit) profit |
(5,222 | ) | 438,197 | 308,311 | | 741,286 | ||||||||||||||
Other expenses: |
||||||||||||||||||||
Selling, general and administrative |
35,895 | 252,629 | 209,688 | | 498,212 | |||||||||||||||
Depreciation and amortization |
631 | 38,700 | 25,867 | | 65,198 | |||||||||||||||
Impairment of assets |
| | 12,262 | | 12,262 | |||||||||||||||
Severance and transaction-related costs |
372 | | 369 | | 741 | |||||||||||||||
Other expense (income), net |
(21,067 | ) | 10,218 | 11,260 | | 411 | ||||||||||||||
15,831 | 301,547 | 259,446 | | 576,824 | ||||||||||||||||
Operating income (loss) |
(21,053 | ) | 136,650 | 48,865 | | 164,462 | ||||||||||||||
Gain on early debt extinguishment |
13,388 | | | | 13,388 | |||||||||||||||
Impairment of equity investment |
| 6,030 | | | 6,030 | |||||||||||||||
Interest expense, net |
156,427 | 1,190 | 89 | | 157,706 | |||||||||||||||
Income (loss) before income taxes |
(164,092 | ) | 129,430 | 48,776 | | 14,114 | ||||||||||||||
Income tax expense |
23 | 1,939 | 7,829 | | 9,791 | |||||||||||||||
Income (loss) from continuing operations |
(164,115 | ) | 127,491 | 40,947 | | 4,323 | ||||||||||||||
Equity in earnings of subsidiaries |
168,438 | 4,847 | | (173,285 | ) | | ||||||||||||||
Net income |
4,323 | 132,338 | 40,947 | (173,285 | ) | 4,323 | ||||||||||||||
Foreign currency translation and interest rate swap
adjustments, net of tax |
8,363 | 1,562 | (2,946 | ) | 1,384 | 8,363 | ||||||||||||||
Reclassification of foreign currency translation
adjustments into net income (loss) |
(9,572 | ) | (9,572 | ) | | 9,572 | (9,572 | ) | ||||||||||||
Comprehensive income |
$ | 3,114 | $ | 124,328 | $ | 38,001 | $ | (162,329 | ) | $ | 3,114 | |||||||||
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Fiscal 2009
(in thousands)
Fiscal 2009
(in thousands)
Non- | Consolidated | |||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Combined | ||||||||||||||||
Net sales |
$ | | $ | 792,190 | $ | 550,199 | $ | | $ | 1,342,389 | ||||||||||
Cost of sales, occupancy and buying expenses |
| 402,594 | 260,675 | | 663,269 | |||||||||||||||
Gross profit |
| 389,596 | 289,524 | | 679,120 | |||||||||||||||
Other expenses: |
||||||||||||||||||||
Selling, general and administrative |
31,786 | 241,226 | 192,694 | | 465,706 | |||||||||||||||
Depreciation and amortization |
1,439 | 43,182 | 26,850 | | 71,471 | |||||||||||||||
Impairment of assets |
| 3,142 | | | 3,142 | |||||||||||||||
Severance and transaction-related costs |
921 | | | | 921 | |||||||||||||||
Other expense (income), net |
(16,756 | ) | 19,714 | (7,192 | ) | | (4,234 | ) | ||||||||||||
17,390 | 307,264 | 212,352 | | 537,006 | ||||||||||||||||
Operating income (loss) |
(17,390 | ) | 82,332 | 77,172 | | 142,114 | ||||||||||||||
Gain on early debt extinguishment |
36,412 | | | | 36,412 | |||||||||||||||
Interest expense (income), net |
177,518 | (11 | ) | (89 | ) | | 177,418 | |||||||||||||
Income (loss) before income taxes |
(158,496 | ) | 82,343 | 77,261 | | 1,108 | ||||||||||||||
Income tax expense |
2,503 | 1,916 | 7,091 | | 11,510 | |||||||||||||||
Income (loss) from continuing operations |
(160,999 | ) | 80,427 | 70,170 | | (10,402 | ) | |||||||||||||
Equity in earnings of subsidiaries |
150,597 | 7,101 | | (157,698 | ) | | ||||||||||||||
Net income (loss) |
(10,402 | ) | 87,528 | 70,170 | (157,698 | ) | (10,402 | ) | ||||||||||||
Foreign currency translation and interest
rate swap adjustments, net of tax |
24,944 | 4,426 | 16,457 | (20,883 | ) | 24,944 | ||||||||||||||
Comprehensive income |
$ | 14,542 | $ | 91,954 | $ | 86,627 | $ | (178,581 | ) | $ | 14,542 | |||||||||
85
Table of Contents
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Fiscal 2008
(in thousands)
Fiscal 2008
(in thousands)
Non- | Consolidated | |||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Combined | ||||||||||||||||
Net sales |
$ | | $ | 845,430 | $ | 567,530 | $ | | $ | 1,412,960 | ||||||||||
Cost of sales, occupancy and buying expenses |
| 445,307 | 279,525 | | 724,832 | |||||||||||||||
Gross profit |
| 400,123 | 288,005 | | 688,128 | |||||||||||||||
Other expenses: |
||||||||||||||||||||
Selling, general and administrative |
32,720 | 266,838 | 214,194 | | 513,752 | |||||||||||||||
Depreciation and amortization |
3,013 | 50,584 | 31,496 | | 85,093 | |||||||||||||||
Impairment of assets |
134,000 | 180,000 | 184,490 | | 498,490 | |||||||||||||||
Severance and transaction-related costs |
2,374 | 7,553 | 6,001 | | 15,928 | |||||||||||||||
Other expense (income), net |
(19,778 | ) | 21,740 | (6,461 | ) | | (4,499 | ) | ||||||||||||
152,329 | 526,715 | 429,720 | | 1,108,764 | ||||||||||||||||
Operating loss |
(152,329 | ) | (126,592 | ) | (141,715 | ) | | (420,636 | ) | |||||||||||
Impairment of equity investment |
25,500 | | | | 25,500 | |||||||||||||||
Interest expense (income), net |
197,089 | (261 | ) | (881 | ) | | 195,947 | |||||||||||||
Loss before income taxes |
(374,918 | ) | (126,331 | ) | (140,834 | ) | | (642,083 | ) | |||||||||||
Income tax expense (benefit) |
(18,143 | ) | 19,904 | (252 | ) | | 1,509 | |||||||||||||
Loss from continuing operations |
(356,775 | ) | (146,235 | ) | (140,582 | ) | | (643,592 | ) | |||||||||||
Equity in earnings (loss) of subsidiaries |
(286,817 | ) | 7,706 | | 279,111 | | ||||||||||||||
Net loss |
(643,592 | ) | (138,529 | ) | (140,582 | ) | 279,111 | (643,592 | ) | |||||||||||
Foreign currency translation and interest
rate swap adjustments, net of tax |
(25,677 | ) | (5,285 | ) | (38,137 | ) | 43,422 | (25,677 | ) | |||||||||||
Comprehensive loss |
$ | (669,269 | ) | $ | (143,814 | ) | $ | (178,719 | ) | $ | 322,533 | $ | (669,269 | ) | ||||||
86
Table of Contents
Condensed Consolidating Statement of Cash Flows
Fiscal 2010
(in thousands)
Fiscal 2010
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 4,323 | $ | 132,338 | $ | 40,947 | $ | (173,285 | ) | $ | 4,323 | |||||||||
Adjustments to reconcile net income to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(168,438 | ) | (4,847 | ) | | 173,285 | | |||||||||||||
Depreciation and amortization |
631 | 38,700 | 25,867 | | 65,198 | |||||||||||||||
Impairment |
| 6,030 | 12,262 | | 18,292 | |||||||||||||||
Amortization of lease rights and other assets |
| 29 | 3,175 | | 3,204 | |||||||||||||||
Amortization of debt issuance costs |
9,963 | | 42 | | 10,005 | |||||||||||||||
Payment of in kind interest expense |
36,872 | | | | 36,872 | |||||||||||||||
Net accretion of favorable (unfavorable) lease
obligations |
| (2,054 | ) | 564 | | (1,490 | ) | |||||||||||||
Loss on sale/retirement of property and equipment, net |
| 668 | 4 | | 672 | |||||||||||||||
Gain on early debt extinguishment |
(13,388 | ) | | | | (13,388 | ) | |||||||||||||
Stock compensation expense |
3,863 | | 1,150 | | 5,013 | |||||||||||||||
(Increase) decrease in: |
||||||||||||||||||||
Inventories |
| (10,966 | ) | (14,408 | ) | | (25,374 | ) | ||||||||||||
Prepaid expenses |
(342 | ) | 12,536 | 464 | | 12,658 | ||||||||||||||
Other assets |
1,243 | 4,335 | (4,827 | ) | | 751 | ||||||||||||||
Increase (decrease) in: |
||||||||||||||||||||
Trade accounts payable |
(128 | ) | 6,682 | 3,760 | | 10,314 | ||||||||||||||
Income taxes payable |
| 2,320 | 1,347 | | 3,667 | |||||||||||||||
Accrued interest payable |
2,053 | | 86 | | 2,139 | |||||||||||||||
Accrued expenses and other liabilities |
4,828 | 1,800 | 7,947 | | 14,575 | |||||||||||||||
Deferred income taxes |
| 318 | (913 | ) | | (595 | ) | |||||||||||||
Deferred rent expense |
(107 | ) | 2,273 | 2,257 | | 4,423 | ||||||||||||||
Net cash provided by (used in) operating activities |
(118,627 | ) | 190,162 | 79,724 | | 151,259 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Acquisition of property and equipment, net |
(1,248 | ) | (18,310 | ) | (29,153 | ) | | (48,711 | ) | |||||||||||
Proceeds from sale of property and equipment |
| 16,765 | | | 16,765 | |||||||||||||||
Acquisition of intangible assets/lease rights |
| (126 | ) | (978 | ) | | (1,104 | ) | ||||||||||||
Changes in restricted cash |
(3,450 | ) | | (20,452 | ) | | (23,902 | ) | ||||||||||||
Net cash provided by (used in) investing activities |
(4,698 | ) | (1,671 | ) | (50,583 | ) | | (56,952 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Payments from Credit facility |
(14,500 | ) | | | | (14,500 | ) | |||||||||||||
Proceeds from Short-term debt |
| | 57,494 | 57,494 | ||||||||||||||||
Repurchase of Notes |
(79,865 | ) | | | | (79,865 | ) | |||||||||||||
Payment of debt issuance costs |
| | (503 | ) | (503 | ) | ||||||||||||||
Principal payments of capital leases |
| (765 | ) | | | (765 | ) | |||||||||||||
Intercompany activity, net |
284,631 | (176,753 | ) | (107,878 | ) | | | |||||||||||||
Net cash provided by (used in) financing activities |
190,266 | (177,518 | ) | (50,887 | ) | | (38,139 | ) | ||||||||||||
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
| 3,218 | (2,192 | ) | | 1,026 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
66,941 | 14,191 | (23,938 | ) | | 57,194 | ||||||||||||||
Cash and cash equivalents at beginning of period |
109,138 | (10,604 | ) | 100,174 | | 198,708 | ||||||||||||||
Cash and cash equivalents at end of period |
176,079 | 3,587 | 76,236 | | 255,902 | |||||||||||||||
Restricted cash at end of period |
3,450 | | 20,414 | | 23,864 | |||||||||||||||
Cash and cash equivalents and restricted cash at end of period |
$ | 179,529 | $ | 3,587 | $ | 96,650 | $ | | $ | 279,766 | ||||||||||
87
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Condensed Consolidating Statement of Cash Flows
Fiscal 2009
(in thousands)
Fiscal 2009
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | (10,402 | ) | $ | 87,528 | $ | 70,170 | $ | (157,698 | ) | $ | (10,402 | ) | |||||||
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Equity in (earnings) loss of subsidiaries |
(150,597 | ) | (7,101 | ) | | 157,698 | | |||||||||||||
Depreciation and amortization |
1,439 | 43,182 | 26,850 | | 71,471 | |||||||||||||||
Impairment of assets |
| 3,142 | | | 3,142 | |||||||||||||||
Amortization of lease rights and other assets |
| 49 | 2,150 | | 2,199 | |||||||||||||||
Amortization of debt issuance costs |
10,398 | | | | 10,398 | |||||||||||||||
Payment of in kind interest expense |
39,013 | | | | 39,013 | |||||||||||||||
Net accretion of favorable (unfavorable) lease obligations |
| (2,550 | ) | 399 | | (2,151 | ) | |||||||||||||
(Gain) loss on sale/retirement of property and equipment,
net |
(1,430 | ) | 20 | 21 | | (1,389 | ) | |||||||||||||
Gain on early debt extinguishment |
(36,412 | ) | | | | (36,412 | ) | |||||||||||||
Gain on sale of intangible assets/lease rights |
| | (506 | ) | | (506 | ) | |||||||||||||
Stock compensation expense |
4,942 | | 1,717 | | 6,659 | |||||||||||||||
(Increase) decrease in: |
||||||||||||||||||||
Inventories |
| (457 | ) | (3,624 | ) | | (4,081 | ) | ||||||||||||
Prepaid expenses |
(76 | ) | 425 | 1,448 | | 1,797 | ||||||||||||||
Other assets |
134 | (4,926 | ) | (727 | ) | | (5,519 | ) | ||||||||||||
Increase (decrease) in: |
||||||||||||||||||||
Trade accounts payable |
(1,016 | ) | (3,389 | ) | (8,339 | ) | | (12,744 | ) | |||||||||||
Income taxes payable |
| 248 | 5,262 | | 5,510 | |||||||||||||||
Accrued interest payable |
1,331 | | (3 | ) | | 1,328 | ||||||||||||||
Accrued expenses and other current liabilities |
(1,424 | ) | 229 | 1,066 | | (129 | ) | |||||||||||||
Deferred income taxes |
2,483 | 13 | 1,618 | | 4,114 | |||||||||||||||
Deferred rent expense |
(591 | ) | 2,425 | 1,344 | | 3,178 | ||||||||||||||
Net cash provided by (used in) operating activities |
(142,208 | ) | 118,838 | 98,846 | | 75,476 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Acquisition of property and equipment, net |
(120 | ) | (12,209 | ) | (12,623 | ) | | (24,952 | ) | |||||||||||
Proceeds from sale of property and equipment |
1,830 | | | | 1,830 | |||||||||||||||
Acquisition of intangible assets/lease rights |
| (111 | ) | (435 | ) | | (546 | ) | ||||||||||||
Proceeds from sale of intangible assets/lease rights |
| | 2,409 | | 2,409 | |||||||||||||||
Net cash provided by (used in) investing activities |
1,710 | (12,320 | ) | (10,649 | ) | | (21,259 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Payments of Credit facility |
(14,500 | ) | | | | (14,500 | ) | |||||||||||||
Repurchase of Notes |
(46,091 | ) | | | | (46,091 | ) | |||||||||||||
Intercompany activity, net |
155,813 | (117,125 | ) | (38,688 | ) | | | |||||||||||||
Net cash provided by (used in) financing activities |
95,222 | (117,125 | ) | (38,688 | ) | | (60,591 | ) | ||||||||||||
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
| (208 | ) | 716 | | 508 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
(45,276 | ) | (10,815 | ) | 50,225 | | (5,866 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
154,414 | 211 | 49,949 | | 204,574 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 109,138 | $ | (10,604 | ) | $ | 100,174 | $ | | $ | 198,708 | |||||||||
88
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Condensed Consolidating Statement of Cash Flows
Fiscal 2008
(in thousands)
Fiscal 2008
(in thousands)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net loss |
$ | (643,592 | ) | $ | (138,529 | ) | $ | (140,582 | ) | $ | 279,111 | $ | (643,592 | ) | ||||||
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Equity in (earnings) loss of subsidiaries |
286,817 | (7,706 | ) | | (279,111 | ) | | |||||||||||||
Depreciation and amortization |
3,013 | 50,584 | 31,496 | | 85,093 | |||||||||||||||
Impairment of assets |
159,500 | 180,000 | 184,490 | | 523,990 | |||||||||||||||
Amortization of lease rights and other assets |
| 54 | 2,005 | | 2,059 | |||||||||||||||
Amortization of debt issuance costs |
10,567 | | | | 10,567 | |||||||||||||||
Payment of in kind interest expense |
24,522 | | | | 24,522 | |||||||||||||||
Net accretion of favorable (unfavorable) lease
obligations |
| (2,424 | ) | 568 | | (1,856 | ) | |||||||||||||
Gain on sale/retirement of property and equipment, net |
(23 | ) | (55 | ) | (105 | ) | | (183 | ) | |||||||||||
Gain on sale of intangible assets/lease rights |
| | (1,372 | ) | | (1,372 | ) | |||||||||||||
Stock compensation expense |
6,203 | | 2,023 | | 8,226 | |||||||||||||||
(Increase) decrease in: |
||||||||||||||||||||
Inventories |
| 11,506 | (5,024 | ) | | 6,482 | ||||||||||||||
Prepaid expenses |
(31 | ) | 624 | (1,680 | ) | | (1,087 | ) | ||||||||||||
Other assets |
(358 | ) | (822 | ) | (7,905 | ) | | (9,085 | ) | |||||||||||
Increase (decrease) in: |
||||||||||||||||||||
Trade accounts payable |
1,582 | 3,225 | 2,565 | | 7,372 | |||||||||||||||
Income taxes payable |
8,383 | (16,239 | ) | (2,854 | ) | | (10,710 | ) | ||||||||||||
Accrued interest payable |
(6,222 | ) | | 3 | | (6,219 | ) | |||||||||||||
Accrued expenses and other current liabilities |
4,507 | (3,271 | ) | 1,796 | | 3,032 | ||||||||||||||
Deferred income taxes |
| 716 | (5,525 | ) | | (4,809 | ) | |||||||||||||
Deferred rent expense |
(558 | ) | 7,182 | 2,319 | | 8,943 | ||||||||||||||
Net cash provided by (used in) operating activities |
(145,690 | ) | 84,845 | 62,218 | | 1,373 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Acquisition of property and equipment, net |
(248 | ) | (41,013 | ) | (18,144 | ) | | (59,405 | ) | |||||||||||
Proceeds from sale of property and equipment |
104 | | | | 104 | |||||||||||||||
Acquisition of intangible assets/lease rights |
| (177 | ) | (1,794 | ) | | (1,971 | ) | ||||||||||||
Proceeds from sale of intangible assets/lease rights |
| | 516 | | 516 | |||||||||||||||
Net cash used in investing activities |
(144 | ) | (41,190 | ) | (19,422 | ) | | (60,756 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Proceeds from Credit facility |
194,000 | | | | 194,000 | |||||||||||||||
Payments of Credit facility |
(14,500 | ) | | | | (14,500 | ) | |||||||||||||
Intercompany activity, net |
94,913 | (45,557 | ) | (49,356 | ) | | | |||||||||||||
Net cash provided by (used in) financing activities |
274,413 | (45,557 | ) | (49,356 | ) | | 179,500 | |||||||||||||
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
| 221 | (1,738 | ) | | (1,517 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents |
128,579 | (1,681 | ) | (8,298 | ) | | 118,600 | |||||||||||||
Cash and cash equivalents at beginning of period |
25,835 | 1,892 | 58,247 | | 85,974 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 154,414 | $ | 211 | $ | 49,949 | $ | | $ | 204,574 | ||||||||||
89
Table of Contents
16. SUBSEQUENT EVENTS
On March 4, 2011, the Company issued $450.0 million aggregate principal amount of 8.875% senior
secured second lien notes that mature on March 15, 2019 (the Senior Secured Second Lien Notes).
Interest on the Senior Secured Second Lien Notes is payable semi-annually to holders of record at
the close of business on March 1 or September 1 immediately preceding the interest payment date on
March 15 and September 15 of each year, commencing on September 15, 2011. The Senior Secured
Second Lien Notes are guaranteed on a second-priority senior secured basis by all of the Companys
existing and future direct or indirect wholly-owned domestic subsidiaries that guarantee the
Companys senior secured credit facility. The Senior Secured Second Lien Notes and related
guarantees are secured by a second-priority lien on substantially all of the assets that secure the
Companys and its subsidiary guarantors obligations under the Companys senior secured credit
facility. The Company used the net proceeds of the offering of the Senior Secured Second Lien
Notes to reduce the entire $194.0 million outstanding under the Revolver (without terminating the
commitment) and $241.0 million indebtedness under the Companys senior secured term loan.
The initial purchasers of the Senior Secured Second Lien Notes were Credit Suisse Securities (USA)
LLC, J.P. Morgan Securities LLC, Goldman Sachs & Co., and Morgan Joseph TriArtisan LLC. Apollo
Management, LLC, an affiliate of Apollo Management VI, L.P., has a non-controlling interest in
Morgan Joseph TriArtisan LLC and its affiliates. Additionally, a member of the Companys Board of
Directors is an executive of Morgan Joseph TriArtisan Inc., an affiliate of Morgan Joseph
TriArtisan LLC. In connection with the issuance of the Senior Secured Second Lien Notes, the
Company paid a fee of approximately $0.3 million to Morgan Joseph TriArtisan LLC.
On March 9, 2011, the Company was notified by Canada Revenue Agency that it will proceed with a
withholding tax assessment for 2003 through 2007 of approximately $5.0 million, including penalties
and interest. In conjunction with this assessment, a security deposit will be required in the
amount of approximately $5.0 million until such time a final decision is made by the tax authority.
The Company is objecting to this assessment and believes it will prevail at the appeals level;
therefore, an accrual has not been recorded for this item. On February 11, 2011, the Internal
Revenue Service concluded its tax examination of our U.S. Federal income tax return for Fiscal 2007
and did not assess any additional tax liability.
90
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Companys management, including its Chief Executive Officer and its Chief Financial Officer,
performed an evaluation of the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act ) as of January 29, 2011.
Disclosure controls and procedures are designed to provide reasonable assurance that the
information required to be disclosed by the Company in the reports that it files or submits under
the Exchange Act has been appropriately recorded, processed, summarized, and reported on a timely
basis and are effective in ensuring that such information is accumulated and communicated to the
Companys management, including the Companys Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
Based upon that evaluation, the Companys management, including the Chief Executive Officer and the
Chief Financial Officer, concluded that the Companys disclosure controls and procedures were
effective as of January 29, 2011.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f), and 15d 15(f) under the
Exchange Act. Under the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal controls over financial reporting based on the framework in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control Integrated
Framework, our management concluded that our internal control over financial reporting was
effective as of January 29, 2011.
This Annual Report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. The Companys internal
control over financial reporting was not subject to attestation by the Companys registered public
accounting firm pursuant to rules of the Securities and Exchange Commission that permits the
Company, as a non-accelerated filer, to provide only managements report in this Annual Report.
Changes in Internal Controls over Financial Reporting
There were no changes in the Companys internal control over financial reporting during our last
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information
None.
PART III.
An amendment to this Annual Report on Form 10-K to include Part III of the Form 10-K will be filed
with the Securities and Exchange Commission no later than 120 days after the end of Fiscal 2010.
91
Table of Contents
PART IV.
Item 15. Exhibits, Financial Statement Schedules
(a) List of documents filed as part of this report.
1. | Financial Statements | Page No. | ||
Report of Independent Registered Public Accounting Firm
|
46 | |||
Consolidated Balance Sheets as of January 29, 2011 and January 30, 2010
|
47 | |||
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the fiscal years ended January 29, 2011, January
30, 2010 and January 31, 2009
|
48 | |||
Consolidated Statements of Changes in Stockholders Equity
(Deficit) for the fiscal years ending January 29, 2011,
January 30, 2010 and January 31, 2009
|
49 | |||
Consolidated Statements of Cash Flows for the fiscal years
ending January 29, 2011, January 30, 2010 and January 31,
2009
|
50 | |||
Notes to Consolidated Financial Statements
|
51 |
2. | Financial Statement Schedules |
All schedules have been omitted because the required information is included in the Consolidated
Financial Statements or the notes thereto, or the omitted schedules are not applicable.
3. | Exhibits |
3.1
|
Articles of Incorporation of Claires Stores, Inc.(1) | |
3.2
|
By-laws of Claires Stores, Inc. (1) | |
3.3
|
Certificate of Incorporation of BMS Distributing Corp. (1) | |
3.4
|
By-laws of BMS Distributing Corp. (1) | |
3.5
|
Certificate of Incorporation of CBI Distributing Corp. (1) | |
3.6
|
By-laws of CBI Distributing Corp. (1) | |
3.7
|
Articles of Incorporation of Claires Boutiques, Inc. (1) | |
3.8
|
By-laws of Claires Boutiques, Inc. (1) | |
3.9
|
Certificate of Incorporation of Claires Canada Corp. (1) | |
3.10
|
By-laws of Claires Canada Corp. (1) | |
3.11
|
Certificate of Incorporation of Claires Puerto Rico Corp. (1) | |
3.12
|
By-laws of Claires Puerto Rico Corp. (1) | |
4.1
|
Senior Notes Indenture, dated as of May 29, 2007, between Bauble Acquisition Sub, Inc. and The Bank of New York, as Trustee (1) |
92
Table of Contents
4.2
|
Senior Toggle Notes Indenture, dated as of May 29, 2007, between Bauble Acquisition Sub, Inc. and The Bank of New York, as Trustee (1) | |
4.3
|
Senior Subordinated Notes Indenture, dated as of May 29, 2007, between Bauble Acquisition Sub, Inc. and The Bank of New York, as Trustee (1) | |
4.4
|
Senior Notes Supplemental Indenture, dated as of May 29, 2007, by and among Claires Stores, Inc., the guarantors listed on Exhibit A thereto and The Bank of New York, as Trustee, to the Senior Notes Indenture, dated as of May 29, 2007, between Bauble Acquisition Sub, Inc. and The Bank of New York, as Trustee (1) | |
4.5
|
Senior Toggle Notes Supplemental Indenture, dated as of May 29, 2007, by and among Claires Stores, Inc., the guarantors listed on Exhibit A thereto and The Bank of New York, as Trustee, to the Senior Toggle Notes Indenture, dated as of May 29, 2007, between Bauble Acquisition Sub, Inc. and The Bank of New York, as Trustee (1) | |
4.6
|
Senior Subordinated Notes Supplemental Indenture, dated as of May 29, 2007, by and among Claires Stores, Inc., the guarantors listed on Exhibit A thereto and The Bank of New York, as Trustee, to the Senior Subordinated Notes Indenture, dated as of May 29, 2007, between Bauble Acquisition Sub, Inc. and The Bank of New York, as Trustee (1) | |
4.7
|
Form of 9.25% Senior Notes due 2015 (1) | |
4.8
|
Form of 9.625%/10.375% Senior Toggle Notes due 2015 (1) | |
4.9
|
Form of 10.50% Senior Subordinated Notes due 2017 (1) | |
4.10
|
Indenture, dated as of March 4, 2011, by and between Claires Escrow Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee and Collateral Agent (8) | |
4.11
|
Supplemental Indenture, dated as of March 4, 2011, by and between Claires Stores, Inc., the Guarantors and The Bank of New York Mellon Trust Company, N.A., as Trustee and Collateral Agent (8) | |
4.12
|
Form of 8.875% Senior Secured Second Lien Notes due 2019 (included in the Indenture filed as Exhibit 4.10 hereto) (8) | |
4.13
|
Registration Rights Agreement, dated as of March 4, 2011, by and between Claires Stores, Inc., Claires Escrow Corporation, the Guarantors and the Representatives (8) | |
10.1
|
Credit Agreement, dated as of May 29, 2007, among Bauble Holdings Corp., Bauble Acquisition Sub, Inc. (to be merged with and into Claires Stores, Inc.), as Borrower, the Lenders party thereto, Credit Suisse, as Administrative Agent, Bear Stearns Corporate Lending Inc. and Mizuho Corporate Bank, Ltd., as Co-Syndication Agents, Lehman Commercial Paper Inc. and LaSalle Bank National Association, as Co-Documentation Agents, and Bear, Stearns & Co. Inc., Credit Suisse Securities (USA) LLC, and Lehman Brothers Inc., as Joint Bookrunners and Joint Lead Arrangers (1) | |
10.2
|
Management Services Agreement, dated as of May 29, 2007, among Claires Stores, Inc., Bauble Holdings Corp. and Apollo Management VI, L.P. and Tri-Artisan Capital Partners, LLC and TACP Investments Claires LLC (1) | |
10.3
|
Claires Inc. Amended and Restated Stock Incentive Plan, dated June 29, 2007 (1) |
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10.4
|
1st Amendment to Claires Inc. Amended and Restated Stock Incentive Plan (2) | |
10.5
|
Standard Form of Option Grant Letter (Target Performance Option and Stretch Performance Option) (1) | |
10.6
|
Standard Form of Option Grant Letter (Target Performance Option) (1) | |
10.7
|
Standard Form of Director Option Grant Letter (1) | |
10.8
|
Standard Form of Co-Investment Letter (9) | |
10.9
|
Employment Agreement with Eugene S. Kahn (1) | |
10.10
|
Employment Agreement with James Conroy (1) | |
10.11
|
Amendment to Employment Agreement with James Conroy (3) | |
10.12
|
2nd Amendment to Employment Agreement with James Conroy (7) | |
10.13
|
Employment Agreement with Kenny Wilson (4) | |
10.14
|
Lease Agreement, dated as of February 19, 2010, by and between AGNL Bling, L.L.C. and Claires Boutiques, Inc. (6) | |
10.15
|
Guarantee and Collateral Agreement, dated and effective as of May 29, 2007, among Bauble Holdings Corp., Bauble Acquisition Sub, Inc., and Credit Suisse, dated as of May 29, 2007 (5) | |
10.16
|
Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of May 29, 2007 (5) | |
10.17
|
Employment Agreement with Jay Friedman (9) | |
10.18
|
Collateral Agreement, dated March 4, 2011, by and among Claires Stores, Inc., Claires Inc., the Guarantors and The Bank of New York Mellon Trust Company, N.A, as Collateral Agent (8) | |
10.19
|
Intercreditor Agreement, dated as of March 4, 2011, by and among Claires Stores, Inc., Claires Inc., the Guarantors, The Bank of New York Mellon Trust Company, N.A., as Trustee and Collateral Agent and Credit Suisse AG, Cayman Islands Branch (f/k/a Credit Suisse, Cayman Island Branch), as Credit Agreement Agent (8) | |
10.20
|
Second Lien Trademark Security Agreement, dated as of March 4, 2011, by and between CBI Distributing Corp. and The Bank of New York Mellon Trust Company, N.A., as Collateral Agent (8) | |
21.1
|
Subsidiaries of Claires Stores, Inc. (9) | |
24
|
Power of Attorney (included on signature page) | |
31.1
|
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) (10) | |
31.2
|
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) (10) | |
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 (10) |
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Table of Contents
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 (10) |
(1) | Filed previously as exhibit to the Registration Statement on Form S-4 (File No. 333-148108) by the Company on December 17, 2007. | |
(2) | Filed previously as exhibit to Form 8-K by the Company on September 12, 2008. | |
(3) | Filed previously as exhibit to Form 8-K by the Company on April 22, 2009. | |
(4) | Filed previously as exhibit to Form 10-K/A by the Company on May 27, 2009. | |
(5) | Filed previously as exhibit to Form 10-Q on December 8, 2009. | |
(6) | Filed previously as exhibit to Form 8-K on February 25, 2010. | |
(7) | Filed previously as exhibit to Form 10 K/A on June 1, 2010. | |
(8) | Filed previously as exhibit to Form 8-K by the Company on March 9, 2011. | |
(9) | Filed herewith. | |
(10) | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CLAIRES STORES, INC. |
||||
April 21, 2011 | By: | /s/ Eugene S. Kahn | ||
Eugene S. Kahn, Chief Executive Officer | ||||
(principal executive officer) | ||||
April 21, 2011 | By: | /s/ J. Per Brodin | ||
J. Per Brodin, Executive Vice President and Chief | ||||
Financial Officer (principal financial and accounting officer) | ||||
POWER OF ATTORNEY
We, the undersigned, hereby constitute J. Per Brodin and Greg Hackman, or either of them, our
true and lawful attorneys-in-fact with full power to sign for us in our name and in the capacity
indicated below any and all amendments and supplements to this report, and to file the same, with
exhibits thereto, and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or their substitutes,
each acting alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
April 21, 2011
|
/s/ Peter Copses | |
Peter Copses, Chairman of the Board of Directors | ||
April 21, 2011
|
/s/ Eugene S. Kahn | |
Eugene S. Kahn, Chief Executive Officer and Director | ||
April 21, 2011
|
/s/ Lance Milken | |
Lance Milken, Director | ||
April 21, 2011
|
/s/ George Golleher | |
George Golleher, Director | ||
April 21, 2011
|
/s/ Robert J. DiNicola | |
Robert J. DiNicola, Director | ||
April 21, 2011
|
/s/ Rohit Manocha | |
Rohit Manocha, Director | ||
April 21, 2011
|
/s/ Ron Marshall | |
Ron Marshall, Director |
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INDEX TO EXHIBITS
EXHIBIT NO. | DESCRIPTION | |
10.17
|
Employment Agreement with Jay Friedman | |
21.1
|
Claires Stores, Inc. Subsidiaries. | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a). | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a). | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
97