Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended May 4, 2013

OR

 

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

For the transition period from                      to                     

Commission File Nos. 1-8899, 333-148108 and 333-175171

 

 

Claire’s Stores, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   59-0940416

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2400 West Central Road,

Hoffman Estates, Illinois

  60192
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (847) 765-1100

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Explanatory Note: While registrant is not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act, it has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months.

Indicate by check mark whether registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files )    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of May 1, 2013, 100 shares of the Registrant’s common stock, $0.001 par value, were outstanding.

 

 

 


Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

INDEX

 

     PAGE NO.  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

     3   

Unaudited Condensed Consolidated Balance Sheets as of May 4, 2013 and February 2, 2013

     3   

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended May 4, 2013 and April 28, 2012

     4   

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended May  4, 2013 and April 28, 2012

     5   

Notes to Unaudited Condensed Consolidated Financial Statements

     6   

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

     20   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     29   

Item 4. Controls and Procedures Controls and Procedures

     31   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     32   

Item 1A. Risk Factors

     32   

Item 6. Exhibits

     32   

SIGNATURE PAGE

     33   

Ex-31.1 Section 302 Certification of CEO

  

Ex-31.2 Section 302 Certification of CFO

  

Ex-32.1 Section 906 Certification of CEO

  

Ex-32.2 Section 906 Certification of CFO

  

 

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PART I. FINANCIAL INFORMATION

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     May 4, 2013     February 2, 2013  
     (In thousands, except share and per share amounts)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 242,812      $ 166,956   

Inventories

     159,045        157,549   

Prepaid expenses

     21,221        19,701   

Other current assets

     29,050        29,621   
  

 

 

   

 

 

 

Total current assets

     452,128        373,827   
  

 

 

   

 

 

 

Property and equipment:

    

Furniture, fixtures and equipment

     239,927        234,209   

Leasehold improvements

     317,140        312,789   
  

 

 

   

 

 

 
     557,067        546,998   

Less accumulated depreciation and amortization

     (334,315     (325,618
  

 

 

   

 

 

 
     222,752        221,380   
  

 

 

   

 

 

 

Leased property under capital lease:

    

Land and building

     18,055        18,055   

Less accumulated depreciation and amortization

     (2,934     (2,708
  

 

 

   

 

 

 
     15,121        15,347   
  

 

 

   

 

 

 

Goodwill

     1,550,056        1,550,056   

Intangible assets, net of accumulated amortization of $59,301 and $57,672, respectively

     543,055        547,433   

Deferred financing costs, net of accumulated amortization of $29,748 and $27,156, respectively

     42,776        41,381   

Other assets

     48,819        49,848   
  

 

 

   

 

 

 
     2,184,706        2,188,718   
  

 

 

   

 

 

 

Total assets

   $ 2,874,707      $ 2,799,272   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities:

    

Trade accounts payable

   $ 64,039      $ 73,445   

Income taxes payable

     6,917        10,508   

Accrued interest payable

     51,918        68,254   

Accrued expenses and other current liabilities

     92,121        99,529   
  

 

 

   

 

 

 

Total current liabilities

     214,995        251,736   
  

 

 

   

 

 

 

Long-term debt

     2,522,318        2,373,366   

Obligation under capital lease

     17,207        17,232   

Deferred tax liability

     120,534        120,968   

Deferred rent expense

     29,651        29,859   

Unfavorable lease obligations and other long-term liabilities

     17,859        20,551   
  

 

 

   

 

 

 
     2,707,569        2,561,976   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholder’s deficit:

    

Common stock par value $0.001 per share; authorized 1,000 shares; issued and outstanding 100 shares

     —          —     

Additional paid-in capital

     618,796        618,403   

Accumulated other comprehensive (loss) income, net of tax

     (3,953     3,273   

Accumulated deficit

     (662,700     (636,116
  

 

 

   

 

 

 
     (47,857     (14,440
  

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

   $ 2,874,707      $ 2,799,272   
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(in thousands)

 

     Three Months
Ended

May 4, 2013
    Three Months
Ended

April  28, 2012
 

Net sales

   $ 354,006      $ 340,617   

Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)

     178,566        174,003   
  

 

 

   

 

 

 

Gross profit

     175,440        166,614   
  

 

 

   

 

 

 

Other expenses:

    

Selling, general and administrative

     125,387        118,582   

Depreciation and amortization

     15,625        16,715   

Severance and transaction-related costs

     915        53   

Other expense, net

     924        431   
  

 

 

   

 

 

 
     142,851        135,781   
  

 

 

   

 

 

 

Operating income

     32,589        30,833   

Loss on early debt extinguishment

     1,674        4,602   

Interest expense, net

     58,219        47,022   
  

 

 

   

 

 

 

Loss before income tax benefit

     (27,304     (20,791

Income tax benefit

     (720     (870
  

 

 

   

 

 

 

Net loss

   $ (26,584   $ (19,921
  

 

 

   

 

 

 

Net loss

   $ (26,584   $ (19,921

Other comprehensive income (loss), net of tax:

    

Foreign currency translation adjustments

     (1,775     500   

Net gain (loss) on intra-entity foreign currency transactions, net of tax (benefit) of $(299) and $276

     (5,451     1,752   

Unrealized gain on interest rate swap, net of tax of $0

     —          359   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (7,226     2,611   
  

 

 

   

 

 

 

Comprehensive loss

   $ (33,810   $ (17,310
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Three Months
Ended

May  4, 2013
    Three Months
Ended
April 28, 2012
 

Cash flows from operating activities:

    

Net loss

   $ (26,584   $ (19,921

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

    

Depreciation and amortization

     15,625        16,715   

Amortization of lease rights and other assets

     921        817   

Amortization of debt issuance costs

     2,099        3,106   

Accretion of debt premium

     (513     —     

Net unfavorable accretion of lease obligations

     (158     (90

Loss on sale/retirement of property and equipment, net

     20        23   

Loss on early debt extinguishment

     1,674        4,602   

Stock compensation expense

     393        71   

(Increase) decrease in:

    

Inventories

     (3,493     (7,501

Prepaid expenses

     (1,950     (1,352

Other assets

     (49     (2,977

Increase (decrease) in:

    

Trade accounts payable

     (7,536     10,266   

Income taxes payable

     (3,327     (2,048

Accrued interest payable

     (16,337     14,819   

Accrued expenses and other liabilities

     (6,215     (6,609

Deferred income taxes

     (2,557     (2,142

Deferred rent expense

     22        289   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (47,965     8,068   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisition of property and equipment

     (19,782     (13,944

Acquisition of intangible assets/lease rights

     (834     (11
  

 

 

   

 

 

 

Net cash used in investing activities

     (20,616     (13,955
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payments on credit facility

     —          (489,750

Proceeds from notes

     210,000        501,500   

Repurchases of notes, including tender premiums and fees

     (61,715     —     

Payment of debt issuance costs

     (3,987     (10,970

Principal payments on capital lease

     (12     —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     144,286        780   
  

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash and cash equivalents

     151        437   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     75,856        (4,670

Cash and cash equivalents, at beginning of period

     166,956        170,024   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     242,812        165,354   

Restricted cash, at end of period

     —          4,350   
  

 

 

   

 

 

 

Cash and cash equivalents and restricted cash, at end of period

   $ 242,812      $ 169,704   
  

 

 

   

 

 

 
Supplemental disclosure of cash flow information:     

Interest paid

   $ 72,997      $ 29,062   

Income taxes paid

     4,819        3,601   

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.   Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results for the interim periods presented have been included. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended February 2, 2013 filed with the Securities and Exchange Commission, including Note 2 to the Consolidated Financial Statements included therein which discusses principles of consolidation and summary of significant accounting policies.

The Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make certain estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures regarding contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include, but are not limited to, the value of inventories, goodwill, intangible assets and other long-lived assets, legal contingencies and assumptions used in the calculation of income taxes, stock-based compensation, derivative and hedging activities, residual values and other items. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, energy markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates will be reflected in the financial statements in those future periods when the changes occur.

Due to the seasonal nature of the retail industry and the Company’s business, the results of operations for interim periods of the year are not necessarily indicative of the results of operations on an annualized basis.

 

2.   Recent Accounting Pronouncements

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (“GAAP”) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period. The amendments are effective prospectively for interim and annual periods beginning after December 15, 2012. The Company adopted this guidance in the first quarter of fiscal 2013 and it did not have any impact on the Company’s financial position, results of operations or cash flows.

In July 2012, the FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying

 

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amount. If an entity can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity is not required to take further action. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted. The Company adopted this guidance in the first quarter of fiscal 2013 and it did not have any impact on the Company’s financial position, results of operations or cash flows.

 

3.   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 Unaudited Condensed Consolidated Balance Sheets. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. There is a three-level valuation hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company does not have any assets (liabilities) measured at fair value on a recurring basis. The Company’s former interest rate swap, which was previously measured at fair value on a recurring basis, was terminated on September 20, 2012.

Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

The Company’s 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.

Financial Instruments Not Measured at Fair Value

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, current liabilities and long-term debt. Cash and cash equivalents, accounts receivable and current liabilities approximate fair market value due to the relatively short maturity of these financial instruments.

The Company considers all investments with a maturity of three months or less when acquired to be cash equivalents. The Company’s cash equivalent instruments are valued using quoted market prices and are primarily U.S. Treasury securities. The estimated fair value of the Company’s long-term debt was approximately $2.74 billion as of May 4, 2013, compared to a carrying value of $2.52 billion at that date. The estimated fair value of the Company’s long-term debt was approximately $2.41 billion as of February 2, 2013, compared to a carrying value of $2.37 billion at that date. For publicly-traded debt, the fair value (estimated market value) is based on quoted market prices in less active markets. For non-publicly-traded debt, fair value is estimated based on quoted prices for similar instruments. If measured at fair value in the financial statements, long-term debt would be classified as Level 2 in the fair value hierarchy.

 

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4.   Debt

Debt as of May 4, 2013 and February 2, 2013 included the following components (in thousands):

 

     May 4, 2013      February 2, 2013  

Long-term debt:

     

Senior fixed rate notes due 2015

   $ 181,259       $ 220,270   

Senior toggle notes due 2015

     280,667         302,190   

Senior subordinated notes due 2017

     259,612         259,612   

Senior secured first lien notes due 2019 (1)

     1,140,780         1,141,294   

Senior secured second lien notes due 2019

     450,000         450,000   

Senior secured first lien notes due 2020

     210,000         —     
  

 

 

    

 

 

 

Long-term debt

   $ 2,522,318       $ 2,373,366   
  

 

 

    

 

 

 

Obligation under capital lease (including current portion)

   $ 17,274       $ 17,286   
  

 

 

    

 

 

 

 

(1) Amounts include unamortized premium of $15,780 and $16,294 as of May 4, 2013 and February 2, 2013, respectively.

6.125 % Senior Secured First Lien Notes

On March 15, 2013, the Company issued $210.0 million aggregate principal amount of 6.125% senior secured first lien notes that mature on March 15, 2020 (the “6.125% Senior Secured First Lien Notes”). The notes were issued at a price equal to 100.00% of the principal amount. Interest on the Senior Secured First 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, 2013. The 6.125% Senior Secured First Lien Notes are guaranteed on a first-priority senior secured basis by all of the Company’s existing and future direct or indirect wholly-owned domestic subsidiaries. The 6.125% Senior Secured First Lien Notes and related guarantees are secured, subject to certain exceptions and permitted liens, by a first-priority lien on substantially all of the assets of the Company’s material owned assets and the material owned assets of subsidiary guarantors, limited in the case of equity interests held by the Company or any subsidiary guarantor in a foreign subsidiary, to 100% of the non-voting equity interest and 65% of the voting equity interest of such foreign subsidiary held directly by the Company or a subsidiary guarantor. The Company used the proceeds of the offering of the 6.125% Senior Secured First Lien Notes for note repurchases of $59.8 million to retire $39.0 million aggregate principal amount of 9.25% Senior Fixed Rate Notes due 2015 (the “Senior Fixed Rate Notes”) and $21.5 million aggregate principal amount of 9.625%/10.375% Senior Toggle Notes due 2015 (the “Senior Toggle Notes”), to pay $1.9 million in tender premiums and fees, and to pay $4.0 million in financing costs which have been recorded as Deferred Financing Costs, Net in the accompanying Unaudited Condensed Consolidated Balance Sheets. The Company intends to use the remaining net proceeds, together with cash on hand, to redeem an additional $149.5 million aggregate principal amount of Senior Fixed Rate Notes on June 3, 2013 pursuant to a redemption notice delivered to noteholders on May 3, 2013.

Note Repurchases

The following is a summary of the Company’s debt repurchase activity for the three months ended May 4, 2013 (in thousands). There was no debt repurchase activity for the three months ended April 28, 2012.

 

     Three Months Ended May 4, 2013  

Notes Repurchased

   Principal
Amount
     Repurchase
Price
     Recognized
Loss (1)
 

Senior Fixed Rate Notes

   $ 39,011       $ 38,543       $ 1,103   

Senior Toggle Notes

     21,523         21,281         571   
  

 

 

    

 

 

    

 

 

 
   $ 60,534       $ 59,824       $ 1,674   
  

 

 

    

 

 

    

 

 

 

 

(1) Net of deferred issuance cost write-offs of $353 for the Senior Fixed Rate Notes and $140 for the Senior Toggle Notes and tender premiums and fees of $1,218 for Senior Fixed Rate Notes and $673 for Senior Toggle Notes.

 

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Covenants

Our Senior Fixed Rate Notes, Senior Toggle Notes, 10.5% Senior Subordinated Notes due 2017 (the “Senior Subordinated Notes”), 8.875% Senior Secured Second Lien Notes due 2019 (the “Senior Secured Second Lien Notes”), 9% Senior Secured First Lien Notes due 2019 (the “9% Senior Secured First Lien Notes”), and 6.125% Senior Secured First Lien Notes (collectively, the “Notes”) and our Senior Secured Revolving Credit Facility (the “Credit Facility”) 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.

The 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 except that so long as the revolving loans and letters of credit outstanding exceed $15 million, the Company will be required to comply with a maximum Total Net Secured Leverage Ratio of 5.5 to 1.0 based upon the ratio of its net senior secured first lien debt to adjusted earnings before interest, taxes, depreciation and amortization for the period of four consecutive fiscal quarters most recently ended.

Certain of these covenants, such as limitations on the Company’s 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 Moody’s Investor Services, Inc. (“Moody’s”) and Standard & Poor’s Ratings Group (“S&P”) and no event of default has occurred. Since the date of issuance of the Notes, the Notes have not received investment grade ratings from Moody’s or S&P. Accordingly, all of the covenants under the Notes currently apply to the Company. None of these covenants, however, require the Company to maintain any particular financial ratio or other measure of financial performance except as previously disclosed herein for the Credit Facility.

See Note 3 – Fair Value Measurements for related fair value disclosure on debt, and Note 13- Subsequent Event for information on the refinancing of the Senior Fixed Rate Notes and Senior Toggle Notes.

 

5.   Derivatives and Hedging Activities

The Company does not have any derivative and hedging activity since September 20, 2012 when the Company terminated its former interest rate swap. During the periods when the Company had the interest rate swap, it followed the accounting treatment described below.

The Company formally designated and documented 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 assessed both at inception and at least quarterly thereafter, whether the financial instruments that were used in hedging transactions were effective at offsetting changes in

 

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cash flows of the related underlying exposure. The Company measured 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 employed 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 did not enter into derivative financial instruments for trading or speculative purposes. The Company faced credit risk if the counterparties to the financial instruments were unable to perform their obligations. However, the Company sought to mitigate derivative credit risk by entering into transactions with counterparties that were significant and creditworthy financial institutions. The Company monitored the credit ratings of the counterparties.

For derivatives that qualify as cash flow hedges, the Company reported the effective portion of the change in fair value as a component of “Accumulated other comprehensive income (loss), net of tax” in the Unaudited Condensed Consolidated Balance Sheets and reclassified it into earnings in the same periods in which the hedged item affected 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 was recognized in income immediately. No ineffective portion was recorded to earnings during the three months ended April 28, 2012 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 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 Loss at that time.

The following tables provide a summary of the financial statement effect of the Company’s derivative financial instrument designated as an interest rate cash flow hedge during the three months ended April 28, 2012 (in thousands):

 

Derivatives in Cash

Flow Hedging

Relationships

   Amount of Gain or
(Loss) Recognized in
OCI on Derivative
(Effective Portion)
     Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)
   Amount of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
(1)
 
     Three months ended           Three months ended  
     April 28, 2012           April 28, 2012  

Interest rate swap

   $ 359       Interest expense, net    $ (341

 

(1) Represents reclassification of amounts from accumulated other comprehensive income (loss) into earnings as interest expense is recognized on the former term loan. No ineffectiveness is associated with the interest rate cash flow hedge.

 

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6.   Commitments and Contingencies

The Company is, from time to time, involved in litigation incidental to the conduct of its business, including personal injury litigation, litigation regarding merchandise sold, including product and safety concerns regarding 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 regarding 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.

 

7.   Accumulated Other Comprehensive Income (Loss)

The following summary sets forth the components of accumulated other comprehensive income (loss), net of tax as follows: (in thousands, net of tax)

 

     Foreign
Currency
Items
    Derivative
Instrument
     Total  

Balance as of February 2, 2013

   $ (2,459   $ 5,732       $ 3,273   

Other comprehensive loss before reclassifications

     (7,226     —           (7,226

Amounts reclassified from accumulated other comprehensive income (loss)

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Net other comprehensive loss

     (7,226     —           (7,226
  

 

 

   

 

 

    

 

 

 

Balance as of May 4, 2013

   $ (9,685   $ 5,732       $ (3,953
  

 

 

   

 

 

    

 

 

 

 

8.   Stock Options and Stock-Based Compensation

The following is a summary of activity in the Company’s stock option plan for the three months ended May 4, 2013:

 

                  Weighted-  
           Weighted-      Average  
           Average      Remaining  
     Number of     Exercise      Contractual  
     Shares     Price      Term (Years)  

Outstanding as of February 2, 2013

     5,027,665      $ 10.00      

Options granted

     438,750      $ 10.00      

Options exercised

     —          

Options forfeited

     (60,125   $ 10.00      

Options expired

     (121,600   $ 10.00      
  

 

 

      

Outstanding as of May 4, 2013

     5,284,690      $ 10.00         4.9   
  

 

 

      

Options vested and expected to vest as of May 4, 2013

     4,742,119      $ 10.00         4.7   
  

 

 

      

Exercisable as of May 4, 2013

     1,713,881      $ 10.00         2.2   
  

 

 

      

The weighted average grant date fair value of options granted during the three months ended May 4, 2013 and April 28, 2012 was $3.09 and $2.44, respectively.

During the three months ended May 4, 2013 and April 28, 2012, the Company recorded stock-based compensation expense and additional paid-in capital relating to stock-based compensation of approximately $0.4 million and $0.1 million, respectively. Stock-based compensation expense is recorded in “Selling, general and administrative” expenses in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

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9.   Income Taxes

The effective income tax rate was 2.6% for the three months ended May 4, 2013. This effective income tax rate differed from the statutory federal income tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses in the three months ended May 4, 2013 by the Company’s U.S. operations.

The effective income tax rate was 4.2% for the three months ended April 28, 2012. This effective income tax rate differed from the statutory federal income tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses in the three months ended April 28, 2012 by the Company’s U.S. operations.

In April 2011, the Company received from the Canada Revenue Agency withholding tax assessments for 2003 through 2007 of approximately $5.5 million, including penalties and interest. In conjunction with these assessments, a security deposit will be required in the amount of approximately $5.5 million until such time a final decision is made by the tax authority. The Company is objecting to these assessments and believes it will prevail at the appeals level; therefore, an accrual has not been recorded for this item.

 

10.   Related Party Transactions

We are controlled by investment funds affiliated with, and co-investment vehicles managed by, Apollo Management VI, L.P. (the “Apollo Funds”). The Apollo Funds are affiliates of Apollo Global Management, LLC (together with its subsidiaries, “Apollo”). The initial purchasers of the 6.125% Senior Secured First Lien Notes on March 15, 2013 included Apollo Global Securities, LLC. Apollo Global Securities, LLC is an affiliate of the Apollo Funds. In connection with the issuance of the 6.125% Senior Secured First Lien Notes, the Company paid a fee of approximately $0.2 million to Apollo Global Securities, LLC.

The initial purchasers of the 9.0% Senior Secured First Lien Notes on February 28, 2012 included Apollo Global Securities, LLC 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 Company’s 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 9.0% Senior Secured First Lien Notes, the Company paid fees of approximately $0.7 million to Apollo Global Securities, LLC and $0.1 million to Morgan Joseph TriArtisan LLC.

The Company paid store planning and retail design fees to a business owned by a family member of one of the Company’s former executive officers. These fees are included in “Furniture, fixtures and equipment” in the Company’s Unaudited Condensed Consolidated Balance Sheets and “Selling, general and administrative” expenses in the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. For the three months ended April 28, 2012, the Company paid fees of approximately $0.6 million. This former arrangement was approved by the Audit Committee of the Board of Directors.

 

11.   Segment Information

The Company is organized based on the geographic markets in which it operates. Under this structure, the Company currently has two reportable segments: North America and Europe. The Company accounts 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 Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss within its North America segment. The franchise fees the Company charges under the franchising agreements are reported in “Other expense (income), net” in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss within its Europe segment. Substantially all of the interest expense on the Company’s outstanding debt is recorded in the Company’s North America segment.

 

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Table of Contents

Net sales, depreciation and amortization and operating income (loss) for the three months ended May 4, 2013 and April 28, 2012 are as follows (in thousands):

 

     Three Months     Three Months  
     Ended     Ended  
     May 4, 2013     April 28, 2012  

Net sales:

    

North America

   $ 225,957      $ 221,575   

Europe

     128,049        119,042   
  

 

 

   

 

 

 

Total net sales

     354,006        340,617   
  

 

 

   

 

 

 

Depreciation and amortization:

    

North America

     9,530        9,859   

Europe

     6,095        6,856   
  

 

 

   

 

 

 

Total depreciation and amortization

     15,625        16,715   
  

 

 

   

 

 

 

Operating income (loss) for reportable segments:

    

North America

     33,524        34,673   

Europe

     (20     (3,787
  

 

 

   

 

 

 

Total operating income for reportable segments

     33,504        30,886   

Severance and transaction-related costs

     915        53   
  

 

 

   

 

 

 

Consolidated operating income

     32,589        30,833   

Loss on early debt extinguishment

     1,674        4,602   

Interest expense, net

     58,219        47,022   
  

 

 

   

 

 

 

Consolidated loss before income tax benefit

   $ (27,304   $ (20,791
  

 

 

   

 

 

 

Excluded from operating income for the North America segment are severance and transaction-related costs of approximately $0.5 and $0 million for the three months ended May 4, 2013 and April 28, 2012, respectively.

Excluded from operating loss for the Europe segment are severance and transaction-related costs of approximately $0.4 million and $0.1 million for the three months ended May 4, 2013 and April 28, 2012, respectively.

 

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12.   Supplemental Financial Information

On May 29, 2007, Claire’s Stores, Inc. (the “Issuer”), issued $935.0 million in Senior Fixed Rate Notes, Senior Toggle Notes and Senior Subordinated Notes, (collectively, the “2007 Notes”). On March 4, 2011, the Issuer issued $450.0 million aggregate principal amount of Senior Secured Second Lien Notes, (collectively, the “2011 Notes”). On February 28, 2012, March 12, 2012 and September 20, 2012, the Issuer issued $400.0 million, $100.0 million and $625.0 million, respectively, aggregate principal amount of the same series of 9.0% Senior Secured First Lien Notes (collectively, the “2012 Notes”). On March 15, 2013, the Issuer issued $210.0 million aggregate principal amount of 6.125% Senior Secured First Lien Notes (the “2013 Notes”). The 2007 Notes and the 2011 Notes are irrevocably and unconditionally guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of Claire’s Stores, Inc. that guarantee the Company’s Credit Facility. The 2012 Notes and the 2013 Notes are unconditionally guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of Claire’s Stores, Inc. As of May 4, 2013, Claire’s Stores, Inc. owned 100% of its domestic subsidiaries that guarantee the 2007 Notes, 2011 Notes, 2012 Notes, and 2013 Notes. All guarantors are collectively referred to as the “Guarantors.” The Company’s other subsidiaries, principally its international subsidiaries including its European, Canadian and Asian subsidiaries (the “Non-Guarantors”), are not guarantors of these Notes.

The tables in the following pages present the condensed consolidating financial information for the Issuer, the Guarantors and the Non-Guarantors, together with eliminations, as of and for the periods indicated. The consolidating financial information may not necessarily be indicative of the financial position, results of operations or cash flows had the Issuer, Guarantors and Non-Guarantors operated as independent entities.

 

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Table of Contents

Condensed Consolidating Balance Sheet

May 4, 2013

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 176,849      $ 5,824      $ 60,139      $ —        $ 242,812   

Inventories

     —          85,756        73,289        —          159,045   

Prepaid expenses

     764        2,075        18,382        —          21,221   

Other current assets

     256        18,831        9,963        —          29,050   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     177,869        112,486        161,773        —          452,128   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     6,610        145,245        88,072        —          239,927   

Leasehold improvements

     1,196        169,810        146,134        —          317,140   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     7,806        315,055        234,206        —          557,067   

Less accumulated depreciation and amortization

     (4,002     (205,729     (124,584     —          (334,315
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,804        109,326        109,622        —          222,752   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —          18,055        —          —          18,055   

Less accumulated depreciation and amortization

     —          (2,934     —          —          (2,934
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          15,121        —          —          15,121   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —          272,878        —          (272,878     —     

Investment in subsidiaries

     2,228,012        (55,740     —          (2,172,272     —     

Goodwill

     —          1,235,650        314,406        —          1,550,056   

Intangible assets, net

     286,000        3,555        253,500        —          543,055   

Deferred financing costs, net

     42,776        —          —          —          42,776   

Other assets

     124        3,589        45,106        0        48,819   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,556,912        1,459,932        613,012        (2,445,150     2,184,706   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,738,585      $ 1,696,865      $ 884,407      $ (2,445,150   $ 2,874,707   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

(DEFICIT)

          

Current liabilities:

          

Trade accounts payable

   $ 1,113      $ 28,212      $ 34,714      $ —        $ 64,039   

Income taxes payable

     —          (38     6,955        —          6,917   

Accrued interest payable

     51,918        —          —          —          51,918   

Accrued expenses and other current liabilities

     11,039        36,295        44,787        —          92,121   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     64,070        64,469        86,456        —          214,995   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     200,054        —          72,824        (272,878     —     

Long-term debt

     2,522,318        —          —          —          2,522,318   

Obligation under capital lease

     —          17,207        —          —          17,207   

Deferred tax liability

     —          107,618        12,916        —          120,534   

Deferred rent expense

     —          18,676        10,975        —          29,651   

Unfavorable lease obligations and other long-term liabilities

     —          17,465        394        —          17,859   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,722,372        160,966        97,109        (272,878     2,707,569   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —          367        2        (369     —     

Additional paid in capital

     618,796        1,435,909        797,819        (2,233,728     618,796   

Accumulated other comprehensive income (loss), net of tax

     (3,953     3,504        (13,244     9,740        (3,953

Accumulated deficit

     (662,700     31,650        (83,735     52,085        (662,700
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (47,857     1,471,430        700,842        (2,172,272     (47,857
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 2,738,585      $ 1,696,865      $ 884,407      $ (2,445,150   $ 2,874,707   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Balance Sheet

February 2, 2013

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 56,392      $ 4,299      $ 106,265      $ —        $ 166,956   

Inventories

     36        88,127        69,386        —          157,549   

Prepaid expenses

     592        2,390        16,719        —          19,701   

Other current assets

     262        19,422        9,937        —          29,621   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     57,282        114,238        202,307        —          373,827   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     6,079        141,232        86,898        —          234,209   

Leasehold improvements

     1,177        165,075        146,537        —          312,789   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     7,256        306,307        233,435        —          546,998   

Less accumulated depreciation and amortization

     (3,686     (199,402     (122,530     —          (325,618
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,570        106,905        110,905        —          221,380   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —          18,055        —          —          18,055   

Less accumulated depreciation and amortization

     —          (2,708     —          —          (2,708
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          15,347        —          —          15,347   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —          252,709        —          (252,709     —     

Investment in subsidiaries

     2,205,303        (56,381     —          (2,148,922     —     

Goodwill

     —          1,235,650        314,406        —          1,550,056   

Intangible assets, net

     286,000        4,054        257,379        —          547,433   

Deferred financing costs, net

     41,381        —          —          —          41,381   

Other assets

     129        3,867        45,845        7        49,848   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,532,813        1,439,899        617,630        (2,401,624     2,188,718   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,593,665      $ 1,676,389      $ 930,842      $ (2,401,624   $ 2,799,272   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

(DEFICIT)

          

Current liabilities:

          

Trade accounts payable

   $ 993      $ 31,584      $ 40,868      $ —        $ 73,445   

Income taxes payable

     —          (12     10,520        —          10,508   

Accrued interest payable

     68,254        —          —          —          68,254   

Accrued expenses and other current liabilities

     11,420        39,274        48,835        —          99,529   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     80,667        70,846        100,223        —          251,736   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     154,072        —          98,631        (252,703     —     

Long-term debt

     2,373,366        —          —          —          2,373,366   

Obligation under capital lease

     —          17,232        —          —          17,232   

Deferred tax liability

     —          107,618        13,350        —          120,968   

Deferred rent expense

     —          18,481        11,378        —          29,859   

Unfavorable lease obligations and other long-term liabilities

     —          20,080        471        —          20,551   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,527,438        163,411        123,830        (252,703     2,561,976   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —          367        2        (369     —     

Additional paid in capital

     618,403        1,435,909        797,819        (2,233,728     618,403   

Accumulated other comprehensive income (loss), net of tax

     3,273        3,909        (6,731     2,822        3,273   

Accumulated deficit

     (636,116     1,947        (84,301     82,354        (636,116
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (14,440     1,442,132        706,789        (2,148,921     (14,440
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 2,593,665      $ 1,676,389      $ 930,842      $ (2,401,624   $ 2,799,272   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For The Three Months Ended May 4, 2013

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 208,361      $ 145,645      $ —        $ 354,006   

Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)

     42        101,196        77,328        —          178,566   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (42     107,165        68,317        —          175,440   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     4,527        63,470        57,390        —          125,387   

Depreciation and amortization

     316        8,297        7,012        —          15,625   

Severance and transaction-related costs

     528        —          387        —          915   

Other (income) expense

     (2,089     1,165        1,848        —          924   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,282        72,932        66,637        —          142,851   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (3,324     34,233        1,680        —          32,589   

Loss on early debt extinguishment

     1,674        —          —          —          1,674   

Interest expense, net

     57,687        548        (16     —          58,219   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (62,685     33,685        1,696        —          (27,304

Income tax expense (benefit)

     —          (1,848     1,128        —          (720
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (62,685     35,533        568        —          (26,584

Equity in earnings of subsidiaries

     36,101        333        —          (36,434     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (26,584     35,866        568        (36,434     (26,584

Foreign currency translation adjustments

     (1,775     (129     (996     1,125        (1,775

Net loss on intra-entity foreign currency transactions, net of tax

     (5,451     (276     (5,517     5,793        (5,451
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     (7,226     (405     (6,513     6,918        (7,226
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (33,810   $ 35,461      $ (5,945   $ (29,516   $ (33,810
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For The Three Months Ended April 28, 2012

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 205,890      $ 134,727      $ —        $ 340,617   

Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)

     1,291        97,703        75,009        —          174,003   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (1,291     108,187        59,718        —          166,614   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     4,387        60,875        53,320        —          118,582   

Depreciation and amortization

     252        8,743        7,720        —          16,715   

Severance and transaction-related costs

     5        —          48        —          53   

Other (income) expense

     (2,334     (1,509     4,274        —          431   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,310        68,109        65,362        —          135,781   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (3,601     40,078        (5,644     —          30,833   

Loss on early debt extinguishment

     4,602        —          —          —          4,602   

Interest expense, net

     45,905        542        575        —          47,022   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (54,108     39,536        (6,219     —          (20,791

Income tax expense (benefit)

     —          (1,652     782        —          (870
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (54,108     41,188        (7,001     —          (19,921

Equity in earnings (loss) of subsidiaries

     34,187        (1,173     —          (33,014     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (19,921     40,015        (7,001     (33,014     (19,921

Foreign currency translation adjustments

     500        144        (962     818        500   

Net gain on intra-entity foreign currency transactions, net of tax

     1,752        609        1,804        (2,413     1,752   

Unrealized gain on interest rate swap, net of tax

     359        —          —          —          359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     2,611        753        842        (1,595     2,611   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (17,310   $ 40,768      $ (6,159   $ (34,609   $ (17,310
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows

Three Months Ended May 4, 2013

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (26,584   $ 35,866      $ 568      $ (36,434   $ (26,584

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Equity in earnings of subsidiaries

     (36,101     (333     —          36,434        —     

Depreciation and amortization

     316        8,297        7,012        —          15,625   

Amortization of lease rights and other assets

     —          —          921        —          921   

Amortization of debt issuance costs

     2,099        —          —          —          2,099   

Accretion of debt premium

     (513     —          —          —          (513

Net accretion of unfavorable lease obligations

     —          (142     (16     —          (158

Loss on sale/retirement of property and equipment, net

     —          19        1        —          20   

Loss on early debt extinguishment

     1,674        —          —          —          1,674   

Stock compensation expense

     145        127        121        —          393   

(Increase) decrease in:

          

Inventories

     36        2,372        (5,901     —          (3,493

Prepaid expenses

     (172     315        (2,093     —          (1,950

Other assets

     11        868        (928     —          (49

Increase (decrease) in:

          

Trade accounts payable

     116        (1,310     (6,342     —          (7,536

Income taxes payable

     —          (24     (3,303     —          (3,327

Accrued interest payable

     (16,337     —          —          —          (16,337

Accrued expenses and other liabilities

     (381     (2,991     (2,843     —          (6,215

Deferred income taxes

     —          (1,970     (587     —          (2,557

Deferred rent expense

     —          194        (172     —          22   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (75,691     41,288        (13,562     —          (47,965
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     (545     (12,540     (6,697     —          (19,782

Acquisition of intangible assets/lease rights

     —          (37     (797     —          (834
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (545     (12,577     (7,494     —          (20,616
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from notes

     210,000        —          —          —          210,000   

Repurchases of notes, including tender premium and fees

     (61,715     —          —          —          (61,715

Payment of debt issuance costs

     (3,987     —          —          —          (3,987

Principal payments on capital lease

     —          (12     —          —          (12

Intercompany activity, net

     52,394        (26,461     (25,933     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     196,692        (26,473     (25,933     —          144,286   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash and cash equivalents

     1        (713     863        —          151   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     120,457        1,525        (46,126     —          75,856   

Cash and cash equivalents, at beginning of period

     56,392        4,299        106,265        —          166,956   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     176,849        5,824        60,139        —          242,812   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows

Three Months Ended April 28, 2012

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (19,921   $ 40,015      $ (7,001   $ (33,014   $ (19,921

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Equity in (earnings) loss of subsidiaries

     (34,187     1,173        —          33,014        —     

Depreciation and amortization

     252        8,743        7,720        —          16,715   

Amortization of lease rights and other assets

     —          —          817        —          817   

Amortization of debt issuance costs

     2,512        —          594        —          3,106   

Net accretion of favorable (unfavorable) lease obligations

     —          (223     133        —          (90

Loss on sale/retirement of property and equipment, net

     —          23        —          —          23   

Loss on early debt extinguishment

     4,602        —          —          —          4,602   

Stock compensation expense (benefit)

     17        (28     82        —          71   

(Increase) decrease in:

          

Inventories

     —          (5,462     (2,039     —          (7,501

Prepaid expenses

     9        (564     (797     —          (1,352

Other assets

     —          (2,210     (767     —          (2,977

Increase (decrease) in:

          

Trade accounts payable

     11        4,376        5,879        —          10,266   

Income taxes payable

     —          (810     (1,238     —          (2,048

Accrued interest payable

     14,819        —          —          —          14,819   

Accrued expenses and other liabilities

     (1     (3,971     (2,637     —          (6,609

Deferred income taxes

     —          (1,621     (521     —          (2,142

Deferred rent expense

     —          163        126        —          289   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (31,887     39,604        351        —          8,068   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     (340     (6,227     (7,377     —          (13,944

Acquisition of intangible assets/lease rights

     (11     —          —          —          (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (351     (6,227     (7,377     —          (13,955
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Payments on credit facility

     (489,750     —          —          —          (489,750

Proceeds from notes

     501,500        —          —          —          501,500   

Payment of debt issuance costs

     (10,970     —          —          —          (10,970

Intercompany activity, net

     24,598        (34,522     9,924        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     25,378        (34,522     9,924        —          780   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash and cash equivalents

     —          1,411        (974     —          437   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (6,860     266        1,924        —          (4,670

Cash and cash equivalents, at beginning of period

     102,915        4,908        62,201        —          170,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     96,055        5,174        64,125        —          165,354   

Restricted cash, at end of period

     4,350        —          —          —          4,350   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents and restricted cash, at end of period

   $ 100,405      $ 5,174      $ 64,125      $ —        $ 169,704   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

13.   Subsequent Event

On May 14, 2013, the Company issued $320.0 million aggregate principal amount of 7.75% senior notes that mature on June 1, 2020 (the “7.75% Senior Notes”). The notes were issued at a price equal to 100.00% of the principal amount. Interest on the 7.75% Senior 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 on December 1, 2013. The 7.75% Senior Notes are guaranteed by all of the Company’s existing and future direct or indirect wholly-owned domestic subsidiaries. The 7.75% Senior Notes and related guarantees are unsecured and will: (i) rank equal in right of payment with all of our existing and future indebtedness, (ii) rank senior to any of our existing and future indebtedness that is expressly subordinated to the 7.75% Senior Notes, and (iii) rank junior in priority to our obligations under all of our secured indebtedness, including the Credit Facility, the Senior Secured Second Lien Notes, the 9.0% Senior Secured First Lien Notes and the 6.125% Senior Secured First Lien Notes, to the extent of the value of assets securing such indebtedness. The Company intends to use the net proceeds of the offering of the 7.75% Senior Notes to redeem all outstanding $31.8 million aggregate principal amount of Senior Fixed Rate Notes and all outstanding $280.7 million aggregate principal amount of Senior Toggle Notes on June 13, 2013 pursuant to a redemption notice delivered to noteholders on May 14, 2013.

 

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Table of Contents

The initial purchasers of the 7.75% Senior Notes on May 14, 2013 included Apollo Global Securities, LLC. Apollo Global Securities, LLC is an affiliate of the Apollo Funds, which are the Company’s controlling stockholders. In connection with the issuance of the 7.75% Senior Notes, the Company paid a fee of approximately $0.2 million to Apollo Global Securities, LLC.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide the reader of the financial statements with a narrative on our results of operations, financial position and liquidity, risk management activities, and significant accounting policies and critical estimates. Management’s Discussion and Analysis should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes thereto contained elsewhere in this document.

We include a store in the calculation of same store sales once it has been in operation sixty weeks after its initial opening and, effective in the third quarter of fiscal 2012, we include sales from e-commerce. A store which is temporarily closed, such as for remodeling, is removed from the same store sales computation if it is closed for nine consecutive weeks. The removal is effective prospectively upon the completion of the ninth consecutive week of closure. A store which is closed permanently, such as upon termination of the lease, is immediately removed from the same store sales computation. We compute same store sales on a local currency basis, which eliminates any impact for changes in foreign currency rates.

Business Overview

We are one of the world’s leading specialty retailers of fashionable jewelry and accessories for young women, teens, tweens, and kids. Our vision is to inspire girls and women around the world to become their best selves by providing products and experiences that empower them to express their own unique individual styles. 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. As of May 4, 2013, we operated a total of 3,085 owned stores, of which 1,920 were located in all 50 states of the United States, Puerto Rico, Canada, the U.S. Virgin Islands, and China (North America segment) and 1,165 stores were located in the United Kingdom, Ireland, France, Spain, Portugal, Belgium, Switzerland, Austria, Netherlands, Germany, Poland, Czech Republic, Hungary, Italy and Luxembourg (Europe segment). We operate our stores under two brand names: Claire’s® and Icing®.

As of May 4, 2013, we also franchised or licensed 403 stores in Japan, the Middle East, Turkey, Greece, Guatemala, Malta, Ukraine, Mexico, India, Dominican Republic, El Salvador, Venezuela, Panama, Honduras, and Indonesia. 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 Loss. The franchise fees we charge under the franchising agreements are reported in “Other expense, net” in our Consolidated Statements of Operations and Comprehensive Loss.

Claire’s® is our primary global brand that we operate through company-owned or franchise stores. Claire’s® offers a differentiated and fun store experience with a “treasure hunt” setting that encourages our customer to visit often to explore and find merchandise that appeals to her. We believe by maintaining a highly relevant merchandise assortment and offering a compelling value proposition, Claire’s® has universal appeal to teens, pre-teens and kids. Claire’s® target customer is a girl between 3-18 years old with a particular focus on a core demographic of girls between 10-14 years old.

Icing® is our other brand which we currently operate in North America through company-owned stores. Icing® offers an inspiring merchandise assortment of fashionable products that helps a young woman to say something about herself, whatever the occasion. Our Icing® brand targets a young woman in the 18-35 year age group with a focus on our core 21-25 year olds who have recently entered the workforce. This customer is independent, fashion-conscious, and has enhanced spending ability.

 

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Table of Contents

We provide our target customer groups with a significant selection of fashionable merchandise across a wide range of categories, all with a compelling value proposition. Our major categories of business are:

 

   

Jewelry: Includes earrings, necklaces, bracelets, body jewelry and rings, as well as our ear piercing service; and

 

   

Accessories: Includes fashion and seasonal accessories, including headwear, legwear, hairgoods, handbags and small leather goods, attitude glasses, scarves, armwear and belts, sunglasses, hats, gloves, slippers and earmuffs; and our beauty product offerings.

In North America, our stores are located primarily in shopping malls. The differentiation of our Claire’s® and Icing® brands allows us to operate multiple stores within a single location. In Europe, our stores are located primarily on high streets, in shopping malls and in high traffic urban areas.

Consolidated Results of Operations

A summary of our consolidated results of operations for the three months ended May 4, 2013 and April 28, 2012 are as follows (dollars in thousands):

 

     Three Months
Ended

May 4, 2013
    Three Months
Ended
April 28, 2012
 

Net sales

   $ 354,006      $ 340,617   

Increase (decrease) in same store sales

     2.9     (3.0 )% 

Gross profit percentage

     49.6     48.9

Selling, general and administrative expenses as a percentage of net sales

     35.4     34.8

Depreciation and amortization as a percentage of net sales

     4.4     4.9

Operating income

   $ 32,589      $ 30,833   

Loss on early debt extinguishment

   $ 1,674      $ 4,602   

Net loss

   $ (26,584   $ (19,921

Number of stores at the end of the period (1)

     3,085        3,074   

 

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

Net sales

Net sales for the three months ended May 4, 2013 increased $13.4 million, or 3.9%, from the three months ended April 28, 2012. The increase was attributable to new store sales, an increase in same store sales, and increased shipments to franchisees, partially offset by the effect of store closures and an unfavorable foreign currency translation effect of our non-U.S. net sales. Net sales would have increased 4.7% excluding the impact from foreign currency exchange rate changes.

 

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Table of Contents

For the three months ended May 4, 2013, the increase in same store sales was primarily attributable to an increase in average number of transactions per store of 2.7%, and an increase in average transaction value of 1.1%.

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

 

     Percentage of Total  

Product Category

   Three  Months
Ended

May 4, 2013
     Three Months
Ended
April 28, 2012
 

Jewelry

     51.2         49.8   

Accessories

     48.8         50.2   
  

 

 

    

 

 

 
     100.0         100.0   
  

 

 

    

 

 

 

Gross profit

In calculating gross profit and gross profit percentages, we exclude the costs related to our distribution center and depreciation and amortization expense. These costs are included instead in “Selling, general and administrative” expenses in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. Other retail companies may include these costs in cost of sales, so our gross profit percentages may not be comparable to those retailers.

During the three months ended May 4, 2013, gross profit percentage increased 70 basis points to 49.6% compared to 48.9% during the three months ended April 28, 2012. The increase in gross profit percentage consisted of a 40 basis point decrease in occupancy rate and a 30 basis point increase in merchandise margin. The decrease in occupancy rate resulted primarily from the leveraging effect of an increase in same store sales. The increase in merchandise margin resulted primarily from lower markdowns.

Selling, general and administrative expenses

During the three months ended May 4, 2013, selling, general and administrative expenses increased $6.8 million, or 5.7%, compared to the three months ended April 28, 2012. As a percentage of net sales, selling, general and administrative expenses increased 60 basis points compared to the three months ended April 28, 2012. Excluding a favorable $1.0 million foreign currency translation effect, selling, general and administrative expenses would have increased $7.8 million. The majority of the increase is primarily due to compensation-related expenses, such as salaries, bonuses, and non-cash stock compensation.

Depreciation and amortization expense

During the three months ended May 4, 2013, depreciation and amortization expense decreased $1.1 million to $15.6 million compared to $16.7 million for the three months ended April 28, 2012. Excluding a favorable $0.1 million foreign currency translation effect, the decrease in depreciation and amortization expense would have been $1.0 million.

Other expense, net

The following is a summary of other expense activity for the three months ended May 4, 2013 and April 28, 2012 (in thousands):

 

     Three Months
Ended

May 4, 2013
    Three Months
Ended
April 28, 2012
 

Foreign currency exchange loss, net

   $ 2,029      $ 858   

Royalty income

     (1,105     (427
  

 

 

   

 

 

 
   $ 924      $ 431   
  

 

 

   

 

 

 

 

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Loss on early debt extinguishment

The following is a summary of our debt repurchase activity for the three months ended May 4, 2013 (in thousands). There was no debt repurchase activity for the three months ended April 28, 2012.

 

     Three Months Ended May 4, 2013  

Notes Repurchased

   Principal
Amount
     Repurchase
Price
     Recognized
Loss (1)
 

Senior Fixed Rate Notes

   $ 39,011       $ 38,543       $ 1,103   

Senior Toggle Notes

     21,523         21,281         571   
  

 

 

    

 

 

    

 

 

 
   $ 60,534       $ 59,824       $ 1,674   
  

 

 

    

 

 

    

 

 

 

 

 

(1) Net of deferred issuance cost write-offs of $353 for the Senior Fixed Rate Notes and $140 for the Senior Toggle Notes and tender premiums and fees of $1,218 for Senior Fixed Rate Notes and $673 for Senior Toggle Notes.

During the first quarter of fiscal 2012, we recognized a $4.6 million loss on early debt extinguishment attributed to the write-off of unamortized debt issuance costs associated with the early repayment of $489.8 million of indebtedness under our former senior secured term loan credit facility.

Interest expense, net

During the three months ended May 4, 2013, net interest expense aggregated $58.2 million compared to $47.0 million for the three months ended April 28, 2012. The increase of $11.2 million is primarily due to indebtedness incurred under the 9.0% Senior Secured First Lien Notes that bears a higher rate of interest than the former credit facility.

Income taxes

The effective income tax rate for the three months ended May 4, 2013 was 2.6% compared to 4.2% for the three months ended April 28, 2012. These effective income tax rates differed from the statutory federal income tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses in the three months ended May 4, 2013 and April 28, 2012, respectively, by our U.S. operations.

Segment Operations

We have two reportable segments – North America and Europe. The following is a discussion of results of operations by reportable segment.

North America

Key statistics and results of operations for our North America segment are as follows (dollars in thousands):

 

     Three Months
Ended

May 4, 2013
    Three Months
Ended
April 28, 2012
 

Net sales

   $ 225,957      $ 221,575   

Increase (decrease) in same store sales

     2.3     (1.7 )% 

Gross profit percentage

     51.7     52.0

Number of stores at the end of the period (1)

     1,920        1,944   

 

(1) Number of stores excludes stores operated under franchise and licensing agreements and includes 7 China stores as of May 4, 2013.

 

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During the three months ended May 4, 2013, net sales in North America increased $4.4 million, or 2.0%, from the three months ended April 28, 2012. The increase was attributable to an increase in same store sales, new store sales, and increased shipments to franchisees, partially offset by the effect of store closures and an unfavorable foreign currency translation effect of our non-U.S. net sales. Sales would have increased 2.1% excluding the impact from foreign currency exchange rate changes.

For the three months ended May 4, 2013, the increase in same store sales was primarily attributable to an increase in average number of transactions per store of 2.5% and an increase in average transaction value of 0.4%.

During the three months ended May 4, 2013, gross profit percentage decreased 30 basis points to 51.7% compared to 52.0% during the three months ended April 28, 2012. The decrease in gross profit percentage consisted of a 30 basis point decrease in merchandise margin and a 10 basis point increase in occupancy rate, partially offset by a 10 basis point decrease in buying and buying-related costs. The decrease in merchandise margin resulted primarily from higher markdowns.

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

 

     Percentage of Total  

Product Category

   Three Months
Ended

May 4, 2013
     Three Months
Ended
April 28, 2012
 

Jewelry

     55.5         54.1   

Accessories

     44.5         45.9   
  

 

 

    

 

 

 
     100.0         100.0   
  

 

 

    

 

 

 

Europe

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

 

     Three Months
Ended

May 4, 2013
    Three Months
Ended
April 28, 2012
 

Net sales

   $ 128,049      $ 119,042   

Increase (decrease) in same store sales

     4.0     (5.5 )% 

Gross profit percentage

     45.8     43.2

Number of stores at the end of the period (1)

     1,165        1,130   

 

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

During the three months ended May 4, 2013, net sales in Europe increased $9.0 million, or 7.6%, from the three months ended April 28, 2012. The increase was attributable to new store sales and an increase in same store sales, partially offset by the effect of store closures and an unfavorable foreign currency translation effect of our non-U.S. net sales. Sales would have increased 9.6% excluding the impact from foreign currency exchange rate changes.

For the three months ended May 4, 2013, the increase in same store sales was primarily attributable to an increase in average transaction value of 3.2% and an increase in average number of transactions per store of 2.2%.

During the three months ended May 4, 2013, gross profit percentage increased 260 basis points to 45.8% compared to 43.2% during the three months ended April 28, 2012. The increase in gross profit percentage consisted of a 150 basis point decrease in occupancy rate and a 130 basis point increase in merchandise margin, partially offset by a 20 basis point increase in buying and buying-related costs. The decrease in occupancy rate resulted primarily from the leveraging effect of an increase in same store sales. The increase in merchandise margin resulted from lower markdowns.

 

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

 

     Percentage of Total  

Product Category

   Three Months
Ended

May 4, 2013
     Three Months
Ended
April 28, 2012
 

Jewelry

     43.8         42.1   

Accessories

     56.2         57.9   
  

 

 

    

 

 

 
     100.0         100.0   
  

 

 

    

 

 

 

Liquidity and Capital Resources

A summary of cash flows provided by (used in) operating, investing and financing activities for the three months ended May 4, 2013 and April 28, 2012 is outlined in the table below (in thousands):

 

     Three Months
Ended

May 4, 2013
    Three Months
Ended
April 28, 2012
 

Operating activities

   $ (47,965   $ 8,068   

Investing activities

     (20,616     (13,955

Financing activities

     144,286        780   

Cash flows from operating activities

For the three months ended May 4, 2013, cash provided by operations decreased $56.0 million compared to the prior year period. The primary reason for decrease was an increase in interest payments of $43.9 million and an increase in working capital and other items, excluding cash equivalents, of $12.1 million.

Cash flows from investing activities

For the three months ended May 4, 2013, cash used in investing activities was $20.6 million and primarily consisted of $19.8 million for capital expenditures. For the three months ended April 28, 2012, cash used in investing activities was $14.0 million and primarily consisted of $13.9 million for capital expenditures. During the remainder of Fiscal 2013, we expect to fund between $65.0 million and $70.0 million of capital expenditures.

Cash flows from financing activities

For the three months ended May 4, 2013, cash provided by financing activities was $144.3 million which consisted primarily of proceeds of $210.0 million from the issuance of 6.125% Senior Secured First Lien Notes, note repurchases of $59.8 million to retire $39.0 million aggregate principal amount of Senior Fixed Rate Notes and $21.5 million aggregate principal amount of Senior Toggle Notes pursuant to a tender offer, to pay $1.9 million in tender premiums and fees, and to pay $4.0 million in financing costs. We intend to use the remaining net proceeds, together with cash on hand, to redeem $149.5 million aggregate principal amount of the Senior Fixed Rate Notes on June 3, 2013 pursuant to a redemption notice delivered to noteholders on May 3, 2013. For the three months ended April 28, 2012, cash provided by financing activities was $0.8 million which consisted primarily of net proceeds of $501.5 million from the issuance of Senior Secured First Lien Notes used to repay $489.8 million of indebtedness under the former senior secured term loan credit facility and pay $11.0 million in financing costs.

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 May 4, 2013, we had cash and cash equivalents of $242.8 million and all cash equivalents were maintained in one money market fund invested exclusively in U.S. Treasury Securities.

 

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As of May 4, 2013, our foreign subsidiaries held cash and cash equivalents of $60.1 million. During the three months ended May 4, 2013, we did not repatriate any cash held by foreign subsidiaries, but we expect a portion of our foreign subsidiaries’ future cash flow generation to be repatriated to the U.S. to meet certain liquidity needs. Based upon the amount of our remaining U.S. net operating loss carryforwards as of May 4, 2013, we do not expect to pay U.S. income tax on fiscal 2013 repatriations. When our U.S. net operating loss carryforwards are no longer available, we would be required to accrue and pay U.S. income taxes, net of any foreign tax credit benefit, on any such repatriation.

We anticipate that cash generated from operations will be sufficient to meet our debt service requirements as they become due, new store expenditures, and future working capital requirements for at least the next twelve months. However, our ability to make scheduled payments of interest on, to pay principal on, or refinance indebtedness, to satisfy any other present or future debt obligations and our ability to fund future capital expenditures and operating expenses 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 our control, including those disclosed in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

6.125% Senior Secured First Lien Notes

On March 15, 2013, we issued $210.0 million aggregate principal amount of 6.125% senior secured first lien notes that mature on March 15, 2020 (the “6.125% Senior Secured First Lien Notes”). The notes were issued at a price equal to 100.00% of the principal amount. Interest on the Senior Secured First 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, 2013. The 6.125% Senior Secured First Lien Notes are guaranteed on a first-priority senior secured basis by all of our existing and future direct or indirect wholly-owned domestic subsidiaries. The 6.125% Senior Secured First Lien Notes and related guarantees are secured, subject to certain exceptions and permitted liens, by a first-priority lien on substantially all of the assets of our material owned assets and the material owned assets of subsidiary guarantors, limited in the case of equity interests held by us or any subsidiary guarantor in a foreign subsidiary, to 100% of the non-voting equity interest and 65% of the voting equity interest of such foreign subsidiary held directly by us or a subsidiary guarantor. We used the proceeds of the offering of the 6.125% Senior Secured First Lien Notes for note repurchases of $59.8 million to retire $39.0 million aggregate principal amount of Senior Fixed Rate Notes and $21.5 million aggregate principal amount of Senior Toggle Notes, to pay $1.9 million in tender premiums and fees, and to pay $4.0 million in financing costs which have been recorded as Deferred Financing Costs, Net in the accompanying Unaudited Condensed Consolidated Balance Sheets. We intend to use the remaining net proceeds, together with cash on hand, to redeem an additional $149.5 million aggregate principal amount of Senior Fixed Rate Notes on June 3, 2013 pursuant to a redemption notice delivered to noteholders on May 3, 2013.

7.75% Senior Notes

On May 15, 2013, we issued $320.0 million aggregate principal amount of 7.75% Senior Notes due June 1, 2020 (the “7.75% Senior Notes”). See Note 13 – Subsequent Event in the Notes to Unaudited Condensed Consolidated Financial Statements for further description of the 7.75% Senior Notes.

Credit Facility

On September 20, 2012, we entered into an Amended and Restated Credit Agreement by and among Claire’s Inc. (“Parent”), the Company, Credit Suisse AG, as Administrative Agent, and the other Lenders named therein (the “Credit Facility”), pursuant to which we replaced our existing $200.0 million senior secured Former Revolver maturing May 29, 2013 with a $115.0 million five-year senior secured revolving credit facility.

Borrowings under the 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) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR rate plus 1.00%, or (b) a LIBOR rate with

 

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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 of 4.50% for LIBOR rate loans and 3.50% for alternate base rate loans. We also pay a facility fee of 0.50% per annum of the committed amount of the Credit Facility whether or not utilized.

All obligations under the Credit Facility are unconditionally guaranteed by (i) Parent, prior to an initial public offering of our stock, and (ii) our existing and future direct or indirect 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 and permitted liens, by a first priority lien on, (i) all of our capital stock, prior to an initial public offering of its stock, and (ii) substantially all of our material owned assets and the material owned assets of subsidiary guarantors, limited in the case of equity interests held by us or any subsidiary guarantor in a foreign subsidiary, to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by us or a subsidiary guarantor. The liens securing the Credit Facility rank equally to the liens securing the 9.0% Senior Secured First Lien Notes.

The 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 us to maintain any particular financial ratio or other measure of financial performance except that so long as the revolving loans and letters of credit outstanding exceed $15 million, we will be required to comply with a maximum Total Net Secured Leverage Ratio of 5.5 to 1.0 based upon the ratio of its net senior secured first lien debt to adjusted earnings before interest, taxes, depreciation and amortization for the period of four consecutive fiscal quarters most recently ended.

The Credit Facility does contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our Parent’s 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. As of May 4, 2013, we were in compliance with the covenants under the Credit Facility.

At May 4, 2013, we had $5.7 million of letters of credit outstanding which reduces the borrowing availability under the Credit Facility.

 

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Europe Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $2.4 million. These facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in their respective countries of operation. At May 4, 2013, the entire amount of $2.4 million was available for borrowing by us, subject to a reduction of $2.1 million for outstanding bank guarantees.

Note Covenants

Our Senior Fixed Rate Notes, Senior Toggle Notes, Senior Subordinated Notes, Senior Secured Second Lien Notes, 9% Senior Secured First Lien Notes and 6.125% Senior Secured First 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 the Notes have investment grade ratings from both of the rating agencies of Moody’s Investor Services, Inc. (“Moody’s”) and Standard & Poor’s Ratings Group (“S&P”) and no event of default has occurred. Since the date of issuance of the Notes, the Notes have not received investment grade ratings from Moody’s or S&P. Accordingly, all of the covenants under the Notes currently apply us. None of these note covenants, however, require us to maintain any particular financial ratio or other measure of financial performance. As of May 4, 2013, we were in compliance with the covenants under the Notes.

Parent Company Registration Statement Filing

On May 3, 2013, Claire’s Inc. filed a registration statement with the Securities and Exchange Commission for an initial public offering of Claire’s Inc.’s common stock.

Critical Accounting Policies and Estimates

Our Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Fiscal 2012 Annual Report on Form 10-K, filed on April 3, 2013, in the Notes to Consolidated Financial Statements, Note 2 – Summary of Significant Accounting Policies, and the Critical Accounting Policies and Estimates section contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations therein.

 

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Recent Accounting Pronouncements

See Note 2 – Recent Accounting Pronouncements, in the Notes to the Unaudited Condensed Consolidated Financial Statements.

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

We and our representatives may from time to time make written or oral forward-looking statements, including statements contained in this and other filings with the Securities and Exchange Commission and in our press releases and reports we issue publicly. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to our future financial performance, business strategy, planned capital expenditures, ability to service our debt, and new store openings for future periods, are forward-looking statements. The forward-looking statements are and will be based on management’s then current views and assumptions regarding future events and operating performance, and we assume no obligation to update any forward-looking statement. Forward-looking statements involve known or unknown risks, uncertainties and other factors, including changes in estimates and judgments discussed under “Critical Accounting Policies and Estimates” which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements may use the words “expect,” “anticipate,” “plan,” “intend,” “project,” “may,” “believe,” “forecasts” and similar expressions. Some of these risks, uncertainties and other factors are as follows: our level of indebtedness; general economic conditions; changes in consumer preferences and consumer spending; competition; general political and social conditions such as war, political unrest and terrorism; natural disasters or severe weather events; currency fluctuations and exchange rate adjustments; 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 in Europe, China, or expand to grow our international store base through franchise or similar licensing arrangements; inability to design and implement new information systems; data security breaches of confidential information or other cyber attacks; delays in anticipated store openings or renovations; changes in applicable laws, rules and regulations, including changes in North America, Europe, or China 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. Additional discussion of these and other risks and uncertainties is contained elsewhere in this Item 2, in Item 3, “Quantitative and Qualitative Disclosures About Market Risk” and in our Form 10-K for Fiscal 2012 under “Statement Regarding Forward-Looking Disclosures” and “Risk Factors.”

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Cash and Cash Equivalents

We have significant amounts of cash and cash equivalents at financial institutions that are in excess of federally insured limits. With the current financial environment and the instability of financial institutions, we cannot be assured that we will not experience losses on our deposits. We mitigate this risk by investing in money market funds that are invested exclusively in U.S. Treasury securities and by maintaining bank accounts with a group of credit worthy financial institutions. As of May 4, 2013, all cash equivalents were maintained in one money market fund that was invested exclusively in U.S. Treasury securities.

 

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Interest Rates

We no longer have exposure to interest rate risk associated with derivative instruments. On September 20, 2012, we terminated the interest rate swap agreement entered into on July 28, 2010, settled the contract at fair value of the liability and also extinguished the associated hedged debt instrument.

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 activities in currencies other than local currencies and to the carrying value of our net investments in foreign subsidiaries. At May 4, 2013, 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 loss” are $(7.2) million and $2.3 million, net of tax, reflecting the unrealized gain (loss) on foreign currency translations and intra-entity foreign currency transactions during the three months ended May 4, 2013 and April 28, 2012, respectively.

Certain of our subsidiaries make significant USD purchases from Asian suppliers, particularly in China. Until July 2005, the Chinese government pegged its currency, the yuan renminbi (“RMB”), to the USD, adjusting the relative value only slightly and on infrequent occasion. Many people viewed this practice as leading to a substantial undervaluation of the RMB relative to the USD and other major currencies, providing China with a competitive advantage in international trade. China now allows the RMB to float to a limited degree against a basket of major international currencies, including the USD, the euro and the Japanese yen. The official exchange rate has historically remained stable; however, there are no assurances that this currency exchange rate will continue to be as stable in the future due to the Chinese government’s adoption of a floating rate with respect to the value of the RMB against foreign currencies. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on China to adopt an even more flexible and more market-oriented currency policy that allows a greater fluctuation in the exchange rate between the RMB and the USD. This floating exchange rate, and any appreciation of the RMB that may result from such rate, could have various effects on our business, which include making our purchases of Chinese products more expensive. If we are unable to negotiate commensurate price decreases from our Chinese suppliers, these higher prices would eventually translate into higher costs of sales, which could have a material adverse effect on our results of operations.

The results of operations of our foreign subsidiaries, when translated into U.S. dollars, reflect the average foreign currency exchange rates for the months that comprise the periods presented. As a result, if foreign currency exchange rates fluctuate significantly from one period to the next, results in local currency can vary significantly upon translation into U.S. dollars. Accordingly, fluctuations in foreign currency exchange 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 we have little or no control. The increase in costs of such staple items has reduced the amount

 

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of discretionary funds that consumers are willing and able to spend for other goods, including our merchandise. Should there be continued volatility in food and energy costs, sustained recession in the U.S. and Europe, rising unemployment and continued declines in discretionary income, our revenue and margins could be significantly affected in the future. We can not predict whether, when or the manner in which the economic conditions described above will change.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officers and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officers and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including each of such officers as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting have been made during the quarter ended May 4, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are, from time to time, involved in routine litigation incidental to the conduct of our business, including litigation instituted by persons injured upon premises under our control; litigation regarding the merchandise that we sell, including product and safety concerns regarding content in our merchandise; litigation with respect to various employment matters, including wage and hour litigation; litigation with present and former employees; and litigation regarding intellectual property rights. Although litigation is routine and incidental to the conduct of our business, like any business of our size which employs a significant number of employees and sells a significant amount of merchandise, such litigation can result in large monetary awards when judges, juries or other finders of facts do not agree with management’s evaluation of possible liability or outcome of litigation. Accordingly, the consequences of these matters cannot be finally determined by management. However, in the opinion of management, we believe that current pending litigation will not have a material adverse effect on our financial results.

Item 1A. Risk Factors

There have been no material changes in our risk factors disclosed in our Annual Report on Form 10-K for the year ended February 2, 2013.

Item 6. Exhibits

 

4.17    Indenture, dated as of May 14, 2013, by and between Claire’s Stores, Inc. the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee (2)
4.18    Form of 7.750% Senior Note due 2020 (included in the Indenture filed as Exhibit 4.18 hereto) (2)
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). (1)
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). (1)
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) 

Filed herewith.

(2) 

Filed previously as exhibit to Form 8-K by the Company on May 16, 2013.

Items 2, 3, 4 and 5 of Part II are not applicable and have been omitted.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    CLAIRE’S STORES, INC.
May 30, 2013     By:   /s/ James D. Fielding
     

James D. Fielding, Chief Executive Officer

(principal executive officer)

 

May 30, 2013     By:   /s/ J. Per Brodin
     

J. Per Brodin, Executive Vice President and Chief

Financial Officer (principal financial and accounting

officer)

 

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Table of Contents

INDEX TO EXHIBITS

 

EXHIBIT NO.    DESCRIPTION
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32.1    Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

34