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 August 2, 2014

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 August 1, 2014, 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 August 2, 2014 and February 1, 2014

     3   
 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended August 2, 2014 and August 3, 2013

     4   
 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended August  2, 2014 and August 3, 2013

     5   
 

Notes to Unaudited Condensed Consolidated Financial Statements

     6   
 

Item 2.

 

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

     19   
 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     30   
 

Item 4.

 

Controls and Procedures

     32   

PART II.

 

OTHER INFORMATION

  
 

Item 1.

 

Legal Proceedings

     33   
 

Item 1A.

 

Risk Factors

     33   
 

Item 6.

 

Exhibits

     33   

SIGNATURES

     34   
 

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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Table of Contents

PART I. FINANCIAL INFORMATION

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     August 2, 2014     February 1, 2014  
     (In thousands, except share and per share amounts)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 27,126      $ 58,343   

Inventories

     170,673        178,882   

Prepaid expenses

     22,665        19,471   

Other current assets

     28,036        26,305   
  

 

 

   

 

 

 

Total current assets

     248,500        283,001   
  

 

 

   

 

 

 

Property and equipment:

    

Furniture, fixtures and equipment

     256,301        260,709   

Leasehold improvements

     341,669        335,858   
  

 

 

   

 

 

 
     597,970        596,567   

Less accumulated depreciation and amortization

     (362,062     (347,408
  

 

 

   

 

 

 
     235,908        249,159   
  

 

 

   

 

 

 

Leased property under capital lease:

    

Land and building

     18,055        18,055   

Less accumulated depreciation and amortization

     (4,062     (3,611
  

 

 

   

 

 

 
     13,993        14,444   
  

 

 

   

 

 

 

Goodwill

     1,550,056        1,550,056   

Intangible assets, net of accumulated amortization of $68,898 and $65,194, respectively

     537,035        541,095   

Deferred financing costs, net of accumulated amortization of $21,437 and $38,917, respectively

     35,649        39,481   

Restricted cash

     2,417        —     

Other assets

     53,283        54,396   
  

 

 

   

 

 

 
     2,178,440        2,185,028   
  

 

 

   

 

 

 

Total assets

   $ 2,676,841      $ 2,731,632   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities:

    

Revolving credit facility

   $ 19,500      $ —     

Trade accounts payable

     69,278        84,364   

Income taxes payable

     1,510        3,729   

Accrued interest payable

     68,862        68,338   

Accrued expenses and other current liabilities

     97,519        94,727   
  

 

 

   

 

 

 

Total current liabilities

     256,669        251,158   
  

 

 

   

 

 

 

Long-term debt

     2,377,657        2,378,786   

Obligation under capital lease

     17,043        17,124   

Deferred tax liability

     119,347        119,564   

Deferred rent expense

     33,541        32,000   

Unfavorable lease obligations and other long-term liabilities

     13,738        16,033   
  

 

 

   

 

 

 
     2,561,326        2,563,507   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholder’s deficit:

    

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

     —          —     

Additional paid-in capital

     619,126        619,499   

Accumulated other comprehensive loss, net of tax

     (146     (1,109

Accumulated deficit

     (760,134     (701,423
  

 

 

   

 

 

 
     (141,154     (83,033
  

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

   $ 2,676,841      $ 2,731,632   
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands)

 

     Three Months
Ended
August 2, 2014
    Three Months
Ended
August 3, 2013
    Six Months
Ended
August 2, 2014
    Six Months
Ended
August 3, 2013
 

Net sales

   $ 377,829      $ 366,703      $ 731,172      $ 720,709   

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

     189,735        180,973        376,805        359,539   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     188,094        185,730        354,367        361,170   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

      

Selling, general and administrative

     129,214        126,448        255,172        251,835   

Depreciation and amortization

     17,800        16,153        41,264        31,778   

Severance and transaction-related costs

     2,182        889        3,764        1,804   

Other (income) expense, net

     671        (2,082     (815     (1,158
  

 

 

   

 

 

   

 

 

   

 

 

 
     149,867        141,408        299,385        284,259   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     38,227        44,322        54,982        76,911   

Loss on early debt extinguishment

     —          3,121        —          4,795   

Interest expense, net

     54,557        57,755        109,316        115,974   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

     (16,330     (16,554     (54,334     (43,858

Income tax expense

     4,244        4,118        4,377        3,398   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (20,574   $ (20,672   $ (58,711   $ (47,256
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (20,574   $ (20,672   $ (58,711   $ (47,256

Other comprehensive income (loss):

      

Foreign currency translation adjustments

     (1,606     (36     181        (1,811

Net gain (loss) on intra-entity foreign currency transactions, net of tax expense (benefit) of $(205) $(33), $104 and $(333)

     (3,841     205        782        (5,246
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (5,447     169        963        (7,057
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (26,021   $ (20,503   $ (57,748   $ (54,313
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Six Months
Ended
August 2, 2014
    Six Months
Ended
August 3, 2013
 

Cash flows from operating activities:

    

Net loss

   $ (58,711   $ (47,256

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     41,264        31,778   

Amortization of lease rights and other assets

     2,021        1,950   

Amortization of debt issuance costs

     3,998        4,228   

Accretion of debt premium

     (1,129     (1,037

Net unfavorable accretion of lease obligations

     (264     (423

Loss on sale/retirement of property and equipment, net

     92        33   

Loss on early debt extinguishment

     —          4,795   

Loss on sale of intangible assets/lease rights

     216        —     

Stock-based compensation (benefit) expense

     (373     536   

(Increase) decrease in:

    

Inventories

     8,594        (18,534

Prepaid expenses

     (2,975     (2,170

Other assets

     (2,203     (1,441

Increase (decrease) in:

    

Trade accounts payable

     (9,005     849   

Income taxes payable

     (2,251     (8,040

Accrued interest payable

     524        2,376   

Accrued expenses and other liabilities

     (1,145     (14,407

Deferred income taxes

     194        (120

Deferred rent expense

     1,414        460   
  

 

 

   

 

 

 

Net cash used in operating activities

     (19,739     (46,423
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisition of property and equipment

     (30,947     (40,718

Acquisition of intangible assets/lease rights

     (490     (1,617
  

 

 

   

 

 

 

Net cash used in investing activities

     (31,437     (42,335
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from revolving credit facility

     122,500        —     

Payments on revolving credit facility

     (103,000     —     

Proceeds from notes

     —          530,000   

Repurchases of notes, including tender premiums and fees

     —          (523,660

Payment of debt issuance costs

     (165     (9,845

Principal payments on capital lease

     (50     (24
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     19,285        (3,529
  

 

 

   

 

 

 

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

     674        (871
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (31,217     (93,158

Cash and cash equivalents, at beginning of period

     58,343        166,956   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 27,126      $ 73,798   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 105,801      $ 110,377   

Income taxes paid

     7,079        11,988   

Non-cash investing activities:

    

Restricted cash in escrow

     2,497        —     

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

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 1, 2014 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, residual values and other items. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, energy markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates will be reflected in the financial statements in those future periods when the changes occur.

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

The Unaudited Condensed Consolidated Financial Statements include certain reclassifications of prior period amounts in order to conform to current period presentation.

 

2. Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which updates guidance on performance stock awards. The new standard requires that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. This standard is effective for fiscal years beginning after December 15, 2015. Earlier adoption is permitted. The Company does not expect adoption of ASU 2014-12 to have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

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Table of Contents

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 250) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposal of Components of an Entity.” ASU 2014-08 provides a narrower definition of discontinued operations than under existing U.S GAAP. ASU 2014-08 requires that only disposal of components of an entity (or groups of components) that represent a strategic shift that has or will have a major effect on the reporting entity’s operations are reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations. ASU 2014-08 is effective prospectively for disposals of components of an entity that occur in annual or interim periods beginning after December 15, 2014. Early adoption is permitted only for disposals that have not been previously reported. The Company early adopted ASU 2014-08 which did not have a material 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 financial assets (liabilities) measured at fair value on a recurring basis.

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, restricted cash, accounts receivable, current liabilities, revolving credit facility and long-term debt. Cash and cash equivalents, restricted cash, 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 revolving credit facility approximates fair value due to the variable component of its interest rate. The estimated fair value of the Company’s long-term debt was approximately $2.15 billion as of August 2, 2014, compared to a carrying value of $2.38 billion at that date. The estimated fair value of the Company’s long-term debt was approximately $2.36 billion as of February 1, 2014, compared to a carrying value of $2.38 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 August 2, 2014 and February 1, 2014 included the following components (in thousands):

 

     August 2, 2014      February 1, 2014  

Senior secured revolving credit facility due 2017

   $ 19,500       $ —     
  

 

 

    

 

 

 

Long-term debt:

     

10.5% Senior subordinated notes due 2017

   $ 259,612       $ 259,612   

9.0% Senior secured first lien notes due 2019 (1)

     1,138,045         1,139,174   

8.875% Senior secured second lien notes due 2019

     450,000         450,000   

6.125% Senior secured first lien notes due 2020

     210,000         210,000   

7.75% Senior notes due 2020

     320,000         320,000   
  

 

 

    

 

 

 

Long-term debt

   $ 2,377,657       $ 2,378,786   
  

 

 

    

 

 

 

Obligation under capital lease (including current portion)

   $ 17,181       $ 17,232   
  

 

 

    

 

 

 

 

(1) Amounts include unamortized premium of $13,045 and $14,174 as of August 2, 2014 and February 1, 2014, respectively.

Credit Facility

On April 30, 2014, the Company entered into Amendment No. 1 to its Amended and Restated Credit Agreement (as amended, the “Credit Facility”), dated as of September 20, 2012, among the Company, Claire’s, Inc., the Administrative Agent and Issuing Agent named therein and the Lenders party thereto (the “Amendment”). The Amendment increased the maximum permitted Total Net Secured Leverage Ratio from 5.50:1.00 to 6.00:1.00 for purposes of the covenant described below under “Credit Facility and Note Covenants.”

Note Repurchases

There was no debt repurchase activity for the three and six months ended August 2, 2014. The following is a summary of the Company’s debt repurchase activity for the three and six months ended August 3, 2013 (in thousands). All debt repurchases in the three and six months ended August 3, 2013, were pursuant to the tender offer and note redemptions.

 

     Three Months Ended August 3, 2013      Six Months Ended August 3, 2013  
     Principal      Repurchase      Recognized      Principal      Repurchase      Recognized  

Notes Repurchased

   Amount      Price      Loss (1)      Amount      Price      Loss (2)  

9.25% Senior Fixed Rate Notes due 2015 (the “Senior Fixed Rate Notes”)

   $ 181,259       $ 181,259       $ 1,494       $ 220,270       $ 219,802       $ 2,597   

9.625%/10.375% Senior Toggle Notes due 2015 (the “Senior Toggle Notes”)

     280,667         280,667         1,627         302,190         301,947         2,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 461,926       $ 461,926       $ 3,121       $ 522,460       $ 521,749       $ 4,795   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Net of deferred issuance cost write-offs of $1,476 for the Senior Fixed Rate Notes and $1,625 for the Senior Toggle Notes and tender premiums and fees of $18 for the Senior Fixed Rate Notes and $2 for the Senior Toggle Notes.
(2) Net of deferred issuance cost write-offs of $1,829 for the Senior Fixed Rate Notes and $1,766 for the Senior Toggle Notes and tender premiums and fees of $1,236 for the Senior Fixed Rate Notes and $675 for the Senior Toggle Notes.

 

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Credit Facility and Note Covenants

Our Credit Facility and our 10.5% Senior Subordinated Notes due 2017 (the “Senior Subordinated Notes”), 8.875% Senior Secured Second Lien Notes due 2019 (the “Senior Secured Lien Notes”), 9.0% Senior Secured First Lien Notes due 2019 (the “9.0% Senior Secured First Lien Notes”), 6.125% Senior Secured First Lien Notes due 2020 (the “6.125% Senior Secured First Lien Notes”) and 7.75% Senior Notes due 2020 (the “7.75% Senior Notes”) (collectively, the “Notes”) contain certain covenants that, among other things, 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 in the indentures governing the Notes, 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 the covenants under the Notes, however, require the Company to maintain any particular financial ratio or other measure of financial performance.

The Credit Facility also 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 $15.0 million, the Company is required to maintain, at each borrowing date measured at the end of the prior fiscal quarter (but reflecting borrowings and repayments under the Credit Facility through the measurement date) and at the end of each quarter, a maximum Total Net Secured Leverage Ratio of 6.0:1.0 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.

See Note 3 – Fair Value Measurements for related fair value disclosure on debt.

 

5. 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.

 

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6. 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 1, 2014

   $ (6,841   $ 5,732       $ (1,109

Other comprehensive income

     963        —           963   
  

 

 

   

 

 

    

 

 

 

Net other comprehensive income

     963        —           963   
  

 

 

   

 

 

    

 

 

 

Balance as of August 2, 2014

   $ (5,878   $ 5,732       $ (146
  

 

 

   

 

 

    

 

 

 

 

7. Stock Options and Stock-Based Compensation

The following is a summary of activity in the Company’s stock option plan for the six months ended August 2, 2014:

 

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

Outstanding as of February 1, 2014

     5,166,566      $ 10.00      

Options granted

     2,005,850      $ 10.00      

Options exercised

     —          

Options forfeited

     (2,629,593   $ 10.00      

Options expired

     (400,845   $ 10.00      
  

 

 

      

Outstanding as of August 2, 2014

     4,141,978      $ 10.00         5.2   
  

 

 

      

Options vested and expected to vest as of August 2, 2014

     3,763,102      $ 10.00         5.1   
  

 

 

      

Exercisable as of August 2, 2014

     1,901,934      $ 10.00         4.6   
  

 

 

      

The weighted average grant date fair value of options granted during the six months ended August 2, 2014 and August 3, 2013 was $0.04 and $3.27, respectively.

During the three and six months ended August 2, 2014 and August 3, 2013, the Company recorded stock-based compensation expense (benefit) and additional paid-in capital relating to stock-based compensation of approximately $(0.1) million, $0.1 million, $(0.4) million and $0.5 million, respectively. During the three and six months ended August 2, 2014, the Company recorded reversals of stock option expense of $0.5 million and $1.0 million, respectively, associated with the forfeitures of stock options, including $0.2 million and $0.6 million, respectively, for former executive officers. Stock-based compensation expense (benefit) is recorded in “Selling, general and administrative” expenses in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

8. Income Taxes

The effective income tax rate was (26.0)% and (8.1)% for the three and six months ended August 2, 2014. 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 and six months ended August 3, 2013 by the Company’s U.S. operations.

The effective income tax rate was (24.9)% and (7.7)% for the three and six months ended August 3, 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 and six months ended August 3, 2013 by the Company’s U.S. operations.

 

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In April 2011, the Company received from the Canada Revenue Agency withholding tax assessments for 2003 through 2007 of approximately $5.3 million, including penalties and interest. In July 2014, the Company received notice from the Canada Revenue Agency that the withholding tax assessments for 2003 through 2007, including penalties and interest have been reversed.

 

9. 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 and the 7.75% Senior Notes on May 14, 2013 included Apollo Global Securities, LLC, an affiliate of the Apollo Funds, which are the Company’s controlling stockholders. In connection with the issuance of the 6.125% Senior Secured First Lien Notes and the 7.75% Senior Notes, the Company paid fees in the aggregate amount of approximately $0.2 million and $0.4 million to Apollo Global Securities, LLC for the three and six months ended August 2, 2014.

 

10. 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 (income) expense, 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.

Net sales, depreciation and amortization and operating income for the three and six months ended August 2, 2014 and August 3, 2013 are as follows (in thousands):

 

     Three Months
Ended
August 2, 2014
    Three Months
Ended
August 3, 2013
    Six Months
Ended
August 2, 2014
    Six Months
Ended
August 3, 2013
 

Net sales:

        

North America

   $ 212,458      $ 219,317      $ 426,656      $ 445,274   

Europe

     165,371        147,386        304,516        275,435   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     377,829        366,703        731,172        720,709   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

        

North America

     10,838        9,935        28,022        19,464   

Europe

     6,962        6,218        13,242        12,314   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization

     17,800        16,153        41,264        31,778   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income for reportable segments:

        

North America

     20,071        28,198        31,865        61,722   

Europe

     20,338        17,013        26,881        16,993   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income for reportable segments

     40,409        45,211        58,746        78,715   

Severance and transaction-related costs

     2,182        889        3,764        1,804   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income

     38,227        44,322        54,982        76,911   

Loss on early debt extinguishment

     —          3,121        —          4,795   

Interest expense, net

     54,557        57,755        109,316        115,974   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated loss before income tax expense

   $ (16,330   $ (16,554   $ (54,334   $ (43,858
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Excluded from operating income for the North America segment are severance and transaction-related costs of approximately $1.1 million and $0.6 million for the three months ended August 2, 2014 and August 3, 2013, respectively, and $1.9 million and $1.2 million for the six months ended August 2, 2014 and August 3, 2013, respectively.

Excluded from operating loss for the Europe segment are severance and transaction-related costs of approximately $1.1 million and $0.3 million for the three months ended August 2, 2014 and August 3, 2013, respectively, and $1.9 million and $0.6 million for the six months ended August 2, 2014 and August 3, 2013, respectively.

 

11. Supplemental Financial Information

On May 29, 2007, the Issuer issued $335.0 million of 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, (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 and on May 14, 2013, the Issuer issued $320.0 million aggregate principal amount of 7.75% Senior Notes (collectively, 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 August 2, 2014 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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Condensed Consolidating Balance Sheet

August 2, 2014

(in thousands)

 

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 1,367      $ 6,486      $ 19,273      $ —        $ 27,126   

Inventories

     —          96,906        73,767        —          170,673   

Prepaid expenses

     848        2,092        19,725        —          22,665   

Other current assets

     —          20,543        7,493        —          28,036   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     2,215        126,027        120,258        —          248,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     4,250        160,116        91,935        —          256,301   

Leasehold improvements

     1,335        193,302        147,032        —          341,669   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     5,585        353,418        238,967        —          597,970   

Less accumulated depreciation and amortization

     (3,260     (226,026     (132,776     —          (362,062
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,325        127,392        106,191        —          235,908   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —          18,055        —          —          18,055   

Less accumulated depreciation and amortization

     —          (4,062     —          —          (4,062
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          13,993        —          —          13,993   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —          194,054        —          (194,054     —     

Investment in subsidiaries

     2,197,415        (51,515     —          (2,145,900     —     

Goodwill

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

Intangible assets, net

     286,000        1,871        249,164        —          537,035   

Deferred financing costs, net

     35,649        —          —          —          35,649   

Restricted cash

     —          —          2,417        —          2,417   

Other assets

     412        4,096        48,775        —          53,283   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,519,476        1,384,156        614,762        (2,339,954     2,178,440   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,524,016      $ 1,651,568      $ 841,211      $ (2,339,954   $ 2,676,841   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Revolving credit facility

   $ 19,500      $ —        $ —        $ —        $ 19,500   

Trade accounts payable

     1,057        24,684        43,537        —          69,278   

Income taxes payable

     —          (118     1,628        —          1,510   

Accrued interest payable

     68,862        —          —          —          68,862   

Accrued expenses and other current liabilities

     6,432        39,071        52,016        —          97,519   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     95,851        63,637        97,181        —          256,669   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     191,662        —          2,393        (194,055     —     

Long-term debt

     2,377,657        —          —          —          2,377,657   

Obligation under capital lease

     —          17,043        —          —          17,043   

Deferred tax liability

     —          107,131        12,216        —          119,347   

Deferred rent expense

     —          22,196        11,345        —          33,541   

Unfavorable lease obligations and other long-term liabilities

     —          13,590        148        —          13,738   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,569,319        159,960        26,102        (194,055     2,561,326   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —          367        2        (369     —     

Additional paid in capital

     619,126        1,435,909        797,655        (2,233,564     619,126   

Accumulated other comprehensive income (loss), net of tax

     (146     1,024        (4,981     3,957        (146

Accumulated deficit

     (760,134     (9,329     (74,748     84,077        (760,134
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (141,154     1,427,971        717,928        (2,145,899     (141,154
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 2,524,016      $ 1,651,568      $ 841,211      $ (2,339,954   $ 2,676,841   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Balance Sheet

February 1, 2014

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 9,911      $ 4,055      $ 44,377      $ —        $ 58,343   

Inventories

     —          100,292        78,590        —          178,882   

Prepaid expenses

     443        2,023        17,005        —          19,471   

Other current assets

     644        16,953        8,708        —          26,305   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     10,998        123,323        148,680        —          283,001   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     6,956        164,902        88,851        —          260,709   

Leasehold improvements

     1,471        189,407        144,980        —          335,858   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     8,427        354,309        233,831        —          596,567   

Less accumulated depreciation and amortization

     (4,625     (220,617     (122,166     —          (347,408
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,802        133,692        111,665        —          249,159   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —          18,055        —          —          18,055   

Less accumulated depreciation and amortization

     —          (3,611     —          —          (3,611
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          14,444        —          —          14,444   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —          158,450        —          (158,450     —     

Investment in subsidiaries

     2,199,771        (49,924     —          (2,149,847     —     

Goodwill

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

Intangible assets, net

     286,000        2,471        252,624        —          541,095   

Deferred financing costs, net

     39,481        —          —          —          39,481   

Other assets

     74        3,890        50,433        (1     54,396   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,525,326        1,350,537        617,463        (2,308,298     2,185,028   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,540,126      $ 1,621,996      $ 877,808      $ (2,308,298   $ 2,731,632   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Trade accounts payable

   $ 10,630      $ 33,800      $ 39,934      $ —        $ 84,364   

Income taxes payable

     —          33        3,696        —          3,729   

Accrued interest payable

     68,338        —          —          —          68,338   

Accrued expenses and other current liabilities

     7,405        36,669        50,653        —          94,727   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     86,373        70,502        94,283        —          251,158   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     158,000        —          451        (158,451     —     

Long-term debt

     2,378,786        —          —          —          2,378,786   

Obligation under capital lease

     —          17,124        —          —          17,124   

Deferred tax liability

     —          106,890        12,674        —          119,564   

Deferred rent expense

     —          20,609        11,391        —          32,000   

Unfavorable lease obligations and other long-term liabilities

     —          15,812        221        —          16,033   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,536,786        160,435        24,737        (158,451     2,563,507   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —          367        2        (369     —     

Additional paid in capital

     619,499        1,435,909        797,836        (2,233,745     619,499   

Accumulated other comprehensive income (loss), net of tax

     (1,109     205        (4,779     4,574        (1,109

Accumulated deficit

     (701,423     (45,422     (34,271     79,693        (701,423
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (83,033     1,391,059        758,788        (2,149,847     (83,033
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 2,540,126      $ 1,621,996      $ 877,808      $ (2,308,298   $ 2,731,632   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended August 2, 2014

(in thousands)

 

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 195,933      $ 181,896      $ —        $ 377,829   

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

     (1,269     100,785        90,219        —          189,735   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,269        95,148        91,677        —          188,094   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     3,549        64,103        61,562        —          129,214   

Depreciation and amortization

     714        9,247        7,839        —          17,800   

Severance and transaction-related costs

     1,073        0        1,109        —          2,182   

Other (income) expense

     (1,968     (4     2,643        —          671   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,368        73,346        73,153        —          149,867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (2,099     21,802        18,524        —          38,227   

Interest expense, net

     54,006        558        (7     —          54,557   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (56,105     21,244        18,531        —          (16,330

Income tax expense

     —          706        3,538        —          4,244   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (56,105     20,538        14,993        —          (20,574

Equity in earnings (loss) of subsidiaries

     35,531        (98     —          (35,433     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (20,574     20,440        14,993        (35,433     (20,574

Foreign currency translation adjustments

     (1,606     170        (1,963     1,793        (1,606

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

     (3,841     166        (3,860     3,694        (3,841
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (5,447     336        (5,823     5,487        (5,447
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (26,021   $ 20,776      $ 9,170      $ (29,946   $ (26,021
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended August 3, 2013

(in thousands)

 

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 200,481      $ 166,222      $ —        $ 366,703   

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

     65        97,124        83,784        —          180,973   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (65     103,357        82,438        —          185,730   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     4,567        65,044        56,837        —          126,448   

Depreciation and amortization

     335        8,603        7,215        —          16,153   

Severance and transaction-related costs

     643        —          246        —          889   

Other (income) expense

     (2,989     1,242        (335     —          (2,082
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,556        74,889        63,963        —          141,408   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (2,621     28,468        18,475        —          44,322   

Loss on early debt extinguishment

     3,121        —          —          —          3,121   

Interest expense, net

     57,207        555        (7     —          57,755   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (62,949     27,913        18,482        —          (16,554

Income tax expense

     —          654        3,464        —          4,118   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (62,949     27,259        15,018        —          (20,672

Equity in earnings of subsidiaries

     42,277        342        —          (42,619     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (20,672     27,601        15,018        (42,619     (20,672

Foreign currency translation adjustments

     (36     (48     1,690        (1,642     (36

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

     205        (906     208        698        205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     169        (954     1,898        (944     169   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (20,503   $ 26,647      $ 16,916      $ (43,563   $ (20,503
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Six Months Ended August 2, 2014

(in thousands)

 

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 394,364      $ 336,808      $ —        $ 731,172   

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

     515        203,797        172,493        —          376,805   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (515     190,567        164,315        —          354,367   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     7,516        125,801        121,855        —          255,172   

Depreciation and amortization

     1,999        21,558        17,707        —          41,264   

Severance and transaction-related costs

     1,697        1        2,066        —          3,764   

Other (income) expense

     (4,141     (26     3,352        —          (815
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     7,071        147,334        144,980        —          299,385   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (7,586     43,233        19,335        —          54,982   

Interest expense, net

     108,226        1,097        (7     —          109,316   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (115,812     42,136        19,342        —          (54,334

Income tax expense (benefit)

     —          (1,041     5,418        —          4,377   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (115,812     43,177        13,924        —          (58,711

Equity in earnings (loss) of subsidiaries

     57,101        (1,171     —          (55,930     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (58,711     42,006        13,924        (55,930     (58,711

Foreign currency translation adjustments

     181        295        (994     699        181   

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

     782        524        792        (1,316     782   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     963        819        (202     (617     963   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (57,748   $ 42,825      $ 13,722      $ (56,547   $ (57,748
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Six Months Ended August 3, 2013

(in thousands)

 

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 408,842      $ 311,867      $ —        $ 720,709   

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

     107        198,320        161,112        —          359,539   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (107     210,522        150,755        —          361,170   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     9,094        128,514        114,227        —          251,835   

Depreciation and amortization

     651        16,900        14,227        —          31,778   

Severance and transaction-related costs

     1,171        —          633        —          1,804   

Other (income) expense

     (5,078     2,407        1,513        —          (1,158
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     5,838        147,821        130,600        —          284,259   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (5,945     62,701        20,155        —          76,911   

Loss on early debt extinguishment

     4,795        —          —          —          4,795   

Interest expense, net

     114,894        1,103        (23     —          115,974   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (125,634     61,598        20,178        —          (43,858

Income tax expense (benefit)

     —          (1,194     4,592        —          3,398   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (125,634     62,792        15,586        —          (47,256

Equity in earnings of subsidiaries

     78,378        675        —          (79,053     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (47,256     63,467        15,586        (79,053     (47,256

Foreign currency translation adjustments

     (1,811     (177     694        (517     (1,811

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

     (5,246     (1,182     (5,309     6,491        (5,246
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (7,057     (1,359     (4,615     5,974        (7,057
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (54,313   $ 62,108      $ 10,971      $ (73,079   $ (54,313
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows

Six Months Ended August 2, 2014

(in thousands)

 

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (58,711   $ 42,006      $ 13,924      $ (55,930   $ (58,711

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

          

Equity in earnings (loss) of subsidiaries

     (57,101     1,171        —          55,930        —     

Depreciation and amortization

     1,999        21,558        17,707        —          41,264   

Amortization of lease rights and other assets

     —          —          2,021        —          2,021   

Amortization of debt issuance costs

     3,998        —          —          —          3,998   

Accretion of debt premium

     (1,129     —          —          —          (1,129

Net accretion of unfavorable lease obligations

     —          (242     (22     —          (264

Loss on sale/retirement of property and equipment, net

     —          90        2        —          92   

Loss on sale of intangible assets/lease rights

     —          —          216        —          216   

Stock-based compensation (benefit) expense

     (620     115        132        —          (373

(Increase) decrease in:

          

Inventories

     —          3,386        5,208        —          8,594   

Prepaid expenses

     (405     (69     (2,501     —          (2,975

Other assets

     306        (3,559     1,050        —          (2,203

Increase (decrease) in:

          

Trade accounts payable

     (9,572     (3,492     4,059        —          (9,005

Income taxes payable

     —          (148     (2,103     —          (2,251

Accrued interest payable

     524        —          —          —          524   

Accrued expenses and other liabilities

     (974     989        (1,160     —          (1,145

Deferred income taxes

     —          —          194        —          194   

Deferred rent expense

     —          1,587        (173     —          1,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (121,685     63,392        38,554        —          (19,739
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     (522     (20,459     (9,966     —          (30,947

Acquisition of intangible assets/lease rights

     —          (59     (431     —          (490
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (522     (20,518     (10,397     —          (31,437
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from revolving credit facility

     122,500        —          —          —          122,500   

Payments on revolving credit facility

     (103,000     —          —          —          (103,000

Payment of debt issuance costs

     (165     —          —          —          (165

Principal payments on capital lease

     —          (50     —          —          (50

Intercompany activity, net

     94,329        (41,514     (52,815     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     113,664        (41,564     (52,815     —          19,285   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (1     1,121        (446     —          674   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (8,544     2,431        (25,104     —          (31,217

Cash and cash equivalents, at beginning of period

     9,911        4,055        44,377        —          58,343   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     1,367        6,486        19,273        —          27,126   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

Condensed Consolidating Statement of Cash Flows

Six Months Ended August 3, 2013

(in thousands)

 

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (47,256   $ 63,467      $ 15,586      $ (79,053   $ (47,256

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

          

Equity in earnings of subsidiaries

     (78,378     (675     —          79,053        —     

Depreciation and amortization

     651        16,900        14,227        —          31,778   

Amortization of lease rights and other assets

     —          —          1,950        —          1,950   

Amortization of debt issuance costs

     4,228        —          —          —          4,228   

Accretion of debt premium

     (1,037     —          —          —          (1,037

Net accretion of unfavorable lease obligations

     —          (396     (27     —          (423

Loss on sale/retirement of property and equipment, net

     —          32        1        —          33   

Loss on early debt extinguishment

     4,795        —          —          —          4,795   

Stock compensation (benefit) expense

     353        (82     265        —          536   

(Increase) decrease in:

          

Inventories

     36        (7,499     (11,071     —          (18,534

Prepaid expenses

     (301     127        (1,996     —          (2,170

Other assets

     (235     (170     (1,036     —          (1,441

Increase (decrease) in:

          

Trade accounts payable

     (364     913        300        —          849   

Income taxes payable

     —          (239     (7,801     —          (8,040

Accrued interest payable

     2,376        —          —          —          2,376   

Accrued expenses and other liabilities

     (1,879     (7,162     (5,366     —          (14,407

Deferred income taxes

     —          —          (120     —          (120

Deferred rent expense

     —          788        (328     —          460   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (117,011     66,004        4,584        —          (46,423
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     (1,153     (25,449     (14,116     —          (40,718

Acquisition of intangible assets/lease rights

     —          (105     (1,512     —          (1,617
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,153     (25,554     (15,628     —          (42,335
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from notes

     530,000        —          —          —          530,000   

Repurchases of notes, including tender premium and fees

     (523,660     —          —          —          (523,660

Payment of debt issuance costs

     (9,845     —          —          —          (9,845

Principal payments on capital lease

     —          (24     —          —          (24

Intercompany activity, net

     65,173        (35,826     (29,347     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     61,668        (35,850     (29,347     —          (3,529
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (1     (2,452     1,582        —          (871
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (56,497     2,148        (38,809     —          (93,158

Cash and cash equivalents, at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     (105     6,447        67,456        —          73,798   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
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, 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 one week or more. The removal is effective prospectively upon the completion of the first fiscal 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.

Results of Consolidated Operations

Management 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 August 2, 2014, we operated a total of 3,052 owned stores, of which 1,880 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (North America segment) and 1,172 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®. In January 2014, we made a decision to close our China stores and closed all of our 17 company-operated stores by May 4, 2014.

As of August 2, 2014 we also franchised or licensed 436 stores in Japan, the Middle East, Turkey, Greece, Guatemala, Malta, Ukraine, Mexico, India, Dominican Republic, El Salvador, Venezuela, Panama, Honduras, Indonesia, Philippines, Costa Rica, Colombia, Serbia, Sweden, Romania and Bulgaria. We account for the goods we sell to third parties under franchising agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. The franchise fees we charge under the franchising agreements are reported in “Other (income) expense, net” in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.

Claire’s® is our primary global brand that we operate through company-operated 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-operated 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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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 as well as our ear piercing service, necklaces, bracelets, body jewelry and rings; and

 

    Accessories: Includes hairgoods; beauty products; personal, fashion, and seasonal accessories, including tech accessories, holders, phone cases, stationery, key rings, DIY kits, attitude glasses, headwear, legwear, armwear, and sunglasses; and handbags and small leather goods.

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.

Financial activity for the three and six months ended August 2, 2014 includes the following:

 

    Net sales increase of 3.0% and 1.5%, respectively.

 

    Same store sales percentages:

 

     Three Months
Ended
August 2, 2014
    Six Months
Ended
August 2, 2014
 

Consolidated

     (0.6 )%      (2.5 )% 

North America

     (2.9 )%      (4.3 )% 

Europe

     2.5     0.2

 

    Operating income margin of 10.1% and 7.5%, respectively.

Operational activity for the three and six months ended August 2, 2014 includes the following:

 

    Opened 11 and 26, respectively, new company-operated stores.
    Closed 30 and 88, respectively, company-operated stores due to underperformance or lease renewal terms that did not meet our criteria, including 3 and 17 stores, respectively, in China.

A summary of our consolidated results of operations for the three and six months ended August 2, 2014 and August 3, 2013 are as follows (dollars in thousands):

 

     Three Months
Ended
August 2, 2014
    Three Months
Ended
August 3, 2013
 

Net sales

   $ 377,829      $ 366,703   

Decrease in same store sales

     (0.6 )%      (0.1 )% 

Gross profit percentage

     49.8     50.6

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

     34.2     34.5

Depreciation and amortization as a percentage of net sales

     4.7     4.4

Operating income

   $ 38,227      $ 44,322   

Loss on early debt extinguishment

   $ —        $ 3,121   

Net loss

   $ (20,574   $ (20,672

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

     3,052        3,094   

 

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

 

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     Six Months
Ended
August 2, 2014
    Six Months
Ended
August 3, 2013
 

Net sales

   $ 731,172      $ 720,709   

(Decrease) increase in same store sales

     (2.5 )%      1.3

Gross profit percentage

     48.5     50.1

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

     34.9     34.9

Depreciation and amortization as a percentage of net sales

     5.6     4.4

Operating income

   $ 54,982      $ 76,911   

Loss on early debt extinguishment

   $ —        $ 4,795   

Net loss

   $ (58,711   $ (47,256

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

     3,052        3,094   

 

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

Net sales

Net sales for the three months ended August 2, 2014 increased $11.1 million, or 3.0%, from the three months ended August 3, 2013. The increase was attributable to new store sales of $15.9 million, a favorable foreign currency translation effect of our non-U.S. net sales of $8.1 million and an increase in shipments to franchisees of $1.0 million, partially offset by the effect of store closures of $11.7 million and a decrease in same store sales of $2.2 million. Net sales would have increased 0.8% excluding the impact from foreign currency exchange rate changes.

Net sales for the six months ended August 2, 2014 increased $10.5 million, or 1.5%, from the six months ended August 3, 2013. The increase was attributable to new store sales of $32.6 million, a favorable foreign currency translation effect of our non-U.S. net sales of $14.7 million and an increase in shipments to franchisees of $1.7 million, partially offset by the effect of store closures of $21.2 million and a decrease in same store sales of $17.3 million. Net sales would have decreased 0.6% excluding the impact from foreign currency exchange rate changes.

For the three months ended August 2, 2014, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 0.6%, partially offset by an increase in average transaction value of 1.4%.

For the six months ended August 2, 2014, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 2.0%, partially offset by an increase in average transaction value of 0.6%.

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

 

     Percentage of Total      Percentage of Total  

Product Category

   Three Months
Ended
August 2, 2014
     Three Months
Ended
August 3, 2013
     Six Months
Ended
August 2, 2014
     Six Months
Ended
August 3, 2013
 

Jewelry

     50.3         51.8         50.3         51.5   

Accessories

     49.7         48.2         49.7         48.5   
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0         100.0         100.0         100.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Gross profit

In calculating gross profit and gross profit percentages, we exclude the costs related to our distribution center 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 August 2, 2014, gross profit percentage decreased 80 basis points to 49.8% compared to 50.6% during the three months ended August 3, 2013. The decrease in gross profit percentage consisted of a 40 basis point decrease in merchandise margin, a 30 basis point increase in occupancy costs and a 10 basis point increase in buying and buying-related costs. The decrease in merchandise margin resulted primarily from an increase in markdowns. Markdowns fluctuate based upon many factors including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The increase in occupancy costs, as a percentage of net sales, was primarily caused by the deleveraging effect of a decrease in same store sales.

During the six months ended August 2, 2014, gross profit percentage decreased 160 basis points to 48.5% compared to 50.1% during the six months ended August 3, 2013. The decrease in gross profit percentage consisted of a 120 basis point increase in occupancy costs and a 40 basis point decrease in merchandise margin. The increase in occupancy costs, as a percentage of net sales, was primarily caused by the deleveraging effect of a decrease in same store sales. The decrease in merchandise margin resulted primarily from an increase in markdowns. Markdowns fluctuate based upon many factors including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin.

Selling, general and administrative expenses

During the three months ended August 2, 2014, selling, general and administrative expenses increased $2.8 million, or 2.2%, compared to the three months ended August 3, 2013. As a percentage of net sales, selling, general and administrative expenses decreased 30 basis points compared to the three months ended August 3, 2013. Excluding an unfavorable $2.9 million foreign currency translation effect, selling, general and administrative expenses would have decreased $0.1 million.

During the six months ended August 2, 2014, selling, general and administrative expenses increased $3.3 million, or 1.3%, compared to the six months ended August 3, 2013. As a percentage of net sales, selling, general and administrative expenses remained unchanged compared to the six months ended August 3, 2013. Excluding an unfavorable $5.6 million foreign currency translation effect, selling, general and administrative expenses would have decreased $2.3 million. This decrease primarily resulted from reductions in compensation-related expenses, such as store payroll and bonus and previously recorded non-cash stock-based compensation expense.

Depreciation and amortization expense

During the three months ended August 2, 2014, depreciation and amortization expense increased $1.6 million to $17.8 million compared to $16.2 million for the three months ended August 3, 2013. Excluding an unfavorable $0.3 million foreign currency translation effect, the increase in depreciation and amortization expense would have been $1.3 million.

During the six months ended August 2, 2014, depreciation and amortization expense increased $9.5 million to $41.3 million compared to $31.8 million for the six months ended August 3, 2013. Excluding an unfavorable $0.6 million foreign currency translation effect, the increase in depreciation and amortization would have been $8.9 million.

 

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Other (income) expense, net

The following is a summary of other (income) expense activity for the three and six months ended August 2, 2014 and August 3, 2013 (in thousands):

 

     Three Months
Ended
August 2, 2014
    Three Months
Ended
August 3, 2013
    Six Months
Ended
August 2, 2014
    Six Months
Ended
August 3, 2013
 

Foreign currency exchange (gain) loss, net

   $ 2,026      $ (755   $ 1,769      $ 1,274   

Royalty income

     (1,355     (1,327     (2,541     (2,432

Other income

     —          —          (43     —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 671      $ (2,082   $ (815   $ (1,158
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss on early debt extinguishment

There was no debt repurchase activity for the three and six months ended August 2, 2014. The following is a summary of the Company’s debt repurchase activity for the three and six months ended August 3, 2013 (in thousands). All debt repurchases in the three and six months ended August 3, 2013, were pursuant to the tender offer and note redemptions.

 

     Three Months Ended August 3, 2013      Six Months Ended August 3, 2013  

Notes Repurchased

   Principal
Amount
     Repurchase
Price
     Recognized
Loss (1)
     Principal
Amount
     Repurchase
Price
     Recognized
Loss (2)
 

9.25% Senior Fixed Rate Notes due 2015 (the “Senior Fixed Rate Notes”)

   $ 181,259       $ 181,259       $ 1,494       $ 220,270       $ 219,802       $ 2,597   

9.625%/10.375% Senior Toggle Notes due 2015 (the “Senior Toggle Notes”)

     280,667         280,667         1,627         302,190         301,947         2,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 461,926       $ 461,926       $ 3,121       $ 522,460       $ 521,749       $ 4,795   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Net of deferred issuance cost write-offs of $1,476 for the Senior Fixed Rate Notes and $1,625 for the Senior Toggle Notes and tender premiums and fees of $18 for the Senior Fixed Rate Notes and $2 for the Senior Toggle Notes.
(2) Net of deferred issuance cost write-offs of $1,829 for the Senior Fixed Rate Notes and $1,766 for the Senior Toggle Notes and tender premiums and fees of $1,236 for the Senior Fixed Rate Notes and $675 for the Senior Toggle Notes.

Interest expense, net

During the three months ended August 2, 2014, net interest expense aggregated $54.6 million compared to $57.8 million for the three months ended August 3, 2013. The decrease of $3.2 million is primarily due to a lower rate of interest on the indebtedness used to refinance our former Senior Fixed Rate Notes and Senior Toggle Notes.

During the six months ended August 2, 2014, net interest expense aggregated $109.3 million compared to $116.0 million for the six months ended August 3, 2013. The decrease of $6.7 million is primarily due to a lower rate of interest on the indebtedness used to refinance our former Senior Fixed Rate Notes and Senior Toggle Notes.

Income taxes

The effective income tax rate for the three and six months ended August 2, 2014 was (26.0)% and (8.1)% compared to (24.9)% and (7.7)% for the three and six months ended August 3, 2013. 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 and six months ended August 2, 2014 and August 3, 2013, 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.

 

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North America

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

 

     Three Months
Ended
August 2, 2014
    Three Months
Ended
August 3, 2013
    Six Months
Ended
August 2, 2014
    Six Months
Ended
August 3, 2013
 

Net sales

   $ 212,458      $ 219,317      $ 426,656      $ 445,274   

(Decrease) increase in same store sales

     (2.9 )%      1.1     (4.3 )%      1.7

Gross profit percentage

     49.1     51.7     48.0     51.7

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

     1,880        1,925        1,880        1,925   

 

(1) Number of stores excludes stores operated under franchise agreements and includes 11 China stores as of August 3, 2013.

During the three months ended August 2, 2014, net sales in North America decreased $6.9 million, or 3.1%, from the three months ended August 3, 2013. The decrease was attributable to the effect of store closures of $6.5 million, a decrease in same store sales of $5.9 million and an unfavorable foreign currency translation effect of our non-U.S. net sales of $0.8 million, partially offset by new store sales of $5.3 million and an increase in shipments to franchisees of $1.0 million. Sales would have decreased 2.8% excluding the impact from foreign currency exchange rate changes.

During the six months ended August 2, 2014, net sales in North America decreased $18.6 million, or 4.2%, from the six months ended August 3, 2013. The decrease was attributable to a decrease in same store sales of $17.9 million, the effect of store closures of $12.0 million and an unfavorable foreign currency translation effect of our non-U.S. net sales of $2.2 million, partially offset by new store sales of $11.8 million and increased shipments to franchisees of $1.7 million. Sales would have decreased 3.7% excluding the impact from foreign currency exchange rate changes.

For the three months ended August 2, 2014, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 0.9% and a decrease in average transaction value of 0.8%.

For the six months ended August 2, 2014, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 2.8% and a decrease in average transaction value of 0.6%.

During the three months ended August 2, 2014, gross profit percentage decreased 260 basis points to 49.1% compared to 51.7% during the three months ended August 3, 2013. The decrease in gross profit percentage consisted of a 150 basis point decrease in merchandise margin and a 110 basis point increase in occupancy costs. The decrease in merchandise margin resulted primarily from an increase in markdowns and lower initial markups. Markdowns fluctuate based upon many factors including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The increase in occupancy costs, as a percentage of net sales, was primarily caused by the deleveraging effect of a decrease in same store sales.

During the six months ended August 2, 2014, gross profit percentage decreased 370 basis points to 48.0% compared to 51.7% during the six months ended August 3, 2013. The gross profit percentage consisted of a 200 basis point increase in occupancy costs and a 170 basis point decrease in merchandise margin. The increase in occupancy costs, as a percentage of net sales, was primarily caused by the deleveraging effect of a decrease in same store sales. The decrease in merchandise margin resulted primarily from an increase in markdowns. Markdowns fluctuate based upon many factors including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin.

 

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

 

     Percentage of Total      Percentage of Total  

Product Category

   Three Months
Ended
August 2, 2014
     Three Months
Ended
August 3, 2013
     Six Months
Ended
August 2, 2014
     Six Months
Ended
August 3, 2013
 

Jewelry

     55.4         57.5         55.5         56.5   

Accessories

     44.6         42.5         44.5         43.5   
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0         100.0         100.0         100.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Europe

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

 

     Three Months
Ended
August 2, 2014
    Three Months
Ended
August 3, 2013
    Six Months
Ended
August 2, 2014
    Six Months
Ended
August 3, 2013
 

Net sales

   $ 165,371      $ 147,386      $ 304,516      $ 275,435   

Increase (decrease) in same store sales

     2.5     (2.0 )%      0.2     0.7

Gross profit percentage

     50.6     49.1     49.1     47.6

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

     1,172        1,169        1,172        1,169   

 

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

During the three months ended August 2, 2014, net sales in Europe increased $18.0 million, or 12.2%, from the three months ended August 3, 2013. The increase was attributable to new store sales of $10.6 million, a favorable foreign currency translation effect of our non-U.S. net sales of $8.9 million and an increase of same store sales of $3.7 million, partially offset by the effect of store closures of $5.2. Sales would have increased 5.8% excluding the impact from foreign currency exchange rate changes.

During the six months ended August 2, 2014, net sales in Europe increased $29.1 million, or 10.6%, from the six months ended August 3, 2013. The increase was attributable to new store sales of $20.8 million, a favorable foreign currency translation effect of our non-U.S. net sales of $16.9 million and an increase in same store sales of $0.6 million, partially offset by the effect of store closures of $9.2 million. Sales would have increased 4.2% excluding the impact from foreign currency exchange rate changes.

For the three months ended August 2, 2014, the increase in same store sales was primarily attributable to an increase in average transaction value of 4.7%, partially offset by a decrease in average number of transactions per store of 1.0%.

For the six months ended August 2, 2014, the increase in same store sales was primarily attributable to an increase in average transaction value of 3.1%, partially offset by a decrease in average number of transactions per store of 1.8%.

During the three months ended August 2, 2014, gross profit percentage increased 150 basis points to 50.6% compared to 49.1% during the three months ended August 3, 2013. The increase in gross profit percentage consisted of a 90 basis point increase in merchandise margin and a decrease of 80 basis points in occupancy costs, partially offset by a 20 basis point increase in buying and buying-related costs. The increase in merchandise margin resulted primarily from a decrease in markdowns partially offset by higher inventory shrink. Markdowns fluctuate based upon many factors including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns or shrink that would materially affect our merchandise margin. The decrease increase in occupancy costs, as a percentage of net sales, was primarily caused by the leveraging effect of an increase in same store sales.

During the six months ended August 2, 2014, gross profit percentage increased 150 basis points to 49.1% compared to 47.6% during the six months ended August 3, 2013. The increase in gross profit percentage consisted of a 140 basis point increase in merchandise margin and a 20 basis point decrease in occupancy costs, partially offset by a 10 basis point increase in buying and buying-related costs. The increase in merchandise margin resulted primarily from a decrease in markdowns and higher initial markups.

 

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Markdowns fluctuate based upon many factors including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The decrease increase in occupancy costs, as a percentage of net sales, was primarily caused by the leveraging effect of an increase in same store sales.

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

 

     Percentage of Total      Percentage of Total  
     Three Months      Three Months      Six Months      Six Months  
     Ended      Ended      Ended      Ended  

Product Category

   August 2, 2014      August 3, 2013      August 2, 2014      August 3, 2013  

Jewelry

     43.8         43.6         43.2         43.7   

Accessories

     56.2         56.4         56.8         56.3   
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0         100.0         100.0         100.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liquidity and Capital Resources

We anticipate that cash generated from operations, borrowings under our $115.0 million Credit Facility (as described below) and future refinancings of our indebtedness will be sufficient to allow us to satisfy payments of interest and principal on our indebtedness as they become due, to fund new store expenditures, and future working capital requirements in both the next twelve months and over the longer term. Interest on the outstanding Notes (as described below) will be approximately $206.1 million in Fiscal 2014, and we expect to fund these interest payments through a combination of cash from operations and borrowings under our Credit Facility. No principal is due on the Notes until Fiscal 2017, when our Senior Subordinated Notes will mature. We expect to pay the outstanding principal amount of these Notes at maturity through a combination of new indebtedness, cash from operations and other available sources. In addition, we anticipate the cash generated from operations and borrowings under the Credit Facility will be sufficient to allow us to fund new store expenditures and future working capital requirements in both the next twelve months and over the longer term. However, our ability to make interest payments and meet operational liquidity needs, as well as our ability to refinance the Senior Subordinated Notes when they mature in Fiscal 2017, will depend, in part, on our future operating performance. Our future operating performance and liquidity, as well as our ability to refinance our indebtedness, 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 1, 2014.

A summary of cash flows provided by (used in) operating, investing and financing activities for the six months ended August 2, 2014 and August 3, 2013 is outlined in the table below (in thousands):

 

     Six Months     Six Months  
     Ended     Ended  
     August 2, 2014     August 3, 2013  

Operating activities

   $ (19,739   $ (46,423

Investing activities

     (31,437     (42,335

Financing activities

     19,285        (3,529

Cash flows from operating activities

For the six months ended August 2, 2014, cash used in operations decreased $26.7 million compared to the prior year period. The primary reason for the decrease was a decrease in working capital, excluding cash and cash equivalents, of $28.4 million, a decrease in tax payments and other items of $6.5 million, and a decrease in interest payments of $4.6 million, partially offset by a net decrease in operating income, of $12.8 million.

 

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Cash flows from investing activities

For the six months ended August 2, 2014, cash used in investing activities was $31.4 million and primarily consisted of $31.4 million for capital expenditures. For the six months ended August 3, 2013, cash used in investing activities was $42.3 million and primarily consisted of $42.3 million for capital expenditures. During the remainder of Fiscal 2014, we expect to fund approximately $10.0 million of capital expenditures.

Cash flows from financing activities

For the six months ended August 2, 2014, cash provided by financing activities was $19.3 million, which consisted primarily of net borrowings of $19.5 million under the revolving Credit Facility, partially offset by payment of $0.2 million in financing costs. For the six months ended August 3, 2013, cash used in financing activities was $3.5 million, which consisted primarily of proceeds of $530.0 million from the issuance of $210.0 million aggregate principal amount of 6.125% Senior Secured First Lien Notes and $320.0 million aggregate principal amount of 7.75% Senior Notes, note repurchases of $521.7 million to retire $220.3 million aggregate principal amount of Senior Fixed Rate Notes and $302.2 million aggregate principal amount of Senior Toggle Notes pursuant to a tender offer and note redemptions, to pay $1.9 million in tender premiums and fees, and to pay $9.8 million in financing costs.

We or our affiliates have purchased and may, from time to time, purchase portions of our indebtedness in privately-negotiated, open market transactions.

Cash Position

As of August 2, 2014, we had cash and cash equivalents of $27.1 million and all cash equivalents were maintained in one money market fund invested exclusively in U.S. Treasury Securities.

As of August 2, 2014, our foreign subsidiaries held cash and cash equivalents of $19.3 million. During the six months ended August 2, 2014, we repatriated cash held by foreign subsidiaries but did not accrue U.S. income taxes since the amount of our remaining U.S. net operating loss carry forwards was sufficient to offset the associated income tax liability. During the remainder of Fiscal 2014, 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 August 2, 2014, we do not expect to pay U.S. income tax on future Fiscal 2014 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, borrowings under our Credit Facility (as described below), and future refinancings of our indebtedness will be sufficient to allow us to satisfy payments of interest and principal on our indebtedness as they become due, to fund new store expenditures, and future working capital requirements in both the next twelve months and over the longer term. However, this will depend, in part, on our future operating performance. Our future operating performance and liquidity, as well as our ability to refinance our indebtedness, may 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 1, 2014.

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 (as amended, 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, maturing September 20, 2017. On April 30, 2014, the Company entered into Amendment No. 1 to its Credit Facility (the “Amendment”). The Amendment increased the maximum permitted Total Net Secured Leverage Ratio from 5.50:1.00 to 6.00:1.00 for purposes of the covenant described below.

 

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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 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 our 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 6.125% Senior Secured First Lien Notes and the 9.0% Senior Secured First Lien Notes due 2019 (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 are required to maintain, at each borrowing date measured at the end of the prior fiscal quarter (but reflecting borrowings and repayments under the Credit Facility through the measurement date) and at the end of each fiscal quarter, a maximum Total Net Secured Leverage Ratio of 6.0:1.0 based upon the ratio of our 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. As of August 2, 2014, our revolving loans and letters of credit outstanding exceeded $15.0 million, and our Total Net Secured Leverage Ratio was 5.1:1.0.

The Credit Facility also contains various covenants that limit our ability to engage in specified types of transactions. These covenants, subject to certain exceptions and other basket amounts, limit our and our 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 August 2, 2014, we were in compliance with the covenants.

 

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As of August 2, 2014, we had $19.5 million of borrowings and $3.3 million of letters of credit outstanding, which reduces the borrowing availability under the Credit Facility to $92.2 million as of that date.

Note Covenants

Our Senior Subordinated Notes, Senior Secured Second Lien Notes, 9.0% Senior Secured First Lien Notes, 6.125% Senior Secured First Lien Notes, and 7.75% Senior Notes (collectively, the “Notes”) also contain various covenants that limit our ability to engage in specified types of transactions. These covenants, subject to certain exceptions and other basket amounts, limit our and our subsidiaries’ ability to, among other things:

 

    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 to us. None of these Note covenants, however, require us to maintain any particular financial ratio or other measure of financial performance. As of August 2, 2014, we were in compliance with the covenants under the Notes.

 

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Europe Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $2.5 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. As of August 2, 2014, we had a reduction of $2.4 million of outstanding bank guarantees under this facility, which reduces the borrowing availability to $0.1 million as of that date.

Parent Company Registration Statement Filing

On May 3, 2013, Claire’s Inc., our Parent, 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 2013 Annual Report on Form 10-K, filed on April 2, 2014, 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.

Recent Accounting Pronouncements

See Note 2 – Recent Accounting Pronouncements, in the Notes to 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; unwillingness of vendors and service providers to supply goods or services pursuant to historical customary credit arrangements; 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 other channels, such as e-commerce; uncertainties generally associated with the specialty retailing business, such as decreases in mall traffic; 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; increase in our cost of merchandise; significant increases in our merchandise markdowns; inability to grow our Company operated store base in North America and Europe, or expand

 

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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; results from any future asset impairment analysis; changes in applicable laws, rules and regulations, including changes in North America and Europe, 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 anti-bribery laws; changes in employment laws, including 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; 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 2013 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, excluding restricted cash, at financial institutions that are in excess of federally insured limits. With the current financial environment, 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 August 2, 2014, all cash equivalents were maintained in one money market fund that was invested exclusively in U.S. Treasury securities and our restricted cash was deposited with a significant and credit worthy financial institution.

Interest Rates

As of August 2, 2014, we had fixed rate debt of $2,377.7 million and variable rate debt of $19.5 million. Based on our variable rate balance as of August 2, 2014, a 1% change in interest rates would increase or decrease our annual interest expense by approximately $0.2 million.

Foreign Currency

We are exposed to market risk from foreign currency exchange rate fluctuations on the United States dollar (“USD” or “dollar”) value of foreign currency denominated transactions and our investments in foreign subsidiaries. We manage this exposure to market risk through our regular operating and financing activities, and may from time to time, use foreign currency options. Exposure to market risk for changes in foreign currency exchange rates relates primarily to our foreign operations’ buying, selling, and financing activities in currencies other than local currencies and to the carrying value of our net investments in foreign subsidiaries. At August 2, 2014, we maintained no foreign currency options. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries. Included in “Comprehensive income (loss)” are $1.0 million and $(7.1) million, net of tax, reflecting the unrealized gain (loss) on foreign currency translations and intra-entity foreign currency transactions during the six months ended August 2, 2014 and August 3, 2013, 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

 

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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 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. See also “Cautionary Note Regarding Forward Looking Statements and Risk Factors.”

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and 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 August 2, 2014, 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 1, 2014.

 

Item 6. Exhibits

 

  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.

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

 

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SIGNATURES

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

 

    CLAIRE’S STORES, INC.
August 29, 2014     By:  

/s/ Beatrice Lafon

      Beatrice Lafon, Chief Executive Officer (principal executive officer)
August 29, 2014     By:  

/s/ J. Per Brodin

      J. Per Brodin, Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

 

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INDEX TO EXHIBITS

 

EXHIBIT
NO.
   DESCRIPTION
  31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
  31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
  32.1    Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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

 

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