10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended May 2, 2015

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 June 1, 2015, 100 shares of the Registrant’s common stock, $0.001 par value, were outstanding.

 

 

 


Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

INDEX

 

     PAGE NO.  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

     3   

Unaudited Condensed Consolidated Balance Sheets as of May 2, 2015 and January 31, 2015

     3   

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended May 2, 2015 and May 3, 2014

     4   

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended May  2, 2015 and May 3, 2014

     5   

Notes to Unaudited Condensed Consolidated Financial Statements

     6   

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

     18   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     28   

Item 4. Controls and Procedures

     30   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     30   

Item 1A. Risk Factors

     30   

Item 6. Exhibits

     31   

SIGNATURES

     32   

Ex-31.1 Section 302 Certification of CEO

  

Ex-31.2 Section 302 Certification of CFO

  

Ex-32.1 Section 906 Certification of CEO

  

Ex-32.2 Section 906 Certification of CFO

  

 

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PART I. FINANCIAL INFORMATION

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     May 2, 2015     January 31, 2015  
     (In thousands, except share and per share amounts)  

ASSETS

    

Current assets:

    

Cash and cash equivalents and restricted cash of $2,016 and $2,029 respectively

   $ 22,458      $ 29,415   

Inventories

     156,311        145,908   

Prepaid expenses

     32,660        17,349   

Other current assets

     27,468        27,474   
  

 

 

   

 

 

 

Total current assets

  238,897      220,146   
  

 

 

   

 

 

 

Property and equipment:

Furniture, fixtures and equipment

  250,161      248,162   

Leasehold improvements

  326,088      324,306   
  

 

 

   

 

 

 
  576,249      572,468   

Accumulated depreciation and amortization

  (375,634   (365,036
  

 

 

   

 

 

 
  200,615      207,432   
  

 

 

   

 

 

 

Leased property under capital lease:

Land and building

  18,055      18,055   

Accumulated depreciation and amortization

  (4,739   (4,514
  

 

 

   

 

 

 
  13,316      13,541   
  

 

 

   

 

 

 

Goodwill

  1,426,899      1,426,899   

Intangible assets, net of accumulated amortization of $71,601 and $70,374, respectively

  508,096      510,362   

Deferred financing costs, net of accumulated amortization of $27,502 and $25,465, respectively

  30,398      32,525   

Other assets

  44,951      45,672   
  

 

 

   

 

 

 
  2,010,344      2,015,458   
  

 

 

   

 

 

 

Total assets

$ 2,463,172    $ 2,456,577   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

Current liabilities:

Revolving credit facility

$ 67,500    $ —     

Trade accounts payable

  80,701      69,826   

Income taxes payable

  508      1,780   

Accrued interest payable

  42,431      67,790   

Accrued expenses and other current liabilities

  86,683      93,505   
  

 

 

   

 

 

 

Total current liabilities

  277,823      232,901   
  

 

 

   

 

 

 

Long-term debt

  2,375,870      2,376,478   

Obligation under capital lease

  16,897      16,954   

Deferred tax liability

  113,029      113,215   

Deferred rent expense

  34,998      35,265   

Unfavorable lease obligations and other long-term liabilities

  11,929      13,538   
  

 

 

   

 

 

 
  2,552,723      2,555,450   
  

 

 

   

 

 

 

Commitments and contingencies

Stockholder’s deficit:

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

  —        —     

Additional paid-in capital

  618,679      619,325   

Accumulated other comprehensive loss, net of tax

  (37,234   (37,698

Accumulated deficit

  (948,819   (913,401
  

 

 

   

 

 

 
  (367,374   (331,774
  

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

$ 2,463,172    $ 2,456,577   
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(in thousands)

 

     Three Months     Three Months  
     Ended     Ended  
     May 2, 2015     May 3, 2014  

Net sales

   $ 319,995      $ 353,343   

Cost of sales, occupancy and buying expenses

(exclusive of depreciation and amortization shown separately below)

     172,852        187,070   
  

 

 

   

 

 

 

Gross profit

  147,143      166,273   
  

 

 

   

 

 

 

Other expenses:

Selling, general and administrative

  113,018      125,958   

Depreciation and amortization

  14,554      23,464   

Severance and transaction-related costs

  407      1,582   

Other expense (income), net

  140      (1,486
  

 

 

   

 

 

 
  128,119      149,518   
  

 

 

   

 

 

 

Operating income

  19,024      16,755   

Interest expense, net

  54,420      54,759   
  

 

 

   

 

 

 

Loss before income tax expense

  (35,396   (38,004

Income tax expense

  22      133   
  

 

 

   

 

 

 

Net loss

$ (35,418 $ (38,137
  

 

 

   

 

 

 

Net loss

$ (35,418 $ (38,137

Other comprehensive income:

Foreign currency translation adjustments

  (85   1,787   

Net gain on intra-entity foreign currency transactions, net of tax (benefit) expense of $(264) and $308

  549      4,623   
  

 

 

   

 

 

 

Other comprehensive income

  464      6,410   
  

 

 

   

 

 

 

Comprehensive loss

$ (34,954 $ (31,727
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Three Months     Three Months  
     Ended     Ended  
     May 2, 2015     May 3, 2014  

Cash flows from operating activities:

    

Net loss

   $ (35,418   $ (38,137

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

    

Depreciation and amortization

     14,554        23,464   

Amortization of lease rights and other assets

     787        1,007   

Amortization of debt issuance costs

     2,036        2,022   

Accretion of debt premium

     (608     (559

Net unfavorable accretion of lease obligations

     (84     (146

Loss on sale/retirement of property and equipment, net

     156        109   

Stock-based compensation benefit

     (646     (231

(Increase) decrease in:

    

Inventories

     (10,331     5,931   

Prepaid expenses

     (15,010     (2,474

Other assets

     (522     (4,022

Increase (decrease) in:

    

Trade accounts payable

     10,891        (5,019

Income taxes payable

     (1,247     (728

Accrued interest payable

     (25,571     (24,788

Accrued expenses and other liabilities

     (7,900     (5,400

Deferred income taxes

     613        (670

Deferred rent expense

     (334     1,042   
  

 

 

   

 

 

 

Net cash used in operating activities

  (68,634   (48,599
  

 

 

   

 

 

 

Cash flows from investing activities:

Acquisition of property and equipment

  (6,207   (18,973

Acquisition of intangible assets/lease rights

  (44   (413
  

 

 

   

 

 

 

Net cash used in investing activities

  (6,251   (19,386
  

 

 

   

 

 

 

Cash flows from financing activities:

Proceeds from revolving credit facilities

  136,986      72,000   

Payments on revolving credit facilities

  (69,486   (37,400

Payment of debt issuance costs

  —        (165

Principal payments on capital lease

  (40   (25
  

 

 

   

 

 

 

Net cash provided by financing activities

  67,460      34,410   
  

 

 

   

 

 

 

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

  481      (386
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

  (6,944   (33,961

Cash and cash equivalents, at beginning of period

  27,386      58,343   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

  20,442      24,382   

Restricted cash, at end of period

  2,016      2,497   
  

 

 

   

 

 

 

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

$ 22,458    $ 26,879   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

Interest paid

$ 78,524    $ 78,041   

Income taxes paid

  1,287      3,253   

Non-cash investing activities

Restricted cash received in escrow

  —        2,497   

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results for the interim periods presented have been included. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended January 31, 2015 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, and energy markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates will be reflected in the financial statements in those future periods when the changes occur.

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

 

2. Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. For public business entities, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Entities should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, entities are required to comply with the applicable disclosures for a change in an accounting principle. The Company does not expect adoption of ASU 2015-03 to have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2014, the 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 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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3. Fair Value Measurements

ASC 820, Fair Value Measurement Disclosures, defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Disclosures of the fair value of certain financial instruments are required, whether or not recognized in the Unaudited Condensed Consolidated Balance Sheets. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. There is a three-level valuation hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability.

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

The Company does not have any assets (liabilities) measured at fair value on a recurring basis.

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, long-term debt and revolving credit facility. 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 $1.73 billion as of May 2, 2015, 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 $1.90 billion as of January 31, 2015, 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 May 2, 2015 and January 31, 2015 included the following components (in thousands):

 

     May 2, 2015      January 31, 2015  

U.S. senior secured revolving credit facility due 2017

   $ 67,500       $ —     
  

 

 

    

 

 

 

Long-term debt:

10.5% Senior subordinated notes due 2017

$ 259,612    $ 259,612   

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

  1,136,258      1,136,866   

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   
  

 

 

    

 

 

 

Total long-term debt

$ 2,375,870    $ 2,376,478   
  

 

 

    

 

 

 

Obligation under capital lease (including current portion)

$ 17,084    $ 17,124   
  

 

 

    

 

 

 

 

(1) Amounts include unamortized premium of $11,258 and $11,866 as of May 2, 2015 and January 31, 2015, respectively.

U.S. Revolving Credit Facility

On April 30, 2014, the Company entered into Amendment No. 1 to its Amended and Restated Credit Agreement with respect to the Company’s senior secured revolving credit facility due 2017 (as amended, the “U.S. 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 “U.S Credit Facility and Note Covenants.”

U.S. Revolving Credit Facility and Note Covenants

Our U.S. 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

 

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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 U.S. 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 U.S. 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.

Europe Revolving Credit Facility

On October 2, 2014, certain of the European subsidiaries of the Company entered into an unsecured euro denominated multi-currency revolving credit facility (the “Europe Credit Facility”) in the amount of €35.0 million that will terminate on August 20, 2017. Loans under the Europe Credit Facility will bear interest at 2.50% per annum plus the Euro Interbank Offered Rate as in effect for interest periods of one, three or six months or any other period agreed upon. The Europe Credit Facility also provides for a facility fee of 0.875% per annum on the unused amount of the facility.

All obligations under the Europe Credit Facility are unconditionally and fully guaranteed by Claire’s (Gibraltar) Holdings Ltd. (“Claire’s Gibraltar”) and certain of its existing direct or indirect wholly-owned European subsidiaries, subject to certain exceptions and limitations.

The Europe Credit Facility contains customary affirmative and negative covenants applicable to Claire’s Gibraltar and its subsidiaries, events of default and provisions relating to mandatory and voluntary payments, which include an annual requirement that for at least 5 successive Business Days in each year no loans under the Europe Credit Facility may be outstanding. The Europe Credit Facility also contains covenants that require Claire’s Gibraltar to maintain particular financial ratios so long as any amounts are outstanding under the facility: a Fixed Charge Cover Ratio not lower than 1.5:1.0 based upon the ratio of adjusted earnings before interest, taxes, depreciation, amortization, and rent to net interest and rent for each period of four consecutive fiscal quarters and a Leverage Ratio not more than 1.5:1.0 based upon the ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization for each period of four consecutive fiscal quarters.

Europe Bank Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $2.4 million. These facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in their respective countries of operation. As of May 2, 2015, we had a reduction of $2.3 million for outstanding bank guarantees, which reduces the borrowing availability to $0.1 million as of that date.

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.

 

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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.

 

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 January 31, 2015

   $ (43,430    $ 5,732       $ (37,698

Other comprehensive income

     464         —           464   
  

 

 

    

 

 

    

 

 

 

Net other comprehensive income

  464      —        464   
  

 

 

    

 

 

    

 

 

 

Balance as of May 2, 2015

$ (42,966 $ 5,732    $ (37,234
  

 

 

    

 

 

    

 

 

 

 

7. Stock Options and Stock-Based Compensation

The following is a summary of activity in the Company’s stock option plan for the three months ended May 2, 2015:

 

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

Outstanding as of January 31, 2015

     4,166,399       $ 10.00      

Options granted

     125,000       $ 10.00      

Options exercised

     —           

Options forfeited

     (370,981    $ 10.00      

Options expired

     (107,352    $ 10.00      
  

 

 

       

Outstanding as of May 2, 2015

  3,813,066    $ 10.00      4.5   
  

 

 

       

Options vested and expected to vest as of May 2, 2015

  3,506,242    $ 10.00      4.4   
  

 

 

       

Exercisable as of May 2, 2015

  1,890,986    $ 10.00      3.8   
  

 

 

       

The weighted average grant date fair value of options granted during the three months ended May 2, 2015 and May 3, 2014 was $0.04 and $0.04, respectively.

During the three months ended May 2, 2015 and May 3, 2014, the Company recorded stock-based compensation expense (benefit) and additional paid-in capital relating to stock-based compensation of approximately $(0.6) million and $(0.2) million, respectively. During the three months ended May 2, 2015, the Company recorded a reversal of stock option expense of $0.7 million. Stock-based compensation 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 (0.1)% for the three months ended May 2, 2015. This effective income tax rate differed from the statutory federal income tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses in the three months ended May 2, 2015 by the Company’s U.S. operations.

 

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The effective income tax rate was (0.3)% for the three months ended May 3, 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 months ended May 3, 2014 by the Company’s U.S. operations.

 

9. Segment Information

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

Net sales, depreciation and amortization and operating income for the three months ended May 2, 2015 and May 3, 2014 are as follows (in thousands):

 

     Three Months      Three Months  
     Ended      Ended  
     May 2, 2015      May 3, 2014  

Net sales:

     

North America

   $ 205,728       $ 214,198   

Europe

     114,267         139,145   
  

 

 

    

 

 

 

Total net sales

  319,995      353,343   
  

 

 

    

 

 

 

Depreciation and amortization:

North America

  9,193      17,184   

Europe

  5,361      6,280   
  

 

 

    

 

 

 

Total depreciation and amortization

  14,554      23,464   
  

 

 

    

 

 

 

Operating income (loss) for reportable segments:

North America

  19,585      11,794   

Europe

  (154   6,543   
  

 

 

    

 

 

 

Total operating income for reportable segments

  19,431      18,337   

Severance and transaction-related costs

  407      1,582   
  

 

 

    

 

 

 

Consolidated operating income

  19,024      16,755   

Interest expense, net

  54,420      54,759   
  

 

 

    

 

 

 

Consolidated loss before income tax expense

$ (35,396 $ (38,004
  

 

 

    

 

 

 

Excluded from operating income for the North America segment are severance and transaction-related costs of approximately $0.1 million and $0.8 million for the three months ended May 2, 2015 and May 3, 2014, respectively.

Excluded from operating income (loss) for the Europe segment are severance and transaction-related costs of approximately $0.3 million and $0.8 million for the three months ended May 2, 2015 and May 3, 2014, respectively.

 

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10. Supplemental Financial Information

On May 29, 2007, Claire’s Stores, Inc. (the “Issuer”), issued the Senior Subordinated Notes, (collectively, the “2007 Notes”). On March 4, 2011, the Issuer issued the Senior Secured Second Lien Notes, (collectively, the “2011 Notes”). On February 28, 2012, March 12, 2012 and September 20, 2012, the Issuer issued the 9.0% Senior Secured First Lien Notes (collectively, the “2012 Notes”). On March 15, 2013, the Issuer issued the 6.125% Senior Secured First Lien Notes and on May 14, 2013, the Issuer issued the 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 U.S. Credit Facility. The 2012 Notes and the 2013 Notes are unconditionally guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of Claire’s Stores, Inc. As of May 2, 2015 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

May 2, 2015

(in thousands)

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents and restricted cash (1)

   $ 1,208      $ 4,531      $ 16,719      $ —        $ 22,458   

Inventories

     —          86,400        69,911        —          156,311   

Prepaid expenses

     932        13,998        17,730        —          32,660   

Other current assets

     —          18,712        8,756        —          27,468   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

  2,140      123,641      113,116      —        238,897   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

Furniture, fixtures and equipment

  4,808      161,232      84,121      —        250,161   

Leasehold improvements

  1,335      195,531      129,222      —        326,088   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  6,143      356,763      213,343      —        576,249   

Accumulated depreciation and amortization

  (3,829   (242,945   (128,860   —        (375,634
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  2,314      113,818      84,483      —        200,615   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

Land and building

  —        18,055      —        —        18,055   

Accumulated depreciation and amortization

  —        (4,739   —        —        (4,739
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  —        13,316      —        —        13,316   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

  —        169,180      —        (169,180   —     

Investment in subsidiaries

  1,958,281      (48,531   —        (1,909,750   —     

Goodwill

  —        1,112,494      314,405      —        1,426,899   

Intangible assets, net

  274,000      1,120      232,976      —        508,096   

Deferred financing costs, net

  29,720      —        678      —        30,398   

Other assets

  484      4,339      40,128      —        44,951   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  2,262,485      1,238,602      588,187      (2,078,930   2,010,344   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

$ 2,266,939    $ 1,489,377    $ 785,786    $ (2,078,930 $ 2,463,172   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

Current liabilities:

Revolving credit facility

$ 67,500    $ —      $ —      $ —      $ 67,500   

Trade accounts payable

  13,091      28,261      39,349      —        80,701   

Income taxes payable

  —        (102   610      —        508   

Accrued interest payable

  42,431      —        —        —        42,431   

Accrued expenses and other current liabilities

  5,415      35,969      45,299      —        86,683   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

  128,437      64,128      85,258      —        277,823   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

  130,006      —        39,174      (169,180   —     

Long-term debt

  2,375,870      —        —        —        2,375,870   

Obligation under capital lease

  —        16,897      —        —        16,897   

Deferred tax liability

  —        102,577      10,452      —        113,029   

Deferred rent expense

  —        24,855      10,143      —        34,998   

Unfavorable lease obligations and other long-term liabilities

  —        11,864      65      —        11,929   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  2,505,876      156,193      59,834      (169,180   2,552,723   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

Common stock

  —        367      2      (369   —     

Additional paid in capital

  618,679      1,435,909      797,656      (2,233,565   618,679   

Accumulated other comprehensive loss, net of tax

  (37,234   (2,582   (36,477   39,059      (37,234

Accumulated deficit

  (948,819   (164,638   (120,487   285,125      (948,819
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (367,374   1,269,056      640,694      (1,909,750   (367,374
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

$ 2,266,939    $ 1,489,377    $ 785,786    $ (2,078,930 $ 2,463,172   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Cash and cash equivalents include restricted cash of $2,016 for “Non-Guarantors”.

 

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Condensed Consolidating Balance Sheet

January 31, 2015

(in thousands)

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents and restricted cash (1)

   $ 3,480      $ 4,009      $ 21,926      $ —        $ 29,415   

Inventories

     —          82,949        62,959        —          145,908   

Prepaid expenses

     547        1,820        14,982        —          17,349   

Other current assets

     —          19,607        7,867        —          27,474   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

  4,027      108,385      107,734      —        220,146   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

Furniture, fixtures and equipment

  4,624      160,263      83,275      —        248,162   

Leasehold improvements

  1,335      194,571      128,400      —        324,306   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  5,959      354,834      211,675      —        572,468   

Accumulated depreciation and amortization

  (3,629   (236,760   (124,647   —        (365,036
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  2,330      118,074      87,028      —        207,432   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

Land and building

  —        18,055      —        —        18,055   

Accumulated depreciation and amortization

  —        (4,514   —        —        (4,514
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  —        13,541      —        —        13,541   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

  —        157,508      46,000      (203,508   —     

Investment in subsidiaries

  2,011,504      (46,047   —        (1,965,457   —     

Goodwill

  —        1,112,494      314,405      —        1,426,899   

Intangible assets, net

  274,000      1,391      234,971      —        510,362   

Deferred financing costs, net

  31,696      —        829      —        32,525   

Other assets

  453      4,010      41,208      1      45,672   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  2,317,653      1,229,356      637,413      (2,168,964   2,015,458   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

$ 2,324,010    $ 1,469,356    $ 832,175    $ (2,168,964 $ 2,456,577   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

Current liabilities:

Trade accounts payable

$ 1,385    $ 27,678    $ 40,763    $ —      $ 69,826   

Income taxes payable

  —        103      1,677      —        1,780   

Accrued interest payable

  67,765      —        25      —        67,790   

Accrued expenses and other current liabilities

  6,649      38,541      48,315      —        93,505   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

  75,799      66,322      90,780      —        232,901   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

  203,507      —        —        (203,507   —     

Long-term debt

  2,376,478      —        —        —        2,376,478   

Obligation under capital lease

  —        16,954      —        —        16,954   

Deferred tax liability

  —        102,550      10,665      —        113,215   

Deferred rent expense

  —        24,887      10,378      —        35,265   

Unfavorable lease obligations and other long-term liabilities

  —        13,454      84      —        13,538   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  2,579,985      157,845      21,127      (203,507   2,555,450   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

Common stock

  —        367      2      (369   —     

Additional paid in capital

  619,325      1,435,909      797,656      (2,233,565   619,325   

Accumulated other comprehensive loss, net of tax

  (37,698   (4,126   (34,565   38,691      (37,698

Accumulated deficit

  (913,401   (186,961   (42,825   229,786      (913,401
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (331,774   1,245,189      720,268      (1,965,457   (331,774
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

$ 2,324,010    $ 1,469,356    $ 832,175    $ (2,168,964 $ 2,456,577   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Cash and cash equivalents include restricted cash of $2,029 for “Non-Guarantors”.

 

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Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended May 2, 2015

(in thousands)

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —        $ 192,508      $ 127,487      $ —        $ 319,995   

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

     53        102,177        70,622        —          172,852   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

  (53   90,331      56,865      —        147,143   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

Selling, general and administrative

  2,637      59,457      50,924      —        113,018   

Depreciation and amortization

  201      8,313      6,040      —        14,554   

Severance and transaction-related costs

  135      —        272      —        407   

Other (income) expense

  639      (767   268      —        140   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  3,612      67,003      57,504      —        128,119   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  (3,665   23,328      (639   —        19,024   

Interest expense, net

  53,628      543      249      —        54,420   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  (57,293   22,785      (888   —        (35,396

Income tax expense (benefit)

  —        (1,191   1,213      —        22   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

  (57,293   23,976      (2,101   —        (35,418

Equity in earnings (loss) of subsidiaries

  21,875      (1,655   —        (20,220   —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  (35,418   22,321      (2,101   (20,220   (35,418

Foreign currency translation adjustments

  (85   402      (2,445   2,043      (85

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

  549      1,142      533      (1,675   549   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

  464      1,544      (1,912   368      464   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

$ (34,954 $ 23,865    $ (4,013 $ (19,852 $ (34,954
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended May 3, 2014

(in thousands)

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —        $ 198,431      $ 154,912      $ —        $ 353,343   

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

     1,784        103,012        82,274        —          187,070   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

  (1,784   95,419      72,638      —        166,273   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

Selling, general and administrative

  3,967      61,698      60,293      —        125,958   

Depreciation and amortization

  1,285      12,311      9,868      —        23,464   

Severance and transaction-related costs

  624      1      957      —        1,582   

Other (income) expense

  (2,173   (22   709      —        (1,486
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  3,703      73,988      71,827      —        149,518   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  (5,487   21,431      811      —        16,755   

Interest expense, net

  54,220      539      —        —        54,759   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  (59,707   20,892      811      —        (38,004

Income tax expense (benefit)

  —        (1,747   1,880      —        133   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

  (59,707   22,639      (1,069   —        (38,137

Equity in earnings (loss) of subsidiaries

  21,570      (1,073   —        (20,497   —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  (38,137   21,566      (1,069   (20,497   (38,137

Foreign currency translation adjustments

  1,787      125      969      (1,094   1,787   

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

  4,623      358      4,652      (5,010   4,623   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

  6,410      483      5,621      (6,104   6,410   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

$ (31,727 $ 22,049    $ 4,552    $ (26,601 $ (31,727
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Cash Flows

Three Months Ended May 2, 2015

(in thousands)

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (35,418   $ 22,321      $ (2,101   $ (20,220   $ (35,418

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

          

Equity in earnings of subsidiaries

     (21,875     1,655        —          20,220        —     

Depreciation and amortization

     201        8,313        6,040        —          14,554   

Amortization of lease rights and other assets

     —          —          787        —          787   

Amortization of debt issuance costs

     1,976        —          60        —          2,036   

Accretion of debt premium

     (608     —          —          —          (608

Net accretion of unfavorable lease obligations

     —          (79     (5     —          (84

Loss on sale/retirement of property and equipment, net

     —          156        —          —          156   

Stock-based compensation benefit

     (596     —          (50     —          (646

(Increase) decrease in:

          

Inventories

     —          (3,451     (6,880     —          (10,331

Prepaid expenses

     (385     (12,178     (2,447     —          (15,010

Other assets

     (32     596        (1,086     —          (522

Increase (decrease) in:

          

Trade accounts payable

     11,707        675        (1,491     —          10,891   

Income taxes payable

     —          (205     (1,042     —          (1,247

Accrued interest payable

     (25,334     —          (237     —          (25,571

Accrued expenses and other liabilities

     (1,234     (3,846     (2,820     —          (7,900

Deferred income taxes

     —          —          613        —          613   

Deferred rent expense

     —          (32     (302     —          (334
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

  (71,598   13,925      (10,961   —        (68,634
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

Acquisition of property and equipment

  (184   (4,054   (1,969   —        (6,207

Acquisition of intangible assets/lease rights

  —        (11   (33   —        (44
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

  (184   (4,065   (2,002   —        (6,251
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

Proceeds from revolving credit facilities

  82,000      —        54,986      —        136,986   

Payments on revolving credit facilities

  (14,500   —        (54,986   —        (69,486

Payment of debt issuance costs

  —        —        —        —        —     

Principal payments on capital lease

  —        (40   —        —        (40

Intercompany activity, net

  2,010      (11,672   9,662      —        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  69,510      (11,712   9,662      —        67,460   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  —        2,374      (1,893   —        481   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  (2,272   522      (5,194   —        (6,944

Cash and cash equivalents, at beginning of period

  3,480      4,009      19,897      —        27,386   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

  1,208      4,531      14,703      —        20,442   

Restricted cash, at end of period

  —        —        2,016      —        2,016   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  1,208      4,531      16,719      —        22,458   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows

Three Months Ended May 3, 2014

(in thousands)

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (38,137   $ 21,566      $ (1,069   $ (20,497   $ (38,137

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

          

Equity in earnings of subsidiaries

     (21,570     1,073        —          20,497        —     

Depreciation and amortization

     1,285        12,311        9,868        —          23,464   

Amortization of lease rights and other assets

     —          —          1,007        —          1,007   

Amortization of debt issuance costs

     2,022        —          —          —          2,022   

Accretion of debt premium

     (559     —          —          —          (559

Net accretion of unfavorable lease obligations

     —          (130     (16     —          (146

Loss on sale/retirement of property and equipment, net

     35        68        6        —          109   

Stock-based compensation (benefit) expense

     (289     20        38        —          (231

(Increase) decrease in:

          

Inventories

     213        5,261        457        —          5,931   

Prepaid expenses

     (252     (62     (2,160     —          (2,474

Other assets

     375        (2,557     (1,840     —          (4,022

Increase (decrease) in:

          

Trade accounts payable

     (8,321     878        2,424        —          (5,019

Income taxes payable

     —          33        (761     —          (728

Accrued interest payable

     (24,788     —          —          —          (24,788

Accrued expenses and other liabilities

     (847     (1,496     (3,057     —          (5,400

Deferred income taxes

     —          —          (670     —          (670

Deferred rent expense

     —          960        82        —          1,042   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

  (90,833   37,925      4,309      —        (48,599
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

Acquisition of property and equipment

  (324   (12,467   (6,182   —        (18,973

Acquisition of intangible assets/lease rights

  —        (16   (397   —        (413
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

  (324   (12,483   (6,579   —        (19,386
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

Proceeds from revolving credit facility

  72,000      —        —        —        72,000   

Payments on revolving credit facility

  (37,400   —        —        —        (37,400

Payment of debt issuance costs

  (165   —        —        —        (165

Principal payments on capital lease

  —        (25   —        —        (25

Intercompany activity, net

  49,239      (25,380   (23,859   —        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  83,674      (25,405   (23,859   —        34,410   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  —        776      (1,162   —        (386
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  (7,483   813      (27,291   —        (33,961

Cash and cash equivalents, at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

  2,428      4,868      17,086      —        24,382   

Restricted cash, at end of period

  —        —        2,497      —        2,497   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  2,428      4,868      19,583      —        26,879   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 be the emporium of choice for all girls (in age or attitude) across the world. We deliver this by offering a range of innovative, fun and affordable products and services that cater to all of her activities, as she grows up, whenever and wherever. Our broad and dynamic selection of merchandise is unique. We are organized into two operating segments: North America and Europe. We identify our operating segments by how we manage and evaluate our business activities. As of May 2, 2015, we operated a total of 2,983 company-operated stores of which 1,832 were located in all 50 states of the United States, Puerto Rico, Canada and the U.S. Virgin Islands (North America segment) and 1,151 stores were located in the United Kingdom, Switzerland, Austria, Germany, France, Ireland, Spain, Portugal, Netherlands, Belgium, 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. We are currently studying reintroduction of our brand in China via alternative channels. As of May 2, 2015, we have a total of 219 concession stores, of which 22 were located in the United States and Canada (North America segment) and 197 stores were located in the United Kingdom, France, Spain, Austria, Germany, Italy and Portugal (Europe segment).

As of May 2, 2015, we also franchised 443 stores in Japan, the Middle East, Turkey, Greece, Guatemala, Malta, Ukraine, India, Dominican Republic, El Salvador, Venezuela, Panama, Indonesia, Philippines, Costa Rica, Colombia, Serbia, Bulgaria, Sweden, Romania, Martinique and Pakistan. We account for the goods we sell to third parties under franchising agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” (North America segment) in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. The franchise fees we charge under the franchising agreements are reported in “Other expense (income), net” (North America segment) in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.

Claire’s® is our primary global brand that we operate through company-operated, concession stores, 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 for whom we create three distinct ranges: 3 to 6, 6 to 12 and 12 to 18.

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

 

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Table of Contents

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

 

    Jewelry: Includes earrings 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 such as phone cases, jewelry holders, 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 months ended May 2, 2015 includes the following:

 

    Net sales decrease of 9.4%;
    Same store sales percentages;

 

     Three Months
Ended May 2, 2015

Consolidated

   (2.5)%

North America

   (1.9)%

Europe

   (3.6)%

 

    Merchandise margin decreased 180 basis points;
    Operating income increase of 13.5 %; and
    Operating income margin of 5.9 %.

Operational activity for the three months ended May 2, 2015 includes the following:

 

    Opened 91 concession stores;
    Opened 4 new company-operated stores;
    Closed 19 company-operated stores due to underperformance or lease renewal terms that did not meet our criteria;
    Opened one new Icing ® franchise store overseas.

 

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Table of Contents

A summary of our consolidated results of operations for the three months ended May 2, 2015 and May 3, 2014 are as follows (dollars in thousands):

 

     Three Months
Ended
May 2, 2015
     Three Months
Ended
May 3, 2014
 

Net sales

   $ 319,995       $ 353,343   

(Decrease) increase in same store sales

     (2.5)%         (4.4)%   

Gross profit percentage

     46.0%         47.1%   

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

     35.3%         35.6%   

Depreciation and amortization as a percentage of net sales

     4.5%         6.6%   

Operating income

   $ 19,024       $ 16,755   

Net loss

   $ (35,418)       $ (38,137)   

Number of company-operated stores at the end of the period

     2,983         3,071   

Number of concession stores at the end of the period

     219         20   

Net sales

Net sales for the three months ended May 2, 2015 decreased $33.3 million, or 9.4%, from the three months ended May 3, 2014. The decrease was attributable to an unfavorable foreign currency translation effect of our non-U.S. net sales of $24.3 million, the effect of store closures of $9.9 million and a decrease in same store sales of $7.8 million, partially offset by new store sales of $8.6 million and increased shipments to franchisees of $0.1 million. Net sales would have decreased 2.8% excluding the impact from foreign currency exchange rate changes.

For the three months ended May 2, 2015, the decrease in same store sales was primarily attributable to a decrease in average transaction value of 1.3% and a decrease in average number of transactions per store of 0.8%.

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

 

     Percentage of Total  

Product Category

   Three Months
Ended
May 2, 2015
     Three Months
Ended
May 3, 2014
 

Jewelry

     49.2         50.4   

Accessories

     50.8         49.6   
  

 

 

    

 

 

 
  100.0      100.0   
  

 

 

    

 

 

 

Gross profit

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

During the three months ended May 2, 2015, gross profit percentage decreased 110 basis points to 46.0% compared to 47.1% during the three months ended May 3, 2014. The decrease in gross profit percentage consisted of a decrease in merchandise margin of 180 basis points, partially offset by a 50 basis point decrease in occupancy costs and by a 20 basis point decrease in buying and buying-related costs. The decrease in merchandise margin percentage resulted primarily from increased accessories penetration in Europe, higher freight costs and unfavorable foreign currency exchange rates. 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 in occupancy costs, as a percentage of sales, resulted primarily from the reduction in costs associated with China store closures, partially offset by the deleveraging effect from a decrease in same store sales.

 

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Table of Contents

Selling, general and administrative expenses

During the three months ended May 2, 2015, selling, general and administrative expenses decreased $12.9 million, or 10.3%, compared to the three months ended May 3, 2014. As a percentage of net sales, selling, general and administrative expenses decreased 30 basis points compared to the three months ended May 3, 2014. Excluding a favorable $9.2 million foreign currency translation effect, selling, general, and administrative expenses would have decreased $3.7 million. Of the remainder, the decrease was primarily due to lower store compensation and related expenses.

Depreciation and amortization expense

During the three months ended May 2, 2015, depreciation and amortization expense decreased $8.9 million to $14.6 million compared to $23.5 million for the three months ended May 3, 2014. Excluding a favorable $1.1 million foreign currency translation effect, the decrease in depreciation and amortization expense would have been $7.8 million.

Other expense (income), net

The following is a summary of other expense (income) activity for the three months ended May 2, 2015 and May 3, 2014 (in thousands):

 

     Three Months
Ended
May 2, 2015
    Three Months
Ended
May 3, 2014
 

Royalty income

   $ (1,248   $ (1,186

Foreign currency exchange (gain) loss, net

     1,425        (257

Other income

     (37     (43
  

 

 

   

 

 

 
$ 140    $ (1,486
  

 

 

   

 

 

 

Interest expense, net

During the three months ended May 2, 2015, net interest expense aggregated $54.4 million compared to $54.8 million for the three months ended May 3, 2014.

Income taxes

The effective income tax rate for the three months ended May 2, 2015 was (0.1)% compared to (0.3)% for the three months ended May 3, 2014. These effective income tax rates differed from the statutory federal income tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses in the three months ended May 2, 2015 and May 3, 2014, respectively, by our U.S. operations.

 

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Table of Contents

Segment Operations

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

North America

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

 

     Three Months
Ended
May 2, 2015
    Three Months
Ended
May 3, 2014
 

Net sales

   $ 205,728      $ 214,198   

(Decrease) increase in same store sales

     (1.9 )%      (5.6 )% 

Gross profit percentage

     47.3     46.8

Number of company-operated stores at the end of the period (1)

     1,832        1,884   

Number of concession stores at the end of the period

     22          

 

(1) Includes 3 China stores as of May 3, 2014.

During the three months ended May 2, 2015, net sales in North America decreased $8.5 million, or 4.0%, from the three months ended May 3, 2014. The decrease was attributable to the effect of store closures of $6.4 million, a decrease in same store sales of $3.8 million and an unfavorable foreign currency translation effect of our non-U.S. net sales of $1.8 million, partially offset by new store sales of $3.4 million and increased shipments to franchisees of $0.1 million. Sales would have decreased 3.2% excluding the impact from foreign currency exchange rate changes.

For the three months ended May 2, 2015, the decrease in same store sales was primarily attributable to a decrease in average transaction value of 3.8%, partially offset by an increase in average number of transactions per store of 2.1%.

During the three months ended May 2, 2015, gross profit percentage increased 50 basis points to 47.3% compared to 46.8% during the three months ended May 3, 2014. The increase in gross profit percentage consisted of a 60 basis point decrease in occupancy costs and a 30 basis point decrease in buying and buying-related costs, partially offset by a 40 basis point decrease in merchandise margin. The decrease in occupancy costs, as a percentage of sales, resulted primarily from the reduction in costs associated with China store closures, partially offset by the deleveraging effect from a decrease in same store sales. The decrease in merchandise margin resulted primarily from higher freight costs. 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 following table compares our sales of each product category in North America for each of the periods presented:

 

     Percentage of Total  

Product Category

   Three Months
Ended
May 2, 2015
     Three Months
Ended
May 3, 2014
 

Jewelry

     55.8         55.6   

Accessories

     44.2         44.4   
  

 

 

    

 

 

 
  100.0      100.0   
  

 

 

    

 

 

 

 

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Table of Contents

Europe

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

 

     Three Months
Ended
May 2, 2015
    Three Months
Ended
May 3, 2014
 

Net sales

   $ 114,267      $ 139,145   

(Decrease) increase in same store sales

     (3.6 )%      (2.4 )% 

Gross profit percentage

     43.7     47.4

Number of company-operated stores at the end of the period

     1,151        1,187   

Number of concession stores at the end of the period

     197        20   

During the three months ended May 2, 2015, net sales in Europe decreased $24.8 million, or 17.9%, from the three months ended May 3, 2014. The decrease was attributable to an unfavorable foreign currency translation effect of our non-U.S. net sales of $22.5 million, a decrease in same stores sales of $4.0 million and the effect of store closures of $3.5 million, partially offset by new store sales of $5.2 million. Sales would have decreased 2.1% excluding the impact from foreign currency exchange rate changes.

For the three months ended May 2, 2015, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 4.1%, partially offset by an increase in average transaction value of 1.6%.

During the three months ended May 2, 2015, gross profit percentage decreased 370 basis points to 43.7% compared to 47.4% during the three months ended May 3, 2014. The decrease in gross profit percentage consisted of a 380 basis point decrease in merchandise margin and a 20 basis point increase in occupancy costs, partially offset by a 30 basis point decrease in buying and buying-related costs. The decrease in merchandise margin percentage resulted primarily from increased accessories penetration in Europe, higher freight costs and unfavorable foreign currency exchange rates. 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 promotional markdowns or shrink 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 from a decrease in same store sales and unfavorable foreign currency exchange rates.

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

 

     Percentage of Total  

Product Category

   Three Months
Ended
May 2, 2015
     Three Months
Ended
May 3, 2014
 

Jewelry

     37.8         42.5   

Accessories

     62.2         57.5   
  

 

 

    

 

 

 
  100.0      100.0   
  

 

 

    

 

 

 

Liquidity and Capital Resources

We anticipate that cash generated from operations, borrowings under our $115.0 million U.S. Credit Facility and €35.0 million Europe Credit Facility, which we collectively refer to as the “Credit Facilities”, 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 2015, and we expect to fund these interest payments through a combination of cash from operations and borrowings under our Credit Facilities. 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. 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, political and financial conditions, foreign currency exchange exposures, 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 January 31, 2015.

 

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Table of Contents

A summary of cash flows provided by (used in) operating, investing and financing activities for the three months ended May 2, 2015 and May 3, 2014 is outlined in the table below (in thousands):

 

     Three Months
Ended
May 2, 2015
    Three Months
Ended
May 3, 2014
 

Operating activities

   $ (68,634   $ (48,599

Investing activities

     (6,251     (19,386

Financing activities

     67,460        34,410   

Cash flows from operating activities

For the three months ended May 2, 2015, cash used in operations increased $20.0 million compared to the prior year period. The primary reason for the increase was a net decrease in operating income and other items of $5.7 million and an increase in working capital of $14.3 million, excluding cash equivalents. For the three months ended May 3, 2014, cash used in operations increased $0.6 million compared to the prior year period. The primary reason for the increase was a net decrease in operating income and other items of $11.8 million, partially offset by a decrease in working capital of $11.2 million, excluding cash equivalents.

Cash flows from investing activities

For the three months ended May 2, 2015, cash used in investing activities was $6.3 million and consisted of $6.3 million for capital expenditures. During the remainder of Fiscal 2015, we expect to spend between $20.0 million and $30.0 million of capital expenditures.

Cash flows from financing activities

For the three months ended May 2, 2015, cash provided by financing activities was $67.5 million, which consisted primarily of net borrowings of $67.5 million under the revolving U.S. Credit Facility. For the three months ended May 3, 2014, provided by financing activities was $34.4 million, which consisted primarily of net borrowings of $34.6 million under the revolving U.S. Credit Facility, partially offset by payment of $0.2 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 May 2, 2015, we had cash and cash equivalents of $22.5 million and all cash equivalents were maintained in one money market fund invested exclusively in U.S. Treasury Securities.

In addition, as of May 2, 2015, our foreign subsidiaries held cash and cash equivalents of $16.7 million. During the three months ended May 2, 2015, 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 2015, we expect a portion of our foreign subsidiaries’ future cash flow generation to be repatriated to the U.S. to meet certain liquidity needs. Based upon the amount of our remaining U.S. net operating loss carryforwards as of May 2, 2015, we do not expect to pay U.S. income tax on future Fiscal 2015 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.

 

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We anticipate that cash generated from operations, borrowings under our Credit Facilities, 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 January 31, 2015.

U.S Revolving Credit Facility

We are party to an Amended and Restated Credit Agreement, dated as of September 20, 2012, by and among Claire’s Inc. (“Parent”), the Company, Credit Suisse AG, as Administrative Agent, and the other Lenders named therein, as amended by Amendment No. 1, dated as of April 30, 2014 (as amended, the “U.S. Credit Facility”), which provides for a $115.0 million five-year senior secured revolving credit facility maturing September 20, 2017.

Borrowings under the U.S. 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 U.S. Credit Facility whether or not utilized.

All obligations under the U.S. Credit Facility are unconditionally guaranteed by (i) Claire’s Inc., our parent corporation, 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 U.S. 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 U.S. 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 U.S. 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 U.S. 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 May 2, 2015, our revolving loans and letters of credit outstanding exceeded $15.0 million, and our Total Net Secured Leverage Ratio was 5.9:1.0.

The U.S. 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;

 

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    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 U.S. 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 U.S. Credit Facility could proceed against the collateral granted to them to secure that indebtedness. As of May 2, 2015, we were in compliance with the covenants.

As of May 2, 2015, we had $67.5 million of borrowings and $3.6 million of letters of credit outstanding, which reduces the borrowing availability under the U.S. Credit Facility to $43.9 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 May 2, 2015, we were in compliance with the covenants under the Notes.

Europe Revolving Credit Facility

On October 2, 2014, certain of the European subsidiaries of the Company entered into an unsecured euro denominated multi-currency revolving credit facility (the “Europe Credit Facility”) in the amount of €35.0 million that will terminate on August 20, 2017. Loans under the Europe Credit Facility will bear interest at 2.50% per annum plus the Euro Interbank Offered Rate as in effect for interest periods of one, three or six months or any other period agreed upon. The Europe Credit Facility also provides for a facility fee of 0.875% per annum on the unused amount of the facility.

 

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All obligations under the Europe Credit Facility are unconditionally and fully guaranteed by Claire’s (Gibraltar) Holdings Ltd. (“Claire’s Gibraltar”) and certain of its existing direct or indirect wholly-owned European subsidiaries, subject to certain exceptions and limitations.

The Europe Credit Facility contains customary affirmative and negative covenants applicable to Claire’s Gibraltar and its subsidiaries, events of default and provisions relating to mandatory and voluntary payments, which include an annual requirement that for at least 5 successive Business Days in each year no loans under the Europe Credit Facility may be outstanding. The Europe Credit Facility also contains covenants that require Claire’s Gibraltar to maintain particular financial ratios so long as any amounts are outstanding under the facility: a Fixed Charge Cover Ratio not lower than 1.5:1.0 based upon the ratio of adjusted earnings before interest, taxes, depreciation, amortization, and rent to net interest and rent for each period of four consecutive fiscal quarters and a Leverage Ratio not more than 1.5:1.0 based upon the ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization for each period of four consecutive fiscal quarters. As of May 2, 2015, Claire’s Gibraltar’s Fixed Charge Cover Ratio was 1.8:1.0.

As of May 2, 2015, we had undrawn availability under our Europe Credit Facility of €35.0 million ($39.2 million).

Europe Bank Credit Facilities

In addition to the Europe Credit Facility, our non-U.S. subsidiaries have bank credit facilities totaling $2.4 million. These facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in their respective countries of operation. As of May 2, 2015, we had a reduction of $2.3 million for outstanding bank guarantees, 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 2014 Annual Report on Form 10-K, filed on April 8, 2015, 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 the Unaudited Condensed Consolidated Financial Statements.

 

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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 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 2014 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 May 2, 2015, 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 May 2, 2015, we had fixed rate debt of $2,375.9 million and variable rate debt of $67.5 million. Based on our variable rate balance as of May 2, 2015, a 1% change in interest rates would increase or decrease our annual interest expense by approximately $0.7 million.

 

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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. As of May 2, 2015, we maintained no foreign currency options. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries. Included in “Comprehensive loss” are $0.5 million and $6.4 million, net of tax, reflecting the unrealized gain (loss) on foreign currency translations and intra-entity foreign currency transactions during the three months ended May 2, 2015 and May 3, 2014, respectively.

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

The results of operations of our foreign subsidiaries, when translated into U.S. dollars, reflect the average foreign currency exchange rates for the months that comprise the periods presented. As a result, if foreign currency exchange rates fluctuate significantly from one period to the next, results in local currency can vary significantly upon translation into U.S. dollars. Accordingly, fluctuations in foreign currency exchange rates, most notably the strengthening of the dollar against the euro, could have a material impact on our revenue growth in future periods.

General Market Risk

Our competitors include department stores, specialty stores, mass merchandisers, discount stores and other retail and internet channels. Our operations are impacted by consumer spending levels, which are affected by general economic conditions, consumer confidence, employment levels, availability of consumer credit and interest rates on credit, consumer debt levels, consumption of consumer staples including food and energy, consumption of other goods, adverse weather conditions and other factors over which we have little or no control. The increase in costs of such staple items has reduced the amount 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 United States and Europe, rising unemployment and continued declines in discretionary income, our revenue and margins could be significantly affected in the future. We cannot 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.”

 

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, including its Chief Executive Officer and its Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act” ) as of May 2, 2015. Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act has been appropriately recorded, processed, summarized, and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based upon that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were not effective as of May 2, 2015 because of a previously identified material weakness in the Company’s internal control over financial reporting as with respect to annual indefinite-lived intangible asset impairment analysis, which we are currently addressing.

As of the end of the period covered by this Quarterly Report, we have not fully remediated this material weakness identified above. We expect this material weakness to be remediated by January 30, 2016, the end of our fiscal year.

Changes in Internal Controls over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors

There have been no material changes in our risk factors disclosed in our Annual Report on Form 10-K for the year ended January 31, 2015.

 

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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.
June 5, 2015 By: /s/ Beatrice Lafon

Beatrice Lafon, Chief Executive Officer (principal

executive officer)

June 5, 2015 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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