FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended October 31, 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 December 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   
  Unaudited Condensed Consolidated Balance Sheets as of October 31, 2015 and January 31, 2015    3
 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended October 31, 2015 and November 1, 2014

   4
 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October  31, 2015 and November 1, 2014

   5
  Notes to Unaudited Condensed Consolidated Financial Statements    6
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations    19
  Item 3. Quantitative and Qualitative Disclosures About Market Risk    31
  Item 4. Controls and Procedures    33
PART II. OTHER INFORMATION   
  Item 1. Legal Proceedings    33
  Item 1A. Risk Factors    34
  Item 6. Exhibits    34

SIGNATURES

   35
  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

 

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

ASSETS

    

Current assets:

    

Cash and cash equivalents and restricted cash of $0 and $2,029, respectively

   $ 23,908      $ 29,415   

Inventories

     192,023        145,908   

Prepaid expenses

     31,183        17,349   

Other current assets

     32,104        27,474   
  

 

 

   

 

 

 

Total current assets

     279,218        220,146   
  

 

 

   

 

 

 

Property and equipment:

    

Furniture, fixtures and equipment

     251,328        248,162   

Leasehold improvements

     321,839        324,306   
  

 

 

   

 

 

 
     573,167        572,468   

Accumulated depreciation and amortization

     (386,919     (365,036
  

 

 

   

 

 

 
     186,248        207,432   
  

 

 

   

 

 

 

Leased property under capital lease:

    

Land and building

     18,055        18,055   

Accumulated depreciation and amortization

     (5,191     (4,514
  

 

 

   

 

 

 
     12,864        13,541   
  

 

 

   

 

 

 

Goodwill

     1,426,899        1,426,899   

Intangible assets, net of accumulated amortization of $73,834 and $70,374, respectively

     501,420        510,362   

Deferred financing costs, net of accumulated amortization of $31,655 and $25,465, respectively

     26,673        32,525   

Other assets

     44,424        45,672   
  

 

 

   

 

 

 
     1,999,416        2,015,458   
  

 

 

   

 

 

 

Total assets

   $ 2,477,746      $ 2,456,577   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities:

    

Revolving credit facilities

   $ 121,591      $ —     

Trade accounts payable

     98,632        69,826   

Income taxes payable

     2,505        1,780   

Accrued interest payable

     42,510        67,790   

Accrued expenses and other current liabilities

     86,953        93,505   
  

 

 

   

 

 

 

Total current liabilities

     352,191        232,901   
  

 

 

   

 

 

 

Long-term debt

     2,374,614        2,376,478   

Obligation under capital lease

     16,778        16,954   

Deferred tax liability

     112,718        113,215   

Deferred rent expense

     36,035        35,265   

Unfavorable lease obligations and other long-term liabilities

     12,345        13,538   
  

 

 

   

 

 

 
     2,552,490        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

     618,823        619,325   

Accumulated other comprehensive loss, net of tax

     (42,131     (37,698

Accumulated deficit

     (1,003,627     (913,401
  

 

 

   

 

 

 
     (426,935     (331,774
  

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

   $ 2,477,746      $ 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
Ended
October 31,
2015
    Three Months
Ended
November 1,
2014
    Nine Months
Ended
October 31,
2015
    Nine Months
Ended
November 1,
2014
 

Net sales

   $ 332,677      $ 350,669      $ 1,000,259      $ 1,081,841   

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

     179,724        183,442        531,652        560,247   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     152,953        167,227        468,607        521,594   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

        

Selling, general and administrative

     118,442        122,657        347,829        377,829   

Depreciation and amortization

     15,464        16,105        45,652        57,369   

Severance and transaction-related costs

     200        751        1,027        4,515   

Other income, net

     (2,185     (1,472     (4,651     (2,287
  

 

 

   

 

 

   

 

 

   

 

 

 
     131,921        138,041        389,857        437,426   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     21,032        29,186        78,750        84,168   

Interest expense, net

     55,296        53,593        164,760        162,909   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

     (34,264     (24,407     (86,010     (78,741

Income tax expense

     1,675        2,415        4,216        6,792   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (35,939   $ (26,822   $ (90,226   $ (85,533
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (35,939   $ (26,822   $ (90,226   $ (85,533

Other comprehensive loss:

        

Foreign currency translation adjustments

     94        (3,304     (507     (3,123

Net loss on intra-entity foreign currency transactions, net of tax expense (benefit) of $1,191, $(680), $820 and $(577)

     (928     (11,909     (3,926     (11,127
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (834     (15,213     (4,433     (14,250
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (36,773   $ (42,035   $ (94,659   $ (99,783
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Nine Months
Ended
October 31, 2015
    Nine Months
Ended
November 1, 2014
 

Cash flows from operating activities:

    

Net loss

   $ (90,226   $ (85,533

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

    

Depreciation and amortization

     45,652        57,369   

Amortization of lease rights and other assets

     2,534        2,949   

Amortization of debt issuance costs

     6,188        5,974   

Accretion of debt premium

     (1,864     (1,712

Net unfavorable accretion of lease obligations

     (256     (394

Loss on sale/retirement of property and equipment, net

     343        185   

(Gain) loss on sale of intangible assets/lease rights

     (2,475     277   

Stock-based compensation benefit

     (502     (211

(Increase) decrease in:

    

Inventories

     (47,094     (5,527

Prepaid expenses

     (13,536     (4,822

Other assets

     (6,180     (2,530

Increase (decrease) in:

    

Trade accounts payable

     29,595        (1,163

Income taxes payable

     746        (2,959

Accrued interest payable

     (25,492     (25,750

Accrued expenses and other liabilities

     (4,340     (1,978

Deferred income taxes

     528        (160

Deferred rent expense

     2,927        3,113   
  

 

 

   

 

 

 

Net cash used in operating activities

     (103,452     (62,872
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisition of property and equipment

     (22,414     (41,394

Acquisition of intangible assets/lease rights

     (140     (478

Proceeds from sale of intangible assets/lease rights

     2,614          
  

 

 

   

 

 

 

Net cash used in investing activities

     (19,940     (41,872
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from revolving credit facilities

     285,223        264,180   

Payments on revolving credit facilities

     (163,758     (189,300

Payment of debt issuance costs

     (415     (606

Principal payments on capital lease

     (123     (77
  

 

 

   

 

 

 

Net cash provided by financing activities

     120,927        74,197   
  

 

 

   

 

 

 

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

     (1,013     80   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (3,478     (30,467

Cash and cash equivalents, at beginning of period

     27,386        58,343   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 23,908      $ 27,876   
  

 

 

   

 

 

 
Supplemental disclosure of cash flow information:     

Interest paid

   $ 185,815      $ 184,232   

Income taxes paid

     2,932        10,591   

Non-cash investing activities

    

Restricted cash received in escrow (bank)

     (2,029     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 July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, Simplifying the Measurement of Inventory. This ASU changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit margin in the subsequent measurement of inventory when cost is determined on a first-in, first-out or average cost basis. The provisions of ASU 2015-11 are effective for public entities with fiscal years beginning after December 15, 2016. The Company does not expect adoption of ASU 2015-11 to have a material impact on the Company’s financial position, results of operations or cash flows.

In April 2015, the FASB issued 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. In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which permits an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt

 

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issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. 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 and ASU 2015-15 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. On August 12, 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The new standard is effective for the Company on January 1, 2018. 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.

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, accounts receivable, current liabilities, long-term debt and revolving credit facilities. Cash and cash equivalents, accounts receivable and current liabilities approximate fair market value due to the relatively short maturity of these financial instruments.

 

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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 facilities approximate fair value due to the variable component of their interest rate. The estimated fair value of the Company’s long-term debt was approximately $1.52 billion as of October 31, 2015, compared to a carrying value of $2.37 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.

4. Debt

Debt as of October 31, 2015 and January 31, 2015 included the following components (in thousands):

 

     October 31, 2015      January 31, 2015  

Revolving credit facilities:

     

U.S. senior secured revolving credit facility due 2017

   $ 111,300       $ —     

Europe unsecured revolving credit facility due 2017

     10,291         —     
  

 

 

    

 

 

 

Total revolving credit facilities

   $ 121,591       $ —     
  

 

 

    

 

 

 

Long-term debt:

     

10.5% Senior subordinated notes due 2017

   $ 259,612       $ 259,612   

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

     1,135,002         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

   $ 2,374,614       $ 2,376,478   
  

 

 

    

 

 

 

Obligation under capital lease (including current portion)

   $ 17,001       $ 17,124   
  

 

 

    

 

 

 

 

(1) Amounts include unamortized premium of $10,002 and $11,866 as of October 31, 2015 and January 31, 2015, respectively.

U.S. Revolving Credit Facility and Note Covenants

The 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”) in the amount of $115 million 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;

 

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    engage in certain transactions with our affiliates; and

 

    merge or consolidate with other companies or transfer all or substantially all of our assets.

Certain of these covenants in the indentures governing the Notes, such as limitations on the Company’s ability to make certain payments such as dividends, or incur debt, will no longer apply if the Notes have investment grade ratings from both of the rating agencies of Moody’s Investor Services, Inc. (“Moody’s”) and Standard & Poor’s Ratings Group (“S&P”) and no event of default has occurred. Since the date of issuance of the Notes, the Notes have not received investment grade ratings from Moody’s or S&P. Accordingly, all of the covenants under the Notes currently apply to the Company. None of the covenants under the Notes, however, require the Company to maintain any particular financial ratio or other measure of financial performance.

The U.S. Credit Facility also contains customary provisions relating to mandatory prepayments, voluntary payments, affirmative and negative covenants, and events of default. In addition, 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 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. Effective September 10, 2015, the Company amended the provisions in its U.S. Credit Facility to increase the maximum Total Net Secured Leverage Ratio. Commencing with the third quarter of Fiscal 2015, the maximum ratio is 6.75:1.0 for all quarters through the end of Fiscal 2016 except the fourth quarters of Fiscal 2015 and Fiscal 2016 when the ratio will be 6.35:1.0.

Europe Revolving Credit Facility

Certain of the Company’s European subsidiaries are party to an unsecured multi-currency revolving credit facility, dated October 2, 2014, as amended on July 15, 2015 (as amended, the “Europe Credit Facility”) in the amount of $50 million that will terminate on August 20, 2017. Loans under the Europe Credit Facility 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 Limited (“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 $2.3 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 October 31, 2015, we had a reduction of $2.2 million for outstanding bank guarantees, which reduces the borrowing availability to $0.1 million as of that date.

 

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

5. Commitments and Contingencies

The Company is, from time to time, involved in litigation incidental to the conduct of its business, including personal injury litigation, litigation regarding merchandise sold, including product and safety concerns regarding heavy metal and chemical content in merchandise, litigation with respect to various employment matters, including litigation with present and former employees, wage and hour litigation and litigation regarding intellectual property rights.

The Company believes that current pending litigation will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.

6. Accumulated Other Comprehensive Loss

The following summary sets forth the components of accumulated other comprehensive 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 loss

     (4,433     —           (4,433
  

 

 

   

 

 

    

 

 

 

Balance as of October 31, 2015

   $ (47,863   $ 5,732       $ (42,131
  

 

 

   

 

 

    

 

 

 

7. Stock Options and Stock-Based Compensation

The following is a summary of activity in the Company’s stock option plan for the nine months ended October 31, 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

     682,325      $ 6.53      

Options exercised

     —          

Options forfeited

     (524,775   $ 9.75      

Options expired

     (427,980   $ 10.00      
  

 

 

      

Outstanding as of October 31, 2015

     3,895,969      $ 9.43         4.6   
  

 

 

      

Options vested and expected to vest as of October 31, 2015

     3,531,208      $ 9.52         4.5   
  

 

 

      

Exercisable as of October 31, 2015

     1,746,132      $ 10.00         3.8   
  

 

 

      

The weighted average grant date fair value of options granted during the nine months ended October 31, 2015 and November 1, 2014 was $0.51 and $0.04, respectively.

During the three and nine months ended October 31, 2015 and November 1, 2014, the Company recorded stock-based compensation expense (benefit) and additional paid-in capital relating to stock-based compensation of approximately $0.1 million, $0.2 million, $(0.5) million and $(0.2) million, respectively. During the three and nine months ended October 31, 2015, the Company recorded reversals of stock option expense of $0.1 million and $0.8 million, respectively, associated with the forfeitures of stock options. Stock-based compensation expense (benefit) is recorded in “Selling, general and administrative” expenses in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

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8. Income Taxes

The effective income tax rate was (4.9)% for both the three and nine months ended October 31, 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 and nine months ended October 31, 2015 by the Company’s U.S. operations.

The effective income tax rate was (9.9)% and (8.6)% for the three and nine months ended November 1, 2014, respectively. This effective income tax rate differed from the statutory federal income tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses in the three and nine months ended November 1, 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 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 and nine months ended October 31, 2015 and November 1, 2014 are as follows (in thousands):

 

     Three Months
Ended
October 31,
2015
    Three Months
Ended
November 1,
2014
    Nine Months
Ended
October 31,
2015
    Nine Months
Ended
November 1,
2014
 

Net sales:

        

North America

   $ 202,434      $ 206,072      $ 618,729      $ 632,728   

Europe

     130,243        144,597        381,530        449,113   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     332,677        350,669        1,000,259        1,081,841   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

        

North America

     9,527        9,567        28,886        37,589   

Europe

     5,937        6,538        16,766        19,780   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization

     15,464        16,105        45,652        57,369   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income for reportable segments:

        

North America

     14,672        18,969        59,127        50,834   

Europe

     6,560        10,968        20,650        37,849   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income for reportable segments

     21,232        29,937        79,777        88,683   

Severance and transaction-related costs

     200        751        1,027        4,515   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income

     21,032        29,186        78,750        84,168   

Interest expense, net

     55,296        53,593        164,760        162,909   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated loss before income tax expense

   $ (34,264   $ (24,407   $ (86,010   $ (78,741
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Excluded from operating income for the North America segment are severance and transaction-related costs of approximately $0.1 million and $0.2 million for the three months ended October 31, 2015 and November 1, 2014, respectively, and $0.4 million and $2.0 million for the nine months ended October 31, 2015 and November 1, 2014, respectively.

Excluded from operating loss for the Europe segment are severance and transaction-related costs of approximately $0.1 million and $0.6 million for the three months ended October 31, 2015 and November 1, 2014, respectively, and $0.6 million and $2.5 million for the nine months ended October 31, 2015 and November 1, 2014, respectively.

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 October 31, 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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Table of Contents

Condensed Consolidating Balance Sheet

October 31, 2015

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 3,780      $ 4,254      $ 15,874      $ —        $ 23,908   

Inventories

     —          113,864        78,159        —          192,023   

Prepaid expenses

     782        13,502        16,899        —          31,183   

Other current assets

     —          20,696        11,408        —          32,104   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     4,562        152,316        122,340        —          279,218   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     5,369        161,629        84,330        —          251,328   

Leasehold improvements

     1,335        193,638        126,866        —          321,839   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     6,704        355,267        211,196        —          573,167   

Accumulated depreciation and amortization

     (4,280     (250,208     (132,431     —          (386,919
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,424        105,059        78,765        —          186,248   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —          18,055        —          —          18,055   

Accumulated depreciation and amortization

     —          (5,191     —          —          (5,191
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          12,864        —          —          12,864   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —          190,137        10,088        (200,225     —     

Investment in subsidiaries

     2,012,688        (46,809     —          (1,965,879     —     

Goodwill

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

Intangible assets, net

     274,000        824        226,596        —          501,420   

Deferred financing costs, net

     26,048        —          625        —          26,673   

Other assets

     486        4,779        39,159        —          44,424   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,313,222        1,261,425        590,873        (2,166,104     1,999,416   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,320,208      $ 1,531,664      $ 791,978      $ (2,166,104   $ 2,477,746   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Revolving credit facilities

   $ 111,300      $ —        $ 10,291      $ —        $ 121,591   

Trade accounts payable

     13,336        32,708        52,588        —          98,632   

Income taxes payable

     —          (234     2,739        —          2,505   

Accrued interest payable

     42,502        —          8        —          42,510   

Accrued expenses and other current liabilities

     5,166        38,526        43,261        —          86,953   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     172,304        71,000        108,887        —          352,191   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     200,225        —          —          (200,225     —     

Long-term debt

     2,374,614        —          —          —          2,374,614   

Obligation under capital lease

     —          16,778        —          —          16,778   

Deferred tax liability

     —          102,578        10,140        —          112,718   

Deferred rent expense

     —          24,995        11,040        —          36,035   

Unfavorable lease obligations and other long-term liabilities

     —          12,310        35        —          12,345   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,574,839        156,661        21,215        (200,225     2,552,490   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —          367        2        (369     —     

Additional paid in capital

     618,823        1,435,909        797,656        (2,233,565     618,823   

Accumulated other comprehensive loss, net of tax

     (42,131     (5,080     (37,534     42,614        (42,131

Accumulated deficit

     (1,003,627     (127,193     (98,248     225,441        (1,003,627
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (426,935     1,304,003        661,876        (1,965,879     (426,935
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 2,320,208      $ 1,531,664      $ 791,978      $ (2,166,104   $ 2,477,746   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Balance Sheet

January 31, 2015

(in thousands)

 

     Issuer     Guarantors     Non-
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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Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended October 31, 2015

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 186,370      $ 146,307      $ —        $ 332,677   

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

     40        101,685        77,999        —          179,724   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (40     84,685        68,308        —          152,953   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     4,254        61,662        52,526        —          118,442   

Depreciation and amortization

     239        8,572        6,653        —          15,464   

Severance and transaction-related costs

     70        —          130        —          200   

Other (income) expense

     (1,726     (1,043     584        —          (2,185
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,837        69,191        59,893        —          131,921   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (2,877     15,494        8,415        —          21,032   

Interest expense, net

     54,501        547        248        —          55,296   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (57,378     14,947        8,167        —          (34,264

Income tax expense

     —          462        1,213        —          1,675   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (57,378     14,485        6,954        —          (35,939

Equity in earnings of subsidiaries

     21,439        11        —          (21,450     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (35,939     14,496        6,954        (21,450     (35,939

Foreign currency translation adjustments

     94        14        37        (51     94   

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

     (928     27        (933     906        (928
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (834     41        (896     855        (834
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (36,773   $ 14,537      $ 6,058      $ (20,595   $ (36,773
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended November 1, 2014

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 189,880      $ 160,789      $ —        $ 350,669   

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

     140        100,861        82,441        —          183,442   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     (140     89,019        78,348        —          167,227   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     4,122        61,429        57,106        —          122,657   

Depreciation and amortization

     184        8,604        7,317        —          16,105   

Severance and transaction-related costs

     165        —          586        —          751   

Other (income) expense, net

     (2,231     (132     891        —          (1,472
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,240        69,901        65,900        —          138,041   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (2,380     19,118        12,448        —          29,186   

Interest expense, net

     52,966        559        68        —          53,593   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (55,346     18,559        12,380        —          (24,407

Income tax expense

     —          553        1,862        —          2,415   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (55,346     18,006        10,518        —          (26,822

Equity in earnings (loss) of subsidiaries

     28,524        (126     —          (28,398     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (26,822     17,880        10,518        (28,398     (26,822

Foreign currency translation adjustments

     (3,304     (257     (1,575     1,832        (3,304

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

     (11,909     (802     (11,971     12,773        (11,909
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (15,213     (1,059     (13,546     14,605        (15,213
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (42,035   $ 16,821      $ (3,028   $ (13,793   $ (42,035
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Nine Months Ended October 31, 2015

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 573,567      $ 426,692      $ —        $ 1,000,259   

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

     122        304,686        226,844        —          531,652   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (122     268,881        199,848        —          468,607   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     10,474        181,788        155,567        —          347,829   

Depreciation and amortization

     651        26,095        18,906        —          45,652   

Severance and transaction-related costs

     431        3        593        —          1,027   

Other (income) expense

     (2,744     (1,658     (249     —          (4,651
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     8,812        206,228        174,817        —          389,857   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (8,934     62,653        25,031        —          78,750   

Interest expense, net

     162,390        1,639        731        —          164,760   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (171,324     61,014        24,300        —          (86,010

Income tax expense (benefit)

     —          (33     4,249        —          4,216   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (171,324     61,047        20,051        —          (90,226

Equity in earnings (loss) of subsidiaries

     81,098        (1,278     —          (79,820     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (90,226     59,769        20,051        (79,820     (90,226

Foreign currency translation adjustments

     (507     (273     913        (640     (507

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

     (3,926     (681     (3,882     4,563        (3,926
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (4,433     (954     (2,969     3,923        (4,433
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (94,659   $ 58,815      $ 17,082      $ (75,897   $ (94,659
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Nine Months Ended November 1, 2014

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —        $ 584,244      $ 497,597      $ —        $ 1,081,841   

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

     655        304,658        254,934        —          560,247   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (655     279,586        242,663        —          521,594   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     11,638        187,230        178,961        —          377,829   

Depreciation and amortization

     2,183        30,162        25,024        —          57,369   

Severance and transaction-related costs

     1,862        1        2,652        —          4,515   

Other (income) expense, net

     (6,372     (158     4,243        —          (2,287
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     9,311        217,235        210,880        —          437,426   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (9,966     62,351        31,783        —          84,168   

Interest expense, net

     161,192        1,656        61        —          162,909   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (171,158     60,695        31,722        —          (78,741

Income tax expense (benefit)

     —          (488     7,280        —          6,792   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (171,158     61,183        24,442        —          (85,533

Equity in earnings (loss) of subsidiaries

     85,625        (1,297     —          (84,328     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (85,533     59,886        24,442        (84,328     (85,533

Foreign currency translation adjustments

     (3,123     38        (2,569     2,531        (3,123

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

     (11,127     (278     (11,179     11,457        (11,127
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (14,250     (240     (13,748     13,988        (14,250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (99,783   $ 59,646      $ 10,694      $ (70,340   $ (99,783
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

Condensed Consolidating Statement of Cash Flows

Nine Months Ended October 31, 2015

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (90,226   $ 59,769      $ 20,051      $ (79,820   $ (90,226

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

          

Equity in earnings (loss) of subsidiaries

     (81,098     1,278        —          79,820        —     

Depreciation and amortization

     651        26,095        18,906        —          45,652   

Amortization of lease rights and other assets

     —          —          2,534        —          2,534   

Amortization of debt issuance costs

     5,954        —          234        —          6,188   

Accretion of debt premium

     (1,864     —          —          —          (1,864

Net accretion of unfavorable lease obligations

     —          (247     (9     —          (256

Loss on sale/retirement of property and equipment, net

     —          348        (5     —          343   

Gain on sale of intangible assets/lease rights

     —          —          (2,475     —          (2,475

Stock-based compensation benefit

     (453     —          (49     —          (502

(Increase) decrease in:

          

Inventories

     —          (30,915     (16,179     —          (47,094

Prepaid expenses

     (234     (11,682     (1,620     —          (13,536

Other assets

     (34     (1,828     (4,318     —          (6,180

Increase (decrease) in:

          

Trade accounts payable

     11,952        5,522        12,121        —          29,595   

Income taxes payable

     —          (337     1,083        —          746   

Accrued interest payable

     (25,263     —          (229     —          (25,492

Accrued expenses and other liabilities

     (1,482     (444     (2,414     —          (4,340

Deferred income taxes

     —          —          528        —          528   

Deferred rent expense

     —          108        2,819        —          2,927   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (182,097     47,667        30,978        —          (103,452
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     (745     (13,162     (8,507     —          (22,414

Acquisition of intangible assets/lease rights

     —          (37     (103     —          (140

Proceeds from sale of intangible assets/lease rights

     —          —          2,614        —          2,614   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (745     (13,199     (5,996     —          (19,940
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from revolving credit facilities

     156,300        —          128,923        —          285,223   

Payments on revolving credit facilities

     (45,000     —          (118,758     —          (163,758

Payment of debt issuance costs

     (306     —          (109     —          (415

Principal payments on capital lease

     —          (123     —          —          (123

Intercompany activity, net

     72,148        (32,631     (39,517     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     183,142        (32,754     (29,461     —          120,927   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —          (1,469     456        —          (1,013
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     300        245        (4,023     —          (3,478

Cash and cash equivalents, at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     3,780        4,254        15,874        —          23,908   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

Condensed Consolidating Statement of Cash Flows

Nine Months Ended November 1, 2014

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (85,533   $ 59,886      $ 24,442      $ (84,328   $ (85,533

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

          

Equity in earnings (loss) of subsidiaries

     (85,625     1,297        —          84,328        —     

Depreciation and amortization

     2,183        30,162        25,024        —          57,369   

Amortization of lease rights and other assets

     —          —          2,949        —          2,949   

Amortization of debt issuance costs

     5,974        —          —          —          5,974   

Accretion of debt premium

     (1,712     —          —          —          (1,712

Net accretion of unfavorable lease obligations

     —          (367     (27     —          (394

Loss on sale/retirement of property and equipment, net

     52        130        3        —          185   

Loss on sale of intangible assets/lease rights

     —          —          277        —          277   

Stock-based compensation (benefit) expense

     (537     146        180        —          (211

(Increase) decrease in:

          

Inventories

     —          (5,115     (412     —          (5,527

Prepaid expenses

     (626     (25     (4,171     —          (4,822

Other assets

     306        (2,069     (767     —          (2,530

Increase (decrease) in:

          

Trade accounts payable

     (9,175     (16     8,028        —          (1,163

Income taxes payable

     —          (29     (2,930     —          (2,959

Accrued interest payable

     (25,828     —          78        —          (25,750

Accrued expenses and other liabilities

     (2,117     (54     193        —          (1,978

Deferred income taxes

     —          —          (160     —          (160

Deferred rent expense

     —          3,240        (127     —          3,113   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (202,638     87,186        52,580        —          (62,872
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     (781     (25,993     (14,620     —          (41,394

Acquisition of intangible assets/lease rights

     —          (85     (393     —          (478
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (781     (26,078     (15,013     —          (41,872
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from revolving credit facilities

     224,000        —          40,180        —          264,180   

Payments on revolving credit facilities

     (189,300     —          —          —          (189,300

Payment of debt issuance costs

     (165     —          (441     —          (606

Principal payments on capital lease

     —          (77     —          —          (77

Intercompany activity, net

     160,933        (59,717     (101,216     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     195,468        (59,794     (61,477     —          74,197   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —          (542     622        —          80   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (7,951     772        (23,288     —          (30,467

Cash and cash equivalents, at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     1,960        4,827        21,089        —          27,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


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 October 31, 2015, we operated a total of 2,926 company-operated stores of which 1,793 were located in all 50 states of the United States, Puerto Rico, Canada and the U.S. Virgin Islands (North America segment) and 1,133 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 October 31, 2015, we also had a total of 703 concession stores, of which 244 were located in the United States and Canada (North America segment) and 459 stores were located in the United Kingdom, Ireland, France, Spain, Austria, Germany, Italy, Portugal and Switzerland (Europe segment).

As of October 31, 2015, we also franchised 530 stores in Japan, the Middle East, Turkey, Greece, Guatemala, Malta, India, Dominican Republic, El Salvador, Venezuela, Panama, Indonesia, Philippines, Costa Rica, Serbia, Bulgaria, Sweden, Romania, Martinique, Pakistan, Thailand and South Africa. 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 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.

 

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Icing® is our second brand which we currently operate in North America through company-operated stores and in Europe and the Middle East 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.

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 and nose 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, watches, and sunglasses; and handbags and small leather goods.

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

Financial activity for the three and nine months ended October 31, 2015 includes the following:

 

    Net sales decrease of 5.1% and decrease of 7.5%; respectively;

 

    Same store sales percentages;

 

     Three Months
Ended
October 31, 2015
  Nine Months
Ended
October 31, 2015

Consolidated

   (0.6)%   (1.6)%

North America

   0.1%   (0.4)%

Europe

   (1.6)%   (3.5)%

 

    Merchandise margin decreased 170 basis points and decreased 140 basis points, respectively;

 

    Operating income decreased of 27.9 % and decreased 6.4%, respectively; and

 

    Operating income margin of 6.3 % and 7.9%, respectively.

Operational activity for the three and nine months ended October 31, 2015 includes the following:

 

    Opened 376 and 585 concession stores, respectively;

 

    Opened 6 and 12 new company-operated stores, respectively;

 

    Closed 34 and 84 company-operated stores, respectively, due to underperformance or lease renewal terms that did not meet our criteria; and

 

    Closed 0 and 12 concession stores, respectively.

 

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A summary of our consolidated results of operations for the three and nine months ended October 31, 2015 and November 1, 2014 are as follows (dollars in thousands):

 

     Three Months
Ended
October 31, 2015
    Three Months
Ended
November 1, 2014
 

Net sales

   $ 332,677      $ 350,669   

Decrease in same store sales

     (0.6 )%      (1.4 )% 

Gross profit percentage

     46.0     47.7

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

     35.6     35.0

Depreciation and amortization as a percentage of net sales

     4.6     4.6

Operating income

   $ 21,032      $ 29,186   

Net loss

   $ (35,939   $ (26,822

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

     2,926        3,038   

Number of concession stores at the end of the period

     703        125   

 

     Nine Months
Ended
October 31, 2015
    Nine Months
Ended
November 1, 2014
 

Net sales

   $ 1,000,259      $ 1,081,841   

Decrease in same store sales

     (1.6 )%      (2.1 )% 

Gross profit percentage

     46.8     48.2

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

     34.8     34.9

Depreciation and amortization as a percentage of net sales

     4.6     5.3

Operating income

   $ 78,750      $ 84,168   

Net loss

   $ (90,226   $ (85,533

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

     2,926        3,038   

Number of concession stores at the end of the period

     703        125   

Net sales

Net sales for the three months ended October 31, 2015 decreased $18.0 million, or 5.1%, from the three months ended November 1, 2014. The decrease was attributable to an unfavorable foreign currency translation effect of our non-U.S. net sales of $17.5 million, the effect of store closures of $10.7 million, a decrease in same store sales of $1.8 million and decreased shipments to franchisees of $0.6 million, partially offset by concession and new store sales of $12.6 million. Net sales would have decreased 0.2% excluding the impact from foreign currency exchange rate changes.

Net sales for the nine months ended October 31, 2015 decreased $81.6 million, or 7.5%, from the nine months ended November 1, 2014. The decrease was attributable to an unfavorable foreign currency translation effect of our non-U.S. net sales of $67.4 million, the effect of store closures of $30.6 million and a decrease in same store sales of $15.4 million, partially offset by concession and new store sales of $31.0 million and increased shipments to franchisees of $0.8 million. Net sales would have decreased 1.4% excluding the impact from foreign currency exchange rate changes.

For the three months ended October 31, 2015, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 1.9%, partially offset by an increase of average transaction value of 1.6%.

For the nine months ended October 31, 2015, the decrease in same store sales was primarily attributable to a decrease in average transaction value of 0.7% and a decrease in average number of transactions per store of 0.5%.

 

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

 

     Percentage of Total    Percentage of Total
Product Category    Three Months
Ended
October 31, 2015
   Three Months
Ended
November 1, 2014
   Nine Months
Ended
October 31, 2015
   Nine Months
Ended
November 1, 2014

Jewelry

   43.4    46.4    47.2    49.0

Accessories

   56.6    53.6    52.8    51.0
  

 

  

 

  

 

  

 

   100.0    100.0    100.0    100.0
  

 

  

 

  

 

  

 

Gross profit

In calculating gross profit and gross profit percentages, we exclude the costs related to our distribution center 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 October 31, 2015, gross profit percentage decreased 170 basis points to 46.0% compared to 47.7% during the three months ended November 1, 2014. The decrease in gross profit percentage consisted of a decrease in merchandise margin of 220 basis points, partially offset by a 30 basis point decrease in buying and buying-related costs and by a 20 basis point decrease in occupancy costs. The decrease in merchandise margin percentage resulted primarily from unfavorable foreign exchange rates and an increase in markdowns. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The decrease in occupancy costs, as a percentage of sales, was primarily caused by the leveraging effect of concession store sales, which do not have associated occupancy costs.

During the nine months ended October 31, 2015, gross profit percentage decreased 140 basis points to 46.8% compared to 48.2% during the nine months ended November 1, 2014. The decrease in gross profit percentage consisted of a decrease in merchandise margin of 190 basis points, partially offset by a 30 basis point decrease in buying and buying-related costs and by a 20 basis point decrease in occupancy costs. The decrease in merchandise margin percentage resulted primarily from unfavorable foreign exchange rates, increase in markdowns and 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 that would materially affect our merchandise margin. The decrease in occupancy costs, as a percentage of sales, was primarily caused by the leveraging effect of concession store sales, which do not have associated occupancy costs, and the closure of our former China operations.

Selling, general and administrative expenses

During the three months ended October 31, 2015, selling, general and administrative expenses decreased $4.2 million, or 3.4%, compared to the three months ended November 1, 2014. As a percentage of net sales, selling, general and administrative expenses increased 60 basis points compared to the three months ended November 1, 2014. Excluding a favorable $6.1 million foreign currency translation effect, selling, general, and administrative expenses would have increased $1.9 million. Of the remainder, the increase was primarily due to increased concession store commission expense, partially offset by lower compensation and related expenses.

During the nine months ended October 31, 2015, selling, general and administrative expenses decreased $30.0 million, or 7.9%, compared to the nine months ended November 1, 2014. As a percentage of net sales, selling, general and administrative expenses decreased 10 basis points compared to the nine months ended November 1, 2014. Excluding a favorable $23.8 million foreign currency translation effect, selling, general, and administrative expenses would have decreased $6.2 million. Of the remainder, the decrease was primarily due to lower compensation and related expenses and closure of our former China operations, partially offset by increased concession store commission expense.

 

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Depreciation and amortization expense

During the three months ended October 31, 2015, depreciation and amortization expense decreased $0.6 million to $15.5 million compared to $16.1 million for the three months ended November 1, 2014. Excluding a favorable $0.8 million foreign currency translation effect, the increase in depreciation and amortization expense would have been $0.2 million.

During the nine months ended October 31, 2015, depreciation and amortization expense decreased $11.7 million to $45.7 million compared to $57.4 million for the nine months ended November 1, 2014. Excluding a favorable $2.9 million foreign currency translation effect, the decrease in depreciation and amortization expense would have been $8.9 million.

Other income, net

The following is a summary of other income activity for the three and nine months ended October 31, 2015 and November 1, 2014 (in thousands):

 

     Three Months     Three Months     Nine Months     Nine Months  
     Ended     Ended     Ended     Ended  
     October 31, 2015     November 1, 2014     October 31, 2015     November 1, 2014  

Royalty income

   $ (1,133   $ (1,325   $ (3,781   $ (3,866

Gain on sale of assets

     (805     —          (2,475     —     

Foreign currency exchange (gain) loss, net

     (237     (129     1,685        1,639   

Other income

     (10     (18     (80     (60
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (2,185   $ (1,472   $ (4,651   $ (2,287
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

During the three months ended October 31, 2015, net interest expense aggregated $55.3 million compared to $53.6 million for the three months ended November 1, 2014.

During the nine months ended October 31, 2015, net interest expense aggregated $164.8 million compared to $162.9 million for the nine months ended November 1, 2014.

Income taxes

The effective income tax rate for the three and nine months ended October 31, 2015 was (4.9)% and (4.9)% compared to (9.9)% and (8.6)% for the three and nine months ended November 1, 2014, respectively. These effective income tax rates differed from the statutory federal income tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses in the three and nine months ended October 31, 2015 and November 1, 2014, respectively, by our U.S. operations.

Segment Operations

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

 

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North America

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

 

     Three Months
Ended
October 31, 2015
    Three Months
Ended
November 1, 2014
    Nine Months
Ended
October 31, 2015
    Nine Months
Ended
November 1, 2014
 

Net sales

   $ 202,434      $ 206,072      $ 618,729      $ 632,728   

Increase (decrease) in same store sales

     0.1     (1.6 )%      (0.4 )%      (3.4 )% 

Gross profit percentage

     46.4     47.2     47.4     47.7

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

     1,793        1,876        1,793        1,876   

Number of concession stores at the end of the period

     244        12        244        12   

During the three months ended October 31, 2015, net sales in North America decreased $3.6 million, or 1.8%, from the three months ended November 1, 2014. The decrease was attributable to the effect of store closures of $6.7 million and an unfavorable foreign currency translation effect of our non-U.S. net sales of $2.6 million and decreased shipments to franchisees of $0.6 million, partially offset by concession and new store sales of $6.1 million and an increase in same store sales of $0.2 million. Sales would have decreased 0.5% excluding the impact from foreign currency exchange rate changes.

During the nine months ended October 31, 2015, net sales in North America decreased $14.0 million, or 2.2%, from the nine months ended November 1, 2014. The decrease was attributable to the effect of store closures of $19.3 million, an unfavorable foreign currency translation effect of our non-U.S. net sales of $6.6 million and a decrease in same store sales of $2.3 million, partially offset by concession and new store sales of $13.4 million and increased shipments to franchisees of $0.8 million. Sales would have decreased 1.2% excluding the impact from foreign currency exchange rate changes.

For the three months ended October 31, 2015, the increase in same store sales was primarily attributable to an increase in average number of transactions per store of 0.6%, partially offset by a decrease in average transaction value of 0.3%.

For the nine months ended October 31, 2015, the decrease in same store sales was primarily attributable to a decrease in average transaction value of 2.9%, partially offset by an increase in average number of transactions per store of 3.4%.

During the three months ended October 31, 2015, gross profit percentage decreased 80 basis points to 46.4% compared to 47.2% during the three months ended November 1, 2014. The decrease in gross profit percentage consisted of a 100 basis point decrease in merchandise margin, partially offset by a 20 basis point decrease in occupancy costs. The decrease in merchandise margin resulted primarily from an increase in markdowns. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The decrease in occupancy costs, as a percentage of sales, was primarily caused by the leveraging effect of concession store sales, which do not have associated occupancy costs.

During the nine months ended October 31, 2015, gross profit percentage decreased 30 basis points to 47.4% compared to 47.7% during the nine months ended November 1, 2014. The decrease in gross profit percentage consisted of an 80 basis point decrease in merchandise margin, partially offset by a 30 basis point decrease in occupancy costs and a 20 basis point decrease in buying and buying-related costs. The decrease in merchandise margin resulted primarily from an increase in markdowns and 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

 

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markdowns that would materially affect our merchandise margin. The decrease in occupancy costs, as a percentage of sales, was primarily caused by the leveraging effect of concession store sales, which do not have associated occupancy costs and the closure of our former China operations. The decrease in buying and buying-related costs, as a percentage of net sales, resulted primarily due to lower buying and buying-relating costs.

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

 

     Percentage of Total    Percentage of Total

Product Category

   Three Months
Ended
October 31, 2015
   Three Months
Ended
November 1, 2014
   Nine Months
Ended
October 31, 2015
   Nine Months
Ended
November 1, 2014

Jewelry

   50.4    52.0    54.0    54.3

Accessories

   49.6    48.0    46.0    45.7
  

 

  

 

  

 

  

 

   100.0    100.0    100.0    100.0
  

 

  

 

  

 

  

 

Europe

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

 

     Three Months
Ended
October 31, 2015
    Three Months
Ended
November 1, 2014
    Nine Months
Ended
October 31, 2015
    Nine Months
Ended
November 1, 2014
 

Net sales

   $ 130,243      $ 144,597      $ 381,530      $ 449,113   

(Decrease) increase in same store sales

     (1.6 )%      (1.1 )%      (3.5 )%      (0.2 )% 

Gross profit percentage

     45.3     48.4     46.0     48.9

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

     1,133        1,162        1,133        1,162   

Number of concession stores at the end of the period

     459        113        459        113   

During the three months ended October 31, 2015, net sales in Europe decreased $14.4 million, or 9.9%, from the three months ended November 1, 2014. The decrease was attributable to an unfavorable foreign currency translation effect of our non-U.S. net sales of $14.9 million, the effect of store closures of $4.0 million and a decrease in same stores sales of $2.0 million, partially offset by concession and new store sales of $6.5 million. Sales would have increased 0.4% excluding the impact from foreign currency exchange rate changes.

During the nine months ended October 31, 2015, net sales in Europe decreased $67.6 million, or 15.0%, from the nine months ended November 1, 2014. The decrease was attributable to an unfavorable foreign currency translation effect of our non-U.S. net sales of $60.8 million, a decrease in same stores sales of $13.1 million and the effect of store closures of $11.3 million, partially offset by concession and new store sales of $17.6 million. Sales would have decreased 1.8% excluding the impact from foreign currency exchange rate changes.

For the three months ended October 31, 2015, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 5.0%, partially offset by an increase in average transaction value of 3.9%.

For the nine months ended October 31, 2015, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 5.0%, partially offset by an increase in average transaction value of 1.2%.

 

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During the three months ended October 31, 2015, gross profit percentage decreased 310 basis points to 45.3% compared to 48.4% during the three months ended November 1, 2014. The decrease in gross profit percentage consisted of a 390 basis point decrease in merchandise margin, partially offset by a 70 basis point decrease in buying and buying-related costs and a 10 basis point decrease in occupancy costs. The decrease in merchandise margin percentage resulted primarily from increase in markdowns 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 that would materially affect our merchandise margin. The decrease in buying and buying-related costs, as a percentage of net sales, resulted primarily due to lower buying and buying-relating costs.

During the nine months ended October 31, 2015, gross profit percentage decreased 290 basis points to 46.0% compared to 48.9% during the nine months ended November 1, 2014. The decrease in gross profit percentage consisted of a 330 basis point decrease in merchandise margin, partially offset by a 40 basis point decrease in buying and buying-related costs. The decrease in merchandise margin percentage resulted primarily from unfavorable foreign currency exchange rates, increase in markdowns and 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 that would materially affect our merchandise margin. The decrease in buying and buying-related costs, as a percentage of net sales, resulted primarily due to lower buying and buying-relating costs.

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

 

     Percentage of Total    Percentage of Total

Product Category

   Three Months
Ended
October 31, 2015
   Three Months
Ended
November 1, 2014
   Nine Months
Ended
October 31, 2015
   Nine Months
Ended
November 1, 2014

Jewelry

   32.8    38.7    36.4    41.7

Accessories

   67.2    61.3    63.6    58.3
  

 

  

 

  

 

  

 

   100.0    100.0    100.0    100.0
  

 

  

 

  

 

  

 

Liquidity and Capital Resources

We anticipate that cash generated from operations, borrowings under our $115.0 million U.S. Credit Facility and $50.0 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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A summary of cash flows provided by (used in) operating, investing and financing activities for the nine months ended October 31, 2015 and November 1, 2014 is outlined in the table below (in thousands):

 

     Nine Months
Ended
October 31, 2015
    Nine Months
Ended
November 1, 2014
 

Operating activities

   $ (103,452   $ (62,872

Investing activities

     (19,940     (41,872

Financing activities

     120,927        74,197   

Cash flows from operating activities

For the nine months ended October 31, 2015, cash used in operations increased $40.6 million compared to the prior year period. The primary reason for the increase was an increase in working capital of $26.4 million and a net decrease in operating income adjusted for non-cash items and other items of $14.2 million, excluding cash equivalents. For the nine months ended November 1, 2014, cash used in operations decreased $39.7 million compared to the prior year period. The primary reason for the decrease was a decrease in working capital, excluding cash and cash equivalents, of $46.8 million, a decrease in tax payments and other items of $5.9 million, and a decrease in interest payments of $4.1 million, partially offset by a net decrease in operating income before depreciation and amortization expense and other non-cash items, of $17.1 million.

Cash flows from investing activities

For the nine months ended October 31, 2015, cash used in investing activities was $19.9 million and consisted of $22.5 million for capital expenditures, partially offset by proceeds of $2.6 million from the sale of intangible assets. For the nine months ended November 1, 2014, cash used in investing activities was $41.9 million and primarily consisted of $41.9 million for capital expenditures. During the remainder of Fiscal 2015, we expect to fund approximately $3.0 million of capital expenditures.

Cash flows from financing activities

For the nine months ended October 31, 2015, cash provided by financing activities was $120.9 million, which consisted primarily of net borrowings of $121.4 million under our Credit Facilities (as described below), partially offset by payment of $0.4 million in financing costs and payment of $0.1 million for capital lease. For the nine months ended November 1, 2014, cash provided by financing activities was $74.2 million, which consisted primarily of net borrowings of $74.9 million under our Credit Facilities (as described below), partially offset by payment of $0.6 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 October 31, 2015, we had cash and cash equivalents of $23.9 million and all cash equivalents were maintained in one money market fund invested exclusively in U.S. Treasury Securities.

In addition, as of October 31, 2015, our foreign subsidiaries held cash and cash equivalents of $15.9 million. During the nine months ended October 31, 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 October 31, 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 (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. In addition, 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 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. Effective September 10, 2015, we amended the provisions in our U.S. Credit Facility to increase the maximum Total Net Secured Leverage Ratio. Commencing with the third quarter of Fiscal 2015, the maximum ratio is 6.75:1.0 for all quarters through the end of Fiscal 2016 except the fourth quarters of Fiscal 2015 and Fiscal 2016 when the ratio will be 6.35:1.0. As of October 31, 2015, our revolving loans and letters of credit outstanding exceeded $15.0 million, and our Total Net Secured Leverage Ratio was 6.5:1.0.

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 October 31, 2015, we were in compliance with the covenants.

As of October 31, 2015, we had $111.3 million of borrowings and $3.6 million of letters of credit outstanding, which reduces the borrowing availability under the U.S. Credit Facility to $0.1 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 October 31, 2015, we were in compliance with the covenants under the Notes.

Europe Revolving Credit Facility

Certain of our European subsidiaries are party to the Europe Credit Facility, entered into in October 2014. In July 2015, we amended the Europe Credit Facility to increase the size from Euro 35 million to USD 50 million. The Europe Credit Facility will terminate on August 20, 2017. Loans under the Europe Credit Facility 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 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 October 31, 2015, we had $10.3 million of borrowings, which reduces the borrowing availability under the Europe Credit Facility to $39.7 million as of that date.

Europe Bank Credit Facilities

In addition to the Europe Credit Facility, our non-U.S. subsidiaries have bank credit facilities totaling $2.3 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 October 31, 2015, we had a reduction of $2.2 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.

Goodwill and indefinite-lived intangible assets are subject to impairment assessments at least annually (or more frequently when events or circumstances indicate that an impairment may have occurred) by applying a fair-value test. These fair value estimates require significant management judgment and are based on the best information available at the time of the analysis. Our principal intangible assets, other than goodwill, are tradenames, franchise agreements, and leases that existed as of the date that the Company was acquired in May 2007, which had terms that were favorable to market at that date. Our annual impairment testing for Fiscal 2014 resulted in a recognition of non-cash impairment charges of $123.2 million and $12.0 million related to goodwill and intangible assets, respectively. We expect to next perform our annual impairment analysis during the fourth fiscal quarter of Fiscal 2015, and we may be required to recognize additional impairment charges at that time or in the future.

Recent Accounting Pronouncements

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

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

We and our representatives may from time to time make written or oral forward-looking statements, including statements contained in this and other filings with the Securities and Exchange Commission and in our press releases and reports we issue publicly. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to our future financial performance, business strategy, planned capital expenditures, ability to service our debt, and new store openings for future periods, are forward-looking statements. The forward-looking statements are and will be based on management’s then current views and assumptions regarding future

 

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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 or promotional sales; 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, or expand our store base through concessions; 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 October 31, 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 October 31, 2015, we had fixed rate debt of $2,374.6 million and variable rate debt of $121.6 million. Based on our variable rate balance as of October 31, 2015, a 1% change in interest rates would increase or decrease our annual interest expense by approximately $1.2 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 October 31, 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 ($4.4) million and ($14.3) million, net of tax, reflecting the unrealized gain (loss) on foreign currency translations and intra-entity foreign currency transactions during the nine months ended October 31, 2015 and November 1, 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 October 31, 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 October 31, 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.
December 4, 2015     By:   /s/Beatrice Lafon
      Beatrice Lafon, Chief Executive Officer
      (principal executive officer)
   
December 4, 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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