e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended August 1, 2009
OR
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o |
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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 and 333-148108
Claires Stores, Inc.
(Exact name of registrant as specified in its charter)
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Florida
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59-0940416 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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3 S.W. 129th Avenue, Pembroke Pines, Florida
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33027 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (954) 433-3900
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 þ No o
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 o No o
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 o |
Accelerated filer o |
Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a 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 o No þ
As of September 1, 2009, 100 shares of the Registrants common stock, $0.001 par value, were
outstanding.
CLAIRES STORES, INC. AND SUBSIDIARIES
INDEX
2
PART I. FINANCIAL INFORMATION
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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August 1, 2009 |
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January 31, 2009 |
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(In thousands, except share and per share amounts) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
182,350 |
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$ |
204,574 |
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Inventories |
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108,193 |
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103,691 |
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Prepaid expenses |
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44,256 |
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31,837 |
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Other current assets |
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26,761 |
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27,079 |
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Total current assets |
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361,560 |
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367,181 |
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Property and equipment: |
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Land and building |
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22,288 |
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22,288 |
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Furniture, fixtures and equipment |
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157,624 |
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143,702 |
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Leasehold improvements |
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226,644 |
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214,007 |
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406,556 |
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379,997 |
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Less accumulated depreciation and amortization |
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(153,914 |
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(113,926 |
) |
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252,642 |
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266,071 |
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Intangible assets, net of accumulated amortization of $26,566 and
$19,371, respectively |
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588,325 |
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587,125 |
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Deferred financing costs, net of accumulated amortization of $23,600 |
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53,990 |
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59,944 |
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and $17,646, respectively |
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Other assets |
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56,585 |
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56,428 |
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Goodwill |
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1,544,346 |
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1,544,346 |
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2,243,246 |
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2,247,843 |
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Total assets |
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$ |
2,857,448 |
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$ |
2,881,095 |
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LIABILITIES AND STOCKHOLDERS DEFICIT |
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Current liabilities: |
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Trade accounts payable |
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$ |
55,071 |
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$ |
53,237 |
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Current portion of long-term debt |
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14,500 |
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14,500 |
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Income taxes payable |
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5,338 |
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6,477 |
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Accrued interest payable |
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13,050 |
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13,316 |
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Accrued expenses and other current liabilities |
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102,772 |
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107,974 |
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Total current liabilities |
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190,731 |
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195,504 |
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Long-term debt |
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2,357,760 |
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2,373,272 |
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Revolving credit facility |
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194,000 |
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194,000 |
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Deferred tax liability |
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114,023 |
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112,829 |
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Deferred rent expense |
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21,116 |
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18,462 |
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Unfavorable lease obligations and other long-term liabilities |
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39,926 |
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42,871 |
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2,726,825 |
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2,741,434 |
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Commitments and contingencies |
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Stockholders deficit: |
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Common stock par value $0.001 per share; authorized 1,000
shares; issued and outstanding 100 shares |
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Additional paid-in capital |
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612,319 |
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609,427 |
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Accumulated other comprehensive income (loss), net of tax |
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3,280 |
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(22,319 |
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Retained deficit |
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(675,707 |
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(642,951 |
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(60,108 |
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(55,843 |
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Total liabilities and stockholders deficit |
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$ |
2,857,448 |
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$ |
2,881,095 |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(in thousands)
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Three Months |
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Three Months |
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Six Months |
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Six Months |
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Ended |
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Ended |
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Ended |
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Ended |
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August 1, 2009 |
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August 2, 2008 |
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August 1, 2009 |
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August 2, 2008 |
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Net sales |
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$ |
314,196 |
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$ |
359,973 |
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$ |
607,294 |
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$ |
686,976 |
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Cost of sales, occupancy and buying
expenses |
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158,088 |
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180,267 |
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309,267 |
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352,249 |
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Gross profit |
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156,108 |
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179,706 |
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298,027 |
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334,727 |
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Other expenses (income): |
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Selling, general and administrative |
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110,813 |
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132,421 |
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219,282 |
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263,756 |
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Depreciation and amortization |
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18,703 |
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22,561 |
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36,858 |
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44,662 |
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Severance and transaction-related costs |
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25 |
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296 |
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374 |
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6,264 |
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Other income, net |
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(722 |
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(549 |
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(308 |
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(1,109 |
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128,819 |
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154,729 |
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256,206 |
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313,573 |
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Operating income |
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27,289 |
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24,977 |
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41,821 |
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21,154 |
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Gain on early debt extinguishment |
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17,104 |
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17,104 |
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Interest expense, net |
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45,329 |
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48,739 |
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90,563 |
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97,396 |
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Loss before income tax expense (benefit) |
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(936 |
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(23,762 |
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(31,638 |
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(76,242 |
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Income tax expense (benefit) |
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2,797 |
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(6,831 |
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1,118 |
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(23,741 |
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Net loss |
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$ |
(3,733 |
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$ |
(16,931 |
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$ |
(32,756 |
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$ |
(52,501 |
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Net loss |
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$ |
(3,733 |
) |
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$ |
(16,931 |
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$ |
(32,756 |
) |
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$ |
(52,501 |
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Foreign currency translation and interest
rate swap adjustments, net of tax |
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20,414 |
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2,831 |
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25,599 |
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12,145 |
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Comprehensive income (loss) |
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$ |
16,681 |
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$ |
(14,100 |
) |
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$ |
(7,157 |
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$ |
(40,356 |
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See accompanying notes to unaudited condensed consolidated financial statements.
4
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Six Months |
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Six Months |
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Ended |
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Ended |
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August 1, 2009 |
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August 2, 2008 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(32,756 |
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$ |
(52,501 |
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Adjustments to reconcile net loss to net cash
used in operating activities: |
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Depreciation and amortization |
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36,858 |
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44,662 |
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Amortization of lease rights and other assets |
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1,008 |
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1,013 |
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Amortization of debt issuance costs |
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5,256 |
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5,291 |
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Payment in kind interest expense |
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19,576 |
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6,052 |
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Net accretion of favorable (unfavorable) lease obligations |
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(1,103 |
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(543 |
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Loss (gain) on sale/retirement of property and equipment, net |
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8 |
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(175 |
) |
Gain on early debt extinguishment |
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(17,104 |
) |
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Gain on sale of intangible assets/lease rights |
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(598 |
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Stock compensation expense |
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2,892 |
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3,915 |
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(Increase) decrease in: |
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Inventories |
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(763 |
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(1,840 |
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Prepaid expenses |
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(8,958 |
) |
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(10,280 |
) |
Other assets |
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996 |
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(6,096 |
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Increase (decrease) in: |
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Trade accounts payable |
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(1,280 |
) |
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12,304 |
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Income taxes payable |
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(1,347 |
) |
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(16,152 |
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Accrued expenses and other liabilities |
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(7,021 |
) |
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12,575 |
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Accrued interest payable |
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(266 |
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3,029 |
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Deferred income taxes |
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2,087 |
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(19,273 |
) |
Deferred rent expense |
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2,029 |
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4,676 |
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Net cash used in operating activities |
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(486 |
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(13,343 |
) |
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Cash flows from investing activities: |
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Acquisition of property and equipment, net |
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(11,101 |
) |
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(31,626 |
) |
Acquisition of intangible assets/lease rights |
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(419 |
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(775 |
) |
Proceeds from sale of intangible assets/lease rights |
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1,638 |
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Net cash used in investing activities |
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(9,882 |
) |
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(32,401 |
) |
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Cash flows from financing activities: |
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Credit facility payments |
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(7,250 |
) |
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(7,250 |
) |
Purchase of senior subordinated notes |
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(10,036 |
) |
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Net cash used in financing activities |
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(17,286 |
) |
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(7,250 |
) |
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Effect of foreign currency exchange rate changes on cash and
cash equivalents |
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5,430 |
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2,256 |
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Net decrease in cash and cash equivalents |
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(22,224 |
) |
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(50,738 |
) |
Cash and cash equivalents at beginning of period |
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204,574 |
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85,974 |
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Cash and cash equivalents at end of period |
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$ |
182,350 |
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$ |
35,236 |
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Supplemental disclosure of cash flow information: |
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Income taxes paid |
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$ |
1,981 |
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$ |
14,668 |
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Interest paid |
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|
66,033 |
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|
83,964 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
CLAIRES 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, 2009 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, investment in joint
venture and other long-lived assets, legal contingencies and assumptions used in the calculation of
income taxes, retirement and other post-retirement benefits, stock-based compensation, derivative
and hedging activities, residual values and other items. These estimates and assumptions are based
on managements best estimates and judgment. Management evaluates its estimates and assumptions on
an ongoing basis using historical experience and other factors, including the current economic
environment, which management believes to be reasonable under the circumstances. Management
adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit
markets, volatile equity, foreign currency, energy markets and declines in consumer spending have
combined to increase the uncertainty inherent in such estimates and assumptions. As future events
and their effects cannot be determined with precision, actual results could differ significantly
from these estimates. Changes in those estimates will be reflected in the financial statements in
those future periods when the changes occur.
Due to the seasonal nature of the retail industry and the Companys 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. Significant Accounting Policies
Update to Significant Accounting Policies and Certain Financial Statement Disclosures
The Company has updated certain portions of its significant accounting policies and financial
statement disclosures since it published its annual report on Form 10-K as of and for the fiscal
year ended January 31, 2009. The portions updated include the following:
Impairment of Assets
The Company continually evaluates whether events and changes in circumstances warrant recognition
of an impairment of goodwill. The conditions that would trigger an impairment assessment of
goodwill include a significant, sustained negative trend in our operating results or cash flows, a
decrease in demand for our products, a change in the competitive environment, and other industry
and economic factors. The Company conducts its annual impairment test to determine whether an
impairment of the value of goodwill has occurred in accordance with the guidance set forth in
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires a two-step process for determining goodwill impairment. The first
step in this process compares the fair value of the reporting unit to its carrying value. If the
carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the impairment. In the second
step,
the
6
fair value of the reporting unit is allocated to all of the assets and liabilities of the
reporting unit to determine an implied goodwill value. This allocation is similar to a purchase
price allocation performed in purchase accounting. If the carrying amount of the reporting units
goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to
that excess. The Company has two reporting units as defined under SFAS No. 142. These reporting
units are the North America segment and the Europe segment.
Fair value is determined using appropriate valuation techniques. All valuation methodologies
applied in a valuation of any form of property can be broadly classified into one of three
approaches: the asset approach, the market approach and the income approach. The Company relies
on the income approach using discounted cash flows and market approach using comparable public
company entities in deriving the fair values for its reporting units. The asset approach is not
used as the reporting units have significant intangible assets, the value of which is dependent on
cash flow.
The fair value of each reporting unit determined under step 1 of the goodwill impairment test was
based on a three-fourths weighting of a discounted cash flow analysis under the income approach
using forward-looking projections of estimated future operating results and a one-fourth weighting
of a guideline company methodology under the market approach using an earnings before interest,
taxes, depreciation and amortization (EBITDA) multiples. The Companys determination of the fair
value of each reporting unit incorporates multiple assumptions and contains inherent uncertainties,
including significant estimates relating to future business growth, earnings projections and the
weighted average cost of capital used for purposes of discounting. Decreases in revenue growth,
decreases in earnings projections and increases in the weighted average cost of capital will all
cause the fair value of the reporting unit to decrease, which could require the Company to modify
future models and cash flow estimates, and could result in an impairment triggering event in the
future.
The Company has weighted the valuation of its reporting units at three-fourths using the income
approach and one-fourth using the market based approach. The Company believes that this weighting
is appropriate since it is difficult to find other comparable publicly traded companies that are
similar to our reporting units heavy penetration of jewelry and accessories sales and margin
structure. It is the Companys view that the future discounted cash flows are more reflective of
the value of the reporting units.
The projected cash flows used in the income approach cover the periods consisting of the fourth
quarter fiscal 2008 and fiscal years 2009 through 2013. Beyond fiscal year 2013, a terminal value
was calculated using the Gordon Growth Model. The Company developed the projected cash flows based
on estimates of forecasted same store sales, new store openings, operating margins and capital
expenditures. Due to the inherent judgment involved in making these estimates and assumptions,
actual results could differ from those estimates. The Companys projected cash flows reflect
projected same store sales increases representative of the Companys past performance
post-recession.
A weighted average cost of capital reflecting the risk associated with the projected cash flows was
calculated for each reporting unit and used to discount each reporting units cash flows and
terminal value. Key assumptions made in calculating a weighted average cost of capital include the
risk-free rate, market risk premium, volatility relative to the market, cost of debt, specific
company premium, small company premium, tax rate and debt to equity ratio.
The calculation of fair value is significantly impacted by the reporting units projected cash
flows and the discount interest rates used. Accordingly, any sustained volatility in the economic
environment could impact these assumptions and make it reasonably possible that another impairment
charge could be recorded sometime in the future. However, since the terminal value is a
significant portion of each reporting units fair value, the impact of any such near-term
volatility on our fair value would be lessened.
For the North American reporting unit, a change of 25 basis points in the same store sales
assumptions would result in a change to the intangible asset impairment of approximately $83
million. A change of 25 basis points in the discounted interest rate would result in a change to
the intangible impairment of approximately $37 million. For the European reporting unit, a change
of 25 basis points in the same store
7
sales assumption would result in a change to the intangible
asset impairment of approximately $45
million. A change of 25 basis points in the discounted interest rate would result in a change to
the intangible asset impairment of approximately $15 million.
Debt
The Company is not required to repay any of the Revolver until the due date of May 29, 2013;
therefore, the Revolver is classified as a long-term liability in the accompanying consolidated
balance sheets as of January 31, 2009.
Stock Options and Stock-Based Compensation
Options granted during the fiscal period ended February 2, 2008 include options to purchase an
aggregate of 312,500 BOGO options granted outside of the Plan to certain senior executive officers
and directors.
Income Taxes
U.S. income taxes have not been recognized on the balance of accumulated unremitted earnings from
the Companys foreign subsidiaries at January 31, 2009 of $187.8 million, as these accumulated
undistributed earnings are considered reinvested indefinitely. This amount is based on the balance
maintained in local currency of the Companys accumulated unremitted earnings from its foreign
subsidiaries at February 2, 2008 converted into U.S. dollars at foreign exchange rates in effect on
January 31, 2009.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 168, The FASB Accounting Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles. This Statement established the
Accounting Standards Codification (ASC) and is effective for interim and annual periods ending
after September 15, 2009. The Company will apply SFAS 168 beginning in our third quarter of fiscal
2009. The adoption of SFAS 168 is not expected to have any substantive impact on our condensed
consolidated financial statements or related footnotes.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The Statement
established a framework for measuring fair value in generally accepted accounting principles, and
expands disclosure about fair value measurements. Certain provisions of the statement were
effective for the Company on February 3, 2008, while the effective date of other provisions
relating to nonfinancial assets and liabilities were effective for the Company as of February 1,
2009. The Companys adoption of SFAS No. 157 on February 1, 2009 related to nonfinancial assets
and nonfinancial liabilities did not have a material impact on its financial position, results of
operations or cash flows. See Note 7 for further discussion and disclosure. This Statement has been
incorporated into ASC 820, Fair Value Measurements and Disclosures.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful
Life of Intangible Assets. This FSP, which applies to intangible assets accounted for pursuant to
SFAS No. 142, Goodwill and Other Intangible Assets, provides guidance for the development of
renewal or extension assumptions used to determine the useful life of an intangible asset. The
Company adopted this Statement on February 1, 2009 which did not have a material impact on its
financial position, results of operations or cash flows. This FSP has been incorporated into ASC
275, Risks and Uncertainties, and ASC 350, Intangibles Goodwill and Other.
In June 2008, the Emerging Issues Task Force issued EITF 08-3, Accounting by Lessees for
Nonrefundable Maintenance Deposits. EITF 08-3 requires lessees to account for nonrefundable
maintenance deposits as deposits if it is probable that maintenance activities will occur and the
deposit is realizable. Amounts on deposit that are not probable of being used to fund future
maintenance activities should be charged to expense. Issue 08-3 is effective for fiscal years
beginning after December 15, 2008.
8
The Company adopted this Statement on February 1, 2009 which did not have a material impact on its
financial position, results of operations or cash flows. EITF 08-3 has been incorporated into ASC
840, Leases.
In October 2008, the EITF issued EITF No. 08-6 which addressed the potential effect of FASB
Statement No. 141R, Business Combinations and SFAS No. 160 Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51 on equity-method accounting under
APB Opinion No. 18, The Equity Method Accounting for Investments in Common Stock. The consensus
of the EITF will not require the Company to perform a separate impairment test on the underlying
assets of our investment in Claires Nippon. However, the Company would be required to recognize
its proportionate share of impairment charges recognized by our joint venture with AEON Co. Ltd. It
would also be required to perform an overall other than temporary impairment test of its investment
in accordance with APB No. 18. EITF 08-6 is effective for fiscal years beginning on or after
December 15, 2008 and interim periods within those fiscal years and is to be applied on a
prospective basis. The Company adopted this Statement on February 1, 2009 which did not have a
material impact on its financial position, results of operations or cash flows. EITF 08-6 has been
incorporated into ASC 323, Investments Equity Method and Joint Ventures.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 establishes
accounting and reporting standards for events that occur after the balance sheet date but before
financial statements are issued or available to be issued. The statement sets forth (i) the period
after the balance sheet date during which management of a reporting entity should evaluate events
or transactions that may occur for potential recognition or disclosure in the financial statements,
(ii) the circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements, and (iii) the disclosures that an entity
should make about events or transactions occurring after the balance sheet date in its financial
statements. The Company adopted the provisions of SFAS No. 165 for the interim period ended August
1, 2009. See Note 9 for further discussion and disclosure. The adoption of SFAS No. 165 had no
impact on the Companys financial position, results of operations or cash flows. SFAS No. 165 has
been incorporated into ASC 855, Subsequent Events.
3. 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, within its North American division, for the goods it sells to third parties under
franchising agreements within Net sales and Cost of sales, occupancy and buying expenses in the
Companys Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(Loss). The franchise fees the Company charges, within its European division, under the
franchising agreements are reported in Other income, net in the Companys Unaudited Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss).
9
Net sales and operating income for the three and six months ended August 1, 2009 and August 2, 2008
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
August 1, 2009 |
|
|
August 2, 2008 |
|
|
August 1, 2009 |
|
|
August 2, 2008 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
193,165 |
|
|
$ |
222,676 |
|
|
$ |
389,609 |
|
|
$ |
432,020 |
|
Europe |
|
|
121,031 |
|
|
|
137,297 |
|
|
|
217,685 |
|
|
|
254,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
314,196 |
|
|
|
359,973 |
|
|
|
607,294 |
|
|
|
686,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
12,682 |
|
|
|
14,776 |
|
|
|
25,249 |
|
|
|
29,402 |
|
Europe |
|
|
6,021 |
|
|
|
7,785 |
|
|
|
11,609 |
|
|
|
15,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
|
18,703 |
|
|
|
22,561 |
|
|
|
36,858 |
|
|
|
44,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income for reportable segments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
12,663 |
|
|
|
15,532 |
|
|
|
28,792 |
|
|
|
19,229 |
|
Europe |
|
|
14,651 |
|
|
|
9,741 |
|
|
|
13,403 |
|
|
|
8,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income for reportable
segments |
|
|
27,314 |
|
|
|
25,273 |
|
|
|
42,195 |
|
|
|
27,418 |
|
Severance and transaction-related costs |
|
|
25 |
|
|
|
296 |
|
|
|
374 |
|
|
|
6,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidated operating income |
|
|
27,289 |
|
|
|
24,977 |
|
|
|
41,821 |
|
|
|
21,154 |
|
Gain on early debt extinguishment |
|
|
17,104 |
|
|
|
|
|
|
|
17,104 |
|
|
|
|
|
Interest expense, net |
|
|
45,329 |
|
|
|
48,739 |
|
|
|
90,563 |
|
|
|
97,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidated loss before income tax
expense (benefit) |
|
$ |
(936 |
) |
|
$ |
(23,762 |
) |
|
$ |
(31,638 |
) |
|
$ |
(76,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluded from operating income for the North American segment are severance and
transaction-related costs of approximately $0 for the three months ended August 1, 2009, $0.4
million for the six months ended August 1, 2009, $0 for the three months ended August 2, 2008 and
$4.3 million for the six months ended August 2, 2008.
Excluded from operating income for the European segment are severance and transaction-related costs
of approximately $0 for the three months ended August 1, 2009, $0 for the six months ended August
1, 2009, $0.3 million for the three months ended August 2, 2008 and $2.0 million for the six months
ended August 2, 2008.
4. Debt
In July 2009, the Company purchased $27.8 million principal amount of 10.50% Senior Subordinated
Notes due June 2017 on the open market. The Company purchased these notes for $10.4 million in
cash, reflecting the Notes then current values plus $0.4 million of accrued interest. In
connection with the purchase, the Company recognized a gain aggregating $17.1 million related to
the early debt extinguishment, net of the write-off of unamortized debt financing costs of $0.7
million. See Note 7 for related fair value disclosure on debt.
10
5. Stock Options and Stock-Based Compensation
The following is a summary of activity in the Companys stock option plan for the six months ended
August 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
Number of |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Price |
|
Life (Years) |
|
Value |
Outstanding at January 31, 2009 |
|
|
6,807,556 |
|
|
$ |
10.00 |
|
|
|
4.8 |
|
|
|
|
|
Options granted |
|
|
453,350 |
|
|
$ |
10.00 |
|
|
|
6.7 |
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(1,178,676 |
) |
|
$ |
10.00 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 1, 2009 |
|
|
6,082,230 |
|
|
$ |
10.00 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at August 1, 2009 |
|
|
1,726,763 |
|
|
$ |
10.00 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the six months ended
August 1, 2009 and August 2, 2008 were $2.92 and $4.24, respectively.
During the three and six months ended August 1, 2009 and August 2, 2008, the Company recorded
stock-based compensation and additional paid-in capital relating to stock-based compensation of
approximately $2.4 million, $2.9 million, $1.1 million and $3.9 million, respectively. Stock-based
compensation is recorded in selling, general and administrative expenses in the Unaudited Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss).
6. Income Taxes
The effective income tax rate was (298.8)% and (3.5)% for the three and six months ended August 1,
2009, respectively. These effective income tax rates differed from the statutory federal tax rate
of 35% primarily from increases in the valuation allowance recorded for additional deferred tax
assets generated in the three and six months ended August 1, 2009 by the Companys U.S. operations.
The effective income tax benefit rate was 28.7% and 31.1% for the three and six months ended August
2, 2008, respectively. These effective income tax benefit rates differed from the statutory
federal tax rate of 35% due to the overall geographic mix of losses in jurisdictions with higher
tax rates and income in jurisdictions with lower tax rates, offset by the accrual of U.S. tax
expense on current foreign earnings, and other factors.
7. Fair Value Measurements and Derivative Instruments
On February 3, 2008, the Company adopted the effective portions of SFAS 157 for all financial
assets and liabilities and non-financial assets and liabilities accounted for at fair value on a
recurring basis. On February 1, 2009, the Company adopted FSP 157-2 for all non-financial assets
and liabilities accounted for at fair value on a non-recurring basis. SFAS No. 157 defines fair
value 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. SFAS No. 157 also establishes 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.
The Companys financial instruments consist primarily of cash and cash equivalents, accounts
receivable, current liabilities, long-term debt, the revolving credit facility and interest rate
swaps. Cash and cash equivalents, accounts receivable and current liabilities approximate fair
market value due to the relatively short maturity of these financial instruments.
11
The Company considers all investments with a maturity of three months or less when acquired to
be cash equivalents. The Companys cash equivalent instruments are valued using quoted market
prices and are primarily U.S. Treasury securities.
As of August 1, 2009, the fair value and carrying value of the Companys debt was approximately
$1,503 million and $2,566 million, respectively. As of January 31, 2009, the fair value and
carrying value of the Companys debt was approximately $734 million and approximately $2,582
million, respectively. The fair value (estimated market value) of the debt is based primarily on
quoted prices for similar instruments.
The Company uses interest rate swap agreements (the Swaps) to manage exposure to fluctuations in
interest rates. The Swaps represent contracts to exchange floating rate for fixed interest
payments periodically over the lives of the Swaps without exchange of the underlying notional
amount. At August 1, 2009, the Swaps cover an aggregate notional amount of $435.0 million of the
$1,421 million outstanding principal balance of the senior term loan facility. The fixed rates of
the Swaps range from 4.96% to 5.25% and the Swaps expire on June 30, 2010. The Swaps have been
designated and accounted for as cash flow hedges in accordance with SFAS No. 133. For these Swaps,
the Company reports the effective portion of the change in fair value as a component of accumulated
other comprehensive loss, net of tax, and reclassifies it into earnings in the same periods in
which the hedged item affects earnings, and within the same income statement line item as the
impact of the hedged item. No ineffective portion was recorded to earnings for the three and six
months ended August 1, 2009, and all components of the derivative gain or loss were included in the
assessment of hedge effectiveness.
The fair value of the Companys interest rate swaps represents the estimated amounts the Company
would receive or pay to terminate those contracts at the reporting date based upon pricing or
valuation models applied to current market information. The interest rate swaps are valued using
the market standard methodology of netting the discounted future fixed cash payments and the
discounted expected variable cash receipts. The variable cash receipts are based on an expectation
of future interest rates derived from observed market interest rate curves. The Company includes
credit valuation adjustment risk in the calculation of fair value. The Company mitigates
derivative credit risk by transacting with highly rated counterparties. The Company does not enter
into derivative financial instruments for trading or speculative purposes.
The following table summarizes the Companys assets (liabilities) measured at fair value on a
recurring basis segregated among the appropriate levels within the fair value hierarchy (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at August 1, 2009 Using |
|
|
Quoted Prices in |
|
|
|
|
|
|
Active Markets for |
|
Significant |
|
Significant |
|
|
Identical Assets |
|
Other Observable |
|
Unobservable |
|
|
(Liabilities) |
|
Inputs |
|
Inputs |
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Debt and Credit Facility |
|
$ |
(1,502,838 |
) |
|
$ |
|
|
|
$ |
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
(17,205 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at January 31, 2009 Using |
|
|
Quoted Prices in |
|
|
|
|
|
|
Active Markets for |
|
Significant |
|
Significant |
|
|
Identical Assets |
|
Other Observable |
|
Unobservable |
|
|
(Liabilities) |
|
Inputs |
|
Inputs |
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Debt and Credit Facility |
|
$ |
(734,000 |
) |
|
$ |
|
|
|
$ |
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
(19,734 |
) |
|
$ |
|
|
12
The fair value of the interest rate swaps are included in accrued expenses and other current
liabilities and is recorded, net of tax of approximately $6.3 million and $7.3 million, as a
component in accumulated other comprehensive loss as of August 1, 2009 and January 31, 2009,
respectively, in the accompanying Unaudited Condensed Consolidated Balance Sheet. The following
table provides a summary of the financial statement effect of the Companys derivative financial
instruments designated as interest rate cash flow hedges during the three and six months ended
August 1, 2009 and August 2, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain |
|
|
|
|
|
|
|
|
|
|
|
|
or (Loss) |
|
Amount of Gain or (Loss) |
Derivatives in |
|
Amount of Gain or (Loss) |
|
Reclassified from |
|
Reclassified from |
SFAS No. 133 Cash |
|
Recognized in OCI on |
|
Accumulated OCI |
|
Accumulated OCI into |
Flow Hedging |
|
Derivative |
|
into Income |
|
Income |
Relationships |
|
(Effective Portion) |
|
(Effective Portion) |
|
(Effective Portion)(1) |
|
|
Three months ended |
|
|
|
|
|
Three months ended |
|
|
August 1, 2009 |
|
August 2, 2008 |
|
|
|
|
|
August 1, 2009 |
|
August 2, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
1,163 |
|
|
$ |
1,912 |
|
|
Interest Expense |
|
$ |
(4,595 |
) |
|
$ |
(2,761 |
) |
|
|
|
(1) |
|
Represents reclassification of amounts from accumulated other comprehensive loss to earnings as interest expense is
recognized on the senior term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain |
|
|
|
|
|
|
|
|
|
|
|
|
or (Loss) |
|
Amount of Gain or (Loss) |
Derivatives in |
|
Amount of Gain or (Loss) |
|
Reclassified from |
|
Reclassified from |
SFAS No. 133 Cash |
|
Recognized in OCI on |
|
Accumulated OCI |
|
Accumulated OCI into |
Flow Hedging |
|
Derivative |
|
into Income |
|
Income |
Relationships |
|
(Effective Portion) |
|
(Effective Portion) |
|
(Effective Portion)(1) |
|
|
Six months ended |
|
|
|
|
|
Six months ended |
|
|
August 1, |
|
August 2, |
|
|
|
|
|
August 1, |
|
August 2, |
|
|
2009 |
|
2008 |
|
|
|
|
|
2009 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
1,596 |
|
|
$ |
5,021 |
|
|
Interest Expense |
|
$ |
(8,645 |
) |
|
$ |
(3,890 |
) |
|
|
|
(1) |
|
Represents reclassification of amounts from accumulated other comprehensive loss to earnings as interest expense is
recognized on the senior term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges. |
As of August 1, 2009, the Company expects to reclassify net losses on the Companys interest
rates swaps recognized within accumulated other comprehensive loss of $10.9 million, net of tax, to
interest expense by the time the swaps expire on June 30, 2010.
The Companys non-financial assets and liabilities, which include goodwill, intangible assets, and
long-lived-assets, are not required to be carried at fair value on a recurring basis. Fair value
measures of non-financial assets and liabilities are primarily used in the impairment analysis of
these assets. A resulting asset impairment would require that the non-financial asset be recorded
at its fair value. The Company reviews goodwill and intangible assets for impairment annually,
during the fourth quarter of each fiscal year, or as circumstances indicate the possibility of
impairment in accordance with SFAS No 142. The Company monitors the carrying value of long-lived
assets for impairment whenever events or changes in circumstances indicate its carrying amount may
not be recoverable in accordance with SFAS No. 144. During the three and six months ended August 1,
2009, the Company did not recognize any impairment charges related to goodwill, intangible assets,
or long-lived assets.
13
8. 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 metal content in merchandise, litigation with respect to
various employment matters, including litigation with present and former employees, wage and hour
litigation, and litigation to protect trademark 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.
9. Subsequent Events
The Company has evaluated subsequent events and transactions for potential recognition and
disclosure in the financial statements through September 11, 2009, the day the financial statements
were issued.
10. Supplemental Financial Information
On May 29, 2007, Claires Stores, Inc. (the Issuer), issued $935.0 million in senior notes,
senior toggle notes and senior subordinated notes. These notes are irrevocably and unconditionally
guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of
Claires Stores, Inc. that guarantee the Companys senior secured credit facility (the
Guarantors). The Companys other subsidiaries, principally its international subsidiaries
including our European, Canadian and Asian subsidiaries, (the Non-Guarantors) are not guarantors
of these notes.
14
The following tables 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.
Condensed Consolidating Balance Sheet
August 1, 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
98,212 |
|
|
$ |
19,112 |
|
|
$ |
65,026 |
|
|
$ |
|
|
|
$ |
182,350 |
|
Inventories |
|
|
|
|
|
|
76,211 |
|
|
|
31,982 |
|
|
|
|
|
|
|
108,193 |
|
Prepaid expenses |
|
|
739 |
|
|
|
15,742 |
|
|
|
27,775 |
|
|
|
|
|
|
|
44,256 |
|
Other current assets |
|
|
87 |
|
|
|
17,008 |
|
|
|
9,666 |
|
|
|
|
|
|
|
26,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
99,038 |
|
|
|
128,073 |
|
|
|
134,449 |
|
|
|
|
|
|
|
361,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and building |
|
|
|
|
|
|
22,288 |
|
|
|
|
|
|
|
|
|
|
|
22,288 |
|
Furniture, fixtures and equipment |
|
|
2,163 |
|
|
|
107,083 |
|
|
|
48,378 |
|
|
|
|
|
|
|
157,624 |
|
Leasehold improvements |
|
|
1,707 |
|
|
|
137,454 |
|
|
|
87,483 |
|
|
|
|
|
|
|
226,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,870 |
|
|
|
266,825 |
|
|
|
135,861 |
|
|
|
|
|
|
|
406,556 |
|
Less accumulated depreciation and amortization |
|
|
(1,614 |
) |
|
|
(97,797 |
) |
|
|
(54,503 |
) |
|
|
|
|
|
|
(153,914 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,256 |
|
|
|
169,028 |
|
|
|
81,358 |
|
|
|
|
|
|
|
252,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany receivables |
|
|
|
|
|
|
49,955 |
|
|
|
77,629 |
|
|
|
(127,584 |
) |
|
|
|
|
Investment in subsidiaries |
|
|
2,215,364 |
|
|
|
1,413 |
|
|
|
|
|
|
|
(2,216,777 |
) |
|
|
|
|
Intangible assets, net |
|
|
286,014 |
|
|
|
15,343 |
|
|
|
286,968 |
|
|
|
|
|
|
|
588,325 |
|
Deferred financing costs, net |
|
|
53,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,990 |
|
Other assets |
|
|
17,185 |
|
|
|
1,983 |
|
|
|
37,417 |
|
|
|
|
|
|
|
56,585 |
|
Goodwill |
|
|
|
|
|
|
1,229,940 |
|
|
|
314,406 |
|
|
|
|
|
|
|
1,544,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,572,553 |
|
|
|
1,298,634 |
|
|
|
716,420 |
|
|
|
(2,344,361 |
) |
|
|
2,243,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,673,847 |
|
|
$ |
1,595,735 |
|
|
$ |
932,227 |
|
|
$ |
(2,344,361 |
) |
|
$ |
2,857,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable |
|
$ |
1,247 |
|
|
$ |
19,309 |
|
|
$ |
34,515 |
|
|
$ |
|
|
|
$ |
55,071 |
|
Current portion of long-term debt |
|
|
14,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,500 |
|
Income taxes payable |
|
|
|
|
|
|
|
|
|
|
5,338 |
|
|
|
|
|
|
|
5,338 |
|
Accrued interest payable |
|
|
13,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,050 |
|
Accrued expenses and other current liabilities |
|
|
25,395 |
|
|
|
35,639 |
|
|
|
41,738 |
|
|
|
|
|
|
|
102,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
54,192 |
|
|
|
54,948 |
|
|
|
81,591 |
|
|
|
|
|
|
|
190,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany payables |
|
|
127,584 |
|
|
|
|
|
|
|
|
|
|
|
(127,584 |
) |
|
|
|
|
Long-term debt |
|
|
2,357,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,357,760 |
|
Revolving credit facility |
|
|
194,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,000 |
|
Deferred tax liability |
|
|
|
|
|
|
99,476 |
|
|
|
14,547 |
|
|
|
|
|
|
|
114,023 |
|
Deferred rent expense |
|
|
419 |
|
|
|
14,152 |
|
|
|
6,545 |
|
|
|
|
|
|
|
21,116 |
|
Unfavorable lease obligations and other long-term
liabilities |
|
|
|
|
|
|
36,612 |
|
|
|
3,314 |
|
|
|
|
|
|
|
39,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,679,763 |
|
|
|
150,240 |
|
|
|
24,406 |
|
|
|
(127,584 |
) |
|
|
2,726,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
367 |
|
|
|
2 |
|
|
|
(369 |
) |
|
|
|
|
Additional paid in capital |
|
|
612,319 |
|
|
|
1,445,796 |
|
|
|
876,798 |
|
|
|
(2,322,594 |
) |
|
|
612,319 |
|
Accumulated other comprehensive income, net of
tax |
|
|
3,280 |
|
|
|
1,724 |
|
|
|
5,143 |
|
|
|
(6,867 |
) |
|
|
3,280 |
|
Retained deficit |
|
|
(675,707 |
) |
|
|
(57,340 |
) |
|
|
(55,713 |
) |
|
|
113,053 |
|
|
|
(675,707 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,108 |
) |
|
|
1,390,547 |
|
|
|
826,230 |
|
|
|
(2,216,777 |
) |
|
|
(60,108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit) |
|
$ |
2,673,847 |
|
|
$ |
1,595,735 |
|
|
$ |
932,227 |
|
|
$ |
(2,344,361 |
) |
|
$ |
2,857,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Condensed Consolidating Balance Sheet
January 31, 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
154,414 |
|
|
$ |
211 |
|
|
$ |
49,949 |
|
|
$ |
|
|
|
$ |
204,574 |
|
Inventories |
|
|
|
|
|
|
73,445 |
|
|
|
30,246 |
|
|
|
|
|
|
|
103,691 |
|
Prepaid expenses |
|
|
434 |
|
|
|
14,641 |
|
|
|
16,762 |
|
|
|
|
|
|
|
31,837 |
|
Other current assets |
|
|
6 |
|
|
|
16,104 |
|
|
|
10,969 |
|
|
|
|
|
|
|
27,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
154,854 |
|
|
|
104,401 |
|
|
|
107,926 |
|
|
|
|
|
|
|
367,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and building |
|
|
|
|
|
|
22,288 |
|
|
|
|
|
|
|
|
|
|
|
22,288 |
|
Furniture, fixtures and equipment |
|
|
2,025 |
|
|
|
103,571 |
|
|
|
38,106 |
|
|
|
|
|
|
|
143,702 |
|
Leasehold improvements |
|
|
1,704 |
|
|
|
136,554 |
|
|
|
75,749 |
|
|
|
|
|
|
|
214,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,729 |
|
|
|
262,413 |
|
|
|
113,855 |
|
|
|
|
|
|
|
379,997 |
|
Less accumulated depreciation and amortization |
|
|
(1,250 |
) |
|
|
(77,042 |
) |
|
|
(35,634 |
) |
|
|
|
|
|
|
(113,926 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,479 |
|
|
|
185,371 |
|
|
|
78,221 |
|
|
|
|
|
|
|
266,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany receivables |
|
|
|
|
|
|
26,876 |
|
|
|
58,416 |
|
|
|
(85,292 |
) |
|
|
|
|
Investment in subsidiaries |
|
|
2,139,955 |
|
|
|
(4,061 |
) |
|
|
|
|
|
|
(2,135,894 |
) |
|
|
|
|
Intangible assets, net |
|
|
286,750 |
|
|
|
17,960 |
|
|
|
282,415 |
|
|
|
|
|
|
|
587,125 |
|
Deferred financing costs, net |
|
|
59,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,944 |
|
Other assets |
|
|
19,392 |
|
|
|
2,602 |
|
|
|
34,434 |
|
|
|
|
|
|
|
56,428 |
|
Goodwill |
|
|
|
|
|
|
1,229,940 |
|
|
|
314,406 |
|
|
|
|
|
|
|
1,544,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,506,041 |
|
|
|
1,273,317 |
|
|
|
689,671 |
|
|
|
(2,221,186 |
) |
|
|
2,247,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,663,374 |
|
|
$ |
1,563,089 |
|
|
$ |
875,818 |
|
|
$ |
(2,221,186 |
) |
|
$ |
2,881,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable |
|
$ |
2,347 |
|
|
$ |
21,112 |
|
|
$ |
29,778 |
|
|
$ |
|
|
|
$ |
53,237 |
|
Current portion of long-term debt |
|
|
14,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,500 |
|
Income taxes payable |
|
|
|
|
|
|
|
|
|
|
6,477 |
|
|
|
|
|
|
|
6,477 |
|
Accrued interest payable |
|
|
13,313 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
13,316 |
|
Accrued expenses and other current liabilities |
|
|
35,795 |
|
|
|
35,782 |
|
|
|
36,397 |
|
|
|
|
|
|
|
107,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
65,955 |
|
|
|
56,894 |
|
|
|
72,655 |
|
|
|
|
|
|
|
195,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany payables |
|
|
85,292 |
|
|
|
|
|
|
|
|
|
|
|
(85,292 |
) |
|
|
|
|
Long-term debt |
|
|
2,373,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,373,272 |
|
Revolving credit facility |
|
|
194,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,000 |
|
Deferred tax liability |
|
|
|
|
|
|
99,122 |
|
|
|
13,707 |
|
|
|
|
|
|
|
112,829 |
|
Deferred rent expense |
|
|
698 |
|
|
|
12,532 |
|
|
|
5,232 |
|
|
|
|
|
|
|
18,462 |
|
Unfavorable lease obligations and other long-term
liabilities |
|
|
|
|
|
|
39,074 |
|
|
|
3,797 |
|
|
|
|
|
|
|
42,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,653,262 |
|
|
|
150,728 |
|
|
|
22,736 |
|
|
|
(85,292 |
) |
|
|
2,741,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
367 |
|
|
|
2 |
|
|
|
(369 |
) |
|
|
|
|
Additional paid in capital |
|
|
609,427 |
|
|
|
1,445,795 |
|
|
|
876,798 |
|
|
|
(2,322,593 |
) |
|
|
609,427 |
|
Accumulated other comprehensive loss, net of tax |
|
|
(22,319 |
) |
|
|
(2,326 |
) |
|
|
(20,597 |
) |
|
|
22,923 |
|
|
|
(22,319 |
) |
Retained deficit |
|
|
(642,951 |
) |
|
|
(88,369 |
) |
|
|
(75,776 |
) |
|
|
164,145 |
|
|
|
(642,951 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,843 |
) |
|
|
1,355,467 |
|
|
|
780,427 |
|
|
|
(2,135,894 |
) |
|
|
(55,843 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit) |
|
$ |
2,663,374 |
|
|
$ |
1,563,089 |
|
|
$ |
875,818 |
|
|
$ |
(2,221,186 |
) |
|
$ |
2,881,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Condensed Consolidating Statement of Operations and Comprehensive Income
For The Three Months Ended August 1, 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net sales |
|
$ |
|
|
|
$ |
335,542 |
|
|
$ |
133,730 |
|
|
$ |
(155,076 |
) |
|
$ |
314,196 |
|
Cost of sales, occupancy and buying expenses |
|
|
|
|
|
|
248,830 |
|
|
|
64,334 |
|
|
|
(155,076 |
) |
|
|
158,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
86,712 |
|
|
|
69,396 |
|
|
|
|
|
|
|
156,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
7,717 |
|
|
|
56,487 |
|
|
|
46,609 |
|
|
|
|
|
|
|
110,813 |
|
Depreciation and amortization |
|
|
369 |
|
|
|
11,548 |
|
|
|
6,786 |
|
|
|
|
|
|
|
18,703 |
|
Severance and transaction-related costs |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
|
Other (income) expense |
|
|
(3,571 |
) |
|
|
4,881 |
|
|
|
(2,032 |
) |
|
|
|
|
|
|
(722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,540 |
|
|
|
72,916 |
|
|
|
51,363 |
|
|
|
|
|
|
|
128,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(4,540 |
) |
|
|
13,796 |
|
|
|
18,033 |
|
|
|
|
|
|
|
27,289 |
|
Gain on early debt extinguishment |
|
|
17,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,104 |
|
Interest expense (income), net |
|
|
45,338 |
|
|
|
(13 |
) |
|
|
4 |
|
|
|
|
|
|
|
45,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(32,774 |
) |
|
|
13,809 |
|
|
|
18,029 |
|
|
|
|
|
|
|
(936 |
) |
Income tax expense (benefit) |
|
|
(174 |
) |
|
|
1,470 |
|
|
|
1,501 |
|
|
|
|
|
|
|
2,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(32,600 |
) |
|
|
12,339 |
|
|
|
16,528 |
|
|
|
|
|
|
|
(3,733 |
) |
Equity in earnings of subsidiaries |
|
|
28,867 |
|
|
|
706 |
|
|
|
|
|
|
|
(29,573 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(3,733 |
) |
|
|
13,045 |
|
|
|
16,528 |
|
|
|
(29,573 |
) |
|
|
(3,733 |
) |
Foreign currency translation and interest rate swap
adjustments, net of tax |
|
|
20,414 |
|
|
|
2,315 |
|
|
|
18,339 |
|
|
|
(20,654 |
) |
|
|
20,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
16,681 |
|
|
$ |
15,360 |
|
|
$ |
34,867 |
|
|
$ |
(50,227 |
) |
|
$ |
16,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended August 2, 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net sales |
|
$ |
|
|
|
$ |
383,145 |
|
|
$ |
153,234 |
|
|
$ |
(176,406 |
) |
|
$ |
359,973 |
|
Cost of sales, occupancy and buying expenses |
|
|
|
|
|
|
283,759 |
|
|
|
72,914 |
|
|
|
(176,406 |
) |
|
|
180,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
99,386 |
|
|
|
80,320 |
|
|
|
|
|
|
|
179,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
6,656 |
|
|
|
67,158 |
|
|
|
58,607 |
|
|
|
|
|
|
|
132,421 |
|
Depreciation and amortization |
|
|
751 |
|
|
|
12,992 |
|
|
|
8,818 |
|
|
|
|
|
|
|
22,561 |
|
Severance and transaction-related costs |
|
|
6 |
|
|
|
|
|
|
|
290 |
|
|
|
|
|
|
|
296 |
|
Other (income) expense |
|
|
(3,856 |
) |
|
|
3,704 |
|
|
|
(397 |
) |
|
|
|
|
|
|
(549 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,557 |
|
|
|
83,854 |
|
|
|
67,318 |
|
|
|
|
|
|
|
154,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(3,557 |
) |
|
|
15,532 |
|
|
|
13,002 |
|
|
|
|
|
|
|
24,977 |
|
Interest expense (income), net |
|
|
49,052 |
|
|
|
(69 |
) |
|
|
(244 |
) |
|
|
|
|
|
|
48,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(52,609 |
) |
|
|
15,601 |
|
|
|
13,246 |
|
|
|
|
|
|
|
(23,762 |
) |
Income tax expense (benefit) |
|
|
(16,023 |
) |
|
|
8,947 |
|
|
|
245 |
|
|
|
|
|
|
|
(6,831 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(36,586 |
) |
|
|
6,654 |
|
|
|
13,001 |
|
|
|
|
|
|
|
(16,931 |
) |
Equity in earnings of subsidiaries |
|
|
19,655 |
|
|
|
1,727 |
|
|
|
|
|
|
|
(21,382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(16,931 |
) |
|
|
8,381 |
|
|
|
13,001 |
|
|
|
(21,382 |
) |
|
|
(16,931 |
) |
Foreign currency translation and interest rate swap
adjustments, net of tax |
|
|
2,831 |
|
|
|
(17 |
) |
|
|
768 |
|
|
|
(751 |
) |
|
|
2,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(14,100 |
) |
|
$ |
8,364 |
|
|
$ |
13,769 |
|
|
$ |
(22,133 |
) |
|
$ |
(14,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Six Months Ended August 1, 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net sales |
|
$ |
|
|
|
$ |
661,525 |
|
|
$ |
241,197 |
|
|
$ |
(295,428 |
) |
|
$ |
607,294 |
|
Cost of sales, occupancy and buying expenses |
|
|
|
|
|
|
482,870 |
|
|
|
121,825 |
|
|
|
(295,428 |
) |
|
|
309,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
178,655 |
|
|
|
119,372 |
|
|
|
|
|
|
|
298,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
13,987 |
|
|
|
114,959 |
|
|
|
90,336 |
|
|
|
|
|
|
|
219,282 |
|
Depreciation and amortization |
|
|
1,113 |
|
|
|
22,621 |
|
|
|
13,124 |
|
|
|
|
|
|
|
36,858 |
|
Severance and transaction-related costs |
|
|
374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374 |
|
Other (income) expense |
|
|
(6,238 |
) |
|
|
9,483 |
|
|
|
(3,553 |
) |
|
|
|
|
|
|
(308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,236 |
|
|
|
147,063 |
|
|
|
99,907 |
|
|
|
|
|
|
|
256,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(9,236 |
) |
|
|
31,592 |
|
|
|
19,465 |
|
|
|
|
|
|
|
41,821 |
|
Gain on early debt extinguishment |
|
|
17,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,104 |
|
Interest expense (income), net |
|
|
90,618 |
|
|
|
(13 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
90,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(82,750 |
) |
|
|
31,605 |
|
|
|
19,507 |
|
|
|
|
|
|
|
(31,638 |
) |
Income tax expense (benefit) |
|
|
(174 |
) |
|
|
1,848 |
|
|
|
(556 |
) |
|
|
|
|
|
|
1,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(82,576 |
) |
|
|
29,757 |
|
|
|
20,063 |
|
|
|
|
|
|
|
(32,756 |
) |
Equity in earnings of subsidiaries |
|
|
49,820 |
|
|
|
1,272 |
|
|
|
|
|
|
|
(51,092 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(32,756 |
) |
|
|
31,029 |
|
|
|
20,063 |
|
|
|
(51,092 |
) |
|
|
(32,756 |
) |
Foreign currency translation and interest rate swap
adjustments, net of tax |
|
|
25,599 |
|
|
|
4,049 |
|
|
|
25,849 |
|
|
|
(29,898 |
) |
|
|
25,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(7,157 |
) |
|
$ |
35,078 |
|
|
$ |
45,912 |
|
|
$ |
(80,990 |
) |
|
$ |
(7,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Six Months Ended August 2, 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Net sales |
|
$ |
|
|
|
$ |
751,063 |
|
|
$ |
284,712 |
|
|
$ |
(348,799 |
) |
|
$ |
686,976 |
|
Cost of sales, occupancy and buying expenses |
|
|
|
|
|
|
559,325 |
|
|
|
141,723 |
|
|
|
(348,799 |
) |
|
|
352,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
191,738 |
|
|
|
142,989 |
|
|
|
|
|
|
|
334,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
16,861 |
|
|
|
133,811 |
|
|
|
113,084 |
|
|
|
|
|
|
|
263,756 |
|
Depreciation and amortization |
|
|
1,511 |
|
|
|
25,913 |
|
|
|
17,238 |
|
|
|
|
|
|
|
44,662 |
|
Severance and transaction-related costs |
|
|
4,306 |
|
|
|
|
|
|
|
1,958 |
|
|
|
|
|
|
|
6,264 |
|
Other (income) expense |
|
|
(9,157 |
) |
|
|
8,332 |
|
|
|
(284 |
) |
|
|
|
|
|
|
(1,109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,521 |
|
|
|
168,056 |
|
|
|
131,996 |
|
|
|
|
|
|
|
313,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(13,521 |
) |
|
|
23,682 |
|
|
|
10,993 |
|
|
|
|
|
|
|
21,154 |
|
Interest expense (income), net |
|
|
98,219 |
|
|
|
(254 |
) |
|
|
(569 |
) |
|
|
|
|
|
|
97,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(111,740 |
) |
|
|
23,936 |
|
|
|
11,562 |
|
|
|
|
|
|
|
(76,242 |
) |
Income tax expense (benefit) |
|
|
(38,066 |
) |
|
|
17,803 |
|
|
|
(3,478 |
) |
|
|
|
|
|
|
(23,741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(73,674 |
) |
|
|
6,133 |
|
|
|
15,040 |
|
|
|
|
|
|
|
(52,501 |
) |
Equity in earnings of subsidiaries |
|
|
21,173 |
|
|
|
2,232 |
|
|
|
|
|
|
|
(23,405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(52,501 |
) |
|
|
8,365 |
|
|
|
15,040 |
|
|
|
(23,405 |
) |
|
|
(52,501 |
) |
Foreign currency translation and interest rate swap
adjustments, net of tax |
|
|
12,145 |
|
|
|
39 |
|
|
|
6,440 |
|
|
|
(6,479 |
) |
|
|
12,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(40,356 |
) |
|
$ |
8,404 |
|
|
$ |
21,480 |
|
|
$ |
(29,884 |
) |
|
$ |
(40,356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Condensed Consolidating Statement of Cash Flows
Six Months Ended August 1, 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(32,756 |
) |
|
$ |
31,029 |
|
|
$ |
20,063 |
|
|
$ |
(51,092 |
) |
|
$ |
(32,756 |
) |
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries |
|
|
(49,820 |
) |
|
|
(1,272 |
) |
|
|
|
|
|
|
51,092 |
|
|
|
|
|
Depreciation and amortization |
|
|
1,113 |
|
|
|
22,621 |
|
|
|
13,124 |
|
|
|
|
|
|
|
36,858 |
|
Amortization of lease rights and other assets |
|
|
|
|
|
|
24 |
|
|
|
984 |
|
|
|
|
|
|
|
1,008 |
|
Amortization of debt issuance costs |
|
|
5,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,256 |
|
Payment in kind interest expense |
|
|
19,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,576 |
|
Net accretion of favorable (unfavorable) lease
obligations |
|
|
|
|
|
|
(1,322 |
) |
|
|
219 |
|
|
|
|
|
|
|
(1,103 |
) |
Loss on sale/retirement of property and equipment and
other assets, net |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Gain on early debt extinguishment |
|
|
(17,104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,104 |
) |
Gain on sale of intangible assets/lease rights |
|
|
|
|
|
|
|
|
|
|
(598 |
) |
|
|
|
|
|
|
(598 |
) |
Stock compensation expense |
|
|
1,882 |
|
|
|
|
|
|
|
1,010 |
|
|
|
|
|
|
|
2,892 |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
|
|
|
|
(2,766 |
) |
|
|
2,003 |
|
|
|
|
|
|
|
(763 |
) |
Prepaid expenses |
|
|
(305 |
) |
|
|
(1,101 |
) |
|
|
(7,552 |
) |
|
|
|
|
|
|
(8,958 |
) |
Other assets |
|
|
1,132 |
|
|
|
(529 |
) |
|
|
393 |
|
|
|
|
|
|
|
996 |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable |
|
|
(1,096 |
) |
|
|
(1,392 |
) |
|
|
1,208 |
|
|
|
|
|
|
|
(1,280 |
) |
Income taxes payable |
|
|
|
|
|
|
(164 |
) |
|
|
(1,183 |
) |
|
|
|
|
|
|
(1,347 |
) |
Accrued expenses and other liabilities |
|
|
(7,870 |
) |
|
|
(143 |
) |
|
|
992 |
|
|
|
|
|
|
|
(7,021 |
) |
Accrued interest payable |
|
|
(263 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(266 |
) |
Deferred income taxes |
|
|
|
|
|
|
1,307 |
|
|
|
780 |
|
|
|
|
|
|
|
2,087 |
|
Deferred rent expense |
|
|
(279 |
) |
|
|
1,620 |
|
|
|
688 |
|
|
|
|
|
|
|
2,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(80,534 |
) |
|
|
47,920 |
|
|
|
32,128 |
|
|
|
|
|
|
|
(486 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment, net |
|
|
(143 |
) |
|
|
(6,666 |
) |
|
|
(4,292 |
) |
|
|
|
|
|
|
(11,101 |
) |
Acquisition of intangible assets/lease rights |
|
|
(13 |
) |
|
|
(58 |
) |
|
|
(348 |
) |
|
|
|
|
|
|
(419 |
) |
Proceeds from sale of intangible assets/lease rigthts |
|
|
|
|
|
|
|
|
|
|
1,638 |
|
|
|
|
|
|
|
1,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(156 |
) |
|
|
(6,724 |
) |
|
|
(3,002 |
) |
|
|
|
|
|
|
(9,882 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility payments |
|
|
(7,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,250 |
) |
Purchase of senior subordinated notes |
|
|
(10,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,036 |
) |
Intercompany activity, net |
|
|
41,774 |
|
|
|
(22,145 |
) |
|
|
(19,629 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
24,488 |
|
|
|
(22,145 |
) |
|
|
(19,629 |
) |
|
|
|
|
|
|
(17,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
|
|
|
|
|
|
(150 |
) |
|
|
5,580 |
|
|
|
|
|
|
|
5,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(56,202 |
) |
|
|
18,901 |
|
|
|
15,077 |
|
|
|
|
|
|
|
(22,224 |
) |
Cash and cash equivalents at beginning of period |
|
|
154,414 |
|
|
|
211 |
|
|
|
49,949 |
|
|
|
|
|
|
|
204,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
98,212 |
|
|
$ |
19,112 |
|
|
$ |
65,026 |
|
|
$ |
|
|
|
$ |
182,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Condensed Consolidating Statement of Cash Flows
For The Six Months Ended August 2, 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Issuer |
|
|
Guarantors |
|
|
Guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(52,501 |
) |
|
$ |
8,365 |
|
|
$ |
15,040 |
|
|
$ |
(23,405 |
) |
|
$ |
(52,501 |
) |
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries |
|
|
(21,173 |
) |
|
|
(2,232 |
) |
|
|
|
|
|
|
23,405 |
|
|
|
|
|
Depreciation and amortization |
|
|
1,511 |
|
|
|
25,913 |
|
|
|
17,238 |
|
|
|
|
|
|
|
44,662 |
|
Amortization of lease rights and other assets |
|
|
|
|
|
|
29 |
|
|
|
984 |
|
|
|
|
|
|
|
1,013 |
|
Amortization of debt issuance costs |
|
|
5,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,291 |
|
Payment in kind interest expense |
|
|
6,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,052 |
|
Net accretion of favorable (unfavorable) lease
obligations |
|
|
|
|
|
|
(760 |
) |
|
|
217 |
|
|
|
|
|
|
|
(543 |
) |
(Gain) loss on sale / retirement of property and
equipment and other assets, net |
|
|
|
|
|
|
4 |
|
|
|
(179 |
) |
|
|
|
|
|
|
(175 |
) |
Stock compensation expense |
|
|
2,860 |
|
|
|
|
|
|
|
1,055 |
|
|
|
|
|
|
|
3,915 |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
|
|
|
|
2,811 |
|
|
|
(4,651 |
) |
|
|
|
|
|
|
(1,840 |
) |
Prepaid expenses |
|
|
(868 |
) |
|
|
580 |
|
|
|
(9,992 |
) |
|
|
|
|
|
|
(10,280 |
) |
Other assets |
|
|
101 |
|
|
|
(2,584 |
) |
|
|
(3,613 |
) |
|
|
|
|
|
|
(6,096 |
) |
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable |
|
|
823 |
|
|
|
333 |
|
|
|
11,148 |
|
|
|
|
|
|
|
12,304 |
|
Income taxes payable |
|
|
8,383 |
|
|
|
(18,054 |
) |
|
|
(6,481 |
) |
|
|
|
|
|
|
(16,152 |
) |
Accrued expenses and other liabilities |
|
|
(2,081 |
) |
|
|
6,094 |
|
|
|
8,562 |
|
|
|
|
|
|
|
12,575 |
|
Accrued interest payable |
|
|
3,021 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
3,029 |
|
Deferred income taxes |
|
|
|
|
|
|
(18,490 |
) |
|
|
(783 |
) |
|
|
|
|
|
|
(19,273 |
) |
Deferred rent expense |
|
|
17 |
|
|
|
3,806 |
|
|
|
853 |
|
|
|
|
|
|
|
4,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(48,564 |
) |
|
|
5,815 |
|
|
|
29,406 |
|
|
|
|
|
|
|
(13,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment, net |
|
|
(152 |
) |
|
|
(20,699 |
) |
|
|
(10,775 |
) |
|
|
|
|
|
|
(31,626 |
) |
Acquisition of intangible assets/lease rights |
|
|
|
|
|
|
(82 |
) |
|
|
(693 |
) |
|
|
|
|
|
|
(775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(152 |
) |
|
|
(20,781 |
) |
|
|
(11,468 |
) |
|
|
|
|
|
|
(32,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facility payments |
|
|
(7,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,250 |
) |
Intercompany activity, net |
|
|
29,233 |
|
|
|
8,231 |
|
|
|
(37,464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
21,983 |
|
|
|
8,231 |
|
|
|
(37,464 |
) |
|
|
|
|
|
|
(7,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
|
|
978 |
|
|
|
(125 |
) |
|
|
1,403 |
|
|
|
|
|
|
|
2,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(25,755 |
) |
|
|
(6,860 |
) |
|
|
(18,123 |
) |
|
|
|
|
|
|
(50,738 |
) |
Cash and cash equivalents at beginning of period |
|
|
25,835 |
|
|
|
1,892 |
|
|
|
58,247 |
|
|
|
|
|
|
|
85,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
80 |
|
|
$ |
(4,968 |
) |
|
$ |
40,124 |
|
|
$ |
|
|
|
$ |
35,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations is designed
to provide the reader of the financial statements with a narrative on our results of operations,
financial position and liquidity, risk management activities, and significant accounting policies
and critical estimates. Managements Discussion and Analysis should be read in conjunction with
the 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. A store which is temporarily closed, such as for remodeling, is removed
from the same store sales computation if it is closed for nine consecutive weeks. The removal is
effective prospectively upon the completion of the ninth consecutive week of closure. A store
which is closed permanently, such as upon termination of the lease, is immediately removed from the
same store sales computation. We compute same store sales on a local currency basis, which
eliminates any impact for changes in foreign currency rates.
20
Business Overview
We are a leading specialty retailer offering value-priced, fashion-right accessories and jewelry
for kids, tweens, teens, and young women in the 3 to 27 age range. We are organized based on our
geographic markets, which include our North American Division and our European Division. As of
August 1, 2009, we operated a total of 2,948 stores, of which 2,001 were located in all 50 states
of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American
Division) and 947 stores were located in the United Kingdom, France, Switzerland, Spain, Ireland,
Austria, Germany, Netherlands, Portugal, and Belgium (our European Division). Our stores operate
under the trade names Claires and Icing.
In addition, as of August 1, 2009, we franchised 194 stores in the Middle East, Turkey, Russia,
South Africa, Poland and Guatemala under franchising agreements. We account within our North
American Division for the goods we sell under the merchandising agreements with our franchisees
within Net sales and Cost of sales, occupancy and buying expenses. The royalty fees are
accounted for within our European Division in Other income in our unaudited condensed
consolidated financial statements included in this report.
We also operated, as of August 1, 2009, 212 stores in Japan through our Claires Nippon 50:50 joint
venture with AEON Co. Ltd. We account for the results of operations of Claires Nippon under the
equity method. These results are included within our North American Division in Other income in
our Unaudited Condensed Consolidated Financial Statements included in this report.
During our second fiscal quarter of 2009, we closed 24 stores in North America that were performing
below our expectations. These stores were closed near their respective lease expirations. These
stores accounted for 0.2% of our consolidated net sales for the six months ended August 1, 2009 and
had a combined operating loss before depreciation and amortization of approximately $1.3 million in
that six month period, inclusive of remaining future occupancy costs.
Our primary brand in North America and exclusively in Europe is Claires. Our Claires customers
are predominantly teens (ages 13 to 18), tweens (ages 7 to 12) and kids (ages 3 to 6), or known
internally to Claires as our Young, Younger and Youngest target customer groups.
Our second brand in North America is Icing, which targets a single edit point customer represented
by a 23 year old young woman just graduating from college and entering the workforce who dresses
consistent with the current fashion influences. We believe this niche strategy will enable us to
create a well defined merchandise point of view and attract a broad group of customers from 19 to
27 years of age.
We believe that we are the leading accessories and jewelry destination for our target customers,
which is embodied in our mission statement to be a fashion authority and fun destination
offering a compelling, focused assortment of value-priced accessories, jewelry and other emerging
fashion categories targeted to the lifestyles of kids, tweens, teens and young women.
We provide our target customer groups a significant selection of fashion right merchandise across a
wide range of categories, all with a compelling value proposition. Our two major categories of
business are:
|
|
|
Accessories includes hair goods, handbags, small leather goods, and other fashion
classifications, such as scarves, headwear, attitude glasses, leg wear and seasonal
accessories, such as sunglasses, sandals, slippers and cold weather merchandise including
hats, gloves, scarves and boots, as well as cosmetics |
|
|
|
Jewelry includes earrings, ear piercing, necklaces, bracelets and rings |
In Fiscal 2008, we began shifting our merchandise assortment more towards accessory categories and
away from jewelry and more towards casual fashion and away from dress-up styling.
In North America, our stores are located primarily in shopping malls. The differentiation of our
Claires and Icing brands allows us to operate multiple store locations within a single mall. In
Europe and Japan, our stores are located primarily on high streets, in shopping malls and in high
traffic urban areas.
21
Current Market Conditions
The current distress in the financial markets has resulted in declines in consumer confidence and
spending, extreme volatility in securities prices, and has had a negative impact on credit
availability and declining valuations of certain investments. We have assessed the implications of
these factors on our current business and have responded with our Cost Savings Initiative (CSI)
and Pan European Transformation (PET) projects, scaled back planned capital expenditures for
Fiscal 2009 and have implemented a conservative approach to discretionary spending. If the
national, or global, economies or credit market conditions in general were to deteriorate further
in the future, it is possible that such deterioration could put additional negative pressure on
consumer spending and negatively affect our cash flows or cause a tightening of trade credit that
may negatively affect our liquidity.
Consolidated Results of Operations
Summaries of our consolidated results of operations for the three and six months ended August 1,
2009 and August 2, 2008 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
|
Ended |
|
Ended |
|
|
August 1, 2009 |
|
August 2, 2008 |
Net sales |
|
$ |
314,196 |
|
|
$ |
359,973 |
|
Increase (decrease) in same store sales |
|
|
(6.9 |
)% |
|
|
(5.8 |
)% |
Gross profit percentage |
|
|
49.7 |
% |
|
|
49.9 |
% |
Selling, general and administrative expenses as a percentage of
net sales |
|
|
35.3 |
% |
|
|
36.8 |
% |
Depreciation and amortization as a percentage of net sales |
|
|
6.0 |
% |
|
|
6.3 |
% |
Severance and transaction-related costs as percentage of net sales |
|
|
0.0 |
% |
|
|
0.1 |
% |
Operating income |
|
$ |
27,289 |
|
|
$ |
24,977 |
|
Gain on early debt extinguishment |
|
$ |
17,104 |
|
|
$ |
|
|
Net loss |
|
$ |
(3,733 |
) |
|
$ |
(16,931 |
) |
Number of stores at the end of the period (1) |
|
|
2,948 |
|
|
|
3,053 |
|
|
|
|
(1) |
|
Number of stores excludes stores operated under franchise agreements and joint venture stores. |
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
August 1, 2009 |
|
August 2, 2008 |
Net sales |
|
$ |
607,294 |
|
|
$ |
686,976 |
|
Increase (decrease) in same store sales |
|
|
(4.7 |
)% |
|
|
(7.0 |
)% |
Gross profit percentage |
|
|
49.1 |
% |
|
|
48.7 |
% |
Selling, general and administrative expenses as a percentage of
net sales |
|
|
36.1 |
% |
|
|
38.4 |
% |
Depreciation and amortization as a percentage of net sales |
|
|
6.1 |
% |
|
|
6.5 |
% |
Severance and transaction-related costs as percentage of net sales |
|
|
0.1 |
% |
|
|
0.9 |
% |
Operating income |
|
$ |
41,821 |
|
|
$ |
21,154 |
|
Gain on early debt extinguishment |
|
$ |
17,104 |
|
|
$ |
|
|
Net loss |
|
$ |
(32,756 |
) |
|
$ |
(52,501 |
) |
Number of stores at the end of the period (1) |
|
|
2,948 |
|
|
|
3,053 |
|
|
|
|
(1) |
|
Number of stores excludes stores operated under franchise agreements and joint venture stores. |
22
Net sales
Net sales for the three months ended August 1, 2009 decreased by $45.8 million, or 12.7%, from the
three months ended August 2, 2008. This decrease was primarily attributable to currency
translation of our foreign locations sales of $20.8 million and a decrease in same store sales of
$22.6 million, or 6.9%. The decrease in same store sales is largely attributable to a decrease in
the average number of transactions per store of 6.7%.
Net sales for the six months ended August 1, 2009 decreased by $79.7 million, or 11.6%, from the
six months ended August 2, 2008. This decrease was primarily attributable to currency translation
of our foreign locations sales of $47.8 million and a decrease in same store sales of $29.2
million, or 4.7%. The decrease in same store sales is largely attributable to a decrease in the
average number of transactions per store of 4.8%.
The following table compares our sales of each product category for each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
Six Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
Ended |
|
Ended |
% of Total |
|
August 1, 2009 |
|
August 2, 2008 |
|
August 1, 2009 |
|
August 2, 2008 |
Accessories |
|
|
50.5 |
|
|
|
46.1 |
|
|
|
49.8 |
|
|
|
45.6 |
|
Jewelry |
|
|
49.5 |
|
|
|
53.9 |
|
|
|
50.2 |
|
|
|
54.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. These costs are included instead in selling, general and administrative
expenses. Other retail companies may include these costs in cost of sales, so our gross profit
percentages may not be comparable to those retailers.
The gross profit percentage decreased 20 basis points during the fiscal 2009 second quarter to
49.7% compared to the fiscal 2008 second quarter of 49.9%. The decrease consisted of an 80 basis
point improvement in merchandise margin and a 30 basis point decrease in buying cost, offset by a
130 basis point increase in occupancy costs. The improvement in merchandise margin was due to
increased initial mark-up on purchases, reduced markdowns and decreased freight costs. Occupancy
costs decreased approximately $6.1 million primarily due to foreign exchange effects, but increased
as a percentage of sales due to the deleveraging effect of lower sales. Excluding $1.6 million of
non-recurring expenses relating to our PET project that were included in buying costs in the fiscal
2008 second quarter, the decrease in gross profit percentage was approximately 70 basis points.
The gross profit percentage increased 40 basis points during the first six months of fiscal 2009 to
49.1% compared to the first six months of fiscal 2008 of 48.7%. The increase included a 90 basis
point improvement in merchandise margin and a 30 basis point decrease in buying cost, partially
offset by an 80 basis point increase in occupancy costs. The improvement in merchandise margin was
due to increased initial mark-up on purchases, reduced markdowns and decreased freight and shrink
related costs. Occupancy costs decreased approximately $13.8 million primarily due to foreign
exchange effects, but increased as a percentage of sales due to the deleveraging effect of lower
sales. Excluding $2.6 million of non-recurring expenses relating to our PET project that were
included in buying costs in the six months ended August 2, 2008, the gross profit percentage was
49.1% for both periods.
Selling, general and administrative expenses
During the three months ended August 1, 2009, selling, general and administrative expenses
decreased $21.6 million, or 16.3%, from the comparable prior year period. Excluding a $6.6 million
foreign currency translation effect and a decrease of $3.3 million of non-recurring CSI and PET
project costs, the net decrease in selling, general and administrative expenses was $11.7 million
or 9.1%. This net decrease was due primarily to cost savings benefits realized from our CSI and
PET projects implemented in late fiscal 2008 and early fiscal 2009.
23
During the six months ended August 1, 2009, selling, general and administrative expenses decreased
$44.5 million, or 16.9%, from the comparable prior year period. Excluding a $16.5 million foreign
currency translation effect and a decrease of $5.1 million of non-recurring CSI and PET project
costs, the net decrease in selling, general and administrative expenses was $22.9 million or 8.9%.
This net decrease was due primarily to cost savings benefits realized from our CSI and PET projects
implemented in late fiscal 2008 and early fiscal 2009.
Depreciation and amortization expense
Depreciation and amortization expense decreased $3.9 million to $18.7 million during the three
months ended August 1, 2009 compared to the three months ended August 2, 2008. The majority of
this decrease is due to foreign currency translation effect and the effect of assets becoming fully
depreciated or amortized.
Depreciation and amortization expense decreased $7.8 million to $36.9 million during the six months
ended August 1, 2009 compared to the six months ended August 2, 2008. The majority of this
decrease is due to foreign currency translation effect and the effect of assets becoming fully
depreciated or amortized.
Severance and transaction-related costs
Since 2007, we have incurred costs related to the sale of the Company. These costs consisted
primarily of financial advisory fees, legal fees and change in control payments to employees. In
connection with our CSI and PET projects, we incurred severance costs for terminated employees.
The aggregate of these severance and transaction-related costs for the three and six months ended
August 2, 2009 and August 1, 2008 were $0 million, $0.4 million, $0.3 million and $6.3 million,
respectively.
Gain on early debt extinguishment
In July, 2009, we purchased $27.8 million principal amount of 10.50% Senior Subordinated Notes due
June 2017 in the open market. We purchased these Notes for $10.4 million in cash, reflecting the
Notes then current values plus $0.4 million of accrued interest. In connection with the purchase,
we recognized a gain aggregating $17.1 million related to the early debt extinguishment, net of the
write-off of unamortized debt financing costs of $0.7 million.
Other income, net
We recognized $0.7 million of other income for the three months ended August 1, 2009 compared to
$0.5 million for the three months ended August 2, 2008. During the three months ended August 1,
2009, we recognized a gain of $0.6 million in connection with the termination of a lease. We also
had a decrease in other income of $0.4 million due primarily to losses recognized in connection
with our Claires Nippon joint venture.
We recognized $0.3 million of other income for the six months ended August 1, 2009 compared to $1.1
million for the six months ended August 2, 2008. During the six months ended August 1, 2009, we
recognized a gain of $0.6 million in connection with the termination of a lease. We also had a
decrease in other income of $1.4 million due primarily to losses recognized in connection with our
Claires Nippon joint venture.
Interest expense, net
Net interest expense for the three months ended August 1, 2009 aggregated $45.3 million (of which
approximately $2.6 million consisted of amortization of deferred debt issuance costs) compared to
$48.7 million for the three months ended August 2, 2008. This decrease of $3.4 million is
primarily the result of reductions in interest rates on the floating portion of our debt.
Net interest expense for the six months ended August 1, 2009 aggregated $90.6 million (of which
approximately $5.3 million consisted of amortization of deferred debt issuance costs) compared to
$97.4 million for the six months ended August 2, 2008. This decrease of $6.8 million is primarily
the result of reductions in interest rates on the floating portion of our debt.
24
Income taxes
The effective income tax rate for the three months and six months ended August 1, 2009 were
(298.8)% and (3.5)%, respectively, as compared to an income tax benefit rate of 28.7% and 31.1% for
the three and six months ended August 2, 2008, respectively. The change in the effective income
tax rate was primarily the result of an increase in our valuation allowance recorded for additional
deferred tax assets generated in the three months and six months ended August 1, 2009 by our U.S.
operations.
Segment Operations
We are organized into two business segments North America and Europe. The following is a
discussion of results of operations by business segment.
North America
Key statistics and results of operations for our North American division are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
Six Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
Ended |
|
Ended |
|
|
August 1, 2009 |
|
August 2, 2008 |
|
August 1, 2009 |
|
August 2, 2008 |
Net sales |
|
$ |
193,165 |
|
|
$ |
222,676 |
|
|
$ |
389,609 |
|
|
$ |
432,020 |
|
Increase (decrease) in same store sales |
|
|
(9.9 |
)% |
|
|
(8.1 |
)% |
|
|
(6.5 |
)% |
|
|
(10.2 |
)% |
Gross profit percentage |
|
|
48.7 |
% |
|
|
48.9 |
% |
|
|
49.4 |
% |
|
|
48.3 |
% |
Number of stores at the end of the period (1) |
|
|
2,001 |
|
|
|
2,142 |
|
|
|
2,001 |
|
|
|
2,142 |
|
|
|
|
(1) |
|
Number of stores excludes stores operated under franchise agreements and joint venture stores. |
Net sales in North America decreased by $29.5 million during the three months ended August 1, 2009,
or 13.3%, from the three months ended August 2, 2008. This decrease was primarily attributable to
a decrease in sales resulting from foreign currency translation of our Canadian operations of $1.5
million, a decrease in same store sales of $20.8 million, or 9.9%, and a decrease in new store
revenue, net of store closures, of $6.2 million.
Net sales in North America decreased by $42.4 million during the six months ended August 1, 2009,
or 9.8%, from the six months ended August 2, 2008. This decrease was primarily attributable to a
decrease in sales resulting from foreign currency translation of our Canadian operations of $4.1
million, a decrease in same store sales of $26.5 million, or 6.5%, and a decrease in new store
revenue, net of store closures, of $11.4 million.
Gross profit percentage decreased 20 basis points for the three months ended August 1, 2009 to
48.7% compared to the gross profit percentage for the three months ended August 2, 2008 of 48.9%.
The decrease was comprised of a 170 basis point improvement in merchandise margin and a 40 basis
point decrease in buying cost, offset by a 230 basis point increase in occupancy cost. The
improvement in merchandise margin was due to increased initial mark-up on purchases, reduced
markdowns and reduced freight costs. Excluding a reduction of $0.4 million of non-recurring
expenses relating to our PET project, the decrease in gross profit percentage was approximately 40
basis points.
Gross profit percentage increased 110 basis points during the first six months of fiscal 2009 to
49.4% compared to the gross profit percentage for the first six months of fiscal 2008 of 48.3%.
The increase included a 180 basis point improvement in merchandise margin and a 30 basis point
decrease in buying cost, partially offset by a 100 basis point increase in occupancy cost. The
improvement in merchandise margin was due to increased initial mark-up on purchases, reduced
markdowns and reduced freight and shrink related costs. Excluding $0.7 million of non-recurring
expenses relating to our PET project that were included in buying costs in the six months ended
August 2, 2008, the increase in gross profit percentage was approximately 100 basis points.
25
The following table compares our sales of each product category in North America for the three and
six months ended August 1, 2009 and August 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
Six Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
Ended |
|
Ended |
% of Total |
|
August 1, 2009 |
|
August 2, 2008 |
|
August 1, 2009 |
|
August 2, 2008 |
Accessories |
|
|
45.2 |
|
|
|
40.5 |
|
|
|
44.5 |
|
|
|
40.1 |
|
Jewelry |
|
|
54.8 |
|
|
|
59.5 |
|
|
|
55.5 |
|
|
|
59.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
Key statistics and results of operations for our European division are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
Six Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
Ended |
|
Ended |
|
|
August 1, 2009 |
|
August 2, 2008 |
|
August 1, 2009 |
|
August 2, 2008 |
Net sales |
|
$ |
121,031 |
|
|
$ |
137,297 |
|
|
$ |
217,685 |
|
|
$ |
254,956 |
|
Increase (decrease) in same store sales |
|
|
(1.6 |
)% |
|
|
(1.7 |
)% |
|
|
(1.3 |
)% |
|
|
(1.0 |
)% |
Gross profit percentage |
|
|
51.2 |
% |
|
|
51.6 |
% |
|
|
48.5 |
% |
|
|
49.5 |
% |
Number of stores at the end of the period (1) |
|
|
947 |
|
|
|
911 |
|
|
|
947 |
|
|
|
911 |
|
|
|
|
(1) |
|
Number of stores excludes stores operated under franchise agreements and joint venture stores. |
Net sales in our European division during the three months ended August 1, 2009 decreased by $16.3
million, or 11.8%, over the comparable prior year period. This decrease was primarily attributable
to a decrease of $19.3 million resulting from foreign currency translation of our European
operations and a decrease in same store sales of $1.8 million, or 1.6%, partially offset by new
store revenue, net of store closures of $4.8 million.
Net sales in our European division during the six months ended August 1, 2009 decreased by $37.3
million, or 14.6%, over the comparable prior year period. This decrease was primarily attributable
to a decrease of $43.8 million resulting from foreign currency translation of our European
operations and a decrease in same store sales of $2.7 million, or 1.3%, partially offset by new
store revenue, net of store closures of $9.2 million.
Gross profit percentage decreased 40 basis points for the three months ended August 1, 2009 to
51.2% compared to the gross profit percentage for the three months ended August 2, 2008 of 51.6%.
The decrease was comprised of a 70 basis point decline in merchandise margin, a 40 basis point
decrease in buying cost, and a 10 basis point increase in occupancy cost. Excluding a reduction of
$1.2 million of non-recurring expenses relating to our PET project, the decrease in gross profit
percentage was approximately 120 basis points.
Gross profit percentage decreased 100 basis points during the first six months of fiscal 2009 to
48.5% compared to the gross profit percentage for the first six months of fiscal 2008 of 49.5%.
The decrease was comprised of a 60 basis point decline in merchandise margin, a 30 basis point
decrease in buying cost, and a 70 basis point increase in occupancy cost. Excluding $1.9 million
of non-recurring expenses relating to our PET project that were included in buying costs in the six
months ended August 2, 2008, the decrease in gross profit percentage was approximately 170 basis
points.
The following table compares our sales of each product category in Europe for the three and six
months ended August 1, 2009 and August 2, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
Six Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
Ended |
|
Ended |
% of Total |
|
August 1, 2009 |
|
August 2, 2008 |
|
August 1, 2009 |
|
August 2, 2008 |
Accessories |
|
|
59.3 |
|
|
|
55.1 |
|
|
|
59.3 |
|
|
|
55.1 |
|
Jewelry |
|
|
40.7 |
|
|
|
44.9 |
|
|
|
40.7 |
|
|
|
44.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Financial Resources and Liquidity
A summary of cash flows used in operating, investing and financing activities for the six months
ended August 1, 2009 and August 2, 2008 is outlined in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
August 1, 2009 |
|
August 2, 2008 |
Operating activities |
|
$ |
(486 |
) |
|
$ |
(13,343 |
) |
Investing activities |
|
|
(9,882 |
) |
|
|
(32,401 |
) |
Financing activities |
|
|
(17,286 |
) |
|
|
(7,250 |
) |
Cash flows from operating activities
Cash used in operating activities approximated $0.5 million and $13.3 million during the six months
ended August 1, 2009 and August 2, 2008, respectively. The primary reasons for the improvement of
$12.8 million were an improvement of operating income and lower interest and taxes paid in the six
months ended August 1, 2009.
Cash flows from investing activities
Cash used in investing activities during the six months ended August 1, 2009 and August 2, 2008
aggregated $9.9 million and $32.4 million, respectively. These funds were used primarily to
remodel existing stores, open new stores and to improve technology systems. During the remainder
of Fiscal 2009, we expect to fund a total of approximately $15 million of capital expenditures to
remodel existing stores, open new stores and to improve technology systems.
Cash flows from financing activities
Cash used in financing activities aggregated $17.3 million and $7.3 million for the six months
ended August 1, 2009 and August 2, 2008, respectively. In both of these periods, we paid $7.3
million for the scheduled principal payments on our credit facility. In the six months ended
August 1, 2009, we paid $10.0 million to retire $27.8 million of face amount of our Senior
Subordinated Notes, as discussed in Note 4 to the Unaudited Condensed Consolidated Financial
Statements.
As discussed in our Annual Report on Form 10-K for the year ended January 31, 2009, we elected to
pay interest in kind on our Senior Toggle Notes for the interest period of December 2, 2008 through
June 1, 2009, as permitted by the terms of the Notes. We continued that election for the interest
period of June 2, 2009 through December 1, 2009. It is our current intention to pay interest in
kind on the Senior Toggle Notes for all interest periods through June 1, 2011.
We or our affiliates may, from time to time, purchase portions of our indebtedness.
Cash position
As of August 1, 2009, we had cash and cash equivalents of $182.4 million, and substantially all of
such cash equivalents consisted of U.S. Treasury Securities.
The current distress in the financial markets has resulted in extreme volatility in security prices
and has had a negative impact on credit availability, and there can be no assurance that our
liquidity will not be affected by changes in the financial markets and the global economy or that
our capital resources will at all times be sufficient to satisfy our liquidity needs. Although we
believe that our existing cash will provide us with sufficient liquidity through the current credit
crisis, tightening of the credit markets could make it more difficult for us to access funds,
refinance our existing indebtedness and enter into agreements for new indebtedness.
27
We have significant amounts of cash and cash equivalents at financial institutions that are in
excess of federally insured limits. With the current financial environment and the instability of
financial institutions, we cannot be assured that we will not experience losses on our deposits.
We anticipate that cash generated from operations will be sufficient to meet our future working
capital requirements, new store expenditures, and debt service requirements as they become due.
However, our ability to fund future operating expenses and capital expenditures and our ability to
make scheduled payments of interest on, to pay principal on, or refinance indebtedness and to
satisfy any other present or future debt obligations will depend on future operating performance.
Our future operating performance and liquidity may also be adversely affected by general economic,
financial, and other factors beyond the Companys control, including those disclosed in Risk
Factors in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.
Credit Facility and Notes
Although the Company did not need to do so, during the quarter ended November 1, 2008, we drew down
the remaining $194.0 million available under our Revolving Credit Facility (Revolver). An
affiliate of Lehman Brothers is a member of the facility syndicate, and so immediately after Lehman
Brothers filed for bankruptcy, in order to preserve the availability of the commitment, we drew
down the full available amount under the Revolver. We received the entire $194.0 million,
including the remaining portion of Lehman Brothers affiliates commitment of $33 million. Upon the
replacement of Lehman Brothers, or the assumption of its commitment by a creditworthy entity, we
will assess whether to pay down all or a portion of this outstanding balance based on various
factors, including the creditworthiness of other syndicate members and general economic conditions.
We believe it is unlikely that this matter will be resolved until some time following the
conclusion of the Lehman Brothers bankruptcy proceedings. The Company is not required to repay any
of the Revolver until the due date of May 29, 2013, therefore, the Revolver is classified as a
long-term liability in the accompanying unaudited condensed consolidated balance sheet as of August
1, 2009.
Our Senior Notes, Senior Toggle Notes and Senior Subordinated Notes (collectively, the Notes)
contain certain covenants that, among other things, and subject to certain exceptions and other
basket amounts, restrict our ability and the ability of our subsidiaries to:
|
|
|
incur additional indebtedness; |
|
|
|
|
pay dividends or distributions on our capital stock, repurchase or retire our capital
stock and redeem, repurchase or defease any subordinated indebtedness; |
|
|
|
|
make certain investments; |
|
|
|
|
create or incur certain liens; |
|
|
|
|
create restrictions on the payment of dividends or other distributions to us from our
subsidiaries; |
|
|
|
|
transfer or sell assets; |
|
|
|
|
engage in certain transactions with our affiliates; and |
|
|
|
|
merge or consolidate with other companies or transfer all or substantially all of our
assets. |
Certain of these covenants, such as limitations on our ability to make certain payments such as
dividends, or incur debt, will no longer apply if our Notes have investment grade ratings from both
of the rating agencies of Moodys Investor Services, Inc. (Moodys) and Standard & Poors Ratings
Group (S&P) and no event of default has occurred. Since the date of issuance of the Notes in May
2007, the Notes have not received investment grade ratings from Moodys or S&P. Accordingly, all of
the covenants under the Notes currently apply to us. None of these covenants, however, require the
Company to maintain any particular financial ratio or other measure of financial performance. As of
August 1, 2009, we were in compliance with the covenants under our Notes.
28
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 2008
Annual Report on Form 10-K, filed on April 28, 2009, in the Notes to the Consolidated Financial
Statements, Note 2, and the Critical Accounting Policies and Estimates section contained in the
Managements Discussion and Analysis of Financial Condition and Results of Operations therein.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 168, The FASB Accounting Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles. This Statement established the
Accounting Standards Codification (ASC) and is effective for interim and annual periods ending
after September 15, 2009. We will apply SFAS 168 beginning in our third quarter of fiscal 2009.
The adoption of SFAS 168 is not expected to have any substantive impact on our condensed
consolidated financial statements or related footnotes.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The Statement
established a framework for measuring fair value in generally accepted accounting principles, and
expands disclosure about fair value measurements. This statement did not require any new fair value
measurement and applies to financial statements issued for fiscal years beginning after November
15, 2007 with early application encouraged. Certain provisions of the statement were effective for
us on February 3, 2008, while the effective date of other provisions relating to nonfinancial
assets and liabilities were effective for us as of February 1, 2009. Our adoption of SFAS No. 157
on February 1, 2009 related to nonfinancial assets and nonfinancial liabilities did not have a
material impact on our financial position, results of operations or cash flows. See Note 7 for
further discussion and disclosure. This Statement has been incorporated into ASC 820, Fair Value
Measurements and Disclosures.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful
Life of Intangible Assets. This FSP, which applies to intangible assets accounted for pursuant to
SFAS No. 142, Goodwill and Other Intangible Assets, provides guidance for the development of
renewal or extension assumptions used to determine the useful life of an intangible asset. We
adopted this Statement on February 1, 2009 which did not have a material impact on our financial
position, results of operations or cash flows. This FSP has been incorporated into ASC 275, Risks
and Uncertainties, and ASC 350, Intangibles Goodwill and Other.
In June 2008, the Emerging Issues Task Force issued EITF 08-3, Accounting by Lessees for
Nonrefundable Maintenance Deposits. EITF 08-3 requires lessees to account for nonrefundable
maintenance deposits as deposits if it is probable that maintenance activities will occur and the
deposit is realizable. Amounts on deposit that are not probable of being used to fund future
maintenance activities should be charged to expense. Issue 08-3 is effective for fiscal years
beginning after December 15, 2008. We adopted this Statement on February 1, 2009 which did not have
a material impact on our financial position, results of operations or cash flows. EITF 08-3 has
been incorporated into ASC 840, Leases.
In October 2008, the EITF issued EITF No. 08-6 which addressed the potential effect of FASB
Statement No. 141R, Business Combinations and SFAS No. 160 Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51 on equity-method accounting under
APB Opinion No. 18, The Equity Method Accounting for Investments in Common Stock. The consensus
of the EITF will not require the Company to perform a separate impairment test on the underlying
assets of our investment in Claires Nippon. However, the Company would be required to recognize
its proportionate share of impairment charges recognized by our joint venture with AEON Co. Ltd. It
would also be required to perform an overall other than temporary impairment test of its investment
in accordance with
APB No. 18. EITF 08-6 is effective for fiscal years beginning on or after December 15, 2008 and
interim periods within those fiscal years and is to be applied on a prospective basis. We adopted
this Statement on
29
February 1, 2009 which did not have a material impact on our financial position, results of
operations or cash flows. EITF 08-6 has been incorporated into ASC 323, Investments Equity
Method and Joint Ventures.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 establishes
accounting and reporting standards for events that occur after the balance sheet date but before
financial statements are issued or available to be issued. The statement sets forth (i) the period
after the balance sheet date during which management of a reporting entity should evaluate events
or transactions that may occur for potential recognition or disclosure in the financial statements,
(ii) the circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements, and (iii) the disclosures that an entity
should make about events or transactions occurring after the balance sheet date in its financial
statements. We adopted the provisions of SFAS No. 165 for the interim period ended August 1, 2009.
The adoption of SFAS No. 165 had no impact on our financial position, results of operations or
cash flows. SFAS No. 165 has been incorporated into ASC 855, Subsequent Events.
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
managements then current views and assumptions regarding future events and operating performance,
and we assume no obligation to update any forward-looking statement. Forward-looking statements
involve known or unknown risks, uncertainties and other factors, including changes in estimates and
judgments discussed under Critical Accounting Policies and Estimates which may cause our actual
results, performance or achievements, or industry results to be materially different from any
future results, performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements may use the words expect, anticipate, plan,
intend, project, may, believe, forecasts and similar expressions. Some of these risks,
uncertainties and other factors are as follows: our level of indebtedness; general economic
conditions; changes in consumer preferences and consumer spending; competition; general political
and social conditions such as war, political unrest and terrorism; natural disasters or severe
weather events; currency fluctuations and exchange rate adjustments; uncertainties generally
associated with the specialty retailing business; disruptions in our supply of inventory; inability
to increase same store sales; inability to renew, replace or enter into new store leases on
favorable terms; significant increases in our merchandise markdowns; inability to grow our store
base in Europe; inability to design and implement new information systems; delays in anticipated
store openings or renovations; changes in applicable laws, rules and regulations, including changes
in federal, state or local regulations governing the sale of our products, particularly regulations
relating to the content in our products, and employment laws relating to overtime pay, tax laws and
import laws; product recalls; loss of key members of management; increases in the cost of labor;
labor disputes; unwillingness of vendors and service providers to supply goods or services pursuant
to historical customary credit arrangements; increases in the cost of borrowings; unavailability of
additional debt or equity capital; and the impact of our substantial indebtedness on our operating
income and our ability to grow. The Company undertakes no obligation to update or revise any
forward-looking statements to reflect subsequent events or circumstances. In addition, we
typically earn a disproportionate share of our operating income in the fourth quarter due to
seasonal buying patterns, which are difficult to forecast with certainty. Additional discussion of
these and other risks and uncertainties is contained elsewhere in this Item 2, in Item 3,
Quantitative and Qualitative Disclosures About Market Risk and in our Form 10-K for Fiscal 2008
under Statement Regarding Forward-Looking Disclosures and Risk Factors.
30
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Cash and cash equivalents
We have significant amounts of cash and cash equivalents at financial institutions that are in
excess of federally insured limits. With the current financial environment and the instability of
financial institutions, we cannot be assured that we will not experience losses on our deposits. We
mitigate this risk by investing in two money market funds that are invested exclusively in U.S.
Treasury securities and limiting the cash balance in any one bank account. As of August 1, 2009,
approximately 94.3% of cash equivalents were maintained in two money market funds that were
invested exclusively in U.S. Treasury securities.
Foreign Currency
We are exposed to market risk from foreign currency exchange rate fluctuations on the U.S. dollar
value of foreign currency denominated transactions and our investment in foreign subsidiaries. We
manage this exposure to market risk through our regular operating and financing activities, and
from time to time, the use of foreign currency options. Exposure to market risk for changes in
foreign exchange rates relates primarily to foreign operations buying, selling, and financing in
currencies other than local currencies and to the carrying value of net investments in foreign
subsidiaries. At August 1, 2009, we maintained no foreign currency options. We do not generally
hedge the translation exposure related to our net investment in foreign subsidiaries. Included in
comprehensive income (loss) are $24.0 million and $7.1 million, net of tax, reflecting the
unrealized gain on foreign currency translation during the six months ended August 1, 2009 and
August 2, 2008, respectively.
Certain of our subsidiaries make significant U.S. dollar purchases from Asian suppliers
particularly in China. In July 2005, China revalued its currency 2.1%, changing the fixed exchange
rate from 8.28 to 8.11 Chinese Yuan to the U.S. Dollar. Since July 2005, the Chinese Yuan increased
by 18.7% as compared to the U.S. Dollar, based on continued pressure from the international
community. If China adjusts the exchange rate further or allows the value to float, we may
experience increases in our cost of merchandise imported from China, which could have a significant
effect on our results of operations.
Interest Rates
Between July 20, 2007 and August 3, 2007, we entered into three interest rate swap agreements (the
Swaps) to manage exposure to fluctuations in interest rates. The Swaps represent contracts to
exchange floating rate for fixed interest payments periodically over the lives of the Swaps without
exchange of the underlying notional amount. At August 1, 2009, the Swaps cover an aggregate
notional amount of $435.0 million of the $1.42 billion outstanding principal balance of the senior
secured term loan facility. The fixed rates of the three swap agreements range from 4.96% to 5.25%
and each swap expires on June 30, 2010. The Swaps have been designated as cash flow hedges. At
August 1, 2009 and January 31, 2009, the estimated fair value of the Swaps were liabilities of
approximately $17.2 million and $19.7 million, respectively, and were recorded, net of tax, as a
component in accumulated other comprehensive income (loss).
At August 1, 2009, we had fixed rate debt of $951.3 million and variable rate debt of $1.62
billion. Based on our variable rate debt balance (less $435 million of interest rate swaps) as of
August 1, 2009, a 1% change in interest rates would increase or decrease our annual interest
expense by approximately $11.8 million, net.
General Market Risk
Our competitors include department stores, specialty stores, mass merchandisers, discount stores
and other retail and internet channels. Our operations are impacted by consumer spending levels,
which are affected by general economic conditions, consumer confidence, employment levels,
availability of consumer credit and interest rates on credit, consumer debt levels, consumption of
consumer staples including food and energy, consumption of other goods, adverse weather conditions
and other factors over which the company has little or no control. The increase in costs of such
staple items has reduced the amount of discretionary funds that consumers are willing and able to
spend for other goods, including our
31
merchandise. Should there be continued volatility in food and
energy costs, sustained recession in the U.S. and Europe, rising unemployment and continued
declines in discretionary income, our revenue and
margins could be significantly affected in the future. We can not predict whether, when or the
manner in which the economic conditions described above will change.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly Report.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of the end of the period covered by this
Quarterly Report to ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities Exchange Commissions rules and forms,
and that such information is accumulated and communicated to our management, including each of such
officers as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting have been made during the quarter ended
August 1, 2009, 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
metal 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 and employing a significant number of employees, such litigation can result in large
monetary awards when judges, juries or other finders of facts do not agree with managements
evaluation of possible liability or outcome of litigation. Accordingly, the consequences of these
matters cannot be finally determined by management. However, in the opinion of management, we
believe that current pending litigation will not have a material adverse effect on our financial
position, results of operations or cash flows.
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, 2009.
32
Item 6. Exhibits
|
|
|
Exhibit 10.1
|
|
Disclosure Schedules to Credit Agreement, dated as of May 29, 2007 (Credit Agreement), among Bauble Holdings
Corp., Bauble Acquisition Sub, Inc. (to be merged with and into Claires Stores, Inc.), as Borrower, the Lenders
party thereto, Credit Suisse, as Administrative Agent, Bear Stearns Corporate Lending Inc. and Mizuho Corporate
Bank, Ltd., as Co-Syndication Agents, Lehman Commercial Paper Inc. and LaSalle Bank National Association, as
Co-Documentation Agents, and Bear, Stearns & Co. Inc., Credit Suisse Securities (USA) LLC, and Lehman Brothers
Inc., as Joint Bookrunners and Joint Lead Arrangers |
|
|
|
Exhibit 10.2
|
|
Exhibits A through D to the Credit Agreement, dated as of May 29, 2007 |
|
|
|
Exhibit 10.3
|
|
Guarantee and Collateral Agreement, dated and effective as of May 29, 2007, among
Bauble Holdings Corp., Bauble Acquisition Sub, Inc., and Credit Suisse, dated as of May 29, 2007 |
|
|
|
Exhibit 10.4
|
|
Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated
as of May 29, 2007 |
|
|
|
Exhibit 10.5
|
|
Exhibits A through E to Eugene Kahn Employment Agreement, dated as of May 29, 2007 |
|
|
|
Exhibit 10.6
|
|
Exhibits A through D to James Conroy Employment Agreement, dated as of December 13,
2007 |
|
|
|
Exhibit 10.7
|
|
Exhibits A and B to Amendment No. 1 to James Conroy Employment Agreement, dated as of
April 16, 2009 |
|
|
|
Exhibit 10.8
|
|
Exhibits A through D to Joan
Munnelly Employment Agreement, dated as of May 29, 2008 |
|
|
|
Exhibit 31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
Exhibit 31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
Exhibit 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 |
|
|
|
Exhibit 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 |
Items 2, 3, 4 and 5 of Part II are not applicable and have been omitted.
33
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.
|
|
|
|
|
|
CLAIRES STORES, INC.
|
|
September 11, 2009 |
By: |
/s/ Eugene S. Kahn
|
|
|
|
Eugene S. Kahn, Chief Executive Officer |
|
|
|
(principal executive officer) |
|
|
|
|
|
September 11, 2009 |
By: |
/s/ J. Per Brodin
|
|
|
|
J. Per Brodin, Senior Vice President and Chief Financial Officer (principal financial and accounting officer) |
|
|
|
|
|
34
INDEX TO EXHIBITS
|
|
|
EXHIBIT NO. |
|
DESCRIPTION |
|
|
|
Exhibit 10.1
|
|
Disclosure Schedules to Credit Agreement, dated as of May 29, 2007 (Credit
Agreement), among Bauble Holdings Corp., Bauble Acquisition Sub, Inc. (to be merged with and into
Claires Stores, Inc.), as Borrower, the Lenders party thereto, Credit Suisse, as Administrative
Agent, Bear Stearns Corporate Lending Inc. and Mizuho Corporate Bank, Ltd., as Co-Syndication
Agents, Lehman Commercial Paper Inc. and LaSalle Bank National Association, as Co-Documentation
Agents, and Bear, Stearns & Co. Inc., Credit Suisse Securities (USA) LLC, and Lehman Brothers Inc.,
as Joint Bookrunners and Joint Lead Arrangers |
|
|
|
Exhibit 10.2
|
|
Exhibits A through D to the Credit Agreement, dated as of May 29, 2007 |
|
|
|
Exhibit 10.3
|
|
Guarantee and Collateral Agreement, dated and effective as of May 29, 2007, among
Bauble Holdings Corp., Bauble Acquisition Sub, Inc., and Credit Suisse, dated as of May 29, 2007 |
|
|
|
Exhibit 10.4
|
|
Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated
as of May 29, 2007 |
|
|
|
Exhibit 10.5
|
|
Exhibits A through E to Eugene Kahn Employment Agreement, dated as of May 29, 2007 |
|
|
|
Exhibit 10.6
|
|
Exhibits A through D to James Conroy Employment Agreement, dated as of December 13,
2007 |
|
|
|
Exhibit 10.7
|
|
Exhibits A and B to Amendment No. 1 to James Conroy Employment Agreement, dated as of
April 16, 2009 |
|
|
|
Exhibit 10.8
|
|
Exhibits A through D to Joan
Munnelly Employment Agreement, dated as of May 29, 2008 |
|
|
|
Exhibit 31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
Exhibit 31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
Exhibit 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 |
|
|
|
Exhibit 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 |
35