UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

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

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

Commission File Nos. 1-8899 and 333-148108

Claire’s Stores, Inc.

(Exact name of registrant as specified in its charter)

Florida		59-0940416
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2400 West Central Road,
Hoffman Estates, Illinois		60195
(Address of principal executive offices)		(Zip Code)

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

Securities registered pursuant to Section 12(b) or 12(g) of the Act: None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

     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 the 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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

     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

     The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant is zero. The registrant is a privately held corporation.

As of April 1, 2010, 100 shares of the Registrant’s common stock, $.001 par value were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 

TABLE OF CONTENTS

Item				Page No.
PART I.					3
Item 1.		Business			5
Item 1A.		Risk Factors			13
Item 1B.		Unresolved Staff Comments			23
Item 2.		Properties			23
Item 3.		Legal Proceedings			24
Item 4.		Reserved			24
PART II					24
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			24
Item 6.		Selected Financial Data			25
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			46
Item 8.		Financial Statements and Supplementary Data			48
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			99
Item 9A(T).		Controls and Procedures			99
Item 9B.		Other Information			99
PART III.					99
Item 10.		Directors, Executive Officers and Corporate Governance			99
Item 11.		Executive Compensation			99
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			99
Item 13.		Certain Relationships and Related Transactions and Director Independence			99
Item 14.		Principal Accountant Fees and Services			99
PART IV.					100
Item 15.		Exhibits, Financial Statement Schedules			100
Signatures					103
EX-21.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I.

Explanatory Notes

We refer to Claire’s Stores, Inc., a Florida corporation, as “Claire’s,” the “Company,” “we,” “our” or similar terms, and typically these references include our subsidiaries.

In May 2007, the Company was acquired by Apollo Management VI, L.P. (“Apollo”), together with certain affiliated co-investment partnerships (collectively the “Sponsors”), through a merger (the “Merger”) and Claire’s Stores, Inc. became a wholly-owned subsidiary of Claire’s Inc. The Merger was financed by the issuance of $250.0 million of 9.25% senior notes due 2015 (the “Senior Fixed Rate Notes”), $350.0 million of 9.625%/10.375% senior toggle notes due 2015 (the “Senior Toggle Notes” and together with the Senior Fixed Rate Notes, the “Senior Notes”), and $335.0 million of 10.50% senior subordinated notes due 2017 (the “Senior Subordinated Notes” and together with the Senior Notes, the “Notes”). The aforementioned transactions, including the Merger and payment of costs related to these transactions as well as the related borrowings, are collectively referred to as the “Transactions.” The purchase of the Company by the Sponsors is referred to as the “Acquisition.” As of January 30, 2010, our total debt, including the current portion, was approximately $2.5 billion, consisting of $914.1 million of Notes and our $1.41 billion senior secured term loan facility and $194.0 million senior secured revolving credit facility (collectively the “Credit Facility”).

On May 14, 2008, we notified the holders of the Senior Toggle Notes of our intent to elect the “payment in kind” (“PIK”) interest option to satisfy the December 1, 2008 interest payment obligation. The PIK election is now the default election for interest periods through June 1, 2011, unless the Company notifies the note holders otherwise. The impact of this election increased the principal amount of our Senior Toggle Notes by $18.2 million on December 1, 2008, $19.1 million on June 1, 2009 and $19.8 million on December 1, 2009. The principal amount of the Senior Toggle Notes will increase semi-annually as long as the PIK election remains in effect. Purchases of Senior Toggle Notes partially offset these increases.

In connection with the consummation of the Transactions, the Company is sometimes referred to as the “Successor Entity” for periods on or after May 29, 2007, and the “Predecessor Entity” for periods prior to May 29, 2007.

Our fiscal year ends on the Saturday closest to January 31. We refer to our fiscal year end based on the year in which the fiscal year begins.

An amendment to this Annual Report on Form 10-K to include Part III of the Form 10-K will be filed with the Securities and Exchange Commission no later than 120 days after the end of Fiscal 2009.

Statement Regarding Forward-Looking Disclosures

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 to stockholders. 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 fiscal years, are forward-looking statements. The forward-looking statements are and will be based on management’s then current views and assumptions regarding future events and operating performance, and we assume no obligation to update any forward-looking statement. The forward-looking statements may use the words “expect,” “anticipate,” “plan,” “intend,” “project,” “may,” “believe,” “forecast,” and similar expressions. 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. 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 metal content in jewelry, 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.

Item 1.		Business

The Company

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 January 30, 2010, we operated a total of 2,948 stores, of which 1,993 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American division) and 955 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 “Claire’s” and “Icing.”

In addition, as of January 30, 2010, we franchised 195 stores in the Middle East, Turkey, Russia, South Africa, Poland, Greece, Guatemala and Malta under franchising agreements. Within our North American division, we account for the goods we sell to third parties under franchising agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” in our Consolidated Statements of Operations and Comprehensive Income (Loss). Within our European division, the franchise fees we charge under the franchising agreements are reported in “Other income, net” in our Consolidated Statements of Operations and Comprehensive Income (Loss) included in this Annual Report.

We also operated 211 stores in Japan through our Claire’s Nippon 50:50 joint venture with AEON Co. Ltd. as of January 30, 2010. Within our North American division, we account for the results of operations of Claire’s Nippon under the equity method and include the results within “Other income, net” in our Consolidated Statements of Operations and Comprehensive Income (Loss) included in this Annual Report.

Our primary brand in North America and exclusively in Europe is Claire’s. Our Claire’s customers are predominantly teens (ages 13 to 18), tweens (ages 7 to 12) and kids (ages 3 to 6), or known internally to Claire’s 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 work force who dresses consistent with the current fashion influences. We believe this niche strategy enables 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. In addition to age segmentation, we use multiple lifestyle aesthetics to further differentiate our merchandise assortments for our Young and Younger target customer groups.

We provide our target customer groups with a significant selection of fashion-right merchandise across a wide range of categories, all with a compelling value proposition. In Fiscal 2009, the average global selling price of our merchandise increased 10% from the prior year to $5.65 and the net average global transaction sales value increased 5% to $13.58. In Fiscal 2009, we successfully continued to shift our merchandise assortment more toward accessories categories, which resulted in accessories increasing to approximately 54% of our business.

Our major categories of business are:

•

Accessories — includes fashion accessories for year-round use, including legwear, armwear, headwear, scarves, attitude glasses, and belts, and seasonal use, including sunglasses, hats, scarves, sandals, boots and slippers; and other accessories, including hairgoods, handbags, and small leather goods, as well as cosmetics

•

Jewelry — includes earrings, necklaces, bracelets, body jewelry and rings, as well as ear piercing

In North America, our stores are located primarily in shopping malls and average approximately 970 square feet of selling space. The differentiation of our Claire’s 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 and average approximately 630 square feet of selling space.

Our Competitive Strengths

Strong Claire’s Name Brand Recognition Across the Globe. A Claire’s store is located in approximately 92% of all major U.S. shopping malls and in 29 countries or territories outside of the U.S., including stores that we franchise or operate through a joint venture. This global presence provides us with strong brand recognition of the Claire’s name within our target customer base. Our merchandise and the Claire’s brand name are featured in editorial coverage, press clips in popular periodicals, and on the web, reinforcing our presence and allowing us to incur minimal external media advertising expense.

Cost-Efficient Global Sourcing Capabilities. Our merchandising strategy is supported by efficient, low-cost global sourcing capabilities diversified across approximately 700 suppliers located primarily outside the United States. A significant portion of our product offering is developed by our product development team and RSI, our global buying and sourcing group based in Hong Kong, enabling us to buy and source merchandise rapidly and cost effectively.

Diversification Across Geographies and Merchandise Categories. As of January 30, 2010, we operated a total of 2,948 stores, of which 1,993 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands. As of January 30, 2010, we also operated 955 stores in 10 countries throughout Europe, 195 stores in 17 countries outside of Europe and North America through our franchise operations, and 211 stores in Japan through a joint venture.

During Fiscal 2009, we generated approximately 63% of our net sales from the North American division and 37% from the 10 countries in our European division. Our net sales are not dependent on any one category, product or style and are diversified across approximately 8,000 ongoing stock-keeping units. This multi-classification approach allows us to capitalize on many fashion trends, while not being dependent on any one of them.

Compelling Unit Economics. Our stores realize a high return on invested capital. Our average store has an initial investment of approximately $215,000, including leasehold improvements and fixtures. Our minimal working capital requirements result from high merchandise margins, low unit cost of our merchandise and the limited seasonality of our business. Over the past three fiscal years, no single quarter represented less than 22% or more than 31% of annual net sales for the respective year.

Strong and Experienced Senior Management Team. We have a strong and experienced senior management team with extensive retail experience. Gene Kahn, our Chief Executive Officer (“CEO”), has over 36 years of experience in the retail industry, including positions of Chairman, Chief Executive Officer and President of The May Department Stores. Jim Conroy, our Corporate President, collaborates with the CEO to oversee the Global business. Mr Conroy has over 19 years of retail experience, including as a management consultant and retail executive. J. Per Brodin, our Senior Vice President and Chief Financial Officer, has extensive financial accounting and management skills within and outside of retail. Kenneth Wilson, our President of Europe, brings to the Company 18 years of experience with Levi Strauss Corporation, and has extensive Pan-European experience across a broad array of retail related responsibilities.

Business Strategy

The recent global financial crisis that began in 2008 broadened and intensified into 2009, significantly impacting consumer confidence. Purchases of discretionary items, including our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. We assessed the implications of these factors on our current business and responded with our Cost Savings

Initiative and Pan-European Transformation projects in late 2008 and early 2009, prudently planned capital expenditures in Fiscal 2009 and developed growth objectives that were balanced against the current economic environment.

Recap of Fiscal 2009 Priorities

In Fiscal 2009, we developed five priorities to advance our global objectives. These five priorities and the steps taken during Fiscal 2009 to execute on these priorities are summarized below:

Deliver Same Store Sales with Commensurate Merchandise Margin. During Fiscal 2009, we drove sales in both our Claire’s and Icing brands by accelerating the growth of accessories, maximizing up-trending classifications and refining in-store presentation and marketing. Our focus on our stores resulted in stronger plan-o-gram execution and capture of customer contact information in North America. We also impacted margin by increasing initial mark-up, improving inventory flow while decreasing freight costs, improving regular price sell through to reduce markdowns, and reenergizing our shrink reduction efforts. We are operating with cleaner inventories enabled by the monthly markdown cadence that we have established as the basis of our North American clearance strategy and improved European mid-season and semi-annual clearance sales execution.

In addition to these common steps for both the Claire’s and Icing brands, we drove Claire’s sales by focusing our merchandise selection based on our target customers of Young, Younger and Youngest, specifically capitalizing on the growth opportunity in further developing our Young business. We focused on delivering a compelling merchandise assortment for each target customer group by upgrading the sophistication, styling and fashion sensibility of our merchandise. We achieved this by improving our capabilities in fashion and trend forecasting and strengthening product development capabilities while maintaining our compelling value proposition. We continue to focus on both price tiering of good, better and best price ranges by merchandise classification as well as the fashion sensibilities of basic, fashion core and trendy to provide a balanced product offering.

We continued to differentiate the Icing brand as we focused on fashion accessories categories. We created a balance of the assortment between more casual and dressier styles. We also upgraded in-store collateral and sophisticated illustrations in our Icing stores to distinguish the look of our Icing stores from Claire’s.

Achieve Expense Reduction Objectives and Build a Cost Conscious Culture. During Fiscal 2009, we continued to execute our Cost Savings Initiative (“CSI”) program that began in 2008 and to identify other cost reduction opportunities. We pursued expense saving opportunities, including reduction of capital expenditures. We continued to refine the process of aligning our store labor expense to variations in store revenue through our Store Service Delivery Program implemented in Fiscal 2008, and expanded this implementation more broadly across Europe. We also continued our shrink reduction efforts. As a result of CSI and other cost reduction opportunities, we decreased our expenses year over year, both in real dollars and as a percentage of sales, and achieved our planned savings.

We maintained our global focus on our lease renewal and rent reduction program. This effort is part of our broader ongoing real estate plan to better control all components of our occupancy costs globally. For example, in North America during Fiscal 2009, we closed 39 stores, adding to the 118 stores that we closed in January 2009. The European division also focused on lease renewals that resulted in rent reductions.

Refine and Strengthen our Merchandise Offense While Undertaking Other Supporting Initiatives. During Fiscal 2009, our efforts continued to focus on our merchandise assortment by utilizing ongoing research and fact gathering to refine our target customer profiles and making our product more relevant to our target customer groups. This was facilitated through an improved assortment planning process and a more dynamic buying cycle.

We continued to improve our merchandise cycle, increased the proportion of common assortment in North American and European buying, and refined our vendor base to better leverage our global buying power. We also further enhanced our inventory management, specifically as it relates to allocation and

replenishment. We better invested our inventory dollars on a store-by-store basis by managing our stock at a lower level of detail.

To strengthen Claire’s brand relevance, particularly with the Young customer, we began to further build our customer relationships. This included upgrading our in-store collateral to convey a stronger fashion message; expanding in-store marketing activity at key times of the year; and in North America, commencing digital marketing efforts to use social networks and achieve growth in customer participation across our on-line channels, email, and mobile. We enhanced our position as a “gift authority” with our “Gift For You, Gift For Me” global campaign focused on distinctive giftable merchandise, seasonal categories and key items. We refreshed and enhanced our global website to be more consistent with the improved store experience, understanding its significance as a marketing tool and customer touchpoint for the brand. In Claire’s North America, we began to capture customer contact information, both on claires.com and in store, to build a customer database. To initiate viral marketing, we launched two interactive digital campaigns in Holiday 2009 which we believe provides a strong foundation upon which to build. We supported this effort across our approximately 1,600 North American stores with complementary in-store collateral, signage and sales associate participation.

Build on the Established Foundation to Further Develop our Pan-European Business. During Fiscal 2009, we continued to strive toward our goal of developing an assortment for Claire’s that is 50% common across the globe, 25% common across all of Europe, with the remaining 25% specific to a particular geographic zone of our business. We believe this philosophy allows our European division to benefit from global purchasing economies of scale, while allowing sufficient flexibility within each zone of business to remain relevant for specific fashion needs of customers. In conjunction with these initiatives, we have benefited from the addition of a Managing Director of Zones 2 and 3 encompassing Continental Europe, who brings a Pan-European mentality to our stores function. We believe these initiatives, coupled with the foundation that was established with the Pan-European Transformation project, will enable us to continue our expansion across Continental Europe.

Develop our Organization into Top Performers and Execute as a Management Team. In Fiscal 2009, we focused on integrating the changes made to our management team during the past three years to allow new reporting relationships to take hold. Through the guidance provided by our senior executive leaders — our Chief Executive Officer, Corporate President and President of Europe — and working with our broader senior management teams, we leveraged our executive development capabilities and team building skills with the goal of improving our organization both individually and collectively.

We strengthened our senior management team through the addition of several experienced retail leaders, including a Senior Vice President of Global Marketing; a Senior Vice President of Global Strategy, Initiatives and Implementation; and a Senior Vice President of North American Real Estate and Global Construction.

Strategic Business Plan

Our overarching global business objective is to grow Claire’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) by generating incremental same store sales while pursuing new store growth. Responding to the changes in the economic and retail environment since the May 2007 Acquisition, we have refined our strategic business plan and identified the following drivers as key contributors to future success.

	•		Exploit opportunities to drive same store sales
	•		Open new Company-owned stores in existing and adjacent markets
	•		Open new stores through the growth of international franchising
	•		Pursue targeted initiatives to deliver additional growth
	•		Enhance our customer relationships through an integrated multi-channel customer experience, including e-commerce

The strategic plan and these five drivers serve as the foundation upon which our Fiscal 2010 priorities are built.

Fiscal 2010 Priorities

We have established six Company priorities for Fiscal 2010 to achieve our global business objectives.

Deliver On-Trend Merchandise Assortment for Each Targeted Customer Group. We intend to build upon our efforts to deliver a more on-trend merchandise assortment that is more relevant to our target customers, especially the Young segment.

We believe the improvements we have made in our Fashion, Trend and Product Innovation functions and Product Design and Development organization will enable us to better forecast fashion trends, and develop exclusive and compelling merchandise that meets our target customers’ preferences. In parallel, we will continue to strengthen our buying and sourcing team with the goal of delivering more sophisticated and fashion-forward designs, while balancing quality and cost requirements.

In 2009, we began to improve our allocation and replenishment methodology, and plan to more fully address the associated processes and supporting systems this year. Given the breadth of our merchandise assortment and our global reach of stores, this focus should allow us to drive sales and merchandise margin by optimizing inventory dollars on a store-by-store basis, maintaining a strong in-stock position for the customer, and reducing markdowns.

Strengthen the In-Store Experience. We intend to enhance the selling skills of our store associates and upgrade our level of customer service, through more comprehensive sales and service training in order to meet our customers’ expectations. We believe this builds on improvements we have made to our in-store performance and execution from an operational and in-store presentation perspective.

In Fiscal 2009, we introduced a new store prototype that creates physical delineation between the merchandise intended for our Young, Younger and Youngest assortments, which we believe enables a more impactful merchandise presentation, and increases the store appeal for the Young customer. We intend to utilize this prototype for all new stores as well as in selected top store remodels. We are also developing a modified, scaled-back version of this prototype that should enable us to refresh a larger number of stores on a cost effective basis.

Leverage the Foundational Improvements in Digital and Store Marketing. We intend to further build our brand relevance through marketing both in and outside the store, and build more meaningful customer relationships. We will continue to upgrade the quality, fashionability and relevance of our in-store imagery and collateral, while keeping it in sync with our digital marketing efforts.

We are redesigning our claires.com website which will involve a new look and feel, expanded product information, improved fashion content and better integration with other digital touchpoints including Facebook and Twitter. We will continue to enhance two-way communication with our target customers through email, mobile, and social networking outreach. These efforts will be bolstered by select interactive campaigns and will be supported across our store network through signage, in-store collateral and our sales associates.

Expand our Global Footprint. We intend to leverage our global infrastructure to continue expansion in existing and new markets, through both owned and franchise store locations. In North America, we will selectively pursue additional new store locations, including alternative store formats, top-tier malls, and off-mall concepts. In Europe, we believe we have substantial growth potential for new owned stores in many of our existing countries, as well as adjacent regions such as Eastern Europe.

Although our brand and store concepts have translated globally with an owned model, we intend to more aggressively leverage our franchising capabilities to introduce Claire’s into several new geographies. We are expanding our franchise support team to provide optimal levels of buying, planning, and operational expertise to each of our existing and future franchise partners.

Maintain Strong Financial Discipline. We remain focused on prudent expense discipline. We continue to refine store labor scheduling practices to optimize store hours relative to customer traffic and sales by week and by day. In addition, we continue to work to reduce occupancy expenses by seeking improved terms under our global lease renewal and rent reduction program.

While cost control is an on-going effort, we are making focused investments in recruiting top talent, building the customer relationship, opening new stores, and improving franchise partner support to position Claire’s for growth.

Develop our Team Members into a Top Performing Global Organization. In Fiscal 2010, we will continue to integrate the management changes in our organization. We intend to leverage our Corporate leadership team, as well as our Global Merchandise function, to help drive performance, create consistency and build product leadership globally. Additionally, we will continue to advance a Pan-European orientation to help position us for improved performance across Continental Europe.

In summary, we believe these six priorities provide the appropriate structure to help us deliver on our strategic business plan and global business objectives to grow Claire’s EBITDA through incremental same store sales while pursuing new store growth.

Stores

Our stores in North America are located primarily in shopping malls and average approximately 970 square feet of selling space. Our stores in Europe are located primarily on high streets, in shopping malls and in high traffic urban locations and average approximately 630 square feet of selling space. Our store hours are dictated by shopping mall operators and our stores are typically open from 10:00 a.m. to 9:00 p.m. Monday through Saturday and, where permitted by law, from noon to 5:00 p.m. on Sunday. Approximately 80% of our sales in Fiscal 2009 were made in cash (including checks and debit card transactions), with the balance made by credit cards. We permit, with restrictions on certain items, returns for exchange or refund.

Store Management

Our stores are organized and controlled on a district level. We employ District Managers, each of whom supervises store managers and the business in their respective geographic area and report to Regional Managers.

In North America, each Regional Manager reports to Territorial Vice Presidents, who report to the Senior Vice President of Store Operations. Each store is typically staffed by a Manager, an Assistant Manager and one or more part-time employees.

In Europe, Regional Managers report to Managing Directors, who report to our President of Europe. We now have three operating zones within Europe: (1) United Kingdom and Ireland (Zone 1); (2) France, Spain, Portugal and Belgium (Zone 2); and (3) Switzerland, Austria, Netherlands and Germany (Zone 3). Zone 1 is led by one Managing Director while both Zones 2 and 3 are led by a different Managing Director.

Store Openings, Closings and Future Growth

In Fiscal 2009, we opened 24 stores and closed 45 stores, for a net decrease of 21 stores. In Europe, we increased our store count by 12 stores, net, resulting in a total of 955 stores. In North America, we decreased our store count by 33 stores, net, to 1,993 stores. “Stores, net” refers to stores opened, net of closings, if any.

Store Count as of:		January 30, 2010				January 31, 2009				February 2, 2008
North America			1,993				2,026				2,135
Europe			955				943				905
Subtotal Company-Owned			2,948				2,969				3,040
Joint Venture			211				214				198
Franchise			195				196				166
Subtotal Non-Owned			406				410				364
Total			3,354				3,379				3,404

We plan to open approximately 80 Company-owned stores globally in Fiscal 2010. We also plan to continue opening stores when suitable locations are found and satisfactory lease negotiations are concluded. Our initial investment in new stores opened during Fiscal 2009, which includes leasehold improvements and fixtures, averaged approximately $215,000 per store globally. In addition to the investment in leasehold improvements and fixtures, we may also purchase intangible assets or incur initial direct costs for leases relating to certain store locations in our European operations.

Purchasing and Distribution

We purchased our merchandise from approximately 700 suppliers in Fiscal 2009. Approximately 85% of our merchandise in Fiscal 2009 was purchased from outside the United States, including approximately 65% purchased from China. We are not dependent on any single supplier for merchandise purchased. Merchandise for our North American stores and our franchisees is shipped from our distribution facility in Hoffman Estates, Illinois, a suburb of Chicago. Our distribution facility in Birmingham, United Kingdom services all of our stores in Europe. Merchandise is shipped from our distribution centers by common carrier to our individual store locations. To keep our assortment fresh and exciting, we typically ship merchandise to our stores three to five times a week.

Trademarks and Service Marks

We are the owner in the United States of various marks, including “Claire’s,” “Claire’s Accessories,” “Icing,” and “Icing by Claire’s.” We have also registered these marks outside of the United States. We currently license certain of our marks under franchising arrangements in the Middle East, Turkey, Russia, South Africa, Poland, Greece, Guatemala and Malta. We also license our Claire’s mark under our joint venture arrangement in Japan. We believe our rights in our marks are important to our business and intend to maintain our marks and the related registrations.

Information Technology

Information technology is important to our business success. Our information and operational systems use a broad range of both purchased and internally developed applications to support our retail operations, financial, real estate, merchandising, inventory management and marketing processes. Sales information is generally collected from point of sale terminals in our stores on a daily basis. We have developed proprietary software to support key decisions in various areas of our business including merchandising, allocation and operations. We periodically review our critical systems to evaluate disaster recovery plans and the security of our systems.

Competition

The specialty retail business is highly competitive. We compete on a global, national, regional, and local level with other specialty and discount store chains and independent retail stores. Our competition also includes Internet, direct marketing to consumer, and catalog businesses. We also compete with department stores, mass merchants, and other chain store concepts. We cannot estimate the number of our competitors because of the large number of companies in the retail industry that fall into one of these categories. We believe the main competitive factors in our business are brand recognition, merchandise assortments for each target customer, compelling value, store location and the shopping experience.

Seasonality

Sales of each category of merchandise vary from period to period depending on current trends. We experience traditional retail patterns of peak sales during the Christmas, Easter, and back-to-school periods. Sales as a percentage of total sales in each of the four quarters of Fiscal 2009 were 22%, 23%, 24% and 31%, respectively.

Employees

On January 30, 2010, we employed approximately 16,400 employees, 59% of whom were part-time. Part-time employees typically work up to 20 hours per week. We do not have collective bargaining agreements with any labor unions, and we consider employee relations to be good.

Further Information

We make available free of charge through the Financial page of our website at www.clairestores.com our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

Item 1A. Risk Factors

These risks could have a material adverse effect on our business, financial position or results of operations. The following risk factors may not include all of the important factors that could affect our business or our industry or that could cause our future financial results to differ materially from historic or expected results.

Risks Relating to Current Economic Conditions

Current economic conditions may adversely impact demand for our merchandise, reduce access to credit and cause our customers and others with whom we do business to suffer financial hardship, all of which could adversely impact our business, results of operations, financial condition and cash flows.

Consumer purchases of discretionary items, including our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. Some of the factors impacting discretionary consumer spending include general economic conditions, wages and employment, consumer debt, the availability of customer credit, currency exchange rates, reductions in net worth based on recent severe market declines, taxation, fuel and energy prices, interest rates, consumer confidence and other macroeconomic factors. The downturn in the economy may continue to affect consumer purchases of our merchandise and adversely impact our results of operations and continued growth. It is difficult to predict how long the current economic, capital and credit market conditions will continue and what impact they will have on our business.

In addition, the recent global financial crisis continues to have a negative impact on businesses around the world, and the impact of this crisis on our suppliers cannot be predicted. The inability of our suppliers to access liquidity or trade credit could lead to delays or failures in delivery of merchandise to us.

The global economic crisis could have a material adverse effect on our liquidity and capital resources.

The recent distress in the financial markets has resulted in 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, 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.

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.

Risks Relating to Our Company

Fluctuations in consumer preference may adversely affect the demand for our products and result in a decline in our sales.

Our retail value-priced jewelry and accessories business fluctuates according to changes in consumer preferences. If we are unable to anticipate, identify or react to changing styles or trends, our sales may decline, and we may be faced with excess inventories. If this occurs, we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow moving inventory, which could have a material adverse effect on our results of operations and adversely affect our gross margins. In addition, if we miscalculate customer tastes and our customers come to believe that we are no longer able to offer merchandise that appeals to them, our brand image may suffer.

Advance purchases of our merchandise make us vulnerable to changes in consumer preferences and pricing shifts and may negatively affect our results of operations.

Fluctuations in the demand for retail jewelry and accessories especially affect the inventory we sell because we usually order our merchandise in advance of the applicable season and sometimes before trends are identified or evidenced by customer purchases. In addition, the cyclical nature of the retail business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we and other retailers generally build up inventory levels. We must enter into contracts for the purchase and manufacture of merchandise with our suppliers in advance of the applicable selling season. As a result, we are vulnerable to demand and pricing shifts and it is more difficult for us to respond to new or changing customer needs. Our financial condition could be materially adversely affected if we are unable to manage inventory levels and respond to short-term shifts in client demand patterns. Inventory levels in excess of client demand may result in excessive markdowns and, therefore, lower than planned margins. If we underestimate demand for our merchandise, on the other hand, we may experience inventory shortages resulting in missed sales and lost revenues. Either of these events could negatively affect our operating results and brand image.

A disruption of imports from our foreign suppliers may increase our costs and reduce our supply of merchandise.

We do not own or operate any manufacturing facilities. We purchased merchandise from approximately 700 suppliers in Fiscal 2009. Approximately 85% of our Fiscal 2009 merchandise was purchased from suppliers outside the United States, including approximately 65% purchased from China. Any event causing a sudden disruption of imports from China or other foreign countries, including political and financial instability, would likely have a material adverse effect on our operations. We cannot predict whether any of the countries in which our products currently are manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the United States and other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, embargoes and customs restrictions, on merchandise that we purchase could increase the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition and results of operations. The United States has previously imposed trade quotas on specific categories of goods and apparel imported from China, and may impose additional quotas in the future. There has been increased international pressure on China regarding revaluation of the Chinese yuan, including recently proposed U.S. Federal legislation to place 25-40% tariffs on imports from China unless the Chinese government revalues the Chinese yuan.

Fluctuations in foreign currency exchange rates could negatively impact our results of operations.

Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars. As a result, our sourcing operations may be adversely affected by significant fluctuation in the value of the U.S. dollar against foreign currencies. We are also exposed to the gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our Consolidated Financial Statements due to the translation of operating results and financial position of our foreign subsidiaries. We purchased approximately 65% of our merchandise from China in Fiscal 2009. The currency exchange rate from Chinese yuan to U.S. dollars has historically been stable, in large part due to the economic policies of the Chinese government. However, there are no assurances that this currency exchange rate will continue to be as stable in the future. The U.S. government has stated that the Chinese government should reduce its influence over the currency exchange rate and let market conditions control. Less influence by the Chinese government will most likely result in the Chinese yuan strengthening against the U.S. dollar. An increase in the Chinese yuan against the dollar means that we will have to pay more in U.S. dollars for our purchases from China. If we are unable to negotiate commensurate price decreases from our Chinese suppliers, these higher prices would eventually translate into higher costs of sales.

Our business depends on the willingness of vendors and service providers to supply us with goods and services pursuant to customary credit arrangements which may not be available to us in the future.

Like most companies in the retail sector, we purchase goods and services from trade creditors pursuant to customary credit arrangements. If we are unable to maintain or obtain trade credit from vendors and service providers on terms favorable to us, or at all, or if vendors and service providers are unable to obtain trade credit or factor their receivables, then we may not be able to execute our business plan, develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse affect on our business. In addition, the tightening of trade credit could limit our available liquidity.

The failure to grow our store base in Europe or expand our international franchising may adversely affect our business.

Our growth plans include expanding our store base in Europe. Our ability to grow successfully outside of North America depends in part on determining a sustainable formula to build customer loyalty and gain market share in certain especially challenging international retail environments. Additionally, the integration of our operations in foreign countries presents certain challenges not necessarily presented in the integration of our North American operations.

We plan to expand into new countries through organic growth and by entering into franchising and merchandising agreements with unaffiliated third parties who are familiar with the local retail environment and have sufficient retail experience to operate stores in accordance with our business model, which requires strict adherence to the guidelines established by us in our franchising agreements. Failure to identify appropriate franchisees or negotiate acceptable terms in our franchising and merchandising agreements that meet our financial targets would adversely affect our international expansion goals, and could have a material adverse effect on our operating results and impede our strategy of increasing our net sales through expansion. Additionally, future store openings in Asia are currently subject to our 50:50 joint venture agreement with AEON Co. Ltd.

Our cost of doing business could increase as a result of changes in federal, state, local and international regulations regarding the content of our merchandise.

On August 14, 2008, the Consumer Product Safety Improvement Act of 2008 (“CPSIA”) became law. In general, the CPSIA bans the sale of children’s products containing lead in excess of certain maximum standards, and imposes other restrictions and requirements on the sale of children’s products, including importing, testing and labeling requirements. Accordingly, merchandise covered by the CPSIA that is sold to our Younger and Youngest customers is subject to the CPSIA. Although we had procedures in place prior to the adoption of the CPSIA to address many of the requirements set forth in the CPSIA, our inability to timely comply with these regulatory changes, or other existing or newly adopted regulatory changes, could increase our cost of doing business or result in significant fines or penalties that could have a material adverse effect on our business, results of operations, financial condition and cash flows.

In addition to regulations governing the sale of our merchandise in North America, we are also subject to regulations governing the sale of our merchandise in our European stores. In June 2007, the “REACH” European Union legislation became effective. The REACH legislation requires identification and disclosure of harmful chemicals in consumer products, including chemicals that might be in the merchandise that we sell. We are in the early stages of compliance with this regulation. Our failure to comply with this new European Union legislation could result in significant fines or penalties and increase our cost of doing business.

Recalls, product liability claims, and government, customer or consumer concerns about product safety could harm our reputation, increase costs or reduce sales.

We are subject to regulation by the Consumer Product Safety Commission and similar state and international regulatory authorities, and our products could be subject to involuntary recalls and other actions by these authorities. Concerns about product safety, including but not limited to concerns about the safety of products manufactured in China (where most of our products are manufactured), could lead

us to recall selected products. Recalls and government, customer or consumer concerns about product safety could harm our reputation, increase costs or reduce sales, any of which could have a material adverse effect on our financial results.

If we are unable to renew or replace our store leases or enter into leases for new stores on favorable terms, or if any of our current leases are terminated prior to the expiration of their stated term and we cannot find suitable alternate locations, our growth and profitability could be adversely harmed.

All of our stores are leased. Our ability to renew any expired lease or, if such lease cannot be renewed, our ability to lease a suitable alternate location, and our ability to enter into leases for new stores on favorable terms will depend on many factors which are not within our control, such as conditions in the local real estate market, competition for desirable properties, our relationships with current and prospective landlords, and negotiating acceptable lease terms that meet our financial targets. Our ability to operate stores on a profitable basis depends on various factors, including whether we have to take additional merchandise markdowns due to excessive inventory levels compared to sales trends, whether we can reduce the number of under-performing stores which have a higher level of fixed costs in comparison to net sales, and our ability to maintain a proportion of new stores to mature stores that does not harm existing sales. If we are unable to renew existing leases or lease suitable alternate locations, enter into leases for new stores on favorable terms, or increase our same store sales, our growth and our profitability could be adversely affected.

Natural disasters or unusually adverse weather conditions or potential emergence of disease or pandemic could adversely affect our net sales or supply of inventory.

Unusually adverse weather conditions, natural disasters, potential emergence of disease or pandemic or similar disruptions, especially during the peak Christmas selling season, but also at other times, could significantly reduce our net sales. In addition, these disruptions could also adversely affect our supply chain efficiency and make it more difficult for us to obtain sufficient quantities of merchandise from suppliers, which could have a material adverse effect on our financial position, earnings, and cash flow.

Information technology systems changes may disrupt our supply of merchandise.

Our success depends, in large part, on our ability to source and distribute merchandise efficiently. We continue to evaluate and leverage the best of both our North American and European information systems to support our product supply chain, including merchandise planning and allocation, inventory and price management. We continue to evaluate and implement modifications and upgrades to our information technology systems focused on point of sale cash registers, allocation, and replenishment. Modifications involve replacing legacy systems with successor systems or making changes to the legacy systems and our ability to maintain effective internal controls. We are aware of inherent risks associated with replacing and changing these core systems, including accurately capturing data, and possibly encountering supply chain disruptions. There can be no assurances that we will successfully launch these new systems as planned or that they will occur without disruptions to our operations. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.

If we experience a data security breach and confidential customer information is disclosed, we may be subject to penalties and experience negative publicity, which could affect our customer relationships and have a material adverse effect on our business.

We and our customers could suffer harm if customer information were accessed by third parties due to a security failure in our systems. The collection of data and processing of transactions require us to receive and store a large amount of personally identifiable data. This type of data is subject to legislation and regulation in various jurisdictions. Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting state and federal legislative proposals addressing data privacy and security. If some of the current proposals are adopted, we may be subject to more extensive requirements to protect the customer information that we process in connection with the purchases of our products. We may become exposed to potential liabilities with respect to the data that we collect, manage and process, and may incur legal costs if our information

security policies and procedures are not effective or if we are required to defend our methods of collection, processing and storage of personal data. Future investigations, lawsuits or adverse publicity relating to our methods of handling personal data could adversely affect our business, results of operations, financial condition and cash flows due to the costs and negative market reaction relating to such developments.

Changes in the anticipated seasonal business pattern could adversely affect our sales and profits and our quarterly results may fluctuate due to a variety of factors.

Our business follows a seasonal pattern, peaking during the Christmas, Easter and back-to-school periods. Any decrease in sales or margins during these periods would be likely to have a material adverse effect on our business, financial condition and results of operations. Seasonal fluctuations also affect inventory levels, because we usually order merchandise in advance of peak selling periods. Our quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the time of store openings, the amount of revenue contributed by new stores, the timing and level of markdowns, the timing of store closings, expansions and relocations, competitive factors and general economic conditions.

A decline in number of people who go to shopping malls, particularly in North America, could reduce the number of our customers and reduce our net sales.

Substantially all of our North American stores are located in shopping malls. Our North American sales are derived, in part, from the high volume of traffic in those shopping malls. We benefit from the ability of the shopping mall’s “anchor” tenants, generally large department stores and other area attractions, to generate consumer traffic around our stores. We also benefit from the continuing popularity of shopping malls as shopping destinations for girls and young women. Sales volume and shopping mall traffic may be adversely affected by economic downturns in a particular area, competition from non-shopping mall retailers, other shopping malls where we do not have stores and the closing of anchor tenants in a particular shopping mall. In addition, a decline in the popularity of shopping malls among our target customers that may curtail customer visits to shopping malls, could result in decreased sales that would have a material adverse affect on our business, financial condition and results of operations.

Our industry is highly competitive.

The specialty retail business is highly competitive. We compete with international, national and local department stores, specialty and discount store chains, independent retail stores, the Internet, direct marketing to consumers and catalog businesses that market similar lines of merchandise. Many of our competitors are companies with substantially greater financial, marketing and other resources. Given the large number of companies in the retail industry, we cannot estimate the number of our competitors. Also, a significant shift in customer buying patterns to purchasing value-priced jewelry and accessories through channels other than traditional shopping malls, such as the Internet, could have a material adverse effect on our financial results.

If the Employee Free Choice Act is adopted, it would be easier for our employees to obtain union representation and our business could be adversely impacted.

Currently, none of our employees in North America are represented by unions. However, our employees have the right at any time under the National Labor Relations Act to form or affiliate with a union. If some or all of our workforce were to become unionized and the terms of the collective bargaining agreement were significantly different from our current compensation arrangements, it could increase our costs and adversely impact our profitability. The Employee Free Choice Act of 2009 was introduced in 2009 as H.R. 1409 and S. 560. President Obama and leaders of Congress have made public statements in support of this bill. Accordingly, this bill or a variation of it could be enacted in the future and the enactment of this bill could have an adverse impact on our business, by making it easier for workers to obtain union representation and increasing the penalties employers may incur if they engage in labor practices in violation of the National Labor Relations Act.

Higher health care costs and labor costs could adversely affect our business.

We will be impacted by the recent passage of the U.S. Patient Protection and Affordable Care Act. Under this Act, we may be required to amend our health care plans to, among other things, provide affordable coverage, as defined in the Act, to all employees, or otherwise be subject to a payment per employee based on the affordability criteria in the Act: cover adult children of our employees to age 26; delete lifetime limits; and delete pre-existing condition limitations. Many of these requirements will be phased in over a period of time. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care costs could have a material adverse effect on our business, financial condition and results of operations. In addition, changes in the federal or state minimum wage or living wage requirements or changes in other workplace regulations could adversely affect our ability to meet our financial targets.

Our profitability could be adversely affected by high petroleum prices.

The profitability of our business depends to a certain degree upon the price of petroleum products, both as a component of the transportation costs for delivery of inventory from our vendors to our stores and as a raw material used in the production of our merchandise. We are unable to predict what the price of crude oil and the resulting petroleum products will be in the future. We may be unable to pass along to our customers the increased costs that would result from higher petroleum prices. Therefore, any such increase could have a material adverse impact on our business and profitability.

The possibility of war and acts of terrorism could disrupt our information or distribution systems and increase our costs of doing business.

A significant act of terrorism could have a material adverse impact on us by, among other things, disrupting our information or distributions systems, causing dramatic increases in fuel prices, thereby increasing the costs of doing business and affecting consumer spending, or impeding the flow of imports or domestic products to us.

We depend on our key personnel.

Our ability to anticipate and effectively respond to changing trends and consumer preferences depends in part on our ability to attract and retain key personnel in our design, merchandising, marketing and other functions. We cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. The loss of services of key members of our senior management team or of certain other key employees could also negatively affect our business.

Litigation matters incidental to our business could be adversely determined against us.

We are involved from time to time in litigation incidental to our business. Management believes that the outcome of current litigation will not have a material adverse effect on our results of operations or financial condition. Depending on the actual outcome of pending litigation, charges would be recorded in the future that may have an adverse effect on our operating results.

Goodwill and indefinite-lived intangible assets comprise a significant portion of our total assets. We must test goodwill and indefinite-lived intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable; which could result in a material, non-cash write-down of goodwill or indefinite-lived intangible assets and could have a material adverse impact on our results of operations.

Goodwill and indefinite-lived intangible assets are subject to impairment assessments at least annually (or more frequently when events or circumstances indicate that an impairment may have occurred) by applying a fair-value test. Our principal intangible assets are tradenames, franchise agreements, and leases that existed at date of acquisition with terms that were favorable to market at that date. We may be required to recognize additional impairment charges in the future. Additional impairment losses could have a material adverse impact on our results of operations and stockholders equity.

There are factors that can affect our provision for income taxes.

We are subject to income taxes in numerous jurisdictions, including the United States, individual states and localities, and internationally. Our provision for income taxes in the future could be adversely affected by numerous factors including, but not limited to, the mix of income and losses from our foreign and domestic operations that may be taxed at different rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting principles or interpretations thereof, which could adversely impact earnings in future periods. In addition, the estimates we make regarding domestic and foreign taxes are based on tax positions that we believe are supportable, but could potentially be subject to successful challenge by the Internal Revenue Service or other authoritative agencies. If we are required to settle matters in excess of our established accruals for uncertain tax positions, it could result in a charge to our earnings.

If our independent manufacturers or franchisees or joint venture partners do not use ethical business practices or comply with applicable laws and regulations, our brand name could be harmed due to negative publicity and our results of operations could be adversely affected.

While our internal and vendor operating guidelines promote ethical business practices, we do not control our independent manufacturers, franchisees or joint venture partners, or their business practices. Accordingly, we cannot guarantee their compliance with our guidelines. Violation of labor or other laws, such as the Foreign Corrupt Practices Act, by our independent manufacturers, franchisees or joint venture partners, or the divergence from labor practices generally accepted as ethical in the United States, could diminish the value of our brand and reduce demand for our merchandise if, as a result of such violation, we were to attract negative publicity. As a result, our results of operations could be adversely affected.

We rely on third parties to deliver our merchandise and if these third parties do not adequately perform this function, our business would be disrupted.

The efficient operation of our business depends on the ability of our third party carriers to ship merchandise directly to our distribution facilities and individual stores. These carriers typically employ personnel represented by labor unions and have experienced labor difficulties in the past. Due to our reliance on these parties for our shipments, interruptions in the ability of our vendors to ship our merchandise to our distribution facilities or the ability of carriers to fulfill the distribution of merchandise to our stores could adversely affect our business, financial condition and results of operations.

We depend on single North American and single European distribution facilities.

We handle merchandise distribution for all of our North American stores from a single facility in Hoffman Estates, Illinois, a suburb of Chicago, Illinois. We handle merchandise distribution for all of our operations outside of North America from a single facility in Birmingham, United Kingdom. Independent third party transportation companies deliver our merchandise to our stores and our clients. Any significant interruption in the operation of the distribution facility or the domestic transportation infrastructure due to natural disasters, accidents, inclement weather, system failures, work stoppages, slowdowns or strikes by employees of the transportation companies, or other unforeseen causes could delay or impair our ability to distribute merchandise to our stores, which could result in lower sales, a loss of loyalty to our brands and excess inventory and would have a material adverse effect on our business, financial condition and results of operations.

We may be unable to protect our tradenames and other intellectual property rights.

We believe that our tradenames and service marks are important to our success and our competitive position due to their name recognition with our customers. There can be no assurance that the actions we have taken to establish and protect our tradenames and service marks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the tradenames, service marks and proprietary rights of others. The laws of some foreign countries may not protect proprietary rights to the same extent as do the laws of the United States, and it may be more difficult for us to successfully challenge the use of our proprietary rights by other parties in

these countries. Also, others may assert rights in, or ownership of, our tradenames and other proprietary rights, and we may be unable to successfully resolve those types of conflicts to our satisfaction.

Our success depends on our ability to maintain the value of our brands.

Our success depends on the value of our Claire’s and Icings brands. The Claire’s and Icings names are integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brands will depend largely on the success of our design, merchandising, and marketing efforts and our ability to provide a consistent, enjoyable quality client experience. Our brands could be adversely affected if we fail to achieve these objectives for one or both of these brands and our public image and reputation could be tarnished by negative publicity. Any of these events could negatively impact sales.

We may be unable to rely on liability indemnities given by foreign vendors which could adversely affect our financial results.

The quality of our globally sourced products may vary from our expectations and sources of our supply may prove to be unreliable. In the event we seek indemnification from our suppliers for claims relating to the merchandise shipped to us, our ability to obtain indemnification may be hindered by the supplier’s lack of understanding of U.S. product liability laws. Our ability to successfully pursue indemnification claims may also be adversely affected by the financial condition of the supplier. Any of these circumstances could have a material adverse effect on our business and financial results.

We are indirectly owned and controlled by Apollo, a private equity firm, and its interests as an equity holder may conflict with the interest of our creditors.

Substantially all of the stock of our parent corporation is beneficially owned by Apollo, a private equity firm. As a result, Apollo has the ability to elect all of the members of our board of directors and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payments of dividends, if any, on our common stock, the incurrence of debt by us, amendments to our articles of incorporation and bylaws and the entering into of extraordinary transactions. The interests of Apollo may not in all cases be aligned with the interests of our creditors. For example, if we encounter financial difficulties or are unable to pay our indebtedness as it matures, the interests of the Apollo as an equity holder might conflict with the interests of our creditors. In addition, Apollo may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investments, even though such transactions might involve risks to our creditors. Furthermore, Apollo may in the future own businesses that directly or indirectly compete with us. Apollo also may pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Apollo continues to own a significant amount of our combined voting power, even if such amount is less than 50%, it will continue to be able to strongly influence or effectively control our decisions. Because our equity securities are not registered under the Securities Exchange Act and are not listed on any U.S. securities exchange, we are not subject to any of the corporate governance requirements of any U.S. securities exchange.

Risks Relating to Our Indebtedness

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under the Notes and Credit Facility.

We are significantly leveraged. As of January 30, 2010, our total debt, including the current portion, was approximately $2.5 billion, consisting of the Notes and borrowings under our Credit Facility.

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the Notes and Credit Facility. Our high degree of leverage could have important consequences, including:

	•		increasing our vulnerability to adverse economic, industry or competitive developments;
	•		requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
	•		exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our Credit Facility, will be at variable rates of interest;
	•		making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the Notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indentures governing the Notes and the agreements governing such other indebtedness;
	•		restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
	•		limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and
	•		limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.

Despite our high indebtedness level, we and our subsidiaries are still able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the indentures governing the Notes and the Credit Facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we now face would increase. In addition, the indentures governing the Notes do not prevent us from incurring obligations that do not constitute indebtedness under those agreements.

On May 14, 2008, we notified the holders of the Senior Toggle Notes of our intent to elect the “payment in kind” (PIK) interest option to satisfy the November 2008 interest payment obligation. We continued the PIK election for the interest payment dates of June 1, 2009 and December 1, 2009. The PIK election is now the default election for interest periods through June 1, 2011, unless the Company notifies the holders otherwise. The impact of these elections increased the principal amount of our Senior Toggle Notes by $38.9 million during Fiscal 2009 and $18.2 million during Fiscal 2008, and will increase the principal amount of the Senior Toggle Notes semi-annually as long as the PIK election remains in effect.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our Credit Facility and the indentures governing the Notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our, our parent’s and our restricted subsidiaries’ ability to, among other things:

	•		incur additional indebtedness or issue certain preferred shares;
	•		pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
	•		make certain investments;
	•		sell certain assets;
	•		create liens;
	•		consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
	•		enter into certain transactions with our affiliates.

A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions, and, in the case of our revolving Credit Facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under our Credit Facility, the lenders could elect to declare all amounts outstanding under our Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our Credit Facility could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our Credit Facility. If the lenders under our Credit Facility accelerate the repayment of borrowings, we may not have sufficient assets to repay our Credit Facility as well as our unsecured indebtedness, including the Notes.

We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the Notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments and the indentures governing the Notes may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

Repayment of our debt is dependent on cash flow generated by our subsidiaries.

Our subsidiaries own a significant portion of our assets and conduct a significant portion of our operations. Accordingly, repayment of our indebtedness is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a

distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indentures governing the Notes limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

To service our debt obligations, we may need to increase the portion of the income of our foreign subsidiaries that is expected to be remitted to the United States, which could increase our income tax expense.

The amount of the income of our foreign subsidiaries that we expect to remit to the United States may significantly impact our U.S. federal income tax expense. We record U.S. federal income taxes on that portion of the income of our foreign subsidiaries that is expected to be remitted to the United States and be taxable. In order to service our debt obligations, we may need to increase the portion of the income of our foreign subsidiaries that we expect to remit to the United States, which may significantly increase our income tax expense. Consequently, our income tax expense has been, and will continue to be, impacted by our strategic initiative to make substantial capital investments outside the United States.

If we default on our obligations to pay our other indebtedness, the holders of our debt could exercise rights that could have a material effect on us.

If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default,

	•		the holders of such indebtedness may be able to cause all of our available cash flow to be used to pay such indebtedness and, in any event, could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest;
	•		the lenders under our Credit Facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets; and
	•		we could be forced into bankruptcy or liquidation.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our stores are located in all 50 states of the United States, Puerto Rico, Canada, the Virgin Islands, the United Kingdom, Ireland, France, Spain, Portugal, Belgium, Switzerland, Austria, the Netherlands and Germany. We lease all of our 2,948 store locations, generally for terms ranging from five to approximately 25 years. Under the terms of the leases, we pay a fixed minimum rent and/or rentals based on a percentage of net sales. We also pay certain other expenses (e.g., common area maintenance charges and real estate taxes) under the leases. The internal layout and fixtures of each store are designed by management and constructed under contracts with third parties.

Most of our stores in North American and the European divisions are located in enclosed shopping malls, while other stores are located within central business districts, power centers, lifestyle centers, “open-air” outlet malls or “strip centers.” Our criteria for opening new stores includes geographic location, demographic aspects of communities surrounding the store site, quality of anchor tenants, advantageous location within a mall or central business district, appropriate space availability, and rental rates. We believe that sufficient desirable locations are available to accommodate our expansion plans. We refurbish our existing stores on a regular basis.

Prior to February 19, 2010, we owned central buying and store operations offices and the North American distribution center located in Hoffman Estates, Illinois (the “Property”) which is on approximately 28.4 acres of land. The Property has buildings with approximately 538,000 total square feet of space, of which 373,000 square feet is devoted to receiving and distribution and 165,000 square feet is devoted to office space.

On February 19, 2010, we sold the Property to a third party. Net proceeds from the sale were $17.4 million. Contemporaneously with the sale of the Property, we entered into a lease agreement, dated February 19, 2010. The lease agreement provides for (1) an initial expiration date of February 28, 2030 with two (2) five (5) year renewal periods, each at our option, and (2) basic rent of $2.1 million per annum (subject to annual increases). This transaction is accounted for as a capital lease.

Our subsidiary, Claire’s Accessories UK Ltd., or “Claire’s UK,” leases distribution and office space in Birmingham, United Kingdom. The facility consists of 24,000 square feet of office space and 62,000 square feet of distribution space. The lease expires in December 2024, and Claire’s UK has the right to assign or sublet this lease at any time during the term of the lease, subject to landlord approval. The Birmingham, United Kingdom distribution center currently services our stores outside of North America. We lease approximately 8,800 and 8,900 square feet of office space in Paris, France and Zurich, Switzerland, respectively, where we maintain our human resource and operating functions for these countries.

We lease approximately 36,000 square feet in Pembroke Pines, Florida, where we maintain our accounting and finance offices.

Item 3. Legal Proceedings

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

Item 4. Reserved

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

There is no established public trading market for our common stock.

Holders

As of April 1, 2010, there was one holder of record of our common stock, our parent, Claire’s Inc.

Dividends

We have paid no cash dividends since the Merger. Our Credit Facility and indentures governing our Notes restrict our ability to pay dividends.

Item 6. Selected Financial Data

The balance sheet and statement of operations data set forth below is derived from our Consolidated Financial Statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the related notes thereto appearing elsewhere in this Annual Report. The Consolidated Balance Sheet data as of February 2, 2008, May 28, 2007, February 3, 2007 and January 28, 2006 and the Consolidated Statement of Operations and Comprehensive Income (Loss) data for each of the fiscal years ended February 3, 2007 and January 28, 2006 are derived from our Consolidated Financial Statements which are not included herein.

As a result of the consummation of the Transactions, the Company is sometimes referred to as the “Successor Entity” for periods on or after May 29, 2007, and the “Predecessor Entity” for periods prior to May 29, 2007. The Consolidated Financial Statements for the period on or after May 29, 2007 are presented on a different basis than that for the periods before May 29, 2007, as a result of the application of purchase accounting as of May 29, 2007 and therefore are not comparable. The acquisition of Claire’s Stores, Inc. was accounted for as a business combination using the purchase method of accounting, whereby the purchase price was allocated to the assets and liabilities based on the estimated fair market values at the date of acquisition.

		Successor Entity													Predecessor Entity
		Fiscal Year Ended				Fiscal Year Ended				May 29, 2007					Feb. 4, 2007				Fiscal Year Ended				Fiscal Year Ended
		January 30,				January 31,				Through					Through				February 3,				January 28,
		2010 (1)				2009 (1)				Feb. 2, 2008					May 28, 2007				2007 (1)				2006 (1)
		(In thousands, except for ratios and store data)
Statement of Operations Data:
Net sales		$	1,342,389			$	1,412,960			$	1,085,932				$	424,899			$	1,480,987			$	1,369,752
Cost of sales, occupancy and buying expenses			659,796				720,351				521,384					206,438				691,646				625,866
Gross profit			682,593				692,609				564,548					218,461				789,341				743,886
Other expenses (income):
Selling, general and administrative			469,179				518,233				354,875					154,409				481,979				449,430
Depreciation and amortization			71,471				85,093				61,451					19,652				56,771				48,900
Impairment of assets			3,142				523,990				3,478					73				—				—
Severance and transaction-related costs			921				15,928				7,319					72,672				—				—
Other income, net			(4,234	)			(4,499	)			(3,088	)				(1,476	)			(3,484	)			(4,622	)
			540,479				1,138,745				424,035					245,330				535,266				493,708
Operating income (loss)			142,114				(446,136	)			140,513					(26,869	)			254,075				250,178
Gain on early debt extinguishment			36,412				—				—					—				—				—
Interest expense (income), net			177,418				195,947				147,892					(4,876	)			(14,575	)			(9,493	)
Income (loss) from continuing operations before income taxes			1,108				(642,083	)			(7,379	)				(21,993	)			268,650				259,671
Income tax expense (benefit)			11,510				1,509				(8,020	)				21,779				79,888				87,328
Income (loss) from continuing operations		$	(10,402	)		$	(643,592	)		$	641				$	(43,772	)		$	188,762			$	172,343
Other Financial Data:
Capital expenditures:
New stores and remodels		$	16,557			$	36,270			$	46,225				$	24,231			$	77,021			$	64,275
Other			8,395				23,135				12,259					3,757				18,171	(2)			9,169
Total capital expenditures			24,952				59,405				58,484					27,988				95,192				73,444
Cash interest expense (4)			126,733				168,567				123,620					86				118				125
Ratio of earnings to fixed charges (3)			1.0	x			—				—					—				5.2	x			5.3	x
Store Data:
Number of stores (at period end)
North America			1,993				2,026				2,135					2,124				2,133				2,106
Europe			955				943				905					879				859				772
Total number of stores (at period end)			2,948				2,969				3,040					3,003				2,992				2,878
Total gross square footage (000’s) (at period end)			2,982				3,011				3,105					3,043				3,021				2,883
Net sales per store (000’s) (5)		$	454			$	461			$	359				$	142			$	504			$	479
Net sales per square foot (6)			448				453				353					140				500				480
Balance Sheet Data (at period end)
Cash and cash equivalents		$	198,708			$	204,574			$	85,974				$	350,476			$	340,877			$	431,122
Total assets			2,834,105				2,881,095				3,348,497					1,119,047				1,091,266				1,090,701
Total debt			2,521,878				2,581,772				2,377,750					—				—				—
Total stockholders’ equity (deficit)			(34,642	)			(55,843	)			605,200					792,071				847,662				868,318

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Our fiscal year ends on the Saturday closest to January 31, and we refer to the fiscal year by the calendar year in which it began. Our Fiscal 2009, Fiscal 2008 and Fiscal 2007 results all consisted of 52 weeks.

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.

Acquisition of the Company by Apollo Management VI, L.P.

As a result of the Merger on May 29, 2007, described under “Explanatory Notes” in this Annual Report, there was a significant change in the Company’s capital structure, including:

	•		the closing of the offering of the Notes;
	•		the closing of our $1.65 billion Credit Facility; and
	•		the equity investment of approximately $595.7 million by Apollo Management VI, L.P. on behalf of certain affiliated co-investment partnerships.

We refer to aforementioned transactions, including the Merger and our payment of any costs related to these transactions, collectively herein as the “Transactions.” In connection with the Transactions, we incurred significant indebtedness and became highly leveraged.

Effect of the Transactions

In connection with the Transactions, the Company incurred significant indebtedness, including $935.0 million aggregate principal amount of the Notes, and $1.45 billion under the Credit Facility. In addition, a standby letter of credit, in the face amount of approximately $4.5 million, was issued under the Credit Facility.

The acquisition of Claire’s Stores, Inc. was accounted for as a business combination using the purchase method of accounting, whereby the purchase price was allocated to the assets and liabilities based on the estimated fair market values at the date of acquisition.

The following discussion and analysis of the Company’s historical financial condition and results of operations covers periods prior to the consummation of the Transactions. Accordingly, the discussion and analysis of such periods does not reflect the significant impact the Transactions have on the Company. After the Transactions, the Company became highly leveraged. See “—Analysis of Consolidated Financial Condition.”

Results of Consolidated Operations

As a result of the Transactions, the financial results for Fiscal 2007 have been separately presented in the Consolidated Statements of Operations and Comprehensive Income (Loss). The results have been split between the “Predecessor Entity”, covering the period February 4, 2007 through May 28, 2007, and the “Successor Entity”, covering the period from May 29, 2007 (the date the Transactions were consummated) through February 2, 2008. For comparative purposes, the Company has combined the Predecessor Entity and Successor Entity periods in its discussion below related to Fiscal 2007. This combination is not a generally accepted accounting principles presentation. However, the Company believes this combination is useful to provide the reader a more accurate comparison and is provided to enhance the reader’s understanding of the results of operations for the fiscal year presented.

Management overview

Fiscal 2009 was a challenging year for the retail industry and for our Company. The severe recession, which began in the latter part of 2007, continued throughout 2008 and into 2009, marking these past few years as ones defined by low consumer confidence, rising unemployment levels and declining consumer spending. To protect operating cash flow and position the business for long-term success, we relied on the following initiatives in Fiscal 2009 that had begun in Fiscal 2008 and Fiscal 2007:

	•		We continued the implementation of our Cost Savings Initiative (“CSI”) project. This project identified areas for cost savings and implemented actions late Fiscal 2008 and early Fiscal 2009 to achieve significant savings.
	•		We continued the implementation of our Pan European Transformation (“PET”) project. As the European market continues to grow and become an increasingly larger share of our operations, we believe we need to have the resources close at hand to the European operations. In Fiscal 2008, we transitioned an integrated merchandising team to Europe to focus solely on our European operations. This also allowed our North American merchandising team to focus on our North American operations. In Fiscal 2009, we centralized our European finance and operations into one central location in Birmingham, England.
	•		We improved our inventory management. Notwithstanding the unprecedented level of promotional activity in the overall retail sector, we successfully managed our inventory levels throughout the year, carefully considering the desire to maximize sales with the potential cost (markdown risk).
	•		We also focused on preserving cash and reduced our capital expenditures to $25 million in Fiscal 2009. We ended Fiscal 2009 with $198.7 million in cash and cash equivalents.

Looking ahead to Fiscal 2010, we will focus on prudently implementing our sales growth strategies, continuing to manage our cost structure, maintaining our cash position and strengthening and evolving our brands to promote strong recognition among our customers and positioning our Company for long-term success.

A summary of our consolidated results of operations is as follows (dollars in thousands):

		Successor Entity				Successor Entity				Combined				Successor Entity				Predecessor Entity
		Fiscal Year				Fiscal Year				Fiscal Year				May 29, 2007				Feb. 4, 2007
		Ended				Ended				Ended				Through				Through
		Jan. 30, 2010				Jan. 31, 2009				Feb. 2, 2008				Feb. 2, 2008				May 28, 2007
Net sales		$	1,342,389			$	1,412,960			$	1,510,831			$	1,085,932			$	424,899
Increase (decrease) in same store sales			(1.7	)%			(6.9	)%			(1.8	)%			(2.8	)%			0.5	%
Gross profit percentage			50.8	%			49.0	%			51.8	%			52.0	%			51.4	%
Selling, general and administrative expenses as a percentage of net sales			35.0	%			36.7	%			33.7	%			32.7	%			36.3	%
Depreciation and amortization as a percentage of net sales			5.3	%			6.0	%			5.4	%			5.7	%			4.6	%
Severance and transaction-related costs as percentage of net sales			0.1	%			1.1	%			5.3	%			0.7	%			17.1	%
Impairment of assets		$	3,142			$	523,990			$	3,551			$	3,478			$	73
Operating income (loss)		$	142,114			$	(446,136	)		$	113,644			$	140,513			$	(26,869	)
Gain on early debt extinguishment		$	36,412			$	—			$	—			$	—			$	—
Net income (loss)		$	(10,402	)		$	(643,592	)		$	(43,131	)		$	641			$	(43,772	)
Number of stores at the end of the period (1)			2,948				2,969				3,040				3,040				3,003

Net sales

Net sales in Fiscal 2009 decreased $70.6 million, or 5.0%, from Fiscal 2008. This decrease was attributable to $33.5 million of foreign currency translation effect of our foreign locations’ sales, the effect of stores closed in North America and Europe at the end of Fiscal 2008 and the first half of Fiscal 2009 that decreased sales $31.0 million, a decrease in same store sales of $22.2 million, or 1.7%, and decreases in shipments to franchisees of $2.9 million, partially offset by new store revenue of $19.1 million.

The decrease in same store sales was primarily attributable to a decrease in the average number of transactions per store of 6.7%, partially offset by an increase in average transaction value of 4.7%.

Net sales in Fiscal 2008 decreased $97.9 million, or 6.5%, from Fiscal 2007. This decrease was primarily attributable to a decrease in same store sales of $99.8 million, or 6.9%, and a decrease of $17.1 million resulting from foreign currency translation of our foreign locations’ sales, partially offset by new store revenue, net of store closures, of $17.3 million and a net increase of $1.7 million from increased sales to franchises.

The decrease in 2008 same store sales was primarily attributable to a decrease in the average number of transactions per store of 10.7%, partially offset by an increase in average transaction value.

At the end of Fiscal 2008, we closed 118 stores in North America that were performing below our expectations. These stores accounted for 1.7% of the net sales in Fiscal 2008 and had a combined operating loss before depreciation and amortization of $0.7 million in Fiscal 2008.

The following table compares our sales of each product category for the last three fiscal years:

		Fiscal Year Ended				Fiscal Year Ended				Fiscal Year Ended
		January 30,				January 31,				February 2,
% of Total		2010				2009				2008
Accessories			53.6				48.4				45.8
Jewelry			46.4				51.6				54.2
			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 in our Consolidated Statements of Operations and Comprehensive Income (Loss). Other retail companies may include these costs in cost of sales, so our gross profit percentages may not be comparable to those retailers.

In Fiscal 2009, gross profit percentage increased 180 basis points to 50.8% compared to the prior fiscal year of 49.0%. The increase consisted of a 200 basis point improvement in merchandise margin and a 10 basis point decrease in buying costs, offset by a 30 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 $12.2 million primarily due to foreign currency translation effects, but increased as a percentage of sales due to the deleveraging effect of lower sales. Fiscal 2008 included $3.1 million of PET project costs, in buying costs, that did not recur in Fiscal 2009, accounting for 20 basis points of the improvement in gross margin.

In Fiscal 2008, gross profit percentage decreased 280 basis points compared to the prior fiscal year. This decrease was comprised of a 280 basis point loss of operating leverage in occupancy and buying costs and a 20 basis point decline due to non-recurring PET project costs, partially offset by a 20 basis point increase in merchandise margin.

Selling, general and administrative expenses

In Fiscal 2009, selling, general and administrative expenses decreased $49.1 million, or 9.5%, over the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses decreased 170 basis points compared to the prior year. Excluding a $13.3 million foreign currency translation effect and a decrease of $10.0 million of non-recurring CSI and PET project costs, the net decrease in selling, general and administrative expenses would have been $25.8 million, or 5.2%, compared to the prior fiscal year. Excluding the foreign currency translation effect and non-recurring CSI and PET project costs, selling, general and administrative expenses as a percentage of net sales decreased 10 basis points compared to the prior year.

In Fiscal 2008, selling, general and administrative expenses increased $8.9 million, or 1.8%, over the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses increased 300 basis points compared to the prior year. Excluding $5.9 million of CSI project costs, $4.1 million of PET project costs, a $1.0 million increase in Sponsor management fees as a result of a full year of ownership by our Sponsors after the Merger and a decrease due to the effect of foreign currency translation of $3.2 million, selling, general and administrative expenses increased $1.1 million, or 0.2%, compared to the prior fiscal year. Excluding these items, selling, general and administrative expenses as a percentage of net sales increased 240 basis points compared to the prior year. The majority of this increase was due to the loss of operating leverage in selling, general and administrative expenses.

Depreciation and amortization expense

Depreciation and amortization expense decreased $13.6 million to $71.5 million during Fiscal 2009 compared to Fiscal 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 increased $4.0 million to $85.1 million for Fiscal 2008 compared to Fiscal 2007. This increase was due to the $1.8 million of the acceleration of depreciation for store fixed assets for the 118 stores closed at the end of Fiscal 2008 and the additional depreciation and amortization expense related to the purchase accounting adjustments related to store leasehold improvements, franchise agreements and non-compete agreements that resulted from the Acquisition for a full year in Fiscal 2008 compared to eight months in Fiscal 2007.

Impairment of assets

The deterioration in the economy and resulting effect on consumer confidence and discretionary spending that occurred during Fiscal 2009 and Fiscal 2008 had a significant impact on the retail industry. We performed our tests for goodwill, intangible assets, property and equipment and other asset impairment following relevant accounting standards pertaining to the particular asset being tested. The impairment testing resulted in our recognition of non-cash impairment charges of $3.1 million related to property and equipment in Fiscal 2009. Similar testing conducted in Fiscal 2008 resulted in the recognition of non-cash impairment charges of $297.0 million related to goodwill and $227.0 million related to intangible and other assets. Similar testing conducted in Fiscal 2007 resulted in the recognition of impairment charges aggregating $3.5 million related to other assets. See Note 3 to our Consolidated Financial Statements for further discussion of the impairment charges.

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. We incurred $0.9 million of such costs in Fiscal 2009, $3.5 million in Fiscal 2008 and $80.0 million in Fiscal 2007. In connection with our CSI and PET projects in Fiscal 2008, we incurred severance costs of $12.4 million for terminated employees.

Gain on early debt extinguishment

The following is a summary of the Company’s debt repurchase activity during Fiscal 2009 (in thousands):

		Principal				Purchase				Recognized
Note Purchased		Amount				Price				Gain (1)
Senior Subordinated Notes		$	52,763			$	26,347			$	25,115
Senior Toggle Notes			30,500				19,744				11,297
		$	83,263			$	46,091			$	36,412

Other income, net

The following is a summary of other (income) expense activity for Fiscal 2009, Fiscal 2008, the period from May 29, 2007 through February 2, 2008 and the period from February 4, 2007 through May 28, 2007 (in thousands):

		Successor Entity				Successor Entity				Combined				Successor Entity				Predecessor Entity
		Fiscal Year Ended				Fiscal Year Ended				Fiscal Year Ended				May 29, 2007 Through				Feb. 4, 2007 Through
		January 30,				January 31,				February 2,				February 2,				May 28,
		2010				2009				2008				2008				2007
Gain on sale of assets		$	(1,935	)		$	(1,287	)		$	—			$	—			$	—
Equity (income) loss			1,014				(320	)			(1,415	)			(751	)			(664	)
Write down of JV investment			—				—				650				650				—
Royalty income			(1,943	)			(2,309	)			(2,309	)			(1,710	)			(599	)
Other income			(1,370	)			(583	)			(1,490	)			(1,277	)			(213	)
		$	(4,234	)		$	(4,499	)		$	(4,564	)		$	(3,088	)		$	(1,476	)

Interest expense (income), net

Interest income for Fiscal 2009 aggregated $0.2 million, a decrease of $1.3 million from the prior year. This decrease was due to lower interest rates on our cash balances.

Interest income for Fiscal 2008 aggregated $1.5 million, a decrease of $5.9 million from the prior year. This decrease was due to lower cash and cash equivalent balances resulting from cash used to fund the acquisition of the Company and related expenses and lower interest rates on our cash balances.

Interest expense for Fiscal 2009 aggregated $177.6 million, a decrease of $19.8 million compared to the prior year. This decrease is primarily the result of reductions in interest rates on the floating portion of our debt and Note purchases. Included in interest expense for Fiscal 2009 is approximately $10.4 million of amortization of deferred debt issuance costs and $39.0 million of interest paid in kind.

Interest expense for Fiscal 2008 aggregated $197.4 million, an increase of $47.0 million compared to the prior year. This increase was primarily the result of the incurrence of interest expense associated with the financing of the acquisition of the Company for a full twelve months in Fiscal 2008 as compared to eight months in Fiscal 2007. Included in interest expense for Fiscal 2008 was approximately $10.6 million of amortization of deferred debt issuance costs and $24.5 million of interest paid in kind.

Income taxes

In Fiscal 2009, our income tax expense was $11.5 million and our effective income tax rate was 1,038.8%. Our effective income tax rate for Fiscal 2009 reflects tax expense of $18.6 million on the repatriation of foreign earnings, plus tax expense of $17.5 million related to our valuation allowance on deferred tax assets, offset by tax benefits of $21.4 million on income in our foreign jurisdictions that are taxed at lower rates, and $4.7 million relating to other permanent tax benefits. In Fiscal 2009, we made cash income tax payments of $3.2 million.

In Fiscal 2008, our income tax expense was $1.5 million and our effective tax rate was (0.2)%. Our effective income tax rate for Fiscal 2008 reflected the non-deductible nature of the goodwill and joint venture impairment charges aggregating $322.5 million, as well an increase of $95.8 million to our valuation allowance on deferred tax assets generated by our U.S. operations. We increased our valuation allowance due to a lack of sufficient accounting evidence that it was more likely than not that our deferred tax assets would be realized. In Fiscal 2008, we made cash income tax payments of $14.2 million.

In Fiscal 2007, our income tax expense was $13.8 million and our effective income tax rate was (46.8)%. Our effective income tax rate for Fiscal 2007 reflected benefits due to the overall geographic mix of losses in jurisdictions with higher tax rates and income in jurisdictions with lower tax rates, partially offset by the additional tax expense of $10.6 million associated with non-deductible transaction costs related to the Merger, and of $22.0 million related to the repatriation of foreign earnings to fund, in part, the acquisition of the Company. In Fiscal 2007, we made cash income tax payments of $33.3 million.

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):

		Successor Entity				Successor Entity				Combined				Successor Entity				Predecessor Entity
		Fiscal Year				Fiscal Year				Fiscal Year				May 29, 2007				Feb. 4, 2007
		Ended				Ended				Ended				Through				Through
		January 30,				January 31,				February 2,				February 2,				May 28,
		2010				2009				2008				2008				2007
Net sales		$	850,313			$	907,486			$	995,469			$	702,986			$	292,483
Increase (decrease) in same store sales			(3.2	)%			(9.2	)%			(2.6	)%			(4.2	)%			1.3	%
Gross profit percentage			50.4	%			48.5	%			52.0	%			51.5	%			53.1	%
Number of stores at the end of the period (1)			1,993				2,026				2,135				2,135				2,124

Net sales

Net sales in North America during Fiscal 2009 decreased $57.2 million, or 6.3%, from Fiscal 2008. This decrease was attributable to the effect of stores closed in North America at the end of Fiscal 2008 that

decreased sales $29.8 million, decrease in same store sales of $27.2 million, or 3.2%, foreign currency translation effect of our Canadian operations of $1.2 million, and decreases in shipments to franchisees of $2.9 million, partially offset by new store revenue of $4.0 million.

The decrease in same store sales was primarily attributable to a decrease in the average number of transactions per store of 8.1%, partially offset by an increase in average transaction value of 4.2%.

Net sales in North America during Fiscal 2008 decreased $88.0 million, or 8.8%, from Fiscal 2007. This decrease was attributable to a decrease in same store sales of $87.6 million, or 9.2%, and a decrease of $2.6 million resulting from foreign currency translation of our foreign operations, partially offset by new store revenue, net of store closures, of $0.5 million and a net increase of $1.7 million from increased sales to franchisees.

The decrease in same store sales in North America was primarily attributable to a decrease in the average number of transactions per store of 14.6%, partially offset by an increase in average transaction value.

At the end of Fiscal 2008, we closed 118 stores in North America that were performing below our expectations. These stores accounted for 1.7% of the net sales in Fiscal 2008 and had a combined operating loss before depreciation and amortization of $0.7 million in Fiscal 2008.

Gross profit

In Fiscal 2009, gross profit percentage increased 190 basis points to 50.4% compared to the gross profit percentage for Fiscal 2008 of 48.5%. This increase included a 230 basis point improvement in merchandise margin and a 20 basis point decrease in buying costs, partially offset by a 60 basis point increase in occupancy costs. Fiscal 2008 included $1.1 million of non-recurring PET project costs, which were included in buying costs and accounted for 10 basis points of the improvement in gross margin.

In Fiscal 2008, gross profit percentage decreased by 350 basis points compared to the prior fiscal year. This decrease was comprised of a 330 basis point loss of operating leverage in occupancy and buying costs, a 10 basis point decline due to non-recurring PET project costs and a 20 basis point decline due to the closure of 118 stores in January 2009, partially offset by a 10 basis point increase in merchandise margin.

The following table compares our sales of each product category for the last three fiscal years:

		Fiscal Year				Fiscal Year				Fiscal Year
		Ended				Ended				Ended
		January 30,				January 31,				February 2,
% of Total		2010				2009				2008
Accessories			48.5				43.3				41.8
Jewelry			51.5				56.7				58.2
			100.0				100.0				100.0

Europe

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

		Successor Entity				Successor Entity				Combined				Successor Entity				Predecessor Entity
		Fiscal Year				Fiscal Year				Fiscal Year				May 29, 2007				Feb. 4, 2007
		Ended				Ended				Ended				Through				Through
		January 30,				January 31,				February 2,				February 2,				May 28,
		2010				2009				2008				2008				2007
Net sales		$	492,076			$	505,474			$	515,362			$	382,946			$	132,416
Increase (decrease) in same store sales			1.1	%			(2.5	)%			(0.2	)%			0.2	%			(1.2	)%
Gross profit percentage			51.6	%			50.0	%			51.5	%			52.8	%			47.8	%
Number of stores at the end of the period (1)			955				943				905				905				879

Net sales

Net sales in our European division during Fiscal 2009 decreased $13.4 million, or 2.7%, from Fiscal 2008. This decrease was attributable to a decrease of $32.3 million resulting from foreign currency translation of our European operations and a decrease of $1.2 million due to store closures, partially offset by new store revenue of $15.1 million and increases in same store sales of $5.0 million, or 1.1%.

The increase in same store sales was primarily attributable to an increase in average transaction value of 6.6%, partially offset by a decrease in average number of transactions per store of 5.2%.

Net sales in our European division during Fiscal 2008 decreased $9.9 million, or 1.9%, from Fiscal 2007. This decrease was attributable to a decrease in same store sales of $12.2 million, or 2.5%, and a decrease of $14.5 million resulting from foreign currency translation of our European operations, partially offset by new store revenue, net of store closures, of $16.8 million.

The decrease in same store sales was primarily attributable to a decrease in the average number of transactions per store of 6.0%, partially offset by an increase in average transaction value.

Gross profit

In Fiscal 2009, gross profit percentage increased 160 basis points to 51.6% compared to the gross profit percentage for Fiscal 2008 of 50.0%. This increase was comprised of a 140 basis point improvement in merchandise margin and a 20 basis point decrease in occupancy costs. Fiscal 2008 included $2.1 million of non-recurring PET project costs, which were included in buying costs and accounted for 40 basis points of the improvement in gross margin.

In Fiscal 2008, gross profit percentage decreased 150 basis points compared to the prior fiscal year. This decrease was comprised of a 190 basis point loss of operating leverage in occupancy and buying costs and a 40 basis point decrease due to non-recurring PET project costs, partially offset by an 80 basis point increase in merchandise margin.

The following table compares our sales of each product category for the last three fiscal years:

		Fiscal Year				Fiscal Year				Fiscal Year
		Ended				Ended				Ended
		January 30,				January 31,				February 2,
% of Total		2010				2009				2008
Accessories			62.2				57.3				53.5
Jewelry			37.8				42.7				46.5
			100.0				100.0				100.0

Liquidity and Capital Resources

Our operating liquidity requirements are funded through internally generated cash flow from normal sales and cash on hand. The Company’s primary uses of cash are working capital requirements, new store expenditures, and debt service requirements. Cash outlays for the payment of interest are significantly higher in Fiscal 2009 and Fiscal 2008 than in prior years as a result of the Credit Facility and Notes incurred in connection with the Transactions described below. Our current capital structure generates losses in our U.S. operations because of debt service requirements. Accordingly, we expect to pay minimal cash taxes in the U.S. in the near term, while our foreign cash taxes are less affected by our capital structure and debt service requirements. The Company anticipates that the existing cash and cash equivalents and cash generated from operations will be sufficient to meet its future working capital requirements, new store expenditures, and debt service requirements as they become due. However, the Company’s ability to fund future operating expenses and capital expenditures and its 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 Company’s control, including those disclosed in “Risk Factors.”

Credit Facility

Our Credit Facility provides senior secured financing of up to $1.65 billion, consisting of a $1.45 billion senior secured term loan facility and a $200.0 million senior secured revolving credit facility. On May 29, 2007, upon closing of the Transactions, we borrowed $1.45 billion under our senior secured term loan facility and were issued a $4.5 million letter of credit. As of January 30, 2010, we were in compliance with the covenants in our Credit Facility.

Borrowings under our Credit Facility bear interest at a rate equal to, at our option, either (a) an alternate base rate determined by reference to the higher of (1) prime rate in effect on such day and (2) the federal funds effective rate plus 0.50% or (b) a LIBOR rate, with respect to any Eurodollar borrowing, determined by reference to the costs of funds for U.S. dollar deposits in the London Interbank Market for the interest period relevant to such borrowing, adjusted for certain additional costs, in each case plus an applicable margin. The initial applicable margin for borrowings under our Credit Facility is 1.75% per annum with respect to the alternate base rate borrowing and 2.75% per annum in the case of any LIBOR borrowings. The applicable margin for our revolving credit loans under our Credit Facility will be subject to one or more stepdowns, in each case based upon the ratio of our net senior secured debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the period of four consecutive fiscal quarters most recently ended as of such date (the “Total Net Secured Leverage Ratio”).

Between July 20, 2007 and August 3, 2007, the Company entered into three interest rate swap agreements to manage exposure to interest rate changes related to the senior secured term loan facility. The interest rate swaps result in the Company paying a fixed rate of 5.11%, plus the applicable margin then in effect for LIBOR borrowings resulting in an interest rate of 7.86% at January 30, 2010, on a notional amount of $435.0 million of the senior secured term loan. Each swap expires on June 30, 2010.

In addition to paying interest on outstanding principal under our Credit Facility, we are required to pay a commitment fee, initially 0.50% per annum, in respect of the revolving credit commitments thereunder. The commitment fee will be subject to one stepdown, based upon our Total Net Secured Leverage Ratio. We must also pay customary letter of credit fees and agency fees. At January 30, 2010, the weighted average interest rate for borrowings outstanding under our Credit Facility was 2.94% per annum.

Our senior secured term loan facility is amortized in equal quarterly installments of $3.625 million, beginning on September 30, 2007 and ending on March 31, 2014. The remaining balance of $1,356 million is due on May 29, 2014. The principal amount outstanding of the loans under our senior secured revolving Credit Facility, plus interest accrued and unpaid thereon, will be due and payable in full at maturity on May 29, 2013.

All obligations under our Credit Facility are unconditionally guaranteed by (i) Claire’s Inc., our parent, prior to an initial public offering of Claire’s Stores, Inc. stock, and (ii) certain of our existing and future wholly-owned domestic subsidiaries, subject to certain exceptions.

All obligations under our Credit Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by (i) all of Claire’s Stores, Inc. capital stock, prior to an initial public offering of Claire’s Stores, Inc. stock, and (ii) substantially all of our material owned assets and the material owned assets of subsidiary guarantors, including:

	•		a perfected pledge of all the equity interests held by us or any subsidiary guarantor, which pledge, in the case of any foreign subsidiary, is limited to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by us and the subsidiary guarantors; and
	•		perfected security interests in, and mortgages on, substantially all material tangible and intangible assets owned by us and each subsidiary guarantor, subject to certain exceptions.

Our Credit Facility contains customary provisions relating to mandatory prepayments, voluntary payments, affirmative and negative covenants, and events of default; however, it does not contain any covenants that require the Company to maintain any particular financial ratio or other measure of financial performance.

Although we 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 affiliate’s 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 Consolidated Balance Sheet as of January 30, 2010. The interest rate on the Revolver on January 30, 2010 was 2.5%.

Notes

In connection with the Transactions, we also issued a series of notes.

Our senior notes were issued in two series: (1) $250.0 million of 9.25% senior notes due 2015; and (2) $350.0 million of 9.625%/10.375% senior toggle notes due 2015. The $250.0 million senior notes are unsecured obligations, mature on June 1, 2015 and bear interest at a rate of 9.25% per annum. The $350.0 million senior toggle notes are senior obligations and will mature on June 1, 2015. For any interest period through June 1, 2011, we may, at our option, elect to pay interest on the senior toggle notes (i) entirely in cash, (ii) entirely by increasing the principal amount of the outstanding senior toggle notes or by issuing payment in kind (PIK) Notes, or (iii) 50% as cash interest and 50% as PIK interest. After June 1, 2011, we will make all interest payments on the senior toggle notes in cash. Cash interest on the senior toggle notes will accrue at the rate of 9.625% per annum and be payable in cash. PIK interest on the senior toggle notes will accrue at the cash interest rate per annum plus 0.75% and be payable by issuing PIK notes. When we make a PIK interest election, our debt increases by the amount of such interest and we issue PIK notes on the scheduled semi-annual payment dates.

We also issued 10.50% senior subordinated notes due 2017 in an initial aggregate principal amount of $335.0 million. The senior subordinated notes are senior subordinated obligations, will mature on June 1, 2017 and bear interest at a rate of 10.50% per annum.

Interest on the notes is payable semi-annually to holders of record at the close of business on May 15 or November 15 immediately preceding the interest payment date on June 1 and December 1 of each year, commencing December 1, 2007. The notes are also subject to certain redemption and repurchase rights as described in Note 5 to the Consolidated Financial Statements.

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 Moody’s Investor Services, Inc. (“Moody’s”) and Standard & Poor’s Ratings Group (“S&P”) and no event of default has occurred. Since the date of issuance of the Notes in May 2007, the Notes have not received investment grade ratings from Moody’s or S&P. Accordingly, all of the covenants under the Notes currently apply to us. None of these covenants, however, require the Company to maintain any particular financial ratio or other measure of financial performance. As of January 30, 2010, we were in compliance with the covenants under the Notes.

On May 14, 2008, we elected to pay interest in kind on our 9.625%/10.375% Senior Toggle Notes due 2015. The election was for the interest period from June 2, 2008 through December 1, 2008. On December 1, 2008, we increased the principal amount on the outstanding Senior Toggle Notes by $18.2 million in satisfaction of interest paid in kind for the interest period from June 2, 2008 through December 1, 2008. We continued the election to pay interest in kind for the interest period from December 2, 2008 through June 1, 2009 and for the interest period from June 2, 2009 through December 1, 2009. We increased the principal amount on the outstanding Senior Toggle Notes by $19.1 million and $19.8 million on June 1, 2009 and December 1, 2009, respectively. Payment in kind interest accrued for the period from December 2, 2009 through January 30, 2010 of approximately $6.5 million is included in “Long-term debt” in the accompanying Consolidated Balance Sheet as of January 30, 2010. It is our current intention to pay interest in kind on the Senior Toggle Notes for all interest payments through June 1, 2011.

Pre-Transaction Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $2.4 million. These facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in their respective countries of operation. At January 30, 2010, the entire amount of $2.4 million was available for borrowing by us, subject to reduction for $2.0 million of outstanding bank guarantees.

Analysis of Consolidated Financial Condition

A summary of cash flows provided by (used in) operating, investing and financing activities is outlined in the table below (in thousands):

		Successor Entity				Successor Entity				Combined				Successor Entity				Predecessor Entity
		Fiscal Year				Fiscal Year				Fiscal Year				May 29, 2007				Feb. 4, 2007
		Ended				Ended				Ended				Through				Through
		January 30,				January 31,				February 2,				February 2,				May 28,
		2010				2009				2008				2008				2007
Operating activities		$	75,476			$	1,373			$	6,795			$	(35,851	)		$	42,646
Investing activities			(21,259	)			(60,756	)			(3,140,441	)			(3,112,372	)			(28,069	)
Financing activities			(60,591	)			179,500				2,874,807				2,880,810				(6,003	)

Our working capital at the end of Fiscal 2009 was $188.6 million compared to $171.7 million at the end of Fiscal 2008, an increase of $17.0 million. The increase in working capital mainly reflects the decrease in trade accounts payable of $7.6 million and the decrease in accrued expenses and other current liabilities of $11.5 million.

Cash flows from operating activities

In Fiscal 2009, cash provided by operating activities increased $74.1 million compared to Fiscal 2008. The primary reasons for the increase were lower cash interest payments of $41.8 million, lower cash tax payments of $11.1 million, and an increase in operating income before impairment of assets and depreciation and amortization expense of $53.8 million, partially offset by an increase in working capital, excluding cash and cash equivalents, of $22.8 million, an increase in other assets of $4.6 million and a decrease in deferred rent expense of $5.8 million.

In Fiscal 2008, cash provided by operating activities decreased $5.4 million compared to Fiscal 2007. The primarily reasons for the decrease were an increase of $45.0 million of interest paid on the debt related to the Acquisition for a full twelve month period compared to only eight months during Fiscal 2007, and a reduction of $35.4 million of operating income before impairment of assets and depreciation and amortization expense, offset by $75.0 million of working capital and other balance sheet changes.

Cash flows from investing activities

In Fiscal 2009, cash used in investing activities decreased $39.5 million compared to Fiscal 2008. The primary reason for the decrease was lower capital expenditures due to fewer store openings. We reduced capital expenditures during 2009 to maximize cash flow in response to the distress in the financial markets which has resulted in declines in consumer confidence and spending.

In Fiscal 2008, cash used in investing activities decreased $3.1 billion compared to Fiscal 2007. The majority of the cash used in investing activities in Fiscal 2007 was directly attributable to the cash and cash equivalents used to fund the Acquisition. We funded these investing activities primarily from the financing activities discussed below.

Capital expenditures were $25.0 million, $59.4 million and $86.5 million in Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively, primarily to remodel existing stores, open new stores and to improve technology systems. In Fiscal 2010, we currently expect to fund a total of between $45.0 million and $50.0 million of capital expenditures to remodel existing stores, open new stores and to improve technology systems.

Cash flows from financing activities

During Fiscal 2009, we paid $46.1 million to retire $30.5 million of Senior Toggle Notes and $52.8 million of Senior Subordinated Notes. During Fiscal 2008, we drew down the remaining $194.0 million available under our Revolving Credit Facility. In both of these periods, we paid $14.5 million for the scheduled principal payments on our Credit Facility.

In Fiscal 2007, we raised $1.45 billion from our Credit Facility and $935.0 million from our note offerings, an aggregate of $2.4 billion from debt. As part of the Transactions, our Sponsors contributed $595.7 million in capital. Therefore, the capital raised to fund the Acquisition was $2.98 billion. We paid $77.4 million of debt issuance costs from these proceeds and used the remainder from existing cash and cash equivalents to fund the Acquisition. We paid $7.9 million upon the acquisition of the Company to holders of the predecessor entity stock options. We also paid in Fiscal 2007 the first two quarterly installments of principal payments on our Credit Facility aggregating $7.3 million.

On May 14, 2008, we elected to pay interest in kind on our 9.625%/10.375% Senior Toggle Notes due 2015. The election was for the interest period from June 2, 2008 through December 1, 2008. On December 1, 2008, we increased the principal amount on the outstanding Senior Toggle Notes by $18.2 million in satisfaction of interest paid in kind for the interest period from June 2, 2008 through December 1, 2008. We continued the election to pay interest in kind for the interest period from December 2, 2008 through June 1, 2009 and for the interest period from June 2, 2009 through December 1, 2009. We increased the principal amount on the outstanding Senior Toggle Notes by $19.1 million and $19.8 million on June 1, 2009 and December 1, 2009, respectively. Payment in kind interest accrued for the period from December 2, 2009 through January 30, 2010 of approximately $6.5 million is included in “Long-term debt” in the accompanying Consolidated Balance Sheet as of January 30, 2010. It is our current intention to pay interest in kind on the Senior Toggle Notes for all interest payments through June 1, 2011.

We or our affiliates have purchased and may, from time to time, purchase portions of our indebtedness.

Cash position

As of January 30, 2010, we had cash and cash equivalents of $198.7 million and substantially all of the cash equivalents consisted of U.S. Treasury Securities.

We anticipate that cash generated from operations will be sufficient to meet our future working capital requirements, new store expenditures, and debt service requirements for at least the next twelve months. 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 Company’s control, including those disclosed in “Risk Factors”.

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 CSI and PET projects, scaled back planned capital expenditures for Fiscal 2010 and are proceeding cautiously to support increased sales. 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.

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make certain estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures regarding contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include, but are not limited to, the value of inventories, goodwill, intangible assets and other long-lived assets, legal contingencies and assumptions used in the calculation of income taxes, 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 our best estimates and judgment. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust 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.

Inventory Valuation

Our inventories in North America are valued at the lower of cost or market, with cost determined using the retail method. Inherent in the retail inventory calculation are certain significant management judgments and estimates including, among others, merchandise markups, markdowns and shrinkage, which impact the ending inventory valuation at cost as well as resulting gross margins. The methodologies used to value merchandise inventories include the development of the cost to retail ratios, the groupings of homogeneous classes of merchandise, development of shrinkage reserves and the accounting for retail price changes. The inventories in Europe are accounted for under the lower of cost or market method, with cost determined using the average cost method at an individual item level. Market is determined based on the estimated net realizable value, which is generally the merchandise selling price. Inventory valuation is impacted by the estimation of slow moving goods, shrinkage and markdowns. Merchandise inventory levels are monitored to identify slow-moving items and markdowns are used to clear such inventories. Changes in consumer demand of our products could affect our retail prices, and therefore impact the retail method and lower of cost or market valuations.

Valuation of Long-Lived Assets

We evaluate the carrying value of long-lived assets whenever events or changes in circumstances indicate that a potential impairment has occurred. A potential impairment has occurred if the projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of the asset in operations. When a potential impairment has occurred, an impairment charge is recorded if the carrying value of the long-lived asset exceeds its fair value. Fair value is measured based on a projected discounted cash flow model using a discount rate we feel is commensurate with the risk inherent in our business. A prolonged decrease in consumer spending would require us to modify our models and cash flow estimates, with the risk of an impairment triggering event in the future. Our impairment analyses contain estimates due to the inherently judgmental nature of forecasting long-term estimated cash flows and determining the ultimate useful lives of assets. Actual results may differ, which could materially impact our impairment assessment. During Fiscal 2009, an impairment charge of approximately $3.1 million was recorded related to our central buying and store operations offices and the North American distribution center located in Hoffman Estates, Illinois. During Fiscal 2008, an impairment charge of approximately $2.5 million was recorded related to store asset impairment. During Fiscal 2007, an impairment charge of approximately $3.5 million was recorded relating to computer software impairment.

Goodwill Impairment

We continually evaluate 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. We conduct our annual impairment test to determine whether an impairment of the value of goodwill has occurred in accordance with the guidance set forth in ASC Topic 350, Intangibles — Goodwill and Other. ASC Topic 350 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 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 unit’s goodwill

exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess. We have two reporting units as defined under ASC Topic 350. These reporting units are our North American segment and our European 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. We rely on the income approach using discounted cash flows and market approach using comparable public company entities in deriving the fair values of our reporting units. The asset approach is not used as our 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 earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. Our 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 us to modify future models and cash flow estimates, and could result in an impairment triggering event in the future.

We have weighted the valuation of our reporting units at three-fourths using the income approach and one-fourth using the market based approach. We believe 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 our 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 2009 and the fiscal years 2010 through 2014. Beyond fiscal year 2014, a terminal value was calculated using the Gordon Growth Model. We 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 projected cash flows reflect projected same store sales increases representative of the Company’s 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 unit’s 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 unit’s 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 some time in the future. However, since the terminal value is a significant portion of each reporting unit’s fair value, the impact of any such near-term volatility on our fair value would be lessened.

Our annual impairment analysis did not result in any impairment of goodwill during Fiscal 2009. We recognized a non-cash impairment charge of $297.0 million in Fiscal 2008. We also performed this analysis during Fiscal 2007 and recorded no impairment charge. The excess of fair value over carrying value for each of our reporting units as of November 1, 2009, the annual testing date for Fiscal 2009, ranged from approximately $291.0 million to approximately $481.0 million. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of each reporting unit. This hypothetical 10% decrease would result in excess fair value over carrying value ranging from approximately $91.0 million to approximately $361.0 million for each of our reporting units.

Intangible Asset Impairment

Intangible assets include tradenames, franchise agreements, lease rights, non-compete agreements and leases that existed at the date of acquisition with terms that were favorable to market at that date. We continually evaluate whether events and changes in circumstances warrant revised estimates of the useful lives, residual values or recognition of an impairment loss for intangible assets. Future adverse changes in market and legal conditions or poor operating results of underlying assets could result in losses or an inability to recover the carrying value of the intangible asset, thereby possibly requiring an impairment charge in the future.

We evaluate the market value of the intangible assets periodically and record an impairment charge when we believe the carrying amount of the asset is not recoverable. Indefinite-lived intangible assets are tested for impairment annually or more frequently when events or circumstances indicate that impairment may have occurred. Definite-lived intangible assets are tested for impairment when events or circumstances indicate that the carrying amount may not be recoverable. We estimate the fair value of these intangible assets primarily utilizing a discounted cash flow model. The forecasted cash flows used in the model contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins and cost of capital. Changes in any of the assumptions utilized could affect the fair value of the intangible assets and result in an impairment triggering event. A prolonged decrease in consumer spending would require us to modify our models and cash flow estimates, with the risk of an impairment triggering event in the future. As a result of our impairment analysis related to intangible assets, we did not recognize any impairment charge during Fiscal 2009. We recognized a non-cash impairment charge of $199.0 million in Fiscal 2008. We also performed this analysis during Fiscal 2007 and recorded no impairment charge.

Income Taxes

We are subject to income taxes in many jurisdictions, including the United States, individual states and localities and internationally. Our annual consolidated provision for income taxes is determined based on our income, statutory tax rates and the tax implications of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items to be included in the tax return at different times than the items are reflected on the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. We establish deferred tax assets and liabilities as a result of these temporary differences.

Our judgment is required in determining any valuation allowance recorded against deferred tax assets, specifically net operating loss carryforwards, tax credit carryforwards and deductible temporary differences that may reduce taxable income in future periods. In assessing the need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income and tax planning opportunities. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.

During Fiscal 2009, we reported an increase of $18.3 million in valuation allowance against our U.S. deferred tax assets, and an increase of $2.1 million in valuation allowance against our foreign deferred tax assets. The foreign increase primarily relates to foreign jurisdictions that have a history of losses. Our conclusion regarding the need for a valuation allowance against U.S. and foreign deferred tax assets could change in the future based on improvements in operating performance, which may result in the full or partial reversal of the valuation allowance.

In the fourth quarter of Fiscal 2008, we recorded a charge of $95.8 million, respectively, to establish a valuation allowance against our deferred tax assets in the U.S. We concluded that such a valuation allowance was appropriate in light of the significant negative evidence, which was objective and verifiable, such as the cumulative losses in recent fiscal years in our U.S. operations. While our long-term financial outlook in the U.S. remains positive, we concluded that our ability to rely on our long-term outlook as to future taxable income was limited due to the relative weight of the negative evidence from our recent U.S. cumulative losses.

We establish accruals for uncertain tax positions in our Consolidated Financial Statements based on tax positions that we believe are supportable, but are potentially subject to successful challenge by the taxing authorities. We believe these accruals are adequate for all open audit years based on our assessment of many factors including past experience, progress of ongoing tax audits and interpretations of tax law. If changing facts and circumstances cause us to adjust our accruals, or if we prevail in tax matters for which accruals have been established, or we are required to settle matters in excess of established accruals, our income tax expense for a particular period will be affected.

Income tax expense also reflects our best estimate and assumptions regarding, among other things, the geographic mix of income and losses from our foreign and domestic operations, interpretation of tax laws and regulations of multiple jurisdictions, earnings repatriation plans, and resolution of tax audits. Our effective income tax rates in future periods could be impacted by changes in the geographic mix of income and losses from our foreign and domestic operations that may be taxed at different rates, changes in tax laws, repatriation of foreign earnings, and the resolution of unrecognized tax benefits for amounts different from our current estimates. Given our capital structure, we will continue to experience volatility in our effective tax rate over the near term.

Stock-Based Compensation

We issue stock options and other stock-based awards to executive management, key employees and directors under our stock-based compensation plans.

On January 29, 2006, we adopted ASC Topic 718, Compensation — Stock Compensation, using the modified prospective method. The calculation of stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility and pre-vesting forfeitures. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we were to use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate forfeitures based on our historical experience of stock-based awards granted, exercised and cancelled, as well as considering future expected behavior. If the actual forfeiture rate is materially different from our estimate, stock-based compensation expense could be different from what we have recorded in the current period. See Note 8 in the Notes to Consolidated Financial Statements for additional information.

Under ASC Topic 718, time-vested stock awards are accounted for at fair value at date of grant. The compensation expense is recorded over the requisite service period. Compensation expense for time-vested stock awards granted in Fiscal 2009, Fiscal 2008 and Fiscal 2007 was recorded over the requisite service period using the graded-vesting method.

The fair value of time and the buy one, get one (“BOGO”) options granted during Fiscal 2009, Fiscal 2008 and Fiscal 2007 were determined using the Black-Scholes option-pricing model. The fair value of performance based stock options issued during Fiscal 2009, Fiscal 2008 and Fiscal 2007 was based on the Monte Carlo model. Both models incorporate various assumptions such as expected dividend yield, risk-free interest rate, expected life of the options and expected stock price volatility.

Other stock awards, such as long-term incentive plan awards, which qualified as equity plans under ASC Topic 718, were accounted for based on fair value at date of grant. The compensation expense was based on the number of shares expected to be issued when it became probable that performance targets required to receive the award will be achieved. The expense was recorded over the requisite service period.

Other long-term incentive plans accounted for as liabilities under ASC Topic 718 were recorded at fair value at each reporting date until settlement. The compensation expense is based on the number of performance units expected to be issued when it became probable that performance targets required to receive the award will be achieved. The expense was recorded over the requisite service period.

Performance-based stock awards are accounted for at fair value at date of grant. The compensation expense is recognized over the longer of the service period and the period derived from the market conditions.

BOGO options, which are immediately vested and exercisable upon issuance, are accounted for at fair value at date of grant. The compensation expense is recognized over a four year period due to the terms of the option requiring forfeiture in certain cases including the grantee’s voluntary resignation from the Company’s employ prior to May 2011.

Our estimates of stock price volatility, interest rate, grant date fair value and expected life of options and restricted stock are affected by illiquid credit markets, consumer spending and current and future economic conditions. As future events and their effects can not be determined with precision, actual results could differ significantly from our estimates.

Derivatives and Hedging

The Company accounts for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging. In accordance with ASC Topic 815, the Company reports all derivative financial instruments on its Consolidated Balance Sheet at fair value. The Company formally designates and documents the financial instrument as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transaction. The Company formally assesses both at inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure.

The Company primarily employs derivative financial instruments to manage its exposure to market risk from foreign exchange rates and interest rate changes and to limit the volatility and impact of interest rate changes on earnings and cash flows. The Company does not enter into derivative financial instruments for trading or speculative purposes. The Company faces credit risk if the counterparties to the financial instruments are unable to perform their obligations. However, the Company seeks to minimize this risk by entering into transactions with counterparties that are significant and creditworthy financial institutions. The Company monitors the credit ratings of the counterparties.

The Company records unrealized gains and losses on derivative financial instruments qualifying as cash flow hedges in “Accumulated other comprehensive income (loss), net of tax” on the Consolidated Balance Sheets, to the extent that hedges are effective. For derivative financial instruments which do not qualify as cash flow hedges, any changes in fair value would be recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss). We adopted ASC Topic 820, Fair Value Measurements and Disclosures, on February 3, 2008, which required the Company to include credit valuation adjustment risk in the calculation of fair value.

The Company may at its discretion terminate or change the designation of any such hedging instrument agreements prior to maturity. At that time, any gains or losses previously reported in accumulated other comprehensive income (loss) on termination would amortize into interest expense or interest income to correspond to the recognition of interest expense or interest income on the hedged debt. If such debt instrument was also terminated, the gain or loss associated with the terminated derivative included in accumulated other comprehensive income (loss) at the time of termination of the debt would be recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) at that time.

Contractual Obligations and Off Balance Sheet Arrangements

We finance certain equipment through transactions accounted for as non-cancelable operating leases. As a result, the rental expense for this equipment is recorded during the term of the lease contract in our Consolidated Financial Statements, generally over four to seven years. In the event that we, or our landlord, terminate a real property lease prior to its scheduled expiration, we will be required to accrue all future rent payments under any non-cancelable operating lease with respect to leasehold improvements or equipment located thereon.

The following table sets forth our contractual obligations requiring the use of cash as of January 30, 2010:

		Payments Due by Period
Contractual Obligations										2-3				4-5				More than 5
(in millions)		Total				1 year				years				years				years
Operating leases for stores, distribution centers and offices		$	1,047.3			$	190.1			$	327.9			$	248.5			$	280.8
Operating leases for equipment			1.9				0.9				0.7				0.3				—
Long-term debt obligations			2,576.7				14.5				29.0				1,564.3	(1)			968.9
Letters of credit			6.0				6.0				—				—				—
Interest (2)			729.0				110.7				265.0				246.6				106.7
Total		$	4,360.9			$	322.2			$	622.6			$	2,059.7			$	1,356.4

We have no material off-balance sheet arrangements (as such term is defined in Item 303(a) (4) (ii) under Regulation S-K of the Securities Exchange Act.

Seasonality and Quarterly Results

Sales of each category of merchandise vary from period to period depending on current trends. We experience traditional retail patterns of peak sales during the Christmas, Easter and back-to-school periods. Sales as a percentage of total sales in each of the four quarters of Fiscal 2009 were 22%, 23%, 24% and 31%, respectively. See Note 13 of our Consolidated Financial Statements for our quarterly results of operations.

Impact of Inflation

Inflation impacts our operating costs including, but not limited to, cost of goods and supplies, occupancy costs and labor expenses. We seek to mitigate these effects by passing along inflationary increases in costs through increased sales prices of our products where competitively practical or by increasing sales volumes.

Recent Accounting Pronouncements

In the third quarter of fiscal 2009, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The ASC is the single official source of authoritative, non-governmental U.S. generally accepted accounting principles, other than the guidance issued by the Securities and Exchange Commission. The adoption of the ASC did not have any substantive impact on our Consolidated Financial Statements or related footnotes.

In December 2006, the FASB issued guidance that established a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. Certain provisions of this guidance 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. The adoption of this guidance 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 2 in the Notes to Consolidated Financial Statements for further discussion and disclosure.

In April 2008, the FASB issued guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The adoption of this guidance on February 1, 2009 did not have a material impact on our financial position, results of operations or cash flows.

In June 2008, the Emerging Issues Task Force (“EITF”) issued guidance that 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. This guidance is effective for fiscal years beginning after December 15, 2008. The adoption of this guidance on February 1, 2009 did not have a material impact on our financial position, results of operations or cash flows.

In October 2008, the EITF issued guidance that addressed the potential effect of ASC Topic 805, Business Combinations, and ASC 810-10-65, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51, on equity-method accounting under ASC Topic 323, Investments — Equity Method and Joint Ventures. This guidance will not require us to perform a separate impairment test on the underlying assets of our investment in Claire’s Nippon. However, we would be required to recognize our proportionate share of impairment charges recognized by our joint venture with AEON Co. Ltd. We would also be required to perform an overall other than temporary impairment test of our investment in accordance with ASC Topic 323, Investments — Equity Method and Joint Ventures. This guidance 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 adoption of this guidance on February 1, 2009 did not have a material impact on our financial position, results of operations or cash flows.

In May 2009, the FASB issued guidance regarding subsequent events that established 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 guidance 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 this guidance for the interim period ended August 1, 2009. See Note 2 in the Notes to Consolidated Financial Statements for further discussion and disclosure. The adoption of this guidance had no impact on our financial position, results of operations or cash flows.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, Fair Value Measurements and Disclosures — Measuring Liabilities at Fair Value (amendments to ASC Topic 820, Fair Value Measurements and Disclosures). ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. ASU 2009-05 is effective for interim and annual periods beginning after August 27, 2009. The adoption of this guidance on November 1, 2009 did not have a material impact on our financial position, results of operations or cash flows.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures — Improving Disclosures about Fair Value Measurements (amendments to ASC Topic 820, Fair Value Measurements and Disclosures). ASU 2010-06 amends the disclosure requirements related to recurring and nonrecurring measurements. The guidance requires new disclosures on the transfer of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance is effective for interim and annual periods

beginning after December 15, 2009. We do not expect the adoption of ASU 2010-06 to have a material impact on our financial position, results of operations or cash flow.

In February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements (amendments to ASC Topic 855, Subsequent Events). ASU 2010-09 clarifies that subsequent events should be evaluated through the date the financial statements are issued. In addition, this update no longer requires a filer to disclose the date through which subsequent events have been evaluated. This guidance is effective for financial statements issued subsequent to February 24, 2010. We adopted this guidance on this date. This guidance did not have a material impact on our financial position, results of operations or cash flows.

Item 7A. 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 January 30, 2010, all 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 may from time to time, use foreign currency options. Exposure to market risk for changes in foreign currency exchange rates relates primarily to our foreign operations’ buying, selling, and financing in currencies other than local currencies and to the carrying value of net investments in foreign subsidiaries. At January 30, 2010, we maintained no foreign currency options. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries. Included in “Comprehensive income (loss)” are $15.5 million, $(27.1) million, $17.2 million and $8.4 million, net of tax, reflecting the unrealized gain (loss) on foreign currency translations during Fiscal 2009, Fiscal 2008, the period from May 29, 2007 through February 2, 2008 and the period from February 4, 2007 through May 28, 2007, respectively.

We purchased approximately 65% of our merchandise from China in Fiscal 2009. 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 18.8% as compared to the U.S. Dollar, based on continued pressure from the international community. The currency exchange rate from Chinese yuan to U.S. dollars has historically been stable, in large part due to the economic policies of the Chinese government. However, there are no assurances that this currency exchange rate will continue to be as stable in the future. The U.S. government has stated that the Chinese government should reduce its influence over the currency exchange rate and let market conditions control. Less influence by the Chinese government will most likely result in the Chinese yuan strengthening against the U.S. dollar. An increase in the Chinese yuan against the dollar means that we will have to pay more in U.S. dollars for our purchases from China. If we are unable to negotiate commensurate price decreases from our Chinese suppliers, these higher prices would eventually translate into higher costs of sales, which could have a significant effect on our results of operations.

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

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 January 30, 2010, the Swaps cover an aggregate notional amount of $435.0 million of the $1.41 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 January 30, 2010 and January 31, 2009, the estimated fair value of the Swaps were liabilities of approximately $8.8 million and $19.7 million, respectively, and were recorded, net of tax, as a component in “Accumulated other comprehensive income (loss), net of tax.”

At January 30, 2010, we had fixed rate debt of $914.1 million and variable rate debt of $1.61 billion. Based on our variable rate debt balance (less $435 million of interest rate swaps) as of January 30, 2010, a 1% change in interest rates would increase or decrease our annual interest expense by approximately $11.7 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 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 8. Financial Statements and Supplementary Data

		Page No.
Report of Independent Registered Public Accounting Firm			49
Consolidated Balance Sheets as of January 30, 2010 and January 31, 2009			50
Consolidated Statements of Operations and Comprehensive Income (Loss) for the fiscal years ended January 30, 2010 and January 31, 2009 (“Successor Entity”), the period from May 29, 2007 through February 2, 2008 (“Successor Entity”) and the period from February 4, 2007 through May 28, 2007 (“Predecessor Entity”)			51
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the fiscal years ended January 30, 2010 and January 31, 2009 (“Successor Entity”), the period from May 29, 2007 through February 2, 2008 (“Successor Entity”) and the period from February 4, 2007 through May 28, 2007 (“Predecessor Entity”)			52
Consolidated Statements of Cash Flows for the fiscal years ended January 30, 2010 and January 31, 2009 (“Successor Entity”), the period from May 29, 2007 through February 2, 2008 (“Successor Entity”) and the period from February 4, 2007 through May 28, 2007 (“Predecessor Entity”)			53
Notes to Consolidated Financial Statements			55

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder
Claire’s Stores, Inc.:

We have audited the accompanying consolidated balance sheets of Claire’s Stores, Inc. and subsidiaries as of January 30, 2010 (Successor Entity) and January 31, 2009 (Successor Entity), and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for the fiscal years ended January 30, 2010 (Successor Entity) and January 31, 2009 (Successor Entity), the period May 29, 2007 to February 2, 2008 (Successor Entity), and the period February 4, 2007 to May 28, 2007 (Predecessor Entity). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Claire’s Stores, Inc. and subsidiaries as of January 30, 2010 (Successor Entity) and January 31, 2009 (Successor Entity), and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for the fiscal years ended January 30, 2010 (Successor Entity) and January 31, 2009 (Successor Entity), the period May 29, 2007 to February 2, 2008 (Successor Entity), and the period February 4, 2007 to May 28, 2007 (Predecessor Entity) in conformity with U.S. generally accepted accounting principles.

April 13, 2010
Miami, Florida
Certified Public Accountants

CLAIRE’S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

		January 30, 2010				January 31, 2009
		(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	198,708			$	204,574
Inventories			110,338				103,691
Prepaid expenses			32,873				31,837
Other current assets			28,236				27,079
Total current assets			370,155				367,181
Property and equipment:
Land and building			19,318				22,288
Furniture, fixtures and equipment			162,602				143,702
Leasehold improvements			228,503				214,007
			410,423				379,997
Less accumulated depreciation and amortization			(182,439	)			(113,926	)
			227,984				266,071
Intangible assets, net of accumulated amortization of $32,532 and $19,371, respectively			580,027				587,125
Deferred financing costs, net of accumulated amortization of $29,949 and $17,646, respectively			47,641				59,944
Other assets			58,242				56,428
Goodwill			1,550,056				1,544,346
			2,235,966				2,247,843
Total assets		$	2,834,105			$	2,881,095
LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Trade accounts payable		$	45,660			$	53,237
Current portion of long-term debt			14,500				14,500
Income taxes payable			10,272				6,477
Accrued interest payable			14,644				13,316
Accrued expenses and other current liabilities			96,436				107,974
Total current liabilities			181,512				195,504
Long-term debt			2,313,378				2,373,272
Revolving credit facility			194,000				194,000
Deferred tax liability			122,145				112,829
Deferred rent expense			22,082				18,462
Unfavorable lease obligations and other long-term liabilities			35,630				42,871
			2,687,235				2,741,434
Commitments and contingencies
Stockholders’ deficit:
Common stock par value $0.001 per share; authorized 1,000 shares; issued and outstanding 100 shares			—				—
Additional paid-in capital			616,086				609,427
Accumulated other comprehensive income (loss), net of tax			2,625				(22,319	)
Retained deficit			(653,353	)			(642,951	)
			(34,642	)			(55,843	)
Total liabilities and stockholder’s deficit		$	2,834,105			$	2,881,095

See accompanying notes to consolidated financial statements.

CLAIRE’S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)

															Predecessor
		Successor Entity													Entity
		Fiscal Year				Fiscal Year				May 29, 2007					Feb. 4, 2007
		Ended				Ended				Through					Through
		January 30,				January 31,				February 2,					May 28,
		2010				2009				2008					2007
Net sales		$	1,342,389			$	1,412,960			$	1,085,932				$	424,899
Cost of sales, occupancy and buying expenses			659,796				720,351				521,384					206,438
Gross profit			682,593				692,609				564,548					218,461
Other expenses (income):
Selling, general and administrative			469,179				518,233				354,875					154,409
Depreciation and amortization			71,471				85,093				61,451					19,652
Impairment of assets			3,142				523,990				3,478					73
Severance and transaction-related costs			921				15,928				7,319					72,672
Other income, net			(4,234	)			(4,499	)			(3,088	)				(1,476	)
			540,479				1,138,745				424,035					245,330
Operating income (loss)			142,114				(446,136	)			140,513					(26,869	)
Gain on early debt extinguishment			36,412				—				—					—
Interest expense (income), net			177,418				195,947				147,892					(4,876	)
Income (loss) before income tax expense (benefit)			1,108				(642,083	)			(7,379	)				(21,993	)
Income tax expense (benefit)			11,510				1,509				(8,020	)				21,779
Net income (loss)		$	(10,402	)		$	(643,592	)		$	641				$	(43,772	)
Net income (loss)		$	(10,402	)		$	(643,592	)		$	641				$	(43,772	)
Foreign currency translation and interest rate swap adjustments, net of tax			24,944				(25,677	)			3,358					8,440
Comprehensive income (loss)		$	14,542			$	(669,269	)		$	3,999				$	(35,332	)

See accompanying notes to consolidated financial statements.

CLAIRE’S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except per share amounts)

																						Accumulated
		Number of								Number of												other
		shares of				Class A				shares of								Additional				comprehensive				Retained
		Class A				common				common				Common				paid-in				income (loss),				earnings
		common stock				stock				stock				stock				capital				net				(deficit)				Total
Predecessor Entity
Balance: February 3, 2007			4,869				243				88,203				4,410				75,486				33,956				733,567				847,662
Net loss for period from Feb. 4, 2007 to May 28, 2007			—				—				—				—				—				—				(43,772	)			(43,772	)
Cash dividends ($0.18 per common share and $0.09 per Class A common share)			—				—				—				—				—				—				(16,317	)			(16,317	)
Stock options exercised, including tax benefit			—				—				—				—				177				—				—				177
Restricted stock			—				—				—				—				1,851				—				—				1,851
Option conversion payment			—				—				—				—				(7,924	)			—				—				(7,924	)
Tax benefit options			—				—				—				—				2,885				—				—				2,885
Long-term incentive plan, net of amount reclassified as liabilities upon acquisition			—				—				—				2				(933	)			—				—				(931	)
Foreign currency translation adjustment, net of tax			—				—				—				—				—				8,440				—				8,440
Balance: May 28, 2007 (prior to acquisition)			4,869				243				88,203				4,412				71,542				42,396				673,478				792,071
Successor Entity
Acquisition transaction			(4,869	)			(243	)			(88,103	)			(4,412	)			524,133				(42,396	)			(673,478	)			(196,396	)
Capital contribution			—				—				100				—				595,675				—				—				595,675
Net income for period May 29, 2007 to February 2, 2008			—				—				—				—				—				—				641				641
Stock option expense			—				—				—				—				5,092				—				—				5,092
Restricted stock, net of unearned compensation			—				—				—				—				434				—				—				434
Foreign currency translation adjustment and unrealized loss on interest rate swaps, net of tax			—				—				—				—				—				3,358				—				3,358
Balance: February 2, 2008			—				—				100				—				601,201				3,358				641				605,200
Net loss			—				—				—				—				—				—				(643,592	)			(643,592	)
Stock option expense			—				—				—				—				7,783				—				—				7,783
Restricted stock, net of unearned compensation			—				—				—				—				443				—				—				443
Foreign currency translation adjustment and unrealized loss on interest rate swaps, net of tax			—				—				—				—				—				(25,677	)			—				(25,677	)
Balance: January 31, 2009			—				—				100				—				609,427				(22,319	)			(642,951	)			(55,843	)
Net loss			—				—				—				—				—				—				(10,402	)			(10,402	)
Stock option expense			—				—				—				—				6,518				—				—				6,518
Restricted stock, net of unearned compensation			—				—				—				—				141				—				—				141
Foreign currency translation adjustment and unrealized gain on interest rate swaps, net of tax			—				—				—				—				—				24,944				—				24,944
Balance: January 30, 2010			—				—				100				—			$	616,086			$	2,625			$	(653,353	)		$	(34,642	)