UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended April 30, 2011

OR

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

For the transition period from                      to                     
Commission File Nos. 1-8899 and 333-148108

Claire’s Stores, Inc.

(Exact name of registrant as specified in its charter)

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

2400 West Central Road, Hoffman Estates, Illinois		60192
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

Indicate by check mark whether registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)  Yes o   No o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer x		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

As of June 1, 2011, 100 shares of the Registrant’s common stock, $0.001 par value, were outstanding.

 

 

CLAIRE’S STORES, INC. AND SUBSIDIARIES
INDEX

				PAGE NO.
PART I.		FINANCIAL INFORMATION
		Item 1. Financial Statements			3
		Unaudited Condensed Consolidated Balance Sheets as of April 30, 2011 and January 29, 2011			3
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended April 30, 2011 and May 1, 2010			4
		Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2011 and May 1, 2010			5
		Notes to Unaudited Condensed Consolidated Financial Statements			6
		Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
		Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
		Item 4. Controls and Procedures Controls and Procedures			30
PART II.		OTHER INFORMATION
		Item 1. Legal Proceedings			31
		Item 1A. Risk Factors			31
		Item 6. Exhibits			31
SIGNATURE PAGE					32
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION
CLAIRE’S STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

		April 30, 2011				January 29, 2011
		(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents and restricted cash of $25,966 and $23,864, respectively		$	246,134			$	279,766
Inventories			133,237				136,148
Prepaid expenses			34,938				21,449
Other current assets			22,748				24,658
Total current assets			437,057				462,021
Property and equipment:
Furniture, fixtures and equipment			196,977				186,514
Leasehold improvements			264,152				248,030
			461,129				434,544
Less accumulated depreciation and amortization			(252,646	)			(233,511	)
			208,483				201,033
Leased property under capital lease:
Land and building			18,055				18,055
Less accumulated depreciation and amortization			(1,128	)			(903	)
			16,927				17,152
Goodwill			1,550,056				1,550,056
Intangible assets, net of accumulated amortization of $42,962 and $38,747, respectively			562,031				557,466
Deferred financing costs, net of accumulated amortization of $47,905 and $41,659, respectively			40,341				36,434
Other assets			46,817				42,287
			2,199,245				2,186,243
Total assets		$	2,861,712			$	2,866,449
LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Short-term debt and current portion of long-term debt		$	62,796			$	76,154
Trade accounts payable			60,377				54,355
Income taxes payable			8,436				11,744
Accrued interest payable			29,232				16,783
Accrued expenses and other current liabilities			88,557				107,115
Total current liabilities			249,398				266,151
Long-term debt			2,444,779				2,236,842
Revolving credit facility			—				194,000
Obligation under capital lease			17,290				17,290
Deferred tax liability			121,479				121,776
Deferred rent expense			27,471				26,637
Unfavorable lease obligations and other long-term liabilities			28,003				30,268
			2,639,022				2,626,813
Commitments and contingencies
Stockholder’s deficit:
Common stock par value $0.001 per share; authorized 1,000 shares; issued and outstanding 100 shares			—				—
Additional paid-in capital			622,073				621,099
Accumulated other comprehensive income, net of tax			19,846				1,416
Accumulated deficit			(668,627	)			(649,030	)
			(26,708	)			(26,515	)
Total liabilities and stockholder’s deficit		$	2,861,712			$	2,866,449

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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

		Three Months				Three Months
		Ended				Ended
		April 30, 2011				May 1, 2010
Net sales		$	346,446			$	322,077
Cost of sales, occupancy and buying expenses			171,359				158,751
Gross profit			175,087				163,326
Other expenses:
Selling, general and administrative			126,722				118,019
Depreciation and amortization			17,054				16,366
Severance and transaction-related costs			343				102
Other expense, net			5,311				1,230
			149,430				135,717
Operating income			25,657				27,609
Gain on early debt extinguishment			249				4,487
Interest expense, net			46,235				42,763
Loss before income tax (benefit) expense			(20,329	)			(10,667	)
Income tax (benefit) expense			(732	)			1,633
Net loss		$	(19,597	)		$	(12,300	)
Net loss		$	(19,597	)		$	(12,300	)
Foreign currency translation and interest rate swap adjustments, net of tax			18,431				(2,522	)
Comprehensive loss		$	(1,166	)		$	(14,822	)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CLAIRE’S STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

		Three Months				Three Months
		Ended				Ended
		April 30, 2011				May 1, 2010
Cash flows from operating activities:
Net loss		$	(19,597	)		$	(12,300	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			17,054				16,366
Amortization of lease rights and other assets			785				1,028
Amortization of debt issuance costs			5,899				2,535
Payment of in kind interest expense			9,035				9,651
Foreign currency exchange net loss on Euro Loan			3,292				—
Net unfavorable accretion of lease obligations			(275	)			(476	)
Loss on sale/retirement of property and equipment, net			48				236
Gain on early debt extinguishment			(249	)			(4,487	)
Stock compensation expense			974				1,220
(Increase) decrease in:
Inventories			6,683				(792	)
Prepaid expenses			(11,840	)			1,439
Other assets			(709	)			6,052
Increase (decrease) in:
Trade accounts payable			3,693				3,799
Income taxes payable			(3,847	)			(2,329	)
Accrued interest payable			12,396				12,727
Accrued expenses and other liabilities			(21,884	)			(25	)
Deferred income taxes			(1,029	)			474
Deferred rent expense			214				787
Net cash provided by operating activities			643				35,905
Cash flows from investing activities:
Acquisition of property and equipment, net			(15,792	)			(8,218	)
Acquisition of intangible assets/lease rights			(1,347	)			(189	)
Proceeds from sale of property			—				16,765
Changes in restricted cash			(300	)			—
Net cash (used in) provided by investing activities			(17,439	)			8,358
Cash flows from financing activities:
Payments of Credit facility			(438,940	)			(3,625	)
Proceeds from Note			450,000				—
Repurchases of Notes			(24,014	)			(16,849	)
Payment of debt issuance costs			(10,152	)			—
Principal payments of capital leases			—				(765	)
Net cash used in financing activities			(23,106	)			(21,239	)
Effect of foreign currency exchange rate changes on cash and cash equivalents			4,168				(1,721	)
Net (decrease) increase in cash and cash equivalents			(35,734	)			21,303
Cash and cash equivalents, at beginning of period			255,902				198,708
Cash and cash equivalents, at end of period			220,168				220,011
Restricted cash, at end of period			25,966				—
Cash and cash equivalents and restricted cash, at end of period		$	246,134			$	220,011
Supplemental disclosure of cash flow information:
Income taxes paid		$	4,223			$	2,721
Interest paid			18,912				17,838
Non-cash investing and financing activities:
Property acquired under capital lease			—				18,055

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CLAIRE’S STORES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results for the interim periods presented have been included. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended January 29, 2011 filed with the Securities and Exchange Commission, including Note 2 to the Consolidated Financial Statements included therein which discusses principles of consolidation and summary of significant accounting policies.

The Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make certain estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures regarding contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include, but are not limited to, the value of inventories, goodwill, intangible assets and other long-lived assets, legal contingencies and assumptions used in the calculation of income taxes, 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 management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, energy markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates will be reflected in the financial statements in those future periods when the changes occur.

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

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

2. Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”) to provide a consistent definition of fair value and ensure that fair value measurements and disclosure requirements are similar between U.S. GAAP and IFRSs. This guidance changes certain fair value measurement principles and enhances the disclosure requirements for fair value measurements. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2011 and are applied prospectively. Early application by public entities is not permitted. The Company does not expect adoption of ASU 2011-04 will have a material impact on the Company’s financial position, results of operations or cash flows.

3. Fair Value Measurements

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

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

The following tables summarize the Company’s assets (liabilities) measured at fair value on a recurring basis segregated among the appropriate levels within the fair value hierarchy (in thousands):

Fair Value Measurements at April 30, 2011 Using

Quoted Prices in

Active Markets for

Significant

Significant

Identical Assets

Other Observable

Unobservable

(Liabilities)

Inputs

Inputs

Carrying Value

(Level 1)

(Level 2)

(Level 3)

Interest rate swap

$

(1,462

)

$

—

$

(1,462

)

$

—

Fair Value Measurements at January 29, 2011 Using

Quoted Prices in

Active Markets for

Significant

Significant

Identical Assets

Other Observable

Unobservable

(Liabilities)

Inputs

Inputs

Carrying Value

(Level 1)

(Level 2)

(Level 3)

Interest rate swaps

$

(1,165

)

$

—

$

(1,165

)

$

—

The fair value of the Company’s interest rate swaps represent the estimated amounts the Company would receive or pay to terminate those contracts at the reporting date based upon pricing or valuation models applied to current market information. The interest rate swaps are valued using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate curves. The Company included credit valuation adjustment risk in the calculation of fair value for the Swaps entered into in July 2007. The Swap entered into on July 28, 2010 is collateralized by cash and thus the Company does not make any credit-related valuation adjustments. The Company mitigates derivative credit risk by transacting with highly rated counterparties. The Company does not enter into derivative financial instruments for trading or speculative purposes.

Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

The Company’s non-financial assets, which include goodwill, intangible assets, and long-lived tangible assets, are not adjusted to fair value on a recurring basis. Fair value measures of non-financial assets are primarily used in the impairment analysis of these assets. Any resulting asset impairment would require that the non-financial asset be recorded at its fair value. The Company reviews goodwill and indefinite-lived intangible assets for impairment annually, during the fourth quarter of each fiscal year, or as circumstances indicate the possibility of impairment. The Company monitors the carrying value of definite-lived intangible assets and long-lived tangible assets for impairment whenever events or changes in circumstances indicate its carrying amount may not be recoverable.

Financial Instruments Not Measured at Fair Value

The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts receivable, current liabilities, short-term debt, long-term debt, and the revolving credit facility. Cash and cash equivalents, restricted cash, accounts receivable, short-term debt and current liabilities approximate fair market value due to the relatively short maturity of these financial instruments.

The Company considers all investments with a maturity of three months or less when acquired to be cash equivalents. The Company’s cash equivalent instruments are valued using quoted market prices and are primarily U.S. Treasury securities. The estimated fair value of the Company’s long-term debt was approximately $2.37 billion at April 30, 2011, compared to a carrying value of $2.44 billion at that date. The estimated fair value of the Company’s long-term debt, including the current portion, and the revolving credit facility was approximately $2.36 billion at January 29, 2011, compared to a carrying value of $2.45 billion at that date. For publicly-traded debt, the fair value (estimated market value) is based on market prices. For other debt, fair value is estimated based on quoted prices for similar instruments.

4. Debt

Debt as of April 30, 2011 and January 29, 2011 included the following components (in thousands):

		April 30, 2011				January 29, 2011
Short-term debt and current portion of long-term debt:
Note payable to bank due 2012		$	62,796			$	57,703
Current portion of long-term debt			—				18,451
Total short-term debt and current portion of long-term debt		$	62,796			$	76,154
Long-term debt:
Senior secured term loan facility due 2014		$	1,154,310			$	1,399,250
Senior notes due 2015			226,000				236,000
Senior toggle notes due 2015			354,857				360,431
Senior subordinated notes due 2017			259,612				259,612
Senior secured second lien notes due 2019			450,000				—
			2,444,779				2,255,293
Less: current portion of long-term debt			—				(18,451	)
Long-term debt		$	2,444,779			$	2,236,842
Senior secured revolving credit facility due 2013		$	—			$	194,000
Obligations under capital leases		$	17,290			$	17,290

See Note 3 for related fair value disclosure on debt.

Short-term Debt

In January 2011, we entered into a Euro (“€”) denominated loan (the “Euro Loan”) in the amount of €42.4 million that is due on January 24, 2012. The Euro Loan bears interest at the three month Euro Interbank Offered Rate (“EURIBOR”) rate plus 8.00% per year and is payable quarterly. As of April 30, 2011, there was €42.4 million, or the equivalent of $62.8 million, outstanding under the Euro Loan. The net proceeds of the borrowing were used for general corporate purposes.

The obligations under the Euro Loan are secured by a cash deposit in the amount of €15.0 million, or the equivalent of $22.2 million at April 30, 2011, and a perfected first lien security interest in all of the issued and outstanding equity interest of one of our international subsidiaries, Claire’s Holdings S.a.r.l. The cash deposit is classified as “Cash and cash equivalents and restricted cash” in our Unaudited Condensed Consolidated Balance Sheets.

Senior Secured Second Lien Notes

On March 4, 2011, the Company issued $450.0 million aggregate principal amount of 8.875% senior secured second lien notes that mature on March 15, 2019 (the “Senior Secured Second Lien Notes”). Interest on the Senior Secured Second Lien Notes is payable semi-annually to holders of record at the close of business on March 1 or September 1 immediately preceding the interest payment date on March 15 and September 15 of each year, commencing on September 15, 2011. The Senior Secured Second Lien Notes are guaranteed on a second-priority senior secured basis by all of the Company’s existing and future direct or indirect wholly-owned domestic subsidiaries that guarantee the Company’s senior secured credit facility. The Senior Secured Second Lien Notes and related guarantees are secured by a second-priority lien on substantially all of the assets that secure the Company’s and its subsidiary guarantors’ obligations under the Company’s senior secured credit facility. The Company used the proceeds of the offering of the Senior Secured Second Lien Notes to reduce the entire $194.0 million outstanding under the Company’s revolving credit facility (without terminating the commitment), to repay $244.9 million of indebtedness under the Company’s senior secured term loan, and to pay $10.1 million in financing costs which have been recorded as Deferred Financing Costs, Net in the accompanying Unaudited Condensed Consolidated Balance Sheets. As a result of our prepayment under the senior secured term loan facility, we are no longer required to make any quarterly payments and have a final payment due May 29, 2014.

Note Repurchases

The following is a summary of the Company’s debt repurchase activity for the three months ended April 30, 2011 and May 1, 2010 (in thousands):

		Three Months Ended April 30, 2011
		Principal				Repurchase				Recognized
Notes Repurchased		Amount				Price				Gain (Loss) (1)
Senior Notes		$	10,000			$	9,930			$	(98	)
Senior Toggle Notes			14,155				14,084				347
		$	24,155			$	24,014			$	249

		Three Months Ended May 1, 2010
		Principal				Repurchase				Recognized
Notes Repurchased		Amount				Price				Gain (1)
Senior Toggle Notes		$	6,000			$	4,985			$	1,087
Senior Subordinated Notes			15,625				11,864				3,400
		$	21,625			$	16,849			$	4,487

Covenants

Our Senior Notes, Senior Toggle Notes, Senior Subordinated Notes and Senior Secured Second Lien Notes (collectively, the “Notes”) and Euro Loan 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.

None of these covenants, however, require the Company to maintain any particular financial ratio or other measure of financial performance. As of April 30, 2011, we were in compliance with the covenants under our Notes and Euro Loan.

5. Derivatives and Hedging Activities

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 cash flows of the related underlying exposure. The Company measures the effectiveness of its cash flow hedges by evaluating the following criteria: (i) the re-pricing dates of the derivative instrument match those of the debt obligation; (ii) the interest rates of the derivative instrument and the debt obligation are based on the same interest rate index and tenor; (iii) the variable interest rate of the derivative instrument does not contain a floor or cap, or other provisions that cause a basis difference with the debt obligation; and (iv) the likelihood of the counterparty not defaulting is assessed as being probable.

The Company primarily employs derivative financial instruments to manage its exposure to 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 mitigate derivative credit risk by entering into transactions with counterparties that are significant and creditworthy financial institutions. The Company monitors the credit ratings of the counterparties.

For derivatives that qualify as cash flow hedges, the Company reports the effective portion of the change in fair value as a component of “Accumulated other comprehensive income (loss), net of tax” in the Unaudited Condensed Consolidated Balance Sheets and reclassifies it into earnings in the same periods in which the hedged item affects earnings, and within the same income statement line item as the impact of the hedged item. The ineffective portion of the change in fair value of a cash flow hedge is recognized in income immediately. No ineffective portion was recorded to earnings during the three months ended April 30, 2011 and May 1, 2010, respectively, and all components of the derivative gain or loss were included in the assessment of hedge effectiveness. 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).

The Company may at its discretion 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.

On July 28, 2010, the Company entered into an interest rate swap agreement (the “Swap”) to manage exposure to fluctuations in interest rate changes related to the senior secured term loan facility. The Swap has been designated and accounted for as a cash flow hedge and expires on July 30, 2013. The Swap represents a contract to exchange floating rate for fixed interest payments periodically over the life of the Swap without exchange of the underlying notional amount. The Swap covers an aggregate notional amount of $200.0 million of the outstanding principal balance of the senior secured term loan facility and has a fixed rate of 1.2235%. The interest rate Swap results in the Company paying a fixed rate plus the applicable margin then in effect for LIBOR borrowings resulting in an interest rate of 3.97% at April 30, 2011, on a notional amount of $200.0 million of the senior secured term loan.

The Company entered into three interest rate swap agreements in July 2007 (the “2007 Swaps”) to manage exposure to interest rate changes related to the senior secured term loan facility. The 2007 Swaps were designated and accounted for as cash flow hedges. Those 2007 Swaps expired on June 30, 2010. The 2007 Swaps covered an aggregate notional amount of $435.0 million of the outstanding principal balance of the senior secured term loan facility. The fixed rates of the 2007 Swaps ranged from 4.96% to 5.25%.

The Company does not make any credit-related valuation adjustments to the Swap entered into on July 28, 2010 because it is collateralized by cash, the balance of which is $3.8 million at April 30, 2011. The collateral requirement increases for declines in the three year LIBOR rate below 1.2235%. As of April 30, 2011, the three year LIBOR rate was 0.88% and each further 10 basis point decline in rate would result in an additional collateral requirement of $0.6 million. Any subsequent increases in the three year LIBOR rate will result in a release of the collateral. The Company included credit-related valuation adjustments in the calculation of fair value for the 2007 Swaps.

At April 30, 2011 and January 29, 2011, the estimated fair values of the Company’s derivative financial instruments designated as interest rate cash flow hedges were liabilities of approximately $1.5 million and $1.2 million, respectively, which were recorded in “Accrued expenses and other current liabilities” in the Unaudited Condensed Consolidated Balance Sheets. These amounts were also recorded, net of tax of approximately $5.7 million and $5.7 million, respectively, as a component in “Accumulated other comprehensive income (loss), net of tax” in the Unaudited Condensed Consolidated Balance Sheets. See Note 3 — Fair Value Measurements for fair value measurement of interest rate swaps.

The following tables provide a summary of the financial statement effect of the Company’s derivative financial instruments designated as interest rate cash flow hedges during the three months ended April 30, 2011 and May 1, 2010 (in thousands):

Location of Gain or

Amount of Gain or (Loss)

(Loss) Reclassified

Amount of Gain or (Loss)

Derivatives in Cash

Recognized in OCI on

from Accumulated

Reclassified from Accumulated

Flow Hedging

Derivative

OCI into Income

OCI into Income

Relationships

(Effective Portion)

(Effective Portion)

(Effective Portion) (1)

Three months ended

Three months ended

April 30,

May 1,

April 30,

May 1,

2011

2010

2011

2010

Interest rate swaps

$

(297

)

$

5,159

Interest expense, net

$

(465

)

$

(5,332

)

Over the next twelve months, the Company expects to reclassify net losses on the Company’s interest rate swaps recognized within “Accumulated other comprehensive income (loss), net of tax” of $1.9 million to interest expense.

6. Commitments and Contingencies

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

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

7. Stock Options and Stock-Based Compensation

The following is a summary of activity in the Company’s stock option plan for the three months ended April 30, 2011:

										Weighted-
						Weighted-				Average
						Average				Remaining
		Number of				Exercise				Contractual
		Shares				Price				Term (Years)
Outstanding at January 29, 2011			6,860,014			$	10.00
Options granted			111,500			$	10.00
Options exercised		—
Options forfeited or expired			(34,343	)		$	10.00
Outstanding at April 30, 2011			6,937,171			$	10.00				4.2
Options vested and expected to vest at April 30, 2011			6,334,811			$	10.00				4.1
Exercisable at April 30, 2011			2,264,868			$	10.00				3.6

The weighted average grant date fair value of options granted during the three months ended April 30, 2011 and May 1, 2010 was $2.81 and $2.94, respectively.

During the three months ended April 30, 2011 and May 1, 2010, the Company recorded stock-based compensation expense and additional paid-in capital relating to stock-based compensation of approximately $1.0 million and $1.2 million, respectively. Stock-based compensation expense is recorded in “Selling, general and administrative” expenses in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

8. Income Taxes

The effective income tax rate was 3.6% for the three months ended April 30, 2011. This effective income tax rate differed from the statutory federal tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses in the three months ended April 30, 2011 by the Company’s U.S. operations.

The effective income tax rate was (15.3)% for the three months ended May 1, 2010. This effective income tax rate differed from the statutory federal tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated in the three months ended May 1, 2010 by the Company’s U.S. operations.

In April 2011, the Company received from the Canada Revenue Agency withholding tax assessments for 2003 through 2007 of approximately $5.0 million, including penalties and interest. In conjunction with these assessments, a security deposit will be required in the amount of approximately $5.0 million until such time a final decision is made by the tax authority. The Company is objecting to these assessments

and believes it will prevail at the appeals level; therefore, an accrual has not been recorded for this item. In February 2011, the Internal Revenue Service concluded its tax examination of our U.S. Federal income tax return for Fiscal 2007 and did not assess any additional tax liability.

9. Related Party Transactions

The Company paid store planning and retail design fees to a Company owned by a member of one of the Company’s executive officers. These fee are included in “Furniture, fixtures and equipment” in the Company’s Unaudited Condensed Consolidated Balance Sheets and “Selling, general and administrative” expenses in the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). For the three months ended April 30, 2011 and May 1, 2010, the Company paid fees of approximately $0.5 million and $0.2 million, respectively. This arrangement was approved by the Audit Committee of the Board of Directors.

The initial purchasers of the Senior Secured Second Lien Notes were Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, Goldman Sachs & Co., and Morgan Joseph TriArtisan LLC. Apollo Management, LLC, an affiliate of Apollo Management VI, L.P., has a non-controlling interest in Morgan Joseph TriArtisan LLC and its affiliates. Additionally, a member of the Company’s Board of Directors is an executive of Morgan Joseph TriArtisan Inc., an affiliate of Morgan Joseph TriArtisan LLC. In connection with the issuance of the Senior Secured Second Lien Notes, the Company paid a fee of approximately $0.3 million to Morgan Joseph TriArtisan LLC.

10. Segment Information

The Company is organized based on the geographic markets in which it operates. Under this structure, the Company currently has two reportable segments: North America and Europe. The Company accounts for the goods it sells to third parties under franchising and licensing agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” in the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) within its North American division. The franchise fees the Company charges under the franchising agreements are reported in “Other expense (income), net” in the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) within its European division. Until September 2, 2010, the Company accounted for the results of operations of Claire’s Nippon under the equity method and included the results within “Other expense (income), net” in the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) within the Company’s North American division. After September 2, 2010, these former joint venture stores began to operate as licensed stores. Substantially all of the interest expense on the Company’s outstanding debt is recorded in the Company’s North American division.

Net sales and operating income for the three months ended April 30, 2011 and May 1, 2010 are as follows (in thousands):

		Three Months				Three Months
		Ended				Ended
		April 30, 2011				May 1, 2010
Net sales:
North America		$	224,188			$	212,599
Europe			122,258				109,478
Total net sales			346,446				322,077
Depreciation and amortization:
North America			10,405				10,507
Europe			6,649				5,859
Total depreciation and amortization			17,054				16,366
Operating income (loss) for reportable segments:
North America			30,624				24,403
Europe			(4,624	)			3,308
Total operating income for reportable segments			26,000				27,711
Severance and transaction-related costs			343				102
Net consolidated operating income			25,657				27,609
Gain on early debt extinguishment			249				4,487
Interest expense, net			46,235				42,763
Net consolidated loss before income tax expense		$	(20,329	)		$	(10,667	)

Excluded from operating income for the North American segment are severance and transaction-related costs of approximately $0.1 million for each of the three months ended April 30, 2011 and May 1, 2010, respectively.

Excluded from operating income for the European segment are severance and transaction-related costs of approximately $0.2 million and $0 for the three months ended April 30, 2011 and May 1, 2010, respectively.

11. Supplemental Financial Information

On May 29, 2007, Claire’s Stores, Inc. (the “Issuer”), issued $935.0 million in Senior Notes, Senior Toggle Notes and Senior Subordinated Notes, and on March 4, 2011, issued $450.0 million aggregate principal amount of Senior Secured Second Lien Notes. These Notes are irrevocably and unconditionally guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of Claire’s Stores, Inc. that guarantee the Company’s Credit Facility (the “Guarantors”). The Company’s other subsidiaries, principally its international subsidiaries including its European, Canadian and Asian subsidiaries (the “Non-Guarantors”), are not guarantors of these Notes.

The tables in the following pages present the condensed consolidating financial information for the Issuer, the Guarantors and the Non-Guarantors, together with eliminations, as of and for the periods indicated. The consolidating financial information may not necessarily be indicative of the financial position, results of operations or cash flows had the Issuer, Guarantors and Non-Guarantors operated as independent entities.

Condensed Consolidating Balance Sheet
April 30, 2011
(in thousands)
										Non-
		Issuer				Guarantors				Guarantors				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents and restricted cash (1)		$	160,941			$	(8,002	)		$	93,195			$	—			$	246,134
Inventories			—				79,423				53,814				—				133,237
Prepaid expenses			434				15,171				19,333				—				34,938
Other current assets			11				16,096				6,641				—				22,748
Total current assets			161,386				102,688				172,983				—				437,057
Property and equipment:
Furniture, fixtures and equipment			3,446				121,260				72,271				—				196,977
Leasehold improvements			1,071				143,577				119,504				—				264,152
			4,517				264,837				191,775				—				461,129
Less accumulated depreciation and amortization			(2,368	)			(155,707	)			(94,571	)			—				(252,646	)
			2,149				109,130				97,204				—				208,483
Leased property under capital lease:
Land and building			—				18,055				—				—				18,055
Less accumulated depreciation and amortization			—				(1,128	)			—				—				(1,128	)
			—				16,927				—				—				16,927
Intercompany receivables			—				411,558				—				(411,558	)			—
Investment in subsidiaries			2,297,149				(66,467	)			—				(2,230,682	)			—
Goodwill			—				1,235,651				314,405				—				1,550,056
Intangible assets, net			286,000				8,404				267,627				—				562,031
Deferred financing costs, net			39,960				—				381				—				40,341
Other assets			130				4,133				42,554				—				46,817
			2,623,239				1,593,279				624,967				(2,642,240	)			2,199,245
Total assets		$	2,786,774			$	1,822,024			$	895,154			$	(2,642,240	)		$	2,861,712
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Short-term debt		$	—			$	—			$	62,796			$	—			$	62,796
Trade accounts payable			993				22,771				36,613				—				60,377
Income taxes payable			—				(357	)			8,793				—				8,436
Accrued interest payable			29,167				—				65				—				29,232
Accrued expenses and other current liabilities			10,101				35,426				43,030				—				88,557
Total current liabilities			40,261				57,840				151,297				—				249,398
Intercompany payables			328,442				—				83,116				(411,558	)			—
Long-term debt			2,444,779				—				—				—				2,444,779
Revolving credit facility			—				—				—				—				—
Obligation under capital lease			—				17,290				—				—				17,290
Deferred tax liability			—				106,064				15,415				—				121,479
Deferred rent expense			—				17,246				10,225				—				27,471
Unfavorable lease obligations and other long-term liabilities			—				26,750				1,253				—				28,003
			2,773,221				167,350				110,009				(411,558	)			2,639,022
Stockholder’s equity (deficit):
Common stock			—				367				2				(369	)			—
Additional paid in capital			622,073				1,435,909				815,866				(2,251,775	)			622,073
Accumulated other comprehensive income (loss), net of tax			19,846				5,411				7,883				(13,294	)			19,846
Retained earnings (accumulated deficit)			(668,627	)			155,147				(189,903	)			34,756				(668,627	)
			(26,708	)			1,596,834				633,848				(2,230,682	)			(26,708	)
Total liabilities and stockholder’s equity (deficit)		$	2,786,774			$	1,822,024			$	895,154			$	(2,642,240	)		$	2,861,712

Condensed Consolidating Balance Sheet
January 29, 2011
(in thousands)
										Non-
		Issuer				Guarantors				Guarantors				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents and restricted cash (1)		$	179,529			$	3,587			$	96,650			$	—			$	279,766
Inventories			—				84,868				51,280				—				136,148
Prepaid expenses			851				1,680				18,918				—				21,449
Other current assets			—				16,547				8,111				—				24,658
Total current assets			180,380				106,682				174,959				—				462,021
Property and equipment:
Furniture, fixtures and equipment			3,276				119,228				64,010				—				186,514
Leasehold improvements			1,052				143,072				103,906				—				248,030
			4,328				262,300				167,916				—				434,544
Less accumulated depreciation and amortization			(2,205	)			(147,857	)			(83,449	)			—				(233,511	)
			2,123				114,443				84,467				—				201,033
Leased property under capital lease:
Land and building			—				18,055				—				—				18,055
Less accumulated depreciation and amortization			—				(903	)			—				—				(903	)
			—				17,152				—				—				17,152
Intercompany receivables			—				366,929				—				(366,929	)			—
Investment in subsidiaries			2,303,333				(63,535	)			—				(2,239,798	)			—
Goodwill			—				1,235,651				314,405				—				1,550,056
Intangible assets, net			286,000				9,294				262,172				—				557,466
Deferred financing costs, net			35,973				—				461				—				36,434
Other assets			130				3,842				38,315				—				42,287
			2,625,436				1,552,181				615,353				(2,606,727	)			2,186,243
Total assets		$	2,807,939			$	1,790,458			$	874,779			$	(2,606,727	)		$	2,866,449
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Short-term debt and current portion of long-term debt		$	18,451			$	—			$	57,703			$	—			$	76,154
Trade accounts payable			1,199				24,545				28,611				—				54,355
Income taxes payable			—				644				11,100				—				11,744
Accrued interest payable			16,696				—				87				—				16,783
Accrued expenses and other current liabilities			20,630				37,910				48,575				—				107,115
Total current liabilities			56,976				63,099				146,076				—				266,151
Intercompany payables			346,636				—				20,293				(366,929	)			—
Long-term debt			2,236,842				—				—				—				2,236,842
Revolving credit facility			194,000				—				—				—				194,000
Obligation under capital lease			—				17,290				—				—				17,290
Deferred tax liability			—				106,797				14,979				—				121,776
Deferred rent expense			—				17,230				9,407				—				26,637
Unfavorable lease obligations and other long-term liabilities			—				28,889				1,379				—				30,268
			2,777,478				170,206				46,058				(366,929	)			2,626,813
Stockholder’s equity (deficit):
Common stock			—				367				2				(369	)			—
Additional paid in capital			621,099				1,435,909				815,866				(2,251,775	)			621,099
Accumulated other comprehensive income (loss), net of tax			1,416				3,663				(7,080	)			3,417				1,416
Retained earnings (accumulated deficit)			(649,030	)			117,214				(126,143	)			8,929				(649,030	)
			(26,515	)			1,557,153				682,645				(2,239,798	)			(26,515	)
Total liabilities and stockholder’s equity (deficit)		$	2,807,939			$	1,790,458			$	874,779			$	(2,606,727	)		$	2,866,449

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended April 30, 2011
(in thousands)
										Non-
		Issuer				Guarantors				Guarantors				Eliminations				Consolidated
Net sales		$	—			$	209,024			$	137,422			$	—			$	346,446
Cost of sales, occupancy and buying expenses			1,595				98,449				71,315				—				171,359
Gross profit			(1,595	)			110,575				66,107				—				175,087
Other expenses:
Selling, general and administrative			8,188				62,392				56,142				—				126,722
Depreciation and amortization			181				9,478				7,395				—				17,054
Severance and transaction-related costs			133				—				210				—				343
Other (income) expense			(3,648	)			436				8,523				—				5,311
			4,854				72,306				72,270				—				149,430
Operating income (loss)			(6,449	)			38,269				(6,163	)			—				25,657
Gain on early debt extinguishment			249				—				—				—				249
Interest expense, net			44,230				531				1,474				—				46,235
Income (loss) before income taxes			(50,430	)			37,738				(7,637	)			—				(20,329	)
Income tax expense (benefit)			—				(1,112	)			380				—				(732	)
Income (loss) from continuing operations			(50,430	)			38,850				(8,017	)			—				(19,597	)
Equity in earnings of subsidiaries			30,833				(917	)			—				(29,916	)			—
Net income (loss)			(19,597	)			37,933				(8,017	)			(29,916	)			(19,597	)
Foreign currency translation and interest rate swap adjustments, net of tax			18,431				1,748				14,962				(16,710	)			18,431
Comprehensive income (loss)		$	(1,166	)		$	39,681			$	6,945			$	(46,626	)		$	(1,166	)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended May 1, 2010
(in thousands)
										Non-
		Issuer				Guarantors				Guarantors				Eliminations				Consolidated
Net sales		$	—			$	198,592			$	123,485			$	—			$	322,077
Cost of sales, occupancy and buying expenses			1,275				95,987				61,489				—				158,751
Gross profit			(1,275	)			102,605				61,996				—				163,326
Other expenses (income):
Selling, general and administrative			8,432				61,423				48,164				—				118,019
Depreciation and amortization			132				9,638				6,596				—				16,366
Severance and transaction-related costs			102				—				—				—				102
Other (income) expense			(5,875	)			2,254				4,851				—				1,230
			2,791				73,315				59,611				—				135,717
Operating income (loss)			(4,066	)			29,290				2,385				—				27,609
Gain on early debt extinguishment			4,487				—				—				—				4,487
Interest expense, net			42,745				7				11				—				42,763
Income (loss) before income taxes			(42,324	)			29,283				2,374				—				(10,667	)
Income tax expense			23				616				994				—				1,633
Income (loss) from continuing operations			(42,347	)			28,667				1,380				—				(12,300	)
Equity in earnings of subsidiaries			30,047				(47	)			—				(30,000	)			—
Net income (loss)			(12,300	)			28,620				1,380				(30,000	)			(12,300	)
Foreign currency translation and interest rate swap adjustments, net of tax			(2,522	)			9,432				(9,251	)			(181	)			(2,522	)
Comprehensive income (loss)		$	(14,822	)		$	38,052			$	(7,871	)		$	(30,181	)		$	(14,822	)