PART I.
Statement Regarding Forward-Looking Disclosures
The Private Securities Litigation Reform Act of 1995, or the Act, provides a safe harbor for
forward-looking statements made by or on behalf of Claires Stores, Inc., which we refer to as
the Company, we, our, or similar terms, and typically these references include our
subsidiaries. We and our representatives may from time to time make written or verbal
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 shareholders. 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,
planned capital expenditures, upgrades to our information technology systems, and new store
openings for future fiscal years, are forward-looking statements within the meaning of the Act.
The forward-looking statements may use the words expect, anticipate, plan, intend,
project, may, believe, forecast, and similar expressions. The forward-looking statements
are and will be based on managements then current views and assumptions regarding future events
and operating performance, and we assume no obligation to update any forward-looking statement.
Forward-looking statements involve known or unknown risks, uncertainties and other factors,
including changes in estimates and judgments discussed under Critical Accounting Policies and
Estimates and elsewhere in this Form 10-K, 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.
Item 1. Business
General
We are a leading global specialty retailer of value-priced fashion accessories and jewelry for
pre-teens and teenagers as well as young adults. We are organized based on our geographic markets,
which include our North American operations and our International operations. As of January 28,
2006, we operated a total of 2,878 stores in all 50 states of the United States, Puerto Rico,
Canada, the Virgin Islands, the United Kingdom, Switzerland, Austria, Germany (the latter three
collectively referred to as S.A.G.), France, Ireland, Spain, Holland and Belgium. The stores are
operated mainly under the trade names Claires, Claires Boutiques, Claires Accessories,
Icing by Claires, Afterthoughts and The Icing. We are continuing the process of
transitioning our Afterthoughts stores to Icing by Claires stores to capitalize on the
Claires brand name. We also operated 172 stores in Japan through a 50:50 joint venture with AEON
Co. Ltd. (Claires Nippon). We account for the results of operations of Claires Nippon under the
equity method. These results are included within Interest and other income in our Consolidated
Statements of Operations and Comprehensive Income within our North American division. In addition,
we licensed 84 stores in the Middle East under a licensing and merchandising agreement with Al
Shaya Co. Ltd. and 7 stores in South Africa under similar agreements with the House of Busby
Limited. We account for the goods we sell under the merchandising agreements within Net sales
and Cost of sales, occupancy and buying expenses in our North American division and the license
fees we charge under the licensing agreements within Interest and other income within our
International division in our Consolidated Statements of Operations and Comprehensive Income.
We incorporated in 1961 as a Delaware corporation. In June 2000, we completed our reincorporation
from the State of Delaware to the State of Florida through a merger transaction with one of our
wholly-owned subsidiaries.
Our executive offices are located at 3 S.W. 129
th Avenue, Pembroke Pines, Florida
33027, our telephone number is (954) 433-3900 and our general internet address is www.claires.com.
Through our corporate internet website, www.clairestores.com, we make available, as soon as
reasonably practicable after such information has been filed or furnished to the Securities and
Exchange Commission, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports. These reports are available by clicking
financial info and then SEC filings. In addition, we have made our Corporate Governance
Guidelines, the charters of our Audit, Compensation and
3
Nominating and Corporate Governance Committees and our Code of Ethics available through our
website. We will disclose any amendments to our Code of Ethics or waivers of any provision thereof
on our website within four business days following the date of the amendment or waiver, and that
information will remain available for at least a twelve-month period. Printed copies of these
documents are also available to our shareholders upon written request to Investor Relations,
Claires Stores, Inc., 350 Fifth Avenue, Suite 900, New York, NY 10118. The reference to our
website does not constitute incorporation by reference of the information contained on our website,
and the information contained on the website is not part of this Form 10-K.
The Certification of the Co-Chief Executive Officers required by Section 303A.12(a) of The New York
Stock Exchange Listing Standards relating to the Companys compliance with The New York Stock
Exchange Corporate Governance Listing Standards was submitted to the New York Stock Exchange on
July 12, 2005. In addition, we have filed as exhibits to this Annual Report on Form 10-K for the
year ended January 28, 2006, the applicable certifications of our Co-Chief Executive Officers and
Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002, regarding the
quality of the Companys public disclosures.
Business Description
We have two store concepts: Claires Accessories, which caters to fashion-conscious girls and teens
in the 7 to 17 age range, and Icing by Claires, which caters to fashion-conscious teens and young
women in the 17 to 27 age range. Our merchandise typically ranges in price between $2.50 and
$20.00, with the average product priced at approximately $4.40. Our stores share a similar format
and our different store concepts and trade-names allow us to have multiple store locations within a
single mall. Although we face competition from a number of small specialty store chains and others
selling fashion accessories and jewelry, we believe that our stores comprise one of the largest
chains of specialty retail stores in the world devoted to the sale of value-priced fashion
accessories and jewelry for pre-teen, teenage and young adult females.
Our sales are divided into two principal product categories:
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Jewelry Costume jewelry, earrings and ear piercing services; and |
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Accessories Other fashion accessories, hair ornaments, handbags and novelty items. |
The following table compares our sales of each product category for the last three fiscal years
(dollars in thousands):
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Fiscal Year Ended |
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Jan. 28, 2006 |
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Jan. 29, 2005 |
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Jan. 31, 2004 |
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Jewelry |
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$ |
795,377 |
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58.0 |
% |
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$ |
717,406 |
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56.0 |
% |
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$ |
603,564 |
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53.0 |
% |
Accessories |
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574,375 |
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42.0 |
% |
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|
562,001 |
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44.0 |
% |
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529,270 |
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|
47.0 |
% |
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$ |
1,369,752 |
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100.0 |
% |
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$ |
1,279,407 |
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100.0 |
% |
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$ |
1,132,834 |
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100.0 |
% |
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We refer to the fiscal years referenced above as Fiscal 2006, Fiscal 2005 and Fiscal 2004,
respectively.
4
We are organized based on geographic markets in which we operate. Under this structure, we
currently have two reportable segments: North America and International. A summary of North
American and International operations is presented below (dollars in thousands):
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Fiscal Year Ended |
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Jan. 28, |
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Jan. 29, |
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Jan. 31, |
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2006 |
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2005 |
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2004 |
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NET SALES |
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North America |
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$ |
964,008 |
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$ |
906,071 |
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$ |
820,332 |
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International |
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405,744 |
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|
373,336 |
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312,502 |
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Total revenues |
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$ |
1,369,752 |
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$ |
1,279,407 |
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$ |
1,132,834 |
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INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES |
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North America |
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$ |
204,554 |
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$ |
170,323 |
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$ |
138,387 |
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International |
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55,117 |
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51,313 |
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36,035 |
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Total income from continuing
operations before income taxes |
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$ |
259,671 |
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$ |
221,636 |
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$ |
174,422 |
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LONG-LIVED ASSETS |
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North America |
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$ |
159,361 |
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$ |
145,418 |
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$ |
128,585 |
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International |
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|
63,358 |
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|
59,108 |
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|
57,266 |
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Total long-lived assets |
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$ |
222,719 |
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$ |
204,526 |
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$ |
185,851 |
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Additional financial information for our two segments is set forth in Note 11 of our consolidated
financial statements included in this Annual Report on Form 10-K.
Strategy
Through our Claires Accessories and Icing by Claires store concepts, our mission is to be the
most profitable specialty retailer selling accessories and costume jewelry to fashion-aware teens,
tweens and young adults. We believe our customers want to stay current with or ahead of fashion
trends and continually seek newness in their accessory wear. The key elements of our strategy are
as follows:
Actively Manage Merchandise Trends and Display of Merchandise. We devote considerable effort to
identifying emerging fashion trends. Through constant product testing and rapid placement of
successful test items in our stores, we are able to respond to emerging fashion trends. We also
devote considerable effort to how our merchandise is displayed in our stores, which we believe
commands our customers attention, supports our image and promotes a consistent shopping
environment for our customers. Our merchandising and distribution systems enhance our ability to
respond quickly to new fashion trends. We typically deliver merchandise to our stores three to
five times a week.
Provide Attentive Customer Service. We are committed to offering courteous and professional
customer service. We strive to give our customers the same level of respect that is generally
given to adult customers at other retail stores, and to provide friendly and informed customer
service for parents. Additionally, our stores provide a friendly and social atmosphere for our
customers.
Store Growth Strategy. We opened our first store in Europe in 1996 and, as of January 28, 2006,
operated 772 stores in Europe. Our European stores are typically
smaller than our North American stores, which results in higher sales per square foot than our
North American stores. We intend to continue our store growth through the opening of new stores in
our international markets. Future store openings in Asia are currently subject to our 50:50 joint
venture arrangement under Claires Nippon.
Licensing Arrangements. We entered into our first licensing arrangement with a Kuwaiti company in
the fiscal year ended February 3, 2001 and a similar arrangement with a South African company in
Fiscal
5
2005. We intend to continue to seek suitable licensees in order to open stores in certain
international markets.
Maintain Strong Supplier Relationships. We view our supplier relationships as important to our
success, and promote personal interaction with our suppliers. We believe many of our suppliers
view our stores as important distribution channels.
Capitalize on Our Brand Name. We believe that the Claires brand name is one of our most important
assets. We intend to develop our brand through, among other things, in-store marketing and
licensing arrangements.
Stores
Our stores in North America are located primarily in enclosed shopping malls. Our stores in North
America operating as Claires, Claires Boutiques and Claires Accessories average
approximately 1,100 square feet while those stores operating as Icing by Claires, The Icing
and Afterthoughts average approximately 1,200 square feet. Our stores in the United Kingdom,
S.A.G., France, Ireland, Spain, Holland, Belgium and Japan average approximately 600 square feet
and are located primarily in enclosed shopping malls and central business districts. Each store
uses our proprietary displays, which permit the presentation of a wide variety of items in a
relatively small space.
Our stores are distinctively designed for customer identification, ease of shopping and display of
a wide selection of merchandise. Store hours are dictated by the mall operators and the 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 70% of our sales are 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.
Purchasing and Distribution
We purchased our merchandise from approximately 800 domestic and international suppliers in Fiscal
2006. Approximately 83% of our merchandise in Fiscal 2006 was purchased from outside the United
States, including approximately 60% purchased from China. We are not dependent on an individual
supplier for merchandise purchased. All merchandise is shipped from suppliers to our distribution
facility in Hoffman Estates, Illinois, a suburb of Chicago (which services the North American
stores), the distribution facility in Birmingham, England (which services the stores in the United
Kingdom, Ireland, France, Holland and Belgium), or the distribution facilities in Zurich,
Switzerland and Vienna, Austria (which service the stores in S.A.G. and Spain). After inspection,
merchandise is shipped via common carrier to our individual stores. Stores typically receive three
to five shipments a week, which provide our stores with a steady flow of new merchandise.
Our business fluctuates according to changes in customer preferences, which are dictated in part by
fashion and season. In addition, the cyclical nature of the retail business requires us to carry a
significant amount of inventory, especially prior to peak selling seasons. As a result, we
typically purchase merchandise from our suppliers in advance of the applicable selling season, and
sometimes before fashion trends are identified or evidenced by customer purchases.
We determine the allocation of merchandise to our stores based on an analysis of various factors,
including size, location, demographics, sales and inventory history. Merchandise typically is sold
at its original marked price, with the length of time our merchandise remains at the original price
varying by item. We review our inventory levels to identify slow-moving merchandise, and use
markdowns to sell this merchandise. Markdowns may be used if inventory exceeds client demand for
reasons of fashion, design, seasonal adaptation or changes in client preference, or if it is
otherwise determined that the inventory will not sell at its currently marked price.
6
Store Management
Except as stated below, the Senior Vice President of Store Operations for North America is
responsible for managing our North American stores and reports to the President and Chief Operating
Officer for North America, who in turn, reports to our Co-Chief Executive Officers. Our stores are
organized and controlled on a district level. As of January 28, 2006, we employed 221 District
Managers in North America, each of whom oversees and manages approximately 10 stores in their
respective geographic area and reports to one of 21 Regional Managers. Each Regional Manager in
North America reports to one of 6 Territorial Vice Presidents, who reports to the Senior Vice
President of Store Operations. Each store is staffed by a Manager, an Assistant Manager and one or
more part-time employees. The reporting structure for our stores in the International group is
similar to the reporting structure in North America. The President of Claires UK, who is also
responsible for Ireland, Holland and Belgium, reports to the President and Chief Operating Officer
for North America, and the President of S.A.G. reports to our Co-Chief Executive Officer
responsible for our International segment. The President of S.A.G is also responsible for France
and Spain. In the International group, as of January 28, 2006 there were a total of 1 Territorial
Vice President, 7 Regional Managers and 82 District Managers.
Store Openings, Closings and Future Growth
For Fiscal 2006, we opened 168 stores and closed 102 stores, for a total increase of 66 stores.
Stores, net refers to stores opened, net of closings, if any. In our International group, we
increased our operations by 5 stores, net, in the United Kingdom, resulting in a total of 447
stores, decreased our operations by 1 store, net, in S.A.G., resulting in a total of 98 stores and
increased our operations by 25 stores, net, in France, resulting in a total of 201 stores. We also
opened 15, 10 and 1 stores in Spain, Holland and Belgium, respectively, in Fiscal 2006. In North
America, we decreased our operations by 13 stores, net, to 2,106 stores. We believe our store
growth will occur in our international markets, where we plan to open 20 stores, net, in France and
10 stores, net, in S.A.G. during the fiscal year ending February 3, 2007, which is referred to as
Fiscal 2007. We plan to open approximately 15 stores, net, in North America in Fiscal 2007 and 5
stores, net, in the United Kingdom. We also plan to open 60 80 new stores in Spain, Belgium,
and Holland in Fiscal 2007. In Fiscal 2006, Claires Nippon increased operations in Japan by 24
stores, net, to 172 stores. There are 26 store openings planned in Japan in Fiscal 2007.
We closed 319 stores in the last three fiscal years, primarily due to certain locations not meeting
our established profit benchmarks, the unwillingness of landlords to renew leases on terms
acceptable to us, and the elimination of stores in connection with our acquisition of
Afterthoughts. Most of these stores were closed at or near lease expiration. We have not
experienced any substantial difficulty in renewing desired store leases and have no reason to
expect any such difficulty in the future. For each of the last three fiscal years, no individual
store accounted for more than one percent of total sales.
We 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 2006, which
includes leasehold improvements and fixtures, averaged approximately $161,000 per store. In
addition to the investment in leasehold improvements and fixtures, certain store locations in our
International operations require the purchase of intangible assets, which averaged approximately
$197,000 per store during Fiscal 2006.
Our continued growth depends on our ability to open and operate stores on a profitable basis. Our
ability to expand successfully will be dependent upon a number of factors, including sufficient
demand for our merchandise in existing and new markets, our ability to locate and obtain favorable
store sites and negotiate acceptable lease terms, obtain adequate merchandise supply and hire and
train qualified management and other employees. See also Risk Factors.
Brand Building
Our continued ability to develop our existing brand is a key to our success. We believe our
distinct brand name is among our most important assets. All aspects of brand development from
product design and distribution, to marketing, merchandising and shopping environments are
controlled by us. We continue
7
to invest in the development of our brand through consumer research. We have also made investments
to enhance the customer experience through the expansion and remodeling of existing stores, the
closure of under-performing stores, and a focus on customer service.
Trademarks and Service Marks
We are the owner in the United States of various marks, including Claires, Claires
Accessories, Afterthoughts, Icing by Claires and The Icing. We have also registered these
marks outside of the United States. We believe our rights in our marks are important to our
business and intend to maintain our marks and the related registrations.
Competition
The specialty retail business is highly competitive. We compete with department stores and other
chain store concepts on a national and international level. We also compete on a regional or local
level with specialty and discount store chains and independent retail stores. Our competition also
includes internet, direct marketing to consumer, and catalog businesses. 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, fashion, price, merchandise, store location and customer service.
Seasonality
Sales of each category of merchandise vary from period to period depending on current fashion
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 the
fiscal year ended January 28, 2006 were 22%, 24%, 24% and 30%, respectively.
Employees
On January 28, 2006, we had approximately 18,000 employees, 58% 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.
Item 1A. Risk Factors
Certain Risk Factors Relating to our Business.
The following are some of the factors that could cause actual results to differ materially from
estimates contained in our forward-looking statements:
Fluctuations in consumer preference may adversely affect the demand of our products and result
in a decline in our sales.
Our retail costume jewelry and fashion accessories business fluctuates according to changes in
consumer preferences, which are dictated in part by fashion and season. 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 fashion tastes and our customers come to believe that we are no longer able to
offer fashions that appeal to them, our brand image may suffer.
Our business is affected by consumer spending patterns.
Our business is sensitive to a number of factors that influence the levels of consumer spending,
including political and economic conditions, such as recessionary and inflationary environments,
the levels of disposable consumer income, energy costs, consumer debt, interest rates and consumer
confidence.
8
Declines in consumer spending on costume jewelry and accessories could have a material adverse
effect on our operating results.
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 fashion accessories and apparel especially affect the
inventory we sell because we usually order our merchandise in advance of the applicable season and
sometimes before fashion 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 fashion needs.
As a result, if sales do not meet our expectations, our results of operations may be negatively
impacted.
A disruption of imports from our foreign suppliers or significant fluctuation in the value of
the U.S. Dollar or foreign exchange rates may increase our costs and reduce our supply of
merchandise.
We purchased merchandise from approximately 800 domestic and international suppliers in Fiscal
2006. Approximately 83% of our Fiscal 2006 merchandise was purchased from suppliers outside the
United States, including approximately 60% 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 U.S. 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. During the
prior year, the U.S. imposed trade quotas on specific categories of goods and apparel imported from
China, and may impose additional quotas in the future.
Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S.
dollars. As a result, our sourcing operations also may be adversely affected by significant
fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the
transfer of funds, and other trade disruptions. Additionally, if China further adjusts the
exchange rate of the Chinese Yuan or allows the value to float, we will likely experience an
increase in cost of our merchandise purchased from China.
Interruptions in distribution of our merchandise from our distribution facilities may
negatively affect our profitability.
Distribution functions for all of our North American stores are handled from our distribution
center in Hoffman Estates, Illinois. Distribution functions for our stores outside of North
America are handled through three distribution centers located in the United Kingdom, Switzerland
and Austria. We plan to open during Fiscal 2008 a new distribution center in Europe to address our
anticipated growth in Europe. As we construct or expand
our distribution centers, we could experience delays and cost overruns, such as shortages of
materials; shortages of skilled labor or work stoppages; unforeseen construction, scheduling,
engineering, environmental or geological problems; weather interference; fires or other casualty
losses; and unanticipated cost increases. The completion dates and ultimate costs could differ
significantly from initial expectations due to construction-related or other reasons. Any
significant interruption in the operation of our distribution centers, due to natural disaster or
otherwise, would have a material adverse effect on our business, financial condition and results of
operations.
9
Store operations and expansion may affect our ability to increase net sales and operate
profitably.
Our continued success depends, in part, upon our ability to increase sales at existing store
locations, to open new stores and to operate stores on a profitable basis and to maintain good
relationships with mall developers and operators. Because we are primarily a mall-based chain, our
future growth is significantly dependent on our ability to open new stores in desirable locations,
including malls. Our ability to open new stores depends on a number of factors, including our
ability to locate and obtain favorable store sites primarily in malls, negotiate acceptable lease
terms that meet our financial targets, obtain adequate supplies of merchandise, hire and train
qualified employees and expand our infrastructure to accommodate growth. 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. There can be no assurance that our growth will result in
enhanced profitability or that we will achieve our targeted growth rates with respect to new store
openings. In addition, we must be able to effectively renew our existing store leases. Failure to
secure real estate locations adequate to meet annual targets as well as effectively manage the
profitability of our existing stores could have a material adverse effect on our results of
operations.
The failure to execute our international expansion or successfully integrate our international
operations may impede our strategy of increasing net sales and adversely affect our operating
results.
Our international expansion is an integral part of our strategy to increase our net sales through
expansion. If our international expansion is not successful, our results of operations are likely
to be adversely affected. 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, such as integration of information systems. Also, we
recently implemented new financial accounting software that we use to accumulate financial data
used in financial reporting for our UK operations. We intend to implement this software in other
foreign countries in which we operate.
We plan to expand into new countries through organic growth and by entering into licensing 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 licensing
agreements. Failure to identify appropriate licensees or negotiate acceptable terms in our
licensing 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.
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 the Companys net sales. In addition, these disruptions
could also adversely affect the Companys supply chain efficiency and make it more difficult for
the Company to obtain sufficient quantities of merchandise from suppliers.
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 are currently implementing modifications and upgrades to
our information technology systems supporting our product supply chain, including merchandise
planning and allocation, inventory and price management. Modifications involve replacing legacy
systems with successor systems
10
or making changes to the legacy systems. We are aware of inherent risks associated with replacing
and changing these core systems, including accurately capturing data and possibly encountering
supply chain disruptions. We plan to launch these successor systems in a phased operating country
approach over an approximate three-year period, which began in Fiscal 2006. Although we are on
track with the replacement of our systems, there can be no assurances that we will successfully
launch these new systems as planned or that they will occur without supply chain or other
disruptions. Supply chain disruptions, if not anticipated and appropriately mitigated, could have
a material adverse effect on our operations.
We are implementing certain other changes to our information technology systems that may
disrupt operations.
In addition to modifying and replacing our systems related to global retail store operations and
international finance operations, we continue to evaluate and are currently implementing
modifications and upgrades to our information technology systems for point of sales (cash
registers), real estate, and international financial accounting. Modifications involve replacing
legacy systems with successor systems, making changes to legacy systems or acquiring new systems
with new functionality. We are aware of inherent risks associated with replacing these successor
systems, including accurately capturing data and system disruptions and the ability to maintain
effective internal controls. We plan to launch these successor systems in a phased operating
country approach over an approximate three-year period, which began in Fiscal 2006. We plan to
complete installation of our new point of sales system in all our domestic stores, implement our
international financial systems, and replace our lease management systems by the end of Fiscal
2008. Although we are on track with replacement of our systems, there can be no assurances that we
will successfully launch these systems as planned or that they will occur without disruptions to
operations. Information technology system disruptions, if not anticipated and appropriately
mitigated, could have material adverse effect on our operations.
Fluctuations in same-store net sales may affect the price of our stock.
Our comparable same-store net sales results have fluctuated in the past, on a monthly, quarterly
and annual basis, and are expected to continue to fluctuate in the future. In addition, taking into
consideration our consistent same store sales growth during the past several years, our ability to
continue to deliver comparable increases in future years becomes more difficult to achieve each
year. A variety of factors affect our same-store net sales results, including changes in fashion
trends, changes in our merchandise mix, calendar shifts of holiday periods, timing of release of
new merchandise, actions by competitors, weather conditions and general economic conditions. Our
comparable store net sales results for any particular fiscal month, fiscal quarter or fiscal year
in the future may decrease. As a result of these or other factors, our future comparable store net
sales results may have a significant effect on the market price of our common stock because
investors may look to our same-store net sales results to determine how we performed from period to
period absent sales attributable to new stores.
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.
11
Our growth is dependent on successful execution of our business strategy.
During Fiscal 2006, we completed a five-year strategic plan with the assistance of a nationally
recognized consulting firm. Our ability to grow our existing brands and develop or identify new
growth opportunities depends in part on our ability to appropriately identify, develop and
effectively execute strategies and initiatives identified in our plan, as well as new growth
strategies and initiatives. Failure to effectively identify, develop
and execute strategic
initiatives may lead to increased operating costs without offsetting benefits and could have a
material adverse effect on our results of operations.
Our industry is highly competitive.
The specialty retail business is highly competitive. We compete with national and local department
stores, specialty and discount store chains, independent retail stores and internet, direct
marketing to consumer, and catalog businesses that market similar lines of merchandise. Some
competitors have more resources than us. Given the large number of companies in the retail
industry, we cannot estimate the number of our competitors. Our successful performance in recent
years has increased the amount of imitation by other retailers. Such imitation has made and will
continue to make the retail environment in which we operate more competitive. Also, a significant
shift in customer buying patterns to purchasing jewelry and accessories via the Internet could have
a material adverse effect on our financial results.
A decline in number of people who go to malls could reduce the number of our customers and
reduce our net sales.
Substantially all of our North American stores are located in regional shopping malls. Our sales
are derived, in part, from the high volume of traffic in those malls. We benefit from the ability
of the malls anchor tenants, generally large department stores and other area attractions to
generate consumer traffic around our stores and the continuing popularity of malls as shopping
destinations for pre-teens and teenagers. Sales volume and mall traffic may be adversely affected
by economic downturns in a particular area, competition from non-mall retailers, other malls where
we do not have stores, and the closing of anchor tenants in a particular mall. In addition, a
decline in the popularity of mall shopping among our target customers, pre-teens and teenagers, and
increased gasoline prices that may curtail customer visits to malls, could result in decreased
sales that would have a material adverse affect on our business, financial condition and results of
operations.
The possibility of war and acts of terrorism could disrupt the Companys information or
distribution systems and increase our costs of doing business.
A significant act of terrorism on U.S. soil or elsewhere, could have an adverse impact on the
Company by, among other things, disrupting its information or distributions systems; causing
dramatic increases in fuel prices, thereby increasing the costs of doing business and affect
consumer spending; or impeding the flow of imports or domestic products to the Company.
We depend on our key personnel.
Our ability to anticipate and effectively respond to the changing fashion trends and consumer
preferences depends in part on our ability to attract and retain key personnel in our design,
merchandising, marketing and other functions. Competition for this personnel is intense, and 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 the Companys senior
management team or of certain other key employees could negatively affect the Companys business.
In addition, future performance will depend upon the Companys ability to attract, retain and
motivate qualified employees to keep pace with its expansion schedule. The inability to do so may
limit the Companys ability to effectively penetrate new market areas.
12
Litigation matters incidental to our business could be adversely determined against us.
The Company is involved from time to time in litigation incidental to its 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.
We make estimates for our tax liabilities based on tax positions that could be challenged in
the future.
We are subject to taxation in a number of foreign jurisdictions. When we estimate our taxes, we
take into account our foreign operations, as well as our domestic operations. The estimates we
make regarding domestic and foreign taxes are based on tax positions that we believe are
supportable, but could be challenged by the Internal Revenue Service or a foreign jurisdiction. If
we are unsuccessful in defending such a challenge, we could determine that our estimate for taxes
was insufficient which could result in a charge to our earnings in the period such determination is
made.
The Companys cost of doing business could increase as a result of changes in federal, state or
local regulations.
Unanticipated changes in the federal or state minimum wage or living wage requirements or changes
in other workplace regulations could adversely affect the Companys ability to meet our financial
targets. In addition, changes in federal, state or local regulations governing the sale of the
Companys products, particularly regulations relating to metal content in our costume jewelry,
could increase the Companys cost of doing business and could adversely affect the Companys sales
results. Also, the Companys inability to comply with these regulatory changes in a timely fashion
or to adequately execute a required recall could result in significant fines or penalties that
could adversely affect the Companys financial statements as a whole.
If our independent manufacturers or licensees or joint venture partner 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, licensees or joint venture partner, 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,
licensees, or joint venture partner, 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 result,
our results of operations could be adversely affected.
We rely on third parties to distribute 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 vendors to ship merchandise
through third party carriers directly to our 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 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 may be unable to protect our trademarks and other intellectual property rights.
We believe that our trademarks 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 trademarks 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
13
the trademarks, 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 U.S., 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 trademarks and other
proprietary rights, and we may be unable to successfully resolve those types of conflicts to our
satisfaction.
The Company may be unable to rely on liability indemnities given by foreign vendors which could
adversely affect its financial statements as a whole.
The Company imports approximately 83% of its merchandise globally. Sources of supply may prove to
be unreliable, or the quality of the globally sourced products may vary from the Companys
expectations. The Companys ability to obtain indemnification from the manufacturers of these
products may be hindered by the manufactures lack of understanding U.S. product liability laws,
which may make it more likely that the Company may have to respond to claims or complaints from its
customers as if the Company were the manufacturer of the products. Any of these circumstances
could have a material adverse effect on the Companys business and its financial statements as a
whole.
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, Switzerland, Austria, Germany, France, Ireland, Spain, Holland and
Belgium. We lease all of our 2,878 store locations, generally for terms ranging from five to 25
years. Under the terms of the leases, we pay a fixed minimum rent and/or rentals based on a
percentage of gross 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 America and the International division are located in enclosed shopping
malls, while other stores are located within central business districts, open-air outlet malls or
strip centers. Our criteria for new stores includes geographic location, demographic aspects of
communities surrounding the store site, quality of anchor tenants, advantageous location within a
mall, 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.
We own central buying and store operations offices and the North American distribution center
located in Hoffman Estates, Illinois which is on approximately 28.4 acres of land. The property
has buildings with approximately 542,000 total square feet of space, of which 367,000 square feet
is devoted to receiving and distribution and 175,000 square feet is devoted to office space.
Our subsidiary, Claires Accessories UK Ltd., or UK, leases distribution and office space in
Birmingham, England. The facility consists of 25,000 square feet of office space and 60,000 square
feet of distribution space. The lease expires in December 2024, and UK has the right to assign or
sublet this lease at any time during the term of the lease, subject to landlord approval.
Our stores operated by our subsidiaries, Claires Switzerland, Claires Austria, Claires Germany
and Claires Spain, are serviced by distribution centers and offices in Zurich, Switzerland and
Vienna, Austria. The facility maintained in Zurich consists of 13,700 square feet devoted to
distribution and 8,500 square feet devoted to offices. The lease for this location expires on
December 31, 2011. In Vienna, the facility consists of 18,100 square feet devoted to distribution
and 3,400 square feet devoted to offices. The lease on this facility does not have an expiration
date but can be terminated by Claires Austria with six months notice to the landlord.
14
We lease approximately 36,000 square feet in Pembroke Pines, Florida, where we maintain our
executive, accounting and finance offices. See Note 9 entitled Related Party Transactions to our
consolidated financial statements included in this Annual Report.
We also own 5,000 square feet of warehouse space in Miami, Florida. The property is utilized as a
storage facility. We also lease executive office space in New York City and are the owners of a
cooperative apartment in New York City.
Item 3. Legal Proceedings
As a multinational company, we are, from time to time, involved in routine litigation incidental to
the conduct of our business, including litigation instituted by persons injured upon premises under
our control; litigation regarding the merchandise that we sell, including product and safety
concerns regarding metal content in our merchandise and trademark infringement; litigation with
respect to various employment matters, including litigation with present and former employees and
with respect to federal and state wage, hour and other laws; and litigation to protect our
trademark 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, such litigation can
result in large monetary awards when judges, juries or other finders of facts do not agree with
managements evaluation of possible liability or outcome of litigation. Accordingly, the
consequences of these matters cannot be finally determined by management. However, in the opinion
of management, we believe that current pending litigation will not have a material adverse effect
on our consolidated financial results.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of Fiscal 2006.
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
We have two classes of common stock, par value $0.05 per share, outstanding: common stock having
one vote per share and Class A common stock having ten votes per share. The common stock is traded
on the New York Stock Exchange, Inc. under the symbol CLE. The Class A common stock has only
limited transferability and is not traded on any stock exchange or in any organized market.
However, the Class A common stock is convertible on a share-for-share basis into common stock and
may be sold, as common stock, in open market transactions. In December 2003, our Board of
Directors declared a 2-for-1 stock split of our Common stock and Class A common stock in the form
of a 100% stock dividend. As a result, all share and per share amounts have been restated to
reflect the stock split. The following table sets forth, for each quarterly period within the last
two fiscal years, the high and low closing prices of the common stock on the NYSE Composite Tape.
At March 13, 2006, the number of record holders of shares of common stock and Class A common stock
was 1,194 and 371, respectively.
|
|
|
|
|
|
|
|
|
|
|
Closing Price of Common Stock |
|
|
|
High |
|
|
Low |
|
Year Ended January 28, 2006
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
23.79 |
|
|
$ |
20.01 |
|
Second Quarter |
|
|
25.75 |
|
|
|
21.32 |
|
Third Quarter |
|
|
26.55 |
|
|
|
22.89 |
|
Fourth Quarter |
|
|
31.29 |
|
|
|
24.53 |
|
|
|
|
|
|
|
|
|
|
Year Ended January 29, 2005
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
21.91 |
|
|
$ |
18.61 |
|
Second Quarter |
|
|
23.52 |
|
|
|
18.75 |
|
Third Quarter |
|
|
26.25 |
|
|
|
21.87 |
|
Fourth Quarter |
|
|
27.05 |
|
|
|
19.78 |
|
15
We have paid regular quarterly dividends to our shareholders on the common stock since 1985
and on the Class A common stock since July 1994. Our Board of Directors, in their sole discretion,
determines the distribution rate based on our results of operations, economic conditions, tax
considerations and other factors. In Fiscal 2006, we paid quarterly cash dividends on our common
stock (four in the amount of $0.10 per share) and Class A common stock (four in the amount of $0.05
per share), or a total of $0.40 per share on our common stock and $0.20 per share on our Class A
common stock. In addition, during December 2005, we paid a special cash dividend of $0.25 per
share on our common stock and $0.125 per share on our Class A common stock. In Fiscal 2005, we
paid quarterly cash dividends on our common stock (one in the amount of $0.09 per share, one in the
amount of $0.08 per share, one in the amount of $0.07 per share and one in the amount of $0.06 per
share) and Class A common stock (one in the amount of $0.045 per share, one in the amount of $0.04
per share, one in the amount of $0.035 per share and one in the amount of $0.03 per share), or a
total of $0.30 per share on our common stock and $0.15 per share on our Class A common stock.
As of March 13, 2006, our current dividend distribution amount per share is $0.10 and $0.05 each
quarter for common stock and Class A common stock, respectively. We expect to continue paying
dividends. However, there is no assurance that we will be able to continue to do so because the
declaration and payment of dividends are subject to various factors, including contingencies such
as our earnings, liquidity and financial condition and other factors our Board of Directors
considers relevant as well as certain limitations on our ability to make dividend distributions
under our credit facility. See Managements Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Resources.
16
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 our consolidated financial statements
included in this Annual Report, and in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations. The consolidated Balance Sheet data as of January
31, 2004, February 1, 2003 and February 2, 2002 and the consolidated Statement of Operations data
for each of the fiscal years ended February 1, 2003 and February 2, 2002 are derived from our
consolidated financial statements, which are not included herein.
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|
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|
|
|
|
|
|
|
|
|
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As of or for the Fiscal Year Ended |
|
|
|
Jan. 28, |
|
|
Jan. 29, |
|
|
Jan. 31, |
|
|
Feb. 1, |
|
|
Feb. 2, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002(1) |
|
|
|
(In thousands except per share amounts) |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,369,752 |
|
|
$ |
1,279,407 |
|
|
$ |
1,132,834 |
|
|
$ |
1,001,537 |
|
|
$ |
918,737 |
|
Income from continuing operations |
|
|
172,343 |
|
|
|
146,259 |
|
|
|
115,038 |
|
|
|
77,979 |
|
|
|
41,126 |
|
Net income |
|
|
172,343 |
|
|
|
143,124 |
|
|
|
115,038 |
|
|
|
77,744 |
|
|
|
19,583 |
|
Income Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
1.74 |
|
|
$ |
1.48 |
|
|
$ |
1.17 |
|
|
$ |
0.80 |
|
|
$ |
0.42 |
|
Net income |
|
|
1.74 |
|
|
|
1.45 |
|
|
|
1.17 |
|
|
|
0.80 |
|
|
|
0.20 |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
1.73 |
|
|
$ |
1.47 |
|
|
$ |
1.17 |
|
|
$ |
0.80 |
|
|
$ |
0.42 |
|
Net income |
|
|
1.73 |
|
|
|
1.44 |
|
|
|
1.17 |
|
|
|
0.80 |
|
|
|
0.20 |
|
Cash Dividends Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
0.65 |
|
|
$ |
0.30 |
|
|
$ |
0.14 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
Class A common stock |
|
|
0.325 |
|
|
|
0.15 |
|
|
|
0.07 |
|
|
|
0.04 |
|
|
|
0.04 |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
598,007 |
|
|
$ |
493,326 |
|
|
$ |
360,023 |
|
|
$ |
321,608 |
|
|
$ |
214,424 |
|
Current liabilities |
|
|
179,445 |
|
|
|
166,938 |
|
|
|
143,326 |
|
|
|
141,010 |
|
|
|
82,536 |
|
Working capital |
|
|
418,562 |
|
|
|
326,388 |
|
|
|
216,697 |
|
|
|
180,598 |
|
|
|
131,888 |
|
Total assets |
|
|
1,090,701 |
|
|
|
966,129 |
|
|
|
805,924 |
|
|
|
738,129 |
|
|
|
611,575 |
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,000 |
|
|
|
110,104 |
|
Stockholders equity |
|
|
868,318 |
|
|
|
755,687 |
|
|
|
632,450 |
|
|
|
501,254 |
|
|
|
404,188 |
|
|
|
|
(1) |
|
Restated to reflect the plan to discontinue the operations of Mr. Rags (Lux Corp.) in January
2002. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations is designed
to provide the reader of the financial statements with a narrative on our results of operations,
financial position and liquidity, risk management activities and significant accounting policies
and critical estimates. Managements Discussion and Analysis is presented in the following
sections: Overview; Critical Accounting Policies and Estimates; Results of Consolidated Operations;
Segment Operations; and Analysis of Consolidated Financial Condition. It is useful to read
Managements Discussion and Analysis in conjunction with the Consolidated Financial Statements and
related notes thereto contained elsewhere in this document.
Our fiscal years end on the Saturday closest to January 31. As a result, our Fiscal 2006, Fiscal
2005 and Fiscal 2004 results consisted of 52 weeks. All references to earnings per share relate to
diluted earnings per share from continuing operations.
We include a store in the calculation of comparable store sales once it has been in operation sixty
weeks after its initial opening. If a store is closed during a fiscal period, the stores sales
will be included in the computation of comparable store sales for that fiscal month, quarter and
year to date period only for the days in which it was operating as compared to those same days in
the comparable period. Relocated, remodeled and expanded square footage stores are classified the
same as the original store and are not considered new stores upon relocation, remodeling or
completion of their expansion. However, a store which is temporarily closed while undergoing
relocation, remodeling or expansion is excluded from comparable store sales for the related period
of closure.
17
Overview
We are a leading global specialty retailer of value-priced fashion accessories and jewelry for
pre-teens and teenagers as well as young adults. We are organized based on our geographic markets,
which include our North American operations and our International operations. As of January 28,
2006, we operated a total of 2,878 stores in all 50 states of the United States, Puerto Rico,
Canada, the Virgin Islands, the United Kingdom, Switzerland, Austria, Germany (the latter three
collectively referred to as S.A.G.), France, Ireland, Spain, Holland and Belgium. The stores are
operated mainly under the trade names Claires, Claires Boutiques, Claires Accessories,
Icing by Claires, Afterthoughts and The Icing. We are continuing the process of
transitioning our Afterthoughts stores to Icing by Claires stores to capitalize on the
Claires brand name. We also operated 172 stores in Japan through a 50:50 joint venture with AEON
Co. Ltd. (Claires Nippon). We account for the results of operations of Claires Nippon under the
equity method. These results are included within Interest and other income in our Consolidated
Statements of Operations and Comprehensive Income within our North American division. In addition,
we licensed 84 stores in the Middle East under a licensing and merchandising agreement with Al
Shaya Co. Ltd. and 7 stores in South Africa under similar agreements with the House of Busby
Limited. We account for the goods we sell under the merchandising agreements within Net sales
and Cost of sales, occupancy and buying expenses in our North American division and the license
fees we charge under the licensing agreements within Interest and other income within our
International division in our Consolidated Statements of Operations and Comprehensive Income.
We have two store concepts: Claires Accessories, which caters to fashion-conscious girls and teens
in the 7 to 17 age range, and Icing by Claires, which caters to fashion-conscious teens and young
women in the 17 to 27 age range. Our merchandise typically ranges in price between $2.50 and
$20.00, with the average product priced at approximately $4.40. Our stores share a similar format
and our different store concepts and trade-names allow us to have multiple store locations within a
single mall. Although we face competition from a number of small specialty store chains and others
selling fashion accessories, we believe that our stores comprise one of the largest chains of
specialty retail stores in the world devoted to the sale of value-priced fashion accessories for
pre-teen, teenage and young adult females.
Fundamentally, our business model is to offer the customer a compelling price/value relationship
and a wide array of products from which to choose. We seek to deliver a high level of
profitability and cash flow by:
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maximizing the effectiveness of our retail product pricing through promotional activity |
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minimizing our product costs through economies of scale as the worlds leading
mall-based retailer of value-priced accessories and jewelry |
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reinvesting operating cash flows into opening new stores, remodeling existing stores and
infrastructure in order to create future revenues and build brand name loyalty |
While our financial results have grown steadily, the retail environment remains very competitive.
Managements plan for future growth is dependent on:
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successfully identifying merchandise appealing to our customers and managing our
inventory levels |
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displaying our merchandise at convenient, accessible locations staffed with personnel
that provide courteous and professional customer service |
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sourcing our merchandise to achieve a positive price/value relationship |
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increasing sales at existing store locations |
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expanding our sales, especially in our International division, through additional store locations
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18
Our ability to achieve these objectives will be dependent on various factors, including those
outlined in Risk Factors.
Critical Accounting Policies and Estimates
The preparation of financial statements requires us to estimate the effect of various matters that
are inherently uncertain as of the date of the financial statements. Each of these required
estimates varies in regard to the level of judgment involved and its potential impact on our
reported financial results. Estimates are deemed critical when a different estimate could have
reasonably been used or where changes in the estimate are reasonably likely to occur from period to
period, and would materially impact our financial condition, changes in financial condition, or
results of operations. Our significant accounting policies are discussed in Note 1 of the Notes to
consolidated financial statements; critical estimates inherent in these accounting policies are
discussed in the following paragraphs.
On an on-going basis, we evaluate our estimates. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the circumstances at the
time, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Although management believes
that the estimates discussed above are reasonable and the related calculations conform to generally
accepted accounting principles, actual results could differ from these estimates, and such
differences could be material.
Management has discussed the development and selection of these critical accounting policies with
the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosures
relating to them.
Inventory Valuation
Our inventories in North America, Spain and S.A.G. 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 our United
Kingdom, Belgium, Holland, Ireland and France stores are accounted for under the lower of cost or
market method, with cost determined using the average cost method. Inventory valuation is impacted
by the estimation of slow moving goods, shrinkage and markdowns.
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 managements 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. 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.
We recorded no impairment charges during Fiscal 2006, Fiscal 2005 and Fiscal 2004.
Goodwill Impairment
We continually evaluate whether events and changes in circumstances warrant recognition of an
impairment loss 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
19
for our products, a change in the competitive environment and other industry and economic factors.
We measure impairment of goodwill utilizing the discounted cash flow method for each of our
reporting units. The estimated discounted cash flows are then compared to our goodwill amounts.
If the balance of the goodwill exceeds the estimated discounted cash flows, the excess of the
balance is written off. Future cash flows may not meet projected amounts, which could result in
impairment. We performed these analyses during Fiscal 2006, Fiscal 2005 and Fiscal 2004, and no
impairment charge was required.
Intangible Asset Impairment
We continually evaluate whether events and changes in circumstances warrant revised estimates of
the useful lives 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. The Company has concluded that certain intangible
assets, comprised primarily of lease rights, qualify as indefinite-life intangible assets. Fair
market value of the lease rights was determined through the use of third-party valuations. In
addition, we make investments through our International subsidiaries in intangible assets upon the
opening and acquisition of many of our store locations in Europe. These other intangible assets,
which are subject to amortization, are amortized over the useful lives of the respective leases,
not to exceed 25 years. We evaluate the market value of these assets periodically and record the
impairment charge when we believe the carrying amount of the asset is not recoverable. We recorded
no material impairment charges during Fiscal 2006, Fiscal 2005 and Fiscal 2004.
Income Taxes
We are subject to income taxes in many jurisdictions, including the U.S., individual states and
localities and abroad. 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. In assessing the need for a valuation allowance, we consider all available evidence
including past operating results, estimates of future taxable income and 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. Although realization is not assured, we believe
it is more likely than not that our deferred tax assets, net of valuation allowance, will be
realized.
We establish accruals for tax contingencies 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 earnings, interpretation of tax laws of multiple jurisdictions, and
resolution of tax audits. Future changes in the geographic mix of earnings or tax laws, or future
events regarding the resolution of tax audits could have an impact on our effective income tax
rate. During the year we base our tax rate on an estimate of our expected annual effective income
tax rate, and those estimates are updated quarterly.
20
Stock-Based Compensation
During Fiscal 2006, we accounted for stock-based compensation under the provisions of APB No. 25,
Accounting for Stock Issued to Employees. Stock awards which qualified as fixed grants under APB
No. 25, such as our time-vested stock awards, were accounted for at fair value at date of grant.
The compensation expense was recorded over the related vesting period in a systematic and rational
manner consistent with the lapse of restrictions on the shares.
Other stock awards, such as long-term incentive plan awards, were accounted for at fair value at
the date it became probable that performance targets required to receive the award will be
achieved. The compensation expense was recorded over the related vesting period. Determining the
number of shares expected to be awarded under the long-term incentive plan requires judgment in
determining the performance targets to be achieved over the period covered by the plan. If actual
results differ significantly from those estimated, stock-based compensation expense and our results
of operations could be materially impacted.
Stock options were accounted for under the intrinsic value method of APB No. 25. Modifications to
option awards were accounted for under the provisions of FASB Interpretation No. 44, Accounting
for Certain Transactions involving Stock Compensation. The modification to accelerate vesting of
outstanding options required an estimate of options which would have expired or been forfeited
unexercisable absent the modification to accelerate.
On January 29, 2006, we adopted Statement of Financial Accounting Standard No. 123 (revised 2004),
Share-Based Payment. See Recent Accounting Pronouncements below.
Results of Consolidated Operations
A summary of our consolidated results of operations is as follows (dollars in thousands, except per
share data):
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Fiscal Year |
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2006 |
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2005 |
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2004 |
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Net sales |
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$ |
1,369,752 |
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$ |
1,279,407 |
|
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$ |
1,132,834 |
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Increase in comparable store sales |
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6.0 |
% |
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8.0 |
% |
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7.0 |
% |
Gross profit percentage |
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54.3 |
% |
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54.1 |
% |
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53.7 |
% |
Selling, general and administrative expenses
as a percentage of Net sales |
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32.8 |
% |
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33.7 |
% |
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34.8 |
% |
Income from continuing operations |
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$ |
172,343 |
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$ |
146,259 |
|
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$ |
115,038 |
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Net income |
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$ |
172,343 |
|
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$ |
143,124 |
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$ |
115,038 |
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Income from continuing operations per diluted share |
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$ |
1.73 |
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$ |
1.47 |
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$ |
1.17 |
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Number of stores at the end of the period(1) |
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2,878 |
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2,836 |
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2,812 |
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(1)Number of stores excludes Claires Nippon and stores operated under license agreements outside of
North America |
Net sales in Fiscal 2006 increased by $90.3 million, or 7%, from Fiscal 2005, which in turn was
$146.6 million, or 13% higher than Fiscal 2004. The increase in net sales was primarily
attributable to comparable store sales increases of 6.0% and 8.0%, or approximately $72.7 million
and $92.2 million during Fiscal 2006 and Fiscal 2005, respectively. In addition, for Fiscal 2006,
new store revenue, net of store closures, approximated $20.9 million, and increased sales for
stores operated outside North America under licensing agreements approximated $5.6 million. In
addition, new stores opened in our International division produced higher average store sales than
the stores we closed in our North American division in Fiscal 2006. This positive increase in
sales in Fiscal 2006 was offset by the effects of the strengthening U.S. Dollar when translating
our foreign operations at lower exchange rates of approximately $8.9 million. For Fiscal 2005,
new store revenue, net of closures, approximated $19.7 million
21
and increased sales for stores operated outside North America under licensing agreements
approximated $0.3 million. In addition, the effects of the weaker U.S. Dollar when translating our
foreign operations at higher exchange rates resulted in $34.4 million of increased sales in Fiscal
2005.
The positive comparable sales experienced in North America in Fiscal 2006 were primarily
attributable to an increase of approximately 8.0% in the average retail price per transaction,
which was the result of an increase of approximately 8.0% in the average unit retail price. The
positive comparable sales experienced during our past three fiscal years in North America were
across various merchandise categories, most notably in the jewelry, cosmetics, and merchandise
targeted at a younger Claires customer. We believe we experienced this trend through successfully
meeting our customers demands for current fashion trends in jewelry and superior customer service
in our stores. In addition, best practices in merchandise buying, planning and allocation from
Claires have been shared with the Icing by Claires and Afterthoughts stores, which we believe
have contributed significantly to the comparable store sales increases experienced in Fiscal 2006.
We continue to employ strategic initiatives in our International division to address the negative
comparable store sales trend noted in the second half of Fiscal 2004. These initiatives included
sharing best practices employed in our North American division for merchandise selection, store
operations and attentive customer service. We believe these efforts contributed to our
International divisions success in Fiscal 2006, providing an increase in comparable store sales of
6.0%.
The following table compares our sales of each product category for the last three fiscal years:
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Fiscal Year Ended |
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Jan. 28, 2006 |
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Jan. 29, 2005 |
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Jan. 31, 2004 |
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Jewelry |
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58.0 |
% |
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56.0 |
% |
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53.0 |
% |
Accessories |
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42.0 |
% |
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44.0 |
% |
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47.0 |
% |
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100.0 |
% |
|
|
100.0 |
% |
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|
100.0 |
% |
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In calculating Gross profit and Gross profit percentages, we exclude the costs related to our
distribution center. These costs are included instead in Selling, general and administrative
expenses. Other retail companies may include these costs in cost of sales, so our gross profit
percentages may not be comparable to those retailers.
Gross profit percentages increased by 20 basis points and 40 basis points during Fiscal 2006 and
Fiscal 2005, respectively. The increase during Fiscal 2006 was primarily attributable to leverage
realized from sales increasing faster than rent and rent related costs. Merchandise margins
actually decreased slightly on a consolidated basis with North American merchandise margin gains
offset by declines in our International division. Merchandise margins during Fiscal 2006 in our
International division decreased primarily due to the strengthening U.S. Dollar as compared to the
British Pound and the Euro because most of the goods sourced for sale in our International division
are purchased in U.S. Dollars, and increased freight costs due to increased fuel costs for air and
sea freight to Europe from Asia. The primary source of the improvement in Fiscal 2005 was the
ability of our International division to source a significant portion of goods at a lower cost due
to those goods being purchased from our vendors in U.S. dollars. The lower cost was due to the
weakness in the U.S. Dollar in Fiscal 2005 as compared to the British Pound and the Euro and
approximated $4.4 million. In addition, comparable sales increased at a rate faster than the
increase in our occupancy related costs, creating positive leverage on those costs; however, these
costs were partially offset by higher markdowns recorded at the end of Fiscal 2005 in connection
with the Christmas selling season not meeting expectations. Fiscal 2005 also includes $1.5 million
of rent expense recorded to account for the cumulative adjustment to record rent expense incurred
during the construction period prior to lease commencement.
Selling, general and administrative expenses increased $18.5 million and $36.9 million in Fiscal
2006 and Fiscal 2005, respectively. The increase in Fiscal 2006 is primarily attributable to
increases in store payroll, stock compensation expense of $4.4 million for plans implemented in
Fiscal 2006, a $1.9 million charge related to estimated future healthcare costs associated with the
2003 retirement package of our
22
Chairman Emeritus, professional fees associated with auditing and legal matters, increased
consulting fees for strategic initiatives, credit card processing fees, and initial and ongoing
expenses related to opening new stores in Spain, Belgium and Holland. These increases were
partially offset by a reduction in leasing expenses for store assets, and certain insurance
expenses, and by the effects of the stronger U.S. Dollar when translating our foreign operations at
lower exchange rates. The primary source of the increase in Fiscal 2005 is due to higher
compensation paid to store personnel due to average wage increases and additional hours worked in
our North American stores and the effects of the weak U.S. Dollar when translating our foreign
operations at higher exchange rates. Additional hours worked in the North American stores were
necessary to achieve the positive comparable store sales experienced during these periods. In
addition, during Fiscal 2005, increased store, field and corporate bonuses were earned in North
America due to the positive comparable store sales and profit results during the period. As a
percentage of Net sales, Selling, general and administrative expenses decreased by 90 basis points
and 110 basis points during Fiscal 2006 and Fiscal 2005, respectively. This improvement was
primarily due to comparable store sales increases greater than the overall increases in the
underlying expenses.
Interest and other income in Fiscal 2006 increased over Fiscal 2005 primarily as a result of
additional interest income of $6.1 million arising from higher invested cash balances at higher
yields, increased earnings in our Claires Nippon joint venture of $0.5 million, dormancy fees for
gift cards of $1.2 million, and increased license fees of $0.5 million from increased sales of
goods under our merchandising agreements for stores operated outside of North America.
Our effective income tax rates for Fiscal 2006, Fiscal 2005 and Fiscal 2004 were 33.6%, 34.0% and
34.0%, respectively. Our effective income tax rate for Fiscal 2006 includes additional tax expense
of $5.7 million related to the repatriation of $95 million in foreign earnings from our foreign
subsidiaries, pursuant to the American Jobs Creation Act of 2004 (see Note 8 to Consolidated
Financial Statements). Excluding the $5.7 million charge recorded for Fiscal 2006, our effective
income tax rate for Fiscal 2006 has decreased from the previous year primarily due to a change in
the overall geographic mix of earnings and other non-recurring items. With respect to the overall
geographic mix of earnings, our combined effective income tax rate for our foreign operations is
generally lower than our effective income tax rate for U.S. operations. During Fiscal 2005, we
recorded net benefits to the provision for income taxes totaling approximately $0.4 million
attributable to concluded state tax examinations that were settled more favorably than anticipated.
Included in income taxes for Fiscal 2004 was a tax benefit of approximately $2.8 million related
to concluded U.S. and foreign tax examinations that were settled more favorably than anticipated.
Excluding the $2.8 million benefit recorded for Fiscal 2004, our effective income tax rate for
Fiscal 2005 has decreased from the previous year due to a greater proportion of earnings from our
foreign operations. Our effective income tax rate in future periods will depend on several
variables, including the geographic mix of earnings and the resolution of tax contingencies for
amounts different from our current estimates.
Income from continuing operations increased by approximately $26.1 million and $31.2 million during
each of Fiscal 2006 and Fiscal 2005, respectively. These increases were primarily attributable to
the increase in comparable store sales and improved merchandise margins achieved during the
periods, as well as the leverage attained on our fixed costs.
Seasonality and Quarterly Results
Sales of each category of merchandise vary from period to period depending on current fashion
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 the
fiscal year ended January 28, 2006 were 22%, 24%, 24% and 30%, respectively. See Note 10 of our
consolidated financial statements for our quarterly results of operations.
Impact of Inflation
Inflation impacts several of 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 or by increasing
sales volumes.
23
The guidance of this FSP is effective with the first reporting period beginning after December 15,
2005. The Company does not capitalize such rental costs and this FSP will not have a material
impact on the Companys financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation (FIN) 47, Accounting for Conditional Asset
Retirement Obligations, which is an interpretation of SFAS No. 143, Accounting for Asset
Retirement Obligations. This interpretation clarifies terminology within SFAS No. 143 and
requires an entity to recognize a liability for the fair value of a conditional asset retirement
obligation when incurred if the liabilitys fair value can be reasonably estimated. This
interpretation is effective for fiscal years ending after December 15, 2005. The adoption of this
interpretation did not have a material impact on our financial condition or results of operations.
In October 2004, the American Jobs Creation Act of 2004 (the Jobs Creation Act) was signed into
law. The Jobs Creation Act includes a temporary incentive for U.S. multinationals to repatriate
foreign earnings at an approximate 5.25 percent effective tax rate. Such repatriations must occur
in either an enterprises last tax year that began before the enactment date, or the first tax year
that begins during the one-year period beginning on the date of enactment.
Issued in December 2004, FASB FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2),
indicated that the lack of clarification of certain provisions within the Jobs Creation Act and the
timing of the enactment necessitated a practical exception to the SFAS No. 109, Accounting for
Income Taxes, requirement to reflect in the period of enactment the effect of a new tax law.
Accordingly, enterprises were allowed time beyond 2004 to evaluate the effect of the Jobs Creation
Act on their plans for reinvestment or repatriation of foreign earnings for purposes of applying
SFAS No. 109. In Fiscal 2006, the Company repatriated $95 million of foreign earnings and recorded
an associated tax expense of approximately $5.7 million. See Note 8.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency
We are exposed to market risk from foreign currency exchange rate fluctuations on the U.S. dollar
value of foreign currency denominated transactions and our investment in foreign subsidiaries. We
manage this exposure to market risk through our regular operating and financing activities, and
from time to time, the use of foreign currency options. Exposure to market risk for changes in
foreign exchange rates relates primarily to foreign operations buying, selling and financing in
currencies other than local currencies and to the carrying value of net investments in foreign
subsidiaries. We manage our exposure to foreign exchange rate risk related to our foreign
operations buying, selling and financing in currencies other than local currencies by using
foreign currency options from time to time to hedge foreign currency transactional exposure. At
January 28, 2006, we maintained foreign currency options; however, these options were not
designated as hedging instruments under SFAS No. 133. We do not generally hedge the translation
exposure related to our net investment in foreign subsidiaries. Included in Comprehensive income
and Stockholders equity is $7.0 million, net of tax, reflecting the unrealized loss on foreign
currency translation during the fiscal year ended January 28, 2006. Based on the extent of our
foreign operations in Fiscal 2006, the potential gain or loss due to a 10% adverse change on
foreign currency exchange rates could be significant to our consolidated operations.
Certain of our subsidiaries make significant U.S. dollar purchases from Asian suppliers
particularly in China. In July 2005, China revalued its currency 2.1%, changing the fixed exchange
rate from 8.28 to 8.11 Chinese Yuan to the U.S. Dollar. Since July 2005, the Chinese Yuan
increased by 1.0% as compared to the U.S. Dollar, based on continued pressure from the
international community. If China adjusts the exchange rate further or allows the value to float,
we may experience increases in our cost of merchandise imported from China.
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
29
currency can vary significantly upon translation into U.S. dollars if exchange rates fluctuate
significantly from one period to the next.
Interest Rates
Our exposure to market risk for changes in interest rates is limited to our cash, cash equivalents
and debt. Based on our average invested cash balances during Fiscal 2006, a 10% increase in the
average effective interest rate in Fiscal 2006 would not have materially impacted our annual
interest income.
Item 8. Financial Statements and Supplementary Data
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Page No. |
|
Reports of Independent Registered Public Accounting Firm |
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|
31 |
|
Consolidated Balance Sheets as of January 28, 2006 and January 29, 2005 |
|
|
33 |
|
Consolidated Statements of Operations and Comprehensive Income for the
fiscal years ended January 28, 2006, January 29, 2005 and January 31, 2004 |
|
|
34 |
|
Consolidated Statements of Changes in Stockholders Equity for the fiscal
years ended January 28, 2006, January 29, 2005 and January 31, 2004 |
|
|
35 |
|
Consolidated Statements of Cash Flows for the fiscal years ended
January 28, 2006, January 29, 2005 and January 31, 2004 |
|
|
36 |
|
Notes to Consolidated Financial Statements |
|
|
37 |
|
30
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Claires Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Claires Stores, Inc. and
subsidiaries as of January 28, 2006 and January 29, 2005, and the related consolidated statements
of operations and comprehensive income, changes in stockholders equity, and cash flows for each of
the fiscal years ended January 28, 2006, January 29, 2005, and January 31, 2004. These consolidated
financial statements are the responsibility of the Companys 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 the 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 Claires Stores, Inc. and subsidiaries as of January
28, 2006 and January 29, 2005 and the results of their operations and their cash flows for each of
the fiscal years ended January 28, 2006, January 29, 2005, and January 31, 2004 in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Claires Stores, Inc.s internal control over financial
reporting as of January 28, 2006, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated April 12, 2006 expressed an unqualified opinion on managements assessment of,
and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
April 12, 2006
Tampa, Florida
Certified Public Accountants
31
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Claires Stores, Inc.:
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that Claires Stores, Inc. maintained effective internal
control over financial reporting as of January 28, 2006, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Claires Stores, Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the Companys internal control over financial
reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Claires Stores, Inc. maintained effective internal
control over financial reporting as of January 28, 2006, is fairly stated, in all material
respects, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion,
Claires Stores, Inc. maintained, in all material respects, effective internal control over
financial reporting as of January 28, 2006, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Claires Stores, Inc. and subsidiaries as
of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations and
comprehensive income, changes in stockholders equity, and cash flows for the fiscal years ended
January 28, 2006, January 29, 2005, and January 31, 2004, and our report dated April 12, 2006
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
April 12, 2006
Tampa, Florida
Certified Public Accountants
32
CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
Jan. 28, |
|
|
Jan. 29, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except share and per share amounts) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
431,122 |
|
|
$ |
191,006 |
|
Short-term investments |
|
|
|
|
|
|
134,613 |
|
Inventories |
|
|
113,405 |
|
|
|
110,072 |
|
Prepaid expenses and other current assets |
|
|
53,480 |
|
|
|
57,635 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
598,007 |
|
|
|
493,326 |
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
Land and building |
|
|
18,151 |
|
|
|
18,151 |
|
Furniture, fixtures and equipment |
|
|
252,346 |
|
|
|
238,022 |
|
Leasehold improvements |
|
|
238,817 |
|
|
|
211,721 |
|
|
|
|
|
|
|
|
|
|
|
509,314 |
|
|
|
467,894 |
|
Less accumulated depreciation and amortization |
|
|
(286,595 |
) |
|
|
(263,368 |
) |
|
|
|
|
|
|
|
|
|
|
222,719 |
|
|
|
204,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
56,175 |
|
|
|
52,474 |
|
Other assets |
|
|
15,162 |
|
|
|
14,736 |
|
Goodwill |
|
|
198,638 |
|
|
|
201,067 |
|
|
|
|
|
|
|
|
|
|
|
269,975 |
|
|
|
268,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,090,701 |
|
|
$ |
966,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Trade accounts payable |
|
$ |
50,242 |
|
|
$ |
42,325 |
|
Income taxes payable |
|
|
36,708 |
|
|
|
30,600 |
|
Accrued expenses and other liabilities |
|
|
92,495 |
|
|
|
94,013 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
179,445 |
|
|
|
166,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability |
|
|
20,979 |
|
|
|
24,293 |
|
Deferred rent expense |
|
|
21,959 |
|
|
|
19,211 |
|
|
|
|
|
|
|
|
|
|
|
42,938 |
|
|
|
43,504 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock par value $1.00 per share;
authorized 1,000,000 shares, issued and
outstanding 0 shares |
|
|
|
|
|
|
|
|
Class A common stock par value $0.05 per share;
authorized 40,000,000 shares, issued and
outstanding 4,895,746 shares and 5,125,432
shares, respectively |
|
|
245 |
|
|
|
256 |
|
Common stock par value $0.05 per share;
authorized 300,000,000 shares, issued and
outstanding 94,580,977 shares and 93,858,213
shares, respectively |
|
|
4,729 |
|
|
|
4,693 |
|
Additional paid-in capital |
|
|
63,321 |
|
|
|
50,477 |
|
Unearned compensation |
|
|
(2,690 |
) |
|
|
|
|
Accumulated other comprehensive income, net of tax |
|
|
21,036 |
|
|
|
28,041 |
|
Retained earnings |
|
|
781,677 |
|
|
|
672,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
868,318 |
|
|
|
755,687 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,090,701 |
|
|
$ |
966,129 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
33
CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
Jan. 28, 2006 |
|
|
Jan. 29, 2005 |
|
|
Jan. 31, 2004 |
|
|
|
(In thousands, except per share amounts) |
|
Net sales |
|
$ |
1,369,752 |
|
|
$ |
1,279,407 |
|
|
$ |
1,132,834 |
|
Cost of sales, occupancy and buying expenses |
|
|
625,866 |
|
|
|
587,687 |
|
|
|
524,455 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
743,886 |
|
|
|
691,720 |
|
|
|
608,379 |
|
|
|
|
|
|
|
|
|
|
|
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
449,555 |
|
|
|
431,060 |
|
|
|
394,152 |
|
Depreciation and amortization |
|
|
48,900 |
|
|
|
44,882 |
|
|
|
41,451 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
2,561 |
|
Interest and other income |
|
|
(14,240 |
) |
|
|
(5,858 |
) |
|
|
(4,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
484,215 |
|
|
|
470,084 |
|
|
|
433,957 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
259,671 |
|
|
|
221,636 |
|
|
|
174,422 |
|
Income taxes |
|
|
87,328 |
|
|
|
75,377 |
|
|
|
59,384 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
172,343 |
|
|
|
146,259 |
|
|
|
115,038 |
|
|
|
|
|
|
|
|
|
|
|
Discontinued operation (Note 4): |
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of Lux Corp., net of income taxes
of $0, $1,865 and $0, respectively |
|
|
|
|
|
|
(3,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations |
|
|
|
|
|
|
(3,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
172,343 |
|
|
|
143,124 |
|
|
|
115,038 |
|
Foreign currency translation adjustments |
|
|
(7,005 |
) |
|
|
7,932 |
|
|
|
12,890 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
165,338 |
|
|
$ |
151,056 |
|
|
$ |
127,928 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.74 |
|
|
$ |
1.48 |
|
|
$ |
1.17 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
1.74 |
|
|
$ |
1.45 |
|
|
$ |
1.17 |
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.73 |
|
|
$ |
1.47 |
|
|
$ |
1.17 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
1.73 |
|
|
$ |
1.44 |
|
|
$ |
1.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares
outstanding |
|
|
99,106 |
|
|
|
98,937 |
|
|
|
97,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common and common
equivalent shares outstanding |
|
|
99,522 |
|
|
|
99,310 |
|
|
|
98,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
0.65 |
|
|
$ |
0.30 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
$ |
0.325 |
|
|
$ |
0.15 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
34
CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
shares of Class |
|
|
Class A |
|
|
shares of |
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
A common |
|
|
common |
|
|
common |
|
|
Common |
|
|
paid-in |
|
|
Unearned |
|
|
comprehensive |
|
|
Retained |
|
|
|
|
|
|
stock |
|
|
stock |
|
|
stock |
|
|
stock |
|
|
capital |
|
|
compensation |
|
|
income |
|
|
earnings |
|
|
Total |
|
Balance: February 1, 2003 |
|
|
2,693 |
|
|
$ |
135 |
|
|
|
46,147 |
|
|
$ |
2,307 |
|
|
$ |
32,834 |
|
|
$ |
|
|
|
$ |
7,219 |
|
|
$ |
458,759 |
|
|
$ |
501,254 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,038 |
|
|
|
115,038 |
|
Class A common stock converted to Common stock |
|
|
(83 |
) |
|
|
(5 |
) |
|
|
83 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of 2 for 1 stock split |
|
|
2,612 |
|
|
|
131 |
|
|
|
46,471 |
|
|
|
2,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,454 |
) |
|
|
|
|
Stock options exercised, including tax benefit |
|
|
|
|
|
|
|
|
|
|
992 |
|
|
|
50 |
|
|
|
16,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,608 |
|
Cash dividends ($0.14 per Common share and
$0.07 per Class A common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,340 |
) |
|
|
(13,340 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,890 |
|
|
|
|
|
|
|
12,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance: January 31, 2004 |
|
|
5,222 |
|
|
|
261 |
|
|
|
93,693 |
|
|
|
4,685 |
|
|
|
49,392 |
|
|
|
|
|
|
|
20,109 |
|
|
|
558,003 |
|
|
|
632,450 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,124 |
|
|
|
143,124 |
|
Class A common stock converted to Common stock |
|
|
(97 |
) |
|
|
(5 |
) |
|
|
97 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, including tax benefit |
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
3 |
|
|
|
1,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,088 |
|
Cash dividends ($0.30 per Common share and
$0.15 per Class A common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,907 |
) |
|
|
(28,907 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,932 |
|
|
|
|
|
|
|
7,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance: January 29, 2005 |
|
|
5,125 |
|
|
|
256 |
|
|
|
93,858 |
|
|
|
4,693 |
|
|
|
50,477 |
|
|
|
|
|
|
|
28,041 |
|
|
|
672,220 |
|
|
|
755,687 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,343 |
|
|
|
172,343 |
|
Class A common stock converted to common stock |
|
|
(229 |
) |
|
|
(11 |
) |
|
|
229 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.65 per common share and
$0.325 per Class A common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,886 |
) |
|
|
(62,886 |
) |
Stock options exercised, including tax benefit |
|
|
|
|
|
|
|
|
|
|
323 |
|
|
|
17 |
|
|
|
5,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,744 |
|
Acceleration of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314 |
|
Restricted stock issued |
|
|
|
|
|
|
|
|
|
|
171 |
|
|
|
8 |
|
|
|
3,812 |
|
|
|
(2,690 |
) |
|
|
|
|
|
|
|
|
|
|
1,130 |
|
Long-term incentive plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,991 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,005 |
) |
|
|
|
|
|
|
(7,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance: January 28, 2006 |
|
|
4,896 |
|
|
$ |
245 |
|
|
|
94,581 |
|
|
$ |
4,729 |
|
|
$ |
63,321 |
|
|
$ |
(2,690 |
) |
|
$ |
21,036 |
|
|
$ |
781,677 |
|
|
$ |
868,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
35
CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
Jan. 28, 2006 |
|
|
Jan. 29, 2005 |
|
|
Jan. 31, 2004 |
|
|
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
172,343 |
|
|
$ |
143,124 |
|
|
$ |
115,038 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued operations, net of tax benefit |
|
|
|
|
|
|
3,135 |
|
|
|
|
|
Depreciation and amortization |
|
|
48,900 |
|
|
|
44,882 |
|
|
|
41,451 |
|
Amortization of intangible assets |
|
|
1,232 |
|
|
|
1,129 |
|
|
|
1,211 |
|
Loss on retirement of property and equipment |
|
|
3,460 |
|
|
|
3,253 |
|
|
|
2,923 |
|
(Gain) loss on sale of intangible assets |
|
|
|
|
|
|
(170 |
) |
|
|
(409 |
) |
Tax benefit of stock options |
|
|
857 |
|
|
|
323 |
|
|
|
3,900 |
|
Stock compensation expense |
|
|
4,121 |
|
|
|
|
|
|
|
|
|
Acceleration of stock options |
|
|
314 |
|
|
|
|
|
|
|
2,416 |
|
(Increase) decrease in - |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
(4,995 |
) |
|
|
(15,959 |
) |
|
|
(1,192 |
) |
Prepaid expenses and other current assets |
|
|
2,995 |
|
|
|
(4,830 |
) |
|
|
(1,330 |
) |
Increase (decrease) in - |
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable |
|
|
9,747 |
|
|
|
3,585 |
|
|
|
120 |
|
Income taxes payable |
|
|
5,776 |
|
|
|
3,657 |
|
|
|
15,638 |
|
Accrued expenses and other liabilities |
|
|
(309 |
) |
|
|
11,629 |
|
|
|
22,473 |
|
Deferred income taxes |
|
|
(4,458 |
) |
|
|
4,502 |
|
|
|
797 |
|
Deferred rent expense |
|
|
2,876 |
|
|
|
1,030 |
|
|
|
1,371 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
242,859 |
|
|
|
199,290 |
|
|
|
204,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
|
(73,444 |
) |
|
|
(63,567 |
) |
|
|
(48,838 |
) |
Acquisition of intangible assets |
|
|
(9,056 |
) |
|
|
(7,455 |
) |
|
|
(9,871 |
) |
Purchase of short-term investments |
|
|
(82,334 |
) |
|
|
(246,234 |
) |
|
|
|
|
Sale of short-term investments |
|
|
216,947 |
|
|
|
111,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
52,113 |
|
|
|
(205,635 |
) |
|
|
(58,709 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on term loan |
|
|
|
|
|
|
|
|
|
|
(85,932 |
) |
Principal payments on lines of credit |
|
|
|
|
|
|
|
|
|
|
(25,000 |
) |
Proceeds from stock options exercised |
|
|
4,886 |
|
|
|
766 |
|
|
|
10,292 |
|
Dividends paid |
|
|
(62,886 |
) |
|
|
(28,907 |
) |
|
|
(13,340 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(58,000 |
) |
|
|
(28,141 |
) |
|
|
(113,980 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash
and cash equivalents |
|
|
3,144 |
|
|
|
862 |
|
|
|
(2,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
240,116 |
|
|
|
(33,624 |
) |
|
|
29,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
191,006 |
|
|
|
224,630 |
|
|
|
195,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
431,122 |
|
|
$ |
191,006 |
|
|
$ |
224,630 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
36
CLAIRES STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations Claires Stores, Inc., a Florida corporation, and subsidiaries
(collectively the Company), is a leading retailer of value-priced fashion accessories targeted
towards pre-teens, teenagers and young adults. The Company operates stores throughout the United
States, Puerto Rico, Canada, the Virgin Islands, the United Kingdom, Switzerland, Austria, Germany,
(the latter three collectively referred to as S.A.G.), France, Ireland, Spain, Holland, Belgium
and Japan. The stores in Japan are operated through a 50:50 joint venture.
Principles of Consolidation The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. The Companys 50% ownership interest in its
Japanese joint venture (Claires Nippon) is accounted for under the equity method. All significant
intercompany balances and transactions have been eliminated in consolidation. All references in
the Companys financial statements to number of shares, per share amounts, and stock option data of
the Companys Common stock have been restated to give effect to the 2-for-1 stock split of the
Companys Common stock and Class A common stock in the form of a 100% stock dividend in December
2003.
Reclassifications The consolidated financial statements include certain reclassifications
of prior period amounts in order to conform to current year presentation.
Use of Estimates The 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 that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The most
significant estimates include valuation of inventories, valuation of goodwill and intangible
assets, provisions for income taxes, stock-based compensation and contingencies and litigation.
Actual results could differ from these estimates.
Fiscal Year The Companys fiscal year ends on the Saturday closest to January 31. Fiscal
year 2006 consisted of 52 weeks and ended on January 28, 2006. Fiscal year 2005 consisted of 52
weeks and ended on January 29, 2005; Fiscal year 2004 consisted of 52 weeks and ended on January
31, 2004.
Cash and Cash Equivalents The Company considers all highly liquid debt instruments
purchased with an original maturity of 90 days or less to be cash equivalents.
Short-term Investments All short-term investments are classified as available-for-sale
and are carried at par plus accrued interest, which approximates fair value. There were no
unrealized gains or losses at January 29, 2005. At January 29, 2005, these investments consisted
of auction rate securities with original maturities over 90 days. The cost of securities sold is
based on the specific identification method.
The Company viewed its portfolio of auction rate securities with maturity beyond 90 days to be
available for use in current operations and had accordingly classified such marketable investments
as short-term investments, even though the stated maturity dates may be one year or more beyond the
current balance sheet date.
Inventories Merchandise inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out basis using the retail method in North America, Spain and
S.A.G., while the United Kingdom, Belgium, Holland, Ireland and France use average cost.
Approximately 18% of the Companys inventory was maintained using the average cost method at
January 28, 2006 and January 29, 2005.
37
Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets
include the following components as of the period indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Jan. 28, |
|
|
Jan. 29, |
|
|
|
2006 |
|
|
2005 |
|
Prepaid rent and occupancy |
|
$ |
16,017 |
|
|
$ |
26,696 |
|
Deferred tax asset |
|
|
13,071 |
|
|
|
12,246 |
|
Credit card and other receivables |
|
|
10,325 |
|
|
|
7,280 |
|
Trust assets |
|
|
7,066 |
|
|
|
4,560 |
|
Store supplies |
|
|
5,110 |
|
|
|
5,120 |
|
Other |
|
|
1,891 |
|
|
|
1,733 |
|
|
|
|
|
|
|
|
|
|
$ |
53,480 |
|
|
$ |
57,635 |
|
|
|
|
|
|
|
|
Property and Equipment Property and equipment are recorded at cost. Depreciation is
computed on the straight-line method over the estimated useful lives of the building and the
furniture, fixtures and equipment, which range from three to twenty-five years. Amortization of
leasehold improvements is computed on the straight-line method based upon the shorter of the
estimated useful lives of the assets or the terms of the respective leases. Maintenance and repair
costs are charged to earnings while expenditures for major improvements are capitalized. Upon the
disposition of property and equipment, the accumulated depreciation is deducted from the original
cost and any gain or loss is reflected in current earnings.
The Company reviews its long-lived assets for impairment under the provisions of Financial
Accounting Standards Board, (FASB) Statement No. 144, whenever events or changes in circumstances
indicate that the net book value of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the net book value of an asset to the future net
undiscounted cash flows expected to be generated by the asset. An impairment loss would be
recorded for the excess of the net book value over the fair value of the asset impaired. The fair
value is estimated based on expected discounted future cash flows. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less cost to sell and are no longer
depreciated. The Company recorded no impairment charges during the years ended January 31, 2004,
January 29, 2005 or January 28, 2006.
Goodwill Effective February 3, 2002, the Company adopted Statement of Financial
Accounting Standards 142 (SFAS 142), Goodwill and Other Intangible Assets. In accordance with
SFAS 142, the Company ceased amortizing its goodwill effective February 3, 2002. The Company had
$198.6 million and $201.1 million of unamortized goodwill at January 28, 2006 and January 29, 2005,
respectively. The Company had $18.1 million and $18.2 million of accumulated goodwill amortization
at January 28, 2006 and January 29, 2005, respectively.
SFAS 142 requires the Company to perform a goodwill and intangible assets impairment test on an
annual basis. Any impairment charges resulting from the application of this test are immediately
recorded as a charge to earnings in the Companys statement of operations. The Company performed
these impairment tests as of the first day of the fourth quarter of Fiscal 2004, Fiscal 2005 and
Fiscal 2006 and determined that no impairment exists.
Other Assets Other assets primarily include deposits and the non-current portion of
prepaid lease payments on leasehold improvements and equipment financed under non-cancelable
operating leases. The prepaid lease payments are amortized on a straight-line basis over the
respective lease terms, typically ranging from four to seven years. Also included is the Companys
investment in Claires Nippon in the amount of $5.1 million and $3.2 million at January 28, 2006
and January 29, 2005, respectively.
Included in Interest and other income is the Companys share of Claires Nippons net income
approximating $2.3 million, $1.7 million and $1.2 million for Fiscal 2006, 2005, and 2004,
respectively.
38
Intangible Assets The Company has concluded that certain intangible assets, comprised
primarily of lease rights, qualify as indefinite-life intangible assets under SFAS 142. Fair
market value of the lease rights was determined through the use of third-party valuations. In
addition, the Company makes investments through its International subsidiaries in intangible assets
upon the opening and acquisition of many of our store locations in Europe. These other intangible
assets which are subject to amortization are amortized over the useful lives of the respective
leases, not to exceed 25 years. The Company evaluates the market value of its intangible assets
periodically and records an impairment charge when the Company believes the carrying amount of the
asset is not recoverable. No significant impairment charges were recorded during Fiscal 2006,
Fiscal 2005 and Fiscal 2004. The following tables summarize information regarding intangible
assets at the respective periods (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 28, 2006 |
|
|
Jan. 29, 2005 |
|
|
|
Gross |
|
|
Accumulated |
|
|
Gross |
|
|
Accumulated |
|
|
|
Carrying Amount |
|
|
Amortization |
|
|
Carrying Amount |
|
|
Amortization |
|
Amortizable lease rights |
|
$ |
22,198 |
|
|
$ |
10,550 |
|
|
$ |
19,275 |
|
|
$ |
10,218 |
|
Non-amortizable lease
rights |
|
|
44,527 |
|
|
|
|
|
|
|
43,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
66,725 |
|
|
$ |
10,550 |
|
|
$ |
62,692 |
|
|
$ |
10,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
Period for Amortizable |
Lease Right Acquisitions |
|
Non-Amortizable |
|
Amortizable |
|
Lease Rights Acquisitions |
|
|
|
|
|
|
|
|
|
|
(in years) |
Fiscal Year Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2006
|
|
$ |
4,427 |
|
|
$ |
4,629 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 29, 2005
|
|
$ |
7,310 |
|
|
$ |
913 |
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2004
|
|
$ |
9,348 |
|
|
$ |
1,045 |
|
|
|
9.0 |
|
Amortization expense on these intangible assets is expected to be approximately $1.1 million
for each of the next five years. Expected amortization expense for the Companys foreign entities
has been translated to U.S. Dollars at March 31, 2006 exchange rates. The weighted average
amortization period of amortized intangible assets as of January 28, 2006 approximated 14 years.
Accrued Expenses and Other Liabilities Accrued expenses and other liabilities include
the following components as of the period indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Jan. 28, |
|
|
Jan. 29, |
|
|
|
2006 |
|
|
2005 |
|
Compensation and benefits |
|
$ |
37,547 |
|
|
$ |
39,133 |
|
Sales and local taxes |
|
|
13,445 |
|
|
|
9,529 |
|
Gift cards and certificates |
|
|
12,645 |
|
|
|
12,009 |
|
Store rent |
|
|
5,410 |
|
|
|
5,189 |
|
Accrued expenses and other |
|
|
23,448 |
|
|
|
28,153 |
|
|
|
|
|
|
|
|
|
|
$ |
92,495 |
|
|
$ |
94,013 |
|
|
|
|
|
|
|
|
Revenue Recognition The Company recognizes sales as the customer takes possession of
the merchandise. The estimated liability for sales returns is based on the historical return
levels, which is included in Accrued expenses and other liabilities.
Cost of Sales Included within the Companys Consolidated Statement of Operations line
item Cost of sales, occupancy and buying expenses is the cost of merchandise sold to our
customers, inbound and
39
outbound freight charges, purchasing costs and inspection costs. Also included in this line item
are the occupancy costs of the Companys stores and the Companys internal costs of facilitating
the merchandise procurement process, both of which are treated as period costs. All merchandise
purchased by the Company is shipped to one of its four distribution centers. As a result, the
Company has no internal transfer costs. The cost of the Companys distribution centers are
included within the financial statement line item Selling, general and administrative expenses,
and not in Cost of sales, occupancy and buying expenses. These distribution center costs were
approximately $10.9 million, $10.7 million and $9.2 million in Fiscal 2006, Fiscal 2005 and Fiscal
2004, respectively.
Gift Cards and Gift Certificates Upon purchase of a gift card or gift certificate, a
liability is established for the cash value. The liability is included in Accrued expenses and
other liabilities. Revenue from gift card and gift certificate sales is recognized at the time of
redemption. Dormancy fees are charged against the gift card balance if the card remains inactive
for a period of two years. Dormancy fees are included in Interest and other income.
Leasing The Company recognizes rent expense for operating leases with periods of free
rent (including construction periods), step rent provisions and escalation clauses on a
straight-line basis over the applicable lease term. The Company considers lease renewals in the
useful life of its leasehold improvements when such renewals are reasonably assured. The Company
takes these provisions into account when calculating minimum aggregate rental commitments under
non-cancelable operating leases set forth in Note 4 below. From time to time, the Company may
receive capital improvement funding from its lessors. These amounts are recorded as deferred rent
expense and amortized over the remaining lease term as a reduction of rent expense.
Basic and Diluted Shares Basic net income per share is based on the weighted average
number of shares of Class A Common Stock and Common Stock outstanding during the period. Diluted
net income per share includes the dilutive effect of stock options, time-vested stock and shares
earned under the Companys long-term incentive stock plan plus the number of shares included in
basic net income per share.
The information required to compute basic and diluted earnings per share is as follows (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
Jan. 28, |
|
|
Jan. 29, |
|
|
Jan. 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
172,343 |
|
|
$ |
146,259 |
|
|
$ |
115,038 |
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
99,106 |
|
|
|
98,937 |
|
|
|
97,955 |
|
Effect of dilutive stock options |
|
|
370 |
|
|
|
373 |
|
|
|
485 |
|
Effect of dilutive time-vested and long-term incentive stock awards |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
99,522 |
|
|
|
99,310 |
|
|
|
98,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.74 |
|
|
$ |
1.48 |
|
|
$ |
1.17 |
|
Diluted |
|
$ |
1.73 |
|
|
$ |
1.47 |
|
|
$ |
1.17 |
|
All options and other stock awards outstanding during the fiscal year ended January 28, 2006
and options outstanding during the fiscal year ended January 29, 2005 were included in the
calculation of diluted shares. Options to purchase 326,604 shares of common stock at $16.93 per
share were outstanding for the year ended January 31, 2004, but were not included in the
computation of diluted earnings per share because the options exercise price was greater than the
average market price of the common shares for that fiscal year and the effect was anti-dilutive.
40
Subsequent to January 28, 2006 and through March 31, 2006, employees and directors exercised stock
options for approximately 463,000 shares of common stock and the Company repurchased approximately
721,000 shares of common stock in conjunction with its stock repurchase program.
Income Taxes The Company accounts for income taxes under the provisions of SFAS 109 which
generally requires recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities, using enacted tax
rates in effect for the year in which the differences are expected to reverse. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Foreign Currency Translation The financial statements of the Companys foreign operations
are translated into U.S. Dollars. Assets and liabilities are translated at fiscal year-end
exchange rates while income and expense accounts are translated at the average rates in effect
during the year. Equity accounts are translated at historical exchange rates. Resulting
translation adjustments are accumulated as a component of other comprehensive income. Foreign
currency gains and losses resulting from transactions denominated in foreign currencies, including
intercompany transactions, except for intercompany loans of a long-term investment nature, are
included in results of operations.
Fair Value of Financial Instruments The Companys financial instruments consist primarily
of current assets and current liabilities. Current assets and liabilities approximate fair market
value.
Derivative Instruments and Hedging Activities The Company accounts for derivatives and
hedging activities in accordance with SFAS 133, Accounting for Derivative Instruments and Certain
Hedging Activities, as amended, which requires that all derivative instruments be recorded on the
balance sheet at their respective fair values.
The Company is exposed to market risk from foreign exchange rates. The Company continues to
evaluate these risks and takes measures to mitigate these risks, including, among other measures,
entering into derivative financial instruments to hedge risk exposures to currency rates. The
Company enters into foreign currency options to minimize and manage the currency related to its
import merchandise purchase program. The counter-party to these contracts is a highly rated
financial institution. Certain foreign currency options are designated as cash flow hedges, as
defined by SFAS 133, and are effective as hedges. Accordingly, changes in the effective portion of
the fair value of these foreign currency options are included in other comprehensive income. Once
the hedged transactions are completed, or when merchandise is sold, the unrealized gains and losses
on the foreign currency options are reclassified from accumulated other comprehensive income and
recognized in earnings. The unrealized losses related to the import merchandise purchase program
contracts, which were recorded in other comprehensive income, were not material for each period
presented.
Foreign currency options maintained at January 28, 2006 were not designated as hedging instruments
under SFAS 133.
Stock-Based Compensation SFAS 123, Accounting for Stock-Based Compensation, as amended
by SFAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure, allows entities
to choose between a fair value based method of accounting for employee stock options or similar
equity instruments and the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion 25 (APB 25), Accounting for Stock Issued to Employees.
41
Entities electing to account for employee stock options or similar equity instruments under APB 25
must make pro forma disclosures of net income and earnings per share as if the fair value method of
accounting had been applied. The Company has elected to apply the provisions of APB 25 in the
preparation of its consolidated financial statements and provide pro forma disclosure of net income
and earnings per share as required under SFAS 123 and SFAS 148 (dollars in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
Jan. 28, |
|
|
Jan. 29, |
|
|
Jan. 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net income as reported |
|
$ |
172,343 |
|
|
$ |
143,124 |
|
|
$ |
115,038 |
|
Stock-based employee compensation
expense determined under the fair
value based methods, net of income
tax |
|
|
(6,734 |
) |
|
|
(1,944 |
) |
|
|
(1,649 |
) |
Stock-based employee compensation
expense included in reported
net income, net of income tax |
|
|
2,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income pro forma |
|
$ |
168,554 |
|
|
$ |
141,180 |
|
|
$ |
113,389 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share as reported |
|
$ |
1.74 |
|
|
$ |
1.45 |
|
|
$ |
1.17 |
|
Basic net income per share pro forma |
|
$ |
1.70 |
|
|
$ |
1.43 |
|
|
$ |
1.16 |
|
Diluted net income per share as reported |
|
$ |
1.73 |
|
|
$ |
1.44 |
|
|
$ |
1.17 |
|
Diluted net income per share pro forma |
|
$ |
1.69 |
|
|
$ |
1.42 |
|
|
$ |
1.15 |
|
Time-vested stock awards are accounted for based on the fair value at date of grant. The related
compensation expense is recognized over the vesting period in a systematic and rational manner
consistent with the lapse of restrictions on the shares. Stock awards granted under the Companys
long-term incentive stock plan are accounted for based on the fair value of the stock on the date
it becomes probable that performance targets required to receive the award will be achieved.
Compensation expense is recognized over the related vesting period.
Recent Accounting Pronouncements In December 2004, FASB issued SFAS No. 123 (revised
2004) Share-Based Payment. This Statement is a revision of FASB Statement No. 123, Accounting
for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. This Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in share-based payment
arrangements. The Statement eliminated the accounting for share-based transactions under APB No.
25 and its related interpretations, instead requiring all share-based payments to be accounted for
using a fair value method. The Statement can be adopted using the Modified Prospective
Application or the Modified Retrospective Application. SFAS No. 123R also requires the benefits
of tax deductions in excess of recognized compensation cost to be reported as a financing cash
flow, rather than as an operating cash flow as currently required. We cannot estimate what those
amounts will be in the future because they depend on various things, such as when employees
exercise stock options.
The Company adopted SFAS No. 123R on January 29, 2006 using the modified prospective application
approach. As discussed in Note 6, prior to adoption of SFAS No. 123R, the Company accelerated the
vesting on substantially all of its unvested stock options and, as a result, there is no material
compensation expense to be recorded under SFAS No. 123R for the Companys stock options. The
adoption of SFAS No. 123R will not have a material effect on compensation expense to be recorded by
the Company for its time-vested stock awards. Under SFAS No. 123R, the Company will record a lower
compensation expense relating to unvested shares of the long-term incentive stock plan implemented
in Fiscal 2006 than under APB No. 25. The reduced expense arises from the difference in the
Companys stock price utilized to account for these shares under APB No. 25 and the grant date fair
value required by SFAS No. 123R. The impact of adoption of SFAS No. 123R on the new long-term
incentive plan for Fiscal 2007 cannot be determined at the present time as such plan has not yet
been approved by the Compensation Committee of the Board of Directors.
42
During October 2005, the FASB issued FSP FAS 13-1, Accounting for Rental Costs Incurred during a
Construction Period. This FSP states that rental costs, incurred during a construction period,
associated with ground or building operating leases are not capitalizable and shall be recognized
as rental expense. The guidance of this FSP is effective with the first reporting period beginning
after December 15, 2005. The Company does not capitalize such rental costs and this FSP will not
have a material impact on the Companys financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation (FIN) 47, Accounting for Conditional Asset
Retirement Obligations, which is an interpretation of SFAS No. 143, Accounting for Asset
Retirement Obligations. This interpretation clarifies terminology within SFAS No. 143 and
requires an entity to recognize a liability for the fair value of a conditional asset retirement
obligation when incurred if the liabilitys fair value can be reasonably estimated. This
interpretation is effective for fiscal years ending after December 15, 2005. The adoption of this
interpretation did not have a material impact on our financial condition or results of operations.
In October 2004, the American Jobs Creation Act of 2004 (the Jobs Creation Act) was signed into
law. The Jobs Creation Act includes a temporary incentive for U.S. multinationals to repatriate
foreign earnings at an approximate 5.25 percent effective tax rate. Such repatriations must occur
in either an enterprises last tax year that began before the enactment date, or the first tax year
that begins during the one-year period beginning on the date of enactment.
Issued in December 2004, FASB FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2),
indicated that the lack of clarification of certain provisions within the Jobs Creation Act and the
timing of the enactment necessitated a practical exception to the SFAS No. 109, Accounting for
Income Taxes, requirement to reflect in the period of enactment the effect of a new tax law.
Accordingly, enterprises were allowed time beyond 2004 to evaluate the effect of the Jobs Creation
Act on their plans for reinvestment or repatriation of foreign earnings for purposes of applying
SFAS No. 109. In Fiscal 2006, the Company repatriated $95 million of foreign earnings and recorded
an associated tax expense of approximately $5.7 million. See Note 8.
2. STATEMENTS OF CASH FLOWS
Payments of income taxes were $79.1 million in Fiscal 2006, $67.9 million in Fiscal 2005 and $43.6
million in Fiscal 2004. Payments of interest were $0.1 million in Fiscal 2006, $0.2 million in
Fiscal 2005 and $2.7 million in Fiscal 2004. Interest expense for Fiscal 2006 and 2005 is included
in Selling, general and administrative expenses in the Companys Consolidated Statement of
Operations and Comprehensive Income.
During Fiscal 2006, Fiscal 2005 and Fiscal 2004, property and equipment with an original cost of
$25.5 million, $32.4 million and $17.7 million, respectively, was retired. The loss on retirement
approximated $3.5 million, $3.3 million and $2.9 million for Fiscal 2006, Fiscal 2005 and Fiscal
2004, respectively.
3. CREDIT FACILITIES
The Company entered into a new credit facility in March 2004. This credit facility is a revolving
line of credit of up to $60.0 million and is secured by inventory in the United States and expires
on March 31, 2009. The borrowings under this facility are limited based on certain calculations of
availability, primarily on the amount of inventory on hand in the United States. At January 28,
2006, the entire amount of $60.0 million was available for borrowing by the Company, subject to
reduction for $3.4 million of outstanding letters of credit. The credit facility is cancelable by
the Company without penalty and borrowings would bear interest at a margin of 75 basis points over
the London Interbank Borrowing Rate (LIBOR) at January 28, 2006. The credit facility also contains
other restrictive covenants which limit, among other things, our ability to make dividend
distributions if we are in default or if our excess liquidity is less than $20.0 million during
certain periods. Excess liquidity is specifically defined in our debt agreement as the sum of our
available credit lines and certain cash and cash equivalent balances.
43
In December 1999, the Company entered into a credit facility pursuant to which the Company financed
$200.0 million of the purchase price for Afterthoughts. The credit facility included a $40.0
million revolving line of credit which would have matured on December 1, 2004, and a $175.0 million
five year term loan, the first installment of which was paid on December 31, 2000, with future
installments, thereafter, payable on a quarterly basis through December 1, 2004. The credit
facility was prepayable without penalty and bore interest at a margin of 100 basis points over the
LIBOR. The margin was adjusted periodically based on the Companys performance as it related to
certain financial covenants. The Company terminated this facility on March 31, 2004.
The Companys non-U.S. subsidiaries have bank credit facilities totaling approximately $779,000.
The 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 28, 2006, there were no borrowings on these credit
facilities.
4. COMMITMENTS AND CONTINGENCIES
Leasing The Company leases its retail stores, certain offices and warehouse space and
certain equipment under operating leases which expire at various dates through the year 2030 with
options to renew certain of such leases for additional periods. The lease agreements covering
retail store space provide for minimum rentals and/or rentals based on a percentage of net sales.
Rental expense for each of the three fiscal years is set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 |
|
|
Fiscal 2005 |
|
|
Fiscal 2004 |
|
Minimum store rentals |
|
$ |
162,066 |
|
|
$ |
154,994 |
|
|
$ |
143,067 |
|
Store rentals based on net sales |
|
|
4,734 |
|
|
|
4,700 |
|
|
|
3,767 |
|
Other rental expense |
|
|
14,141 |
|
|
|
17,796 |
|
|
|
22,605 |
|
|
|
|
|
|
|
|
|
|
|
Total rental expense from
continuing operations |
|
$ |
180,941 |
|
|
$ |
177,490 |
|
|
$ |
169,439 |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 includes $1.5 million of rent expense recorded to account for the cumulative adjustment
to record rent expense incurred during the construction period prior to lease commencement.
Minimum aggregate rental commitments under non-cancelable operating leases are summarized by fiscal
year ending as follows (in thousands):
|
|
|
|
|
2007 |
|
$ |
162,353 |
|
2008 |
|
|
152,164 |
|
2009 |
|
|
136,069 |
|
2010 |
|
|
121,292 |
|
2011 |
|
|
107,202 |
|
Thereafter |
|
|
229,671 |
|
|
|
|
|
|
|
$ |
908,751 |
|
|
|
|
|
Rental commitments for the Companys foreign entities in the table above have been translated to
U.S. Dollars at March 31, 2006 exchange rates.
Certain leases provide for payment of real estate taxes, insurance and other operating expenses of
the properties. In other leases, some of these costs are included in the basic contractual rental
payments. Certain leases contain escalation clauses resulting from the pass-through of increases
in operating costs, property taxes and the effect on costs from changes in consumer price indexes.
SFAS 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs, was adopted by the Company on February 2, 2003. SFAS 143
requires that the fair value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be made and that the
associated asset retirement costs be capitalized as part of the carrying amount of the long-lived
asset. The retirement obligation relates to costs
44
associated with the retirement of leasehold improvements under store and warehouse leases, within
the International division. The cumulative effect adjustment recognized upon adoption of this
standard and its impact on our results of operations or financial condition for each of the earlier
periods presented was not material. The Company had retirement obligations of $1.8 million and
$1.3 million recorded at January 28, 2006 and January 29, 2005, respectively.
In the year ended February 1, 2003 (Fiscal 2003), the Company disposed of its apparel segment,
which was comprised of Mr. Rags stores, or Lux Corp. At January 28, 2006, the Company remains
guarantor on certain real estate leases for Mr. Rags store locations with future rental payments of
approximately $3.2 million.
Foreign Currency Options From time to time, the Company has entered into short-term
foreign currency options to hedge exposure to currency fluctuations between the British Pound and
the U.S. Dollar. Certain of these contracts are accounted for as cash flow hedges and are
accounted for by adjusting the carrying amount of the contracts to market and recognizing any gain
or loss in accumulated other comprehensive income. The amount recognized in relation to these
contracts was not material.
The counterparty to the Companys foreign currency options is a major financial institution. The
credit ratings and concentration of risk of the financial institution are monitored on a continuing
basis. In the unlikely event that the counterparty fails to meet the terms of a foreign currency
contract, the Companys exposure is limited to the foreign currency rate difference.
Legal The Company is, from time to time, involved in litigation incidental to the conduct
of its business, including personal injury litigation, litigation regarding merchandise sold,
including product and safety concerns regarding metal content in merchandise, litigation with
respect to various employment matters, including litigation with present and former employees, and
litigation to protect trademark rights. In May 2002, the Company sold the stock of Lux Corporation
d/b/a Mr. Rags, and discontinued the operations of its apparel segment. In January 2003, Lux
Corporation filed for bankruptcy, and on November 7, 2003, the Official Committee of Unsecured
Creditors of Lux Corporation, filed a complaint against the Company in the United States Bankruptcy
Court for the Central District of California. This litigation was settled for $5 million ($3.1
million net of income taxes). The settlement represents return of proceeds the Company received as
a result of the sale, and was recorded during Fiscal Year 2005 within the financial statement line
item Net loss from discontinued operations.
The Company believes that current pending litigation will not have a material adverse effect on its
consolidated financial position, earnings or cash flow.
Other
Approximately 60% of the merchandise purchased by the Company was manufactured in China. Any event
causing a sudden disruption of imports from China, or other foreign countries, could have a
material adverse effect on the Companys operations.
In November 2003, the Companys Board of Directors authorized a retirement compensation package for
the Companys founder and former Chairman of the Board. Management estimated that the retirement
package would cost the Company approximately $8.7 million, which was recorded in the Companys
Statement of Operations within expenses titled Selling, general and administrative. At January
28, 2006, the Companys estimated remaining liability relating to this package was approximately
$5.1 million.
5. STOCKHOLDERS EQUITY
Stock Split On November 4, 2003, the Companys Board of Directors announced a 2-for-1
stock split of its Common stock and Class A common stock in the form of a 100% stock dividend
distribution. On December 19, 2003, 46,471,815 shares of Common stock and 2,611,989 shares of
Class A common stock were distributed to stockholders. Stockholders equity has been adjusted to
give recognition of the stock split by reclassifying from retained earnings to the Common stock and
Class A common stock accounts the par value of the additional shares arising from the split. In
addition, all references in the financial statements to number of shares, per share amounts, and stock option data of the Companys stock
have been restated.
45
Preferred Stock The Company has authorized 1,000,000 shares of $1 par value preferred
stock, none of which have been issued. The rights and preferences of such stock may be designated
in the future by the Board of Directors.
Class A Common Stock The Class A common stock has only limited transferability and is not
traded on any stock exchange or any organized market. However, the Class A common stock is
convertible on a share-for-share basis into Common stock and may be sold, as Common stock, in open
market transactions. The Class A common stock has ten votes per share. Dividends declared on the
Class A common stock are limited to 50% of the dividends declared on the Common stock.
Rights to Purchase Series A Junior Participating Preferred Stock The Companys Board of
Directors adopted a stockholder rights plan (the Rights Plan) in May 2003. The Rights Plan has
certain anti-takeover provisions that may cause substantial dilution to a person or group that
attempts to acquire the Company on terms not approved by the Board of Directors. Under the Rights
Plan, each stockholder is issued one right to acquire one one-thousandth of a share of Series A
Junior Participating Preferred Stock at an exercise price of $130.00, subject to adjustment, for
each outstanding share of Common stock and Class A common stock they own. These rights are only
exercisable if a single person or company acquires 15% or more of the outstanding shares of the
Companys common stock. If the Company were acquired, each right, except those of the acquirer,
would entitle its holder to purchase the number of shares of common stock having a then-current
market value of twice the exercise price. The Company may redeem the rights for $0.01 per right at
any time prior to a triggering acquisition and, unless redeemed earlier, the rights would expire on
May 30, 2013.
Stock
Repurchase Program In November 2005, the Companys Board of Directors approved a stock repurchase program of up to
$200 million. No shares were repurchased during the fiscal year ended January 28, 2006.
Subsequent to January 28, 2006 and through March 31, 2006, the Company purchased approximately
721,000 shares of common stock for $24.3 million.
Time-Vested
Stock Awards During the fiscal year ended January 28, 2006, the Company issued approximately 170,000 shares of
restricted common stock to non-management directors and executive management. The shares were
issued under the Claires Stores, Inc. Amended and Restated 1996 Incentive Plan (the 1996 Plan)
and the Amended and Restated 2005 Incentive Plan (the 2005 Plan). The recipients are entitled to
vote and receive dividends on the shares, which are subject to certain transfer restrictions and
forfeiture if a recipient leaves the Company for various reasons, other than disability, death, or
certain other events. The weighted average grant date fair value was $22.48 per share. The stock,
which had an aggregate fair value at date of grant of approximately $3.8 million, is subject to
vesting provisions of one to three years based on continued employment or service to the Company.
Compensation expense relating to these shares recorded during the fiscal year ended January 28,
2006 was approximately $1.1 million. At January 28, 2006, unearned compensation related to these
shares was $2.7 million.
Long-Term
Incentive Stock Plan Beginning for Fiscal 2006, the Compensation Committee of the Board of Directors (the Compensation
Committee) began granting performance stock awards, generally referred to as the long-term
incentive plan (the LTIP). Under the LTIP, common stock will be awarded to certain officers and
employees upon the Companys achievement of specific measurable performance criteria determined by
the Compensation Committee, as may be adjusted by the Compensation Committee under the 1996 Plan
and 2005 Plan. The performance grants for Fiscal 2006 were made under the 1996 Plan. During the
fiscal year ended January 28, 2006, compensation expense and additional paid-in capital of
approximately $3.0 million was recorded in conjunction with the LTIP. This expense was based on
the fair value of the Companys common stock at the end of Fiscal 2006 of $30.87. Shares awarded
under the LTIP vest over a three year period subject to the Company achieving specified performance
targets in each of the three years. During Fiscal 2006, officers and employees earned
approximately 54,000 shares of common stock
46
representing shares earned through achievement of performance targets for Fiscal 2006. A maximum
of approximately 609,000 additional shares may be issued under the LTIP for Fiscal 2006 grants.
6. STOCK OPTIONS
Under the 1996 Plan, the Company may grant either incentive stock options or non-qualified stock
options to purchase up to 8,000,000 shares of Common stock, plus any shares unused or recaptured
from previous plans. Incentive stock options granted under the 1996 Plan are exercisable at prices
equal to the fair market value of shares at the date of grant, except that incentive stock options
granted to any person holding 10% or more of the total combined voting power or value of all
classes of capital stock of the Company, or any subsidiary of the Company, carry an exercise price
equal to 110% of the fair market value at the date of grant. The aggregate number of shares
granted to any one person may not exceed 1,000,000. Each incentive stock option or non-qualified
stock option will terminate ten years after the date of grant (or such shorter period as specified
in the grant) and may not be exercised thereafter.
The 2005 Plan was approved by the Companys Board of Directors in March 2005 and by stockholders in
June 2005. Under the 2005 Plan, the Company may grant incentive stock options, non-qualified stock
options, restricted and deferred stock awards, dividend equivalents, stock appreciation rights,
bonus stock awards, performance awards and other stock based awards to purchase up to 2,000,000
shares of Common stock, plus any shares unused or recaptured from previous plans. Incentive stock
options available for grant under the 2005 Plan are exercisable at prices equal to the fair market
value of shares at the date of the grant, except that incentive stock options available to any
person holding 10% or more of the total combined voting power or value of all classes of capital
stock of the Company, or any subsidiary of the Company, carry an exercise price equal to 110% of
the fair market value at the date of the grant. The aggregate number of shares granted to any one
person may not exceed 500,000 shares. Each incentive stock option or non-qualified stock option
will terminate ten years after the date of grant (or such shorter period as specified in the grant)
and may not be exercised thereafter. The terms and conditions related to restricted and deferred
stock awards, dividend equivalents, stock appreciation rights, bonus stock awards, performance
awards and other stock based awards will be determined by the Compensation Committee.
Incentive stock options currently outstanding are exercisable at various prices and dates beginning
one year from the date of grant, and expire five to ten years after the date of grant.
Non-qualified stock options currently outstanding are exercisable at prices equal to the fair
market value of the shares at the date of grant and expire five to ten years after the date of
grant.
Options to purchase 5,000 shares were outstanding, but not yet exercisable, at January 28, 2006
under the 1996 Plan. There were 9,201,109 shares of Common stock available for future grants under
the 2005 Plan at January 28, 2006 (which includes shares recaptured from the previous plans).
47
A summary of the activity in the Companys stock option plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 |
|
|
Fiscal 2005 |
|
|
Fiscal 2004 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Exercise |
|
|
Number of |
|
|
Exercise |
|
|
Number of |
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding at beginning of period |
|
|
1,511,813 |
|
|
$ |
15.39 |
|
|
|
1,266,868 |
|
|
$ |
14.23 |
|
|
|
1,669,096 |
|
|
$ |
8.52 |
|
Options granted |
|
|
|
|
|
|
|
|
|
|
350,000 |
|
|
$ |
19.01 |
|
|
|
900,000 |
|
|
$ |
16.77 |
|
Options exercised |
|
|
(323,127 |
) |
|
$ |
15.09 |
|
|
|
(68,555 |
) |
|
$ |
11.16 |
|
|
|
(1,235,728 |
) |
|
$ |
8.30 |
|
Options canceled |
|
|
(75,250 |
) |
|
$ |
17.30 |
|
|
|
(36,500 |
) |
|
$ |
15.96 |
|
|
|
(66,500 |
) |
|
$ |
15.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
1,113,436 |
|
|
$ |
15.33 |
|
|
|
1,511,813 |
|
|
$ |
15.40 |
|
|
|
1,266,868 |
|
|
$ |
14.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
1,108,436 |
|
|
$ |
15.32 |
|
|
|
428,842 |
|
|
$ |
12.39 |
|
|
|
189,534 |
|
|
$ |
8.73 |
|
Weighted average fair value
of options granted during
the period (see below) |
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
$ |
10.19 |
|
|
|
|
|
|
$ |
8.98 |
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Expected dividend yield |
|
|
N/A |
|
|
|
1.30 |
% |
|
|
1.40 |
% |
Expected stock price volatility |
|
|
N/A |
|
|
|
50.00 |
% |
|
|
50.00 |
% |
Risk-Free interest rate |
|
|
N/A |
|
|
|
4.60 |
% |
|
|
4.70 |
% |
Expected life of options |
|
|
N/A |
|
|
7 years |
|
7 years |
The following table summarizes information about stock options outstanding at January 28,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Weighted |
|
|
|
|
|
Weighted |
|
|
Number of |
|
Contractual |
|
Average |
|
|
|
|
|
Average |
|
|
Shares |
|
Life |
|
Exercise |
|
Number of |
|
Exercise |
Exercise Prices |
|
Outstanding |
|
(Years) |
|
Price |
|
Shares |
|
Price |
$8.96
|
|
|
100,000 |
|
|
|
0.48 |
|
|
$ |
8.96 |
|
|
|
100,000 |
|
|
$ |
8.96 |
|
$10.19
|
|
|
226,936 |
|
|
|
3.87 |
|
|
$ |
10.19 |
|
|
|
226,936 |
|
|
$ |
10.19 |
|
$13.40
|
|
|
35,000 |
|
|
|
7.41 |
|
|
$ |
13.40 |
|
|
|
35,000 |
|
|
$ |
13.40 |
|
$16.93
|
|
|
436,500 |
|
|
|
7.63 |
|
|
$ |
16.93 |
|
|
|
431,500 |
|
|
$ |
16.93 |
|
$18.61 to $22.04
|
|
|
315,000 |
|
|
|
8.06 |
|
|
$ |
19.05 |
|
|
|
315,000 |
|
|
$ |
19.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,113,436 |
|
|
|
6.34 |
|
|
$ |
15.33 |
|
|
|
1,108,436 |
|
|
$ |
15.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2003, the Companys Board of Directors authorized the acceleration of the vesting
period on 240,000 options to purchase the Companys common stock in connection with the retirement
compensation package granted to the Companys founder and former Chairman of the Board. As a
result of this acceleration, $2.4 million of compensation expense was recorded by the Company
during the year ended January 31, 2004.
48
During January 2006, the Company accelerated the vesting of approximately 659,000 incentive and
non-qualified stock options held by employees, representing substantially all unvested options
outstanding at the time of acceleration. These accelerated options had a weighted average exercise
price of $16.29, which was less than the market price of the Companys Common stock of $29.34 at
the time of acceleration. This action resulted in non-cash, stock-based compensation expense of
$314,000 in Fiscal 2006. It also resulted in an increase of $2.4 million, net of tax, in the pro
forma stock-based employee compensation expense shown in Note 1. The decision to accelerate
vesting of these options was made primarily to avoid recognizing the related compensation cost of
approximately $4.2 million in the Companys future consolidated financial statements upon adoption
of SFAS No. 123R, Share Based Payment.
7. EMPLOYEE BENEFIT PLANS
Profit
Sharing Plan The Company has adopted a Profit Sharing Plan under Section 401(k) of the
Internal Revenue Code. This plan allows employees who serve more than 1,000 hours per year to
defer up to 18% of their income through contributions to the plan. In line with the provisions of
the plan, for every dollar the employee contributes the Company will contribute an additional
$0.50, up to 2% of the employees salary. In Fiscal 2006, Fiscal 2005 and Fiscal 2004, the cost of
Company matching contributions was $716,000, $509,000 and $603,000, respectively.
Deferred
Compensation Plans In August 1999, the Company adopted a deferred compensation plan,
which was amended and restated, effective as of February 4, 2005, that enables certain associates
of the Company to defer a specified percentage of their cash compensation. The plan generally
provides for payments upon retirement, death, or termination of employment. Participants may elect
to defer a percentage of their cash compensation while the Company contributes a specified
percentage of the participants cash compensation based on the participants number of years of
service. All contributions are immediately vested. The Companys obligations under this plan are
funded by making contributions to a rabbi trust. Assets held under this plan totaled $7.1 million
and $4.6 million at January 28, 2006 and January 29, 2005, respectively, and are included in Other
current assets in the Companys Consolidated Balance Sheets. The obligations under the plan are
included in Accrued expenses and other liabilities. Total Company contributions were $408,000,
$313,000 and $197,000 in Fiscal 2006, 2005 and 2004, respectively.
8. INCOME TAXES
Income before income taxes from continuing operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Domestic |
|
$ |
186,904 |
|
|
$ |
155,497 |
|
|
$ |
125,567 |
|
Foreign |
|
|
72,767 |
|
|
|
66,139 |
|
|
|
48,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
259,671 |
|
|
$ |
221,636 |
|
|
$ |
174,422 |
|
|
|
|
|
|
|
|
|
|
|
49
The components of income tax expense (benefit) consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
Jan. 28, |
|
|
Jan. 29, |
|
|
Jan. 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
71,693 |
|
|
$ |
55,299 |
|
|
$ |
38,307 |
|
Deferred |
|
|
(3,315 |
) |
|
|
3,557 |
|
|
|
5,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,378 |
|
|
|
58,856 |
|
|
|
43,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
6,028 |
|
|
|
4,679 |
|
|
|
3,970 |
|
Deferred |
|
|
(343 |
) |
|
|
369 |
|
|
|
587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,685 |
|
|
|
5,048 |
|
|
|
4,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
14,247 |
|
|
|
10,836 |
|
|
|
9,373 |
|
Deferred |
|
|
(982 |
) |
|
|
637 |
|
|
|
1,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,265 |
|
|
|
11,473 |
|
|
|
10,856 |
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense from
continuing operations |
|
|
87,328 |
|
|
|
75,377 |
|
|
|
59,384 |
|
Tax benefit of discontinued operations |
|
|
|
|
|
|
(1,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
$ |
87,328 |
|
|
$ |
73,512 |
|
|
$ |
59,384 |
|
|
|
|
|
|
|
|
|
|
|
50
The tax effects on the significant components of the Companys net deferred tax asset (liability)
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Jan. 28, |
|
|
Jan. 29, |
|
|
|
2006 |
|
|
2005 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
5,050 |
|
|
$ |
4,193 |
|
Deferred rent |
|
|
4,408 |
|
|
|
3,555 |
|
Discontinued operations |
|
|
224 |
|
|
|
3,023 |
|
Compensation & benefits |
|
|
5,575 |
|
|
|
3,921 |
|
Inventory |
|
|
1,714 |
|
|
|
621 |
|
Gift cards |
|
|
1,089 |
|
|
|
|
|
Net operating loss carry forwards |
|
|
8,418 |
|
|
|
6,388 |
|
Other |
|
|
840 |
|
|
|
760 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
27,318 |
|
|
|
22,461 |
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(8,305 |
) |
|
|
(5,884 |
) |
|
|
|
|
|
|
|
Total deferred tax assets, net |
|
|
19,013 |
|
|
|
16,577 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
3,230 |
|
|
|
9,139 |
|
Operating leases |
|
|
230 |
|
|
|
1,034 |
|
Intangible asset amortization |
|
|
22,151 |
|
|
|
17,607 |
|
Other |
|
|
809 |
|
|
|
844 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
26,420 |
|
|
|
28,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(7,407 |
) |
|
$ |
(12,047 |
) |
|
|
|
|
|
|
|
The provision for income taxes from continuing operations differs from an amount computed at the
statutory federal rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
Jan. 28, |
|
|
Jan. 29, |
|
|
Jan. 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
U.S. income taxes at statutory federal rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Foreign income tax benefit at less than U.S. rate |
|
|
(6.4 |
) |
|
|
(6.0 |
) |
|
|
(5.3 |
) |
State and local income taxes, net of federal tax benefit |
|
|
1.4 |
|
|
|
1.7 |
|
|
|
1.7 |
|
American Jobs Creation Act repatriation |
|
|
2.2 |
|
|
|
|
|
|
|
|
|
Change in accrual for estimated tax contingencies |
|
|
2.3 |
|
|
|
1.9 |
|
|
|
0.7 |
|
Other, net |
|
|
(0.9 |
) |
|
|
1.4 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.6 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
|
|
|
|
|
|
|
|
The American Jobs Creation Act of 2004 (the Act), created a temporary incentive for the Company
to repatriate earnings accumulated outside the U.S. by allowing the Company to reduce its taxable
income by 85 percent of certain eligible dividends received from foreign subsidiaries. During the
fourth quarter of Fiscal 2006, the Company repatriated $95 million of foreign earnings under the
Act. Accordingly, the Company recorded income tax expense of $5.7 million in connection with this
repatriation. The additional tax expense consists of federal taxes ($1.4 million), state taxes,
net of federal benefit ($0.5 million) and foreign taxes ($3.8 million).
As of January 28, 2006, there are accumulated unremitted earnings from the Companys foreign
subsidiaries on which deferred taxes have not been provided as the undistributed earnings of the
foreign subsidiaries are indefinitely reinvested. Based on the current United States and foreign
subsidiaries
51
income tax rates, it is estimated that United States taxes, net of foreign tax credits, of
approximately $51.6 million would be due upon repatriation.
As of January 28, 2006 and January 29, 2005, net current deferred income tax assets of $13.1
million and $12.2 million, respectively, are classified as Prepaid expenses and other current
assets in the accompanying Consolidated Balance Sheet. There were no net current deferred income
tax liabilities as of January 28, 2006 and January 29, 2005.
As of January 28, 2006, the Company had available net operating loss (NOL) carry forwards of
approximately $8.4 million for foreign and state income tax purposes. The foreign NOL carry
forwards of approximately $18.3 million ($6.1 million after-tax) have an indefinite expiration. The
state NOL carry forwards of approximately $44.6 million ($2.3 million after-tax) are subject to
various expiration dates pursuant to the applicable statutes of the respective taxing
jurisdictions. The valuation at January 28, 2006, primarily applies to the foreign and state NOL
carry forwards that, in the opinion of management, are more likely than not to expire unutilized.
However, to the extent that tax benefits related to these NOL carry forwards are realized in the
future, the reduction in the valuation allowance will reduce income tax expense in the period of
adjustment. The net change in the total valuation allowance for Fiscal 2006 and 2005 was an
increase of $2.4 million and $0.7 million, respectively.
The Company has established accruals for tax contingencies based on tax positions that it believes
are supportable, but are potentially subject to successful challenge by the taxing authorities.
Accruals for tax contingencies are provided for in accordance with the requirements of SFAS No. 5,
Accounting for Contingencies. The Company believes these contingent tax liabilities are adequate
for all open audit years.
The IRS commenced its audit of the Companys U.S. income tax returns for Fiscal 2003 and 2004 in
the fourth quarter of Fiscal 2006. As of January 28, 2006, the IRS has not proposed any
significant adjustments. The Company anticipates that this audit will be completed by the end of
Fiscal 2007. While it is not possible to predict the impact of this audit on income tax expense,
the Company believes based on currently available information that the ultimate outcome will not
have a material adverse effect on its financial position, results of operations or cash flows.
Accumulated other comprehensive income at January 28, 2006 and January 29, 2005 includes $4.4
million and $7.0 million, respectively, resulting in a decrease of $2.6 million related to the
income tax effect of unrealized gains on foreign currency translation within the Companys foreign
subsidiaries.
Taxes impacted stockholders equity with credits of $0.9 million and $0.3 million for the years
ended January 28, 2006 and January 29, 2005, respectively, relating to tax benefits from the
exercise of stock options.
9. RELATED PARTY TRANSACTIONS
The Company leases its executive offices located in Pembroke Pines, Florida from Rowland Schaefer &
Associates, a general partnership owned by two corporate general partners. Our two Co-Chairmen, as
well as a sister of the Companys Co-Chairmen, each have an approximately 32% ownership interest in
the general partnership, and our Chief Financial Officer has an approximately 5% ownership interest
in the general partnership. During Fiscal 2006, 2005, and 2004, the Company paid Rowland Schaefer
& Associates, Inc. approximately $1,217,000, $1,147,000, and $900,000, respectively, for rent, real
estate taxes, and operating expenses as required under the lease. After obtaining approval of the
Companys Corporate Governance/Nominating Committee, the Company executed a new lease in January
2004 which expires on December 31, 2013.
The Company leases retail space for a Claires Boutiques store in New York City from 720 Lexington
Realty LLC, a limited liability corporation that is controlled by the Companys two Co-Chairmen and
a sister of the Companys Co-Chairmen. During Fiscal 2006, 2005 and 2004, the Company paid
approximately $460,000, $293,000 and $282,000, respectively, for rent to 720 Lexington Realty LLC.
52
During Fiscal 2005 and 2004, the terms under the lease with 720 Lexington Realty LLC were the same
terms as were in effect since September 1994 when the Company leased the retail space from an
unaffiliated third party prior to the purchase by 720 Lexington Realty LLC. The lease expired on
January 31, 2005 and the Companys Corporate Governance/Nominating Committee approved the terms of
a new lease in January 2005. The new lease terms provide for a five-year term with a five year
renewal option, and annual rental payments of $460,000 (exclusive of real estate taxes and other
operating expenses to be paid by the Company under the lease).
Management believes that these lease arrangements are on no less favorable terms than the Company
could obtain from unaffiliated third parties.
53
10. SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 28, 2006 |
|
|
|
1st Qtr |
|
|
2nd Qtr |
|
|
3rd Qtr |
|
|
4th Qtr |
|
|
Year |
|
|
|
(In thousands, except per share amounts) |
|
Net sales |
|
$ |
302,708 |
|
|
$ |
325,042 |
|
|
$ |
327,259 |
|
|
$ |
414,743 |
|
|
$ |
1,369,752 |
|
Gross profit |
|
|
164,013 |
|
|
|
173,194 |
|
|
|
175,718 |
|
|
|
230,961 |
|
|
|
743,886 |
|
Net income |
|
|
29,702 |
|
|
|
35,458 |
|
|
|
38,127 |
|
|
|
69,056 |
|
|
|
172,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.30 |
|
|
$ |
0.36 |
|
|
$ |
0.38 |
|
|
$ |
0.70 |
|
|
$ |
1.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.30 |
|
|
$ |
0.36 |
|
|
$ |
0.38 |
|
|
$ |
0.69 |
|
|
$ |
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 29, 2005 |
|
|
|
1st Qtr |
|
|
2nd Qtr |
|
|
3rd Qtr |
|
|
4th Qtr |
|
|
Year |
|
|
|
(In thousands, except per share amounts) |
|
Net sales |
|
$ |
281,591 |
|
|
$ |
305,223 |
|
|
$ |
296,702 |
|
|
$ |
395,891 |
|
|
$ |
1,279,407 |
|
Gross profit |
|
|
156,067 |
|
|
|
163,303 |
|
|
|
157,470 |
|
|
|
214,880 |
|
|
|
691,720 |
|
Income from continuing operations |
|
|
27,692 |
|
|
|
32,745 |
|
|
|
27,158 |
|
|
|
58,664 |
|
|
|
146,259 |
|
Loss on disposal of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,135 |
|
|
|
3,135 |
|
Net income |
|
|
27,692 |
|
|
|
32,745 |
|
|
|
27,158 |
|
|
|
55,529 |
|
|
|
143,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.28 |
|
|
$ |
0.33 |
|
|
$ |
0.27 |
|
|
$ |
0.59 |
|
|
$ |
1.48 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.03 |
) |
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.28 |
|
|
$ |
0.33 |
|
|
$ |
0.27 |
|
|
$ |
0.56 |
|
|
$ |
1.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.28 |
|
|
$ |
0.33 |
|
|
$ |
0.27 |
|
|
$ |
0.59 |
|
|
$ |
1.47 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.03 |
) |
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.28 |
|
|
$ |
0.33 |
|
|
$ |
0.27 |
|
|
$ |
0.56 |
|
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. SEGMENT REPORTING
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 International. We
account for the goods we sell under the merchandising agreements within Net sales and Cost of
sales, occupancy and buying expenses in our North American division and the license fees we charge
under the licensing agreements within Interest and other income within our International division
in our Consolidated Statements of Operations and Comprehensive Income. The Company accounts for
the results of operations of Claires Nippon under the equity method and includes the results
within Interest and other income in the Companys Consolidated Statements of Operations and
Comprehensive Income within the Companys North American division. Substantially all of the stock
compensation expense for Fiscal 2006 is recorded in the Companys North American division.
54
Information about the Companys operations by segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
964,008 |
|
|
$ |
906,071 |
|
|
$ |
820,332 |
|
International |
|
|
405,744 |
|
|
|
373,336 |
|
|
|
312,502 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
1,369,752 |
|
|
$ |
1,279,407 |
|
|
$ |
1,132,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
226,269 |
|
|
$ |
195,518 |
|
|
$ |
165,279 |
|
International |
|
|
68,062 |
|
|
|
65,142 |
|
|
|
48,948 |
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
294,331 |
|
|
$ |
260,660 |
|
|
$ |
214,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
32,383 |
|
|
$ |
29,046 |
|
|
$ |
27,222 |
|
International |
|
|
16,517 |
|
|
|
15,836 |
|
|
|
14,229 |
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
48,900 |
|
|
$ |
44,882 |
|
|
$ |
41,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,530 |
|
International |
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
(10,669 |
) |
|
$ |
(3,851 |
) |
|
$ |
(2,860 |
) |
International |
|
|
(3,571 |
) |
|
|
(2,007 |
) |
|
|
(1,347 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest and other income |
|
$ |
(14,240 |
) |
|
$ |
(5,858 |
) |
|
$ |
(4,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
204,554 |
|
|
$ |
170,323 |
|
|
$ |
138,387 |
|
International |
|
|
55,117 |
|
|
|
51,313 |
|
|
|
36,035 |
|
|
|
|
|
|
|
|
|
|
|
Total income from continuing operations before income taxes |
|
$ |
259,671 |
|
|
$ |
221,636 |
|
|
$ |
174,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
81,794 |
|
|
$ |
68,484 |
|
|
$ |
52,578 |
|
International |
|
|
5,534 |
|
|
|
6,893 |
|
|
|
6,806 |
|
|
|
|
|
|
|
|
|
|
|
Total income taxes |
|
$ |
87,328 |
|
|
$ |
75,377 |
|
|
$ |
59,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
122,760 |
|
|
$ |
101,839 |
|
|
$ |
85,809 |
|
International |
|
|
49,583 |
|
|
|
44,420 |
|
|
|
29,229 |
|
|
|
|
|
|
|
|
|
|
|
Total income from continuing operations |
|
$ |
172,343 |
|
|
$ |
146,259 |
|
|
$ |
115,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
170,650 |
|
|
$ |
170,650 |
|
|
$ |
170,650 |
|
International |
|
|
27,988 |
|
|
|
30,417 |
|
|
|
29,152 |
|
|
|
|
|
|
|
|
|
|
|
Total goodwill |
|
$ |
198,638 |
|
|
$ |
201,067 |
|
|
$ |
199,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long lived assets: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
159,361 |
|
|
$ |
145,418 |
|
|
$ |
128,585 |
|
International |
|
|
63,358 |
|
|
|
59,108 |
|
|
|
57,266 |
|
|
|
|
|
|
|
|
|
|
|
Total long lived assets |
|
$ |
222,719 |
|
|
$ |
204,526 |
|
|
$ |
185,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
822,687 |
|
|
$ |
668,772 |
|
|
$ |
542,763 |
|
International |
|
|
268,014 |
|
|
|
297,357 |
|
|
|
263,161 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,090,701 |
|
|
$ |
966,129 |
|
|
$ |
805,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
46,895 |
|
|
$ |
46,930 |
|
|
$ |
33,331 |
|
International |
|
|
26,549 |
|
|
|
16,637 |
|
|
|
15,507 |
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
73,444 |
|
|
$ |
63,567 |
|
|
$ |
48,838 |
|
|
|
|
|
|
|
|
|
|
|
55
Identifiable assets are those assets that are identified with the operations of each segment.
Corporate assets consist mainly of cash and cash equivalents, investments in affiliated companies
and other assets. These assets are included within North America. Operating income represents
Gross profit less Selling, general and administrative costs.
Approximately 19.0%, 19.0% and 19.0% of the Companys Net sales were in the United Kingdom for
Fiscal Years 2006, 2005 and 2004, respectively, and approximately 13.0%, 14.0% and 17.0% of the
Companys property and equipment, net, were located in the United Kingdom at January 28, 2006,
January 29, 2005 and January 31, 2004, respectively. Approximately 7.0%, 7.0% and 6.0% of the
Companys Net sales were in France for Fiscal years 2006, 2005 and 2004, respectively, and
approximately 11.0%, 13.0% and 12.0% of the Companys property and equipment, net, were located in
France at January 28, 2006, January 29, 2005 and January 31, 2004, respectively.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our
management, including our Co-Chief Executive Officers and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this
Annual Report. Based upon that evaluation, our Co-Chief Executive Officers and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of the end of the
period covered by this Annual Report to ensure that information required to be disclosed in this
Annual Report is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commissions rules and forms, and that such information is accumulated and
communicated to our management, including each of such officers as appropriate to allow timely
decisions regarding required disclosure.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision
and with the participation of our management, including our Co-Chief Executive Officers and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under
the framework in Internal Control Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of January 28, 2006. Our managements
assessment of the effectiveness of our internal control over financial reporting as of January 28,
2006 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in
their report which is included herein.
Change in our Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our last fiscal
quarter identified in connection with the evaluation referred to above that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
56
PART III.
Items 10, 11, 12, 13 and 14. Directors and Executive Officers of the Registrant; Executive
Compensation; Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters; Certain Relationships and Related Transactions; and Principal Accountant Fees
and Services.
The information called for by Items 10, 11, 12, 13 and 14 will be contained in our definitive Proxy
Statement for our 2006 Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission no later than 120 days after the end of our fiscal year covered by this report pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as amended, and is incorporated herein
by reference.
PART IV.
Item 15. Exhibits, Financial Statement Schedules
(a) List of documents filed as part of this report.
1. Financial Statements
|
|
|
|
|
|
|
Page No. |
|
Reports of Independent Registered Public Accounting Firm |
|
|
31 |
|
Consolidated Balance Sheets as of January 28, 2006 and
January 29, 2005 |
|
|
33 |
|
Consolidated Statements of Operations and Comprehensive Income
for the fiscal years ended January 28, 2006, January 29, 2005
and January 31, 2004 |
|
|
34 |
|
Consolidated Statements of Changes in Stockholders Equity for
the fiscal years ended January 28, 2006, January 29, 2005
and January 31, 2004 |
|
|
35 |
|
Consolidated Statements of Cash Flows for the fiscal years ended
January 28, 2006, January 29, 2005 and January 31, 2004 |
|
|
36 |
|
Notes to Consolidated Financial Statements |
|
|
37 |
|
2. Financial Statement Schedules
All schedules have been omitted because the required information is included in the consolidated
financial statements or the notes thereto, or the omitted schedules are not applicable.
3. Exhibits
|
|
|
(2)(a)
|
|
Agreement and Plan of Merger dated as of March 9, 1998 among the Company, CSI
Acquisition Corp., Lux Corporation, and David Shih, Eva Shih, Daniel Shih,
Douglas Shih, the Shih Irrevocable Trust and Crestwood Partners LLC, as amended
by letter amendment dated March 23, 1998 and addendum thereto dated March 24,
1998 (incorporated by reference to exhibit 2 (a) to the Companys Annual Report
on Form 10-K for the fiscal year ended January 30, 1999). |
|
|
|
(2)(b)
|
|
Asset Purchase Agreement, dated as of November 1, 1999, by and between the
Company, Venator Group, Inc., Venator Group Specialty, Inc., Venator Group
Canada, Inc., Afterthoughts Boutiques, Inc. and Afterthoughts
(incorporated by reference to Exhibit 2.1 to the Companys Current Report
on Form 8-K dated December 1, 1999). |
57
|
|
|
(2)(c)
|
|
Agreement and Plan of Merger, dated as of April 28, 2000, by and between
Claires Stores, Inc. and CSI Florida Acquisition, Inc. (incorporated by
reference to Appendix A to the Companys Proxy Statement relating to the 2000
Annual Meeting of Stockholders). |
|
|
|
(2)(d)
|
|
Stock Purchase Agreement, dated as of May 17, 2002, by and among Mr. Rags
Acquisition, Inc., Claires Stores, Inc. and Lux Corporation d/b/a Mr. Rags
(omitted schedules will be furnished supplementally to the Commission upon
request) (incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on June 3, 2002). |
|
|
|
(3)(a)
|
|
Amended and Restated Articles of Incorporation of Claires Stores, Inc.
(formerly known as CSI Florida Acquisition, Inc.) (incorporated by reference to
Exhibit 3.1 to the Companys Current Report on Form 8-K dated June 30, 2000). |
|
|
|
(3)(b)
|
|
Amended and Restated Bylaws of Claires Stores, Inc. (formerly known as CSI
Florida Acquisition, Inc.) (incorporated by reference to Exhibit 3.1
to the Companys Quarterly Report on Form 10-Q filed on September 2, 2004). |
|
|
|
(3)(c)
|
|
Articles of Amendment to the Amended and Restated Articles of Incorporation of
Claires Stores, Inc. (incorporated by reference to Exhibit 3(c) to the Companys
Annual Report on Form 10-K filed on April 15, 2004). |
|
|
|
(4)(a)
|
|
Rights Agreement, effective May 30, 2003 between Claires Stores, Inc. and
Wachovia Bank, N.A., as Rights Agent, together with the following exhibits
thereto: Exhibit A Form of Articles of Amendment Designating the Series A
Junior Participating Preferred Stock of Claires Stores, Inc.; Exhibit B Form
of Right Certificate; Exhibit C Summary of Rights to Purchase Shares of
Preferred Shares of Claires Stores, Inc. (incorporated by reference to Exhibit
4.1 to the Companys Registration Statement on Form 8-A filed on June 23, 2003). |
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(10)(a)
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Amended and Restated 1996 Incentive Compensation Plan of the Company
(incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q filed on June 8, 2005 relating to the 2003 Annual Meeting of
Stockholders). |
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(10)(b)
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401(k) Profit Sharing Plan, as amended (incorporated by reference to Exhibit
10(e) to the Companys Annual Report on Form 10-K for the fiscal year ended
February 1, 1992). |
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(10)(c)
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2005 Management Deferred Compensation Plan effective as of February 4, 2005
(incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q filed on June 8, 2005). |
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(10)(d)
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Amended and Restated Office Lease dated January 1, 2004 between the Company
and Rowland Schaefer Associates (incorporated by reference to Exhibit 10(x) to
the Companys Annual Report on Form 10-K filed on April 15, 2004). |
58
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(10)(e)
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Retirement Agreement dated December 2003 between Claires Stores, Inc. and
Rowland Schaefer (incorporated by reference to Exhibit 10(y) to the Companys
Annual Report on Form 10-K filed on April 15, 2004). |
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(10)(f)
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Loan and Security Agreement dated March 31, 2004 by and among, the Company,
as lead borrower for BMS Distributing Corp., Claires Boutiques, Inc., CBI
Distributing Corp., and Claires Puerto Rico Corp., Fleet Retail Group, Inc., as
administrative agent for and the revolving credit lenders and other financial
institutions or entities from time to time parties thereto, and Fleet National
Bank as issuer (incorporated by reference to Exhibit 10(z) to the Companys
Annual Report on Form 10-K filed on April 15, 2004). |
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(10)(g)
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Employment Agreement, dated February 11, 2005, between the Company and E.
Bonnie Schaefer (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed on February 17, 2005). |
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(10)(h)
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Employment Agreement, dated February 11, 2005, between the Company and Marla
Schaefer (incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K filed on February 17, 2005). |
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(10)(i)
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2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10 (c)
to the Companys Annual Report on Form 10-K filed on April 13, 2005). |
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(21)
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Subsidiaries of the Company.(1) |
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(23)
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Consent of KPMG LLP.(1) |
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(24)
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Power of Attorney (included on signature page). |
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Each management contract or compensatory plan or arrangement to be filed
as an exhibit to this report pursuant to Item 14(c) is listed in exhibit
nos. (10)(a), (10)(b), (10)(c), (10)(e), (10)(g), (10)(h) and (10)(i). |
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(31.1)
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Certification of Co-Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a).(1) |
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(31.2)
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Certification of Co-Chief Executive Officer pursuant to Rules 13a-14(a) and
15d-14(a).(1) |
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(31.3)
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Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and
15d-14(a).(1) |
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(32.1)
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Certification of Co-Chief Executive Officer pursuant to 18 USC Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(2) |
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(32.2)
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Certification of Co-Chief Executive Officer pursuant to 18 USC Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(2) |
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(32.3)
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Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(2) |
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(1) Filed herewith. |
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(2) Furnished herewith. |
59
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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CLAIRES STORES, INC.
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April 12, 2006 |
By: |
/s/ Marla L. Schaefer
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Marla L. Schaefer, Co-Chief Executive Officer |
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April 12, 2006 |
By: |
/s/ E. Bonnie Schaefer
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E. Bonnie Schaefer, Co-Chief Executive Officer |
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April 12, 2006 |
By: |
/s/ Ira D. Kaplan
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Ira D. Kaplan, Senior Vice President and Chief |
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Financial Officer |
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POWER OF ATTORNEY
We, the undersigned, hereby constitute Ira D. Kaplan and William H. Girard III, or either of
them, our true and lawful attorneys-in-fact with full power to sign for us in our name and in the
capacity indicated below any and all amendments and supplements to this report, and to file the
same, with exhibits thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or their
substitutes, each acting alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
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April 12, 2006 |
/s/ Marla L. Schaefer
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Marla L. Schaefer, Co-Chairman of the Board of |
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Directors (principal co-executive officer and
director) |
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April 12, 2006 |
/s/ E. Bonnie Schaefer
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E. Bonnie Schaefer, Co-Chairman of the Board of |
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Directors (principal co-executive officer and
director) |
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April 12, 2006 |
/s/ Ira D. Kaplan
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Ira D. Kaplan, Senior Vice President, Chief |
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Financial Officer and Director (principal
financial and accounting officer and director) |
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April 12, 2006 |
/s/ Martha Clark Goss
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Martha Clark Goss, Director |
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April 12, 2006 |
/s/ Ann Spector Lieff
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Ann Spector Lieff, Director |
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April 12, 2006 |
/s/ Bruce G. Miller
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Bruce G. Miller, Director |
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April 12, 2006 |
/s/ Steven H. Tishman
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Steven H. Tishman, Director |
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60
INDEX TO EXHIBITS
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EXHIBIT NO.
|
|
DESCRIPTION |
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21
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Subsidiaries of the Company. |
23
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Consent of KPMG LLP. |
31.1
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Certification of Co-Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a). |
31.2
|
|
Certification of Co-Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a). |
31.3
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a). |
32.1
|
|
Certification of Co-Chief Executive Officer pursuant to 18 USC Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2
|
|
Certification of Co-Chief Executive Officer pursuant to 18 USC Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.3
|
|
Certification of Chief Financial Officer pursuant to 18 USC Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
61