CLAIRE'S STORES, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended April 29, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __to __
Commission file number 001-08899
Claires Stores, Inc.
(Exact name of registrant as specified in its charter)
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Florida
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59-0940416 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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3 S.W. 129th Avenue, Pembroke Pines, Florida
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33027 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (954) 433-3900
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. o
Large accelerated filer x Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No x
The number of shares of the registrants Common Stock and Class A Common Stock outstanding as
of May 31, 2006 was 93,165,991 and 4,882,854, respectively.
CLAIRES STORES, INC. AND SUBSIDIARIES
INDEX
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PAGE NO. |
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21 |
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22 |
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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Apr. 29, 2006 |
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Jan. 28, 2006 |
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(In thousands, except share and per share amounts) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
386,354 |
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$ |
431,122 |
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Inventories |
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128,341 |
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113,405 |
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Prepaid expenses |
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42,883 |
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17,738 |
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Other current assets |
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36,560 |
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35,742 |
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Total current assets |
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594,138 |
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598,007 |
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Property and equipment: |
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Land and building |
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17,350 |
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18,151 |
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Furniture, fixtures and equipment |
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261,565 |
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252,346 |
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Leasehold improvements |
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252,374 |
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238,817 |
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531,289 |
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509,314 |
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Less accumulated depreciation and amortization |
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(296,272 |
) |
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(286,595 |
) |
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235,017 |
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222,719 |
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Intangible assets, net of accumulated amortization of $11,304
and $10,550, respectively |
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59,843 |
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56,175 |
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Other assets |
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15,200 |
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15,162 |
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Goodwill |
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199,660 |
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198,638 |
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274,703 |
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269,975 |
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Total assets |
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$ |
1,103,858 |
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$ |
1,090,701 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Trade accounts payable |
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$ |
72,642 |
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$ |
50,242 |
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Income taxes payable |
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27,609 |
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36,708 |
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Accrued expenses and other liabilities |
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86,578 |
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92,495 |
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Total current liabilities |
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186,829 |
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179,445 |
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Long-term liabilities: |
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Deferred tax liability |
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21,513 |
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20,979 |
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Deferred rent expense |
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22,302 |
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21,959 |
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Other liabilities |
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992 |
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44,807 |
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42,938 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock par value $1.00 per share; authorized
1,000,000 shares, issued and outstanding 0 shares |
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Class A common stock par value $0.05 per share;
authorized 40,000,000 shares, issued and outstanding
4,884,557
shares and 4,895,746 shares, respectively |
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244 |
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245 |
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Common stock par value $0.05 per share; authorized
300,000,000 shares, issued and outstanding 94,045,702
shares and 94,580,977 shares, respectively |
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4,702 |
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4,729 |
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Additional paid-in capital |
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71,982 |
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63,321 |
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Unearned compensation |
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(2,690 |
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Accumulated other comprehensive income, net of tax |
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28,730 |
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21,036 |
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Retained earnings |
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766,564 |
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781,677 |
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872,222 |
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868,318 |
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Total liabilities and stockholders equity |
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$ |
1,103,858 |
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$ |
1,090,701 |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME
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Three Months Ended |
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Apr. 29, 2006 |
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Apr. 30, 2005 |
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(In thousands, except per share amounts) |
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Net sales |
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$ |
311,927 |
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$ |
302,708 |
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Cost of sales, occupancy and buying expenses |
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147,174 |
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138,695 |
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Gross profit |
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164,753 |
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164,013 |
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Other expenses (income): |
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Selling, general and administrative |
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111,676 |
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110,517 |
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Depreciation and amortization |
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13,158 |
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12,348 |
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Interest and other income |
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(4,567 |
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(1,961 |
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120,267 |
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120,904 |
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Income before income taxes |
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44,486 |
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43,109 |
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Income taxes |
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14,785 |
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13,407 |
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Net income |
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29,701 |
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29,702 |
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Foreign currency translation adjustments |
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7,694 |
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(1,654 |
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Comprehensive income |
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$ |
37,395 |
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$ |
28,048 |
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Net income per share: |
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Basic |
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$ |
0.30 |
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$ |
0.30 |
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Diluted |
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$ |
0.30 |
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$ |
0.30 |
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Basic weighted average number of common shares outstanding |
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99,160 |
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98,994 |
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Diluted weighted average number of common and common
equivalent
shares outstanding |
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99,572 |
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99,358 |
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Dividends declared per share: |
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Common stock |
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$ |
0.10 |
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$ |
0.10 |
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Class A common stock |
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$ |
0.05 |
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$ |
0.05 |
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See accompanying notes to unaudited condensed consolidated financial statements.
4
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended |
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Apr. 29, 2006 |
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Apr. 30, 2005 |
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(In thousands) |
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Cash flows from operating activities: |
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Net income |
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$ |
29,701 |
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$ |
29,702 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
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13,158 |
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12,348 |
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Amortization of intangible assets |
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348 |
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261 |
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(Gain) loss on sale/retirement of property and equipment, net |
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(147 |
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630 |
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Gain on sale of intangible assets |
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(47 |
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Excess tax benefit from share-based compensation |
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(3,242 |
) |
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Stock compensation expense |
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2,435 |
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640 |
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Increase (decrease) in - |
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Inventories |
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(13,928 |
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(6,962 |
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Prepaid expenses |
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(24,124 |
) |
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(11,622 |
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Other assets |
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400 |
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(531 |
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Increase (decrease) in - |
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Trade accounts payable |
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21,331 |
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17,386 |
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Income taxes payable |
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(4,590 |
) |
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(3,157 |
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Accrued expenses and other liabilities |
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(7,725 |
) |
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(20,255 |
) |
Deferred income taxes |
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(350 |
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246 |
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Deferred rent expense |
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163 |
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892 |
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Net cash provided by operating activities |
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13,383 |
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19,578 |
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Cash flows from investing activities: |
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Acquisition of property and equipment |
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(23,190 |
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(17,031 |
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Proceeds from sale of land and building |
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881 |
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Acquisition of intangible assets |
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(1,679 |
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(2,407 |
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Purchase of short-term investments |
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(82,334 |
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Sale of short-term investments |
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216,947 |
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Net cash provided by (used in) investing activities |
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(23,988 |
) |
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115,175 |
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Cash flows from financing activities: |
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Proceeds from stock options exercised |
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7,539 |
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311 |
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Purchase and retirement of common stock |
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(35,177 |
) |
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Excess tax benefit from share-based compensation |
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3,242 |
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Dividends paid |
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(9,687 |
) |
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(9,657 |
) |
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Net cash used in financing activities |
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(34,083 |
) |
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(9,346 |
) |
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Effect of foreign currency exchange rate changes on cash
and cash equivalents |
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(80 |
) |
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(336 |
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Net increase (decrease) in cash and cash equivalents |
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(44,768 |
) |
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125,071 |
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Cash and cash equivalents at beginning of period |
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431,122 |
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191,006 |
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Cash and cash equivalents at end of period |
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$ |
386,354 |
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$ |
316,077 |
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See accompanying notes to unaudited condensed consolidated financial statements.
5
CLAIRES STORES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. |
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Basis of Presentation and Significant Accounting Policies |
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The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q, and do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair statement have been included. These statements should
be read in conjunction with the consolidated financial statements and notes thereto included in
the Annual Report on Form 10-K for the year ended January 28, 2006 filed with the Securities and
Exchange Commission, including Note 1 to the consolidated financial statements included therein
which discusses principles of consolidation and a summary of significant accounting policies.
These statements have been prepared in accordance with U.S. generally accepted accounting
principles, 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. Due to the seasonal nature of the Companys business, the results of operations for
interim periods of the year are not necessarily indicative of the results of operations on an
annualized basis. Certain prior period amounts have been reclassified to conform to the current
period presentation. |
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Stock-Based Compensation |
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The Company adopted Statement of Financial Accounting Standard No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R) on January 29, 2006. |
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Time-vested stock awards are accounted for at fair value at date of grant. The compensation
expense is recorded over the requisite service period. |
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Other stock awards, such as long-term incentive plan awards, which qualify as equity plans under
SFAS No. 123R, are accounted for based on fair value at date of grant. The compensation expense
is based on the number of shares expected to be issued when it becomes probable that performance
targets required to receive the award will be achieved. The expense is recorded over the
requisite service period. |
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Other long-term incentive plans accounted for as liabilities under SFAS No. 123R are recorded at
fair value at each reporting date until settlement. The compensation expense is based on the
number of performance units expected to be issued when it becomes probable that performance
targets required to receive the award will be achieved. The expense is recorded over the
requisite service period. |
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2. |
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Earnings Per Share |
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The information required to compute basic and diluted earnings per share is as follows (in
thousands, except per share data): |
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Three Months Ended |
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Apr. 29, 2006 |
|
Apr. 30, 2005 |
Numerator: |
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Net income |
|
$ |
29,701 |
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$ |
29,702 |
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Denominator: |
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Weighted average number of shares outstanding |
|
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Basic |
|
|
99,160 |
|
|
|
98,994 |
|
Effect of dilutive stock options |
|
|
343 |
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|
359 |
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Effect of dilutive time-vested and long term incentive stock awards |
|
|
69 |
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|
5 |
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Diluted |
|
|
99,572 |
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|
99,358 |
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Net income per share: |
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|
|
|
|
|
|
Basic |
|
$ |
0.30 |
|
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$ |
0.30 |
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Diluted |
|
$ |
0.30 |
|
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$ |
0.30 |
|
6
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|
All outstanding time-vested stock awards and options for the three months ended April 29,
2006 and April 30, 2005 were included in the computation of diluted earnings per share. |
|
3. |
|
Stock-Based Compensation |
|
|
|
The Company issues stock options and other stock-based awards to executive management, key
employees and directors under stock-based compensation plans. |
|
|
|
Through January 28, 2006, the Company historically accounted for stock-based compensation using
the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) and, accordingly, recognized no compensation expense
related to stock options. For grants of restricted stock, other than those awarded under
long-term incentive agreements, the fair value of the shares at the date of grant was amortized
to compensation expense over the awards vesting period. For awards of stock granted under
long-term incentive agreements, the fair value at the end of each reporting period was amortized
to compensation expense over the awards vesting period. The Company has historically reported
pro forma results under the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as amended by
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. |
|
|
|
|
|
|
|
Three Months Ended |
|
|
Apr. 30, 2005 |
Net income as reported |
|
$ |
29,702 |
|
Stock-based employee compensation
expense determined under the fair
value based methods, net of income tax |
|
|
(890 |
) |
Stock-based employee compensation
expense included in reported net
income, net of income tax |
|
|
416 |
|
|
|
|
|
|
Net income pro forma |
|
$ |
29,228 |
|
|
|
|
|
|
Basic net income per share as reported |
|
$ |
0.30 |
|
Basic net income per share pro forma |
|
$ |
0.30 |
|
Diluted net income per share as reported |
|
$ |
0.30 |
|
Diluted net income per share pro forma |
|
$ |
0.29 |
|
|
|
Effective January 29, 2006, the Company adopted SFAS No. 123R using the modified prospective
transition method. Under the modified prospective transition method, fair value accounting and
recognition provisions of SFAS No. 123R are applied to share-based awards granted or modified
subsequent to the date of adoption and prior periods presented are not restated. In addition,
for awards granted prior to the effective date, the unvested portion of the awards is recognized
in periods subsequent to the effective date based on the grant date fair value determined for
pro forma disclosure purposes under SFAS No. 123. |
|
|
|
Prior to adopting SFAS No. 123R, the Company presented tax benefits resulting from the exercise
of stock options as operating cash flows in the statements of cash flows. SFAS No. 123R
requires cash flows resulting from excess tax benefits to be classified as a part of cash flows
from financing activities. Excess tax benefits are realized tax benefits from tax deductions
for exercised options in excess of the deferred tax asset attributable to stock compensation
costs for such options. |
|
|
|
In the three months ended April 29, 2006 and April 30, 2005, the Company recognized total
stock-based compensation cost of $2.4 million and $0.6 million, respectively, and related tax
benefits of approximately $0.8 million and $0.2 million, respectively. As a result of the
adoption of SFAS No. 123R, the Companys income before income taxes, net income and basic and
diluted earnings per share for the three months ended April 29, 2006 are not materially
different than if the Company had continued to account for the share-based compensation programs
under APB 25. For the three months ended April 29, 2006, cash flow from operating activities
decreased $3.2 million and cash flow from financing activities increased $3.2 million as a
result of adoption of SFAS No. 123R and the requirement relating to classification of cash |
7
|
|
flows of tax benefits from share-based compensation. |
|
|
|
The Company issues new shares to satisfy share-based awards and exercise of stock options.
During the three month periods ended April 29, 2006 and April 30, 2005, no cash was used to
settle equity instruments granted under share-based payment arrangements. |
|
|
|
Under the Claires Stores, Inc. Amended and Restated 1996 Incentive Plan (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 Claires Stores, Inc. Amended and Restated 2005 Incentive Plan (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 of the Companys Board of Directors. |
|
|
|
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. |
|
|
|
There were 9,211,109 shares of Common stock available for future grants under the 2005 Plan at
April 29, 2006 (which includes shares recaptured from the previous plans). There will be no
future grants under the 1996 Plan. |
|
|
|
On January 23, 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. The decision to accelerate vesting of these options was
made primarily to avoid recognizing the related aggregate compensation cost of approximately
$4.2 million in the Companys consolidated financial statements primarily during Fiscal 2007 and
2008 under SFAS No. 123R. |
8
|
|
A summary of the activity in the Companys stock option plans is presented below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 29, 2006 |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
Number of |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Price |
|
Life (Years) |
|
Value |
Outstanding at beginning of
period |
|
|
1,113,436 |
|
|
$ |
15.33 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(485,436 |
) |
|
$ |
15.53 |
|
|
|
|
|
|
|
|
|
Options canceled |
|
|
(10,000 |
) |
|
$ |
16.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
618,000 |
|
|
$ |
15.14 |
|
|
|
5.77 |
|
|
$ |
12,408,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
618,000 |
|
|
$ |
15.14 |
|
|
|
5.77 |
|
|
$ |
12,408,000 |
|
|
|
On January 29, 2006, substantially all of the Companys outstanding stock options were vested
and exercisable. During the three month periods ended April 29, 2006 and April 30, 2005, no
compensation expense relating to stock options was recorded. The aggregate intrinsic value of
stock options exercised during the three month periods ended April 29, 2006 and April 30, 2005
was approximately $9.3 million and $526,000, respectively. |
|
|
|
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 1996 Plan and 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 three months ended April 29, 2006 and April 30, 2005 was approximately
$337,000 and $208,000, respectively. At April 29, 2006, unearned compensation related to these
shares was $2.4 million. That cost is expected to be recognized over a weighted-average period
of 1.75 years. |
|
|
|
A summary of the activity during the three months ended April 29, 2006 in the Companys
time-vested stock is presented below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
Time-Vested Shares |
|
Shares |
|
Grant Date Fair Value |
Nonvested at beginning of period |
|
|
169,933 |
|
|
$ |
22.48 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(37,500 |
) |
|
$ |
22.48 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of period |
|
|
132,433 |
|
|
$ |
22.48 |
|
|
|
|
|
|
|
|
|
|
9
|
|
Long-Term Incentive Stock Plan In 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 three months ended April 29, 2006 and April 30,
2005, compensation expense and additional paid-in capital of approximately $255,000 and
$432,000, respectively, was recorded in conjunction with the LTIP. Compensation expense during
the three months ended April 29, 2006 was based on the fair value of the common stock at date of
grant in Fiscal 2006. Compensation expense for the three months ended April 30, 2005 was based
on the fair value of the common stock on April 30, 2005. 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 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. |
|
|
|
During April 2006, the Compensation Committee approved the Fiscal 2007 Long-Term Incentive
Program (Fiscal 2007 LTIP). Under the Fiscal 2007 LTIP, Performance Units will be issued to
certain officers and employees upon the Companys achievement during the fiscal year ended
February 3, 2007 of specific measurable performance criteria determined by the Compensation
Committee, as may be adjusted by the Compensation Committee. An aggregate maximum of 1,030,000
Performance Units may be earned under the Fiscal 2007 LTIP. The Performance Units will be paid
in cash, based on the closing price of the Companys common stock at the end of each of the
three fiscal years in the vesting period. Performance Units earned vest over a three year
period at the rate of 25%, 25% and 50% during the years ended February 3, 2007, February 2, 2008
and January 31, 2009, respectively. The Fiscal 2007 LTIP is accounted for as a liability under
SFAS 123R. During the three months ended April 29, 2006, the Company recorded compensation
expense of approximately $1.8 million in conjunction with the Fiscal 2007 LTIP. The
compensation expense was based on the common stock closing price on April 29, 2006 of $35.22. |
|
4. |
|
Segment Information |
|
|
|
The Company is organized based on the geographic markets in which it
operates. Under this structure, the Company currently has two
reportable segments: North America and International. 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 Unaudited Condensed Consolidated Statements
of Operations and Comprehensive Income within the Companys North
American division. Net sales and Income before income taxes for the
periods presented were as follows (dollars in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
Income Before Income Taxes |
|
|
Three Months Ended |
|
Three Months Ended |
|
|
Apr. 29, |
|
Apr. 30, |
|
Apr. 29, |
|
Apr. 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
North America |
|
$ |
225,557 |
|
|
$ |
216,340 |
|
|
$ |
42,979 |
|
|
$ |
41,297 |
|
International |
|
|
86,370 |
|
|
|
86,368 |
|
|
|
1,507 |
|
|
|
1,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
311,927 |
|
|
$ |
302,708 |
|
|
$ |
44,486 |
|
|
$ |
43,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
5. |
|
Income Taxes |
|
|
|
The Companys effective income tax rate during the three months
ended April 29, 2006 was 33.2%, as compared to 31.1% during the
comparable period ended April 30, 2005. The Companys higher
effective income tax rate for the three month period ended April
29, 2006 was due to a change in the overall geographic mix of
earnings, and other non-recurring items. |
|
6. |
|
Statements of Cash Flows |
|
|
|
Payments of income taxes were $20.7 million and $16.9 million for the three months ended April
29, 2006 and April 30, 2005, respectively. |
|
|
|
During the three months ended April 29, 2006 and April 30, 2005, Property and equipment with an
original cost of $6.0 million and $4.5 million, respectively, was retired. The loss on
retirement approximated $620,000 and $630,000 for the three months ended April 29, 2006 and
April 30, 2005, respectively. |
|
7. |
|
Stockholders Equity |
|
|
|
During the three months ended April 29, 2006, the Company repurchased and
retired approximately 1,032,000 shares of common stock. Subsequent to April
29, 2006 and through May 26, 2006, the Company repurchased an additional
835,500 shares of common stock for approximately $25.0 million. |
|
8. |
|
Commitments and Contingencies |
|
|
|
The Company is, from time to time, involved in litigation incidental to the
conduct of its business, including personal injury litigation, litigation
regarding merchandise sold, including product and safety concerns regarding
metal content in merchandise, litigation with respect to various employment
matters, including wage and hour litigation, litigation with present and former
employees and litigation to protect trademark rights. The Company believes
that current pending litigation will not have a material adverse effect on its
financial position, earnings or cash flows. |
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations is designed
to provide the reader of the financial statements with a narrative on our results of operations,
financial position and liquidity, risk management activities and significant accounting policies
and critical estimates. Managements Discussion and Analysis is presented in the following
sections: Overview, Critical Accounting Policies and Estimates, Results of Operations and Analysis
of Consolidated Financial Condition. It is useful to read Managements Discussion and Analysis in
conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes
thereto contained elsewhere in this document.
Annually, our fiscal years end on the Saturday closest to January 31. We refer to the prior fiscal
year ended January 28, 2006 as Fiscal 2006, and the current fiscal year ending February 3, 2007 as
Fiscal 2007.
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.
11
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 April 29,
2006, we operated a total of 2,906 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, Portugal, 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 180 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 Unaudited
Condensed Consolidated Statements of Operations and Comprehensive Income within our North American
division. In addition, we licensed 92 stores in the Middle East under a licensing and
merchandising agreement with Al Shaya Co. Ltd. and 8 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 Unaudited Condensed
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:
|
|
|
maximizing the effectiveness of our retail product pricing through promotional activity |
|
|
|
|
minimizing our product costs through economies of scale as the worlds leading
mall-based retailer of value-priced accessories and jewelry |
|
|
|
|
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:
|
|
|
successfully identifying merchandise appealing to our customers and managing our
inventory levels |
|
|
|
|
displaying our merchandise at convenient, accessible locations staffed with personnel
that provide courteous and professional customer service |
|
|
|
|
sourcing our merchandise to achieve a positive price/value relationship |
|
|
|
|
increasing sales at existing store locations |
|
|
|
|
expanding our sales, especially in our International division, through additional store locations |
12
Our ability to achieve these objectives will be dependent on various factors, including those
outlined in Cautionary Note Regarding Forward-Looking Statements and Risk Factors.
Critical Accounting Policies and Estimates
Our Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with
U.S. generally accepted accounting principles. Preparation of these statements requires management
to make judgments and estimates. Some accounting policies have a significant impact on amounts
reported in these financial statements. A summary of significant accounting policies and a
description of accounting policies that are considered critical may be found in our Fiscal 2006
Annual Report on Form 10-K, filed on April 12, 2006, in the Notes to the Consolidated Financial
Statements, Note 1, and the Critical Accounting Policies and Estimates section contained in the
Managements Discussion and Analysis of Financial Condition and Results of Operations therein.
Stock-Based Compensation
On January 29, 2006, we adopted SFAS No. 123R.
Our time-vested stock awards are accounted for at fair value at date of grant. The compensation
expense is recorded over the requisite service period.
Other stock awards, such as long-term incentive plan awards, which qualify as equity plans under
SFAS 123R, are accounted for based on fair value at date of grant. The compensation expense is
based on the number of shares expected to be issued when it becomes probable that performance
targets required to receive the award will be achieved. The expense is recorded over the requisite
service 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.
Other long-term incentive plans accounted for as liabilities under SFAS No. 123R are recorded at
fair value at each reporting date until settlement. The compensation expense is based on the
number of performance units expected to be issued when it becomes probable that performance targets
required to receive the award will be achieved. The expense is recorded over the requisite service
period. Determining the number of Performance Units 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.
Prior to January 29, 2006, the Company applied the intrinsic value method of APB 25 in accounting
for stock options. As a result of the acceleration of vesting of options on January 23, 2006,
substantially all of the Companys stock options were fully vested by the end of Fiscal 2006. The
Company currently has no plans of utilizing stock options during Fiscal 2007 as part of its
stock-based compensation plans.
See Note 3 to the Notes to the Unaudited Condensed Consolidated Financial Statements for the three
month period ended April 29, 2006 for further discussion of SFAS No. 123R.
13
Results of Operations
Consolidated Operations
A summary of our consolidated results of operations is as follows (dollars in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 29, 2006 |
|
April 30, 2005 |
Net sales |
|
$ |
311,927 |
|
|
$ |
302,708 |
|
Increase in comparable store sales |
|
|
3.0 |
% |
|
|
5.0 |
% |
Gross profit percentage |
|
|
52.8 |
% |
|
|
54.2 |
% |
Selling, general and administrative expenses
as a percentage of Net sales |
|
|
35.8 |
% |
|
|
36.5 |
% |
Net income |
|
$ |
29,701 |
|
|
$ |
29,702 |
|
Net income per diluted share |
|
$ |
0.30 |
|
|
$ |
0.30 |
|
Number of stores at the end of the period (1) |
|
|
2,906 |
|
|
|
2,852 |
|
|
|
|
(1) |
|
Number of stores excludes Claires Nippon and stores operated under license agreements
outside of North America |
Net sales for the three months ended April 29, 2006 increased by $9.2 million, or 3.0% from
the three months ended April 30, 2005. This increase was primarily attributable to comparable
store sales increases of 3.0%, or approximately $8.0 million; new store revenue, net of store
closures, of approximately $7.0 million; and a net decline of $5.5 million resulting from foreign
currency translation of our foreign operations.
The positive comparable sales experienced in our North American division has continued and were
across various merchandise categories, most notably in the jewelry related areas. 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. The positive comparable sales
within our International division continue and are stimulated by specific initiatives we continue
to employ, including sharing best practices employed in our North American division for merchandise
selection, store operations and attentive customer service.
During the first quarter of Fiscal 2007, the positive comparable sales were primarily driven by an
increase of approximately 7.0% in the average retail price per transaction, which was the result of
an increase of approximately 4.0% in the average unit retail price and an increase of approximately
3.0% in the number of units sold per transaction, offset by a decrease of approximately 3.0% in
average number of transactions per store.
The following table compares our percentage of sales of each product category for each of the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Apr. 29, 2006 |
|
Apr. 30, 2005 |
Jewelry |
|
|
62.0 |
% |
|
|
59.0 |
% |
Accessories |
|
|
38.0 |
% |
|
|
41.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
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 decreased by 140 basis points during the three months ended April 29, 2006
as compared to the three months ended April 30, 2005. The decrease was primarily attributable to
higher fuel costs resulting in increased freight charges and increased inventory markdowns. The
higher freight charges also resulted from increased use of air transport to ensure our stores were
properly positioned for the Easter holiday sales period.
14
Selling, general and administrative expenses increased $1.2 million for the three months ended
April 29, 2006 as compared to the three months ended April 30, 2005. The increase was primarily
attributable to increases in expenses related to payroll and benefits, offset by lower corporate
overhead expenses. As a percentage of Net sales, Selling, general and administrative expenses
decreased by 70 basis points for the three months ended April 29, 2006.
Interest and other income for the three months ended April 29, 2006 increased $2.6 million over the
comparable prior year period primarily as a result of additional interest income arising from
higher invested cash balances at higher yields.
Our effective income tax rate during the first three months of Fiscal 2007 was 33.2%, as compared
to 31.1% during the comparable period of Fiscal 2006. Our higher effective income tax rate for the
three month period ended April 29, 2006 was 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. 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.
Segment Operations
We are organized into two business segments North America and International. Following is
a discussion of results of operations by business segment.
North America
Key statistics and results of operations for our North American division are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Apr. 29, 2006 |
|
Apr. 30, 2005 |
Net sales |
|
$ |
225,557 |
|
|
$ |
216,340 |
|
Increase in comparable store sales |
|
|
4.0 |
% |
|
|
3.0 |
% |
Gross profit percentage |
|
|
54.7 |
% |
|
|
55.8 |
% |
Number of stores at the end of the period(1) |
|
|
2,114 |
|
|
|
2,123 |
|
|
|
|
(1) |
|
Number of stores excludes Claires Nippon and stores operated under license
agreements outside of North America |
Net sales in North America during the three months ended April 29, 2006 increased by $9.2
million, or 4.3%, over the comparable period ended April 30, 2005. The increase in Net sales was
primarily attributable to comparable store sales increases of 4.0%, or approximately $7.2 million;
new store revenue, net of store closures, of approximately $0.9 million; and an increase of $1.3
million resulting from the stronger Canadian dollar when translating at higher exchange rates.
The positive comparable sales experienced in North America were primarily attributable to an
increase of approximately 7.0% in the average retail price per transaction, which was the result of
an increase of approximately 4.0% in the average unit retail price and an increase of approximately
3.0% in the average number of units sold per transaction. These increases were partially offset by
a decrease of approximately 2.0% in average number of transactions per store. The positive
comparable sales experienced in North America were across various merchandise categories, most
notably in the jewelry related areas. 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 contributed
significantly to the comparable store sales increases experienced during the first quarter of
Fiscal 2007.
15
Gross profit percentages decreased by 110 basis points for the three months ended April 29, 2006 as
compared to the three months ended April 30, 2005. The decrease was principally a result of higher
fuel costs resulting in increased freight charges and increased inventory markdowns. The higher
freight charges also resulted from increased use of air transport to ensure our stores were
properly positioned for the Easter holiday sales period.
The following table compares our percentage of sales of each product category for each of the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Apr. 29, 2006 |
|
Apr. 30, 2005 |
Jewelry |
|
|
66.0 |
% |
|
|
65.0 |
% |
Accessories |
|
|
34.0 |
% |
|
|
35.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Interest and other income of $3.9 million for the three months ended April 29, 2006 increased
$2.8 million, from $1.1 million in the comparable period in Fiscal 2006. The increase was
principally attributable to additional interest income arising from higher invested cash balances
at higher yields.
International
Key statistics and results of operations for our International division are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Apr. 29, 2006 |
|
Apr. 30, 2005 |
Net sales |
|
$ |
86,370 |
|
|
$ |
86,368 |
|
Increase in comparable store sales |
|
|
1.0 |
% |
|
|
9.0 |
% |
Gross profit percentage |
|
|
47.9 |
% |
|
|
50.1 |
% |
Number of stores at the end of the period(1) |
|
|
792 |
|
|
|
729 |
|
|
|
|
(1) |
|
Number of stores excludes Claires Nippon and stores operated under license
agreements |
Net sales in our International division during the three months ended April 29, 2006 did not
significantly change from the three months ended April 30, 2005. This resulted from a decline of
$6.9 million resulting from the stronger U.S. dollar when translating our foreign operations at
lower exchange rates which offset the $6.1 million increase in new store revenues, net of store
closures, and $0.8 million attributable to comparable store sales increases of 1.0% during the
period.
Due to the strategic initiatives employed within our International division, comparable store sales
remain positive. These initiatives included sharing best practices from our North America
operations for merchandise selection, store operations and attentive customer service. In
addition, we are investing in operational systems infrastructure in order to facilitate the greater
level of complexity and precision now required of the business. Our objective is to increase sales
in the International division primarily through store growth and comparable store sales increases.
We also continue to explore expansion into countries in which we do not currently operate.
The positive comparable sales were principally attributable to an increase of approximately 7.0% in
the average retail price per transaction, which was the result of an increase of approximately 3.0%
in the average unit retail price and an increase of approximately 4.0% in the average number of
units sold per transaction, offset by a decrease of approximately 6.0% in average number of
transactions per store.
16
The Gross profit percentage declined by 220 basis points for the three months ended April 29, 2006.
The decline in Gross profit percentage for the three months ended April 29, 2006 is primarily a
result of higher fuel costs resulting in increased freight costs, inventory markdowns and rent
support than the comparable period ended April 30, 2005. The higher freight charges also resulted
from increased use of air transport to ensure our stores were properly positioned for the Easter
holiday sales period. These higher costs were partially offset by the shift to a higher percentage
of jewelry sales, which had a positive impact on merchandise margins.
The following table compares our percentage of sales of each product category for each of the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Apr. 29, 2006 |
|
Apr. 30, 2005 |
Jewelry |
|
|
50.0 |
% |
|
|
43.0 |
% |
Accessories |
|
|
50.0 |
% |
|
|
57.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Analysis of Consolidated Financial Condition
A summary of cash flows provided by (used in) operating, investing and financing activities is
outlined in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Apr. 29, 2006 |
|
Apr. 30, 2005 |
Operating activities |
|
$ |
13,383 |
|
|
$ |
19,578 |
|
Investing activities |
|
$ |
(23,988 |
) |
|
$ |
115,175 |
|
Financing activities |
|
$ |
(34,083 |
) |
|
$ |
(9,346 |
) |
We have consistently satisfied operating liquidity needs and planned capital expenditure
programs through our normal sales. At April 29, 2006, we had $386.4 million in Cash and cash
equivalents, a decrease of $44.8 million from January 28, 2006. We ended the first quarter of
Fiscal 2007 with no debt outstanding. The net decrease in Cash and cash equivalents during the
period was primarily due to cash used to repurchase stock, fund capital expenditures and pay
dividends, offset by cash generated from operations and proceeds from the exercise of stock
options.
Our major source of cash from operations is store sales, substantially all of which are generated
on a cash or credit card basis. Our primary outflow of cash from operations is the purchase of
inventory, net of Trade accounts payable, operational costs and the payment of current taxes.
Our working capital at April 29, 2006 was $407.3 million compared to $418.6 million at January 28,
2006. The decrease in working capital reflects higher inventory levels and lower income taxes
payable; offset by higher trade accounts payable due to the timing of inventory payments and lower
cash and cash equivalents.
Cash provided by operating activities during the first three months of Fiscal 2007 was $13.4
million compared to $19.6 million for the same period in Fiscal 2006, or a $6.2 million decrease.
The change was primarily due to an increase in Prepaid expenses of
$12.5 million, decrease in other
assets of $0.9 million, an increase in inventory purchases of $7.0 million over the comparable
period in the prior year, and an increase in Trade accounts payable of $4.0 million offset by an
increase of $12.5 million in Accrued expenses. Inventory purchases during the three months ended
April 29, 2006 increased compared to the comparable prior year period primarily as a result of
efforts to continue flowing new merchandise into the stores to keep appearances fresh and
responsive to the Easter and Mothers Day holidays. In addition, cash flow from operating
activities during the three months ended April 29, 2006 was reduced by $3.2 million relating to the
excess tax benefit from share-based compensation in conjunction with adoption of SFAS No. 123R.
17
Cash used in investing activities during the first three months of Fiscal 2007 was $24.0 million
compared to $115.2 million provided for the same period in Fiscal 2006, or a $139.2 million
decrease. The cash used was primarily due to capital expenditures of $23.2 million. The Fiscal
2006 cash provided included a $134.6 million sale of short-term investments, net of purchases.
Capital expenditures were made primarily to remodel existing stores and to open new stores. We also
invested $1.6 million in Intangible assets within our International division representing acquired
lease rights on new store locations. In Fiscal 2007, we expect to fund a total of approximately
$90 to $100 million of capital expenditures and approximately $16 million of purchased lease rights
in an effort to continue to expand and remodel our store base.
Cash used by financing activities during the first three months of Fiscal 2007 was $34.1 million
compared to $9.3 million for the same period in Fiscal 2006, or a $24.7 million increase. This was
primarily due to the repurchase of stock of $35.2 million offset by an increase in cash provided by
stock option exercises of $7.2 million over the comparable period last year. In addition, cash
flow from financing activities during the three months ended April 29, 2006 increased $3.2 million
relating to the excess tax benefit from share-based compensation in conjunction with adoption of
SFAS No. 123R.
We paid dividends of $9.7 million during the three months ended April 29, 2006. We expect to pay
approximately $38 million in dividends in Fiscal 2007.
During November 2005, our Board of Directors approved a stock repurchase program of up to $200
million. Share repurchases have been, and will continue to be, made on the open market or through
privately negotiated transactions at prices we consider appropriate, and have been, and will
continue to be, funded from our existing cash. As of April 29, 2006, approximately 1,032,000
shares have been repurchased. Subsequent to April 29, 2006 and through May 26, 2006, an additional
835,500 shares of common stock were repurchased for approximately $25.0 million.
Credit Arrangements
Our credit facility, a revolving line of credit of up to $60.0 million, is secured by inventory in
the United States. The credit facility was entered into on March 31, 2004 and expires on March 31,
2009. The borrowings under this facility are limited based on certain calculations of
availability, based primarily on the amount of inventory and cash on hand in the United States. At
April 29, 2006, the entire amount of $60.0 million would have been available for borrowing by us,
subject to reduction for $4.0 million of outstanding letters of credit. The credit facility is
cancelable by us without penalty and borrowings would bear interest at a margin of 75 basis points
over the London Interbank Borrowing Rate (LIBOR) at April 29, 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 credit agreement as the sum of
our available credit lines and certain cash and cash equivalent balances. Our excess liquidity has
exceeded $20.0 million since the date of inception of the credit facility.
Our non-U.S. subsidiaries have bank credit facilities totaling approximately $806,000. 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 April 29, 2006, there were no borrowings under these credit
facilities.
Management believes that our present ability to borrow is greater than our established credit
lines. However, if market conditions change and sales were to
dramatically decline or we could not control operating costs or other expenses, our cash flows and liquidity could be reduced, and we
could experience an increase in borrowing costs, or even a reduction in or elimination of our
access to debt and/or equity markets.
18
Cautionary Note Regarding Forward-Looking Statements and Risk Factors
We and our representatives may from time to time make written or oral forward-looking statements,
including statements contained in this and other filings with the Securities and Exchange
Commission and in our press releases and reports 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, business strategy,
planned capital expenditures and new store openings for Fiscal 2007, are forward-looking
statements. The forward-looking statements are and will be based on managements then current
views and assumptions regarding future events and operating performance, and we assume no
obligation to update any forward-looking statement. Forward-looking statements involve known or
unknown risks, uncertainties and other factors, including changes in estimates and judgments
discussed under Critical Accounting Policies and Estimates which may cause our actual results,
performance or achievements, or industry results to be materially different from any future
results, performance or achievements expressed or implied by such forward-looking statements. Some
of these risks, uncertainties and other factors are as follows: changes in consumer preferences and
consumer spending; competition; general economic conditions, such as inflation and increased energy
costs; general political and social conditions, such as war, political unrest and terrorism;
natural disasters or severe weather events; currency fluctuations and exchange rate adjustments;
changes in laws, including employment laws relating to overtime pay, tax laws and import laws;
uncertainties generally associated with the specialty retailing business; and disruptions in our
supply of inventory. In addition, we typically earn a disproportionate share of our operating
income in the fourth quarter due to seasonal buying patterns, which are difficult to forecast with
certainty. Additional discussion of these and other risks and uncertainties is contained elsewhere
in this Item 2, in Item 3, Quantitative and Qualitative Disclosures About Market Risk and in our
Form 10-K for Fiscal 2006 under Cautionary Note Regarding Forward-Looking Statements and Risk
Factors.
Item 3. 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
April 29, 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 $7.7 million, net of tax, reflecting the unrealized gain on foreign
currency translation during the three months ended April 29, 2006. Based on the extent of our
foreign operations in Fiscal 2007, 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 and through April 29,
2006, the Chinese Yuan increased by 1.05% as compared to the U.S. Dollar. 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 currency can vary significantly upon translation into U.S. dollars if exchange
rates fluctuate significantly from one period to the next.
19
Interest Rates
Our exposure to market risk for changes in interest rates is limited to our cash and cash
equivalents. Based on our average invested cash balances during the first three months of Fiscal
2007, a 10% increase in the average effective interest rate in the remainder of Fiscal 2007 would
not have a material impact on our annual interest income.
Item 4. 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-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly 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 Quarterly Report to ensure that information required to be disclosed in this Quarterly 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.
There have been no changes in our internal control over financial reporting during the quarter
ended April 29, 2006, that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, involved in routine litigation incidental to the conduct of our
business, including litigation instituted by persons injured upon premises under our control,
litigation regarding the merchandise that we sell, including product and safety concerns regarding
metal content in our merchandise, litigation with respect to various employment matters, including
wage and hour litigation, litigation with present and former employees, and litigation to protect
our trademark rights. Although litigation is routine and incidental to the conduct of our
business, like any business of our size and employing a significant number of employees, such
litigation can result in large monetary awards when judges, juries or other finders of facts do not
agree with managements evaluation of possible liability or outcome of litigation. Accordingly,
the consequences of these matters cannot be finally determined by management. However, in the
opinion of management, we believe that current pending litigation will not have a material adverse
effect on our financial position, earnings or cash flows.
Item 1A. Risk Factors
There have been no material changes in our risk factors disclosed in our Annual Report on Form 10-K
for the year ended January 28, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended April 29, 2006, we purchased shares of our common stock under a
maximum $200 million share repurchase program authorized by the Board of Directors in November
2005. We may purchase shares at any time in the open market or in privately negotiated
transactions at prices we consider appropriate. The stock purchase program contains no expiration
date.
20
The following table sets forth information on our common stock repurchase program activity for the
three months ended April 29, 2006 (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Dollar |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Value of Shares |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
that May Yet be |
|
|
Total Number of |
|
Average Price Paid |
|
Part of Publicly |
|
Purchased Under the |
Period |
|
Shares Purchased |
|
per Share |
|
Announced Programs |
|
Programs |
January 29 - February 25, 2006 |
|
|
215 |
|
|
$ |
30.48 |
|
|
|
215 |
|
|
$ |
193,459 |
|
February 26 - April 1, 2006 |
|
|
506 |
|
|
|
35.08 |
|
|
|
506 |
|
|
|
175,697 |
|
April 2 - April 29, 2006 |
|
|
311 |
|
|
|
34.97 |
|
|
|
311 |
|
|
|
164,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total First Quarter |
|
|
1,032 |
|
|
$ |
34.09 |
|
|
|
1,032 |
|
|
$ |
164,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 6. Exhibits
|
31.1 |
|
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
U.S.C. 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
U.S.C. 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 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
Items 3, 4 and 5 are not applicable and have been omitted.
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
CLAIRES STORES, INC.
|
|
|
(Registrant) |
|
|
|
|
|
|
|
|
June 7, 2006 |
/s/ Marla L. Schaefer
|
|
|
Marla L. Schaefer |
|
|
Co-Chairman of the Board of Directors
(principal co-executive officer and
director) |
|
|
|
|
|
June 7, 2006 |
/s/ E. Bonnie Schaefer
|
|
|
E. Bonnie Schaefer |
|
|
Co-Chairman of the Board of Directors
(principal co-executive officer and
director) |
|
|
|
|
|
June 7, 2006 |
/s/ Ira D. Kaplan
|
|
|
Ira D. Kaplan, Senior Vice President, |
|
|
Chief Financial Officer and Director
(principal financial and accounting
officer and director) |
|
22
INDEX TO EXHIBITS
|
|
|
|
|
EXHIBIT NO. |
|
DESCRIPTION |
|
31.1 |
|
|
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 U.S.C. 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 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
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|
|
|
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32.3 |
|
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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