Claire's Stores, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended October 28, 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 þ 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
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Large accelerated filer þ 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 þ
The number of shares of the registrants Common Stock and Class A Common Stock outstanding as
of November 30, 2006 was 88,181,836 and 4,879,938, respectively.
CLAIRES STORES, INC. AND SUBSIDIARIES
INDEX
2
PART I. FINANCIAL INFORMATION
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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Oct. 28, 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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$ |
244,551 |
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$ |
431,122 |
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Inventories |
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158,853 |
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113,405 |
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Prepaid expenses |
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24,457 |
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17,738 |
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Other current assets |
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44,680 |
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35,742 |
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Total current assets |
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472,541 |
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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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274,278 |
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252,346 |
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Leasehold improvements |
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284,032 |
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238,817 |
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575,660 |
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509,314 |
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Less accumulated depreciation and amortization |
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(314,745 |
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(286,595 |
) |
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260,915 |
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222,719 |
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Intangible assets, net of accumulated amortization of $11,435
and $10,550, respectively |
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61,461 |
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56,175 |
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Other assets |
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17,725 |
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15,162 |
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Goodwill |
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200,227 |
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198,638 |
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279,413 |
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269,975 |
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Total assets |
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$ |
1,012,869 |
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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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$ |
77,880 |
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$ |
50,242 |
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Income taxes payable |
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20,892 |
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36,708 |
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Accrued expenses and other liabilities |
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101,374 |
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92,495 |
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Total current liabilities |
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200,146 |
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179,445 |
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Long-term liabilities: |
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Deferred tax liability |
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19,896 |
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20,979 |
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Deferred rent expense |
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24,411 |
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21,959 |
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Other liabilities |
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2,274 |
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46,581 |
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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
4,880,120
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 $0.05 per share; authorized
300,000,000 shares, issued and outstanding 88,166,654
shares and 94,580,977 shares, respectively |
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4,408 |
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4,729 |
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Additional paid-in capital |
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74,373 |
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63,321 |
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Unearned compensation |
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(2,690 |
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Accumulated other comprehensive income, net of tax |
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30,961 |
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21,036 |
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Retained earnings |
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656,156 |
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781,677 |
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766,142 |
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868,318 |
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Total liabilities and stockholders equity |
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$ |
1,012,869 |
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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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Nine Months Ended |
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Oct. 28, |
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Oct. 29, |
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Oct. 28, |
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Oct. 29, |
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2006 |
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2005 |
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2006 |
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2005 |
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(In thousands, except per share amounts) |
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Net sales |
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$ |
347,593 |
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$ |
327,259 |
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$ |
1,008,680 |
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$ |
955,009 |
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Cost of sales, occupancy and buying expenses |
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165,487 |
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151,541 |
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480,540 |
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442,084 |
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Gross profit |
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182,106 |
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175,718 |
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528,140 |
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512,925 |
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Other expenses (income): |
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Selling, general and administrative |
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118,860 |
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112,631 |
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348,645 |
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334,722 |
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Depreciation and amortization |
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14,249 |
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12,318 |
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41,319 |
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36,442 |
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Interest and other income |
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(3,933 |
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(3,761 |
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(13,181 |
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(8,805 |
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129,176 |
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121,188 |
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376,783 |
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362,359 |
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Income before income taxes |
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52,930 |
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54,530 |
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151,357 |
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150,566 |
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Income taxes |
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16,303 |
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16,403 |
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49,067 |
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47,279 |
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Net income |
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36,627 |
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38,127 |
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102,290 |
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103,287 |
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Foreign currency translation adjustments |
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924 |
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638 |
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9,925 |
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(8,631 |
) |
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Comprehensive income |
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$ |
37,551 |
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$ |
38,765 |
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$ |
112,215 |
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$ |
94,656 |
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Net income per share: |
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Basic |
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$ |
0.39 |
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$ |
0.38 |
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$ |
1.05 |
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$ |
1.04 |
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Diluted |
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$ |
0.39 |
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$ |
0.38 |
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$ |
1.05 |
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$ |
1.04 |
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Basic weighted average number of common
shares outstanding |
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94,414 |
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99,140 |
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97,045 |
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99,063 |
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Diluted weighted average number of common
and common equivalent shares outstanding |
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94,605 |
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99,534 |
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97,324 |
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99,448 |
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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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$ |
0.30 |
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$ |
0.30 |
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Class A common stock |
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$ |
0.05 |
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$ |
0.05 |
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$ |
0.15 |
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$ |
0.15 |
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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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Nine Months Ended |
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Oct. 28, 2006 |
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Oct. 29, 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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$ |
102,290 |
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$ |
103,287 |
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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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41,319 |
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36,442 |
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Amortization of intangible assets |
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1,142 |
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|
829 |
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Loss on sale/retirement of property and equipment, net |
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1,141 |
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2,523 |
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Gain on sale of intangible assets |
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(47 |
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Excess tax benefit from stock-based compensation |
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(3,442 |
) |
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Stock-based compensation expense |
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5,981 |
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2,504 |
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(Increase) decrease in - |
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Inventories |
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(43,601 |
) |
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(38,843 |
) |
Prepaid expenses |
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(5,665 |
) |
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5,389 |
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Other assets |
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(7,541 |
) |
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(5,770 |
) |
Increase (decrease) in - |
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Trade accounts payable |
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25,685 |
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34,348 |
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Income taxes payable |
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(12,197 |
) |
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(14,961 |
) |
Accrued expenses and other liabilities |
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5,275 |
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(4,789 |
) |
Deferred income taxes |
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(4,564 |
) |
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(2,264 |
) |
Deferred rent expense |
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2,134 |
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1,914 |
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Net cash provided by operating activities |
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107,910 |
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|
120,609 |
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Cash flows from investing activities: |
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Acquisition of property and equipment |
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(76,755 |
) |
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(55,314 |
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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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(3,604 |
) |
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(6,968 |
) |
Purchase of short-term investments |
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(82,334 |
) |
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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(79,478 |
) |
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72,331 |
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Cash flows from financing activities: |
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Proceeds from stock options exercised |
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8,565 |
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|
3,141 |
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Purchase and retirement of common stock |
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(199,675 |
) |
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Excess tax benefit from stock-based compensation |
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3,442 |
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Dividends paid |
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(28,491 |
) |
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(28,992 |
) |
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Net cash used in financing activities |
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(216,159 |
) |
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|
(25,851 |
) |
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Effect of foreign currency exchange rate changes on cash
and cash equivalents |
|
|
1,156 |
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|
1,662 |
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Net increase (decrease) in cash and cash equivalents |
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(186,571 |
) |
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|
168,751 |
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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 |
|
$ |
244,551 |
|
|
$ |
359,757 |
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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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|
Recent Accounting Pronouncements |
|
|
|
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law.
The interpretation prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is currently assessing the impact, if any, of FIN 48 which it will adopt at
the beginning of Fiscal 2008. |
|
|
|
In June 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-3, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (that is, Gross versus Net Presentation), which allows companies to adopt a
policy of presenting taxes in the income statement on either a gross or net basis. Taxes within
the scope of this EITF would include taxes that are imposed on a revenue transaction between a
seller and a customer. If such taxes are significant, the accounting policy should be disclosed
as well as the amount of taxes included in the financial statements if presented on a gross
basis. EITF 06-3 is effective for interim and
|
6
|
|
annual reporting periods beginning after December 15, 2006. EITF 06-3 will not impact the method for recording and
reporting these sales or value added taxes in the consolidated financial statements as the
Company does not record such taxes on a gross basis. |
|
|
|
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The Statement
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosure about fair value measurements. This Statement
does not require any new fair value measurement and applies to financial statements issued for
fiscal years beginning after November 15, 2007 with early application encouraged. The Company
is required to implement this Statement on February 3, 2008. The Company does not expect this
Statement will have a material impact on its financial position, results of operations or cash
flows. |
|
|
|
The FASB recently ratified EITF 06-5, Accounting for Purchases of Life Insurance-Determining
the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (EITF
06-5). EITF 06-5 requires that a policyholder should consider any additional amounts included
in the contractual terms of the policy in determining the amount that could be realized under
the insurance contract. EITF 06-5 is effective for fiscal years beginning after December 15,
2006 and it requires that recognition of the effects of adoption should be either by (a) a
change in accounting principle through a cumulative-effect adjustment to retained earnings as of
the beginning of the year of adoption or (b) a change in accounting principle through
retrospective application to all prior periods. The Company does not expect EITF 06-5 will have
a material impact on its financial position, results of operations or cash flows. |
|
|
|
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (SAB 108). SAB 108 requires that registrants quantify
errors using both a balance sheet and income statement approach and evaluate whether either
approach results in a misstated amount that, when all relevant quantitative and qualitative
factors are considered, is material. SAB 108 is effective for the first fiscal year ending
after November 15, 2006 and is not expected to have a material impact on the Companys
consolidated financial statements. |
|
2. |
|
Earnings Per Share |
|
|
|
The information required to compute basic and diluted earnings per share is as follows (in
thousands, except per share data): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
Oct. 28, |
|
|
Oct. 29, |
|
|
Oct. 28, |
|
|
Oct. 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
36,627 |
|
|
$ |
38,127 |
|
|
$ |
102,290 |
|
|
$ |
103,287 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
94,414 |
|
|
|
99,140 |
|
|
|
97,045 |
|
|
|
99,063 |
|
Effect of dilutive stock options |
|
|
155 |
|
|
|
359 |
|
|
|
222 |
|
|
|
364 |
|
Effect of dilutive time-vested stock awards |
|
|
36 |
|
|
|
35 |
|
|
|
57 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
94,605 |
|
|
|
99,534 |
|
|
|
97,324 |
|
|
|
99,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.39 |
|
|
$ |
0.38 |
|
|
$ |
1.05 |
|
|
$ |
1.04 |
|
Diluted |
|
$ |
0.39 |
|
|
$ |
0.38 |
|
|
$ |
1.05 |
|
|
$ |
1.04 |
|
7
|
|
All outstanding time-vested stock awards and options for the three and nine months ended
October 28, 2006 were included in the computation of diluted earnings per share. All
outstanding options and time-vested stock awards for the three months ended October 29, 2005
were included in the computation of diluted earnings per share. Time-vested stock awards of
5,476 shares of common stock for the nine months ended October 29, 2005 were not included in the
computation of diluted earnings per share because their effect would be anti-dilutive. All
outstanding options for the nine months ended October 29, 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 its stock-based compensation plans. |
|
|
|
Through January 28, 2006, the Company 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). 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 |
|
|
Nine Months Ended |
|
|
|
Oct. 29, |
|
|
Oct. 29, |
|
|
|
2005 |
|
|
2005 |
|
Net income as reported |
|
$ |
38,127 |
|
|
$ |
103,287 |
|
Stock-based employee compensation
expense determined under the fair
value based method, net of income tax |
|
|
(948 |
) |
|
|
(2,691 |
) |
Stock-based employee compensation
expense included in reported net
income, net of income tax |
|
|
584 |
|
|
|
1,628 |
|
|
|
|
|
|
|
|
Net income pro forma |
|
$ |
37,763 |
|
|
$ |
102,224 |
|
|
|
|
|
|
|
|
Basic net income per share as reported |
|
$ |
0.38 |
|
|
$ |
1.04 |
|
Basic net income per share pro forma |
|
$ |
0.38 |
|
|
$ |
1.03 |
|
Diluted net income per share as reported |
|
$ |
0.38 |
|
|
$ |
1.04 |
|
Diluted net income per share pro forma |
|
$ |
0.38 |
|
|
$ |
1.03 |
|
|
|
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 stock-based compensation in excess of the deferred tax asset attributable to stock
compensation costs. |
8
|
|
During the three months ended October 28, 2006 and October 29, 2005, the Company recognized $2.2
million and $0.9 million, respectively, of stock-based compensation cost and related tax
benefits of approximately $0.7 million and $0.3 million, respectively. In the nine months ended
October 28, 2006 and October 29, 2005, the Company recognized total stock-based compensation
cost of $6.0 million and $2.5 million, respectively, and related tax benefits of approximately
$2.0 million and $0.8 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 and nine months ended October 28, 2006 are not materially different than if the
Company had continued to account for the share-based compensation programs under APB 25. For
the nine months ended October 28, 2006, cash flow from operating activities decreased $3.4
million and cash flow from financing activities increased $3.4 million as a result of adoption
of SFAS No. 123R and the requirement relating to classification of cash 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 and nine month periods ended October 28, 2006 and October 29, 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 a price equal to the fair
market value of the shares at date of grant and expire 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 date of grant and expire ten years after the date of grant. |
|
|
|
There were 9,192,709 shares of Common stock available for future grants under the 2005 Plan at
October 28, 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
|
9
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. |
|
A summary of the activity in the Companys stock option plans is presented below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 28, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
of Shares |
|
|
Price |
|
|
Life (Years) |
|
|
Value |
|
Outstanding at beginning of
period |
|
|
1,113,436 |
|
|
$ |
15.33 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(594,436 |
) |
|
$ |
14.42 |
|
|
|
|
|
|
|
|
|
Options canceled |
|
|
(10,000 |
) |
|
$ |
16.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
509,000 |
|
|
$ |
16.36 |
|
|
|
6.33 |
|
|
$ |
5,925,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
509,000 |
|
|
$ |
16.36 |
|
|
|
6.33 |
|
|
$ |
5,925,230 |
|
|
|
On January 29, 2006, substantially all of the Companys outstanding stock options were vested
and exercisable. During the three and nine month periods ended October 28, 2006 and October 29,
2005, no compensation expense relating to stock options was recorded. The aggregate intrinsic
value of stock options exercised during the three month periods ended October 28, 2006 and
October 29, 2005 was approximately $47,000 and $0.8 million, respectively. The aggregate
intrinsic value of stock options exercised during the nine month periods ended October 28, 2006
and October 29, 2005 was approximately $11.1 million and $2.1 million, 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. |
|
|
|
During June, 2006, the Company issued an additional 18,400 shares of restricted common stock to
non-management directors under the 2005 Plan. The weighted average grant date fair value was
$24.38 per share. The stock, which had an aggregate fair value at date of grant of
approximately $449,000, is subject to vesting provisions of one year based on continued service
to the Company. There were no other grants of restricted stock during the nine months ended
October 28, 2006. |
10
|
|
Compensation expense relating to all outstanding time-vested shares during the three months
ended October 28, 2006 and October 29, 2005 approximated $337,000 and $378,000, respectively.
Compensation expense relating to all outstanding time-vested shares recorded during the nine
months ended October 28, 2006 and October 29, 2005 was approximately $1,006,000 and $794,000,
respectively. At October 28, 2006, unearned compensation related to these shares was $2.1
million. That cost is expected to be recognized over a weighted-average period of approximately
1.2 years. At the date of vesting, the total fair value of time-vested shares which vested
during the nine months ended October 28, 2006 approximated $1.7 million. |
|
|
|
A summary of the activity during the nine months ended October 28, 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 |
|
|
18,400 |
|
|
$ |
24.38 |
|
Vested |
|
|
(57,433 |
) |
|
$ |
23.02 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of period |
|
|
130,900 |
|
|
$ |
22.52 |
|
|
|
|
|
|
|
|
|
|
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 October 28, 2006 and October
29, 2005, compensation expense and additional paid-in capital of approximately $251,000 and
$521,000, respectively, was recorded in conjunction with the LTIP. During the nine months ended
October 28, 2006 and October 29, 2005, compensation expense and additional paid-in capital of
approximately $762,000 and $1.7 million, respectively, was recorded in conjunction with the
LTIP. Compensation expense during the three and nine months ended October 28, 2006 was based on
the fair value of the common stock at date of grant in Fiscal 2006. Compensation expense for
the three and nine months ended October 29, 2005 was based on the fair value of the common stock
on October 29, 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. These shares were issued
during May 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
approximately 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 and nine months ended October 28, 2006,
the Company recorded compensation expense of approximately
|
11
|
|
$1.6 million and $4.2 million,
respectively, in conjunction with the Fiscal 2007 LTIP. The compensation expense was based on the common stock closing price
on October 28, 2006 of $28.00. |
|
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 goods it sells to third parties who license our brand under the
merchandising agreements within Net sales and Cost of sales, occupancy and buying expenses
in its North American division and the license fees it charges under the licensing agreements
within Interest and other income within its International division in the Companys
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 Unaudited Condensed Consolidated Statements of
Operations and Comprehensive Income within the Companys North American division. Substantially
all of the stock-based compensation expense is recorded in the Companys North American
division. Net sales and Income before income taxes for the periods presented were as follows
(dollars in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before |
|
|
|
|
|
|
|
|
|
|
Income Before |
|
|
|
Net Sales |
|
|
Income Taxes |
|
|
Net Sales |
|
|
Income Taxes |
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
Oct. 28, |
|
|
Oct. 29, |
|
|
Oct. 28, |
|
|
Oct. 29, |
|
|
Oct. 28, |
|
|
Oct. 29, |
|
|
Oct. 28, |
|
|
Oct. 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
North America |
|
$ |
236,337 |
|
|
$ |
228,668 |
|
|
$ |
40,505 |
|
|
$ |
41,732 |
|
|
$ |
699,200 |
|
|
$ |
667,936 |
|
|
$ |
122,324 |
|
|
$ |
119,615 |
|
International |
|
|
111,256 |
|
|
|
98,591 |
|
|
|
12,425 |
|
|
|
12,798 |
|
|
|
309,480 |
|
|
|
287,073 |
|
|
|
29,033 |
|
|
|
30,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
347,593 |
|
|
$ |
327,259 |
|
|
$ |
52,930 |
|
|
$ |
54,530 |
|
|
$ |
1,008,680 |
|
|
$ |
955,009 |
|
|
$ |
151,357 |
|
|
$ |
150,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. |
|
Income Taxes |
|
|
|
The Companys effective income tax rate during the three and nine months ended October 28, 2006
was 30.8% and 32.4%, respectively, as compared to 30.1% and 31.4% during the three and nine
months ended October 29, 2005, respectively. The Companys higher effective income tax rate for
the three and nine months ended October 28, 2006 was due to a change in the overall geographic
mix of earnings and non-recurring items. For the three months ended October 28, 2006, the
Companys effective income tax rate was lower than its expected rate primarily due to a foreign
tax examination that was settled more favorably than anticipated. For the three months ended
October 29, 2005, the Companys effective income tax rate was lower than its expected rate
primarily as a result of a reconciliation between the prior year end tax provision and the tax
return relating to U.S. taxation of the Companys foreign operations. |
|
6. |
|
Statements of Cash Flows |
|
|
|
Payments of income taxes were $67.3 million and $63.5 million for the nine months ended October
28, 2006 and October 29, 2005, respectively. |
|
|
|
During the nine months ended October 28, 2006 and October 29, 2005, Property and equipment with
an original cost of $19.2 million and $13.1 million, respectively, was retired. The loss on
retirement approximated $1.9 million and $2.5 million for the nine months ended October 28, 2006
and October 29, 2005, respectively. |
12
7. |
|
Stockholders Equity |
|
|
|
During the three and nine months ended October 28, 2006, the Company repurchased and retired
approximately 3,214,000 and 7,097,000 shares of common stock, respectively. |
|
|
|
See Note 3 for shares issued during May 2006 in conjunction with the Companys long-term
incentive stock plan. |
|
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 regarding intellectual property 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.
Overview
We are a leading global specialty retailer of value-priced fashion accessories and jewelry for
pre-teens and teenagers as well as young adult females. We are organized based on our geographic
markets, which include our North American operations and our International operations. As of
October 28, 2006, we operated a total of 2,987 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 also operated 192 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 109 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
13
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 |
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.
14
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 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. 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 nine
month period ended October 28, 2006 for further discussion of SFAS No. 123R.
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 |
|
Nine Months Ended |
|
|
Oct. 28, |
|
Oct. 29, |
|
Oct. 28, |
|
Oct. 29, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Net sales |
|
$ |
347,593 |
|
|
$ |
327,259 |
|
|
$ |
1,008,680 |
|
|
$ |
955,009 |
|
Increase in comparable store sales |
|
|
0.0 |
% |
|
|
9.0 |
% |
|
|
2.0 |
% |
|
|
6.0 |
% |
Gross profit percentage |
|
|
52.4 |
% |
|
|
53.7 |
% |
|
|
52.4 |
% |
|
|
53.7 |
% |
Selling, general and administrative expenses
as a percentage of Net sales |
|
|
34.2 |
% |
|
|
34.4 |
% |
|
|
34.6 |
% |
|
|
35.0 |
% |
Net income |
|
$ |
36,627 |
|
|
$ |
38,127 |
|
|
$ |
102,290 |
|
|
$ |
103,287 |
|
Net income per diluted share |
|
$ |
0.39 |
|
|
$ |
0.38 |
|
|
$ |
1.05 |
|
|
$ |
1.04 |
|
Number of stores at the end of the period (1) |
|
|
2,987 |
|
|
|
2,881 |
|
|
|
2,987 |
|
|
|
2,881 |
|
|
|
|
(1) |
|
Number of stores excludes Claires Nippon and stores operated under licensing agreements outside of North America |
15
Net sales for the three months ended October 28, 2006 increased by $20.3 million, or 6.0%,
from the three months ended October 29, 2005. This increase was primarily attributable to new
store revenue, net of store closures, of approximately $12.7 million; a net increase of $5.9
million resulting from foreign currency translation of our foreign operations; and franchising
sales increases of approximately $1.4 million. Net sales for the nine months ended October 28,
2006 increased by $53.7 million, or 6.0%, over the comparable period ended October 29, 2005. This
increase was primarily due to comparable store increases of approximately 2.0%, or approximately
$15.9 million; new store revenue, net of store closures, of approximately $31.6 million; a net
increase of $4.4 million resulting from foreign currency translation of our foreign operations; and
franchising sales increases of $1.7 million.
The modest positive comparable store sales experienced in our North American division during the
three months ended October 28, 2006 were offset by a modest decline in comparable store sales in
our International division. Comparable store sales improvements were noted in various merchandise
categories, most notably in the young novelty, hairgoods, fashion accessories and childrens
merchandise related categories. These increases were partially offset by declines in special
occasions, specialty jewelry, precious metals and lifestyle categories. Within our International
division, we continue to employ strategic initiatives which include sharing best practices from our
North American division for merchandise selection, store operations and customer service.
During the three months ended October 28, 2006, comparable store sales consisted primarily of an
increase of approximately 1.0% in the average retail price per transaction, which was the result of
an increase of approximately 4.0% in the number of units sold per transaction, offset by a decrease
of approximately 3.0% in the average unit retail price. The average number of transactions per
store was flat.
During the nine months ended October 28, 2006, the positive comparable sales were primarily driven
by an increase of approximately 5.0% in the average retail price per transaction, which was the
result of an increase of approximately 2.0% 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 2.0% in the 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 |
|
Nine Months Ended |
|
|
Oct. 28, |
|
Oct. 29, |
|
Oct. 28, |
|
Oct. 29, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Jewelry |
|
|
59.0 |
% |
|
|
59.0 |
% |
|
|
60.0 |
% |
|
|
59.0 |
% |
Accessories |
|
|
41.0 |
% |
|
|
41.0 |
% |
|
|
40.0 |
% |
|
|
41.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
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 130 basis points during both the three and nine months ended
October 28, 2006 as compared to the three and nine months ended October 29, 2005. The decrease
during the three and nine months ended October 28, 2006 was primarily attributable to higher cost
of goods sold due to reduced initial markup, increased inventory markdowns, and higher rent and
rent-related expenses, primarily base rent, utilities and property taxes.
Selling, general and administrative expenses increased $6.2 million for the three months ended
October 28, 2006 as compared to the three months ended October 29, 2005 and $13.9 million for the
nine months ended October 28, 2006 as compared to the nine months ended October 29, 2005. The
increase was primarily attributable to increases in expenses related to payroll and benefits and
expenses associated with on-going litigation, offset by a reduction in corporate overhead expenses.
As a percentage of Net sales, Selling, general
16
and administrative expenses decreased by 20 basis
points for the three months ended October 28, 2006, and decreased 40 basis points for the nine
months ended October 28, 2006.
Interest and other income for the three and nine months ended October 28, 2006 increased $0.2
million and $4.4 million, respectively, over the comparable prior year periods primarily as a
result of additional interest income arising from higher rates of return on invested cash balances,
partially offset by a reduction in earnings from Claires Nippon.
Our effective income tax rates during the three and nine months ended October 28, 2006 were 30.8%
and 32.4%, respectively, as compared to 30.1% and 31.4% during the comparable periods of Fiscal
2006, respectively. Our higher effective income tax rates for the three and nine month periods
ended October 28, 2006 were due to a change in the overall geographic mix of earnings and
non-recurring items. With respect to the overall geographic mix of earnings, our
combined effective income tax rates for our foreign operations are generally lower than our
effective income tax rates for U.S. operations. For the three months ended October 28, 2006, our
effective income tax rate was lower than the expected rate primarily due to a foreign tax
examination that was settled more favorably than anticipated. For the three months ended October
29, 2005, our effective income tax rate was lower than the expected rate primarily as a result of a
reconciliation between the prior year end tax provision and the tax return relating to U.S.
taxation of our foreign operations. Our effective income tax rates 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 |
|
Nine Months Ended |
|
|
Oct. 28, |
|
Oct. 29, |
|
Oct. 28, |
|
Oct. 29, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Net sales |
|
$ |
236,337 |
|
|
$ |
228,668 |
|
|
$ |
699,200 |
|
|
$ |
667,936 |
|
Increase in comparable store sales |
|
|
1.0 |
% |
|
|
9.0 |
% |
|
|
3.0 |
% |
|
|
5.0 |
% |
Gross profit percentage |
|
|
52.7 |
% |
|
|
53.5 |
% |
|
|
52.9 |
% |
|
|
53.9 |
% |
Number of stores at the end of the period (1) |
|
|
2,145 |
|
|
|
2,131 |
|
|
|
2,145 |
|
|
|
2,131 |
|
|
|
|
(1) |
|
Number of stores excludes Claires Nippon and stores operated under licensing agreements outside of North America |
Net sales in North America during the three months ended October 28, 2006 increased by $7.7
million, or 3.0%, over the comparable period ended October 29, 2005. The increase in Net sales for
the three months was primarily attributable to comparable store sales increases of 1.0%, or
approximately $1.5 million; new store revenue, net of store closures, of approximately $3.9
million; an increase in franchising sales of approximately $1.4 million; and an increase of
approximately $0.9 million resulting from the stronger Canadian dollar when translating at higher
exchange rates. Net sales for the nine months ended October 28, 2006 increased by $31.3 million,
or 5.0%, over the comparable period ended October 29, 2005. The increase in Net sales for the nine
months was primarily attributable to comparable store sales increases of 3.0%, or approximately
$17.9 million; new store revenue, net of store closures, of approximately $8.1 million; an increase
in franchising sales of approximately $1.7 million; and an increase of $3.5 million resulting from
the stronger Canadian dollar when translating at higher exchange rates.
17
During the three months ended October 28, 2006, the positive comparable store sales were primarily
driven by an increase of approximately 2.0% in the average retail price per transaction, which was
the result of an increase of approximately 4.0% in the number of units sold per transaction offset
by a decrease of approximately 2.0% in the average unit retail price. During the nine months ended
October 28, 2006, the positive comparable store sales experienced in North America were primarily
attributable to an increase of approximately 6.0% in the average retail price per transaction,
which was the result of an increase of approximately 2.0% in the average unit retail price and an
increase of approximately 4.0% in the average number of units sold per transaction. These
increases were partially offset by a decrease of approximately 1.0% in average number of
transactions per store. The positive comparable store sales experienced in North America were
across various merchandise categories, most notably in the young novelty, hairgoods, fashion
accessories and childrens merchandise related areas. We believe we experienced this trend through
successfully meeting our customers demands for current fashion trends and superior customer
service in our stores.
Gross profit percentages decreased by 80 basis points for the three months ended October 28, 2006
and 100 basis points for the nine months ended October 28, 2006 as compared to the same periods in
the prior year. The decrease for the three months ended October 28, 2006 was principally a result
of higher cost of goods sold due to reduced initial markup, increased inventory markdowns, higher
rent and rent-related expenses, primarily base rent, utilities, store support and property taxes.
The decrease for the nine months ended October 28, 2006 was principally a result of higher cost of
goods sold due to reduced initial markup, increased inventory markdowns, higher rent and
rent-related expenses, primarily base rent, utilities and property taxes.
The following table compares our percentage of sales of each product category for each of the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Oct. 28, |
|
Oct. 29, |
|
Oct. 28, |
|
Oct. 29, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Jewelry |
|
|
63.0 |
% |
|
|
65.0 |
% |
|
|
65.0 |
% |
|
|
66.0 |
% |
Accessories |
|
|
37.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
34.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income of $2.9 million for the three months ended October 28, 2006 remained
flat compared with the comparable period in Fiscal 2006. Interest and other income of $10.8
million for the nine months ended October 28, 2006 increased $4.6 million from $6.2 million in the
comparable period in Fiscal 2006. The increase was principally attributable to additional interest
income arising from higher rates of return on invested cash balances, partially offset by a
reduction in earnings from Claires Nippon.
International
Key statistics and results of operations for our International division are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Oct. 28, |
|
Oct. 29, |
|
Oct. 28, |
|
Oct. 29, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Net sales |
|
$ |
111,256 |
|
|
$ |
98,591 |
|
|
$ |
309,480 |
|
|
$ |
287,073 |
|
Increase (decrease) in comparable store sales |
|
|
(1.0 |
%) |
|
|
8.0 |
% |
|
|
(1.0 |
%) |
|
|
9.0 |
% |
Gross profit percentage |
|
|
51.7 |
% |
|
|
54.1 |
% |
|
|
51.2 |
% |
|
|
53.3 |
% |
Number of stores at the end of the period (1) |
|
|
842 |
|
|
|
750 |
|
|
|
842 |
|
|
|
750 |
|
|
|
|
(1) |
|
Number of stores excludes Claires Nippon and stores operated under licensing agreements |
18
Net sales in our International division during the three months ended October 28, 2006
increased by $12.7 million, or 13.0%, over the comparable period ended October 29, 2005. Net sales
for the nine months ended October 28, 2006 increased by $22.4 million, or 8.0%, over the comparable
period ended October 29, 2005. The increase in Net sales for the three months ended October 28,
2006 resulted from an increase of $5.0 million resulting from the weaker U.S. dollar when
translating our foreign operations at higher exchange rates; an $8.8 million increase in new store
revenues, net of store closures, offset by $1.1 million attributable to comparable store sales
decreases of 1.0% during the period. The increase in net sales for the nine months ended October
28, 2006 was attributable to new store revenue, net of store closures, of approximately $23.5
million during the period; an increase of $0.9 million resulting from the weaker U.S. dollar when
translating our foreign operations at higher exchange rates; offset by comparable store sales
decreases of 1.0% or $2.0 million during the period.
We continue to employ strategic initiatives which include 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.
During the three months ended October 28, 2006, the negative comparable store sales were primarily
driven by a decrease of approximately 2.0% in the average number of transactions per store. The
average number of units sold per transaction increased 5.0%, while the average unit retail price
declined 5.0%. During the nine months ended October 28, 2006, the negative comparable sales
experienced in the International division were principally attributable to a decrease of
approximately 5.0% in average number of transactions per store, offset by an increase of
approximately 4.0% in the average retail price per transaction, which was the result of an increase
of approximately 1.0% in the average unit retail price and an increase of approximately 3.0% in the
average number of units sold per transaction.
The Gross profit percentage declined by 240 basis points and 210 basis points for the three and
nine months ended October 28, 2006, respectively. The decline in Gross profit percentage for the
three and nine months ended October 28, 2006 is primarily a result of higher cost of goods sold due
to increased markdowns, higher rent and rent-related expenses than the comparable periods ended
October 29, 2005. These higher costs were partially offset by the shift to a higher percentage of
jewelry sales, which had a positive impact on the initial markup.
The following table compares our percentage of sales of each product category for each of the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
Oct. 28, |
|
Oct. 29, |
|
Oct. 28, |
|
Oct. 29, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Jewelry |
|
|
49.0 |
% |
|
|
46.0 |
% |
|
|
49.0 |
% |
|
|
45.0 |
% |
Accessories |
|
|
51.0 |
% |
|
|
54.0 |
% |
|
|
51.0 |
% |
|
|
55.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
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):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Oct. 28, |
|
Oct. 29, |
|
|
2006 |
|
2005 |
Operating activities |
|
$ |
107,910 |
|
|
$ |
120,609 |
|
Investing activities |
|
$ |
(79,478 |
) |
|
$ |
72,331 |
|
Financing activities |
|
$ |
(216,159 |
) |
|
$ |
(25,851 |
) |
We have consistently satisfied operating liquidity needs and planned capital expenditure
programs through our normal sales. At October 28, 2006, we had $244.6 million in Cash and cash
equivalents, a decrease of $186.6 million from January 28, 2006. We ended the third quarter of
Fiscal 2007 with no debt outstanding. The net decrease in Cash and cash equivalents during the
nine months ended October 28, 2006 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, increased spending for Prepaid expenses and other assets, net of Trade accounts payable,
operational costs and the payment of current taxes.
Our working capital at October 28, 2006 was $272.4 million compared to $418.6 million at January
28, 2006. The decrease in working capital reflects lower cash and cash equivalents primarily due to
stock repurchases discussed below and higher Trade accounts payable due to the timing of inventory
payments; offset by increased Inventory levels, higher Prepaid expenses and other current assets
and decreased Income taxes payable.
Cash provided by operating activities during the first nine months of Fiscal 2007 was $107.9
million compared to $120.6 million for the same period in Fiscal 2006, or a $12.7 million decrease.
The change was primarily due to an increase in Prepaid expenses of $11.1 million due to the timing
of rent payments, a decrease in Income taxes payable of $2.8 million, an increase in Deferred
income tax of $2.3 million, an increase in inventory purchases of $4.8 million over the comparable
period in the prior year, a decrease in Accrued expenses and other liabilities of $10.1 million and
a decrease in Trade accounts payable of $8.7 million. Inventory purchases during the nine months
ended October 28, 2006 increased compared to the comparable prior year period primarily as a result
of efforts to increase inventory levels in the stores to maintain merchandise presentations fresh
and responsive to the Easter and Mothers Day holidays as well as the summer selling season. In
addition, cash flow from operating activities during the nine months ended October 28, 2006 was
reduced by $3.4 million relating to the excess tax benefit from stock-based compensation in
conjunction with adoption of SFAS No. 123R.
Cash used in investing activities during the first nine months of Fiscal 2007 was $79.5 million
compared to $72.3 million provided for the same period in Fiscal 2006, or a $151.8 million
decrease. The cash used during Fiscal 2007 was primarily due to capital expenditures of $76.8
million, an increase of approximately $21.4 million over the same period in Fiscal 2006. 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 $3.4 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
$87 to $93 million of capital expenditures and approximately $6 million of purchased lease rights
in an effort to continue to expand and remodel our store base.
20
Cash used by financing activities during the first nine months of Fiscal 2007 was $216.2 million
compared to $25.9 million for the same period in Fiscal 2006, or a $190.3 million increase. This
was primarily due to the
repurchase of stock of $199.7 million offset by an increase in cash provided by stock option
exercises of $5.4 million over the comparable period last year. In addition, cash flow from
financing activities during the nine months ended October 28, 2006 increased $3.4 million relating
to the excess tax benefit from stock-based compensation in conjunction with adoption of SFAS No.
123R.
We paid dividends of $28.5 million during the nine months ended October 28, 2006. We expect to pay
approximately $37.6 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 made on the open market or through privately negotiated
transactions at prices we consider appropriate, and have been funded from our existing cash. As of
October 28, 2006, approximately 7,097,000 shares have been repurchased, which completes the stock
repurchase program approved by our Board in November 2005.
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
October 28, 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 October 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 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 $801,000. 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 October 28, 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.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. The
interpretation prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken
in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company is currently assessing the impact, if any, of FIN 48 which it will adopt at the
beginning of Fiscal 2008.
In June 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-3, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (that is, Gross versus Net Presentation), which allows companies to adopt a policy of
presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of
this EITF would include taxes that are imposed on a revenue transaction between a seller and a
customer. If such taxes are significant, the accounting policy should be disclosed as well as the
amount of taxes included in the financial statements if presented on a gross basis. EITF 06-3 is
effective for interim and annual reporting periods beginning after
21
December 15, 2006. EITF 06-3 will not impact the method for recording and reporting these sales or value added taxes
in the consolidated financial statements as the Company does not record such taxes on a gross
basis.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The Statement defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosure about fair value measurements. This Statement does not require
any new fair value measurement and applies to financial statements issued for fiscal years
beginning after November 15, 2007 with early application encouraged. The Company is required to
implement this Statement on February 3, 2008. The Company does not expect this Statement will have
a material impact on its financial position, results of operations or cash flows.
The FASB recently ratified EITF 06-5, Accounting for Purchases of Life Insurance-Determining the
Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (EITF 06-5).
EITF 06-5 requires that a policyholder should consider any additional amounts included in the
contractual terms of the policy in determining the amount that could be realized under the
insurance contract. EITF 06-5 is effective for fiscal years beginning after December 15, 2006 and
it requires that recognition of the effects of adoption should be either by (a) a change in
accounting principle through a cumulative-effect adjustment to retained earnings as of the
beginning of the year of adoption or (b) a change in accounting principle through retrospective
application to all prior periods. The Company does not expect EITF 06-5 will have a material
impact on its financial position, results of operations or cash flows.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB 108). SAB 108 requires that registrants quantify errors using both a
balance sheet and income statement approach and evaluate whether either approach results in a
misstated amount that, when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 is effective for the first fiscal year ending after November 15, 2006 and is not
expected to have a material impact on the Companys consolidated financial statements.
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.
22
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
October 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 $0.9 million and $9.9 million, net of tax, respectively, reflecting the
unrealized gain on foreign currency translation during the three and nine months ended October 28,
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 October 28,
2006, the Chinese Yuan increased by 2.7% as compared to the U.S. Dollar. If China adjusts the
exchange rate further or allows the value to float, we may experience further 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.
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 nine 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 October 28, 2006, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, involved in routine litigation incidental to the conduct of our
business, including litigation instituted by persons injured upon premises under our control,
litigation regarding the merchandise that we sell, including product and safety concerns regarding
metal content in our merchandise, litigation with respect to various employment matters, including
wage and hour litigation, litigation with present and former employees, and litigation regarding
intellectual property rights. Although litigation is routine and incidental to the conduct of our
business, like any business of our size and employing a significant number of employees, such
litigation can result in large monetary awards when judges, juries or other finders of facts do not
agree with managements evaluation of possible liability or outcome of litigation. Accordingly,
the consequences of these matters cannot be finally determined by management. However, in the
opinion of management, we believe that current pending litigation will not have a material adverse
effect on our financial position, 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 nine months ended October 28, 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. Our repurchase program was completed in our third quarter.
The following table sets forth information on our common stock repurchase program activity for the
three months ended October 28, 2006 (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
|
|
Total |
|
|
|
|
|
|
Shares Purchased |
|
|
Value of Shares that |
|
|
|
Number |
|
|
Average |
|
|
as Part of Publicly |
|
|
May Yet be |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Announced |
|
|
Purchased Under |
|
Period |
|
Purchased |
|
|
per Share |
|
|
Programs |
|
|
the Programs |
|
July 30, 2006 August 26, 2006 |
|
|
857 |
|
|
$ |
25.56 |
|
|
|
857 |
|
|
$ |
66,390 |
|
August 27, 2006 September 30, 2006 |
|
|
1,668 |
|
|
|
27.74 |
|
|
|
1,668 |
|
|
|
20,113 |
|
October 1, 2006 October 28, 2006 |
|
|
689 |
|
|
|
28.71 |
|
|
|
689 |
|
|
|
325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Third Quarter |
|
|
3,214 |
|
|
$ |
27.37 |
|
|
|
3,214 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 5. Other Information
On
December 5, 2006, the Board of Directors approved and adopted Amended and Restated Bylaws which
are attached hereto as Exhibit 3.1.
24
Item 6. Exhibits
|
3.1 |
|
Amended and Restated Bylaws |
|
|
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 and 4 are not applicable and have been omitted.
25
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) |
|
|
|
December 6, 2006
|
|
/s/ Marla L. Schaefer |
|
|
|
|
|
Marla L. Schaefer |
|
|
Co-Chairman of the Board of Directors
(principal co-executive officer and
director) |
|
|
|
December 6, 2006
|
|
/s/ E. Bonnie Schaefer |
|
|
|
|
|
E. Bonnie Schaefer |
|
|
Co-Chairman of the Board of Directors
(principal co-executive officer and
director) |
|
|
|
December 6, 2006
|
|
/s/ Ira D. Kaplan |
|
|
|
|
|
Ira D. Kaplan, Senior Vice President,
Chief Financial Officer and Director
(principal financial and accounting
officer and director) |
26
INDEX TO EXHIBITS
|
|
|
|
|
EXHIBIT NO. |
|
DESCRIPTION |
|
3.1 |
|
|
Amended
and Restated Bylaws. |
|
|
|
|
|
|
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. |
27