Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended July 29, 2017

OR

 

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

For the transition period from                      to                     

Commission File Nos. 1-8899, 333-148108 and 333-175171

 

 

Claire’s Stores, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   59-0940416

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2400 West Central Road,

Hoffman Estates, Illinois

  60192
(Address of principal executive offices)   (Zip Code)

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

 

 

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

Explanatory Note: While registrant is not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act, it has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months.

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

☒  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

    

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of September 1, 2017, 100 shares of the Registrant’s common stock, $0.001 par value, were outstanding.

 

 

 


Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

INDEX

 

     PAGE NO.  

PART I. FINANCIAL INFORMATION

  

Item 1.Financial Statements

     3  

Unaudited Condensed Consolidated Balance Sheets as of July  29, 2017 and January 28, 2017

     3  

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended July 29, 2017 and July 30, 2016

     4  

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 29, 2017 and July 30, 2016

     5  

Notes to Unaudited Condensed Consolidated Financial Statements

     6  

Item  2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22  

Item 3.Quantitative and Qualitative Disclosures About Market Risk

     35  

Item 4. Controls and Procedures

     36  

PART II. OTHER INFORMATION

  

Item 1.Legal Proceedings

     37  

Item 1A.Risk Factors

     37  

Item 5.Other Information

     37  

Item 6.Exhibits

     37  

SIGNATURES

     39  

Ex-31.1 Section  302 Certification of CEO

  

Ex-31.2 Section  302 Certification of CFO

  

Ex-32.1 Section  906 Certification of CEO

  

Ex-32.2 Section  906 Certification of CFO

  

 

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PART I. FINANCIAL INFORMATION

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     July 29, 2017     January 28, 2017  
     (In thousands, except share and per share amounts)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 31,189     $ 55,792  

Inventories

     157,617       130,239  

Prepaid expenses

     18,772       14,642  

Other current assets

     25,136       25,270  
  

 

 

   

 

 

 

Total current assets

     232,714       225,943  
  

 

 

   

 

 

 

Property and equipment:

    

Furniture, fixtures and equipment

     224,812       218,804  

Leasehold improvements

     304,130       297,636  
  

 

 

   

 

 

 
     528,942       516,440  

Accumulated depreciation and amortization

     (402,795     (381,975
  

 

 

   

 

 

 
     126,147       134,465  
  

 

 

   

 

 

 

Leased property under capital lease:

    

Land and building

     18,055       18,055  

Accumulated depreciation and amortization

     (6,765     (6,313
  

 

 

   

 

 

 
     11,290       11,742  
  

 

 

   

 

 

 

Goodwill

     1,132,575       1,132,575  

Intangible assets, net of accumulated amortization of $83,969 and $80,502, respectively

     456,657       454,956  

Other assets

     43,337       40,525  
  

 

 

   

 

 

 
     1,632,569       1,628,056  
  

 

 

   

 

 

 

Total assets

   $ 2,002,720     $ 2,000,206  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities:

    

Current portion of long-term debt, net

   $ —       $ 18,405  

Trade accounts payable

     71,017       69,731  

Income taxes payable

     5,117       6,083  

Accrued interest payable

     53,111       53,266  

Accrued expenses and other current liabilities

     83,904       87,146  
  

 

 

   

 

 

 

Total current liabilities

     213,149       234,631  
  

 

 

   

 

 

 

Long-term debt, net

     2,116,949       2,118,653  

Revolving credit facility, net

     44,361       3,925  

Obligation under capital lease

     16,187       16,388  

Deferred tax liability

     99,488       99,255  

Deferred rent expense

     33,867       34,300  

Unfavorable lease obligations and other long-term liabilities

     9,090       10,376  
  

 

 

   

 

 

 
     2,319,942       2,282,897  
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholder’s deficit:

    

Common stock par value $0.001 per share; authorized 1,000 shares; issued and outstanding 100 shares

     —         —    

Additional paid-in capital

     630,652       630,496  

Accumulated other comprehensive loss, net of tax

     (37,840     (51,881

Accumulated deficit

     (1,123,183     (1,095,937
  

 

 

   

 

 

 
     (530,371     (517,322
  

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

   $ 2,002,720     $ 2,000,206  
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands)

 

     Three Months
Ended
July 29, 2017
    Three Months
Ended
July 30, 2016
    Six Months
Ended
July 29, 2017
    Six Months
Ended
July 30, 2016
 

Net sales

   $ 316,637     $ 317,172     $ 616,258     $ 616,819  

Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)

     161,583       170,683       313,371       329,036  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     155,054       146,489       302,887       287,783  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

        

Selling, general and administrative

     112,774       112,372       223,286       220,094  

Depreciation and amortization

     10,890       13,796       22,093       27,856  

Severance and transaction-related costs

     389       125       532       1,698  

Other income, net

     (2,171     (4,538     (4,872     (1,593
  

 

 

   

 

 

   

 

 

   

 

 

 
     121,882       121,755       241,039       248,055  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     33,172       24,734       61,848       39,728  

Interest expense, net

     43,394       55,623       86,974       110,702  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax (benefit) expense

     (10,222     (30,889     (25,126     (70,974

Income tax (benefit) expense

     10,266       1,188       2,120       (139
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (20,488   $ (32,077   $ (27,246   $ (70,835
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (20,488   $ (32,077   $ (27,246   $ (70,835

Other comprehensive income (loss):

        

Foreign currency translation adjustments

     4,523       (2,340     4,567       520  

Net gain (loss) on intra-entity foreign currency transactions, net of tax expense of $714, $209, $944 and $735

     7,593       (6,385     9,474       3,810  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     12,116       (8,725     14,041       4,330  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (8,372   $ (40,802   $ (13,205   $ (66,505
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Six Months     Six Months  
     Ended     Ended  
     July 29, 2017     July 30, 2016  

Cash flows from operating activities:

    

Net loss

   $ (27,246   $ (70,835

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     22,093       27,856  

Amortization of lease rights and other assets

     1,862       1,371  

Amortization of debt issuance costs

     4,312       4,222  

Accretion of debt premium

     (1,457     (1,339

Non-cash pay-in-kind interest expense

     750       9,156  

Net unfavorable accretion of lease obligations

     (55     (126

Loss on sale/retirement of property and equipment, net

     128       170  

Stock-based compensation expense (benefit)

     156       (3

(Increase) decrease in:

    

Inventories

     (22,083     (1,143

Prepaid expenses

     (1,926     (3,051

Other assets

     (75     (281

Increase (decrease) in:

    

Trade accounts payable

     (709     (5,988

Income taxes payable

     (279     (41

Accrued interest payable

     (155     284  

Accrued expenses and other liabilities

     (6,994     (11,997

Deferred income taxes

     (359     (545

Deferred rent expense

     (1,196     (1,213
  

 

 

   

 

 

 

Net cash used in operating activities

     (33,233     (53,503
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisition of property and equipment

     (8,101     (8,523

Acquisition of intangible assets/lease rights

     (38     (103
  

 

 

   

 

 

 

Net cash used in investing activities

     (8,139     (8,626
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from revolving credit facilities

     81,000       120,618  

Payments on revolving credit facilities

     (41,200     —    

Payment on current portion of long-term debt

     (18,420     —    

Payments of unamortized interest related to long-term debt

     (4,272     —    

Payment of debt issuance costs

     (386     (79

Principal payments on capital lease

     (156     (116
  

 

 

   

 

 

 

Net cash provided by financing activities

     16,566       120,423  
  

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash and cash equivalents

     203       (1,893
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (24,603     56,401  

Cash and cash equivalents, at beginning of period

     55,792       18,871  
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 31,189     $ 75,272  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 87,454     $ 98,316  

Income taxes paid

     3,927       658  

Non-cash supplemental financing activities:

    

Increase in term loans due 2021 from pay-in-kind interest

   $ 2,207     $ —    

Decrease in adjustment to carrying value

     2,207       —    

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.

Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements of Claire’s Stores, Inc. (the “Company”) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results for the interim periods presented have been included. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended January 28, 2017 filed with the Securities and Exchange Commission, including Note 2 to the Consolidated Financial Statements included therein, which discusses principles of consolidation and summary of significant accounting policies.

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

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

 

2.

Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Simplifying the Test for Goodwill Impairment, which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The standard is effective January 1, 2020, with early adoption as of January 1, 2017 permitted. The Company does not expect adoption of ASU 2017-04 to have a material impact on the Company’s financial position, results of operations or cash flows.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The update eliminates the exception for an intra-entity transfer of an asset other than inventory, which aligns the recognition of income tax consequences for inter-entity transfers of assets other than inventory by requiring the recognition of current and deferred income taxes resulting from an intra-entity transfer of such an asset when the transfer occurs rather than when it is sold to an external party. The new rules will be effective for the Company in the first quarter of 2018. The Company has not yet evaluated the impact that this standard will have on its consolidated financial position, results of operations, and cash flow.

 

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In August 26, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The amendments in this update address how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The Company does not expect adoption of ASU 2016-15 to have a material impact on the Company’s cash flows.

In March 2016, FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company recognizes all excess tax benefits and shortfalls as income tax expense or benefit in the income statement within the reporting period in which they occur. The requirements of the new standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, which for the Company is the first quarter of Fiscal 2017. The Company did not have any excess tax benefits or shortfalls and elected to continue to account for forfeitures on an estimated basis, and accordingly, our adoption of this guidance on January 29, 2017 had no impact on the Company’s financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20), Recognition of Breakage for Certain Prepaid Stored-Value Products. The new guidance addresses diversity in practice related to the derecognition of a prepaid stored-value product liability. ASU 2016-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The amended standard may be adopted on either a modified retrospective or a retrospective basis. The Company has not yet evaluated the impact that this standard will have on its consolidated financial position, results of operations, and cash flow.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for substantially all leases. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of income. The new standard is effective for years beginning after December 15, 2018, including interim periods within those years. The Company has not yet evaluated the impact that this standard will have on its consolidated financial position, results of operations, and cash flows.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in evaluating whether it controls the good or the service before it is transferred to the customer. The new revenue recognition standard will be effective for public entities for annual reporting periods beginning after December 15, 2017, and interim periods therein, that is, the first quarter of 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method).

 

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The Company is in the process of evaluating the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company’s assessment efforts to date have included reviewing current accounting policies and arrangements to identify potential differences that could arise from the application of ASU 2014-09. Based on these efforts, the Company currently anticipates that the performance obligations created by transactions occurring at underlying company-owned stores, and the timing of recognition thereof, will remain substantially unchanged. While the Company’s evaluation has not been completed, the Company has not identified any information that would indicate that the new guidance will have a material impact on its consolidated financial position, results of operations, and cash flows. While early adoption is permitted, the Company will adopt ASU 2014-09 in the first quarter of fiscal 2018 and continues to evaluate a method of adoption.

 

3.

Fair Value Measurements

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

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

The Company does not have any assets (liabilities) measured at fair value on a recurring basis.

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

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

Financial Instruments Not Measured at Fair Value

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

The Company considers all investments with a maturity of three months or less when acquired to be cash equivalents. The Company’s cash equivalent instruments are valued using quoted market prices and are primarily U.S. Treasury securities. The revolving credit facilities approximate fair value due to the variable component of the interest rate. Excluding unamortized debt issuance costs, the estimated fair value of the Company’s long-term debt was approximately $1.09 billion as of July 29, 2017, compared to a carrying value of $2.13 billion at that date. Excluding unamortized debt issuance costs, the estimated fair value of the Company’s long-term debt (including current portion) was approximately $1.09 billion as of January 28, 2017, compared to a carrying value of $2.15 billion at that date. For publicly-traded debt, the fair value (estimated market value) is based on quoted market prices in less active markets. For non-publicly traded debt, fair value is estimated based on quoted prices for similar instruments. If

 

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measured at fair value in the financial statements, long-term debt excluding term loans would be classified as Level 2 in the fair value hierarchy, while term loans would be classified as Level 3 in the fair value hierarchy.

 

4.

Debt

Debt as of July 29, 2017 and January 28, 2017 included the following components (in thousands):

 

     July 29, 2017     January 28, 2017  

Current portion of long-term debt:

    

10.5% Senior subordinated notes due 2017

   $ —       $ 18,420  

Unamortized debt issuance cost

     —         (15
  

 

 

   

 

 

 

Total current portion of long-term debt, net

   $ —       $ 18,405  
  

 

 

   

 

 

 

Long-term debt:

    

Claire’s Gibraltar unsecured term loan due 2019

   $ 40,000     $ 40,000  

Claire’s Gibraltar Intermediate secured term loan due 2019

     50,750       50,000  

9.0% Senior secured first lien notes due 2019 (1)

     1,130,162       1,131,619  

8.875% Senior secured second lien notes due 2019

     222,300       222,300  

6.125% Senior secured first lien notes due 2020

     210,000       210,000  

7.75% Senior notes due 2020

     216,742       216,742  

9.0% Claire’s Stores term loan due 2021

     31,317       30,933  

9.0% CLSIP term loan due 2021

     101,772       100,525  

9.0% Claire’s Gibraltar term loan due 2021

     46,970       46,394  

Adjustment to carrying value

     79,817       86,296  

Unamortized debt issuance cost

     (12,881     (16,156
  

 

 

   

 

 

 

Total long-term debt, net

   $ 2,116,949     $ 2,118,653  
  

 

 

   

 

 

 

Revolving credit facility:

    

U.S. asset based lending credit facility due 2019

   $ 46,000     $ 6,200  

Unamortized debt issuance cost

     (1,639     (2,275
  

 

 

   

 

 

 

Total revolving credit facility, net

   $ 44,361     $ 3,925  
  

 

 

   

 

 

 

Obligation under capital lease (including current portion)

   $ 16,556     $ 16,712  
  

 

 

   

 

 

 

 

(1)

Amount includes unamortized premium of $5,162 and $6,619 as of July 29, 2017 and January 28, 2017, respectively.

10.50% Senior Subordinated Notes

In March 2017, the Company paid an aggregate principal amount of $18.4 million and, in addition, the related accrued interest associated with the extinguishment of the 10.50% Senior Subordinated Notes due 2017 (the “Senior Subordinated Notes”). As a result, the Company discharged all obligations with respect to the Company’s remaining outstanding 10.50% Senior Subordinated Notes due 2017.

ABL Credit Facility

On September 20, 2016, the ABL Credit Facility, dated as of August 12, 2016, among the Company, Claire’s Inc., the parent of the Company (“Parent”), the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as Administrative Agent (the “ABL Credit Facility”) became effective. The ABL Credit Facility matures on February 4, 2019 and provides for revolving credit loans, subject to borrowing base availability, in an amount up to $75.0 million less any amounts outstanding under the U.S. Credit Facility (as defined below).

 

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Borrowings under the ABL Credit Facility bear interest at a rate equal to, at the Company’s option, either (a) an alternate base rate determined by reference to the higher of (1) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR rate plus 1.00%, or (b) a LIBOR rate with respect to any Eurodollar borrowing, determined by reference to the costs of funds for U.S. dollar deposits in the London Interbank Market for the interest period relevant to such borrowing, adjusted for certain additional costs, in each case plus an applicable margin of 4.50% for LIBOR rate loans and 3.50% for alternate base rate loans. The Company also pays a facility fee of 0.50% per annum of the committed amount of the ABL Credit Facility whether or not utilized, less amounts outstanding under the U.S. Credit Facility (as defined below).

All obligations under the ABL Credit Facility are unconditionally guaranteed by (i) Parent, prior to an initial public offering of the Company’s stock, and (ii) the Company’s existing and future direct or indirect wholly-owned domestic subsidiaries, subject to certain exceptions (including CLSIP LLC and CLSIP Holdings LLC).

All obligations under the ABL Credit Facility, and the guarantees of those obligations, are secured, subject to certain exceptions and permitted liens, by (i) a first-priority security interest in the ABL Priority Collateral (as defined therein) and (ii) a second-priority security interest in the Notes Priority Collateral (as defined therein).

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

As of July 29, 2017, we had $46.0 million of borrowings, which together with the $4.0 million of letters of credit outstanding, reduces the borrowing availability to $25.0 million.

U.S. Revolving Credit Facility

On September 20, 2016, the Second Amended and Restated Credit Facility, dated as of August 12, 2016, among the Company, Parent, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as Administrative Agent (the “U.S. Credit Facility”) became effective. Pursuant to the U.S. Credit Facility, among other things, the availability under the U.S. Credit Facility reduced from $115.0 million to an amount equal to $75.0 million less any amounts outstanding under the ABL Credit Facility, the maturity was extended to February 4, 2019 and certain covenants were modified.

Borrowings under the U.S. Credit Facility bear interest at a rate equal to, at the Company’s option, either (a) an alternate base rate determined by reference to the higher of (1) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR rate plus 1.00%, or (b) a LIBOR rate with respect to any Eurodollar borrowing, determined by reference to the costs of funds for U.S. dollar deposits in the London Interbank Market for the interest period relevant to such borrowing, adjusted for certain additional costs, in each case plus an applicable margin of 4.50% for LIBOR rate loans and 3.50% for alternate base rate loans. The Company also pays a facility fee of 0.50% per annum of the committed amount of the U.S. Credit Facility whether or not utilized, less amounts outstanding under the ABL Credit Facility.

All obligations under the U.S. Credit Facility are unconditionally guaranteed by (i) Parent, prior to an initial public offering of the Company’s stock, and (ii) the Company’s existing and future direct or indirect wholly-owned domestic subsidiaries, subject to certain exceptions (including CLSIP LLC and CLSIP Holdings LLC).

All obligations under the U.S. Credit Facility, and the guarantees of those obligations, are secured, subject to certain exceptions and permitted liens, on a pari passu basis with the 9% Claire’s Stores Term Loans due 2021 and the Senior Secured First Lien Notes (as defined below) by (i) a first-priority lien on the Notes Priority Collateral (as defined therein) and (ii) a second-priority lien on the ABL Priority Collateral (as defined therein).

 

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The U.S. Credit Facility contains customary provisions relating to mandatory prepayments, voluntary payments, payment of dividends, affirmative and negative covenants, and events of default; however, it does not contain any covenants that require the Company to maintain any particular financial ratio or other measure of financial performance except that so long as borrowings and letters of credit outstanding under the U.S. Credit Facility exceed $15 million, the Company is required to maintain, at each borrowing date measured at the end of the prior fiscal quarter (but reflecting borrowings and repayments under the U.S. Credit Facility through the measurement date) and at the end of each fiscal quarter, a maximum Total Net Secured Leverage Ratio of, for the fiscal quarters prior to the first fiscal quarter of 2018, 8.95:1.00, and for the fiscal quarters including and after the first fiscal quarter of 2018, 8.00:1.00, based upon the ratio of the Company’s net senior secured first lien debt to adjusted earnings before interest, taxes, depreciation and amortization for the period of four consecutive fiscal quarters most recently ended.

As of July 29, 2017, no borrowings were outstanding under the U.S. Credit Facility.

Debt Covenants

The Company’s debt agreements contain certain covenants that, among other things, subject to certain exceptions and other basket amounts, restrict our ability and the ability of our subsidiaries to:

 

   

incur additional indebtedness;

 

   

pay dividends or distributions on our capital stock, repurchase or retire our capital stock and redeem, repurchase or defease any subordinated indebtedness;

 

   

make certain investments;

 

   

create or incur certain liens;

 

   

create restrictions on the payment of dividends or other distributions to us from the Company’s subsidiaries;

 

   

transfer or sell assets;

 

   

engage in certain transactions with its affiliates; and

 

   

merge or consolidate with other companies or transfer all or substantially all of its assets.

Certain of these covenants in the indentures governing the 9.0% Senior Secured First Lien Notes due 2019 (the “9.0% Senior Secured First Lien Notes”), 6.125% Senior Secured First Lien Notes due 2020 (the “6.125% Senior Secured First Lien Notes” and collectively with the 9.0% Senior Secured First Lien Notes, the “Senior Secured First Lien Notes”), the 8.765% Senior Secured Second Lien Notes due 2019 (the “Second Lien Notes”), and the 7.750% Senior Notes due 2020 (the “Unsecured Notes”) (collectively, the “Notes”), such as limitations on the Company’s ability to make certain payments such as dividends, or incur debt, will no longer apply if the Notes have investment grade ratings from both of the rating agencies of Moody’s Investor Services, Inc. (“Moody’s”) and Standard & Poor’s Ratings Group (“S&P”) and no event of default has occurred. Since the date of issuance of the Notes, the Notes have not received investment grade ratings from Moody’s or S&P. Accordingly, all of the covenants under the Notes currently apply to the Company. None of the covenants under the Notes, however, require the Company to maintain any particular financial ratio or other measure of financial performance.

See Note 3 – Fair Value Measurements for related fair value disclosure on debt.

Europe Bank Credit Facilities

The Company’s non-U.S. subsidiaries have bank credit facilities totaling approximately $2.0 million. 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 the respective country of operation. As of July 29, 2017, there was a reduction of $1.8 million for outstanding bank guarantees, which reduces the borrowing availability to $0.2 million as of that date.

 

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5.

Commitments and Contingencies

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

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

 

6.

Accumulated Other Comprehensive Loss

The following summary sets forth the components of accumulated other comprehensive loss, net of tax as follows (in thousands, net of tax):

 

     Total (1)  

Balance as of January 28, 2017

   $ (51,881

Other comprehensive income

     14,041  
  

 

 

 

Balance as of July 29, 2017

   $ (37,840
  

 

 

 

 

(1) Represents foreign currency items and $5.7 million of other income associated with expired derivative instruments.

 

7.

Stock Options and Stock-Based Compensation

The following is a summary of activity in the Company’s stock option plan for the six months ended July 29, 2017:

 

                  Weighted-  
           Weighted-      Average  
           Average      Remaining  
     Number of     Exercise      Contractual  
     Shares     Price      Term (Years)  

Outstanding as of January 28, 2017

     3,125,062     $ 5.67     

Options granted

     32,400     $ 1.25     

Options exercised

     —         

Options forfeited

     (33,163   $ 7.58     

Options expired

     (10,962   $ 9.93     
  

 

 

      

Outstanding as of July 29, 2017

     3,113,337     $ 5.58        4.2  
  

 

 

      

Options vested and expected to vest as of July 29, 2017

     2,955,514     $ 5.72        4.2  
  

 

 

      

Exercisable as of July 29, 2017

     1,705,111     $ 7.21        3.5  
  

 

 

      

The weighted average grant date fair value of options granted during the six months ended July 29, 2017 and July 30, 2016 was $0.39 and $0.32, respectively.

Stock-based compensation expense (benefit) is recorded in “Selling, general and administrative” expenses in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

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8.

Income Taxes

The effective income tax rate was (100.4)% and (8.4)% for the three and six months ended July 29, 2017. This effective income tax rate differed from the statutory federal income tax rate of 35% primarily from foreign tax rate differentials as compared to the U.S. statutory rate, changes in the valuation allowance and the correction of an error associated with the prior quarter.

During the three months ended July 29, 2017, the Company identified an error in which the non-cash income tax benefit recorded for the three months ended April 29, 2017 was overstated by $7.5 million. This error was corrected in the three months ended July 29, 2017. As a result, the non-cash income tax expense for the three months ended July 29, 2017 is overstated by $7.5 million. The income tax expense for the six months ended July 29, 2017 is properly stated. The following is a summary of the income tax expense (benefit) both as reported and as if the error was corrected in the appropriate period.

 

     Three Months Ended  
     July 29, 2017      April 29, 2017  

As reported

   $ 10.2 million      ($ 8.1 million

If corrected

   $ 2.7 million      ($ 0.6 million

The effective income tax rate was (3.8)% and 0.2% for the three and six months ended July 30, 2016. This effective income tax rate differed from the statutory federal income tax rate of 35% primarily from foreign tax rate differentials as compared to the U.S. statutory rate and changes in the valuation allowance.

 

9.

Related Party Transactions

The Company, Parent, and affiliates have purchased and may, from time to time, purchase portions of the Company’s indebtedness. All of these purchases have been open market transactions and any interest payments to Parent or affiliates made thereon are paid in accordance with the associated indenture or loan agreement. As of July 29, 2017 and January 28, 2017, Parent and affiliates held $62.8 million and $60.6 million, respectively, of the Company’s indebtedness. For the three and six month ended July 29, 2017 and July 30, 2016, the Company recognized interest expense related to the indebtedness held by Parent and affiliates of $0.0 million, $0.0 million, $6.3 million and $12.4 million, respectively. Interest on the debt held as of July 29, 2017 is payable in kind.

Management Services Agreement    

On June 6, 2017, the Company and Claire’s Inc., the parent of the Company (“Parent”) entered into an Amended and Restated Management Services Agreement (the “Management Services Agreement”) with Apollo Management VI, L.P. (together with its affiliates, “Apollo”), Cowen & Co., LLC, as successor to Tri-Artisan Capital Partners, LLC (“TACP”), (“Cowen”, and together with Apollo, the “Managers”) and TACP Investments – Claire’s LLC (“TACPI”). The Management Services Agreement supersedes, amends and entirely restates the Management Services Agreement, dated as of May 29, 2007 by and among the Company, Parent, Apollo, TACP and TACPI (“the Original Agreement”). Under the Management Service Agreement, the Managers have agreed to provide to the Company certain investment banking, management, consulting and financial planning services on an ongoing basis. The Managers will receive no fee for these services, but will be reimbursed by the Company for their out-of-pocket expenses. In the prior Management Services Agreement, the Managers were paid a $3.0 million fee annually. In addition, under the Management Services Agreement, the Managers have agreed to provide to the Company certain financial advisory and investment banking services from time-to-time in connection with major financial transactions that may be undertaken by the Company or its subsidiaries in exchange for normal and customary fees as agreed by the Managers (or their affiliates) and the Company and Parent, taking into consideration all relevant factors. Under the Management Services Agreement, the Company and Parent have also agreed to provide the Managers (and their affiliates) with customary indemnification. The Management Services Agreement will terminate upon the earliest to occur of May 29, 2025 or the occurrence of certain termination events specified therein.

In addition, on June 6, 2017, the Company and Cowen entered into a letter agreement (the “Cowen Management Agreement”) pursuant to which Cowen will provide the Company with certain financial advisory and investment banking services on a month-to-month basis. Cowen will receive as compensation for such services a monthly cash fee of $32,000, payable at the beginning of each month, and in addition, will be reimbursed for all reasonable out-of-pocket expenses. The Company will provide Cowen (and its affiliates) with a customary indemnification. The Cowen Management Agreement may be terminated by either Cowen or the Company at any time on 30 days prior written notice. So long as the Cowen Management Agreement remains in effect, as between the Company and Parent, and Cowen, in the event of any conflict between the Cowen Management Agreement and the terms of the Management Services Agreement referred to above, the terms of the Cowen Management Agreement shall govern. On September 1, 2017, the Company elected to terminate the Cowen Management Agreement effective as of September 30, 2017.

 

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10.

Segment Information

The Company is organized based on the geographic markets in which it operates. Under this structure, the Company currently has two reportable segments: North America and Europe. The Company accounts for the goods it sells to third parties under franchising and licensing agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” in the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss within its North America segment. The franchise fees the Company charges under the franchising agreements are reported in “Other income, net” in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss within its Europe segment. Substantially all of the interest expense on the Company’s outstanding debt is recorded in the Company’s North America segment.

Net sales, depreciation and amortization and operating income for the three and six months ended July 29, 2017 and July 30, 2016 are as follows (in thousands):

 

     Three Months      Three Months      Six Months      Six Months  
     Ended      Ended      Ended      Ended  
     July 29, 2017      July 30, 2016      July 29, 2017      July 30, 2016  

Net sales:

           

North America

   $ 196,033      $ 194,774      $ 391,993      $ 394,080  

Europe

     120,604        122,398        224,265        222,739  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

     316,637        317,172        616,258        616,819  
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization:

           

North America

     7,028        8,337        14,130        17,432  

Europe

     3,862        5,459        7,963        10,424  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization

     10,890        13,796        22,093        27,856  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income for reportable segments:

           

North America

     16,306        16,184        42,016        40,755  

Europe

     17,255        8,675        20,364        671  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income for reportable segments

     33,561        24,859        62,380        41,426  

Severance and transaction-related costs

     389        125        532        1,698  
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated operating income

     33,172        24,734        61,848        39,728  

Interest expense, net

     43,394        55,623        86,974        110,702  
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated loss before income tax expense

   $ (10,222    $ (30,889    $ (25,126    $ (70,974
  

 

 

    

 

 

    

 

 

    

 

 

 

Excluded from operating income for the North America segment are severance and transaction-related costs of approximately $0.3 million and $0.0 million for the three months ended July 29, 2017 and July 30, 2016, respectively, and $0.3 million and $1.3 million for the six months ended July 29, 2017 and July 30, 2016, respectively.

Excluded from operating income for the Europe segment are severance and transaction-related costs of approximately $0.1 million and $0.1 million for the three months ended July 29, 2017 and July 30, 2016, respectively, and $0.2 million and $0.4 million for the six months ended July 29, 2017 and July 30, 2016, respectively.

 

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11.

Supplemental Financial Information

On March 4, 2011, Claire’s Stores, Inc. (referred to in this Note 11 as the “Issuer”), issued the Second Lien Notes. On February 28, 2012, March 12, 2012 and September 20, 2012, the Issuer issued the 9.0% Senior Secured First Lien Notes. On March 15, 2013, the Issuer issued the 6.125% Senior Secured First Lien Notes and on May 14, 2013, the Issuer issued the Unsecured Notes. The Second Lien Notes are irrevocably and unconditionally guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of Claire’s Stores, Inc. that guarantee the Company’s ABL Credit Facility and U.S. Credit Facility. The First Lien Notes are unconditionally guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of Claire’s Stores, Inc. (subject to certain exceptions, including CLSIP LLC and CLSIP Holdings LLC). As of July 29, 2017, Claire’s Stores, Inc. owned 100% of its domestic subsidiaries that guarantee the Notes. All guarantors are collectively referred to as the “Guarantors.” The Company’s other subsidiaries, principally its international subsidiaries including its European, Canadian and Asian subsidiaries (the “Non-Guarantors”), are not guarantors of these Notes.

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

 

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Condensed Consolidating Balance Sheet

July 29, 2017

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 5,659     $ 4,818     $ 20,712     $ —       $ 31,189  

Inventories

     —         86,383       71,234       —         157,617  

Prepaid expenses

     1,138       1,482       16,152       —         18,772  

Other current assets

     193       14,331       10,612       —         25,136  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     6,990       107,014       118,710       —         232,714  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     5,817       137,748       81,247       —         224,812  

Leasehold improvements

     1,315       183,548       119,267       —         304,130  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     7,132       321,296       200,514       —         528,942  

Accumulated depreciation and amortization

     (5,493     (251,837     (145,465     —         (402,795
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,639       69,459       55,049       —         126,147  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —         18,055       —         —         18,055  

Accumulated depreciation and amortization

     —         (6,765     —         —         (6,765
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —         11,290       —         —         11,290  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —         341,830       87,681       (429,511     —    

Investment in subsidiaries

     1,624,103       (46,286     —         (1,577,817     —    

Goodwill

     —         987,517       145,058       —         1,132,575  

Intangible assets, net

     188,100       149,716       203,475       (84,634     456,657  

Other assets

     1,146       4,305       37,886       —         43,337  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,813,349       1,437,082       474,100       (2,091,962     1,632,569  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,821,978     $ 1,624,845     $ 647,859     $ (2,091,962   $ 2,002,720  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Trade accounts payable

   $ 808     $ 23,401     $ 46,808     $ —       $ 71,017  

Income taxes payable

     —         183       4,934       —         5,117  

Accrued interest payable

     52,741       —         370       —         53,111  

Accrued expenses and other current liabilities

     11,791       34,350       37,763       —         83,904  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     65,340       57,934       89,875       —         213,149  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     429,511       —         —         (429,511     —    

Long-term debt, net

     1,813,137       146,887       156,925       —         2,116,949  

Revolving credit facility, net

     44,361       —         —         —         44,361  

Obligation under capital lease

     —         16,187       —         —         16,187  

Deferred tax liability

     —         93,554       5,934       —         99,488  

Deferred rent expense

     —         22,712       11,155       —         33,867  

Unfavorable lease obligations and other long-term liabilities

     —         9,090       —         —         9,090  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,287,009       288,430       174,014       (429,511     2,319,942  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —         367       2       (369     —    

Additional paid in capital

     630,652       1,520,543       766,993       (2,287,536     630,652  

Accumulated other comprehensive income (loss), net of tax

     (37,840     (3,176     (35,950     39,126       (37,840

Accumulated deficit

     (1,123,183     (239,253     (347,075     586,328       (1,123,183
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (530,371     1,278,481       383,970       (1,662,451     (530,371
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 1,821,978     $ 1,624,845     $ 647,859     $ (2,091,962   $ 2,002,720  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Balance Sheet

January 28, 2017

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 3,038     $ 3,005     $ 49,749     $ —       $ 55,792  

Inventories

     —         74,307       55,932       —         130,239  

Prepaid expenses

     463       1,397       12,782       —         14,642  

Other current assets

     —         14,281       10,989       —         25,270  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     3,501       92,990       129,452       —         225,943  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     5,817       137,382       75,605       —         218,804  

Leasehold improvements

     1,315       183,910       112,411       —         297,636  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     7,132       321,292       188,016       —         516,440  

Accumulated depreciation and amortization

     (5,121     (244,158     (132,696     —         (381,975
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,011       77,134       55,320       —         134,465  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —         18,055       —         —         18,055  

Accumulated depreciation and amortization

     —         (6,313     —         —         (6,313
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —         11,742       —         —         11,742  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —         288,796       61,125       (349,921     —    

Investment in subsidiaries

     1,541,321       (43,213     —         (1,498,108     —    

Goodwill

     —         987,517       145,058       —         1,132,575  

Intangible assets, net

     188,100       149,804       201,686       (84,634     454,956  

Other assets

     1,066       4,342       35,117       —         40,525  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,730,487       1,387,246       442,986       (1,932,663     1,628,056  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,735,999     $ 1,569,112     $ 627,758     $ (1,932,663   $ 2,000,206  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Current portion of long-term debt, net

   $ 18,405     $ —       $ —       $ —       $ 18,405  

Trade accounts payable

     1,719       21,048       46,964       —         69,731  

Income taxes payable

     —         1,160       4,923       —         6,083  

Accrued interest payable

     52,667       —         599       —         53,266  

Accrued expenses and other current liabilities

     14,474       33,517       39,155       —         87,146  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     87,265       55,725       91,641       —         234,631  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     349,923       —         —         (349,923     —    

Long-term debt, net

     1,812,208       149,302       157,143       —         2,118,653  

Revolving credit facility, net

     3,925       —         —         —         3,925  

Obligation under capital lease

     —         16,388       —         —         16,388  

Deferred tax liability

     —         93,554       5,701       —         99,255  

Deferred rent expense

     —         23,424       10,876       —         34,300  

Unfavorable lease obligations and other long-term liabilities

     —         10,373       3       —         10,376  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,166,056       293,041       173,723       (349,923     2,282,897  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —         367       2       (369     —    

Additional paid in capital

     630,496       1,520,544       766,993       (2,287,537     630,496  

Accumulated other comprehensive income (loss), net of tax

     (51,881     (5,187     (47,062     52,249       (51,881

Accumulated deficit

     (1,095,937     (295,378     (357,539     652,917       (1,095,937
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (517,322     1,220,346       362,394       (1,582,740     (517,322
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 1,735,999     $ 1,569,112     $ 627,758     $ (1,932,663   $ 2,000,206  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended July 29, 2017

(in thousands)

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ 180,868     $ 135,769     $ —       $ 316,637  

Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)

     3,017       89,864       68,702       —         161,583  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (3,017     91,004       67,067       —         155,054  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     5,967       58,717       48,090       —         112,774  

Depreciation and amortization

     181       6,379       4,330       —         10,890  

Severance and transaction-related costs

     234       16       139       —         389  

Other income, net

     (918     (112     (1,141     —         (2,171
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     5,464       65,000       51,418       —         121,882  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (8,481     26,004       15,649       —         33,172  

Interest expense, net

     40,071       535       2,788       —         43,394  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (48,552     25,469       12,861       —         (10,222

Income tax expense (benefit)

     —         121       10,145       —         10,266  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (48,552     25,348       2,716       —         (20,488

Equity in earnings (loss) of subsidiaries

     28,064       (2,203     —         (25,861     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (20,488     23,145       2,716       (25,861     (20,488

Foreign currency translation adjustments

     4,523       1,080       (196     (884     4,523  

Net gain (loss) on intra-entity foreign currency transactions, net of tax

     7,593       2,199       7,588       (9,787     7,593  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     12,116       3,279       7,392       (10,671     12,116  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (8,372   $ 26,424     $ 10,108     $ (36,532   $ (8,372
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended July 30, 2016

(in thousands)

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ 179,775     $ 137,397     $ —       $ 317,172  

Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)

     2,861       94,245       73,577       —         170,683  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (2,861     85,530       63,820       —         146,489  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     4,794       58,211       49,367       —         112,372  

Depreciation and amortization

     243       7,543       6,010       —         13,796  

Severance and transaction-related costs

     1       —         124       —         125  

Other (income) expense

     (2,102     398       (2,834     —         (4,538
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,936       66,152       52,667       —         121,755  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (5,797     19,378       11,153       —         24,734  

Interest expense, net

     54,717       553       353       —         55,623  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (60,514     18,825       10,800       —         (30,889

Income tax expense (benefit)

     —         563       625       —         1,188  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (60,514     18,262       10,175       —         (32,077

Equity in earnings (loss) of subsidiaries

     28,437       70       —         (28,507     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (32,077     18,332       10,175       (28,507     (32,077

Foreign currency translation adjustments

     (2,340     (548     (253     801       (2,340

Net gain (loss) on intra-entity foreign currency transactions, net of tax

     (6,385     (768     (6,514     7,282       (6,385
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (8,725     (1,316     (6,767     8,083       (8,725
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (40,802   $ 17,016     $ 3,408     $ (20,424   $ (40,802
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Six Months Ended July 29, 2017

(in thousands)

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ 362,938     $ 253,320     $ —       $ 616,258  

Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)

     6,179       176,063       131,129       —         313,371  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (6,179     186,875       122,191       —         302,887  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     11,720       116,002       95,564       —         223,286  

Depreciation and amortization

     372       12,705       9,016       —         22,093  

Severance and transaction-related costs

     234       73       225       —         532  

Other income, net

     (2,855     (304     (1,713     —         (4,872
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     9,471       128,476       103,092       —         241,039  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (15,650     58,399       19,099       —         61,848  

Interest expense, net

     80,341       1,061       5,572       —         86,974  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (95,991     57,338       13,527       —         (25,126

Income tax expense (benefit)

     —         (943     3,063       —         2,120  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (95,991     58,281       10,464       —         (27,246

Equity in earnings (loss) of subsidiaries

     68,745       (2,157     —         (66,588     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (27,246     56,124       10,464       (66,588     (27,246

Foreign currency translation adjustments

     4,567       668       1,641       (2,309     4,567  

Net gain (loss) on intra-entity foreign currency transactions, net of tax

     9,474       1,343       9,471       (10,814     9,474  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     14,041       2,011       11,112       (13,123     14,041  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (13,205   $ 58,135     $ 21,576     $ (79,711   $ (13,205
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Six Months Ended July 30, 2016

(in thousands)

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ 365,799     $ 251,020     $ —       $ 616,819  

Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)

     5,586       185,497       137,953       —         329,036  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (5,586     180,302       113,067       —         287,783  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     9,565       113,624       96,905       —         220,094  

Depreciation and amortization

     480       15,857       11,519       —         27,856  

Severance and transaction-related costs

     1,349       (3     352       —         1,698  

Other (income) expense

     (3,513     414       1,506       —         (1,593
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     7,881       129,892       110,282       —         248,055  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (13,467     50,410       2,785       —         39,728  

Interest expense, net

     108,986       1,093       623       —         110,702  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (122,453     49,317       2,162       —         (70,974

Income tax expense (benefit)

     —         (776     637       —         (139
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (122,453     50,093       1,525       —         (70,835

Equity in earnings (loss) of subsidiaries

     51,618       (1,594     —         (50,024     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (70,835     48,499       1,525       (50,024     (70,835

Foreign currency translation adjustments

     520       938       (2,959     2,021       520  

Net gain on intra-entity foreign currency transactions, net of tax

     3,810       1,621       3,764       (5,385     3,810  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     4,330       2,559       805       (3,364     4,330  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (66,505   $ 51,058     $ 2,330     $ (53,388   $ (66,505
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

Condensed Consolidating Statement of Cash Flows

Six Months Ended July 29, 2017

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (27,246   $ 56,124     $ 10,464     $ (66,588   $ (27,246

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Loss (equity) in earnings of subsidiaries

     (68,745     2,157       —         66,588       —    

Depreciation and amortization

     372       12,705       9,016       —         22,093  

Amortization of lease rights and other assets

     —         —         1,862       —         1,862  

Amortization of debt issuance costs

     3,781       —         531       —         4,312  

Accretion of debt premium

     (1,457     —         —         —         (1,457

Non-cash pay-in-kind interest expense

     —         —         750       —         750  

Net accretion of unfavorable lease obligations

     —         (56     1       —         (55

Loss on sale/retirement of property and equipment, net

     —         126       2       —         128  

Stock-based compensation expense (benefit)

     139       —         17       —         156  

(Increase) decrease in:

          

Inventories

     —         (12,077     (10,006     —         (22,083

Prepaid expenses

     (675     (84     (1,167     —         (1,926

Other assets

     (268     (23     216       —         (75

Increase (decrease) in:

          

Trade accounts payable

     (912     2,811       (2,608     —         (709

Income taxes payable

     —         (967     688       —         (279

Accrued interest payable

     73       —         (228     —         (155

Accrued expenses and other liabilities

     (2,683     (365     (3,946     —         (6,994

Deferred income taxes

     —         —         (359     —         (359

Deferred rent expense

     —         (712     (484     —         (1,196
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (97,621     59,639       4,749       —         (33,233
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     —         (5,111     (2,990     —         (8,101

Acquisition of intangible assets/lease rights

     —         (38     —         —         (38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —         (5,149     (2,990     —         (8,139
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from revolving credit facilities

     81,000       —         —         —         81,000  

Payments on revolving credit facilities

     (41,200     —         —         —         (41,200

Payment on current portion of long-term debt

     (18,420     —         —         —         (18,420

Payments of unamortized interest related to long-term debt

     (743     (2,415     (1,114     —         (4,272

Payment of debt issuance costs

     —         —         (386     —         (386

Principal payments on capital lease

     —         (156     —         —         (156

Intercompany activity, net

     79,605       (53,034     (26,571     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     100,242       (55,605     (28,071     —         16,566  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash and cash equivalents

     —         2,928       (2,725     —         203  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     2,621       1,813       (29,037     —         (24,603

Cash and cash equivalents, at beginning of period

     3,038       3,005       49,749       —         55,792  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 5,659     $ 4,818     $ 20,712     $ —       $ 31,189  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows

Six Months Ended July 30, 2016

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (70,835   $ 48,499     $ 1,525     $ (50,024   $ (70,835

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Loss (equity) in earnings of subsidiaries

     (51,618     1,594       —         50,024       —    

Depreciation and amortization

     480       15,857       11,519       —         27,856  

Amortization of lease rights and other assets

     —         —         1,371       —         1,371  

Amortization of debt issuance costs

     4,052       —         170       —         4,222  

Accretion of debt premium

     (1,339     —         —         —         (1,339

Non-cash pay-in-kind interest expense

     9,156       —         —         —         9,156  

Net accretion of unfavorable lease obligations

     —         (125     (1     —         (126

Loss on sale/retirement of property and equipment, net

     —         165       5       —         170  

Stock-based compensation expense (benefit)

     (13     —         10       —         (3

(Increase) decrease in:

          

Inventories

     —         5,002       (6,145     —         (1,143

Prepaid expenses

     (839     (166     (2,046     —         (3,051

Other assets

     17       105       (403     —         (281

Increase (decrease) in:

          

Trade accounts payable

     (1,054     (5,703     769       —         (5,988

Income taxes payable

     —         (264     223       —         (41

Accrued interest payable

     262       —         22       —         284  

Accrued expenses and other liabilities

     (124     (6,524     (5,349     —         (11,997

Deferred income taxes

     —         —         (545     —         (545

Deferred rent expense

     —         (973     (240     —         (1,213
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (111,855     57,467       885       —         (53,503
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     (389     (5,058     (3,076     —         (8,523

Acquisition of intangible assets/lease rights

     —         (23     (80     —         (103
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (389     (5,081     (3,156     —         (8,626
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from revolving credit facilities

     68,000       —         52,618       —         120,618  

Payments on revolving credit facilities

     —         —         —         —         —    

Payment of debt issuance costs

     (25     —         (54     —         (79

Principal payments on capital lease

     —         (116     —         —         (116

Intercompany activity, net

     74,903       (54,661     (20,242     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     142,878       (54,777     32,322       —         120,423  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash and cash equivalents

     —         3,641       (5,534     —         (1,893
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     30,634       1,250       24,517       —         56,401  

Cash and cash equivalents, at beginning of period

     2,664       3,394       12,813       —         18,871  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 33,298     $ 4,644     $ 37,330     $ —       $ 75,272  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

We include a store in the calculation of same store sales once it has been in operation sixty weeks after its initial opening and, we include sales from e-commerce. A store which is temporarily closed, such as for remodeling, is removed from the same store sales computation if it is closed for one week or more. The removal is effective prospectively upon the completion of the first fiscal week of closure. A store which is closed permanently, such as upon termination of the lease, is immediately removed from the same store sales computation. We compute same store sales on a local currency basis, which eliminates any impact for changes in foreign currency rates.

We are highly leveraged, with significant debt service obligations. On September 20, 2016, we completed an exchange offer which significantly reduced the amount of our indebtedness, extended our maturities and improved liquidity through the reduction of cash interest expense (the “Exchange Offer”). Nonetheless, as of July 29, 2017, we reported net debt (total debt less cash and cash equivalents) of approximately $2.1 billion. See Note 4 – Debt, in the Notes to the accompanying Unaudited Condensed Consolidated Financial Statements for a summary of our outstanding indebtedness as of July 29, 2017, and Note 6 – Debt, in the Notes to Audited Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended January 28, 2017 filed with the Securities and Exchange Commission, for a description of our existing debt, debt agreements, and Exchange Offer.

Results of Consolidated Operations

Management Overview

We are one of the world’s leading specialty retailers of fashionable jewelry and accessories for young women, teens, tweens, and kids. Our vision is to be the emporium of choice for all girls (in age or attitude) across the world. We deliver this by offering a range of innovative, fun and affordable products and services that cater to all of her activities, as she grows up, whenever and wherever. Our broad and dynamic selection of merchandise is unique. We are organized into two operating segments: North America and Europe. We identify our operating segments by how we manage and evaluate our business activities. As of July 29, 2017, we operated a total of 2,660 company-operated stores of which 1,614 were located in all 50 states of the United States, Puerto Rico, Canada and the U.S. Virgin Islands (North America segment) and 1,046 stores were located in the United Kingdom, Switzerland, Austria, Germany, France, Ireland, Spain, Portugal, Netherlands, Belgium, Poland, Czech Republic, Hungary, Italy and Luxembourg (Europe segment). We operate our stores under two brand names: Claire’s® and Icing®. As of July 29, 2017, we also had a total of 860 concession stores, of which 333 were located in the United States and Canada (North America segment) and 527 stores were located in the United Kingdom, France, Spain, Austria, Germany, Italy, Portugal, Switzerland, Hungary and Poland (Europe segment).

As of July 29, 2017, we also franchised 650 stores in Japan, the Middle East, Greece, Guatemala, Malta, India, Dominican Republic, El Salvador, Panama, Indonesia, Costa Rica, Serbia, Romania, Martinique, Pakistan, Thailand, Southern Africa, Russia and Ecuador. We account for the goods we sell to third parties under franchising agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” (North America segment) in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. The franchise fees we charge under the franchising agreements are reported in “Other income, net” (North America segment) in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

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Claire’s® is our primary global brand that we operate through company-operated, concession stores, or franchise stores. Claire’s® offers a differentiated and fun store experience with a “treasure hunt” setting that encourages our customer to visit often to explore and find merchandise that appeals to her. We believe by maintaining a highly relevant merchandise assortment and offering a compelling value proposition, Claire’s® has universal appeal to teens, pre-teens and kids. Claire’s® target customer is a girl between 3-18 years old for whom we create three distinct ranges: 3 to 6, 6 to 12 and 12 to 18.

Icing® is our second brand which we currently operate in North America through company-operated stores and in the Middle East through franchised stores. Icing® offers an inspiring merchandise assortment of fashionable products that helps a young woman to say something about herself, whatever the occasion. Our Icing® brand targets a young woman in the 18-35 year age group with a focus on our core 21-25 year olds who have recently entered the workforce. This customer is independent, fashion-conscious, and has enhanced spending ability.

We provide our target customer groups with a significant selection of fashionable merchandise across a wide range of categories, all with a compelling value proposition. Our major categories of business are:

 

   

Jewelry: Includes earrings as well as our ear piercing service, necklaces, bracelets, body jewelry and rings; and

 

   

Accessories: Includes hairgoods; beauty products; room decor; personal, fashion, and seasonal accessories, including tech accessories such as phone cases, jewelry holders, stationery, key rings, attitude glasses, headwear, legwear, armwear, and sunglasses; and handbags and small leather goods.

In North America, our stores are located primarily in shopping malls. The differentiation of our Claire’s® and Icing® brands allows us to operate multiple stores within a single location. In Europe, our stores are located primarily on high streets, in shopping malls and in high traffic urban areas.

Financial activity for the three and six months ended July 29, 2017 includes the following:

 

   

Net sales approximately flat year-over-year for both periods; respectively;

 

   

Same store sales percentages;

 

     Three Months
Ended
July 29, 2017
     Six Months
Ended
July 29, 2017
 

Consolidated

     2.8%        3.6%  

North America

     2.6%        1.4%  

Europe

     3.2%        7.5%  

•     Gross profit percentage increase

     280 basis points        240 basis points  

•     Operating income margin

     10.5%        10.0%  

Operational activity for the three and six months ended July 29, 2017 includes the following:

 

Store Activity Openings (Closings):

   Three Months
Ended
July 29, 2017
     Six Months
Ended
July 29, 2017
 
     Opened      Closed(1)      Opened      Closed(1)  

Company-operated

     —          20        1        51  

Concession

     1        42        8        81  

Franchise

     13        10        76        29  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     14        72        85        161  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Due to underperformance or lease renewal terms that did not meet our criteria

 

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Table of Contents

A summary of our consolidated results of operations for the three and six months ended July 29, 2017 and July 30, 2016 are as follows (dollars in thousands):

 

     Three Months
Ended
July 29, 2017
    Three Months
Ended
July 30, 2016
 

Net sales

   $ 316,637     $ 317,172  

Increase (decrease) in same store sales

     2.8     (5.7 )% 

Gross profit percentage

     49.0     46.2

Selling, general and administrative expenses as a percentage of net sales

     35.6     35.4

Depreciation and amortization as a percentage of net sales

     3.4     4.3

Operating income

   $ 33,172     $ 24,734  

Net loss

   $ (20,488   $ (32,077

Number of company-operated stores at the end of the period

     2,660       2,801  

Number of concession stores at the end of the period

     860       806  
     Six Months     Six Months  
     Ended     Ended  
     July 29, 2017     July 30, 2016  

Net sales

   $ 616,258     $ 616,819  

Increase (decrease) in same store sales

     3.6     (5.4 )% 

Gross profit percentage

     49.1     46.7

Selling, general and administrative expenses as a percentage of net sales

     36.2     35.7

Depreciation and amortization as a percentage of net sales

     3.6     4.5

Operating income

   $ 61,848     $ 39,728  

Net loss

   $ (27,246   $ (70,835

Number of company-operated stores at the end of the period

     2,660       2,801  

Number of concession stores at the end of the period

     860       806  

Net sales

Net sales for the three months ended July 29, 2017 decreased $0.5 million, or 0.2%, from the three months ended July 30, 2016. The decrease was attributable to the effect of store closures of $9.7 million, an unfavorable foreign currency translation effect of our non-U.S. net sales of $2.3 million and decreased sales to franchisees of $0.4 million, partially offset by an increase in same store sales of $8.5 million and an increase in new concession store sales and new store sales of $3.4 million. Sales would have increased 0.5% excluding the impact from foreign currency exchange rate changes.

Net sales for the six months ended July 29, 2017 decreased $0.6 million, or 0.1%, from the six months ended July 30, 2016. The decrease was attributable to the effect of store closures of $19.4 million, an unfavorable foreign currency translation effect of our non-U.S. net sales of $9.5 million and decreased sales to franchisees of $1.4 million, partially offset by an increase in same store sales of $20.8 million and an increase in new concession store sales and new store sales of $8.9 million. Sales would have increased 1.4% excluding the impact from foreign currency exchange rate changes.

For the three months ended July 29, 2017, the increase in same store sales was primarily attributable to an increase in average transaction value of 8.7%, partially offset by a decrease in average number of transactions per store of 4.5%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

For the six months ended July 29, 2017, the increase in same store sales was primarily attributable to an increase in average transaction value of 8.3%, partially offset by a decrease in average number of transactions per store of 3.6%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

 

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Table of Contents

The following table compares our sales of each product category for each of the periods presented:

 

     Percentage of Total      Percentage of Total  

Product Category

   Three Months
Ended
July 29, 2017
     Three Months
Ended
July 30, 2016
     Six Months
Ended
July 29, 2017
     Six Months
Ended
July 30, 2016
 

Jewelry

     48.5        48.1        48.7        48.0  

Accessories

     51.5        51.9        51.3        52.0  
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0        100.0        100.0        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

In calculating gross profit and gross profit percentages, we exclude the costs related to our distribution center and depreciation and amortization expense. These costs are included instead in “Selling, general and administrative” expenses in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. Other retail companies may include these costs in cost of sales, so our gross profit percentages may not be comparable to those retailers.    

During the three months ended July 29, 2017, gross profit percentage increased 280 basis points to 49.0% compared to 46.2% during the three months ended July 30, 2016. The increase in gross profit percentage consisted of a 170 basis point increase in merchandise margin and a 110 basis point decrease in occupancy. The increase in merchandise margin percentage resulted primarily from higher initial markup and lower markdowns. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in same store sales.                

During the six months ended July 29, 2017, gross profit percentage increased 240 basis points to 49.1% compared to 46.7% during the six months ended July 30, 2016. The increase in gross profit percentage consisted of a 130 basis point decrease in occupancy costs and by a 120 basis point increase in merchandise margin, partially offset by a 10 basis point increase in buying and buying-related costs. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in same store sales. The increase in merchandise margin percentage resulted primarily from higher initial markup and higher trade discounts.                

Selling, general and administrative expenses

During the three months ended July 29, 2017, selling, general and administrative expenses increased $0.4 million, or 0.4%, compared to the three months ended July 30, 2016. As a percentage of net sales, selling, general and administrative expenses increased 20 basis points compared to the three months ended July 30, 2016. Excluding a favorable $1.0 million foreign currency translation effect, selling, general, and administrative expenses would have increased $1.4 million. Excluding the foreign currency translation effect, the increase was primarily due to increased compensation-related expense, including concession store commission expense and store incentive compensation.

During the six months ended July 29, 2017, selling, general and administrative expenses increased $3.2 million, or 1.5%, compared to the six months ended July 30, 2016. As a percentage of net sales, selling, general and administrative expenses increased 50 basis points compared to the six months ended July 30, 2016. Excluding a favorable $4.0 million foreign currency translation effect, selling, general, and administrative expenses would have increased $7.2 million. Excluding the foreign currency translation effect, the increase was primarily due to increased compensation-related expense, including concession store commission expense and store incentive compensation.

 

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Table of Contents

Depreciation and amortization expense

During the three months ended July 29, 2017, depreciation and amortization expense decreased $2.9 million to $10.9 million compared to $13.8 million for the three months ended July 30, 2016. Excluding a favorable $0.1 million foreign currency translation effect, the decrease in depreciation and amortization expense would have been $2.8 million.    

During the six months ended July 29, 2017, depreciation and amortization expense decreased $5.8 million to $22.1 million compared to $27.9 million for the six months ended July 30, 2016. Excluding a favorable $0.4 million foreign currency translation effect, the decrease in depreciation and amortization expense would have been $5.4 million.    

Other income, net

The following is a summary of other income activity for the three and six months ended July 29, 2017 and July 30, 2016 (in thousands):

 

     Three Months      Three Months      Six Months      Six Months  
     Ended      Ended      Ended      Ended  
     July 29, 2017      July 30, 2016      July 29, 2017      July 30, 2016  

Foreign currency exchange loss (gain), net

   $ 768      $ (3,009    $ 411      $ 1,044  

Other income

     (5      —          (5      (5

Royalty income

     (2,934      (1,529      (5,278      (2,632
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ (2,171    $ (4,538    $ (4,872    $ (1,593
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense, net

During the three months ended July 29, 2017, net interest expense aggregated $43.4 million compared to $55.6 million for the three months ended July 30, 2016. The decrease is primarily due to decreased indebtedness as a result of the Exchange Offer consummated in September 2016 and the extinguishment of the 10.5% Senior Subordinated Notes in the quarter ended April 29, 2017.

During the six months ended July 29, 2017, net interest expense aggregated $87.0 million compared to $110.7 million for the six months ended July 30, 2016. The decrease is primarily due to decreased indebtedness as a result of the Exchange Offer consummated in September 2016 and the extinguishment of the 10.5% Senior Subordinated Notes in the quarter ended April 29, 2017.

Income taxes

The effective income tax rate for the three and six months ended July 29, 2017 was (100.4)% and (8.4)% compared to (3.8)% and 0.2% for the three and six months ended July 30, 2016. These effective income tax rates differed from the statutory federal income tax rate of 35% primarily from foreign tax rate differentials as compared to the U.S. statutory rate, changes in the valuation allowance and the correction of an error associated with the prior quarter as discussed below.

During the three months ended July 29, 2017, the Company identified an error in which the non-cash income tax benefit recorded for the three months ended April 29, 2017 was overstated by $7.5 million. This error was corrected in the three months ended July 29, 2017. As a result, the non-cash income tax expense for the three months ended July 29, 2017 is overstated by $7.5 million. The income tax expense for the six months ended July 29, 2017 is properly stated. The following is a summary of the income tax expense (benefit) both as reported and as if the error was corrected in the appropriate period.

 

     Three Months Ended  
     July 29, 2017      April 29, 2017  

As reported

   $ 10.2 million      ($ 8.1 million

If corrected

   $ 2.7 million      ($ 0.6 million

Segment Operations

We have two reportable segments – North America and Europe. The following is a discussion of results of operations by reportable segment.

 

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Table of Contents

North America

Key statistics and results of operations for our North America segment are as follows (dollars in thousands):

 

     Three Months     Three Months     Six Months     Six Months  
     Ended     Ended     Ended     Ended  
     July 29, 2017     July 30, 2016     July 29, 2017     July 30, 2016  

Net sales

   $ 196,033     $ 194,774     $ 391,993     $ 394,080  

Increase (decrease) in same store sales

     2.6     (4.4 )%      1.4     (2.6 )% 

Gross profit percentage

     48.9     46.1     49.9     48.0

Number of company-operated stores at the end of the period

     1,614       1,699       1,614       1,699  

Number of concession stores at the end of the period

     333       244       333       244  

During the three months ended July 29, 2017, net sales in North America increased $1.3 million, or 0.6%, from the three months ended July 30, 2016. The increase was attributable to an increase in same stores sales of $4.8 million and an increase in new concession store sales and new store sales of $3.1 million, partially offset by the effect of store closures of $6.0 million, decreased sales to franchisees of $0.4 million and an unfavorable foreign currency translation effect of our non-U.S. net sales of $0.2 million. Sales would have increased 0.8% excluding the impact from foreign currency exchange rate changes.

During the six months ended July 29, 2017, net sales in North America decreased $2.1 million, or 0.5%, from the six months ended July 30, 2016. The decrease was attributable to the effect of store closures of $12.9 million, decreased sales to franchisees of $1.4 million and an unfavorable foreign currency translation effect of our non-U.S. net sales of $0.4 million, partially offset by an increase in new concession store sales and new store sales of $7.3 million and an increase in same store sales of $5.3 million. Sales would have decreased 0.5% excluding the impact from foreign currency exchange rate changes.

For the three months ended July 29, 2017, the increase in same store sales was primarily attributable to an increase in average transaction value of 9.2%, partially offset by a decrease in average number of transactions per store of 5.5%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

For the six months ended July 29, 2017, the increase in same store sales was primarily attributable to an increase in average transaction value of 8.3%, partially offset by a decrease in average number of transactions per store of 6.2%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

During the three months ended July 29, 2017, gross profit percentage increased 280 basis points to 48.9% compared to 46.1% during the three months ended July 30, 2016. The increase in gross profit percentage consisted of an increase in merchandise margin of 180 basis points and by a 110 basis point decrease in occupancy costs, partially offset by a 10 basis point increase in buying and buying-related costs. The increase in merchandise margin percentage resulted primarily from lower markdowns, higher trade discounts, partially offset by sales mix. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in same store sales.

During the six months ended July 29, 2017, gross profit percentage increased 190 basis points to 49.9% compared to 48.0% during the six months ended July 30, 2016. The increase in gross profit percentage consisted of an increase in merchandise margin of 120 basis points and by a 90 basis point decrease in

 

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occupancy costs, partially offset by a 20 basis point increase in buying and buying-related costs. The increase in merchandise margin percentage resulted primarily from lower markdowns, higher trade discounts, partially offset by sales mix. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in same store sales. The increase in buying and buying-related costs, as a percentage of net sales, resulted primarily from increased compensation costs and buying related costs.    

The following table compares our sales of each product category in North America for each of the periods presented:

 

     Percentage of Total      Percentage of Total  
     Three Months      Three Months      Six Months      Six Months  
     Ended      Ended      Ended      Ended  

Product Category

   July 29, 2017      July 30, 2016      July 29, 2017      July 30, 2016  

Jewelry

     54.8        53.9        55.1        53.6  

Accessories

     45.2        46.1        44.9        46.4  
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0        100.0        100.0        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Europe

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

 

     Three Months     Three Months     Six Months     Six Months  
     Ended     Ended     Ended     Ended  
     July 29, 2017     July 30, 2016     July 29, 2017     July 30, 2016  

Net sales

   $ 120,604     $ 122,398     $ 224,265     $ 222,739  

Increase (decrease) in same store sales

     3.2     (7.8 )%      7.5     (10.1 )% 

Gross profit percentage

     49.0     46.3     47.8     44.2

Number of company-operated stores at the end of the period

     1,046       1,102       1,046       1,102  

Number of concession stores at the end of the period

     527       562       527       562  

During the three months ended July 29, 2017, net sales in Europe decreased $1.8 million, or 1.5%, from the three months ended July 30, 2016. The decrease was attributable to the effect of store closures of $3.7 million and an unfavorable foreign currency translation effect of our non-U.S. net sales of $2.1 million, partially offset by an increase in same store sales of $3.7 million and an increase in new concession store sales and new store sales of $0.3 million. Sales would have increased 0.2% excluding the impact from foreign currency exchange rate changes.

During the six months ended July 29, 2017, net sales in Europe increased $1.5 million, or 0.7%, from the six months ended July 30, 2016. The increase was attributable to an increase in same stores sales of $15.5 million and an increase in new concession store sales and new store sales of $1.6 million, partially offset an unfavorable foreign currency translation effect of our non-U.S. net sales of $9.1 million and by the effect of store closures of $6.5 million. Sales would have increased 4.9% excluding the impact from foreign currency exchange rate changes.

For the three months ended July 29, 2017, the increase in same store sales was primarily attributable to an increase in average transaction value of 8.3%, partially offset by a decrease in average number of transactions per store of 3.2%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

For the six months ended July 29, 2017, the increase in same store sales was primarily attributable to an increase in average transaction value of 9.8%, partially offset by a decrease in average number of transactions per store of 0.3%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

 

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During the three months ended July 29, 2017, gross profit percentage increased 270 basis points to 49.0% compared to 46.3% during the three months ended July 30, 2016. The increase in gross profit percentage consisted of a 150 basis point increase in merchandise margin and a 120 basis point decrease in occupancy costs. The increase in merchandise margin percentage resulted primarily from higher initial markup, partially offset by an increase in markdowns and unfavorable foreign currency exchange rates. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in same store sales.

During the six months ended July 29, 2017, gross profit percentage increased 360 basis points to 47.8% compared to 44.2% during the six months ended July 30, 2016. The increase in gross profit percentage consisted of a 240 basis point decrease in occupancy costs, a 110 basis point increase in merchandise margin and a 10 basis point decrease in buying and buying-related costs. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in same store sales. The increase in merchandise margin percentage resulted primarily from higher initial markup, partially offset by an increase in markdowns.

The following table compares our sales of each product category in Europe for each of the periods presented:

 

     Percentage of Total      Percentage of Total  
     Three Months      Three Months      Six Months      Six Months  
     Ended      Ended      Ended      Ended  

Product Category

   July 29, 2017      July 30, 2016      July 29, 2017      July 30, 2016  

Jewelry

     38.4        39.1        37.7        38.4  

Accessories

     61.6        60.9        62.3        61.6  
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0        100.0        100.0        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liquidity and Capital Resources

We are highly leveraged, with significant debt service obligations. As of July 29, 2017, we reported net debt (total debt less cash and cash equivalents) of approximately $2.1 billion with maturities ranging from 2019 through 2021.

We completed the Exchange Offer to reduce our outstanding indebtedness and improve liquidity through the reduction of cash interest expense. After the Exchange Offer, the Company’s outstanding debt was reduced by approximately $396 million, debt maturities were extended, and the Company estimates it will realize annual cash interest savings of approximately $24 million.

We currently anticipate that cash on hand, cash generated from operations and borrowings under our ABL Credit Facility and U.S. Credit Facility will be sufficient to allow us to satisfy payments of interest on our indebtedness, to fund new store expenditures, and meet working capital requirements over the near-term. However, this will depend, to a large degree, on our operating performance, which may be adversely affected by general economic, political and financial conditions, foreign currency exchange exposures, and other factors beyond our control, including those disclosed in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.

Repayment of our debt as it matures will require refinancing, and we cannot make assurances that we will have the financial resources required to obtain, or that the conditions of the capital markets will support, any future refinancing, replacement or restructuring of our indebtedness.

 

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A summary of cash flows provided by (used in) operating, investing and financing activities for the six months ended July 29, 2017 and July 30, 2016 is outlined in the table below (in thousands):

 

     Six Months      Six Months  
     Ended      Ended  
     July 29, 2017      July 30, 2016  

Operating activities

   $ (33,233    $ (53,503

Investing activities

     (8,139      (8,626

Financing activities

     16,566        120,423  

Cash flows from operating activities

For the six months ended July 29, 2017, cash used in operations decreased $20.3 million compared to the prior year period. The primary reason for the decrease in cash used in operations was an increase in operating income and net other items of $28.8 million, offset by an increase in working capital of $8.5 million, excluding cash equivalents. For the six months ended July 30, 2016, cash used in operations increased $10.7 million compared to the prior year period. The primary reason for the increase was a decrease in operating income and net other items of $10.2 million and an increase in working capital of $0.5 million, excluding cash equivalents.

Cash flows from investing activities

For the six months ended July 29, 2017, cash used in investing activities was $8.1 million and consisted of $8.1 million for capital expenditures. For the six months ended July 30, 2016, cash used in investing activities was $8.6 million and consisted of $8.6 million for capital expenditures. During the remainder of Fiscal 2017, we expect to spend approximately $13.0 million of capital expenditures.

Cash flows from financing activities

For the six months ended July 29, 2017, cash provided by financing activities was $16.6 million, which consisted primarily of net borrowings of $39.8 million under our ABL Credit Facility, partially offset by payment of $18.4 million for the extinguishment of the Senior Subordinated Notes, payment of $4.3 million for unamortized interest related to long-term debt, payment of $0.4 million in financing costs and payment of $0.1 million for capital lease. For the six months ended July 30, 2016, cash provided by financing activities was $120.4 million, which consisted primarily of net borrowings of $120.6 million under the revolving credit facilities, partially offset by payment of $0.1 million in financing costs and payment of $0.1 million for capital lease.

We or our affiliates have purchased and may, from time to time, purchase portions of our indebtedness. All of our purchases have been open market transactions.

Cash Position

As of July 29, 2017, we had cash and cash equivalents of $31.2 million and all cash equivalents were maintained in one money market fund invested exclusively in U.S. Treasury Securities.    

In addition, as of July 29, 2017, our foreign subsidiaries held cash and cash equivalents of $20.7 million. During the six months ended July 29, 2017, we transferred certain cash held by foreign subsidiaries to the U.S. to meet certain liquidity needs. During the remainder of Fiscal 2017, we expect a portion of our foreign subsidiaries’ future cash flow generation to be repatriated to the U.S. to meet certain liquidity needs. We are currently accruing U.S. income taxes, net of any foreign tax credit benefit, on all foreign earnings deemed repatriated.

We currently anticipate that cash on hand, cash generated from operations and borrowings under our ABL Credit Facility and U.S. Credit Facility will be sufficient to allow us to satisfy payments of interest on our indebtedness, to fund new store expenditures, and meet working capital requirements over the near-term. However, this will depend, to a large degree, on our operating performance, which may be adversely affected by general economic, political and financial conditions, foreign currency exchange exposures, and other factors beyond our control, including those disclosed in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.

 

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10.50% Senior Subordinated Notes

In March 2017, we paid an aggregate principal amount of $18.4 million and, in addition, the related accrued interest associated with the extinguishment of the Senior Subordinated Notes. As a result, we discharged all obligations with respect to the Company’s remaining outstanding Senior Subordinated Notes.    

ABL Credit Facility

On September 20, 2016, the ABL Credit Facility, dated as of August 12, 2016, among the Company, Parent, the lenders part thereto and Credit Suisse AG, Cayman Islands Branch, as Administrative Agent (the “ABL Credit Facility”) became effective. The ABL Credit Facility matures on February 4, 2019 and provides for revolving credit loans, subject to borrowing base availability, in an amount up to $75.0 million less any amounts outstanding under the U.S. Credit Facility (as defined below).

Borrowings under the ABL Credit Facility bear interest at a rate equal to, at the Company’s option, either (a) an alternate base rate determined by reference to the higher of (1) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR rate plus 1.00%, or (b) a LIBOR rate with respect to any Eurodollar borrowing, determined by reference to the costs of funds for U.S. dollar deposits in the London Interbank Market for the interest period relevant to such borrowing, adjusted for certain additional costs, in each case plus an applicable margin of 4.50% for LIBOR rate loans and 3.50% for alternate base rate loans. The Company also pays a facility fee of 0.50% per annum of the committed amount of the ABL Credit Facility whether or not utilized, less amounts outstanding under the U.S. Credit Facility.

All obligations under the ABL Credit Facility are unconditionally guaranteed by (i) Parent, prior to an initial public offering of the Company’s stock, and (ii) the Company’s existing and future direct or indirect wholly-owned domestic subsidiaries, subject to certain exceptions (including CLSIP LLC and CLSIP Holdings LLC).

All obligations under the ABL Credit Facility, and the guarantees of those obligations, are secured, subject to certain exceptions and permitted liens, by (i) a first-priority security interest in the ABL Priority Collateral (as defined therein) and (ii) a second-priority security interest in the Notes Priority Collateral (as defined therein).

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

As of July 29, 2017, we had $46.0 million of borrowings, together with the $4.0 million of letters of credit outstanding, which reduced the borrowing availability to $25.0 million.

U.S. Revolving Credit Facility

On September 20, 2016, the Second Amended and Restated Credit Facility, dated as of August 12, 2016, among the Company, Parent, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as Administrative Agent (the “U.S. Credit Facility”) became effective. Pursuant to the U.S. Credit Facility, among other things, the availability under the U.S. Credit Facility reduced from $115.0 million to an amount equal to $75.0 million less any amounts outstanding under the ABL Credit Facility, the maturity was extended to February 4, 2019 and certain covenants were modified.

Borrowings under the U.S. Credit Facility bear interest at a rate equal to, at the Company’s option, either (a) an alternate base rate determined by reference to the higher of (1) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR rate plus 1.00%, or (b) a LIBOR rate with respect to any Eurodollar borrowing, determined by reference to the costs of funds for

 

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U.S. dollar deposits in the London Interbank Market for the interest period relevant to such borrowing, adjusted for certain additional costs, in each case plus an applicable margin of 4.50% for LIBOR rate loans and 3.50% for alternate base rate loans. The Company also pays a facility fee of 0.50% per annum of the committed amount of the U.S. Credit Facility whether or not utilized, less amounts outstanding under the ABL Credit Facility.

All obligations under the U.S. Credit Facility are unconditionally guaranteed by (i) Parent, prior to an initial public offering of the Company’s stock, and (ii) the Company’s existing and future direct or indirect wholly-owned domestic subsidiaries, subject to certain exceptions (including CLSIP LLC and CLSIP Holdings LLC).

All obligations under the U.S. Credit Facility, and the guarantees of those obligations, are secured, subject to certain exceptions and permitted liens, on a pari passu basis with the 9% Claire’s Stores Term Loans due 2021 and the Senior Secured First Lien Notes by (i) a first-priority lien on the Notes Priority Collateral (as defined therein) and (ii) a second-priority lien on the ABL Priority Collateral (as defined therein).

The U.S. Credit Facility contains customary provisions relating to mandatory prepayments, voluntary payments, payments of dividends, affirmative and negative covenants, and events of default; however, it does not contain any covenants that require the Company to maintain any particular financial ratio or other measure of financial performance except that so long as the revolving loans and letters of credit outstanding under the U.S. Credit Facility exceed $15 million, the Company is required to maintain, at each borrowing date measured at the end of the prior fiscal quarter (but reflecting borrowings and repayments under the U.S. Credit Facility through the measurement date) and at the end of each fiscal quarter, a maximum Total Net Secured Leverage Ratio of, for the fiscal quarters prior to the first fiscal quarter of 2018, 8.95:1.00, and for the fiscal quarters including and after the first fiscal quarter of 2018, 8.00:1.00, based upon the ratio of the Company’s net senior secured first lien debt to adjusted earnings before interest, taxes, depreciation and amortization for the period of four consecutive fiscal quarters most recently ended.

As of July 29, 2017, no borrowings were outstanding under the U.S. Credit Facility.

Debt Covenants

Our debt agreements also contain various covenants that limit our ability to engage in specified types of transactions. These covenants, subject to certain exceptions and other basket amounts, limit our and our subsidiaries’ ability to, among other things:

 

   

incur additional indebtedness;

 

   

pay dividends or distributions on our capital stock, repurchase or retire our capital stock and redeem, repurchase or defease any subordinated indebtedness;

 

   

make certain investments;

 

   

create or incur certain liens;

 

   

create restrictions on the payment of dividends or other distributions to us from our subsidiaries;

 

   

transfer or sell assets;

 

   

engage in certain transactions with our affiliates; and

 

   

merge or consolidate with other companies or transfer all or substantially all of our assets.

For a description of our existing debt and debt agreements, see Note 4 – Debt, in the Unaudited Condensed Consolidated Financial Statements. As of July 29, 2017, we were in compliance with the covenants under all existing debt agreements.

See Note 3 – Fair Value Measurements for related fair value disclosure on debt.

 

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Europe Bank Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $2.0 million. These facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in their respective countries of operation. As of July 29, 2017, we had a reduction of $1.8 million for outstanding bank guarantees, which reduces the borrowing availability to $0.2 million as of that date.

Management Services Agreement    

See Note 9- Related Party Transactions, in the Notes to the Unaudited Condensed Consolidated Financial Statements.

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 2016 Annual Report on Form 10-K, filed on April 14, 2017, in the Notes to Consolidated Financial Statements, Note 2 – Summary of Significant Accounting Policies, and the Critical Accounting Policies and Estimates section contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations therein.

 

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Goodwill and indefinite-lived intangible assets are subject to impairment assessments at least annually (or more frequently when events or circumstances indicate that an impairment may have occurred) by applying a fair-value test. These fair value estimates require significant management judgment and are based on the best information available at the time of the analysis. Our principal intangible assets, other than goodwill, are tradenames, franchise agreements, and leases that existed as of the date that the Company was acquired in May 2007, which had terms that were favorable to market at that date. Our impairment testing for Fiscal 2016 resulted in the recognition of non-cash impairment charges of $169.3 million, $9.0 million and $3.3 million, relating to goodwill, intangible assets and long-lived assets, respectively. We expect to next perform our annual impairment analysis during the fourth fiscal quarter of Fiscal 2017, and we may be required to recognize additional impairment charges at that time or in the future.

Recent Accounting Pronouncements

See Note 2 – Recent Accounting Pronouncements, in the Notes to the Unaudited Condensed 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 we issue publicly. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to our future financial performance, business strategy, planned capital expenditures, ability to service our debt, and new store openings for future periods, are forward-looking statements. The forward-looking statements are and will be based on management’s then current views and assumptions regarding future events and operating performance, and we assume no obligation to update any forward-looking statement. 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. The forward-looking statements may use the words “expect,” “anticipate,” “plan,” “intend,” “project,” “may,” “believe,” “forecasts” and similar expressions. Some of these risks, uncertainties and other factors are as follows: our level of indebtedness; general economic conditions; changes in consumer preferences and consumer spending; unwillingness of vendors and service providers to supply goods or services pursuant to historical customary credit arrangements; competition; general political and social conditions such as war, political unrest and terrorism; natural disasters or severe weather events; currency fluctuations and exchange rate adjustments; failure to maintain our favorable brand recognition; failure to successfully market our products through other channels, such as e-commerce; uncertainties generally associated with the specialty retailing business, such as decreases in mall traffic; disruptions in our supply of inventory; inability to increase same store sales; inability to renew, replace or enter into new store leases on favorable terms; increase in our cost of merchandise; significant increases in our merchandise markdowns or promotional sales; inability to grow our Company operated store base in North America and Europe, or expand our international store base through franchise or similar licensing arrangements, or expand our store base through concessions; inability to design and implement new information systems; data security breaches of confidential information or other cyber attacks; delays in anticipated store openings or renovations; results from any future asset impairment analysis; changes in applicable laws, rules and regulations, including changes in North America and Europe, or other international laws and regulations governing the sale of our products, particularly regulations relating to heavy metal and chemical content in our products; changes in anti-bribery laws; changes in employment laws, including laws relating to overtime pay, tax laws and import laws; product recalls; loss of key members of management; increase in the costs of healthcare for our employees; increases in the cost of labor; labor disputes; increases in the cost of borrowings; unavailability of additional debt or equity capital; and the impact of our substantial indebtedness on our operating income and our ability to grow. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. In addition, we typically earn a disproportionate share of our operating income in the fourth quarter due to seasonal buying patterns, which are difficult to forecast with certainty. 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 2016 under “Statement Regarding Forward-Looking Disclosures” and “Risk Factors.”

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Cash and Cash Equivalents

We have significant amounts of cash and cash equivalents at financial institutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on our deposits. We mitigate this risk by investing in money market funds that are invested exclusively in U.S. Treasury securities and maintaining bank accounts with a group of credit worthy financial institutions.

Interest Rates

As of July 29, 2017, we had fixed rate debt of $2,084.7 million and variable rate debt of $86.0 million. Based on our variable rate balance as of July 29, 2017, a 1% change in interest rates would increase or decrease our annual interest expense by approximately $0.9 million.

Foreign Currency

We are exposed to market risk from foreign currency exchange rate fluctuations on the United States dollar (“USD” or “dollar”) value of foreign currency denominated transactions and our investments in foreign subsidiaries. We manage this exposure to market risk through our regular operating and financing activities, and may from time to time, use foreign currency options. Exposure to market risk for changes in foreign currency exchange rates relates primarily to our foreign operations’ buying, selling, and financing activities in currencies other than local currencies and to the carrying value of our net investments in foreign subsidiaries. As of July 29, 2017, we maintained no foreign currency options. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries. Included in “Comprehensive loss” are $14.0 million and $4.3 million, net of tax, reflecting the unrealized gain on foreign currency translations and intra-entity foreign currency transactions during the six months ended July 29, 2017 and July 30, 2016, respectively.

Certain of our subsidiaries make significant USD purchases from Asian suppliers, particularly in China. Until July 2005, the Chinese government pegged its currency, the yuan renminbi (“RMB”), to the USD, adjusting the relative value only slightly and on infrequent occasion. Many people viewed this practice as leading to a substantial undervaluation of the RMB relative to the USD and other major currencies, providing China with a competitive advantage in international trade. China now allows the RMB to float to a limited degree against a basket of major international currencies, including the USD, the euro and the Japanese yen. The official exchange rate has historically remained stable; however, there are no assurances that this currency exchange rate will continue to be as stable in the future due to the Chinese government’s adoption of a floating rate with respect to the value of the RMB against foreign currencies. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on China to adopt an even more flexible and more market-oriented currency policy that allows a greater fluctuation in the exchange rate between the RMB and the USD. This floating exchange rate, and any appreciation of the RMB that may result from such rate, could have various effects on our business, which include making our purchases of Chinese products more expensive. If we are unable to negotiate commensurate price decreases from our Chinese suppliers, these higher prices would eventually translate into higher costs of sales, which could have a material adverse effect on our results of operations.

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

 

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General Market Risk

Our competitors include department stores, specialty stores, mass merchandisers, discount stores and other retail and internet channels. Our operations are impacted by consumer spending levels, which are affected by general economic conditions, consumer confidence, employment levels, availability of consumer credit and interest rates on credit, consumer debt levels, consumption of consumer staples including food and energy, consumption of other goods, adverse weather conditions and other factors over which we have little or no control. The increase in costs of such staple items has reduced the amount of discretionary funds that consumers are willing and able to spend for other goods, including our merchandise. Should there be continued volatility in food and energy costs, recession in the United States and Europe, rising unemployment and continued declines in discretionary income, our revenue and margins could be significantly affected in the future. We cannot predict whether, when or the manner in which the economic conditions described above will change. See also “Cautionary Note Regarding Forward Looking Statements and Risk Factors.”

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Quarterly Report our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s 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.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were not effective because of a material weakness in the company’s internal control over financial reporting as described below.

Changes in Internal Controls over Financial Reporting

Based on our evaluation under the framework in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that our internal control over financial reporting was not effective as of July 29, 2017 because of the existence of the material weakness described below.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. The Company did not design and maintain effective controls over the quarterly income tax provision analysis, including controls over the review of the accuracy of certain data used to calculate the income tax provision.

Management believes the material weakness referred to above will be remediated by designing additional review procedures which include a more detailed review of the accuracy of inputs included in the calculations used in the Company’s quarterly assessment of its income tax provision.

Other than the identification of the material weakness described above and initial steps to remediate the same, there have been no changes in the Company’s internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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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 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 which employs a significant number of employees and sells a significant amount of merchandise, such litigation can result in large monetary awards when judges, juries or other finders of facts do not agree with management’s evaluation of possible liability or outcome of litigation. Accordingly, the consequences of these matters cannot be finally determined by management. However, in the opinion of management, we believe that current pending litigation will not have a material adverse effect on our financial results.

 

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, 2017.

 

Item 5. Other Information

Management Services Agreements

For a description of the termination of the Management Services Agreement entered into between the Company and Cowen, see Note 9 – Related Party Transactions, in the Notes to the Unaudited Condensed Consolidated Financial Statements.

 

Item 6. Exhibits

 

  10.1    Ron Marshall Transaction Fee Award. (1)
  31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). (1)
  31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). (1)
  32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
  32.2    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. (1)
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document

 

37


Table of Contents
101.PRE   

XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)  

Filed herewith.

Items 2, 3, 4 and 5 of Part II are not applicable and have been omitted.

 

38


Table of Contents

SIGNATURES

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.

 

   

CLAIRE’S STORES, INC.

September 5, 2017

   

By:

 

/s/ Ron Marshall

           

Ron Marshall, Chief Executive Officer (principal executive
officer)

September 5, 2017

   

By:

 

/s/ Scott Huckins

     

Scott Huckins, Executive Vice President and Chief Financial Officer (principal financial officer)

 

39


Table of Contents

INDEX TO EXHIBITS

 

EXHIBIT

NO.

   DESCRIPTION
 10.1    Ron Marshall Transaction Fee Award.
 31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
 31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
 32.1    Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 32.2    Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

40

EX-10.1

Exhibit 10.1

July 10, 2017

VIA HAND AND EMAIL

Mr. Ron Marshall

2400 West Central Road

Hoffman Estates, IL 60192

 

  Re:

Special Bonus Opportunity

Dear Ron:

We are pleased to inform you that, in recognition of your contributions to Claire’s Stores, Inc. (the “Company”), you are being offered the opportunity to receive special cash bonus payments from the Company (each, a “Transaction Fee Award”), on the following terms and conditions:

1.    Payment. Subject to the terms of this letter, you will be entitled to an amount equal to 10% of the amount of each and any fee that may be paid from time to time to Apollo Management VI, L.P. (together with its affiliates, “Apollo”), Cowen & Co., LLC, as successor to Tri-Artisan Capital Partners, LLC, (“Cowen”, and together with Apollo, the “Managers”) pursuant to that Amended and Restated Management Services Agreement dated June 6, 2017 or any successor agreement (the “Management Services Agreement”) between the Company, Claire’s Inc., the Managers and TACP Investments – Claire’s LLC to the extent that such fee is in respect of Major Transaction Services as defined in and pursuant to the Management Services Agreement.

2.    Termination of Employment. In order to receive payment of any Transaction Fee Award, you must remain employed through the date that Apollo and/or Cowen receive their corresponding fee. Upon termination of employment for any reason, any right to any further payments of any Transaction Fee Award will be forfeited.

3.    Tax Withholding. Payment of any Transaction Fee Award will be subject to applicable federal, state and local tax withholding.

4.    Effect on Other Benefits. You acknowledge that payment of any Transaction Fee Award is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits, matching contributions or similar payments.

5.    Assignment. The obligation to pay the any Transaction Fee Award is solely that of the Company, provided that the Company may assign its obligations to any entity that succeeds to the Company’s business. You may not assign your right to receive any Transaction Fee Award.


6.    No Right to Continued Employment. This letter does not affect your status as an at-will employee and the Company or its subsidiaries remain free to terminate your employment at any time for any reason.

7.    Governing Law. Any dispute arising under this letter shall be decided by applying the laws of the State of Illinois, without regard to conflicts of law principles.

We hope that this arrangement encourages your continued commitment to the Company. Please acknowledge your agreement to the terms of this letter by countersigning it in the space below and returning it to me.

Sincerely,

CLAIRE’S STORES, INC.

 

By:

 

/s/ Stephen Sernett

Name:

 

Stephen Sernett

Title:

 

Secretary

ACKNOWLEDGED AND AGREED TO

THIS 10th DAY OF July, 2017

 

   

/s/ Ron Marshall

EX-31.1

Exhibit 31.1

CERTIFICATE PURSUANT TO

RULES 13a-14(a)/15d-14(a),

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Ron Marshall, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Claire’s Stores, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f))) for the registrant and we have:

 

  a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

September 5, 2017

     

/s/ Ron Marshall

     

     Ron Marshall

     

     Chief Executive Officer

 

EX-31.2

Exhibit 31.2

CERTIFICATE PURSUANT TO

RULES 13a-14(a)/15d-14(a),

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott Huckins, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Claire’s Stores, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f))) for the registrant and we have:

 

  a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

September 5, 2017

     

/s/ Scott Huckins

     

     Scott Huckins

     

     Chief Financial Officer

 

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 USC. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the report on Form 10-Q of Claire’s Stores, Inc. (the “Company”) for the quarterly period ended July 29, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ron Marshall, Chief Executive Officer of the Company, hereby certify, pursuant to 18 USC. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)    The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Ron Marshall

     Ron Marshall

     Chief Executive Officer

     September 5, 2017

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 USC. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the report on Form 10-Q of Claire’s Stores, Inc. (the “Company”) for the quarterly period ended July 29, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott Huckins, Chief Financial Officer of the Company, hereby certify, pursuant to 18 USC. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)    The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Scott Huckins

     Scott Huckins

     Chief Financial Officer

     September 5, 2017