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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Nos. 1-8899 and 333-148108
Claire’s Stores, Inc.
(Exact name of registrant as specified in its charter)
     
Florida   59-0940416
     
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
2400 West Central Road,
Hoffman Estates, Illinois
   
60192
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (847) 765-1100
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files ) Yes þ No o
     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     As of September 1, 2011, 100 shares of the Registrant’s common stock, $0.001 par value, were outstanding.
 
 

 


 

CLAIRE’S STORES, INC. AND SUBSIDIARIES
INDEX
         
    PAGE NO.  
       
 
       
    3  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    22  
 
       
    34  
 
       
    35  
 
       
       
 
       
    36  
 
       
    36  
 
       
    36  
 
       
    37  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT

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PART I. FINANCIAL INFORMATION
CLAIRE’S STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                 
    July 30, 2011     January 29, 2011  
    (In thousands, except share and per share amounts)  
ASSETS
               
Current assets:
               
Cash and cash equivalents and restricted cash of $26,725 and $23,864, respectively
  $ 211,127     $ 279,766  
Inventories
    147,665       136,148  
Prepaid expenses
    33,828       21,449  
Other current assets
    27,189       24,658  
 
           
Total current assets
    419,809       462,021  
 
           
Property and equipment:
               
Furniture, fixtures and equipment
    203,516       186,514  
Leasehold improvements
    271,986       248,030  
 
           
 
    475,502       434,544  
Less accumulated depreciation and amortization
    (265,314 )     (233,511 )
 
           
 
    210,188       201,033  
 
           
Leased property under capital lease:
               
Land and building
    18,055       18,055  
Less accumulated depreciation and amortization
    (1,354 )     (903 )
 
           
 
    16,701       17,152  
 
           
 
               
Goodwill
    1,550,056       1,550,056  
Intangible assets, net of accumulated amortization of $45,495 and $38,747, respectively
    558,030       557,466  
Deferred financing costs, net of accumulated amortization of $50,811 and $41,659, respectively
    37,826       36,434  
Other assets
    45,907       42,287  
 
           
 
    2,191,819       2,186,243  
 
           
 
               
Total assets
  $ 2,838,517     $ 2,866,449  
 
           
 
               
LIABILITIES AND STOCKHOLDER’S DEFICIT
               
Current liabilities:
               
Short-term debt and current portion of long-term debt
  $ 61,042     $ 76,154  
Trade accounts payable
    64,870       54,355  
Income taxes payable
    10,486       11,744  
Accrued interest payable
    32,282       16,783  
Accrued expenses and other current liabilities
    91,613       107,115  
 
           
Total current liabilities
    260,293       266,151  
 
           
 
               
Long-term debt
    2,425,589       2,236,842  
Revolving credit facility
          194,000  
Obligation under capital lease
    17,290       17,290  
Deferred tax liability
    121,112       121,776  
Deferred rent expense
    27,805       26,637  
Unfavorable lease obligations and other long-term liabilities
    27,236       30,268  
 
           
 
    2,619,032       2,626,813  
 
           
 
               
Commitments and contingencies
               
 
               
Stockholder’s deficit:
               
Common stock par value $0.001 per share; authorized 1,000 shares; issued and outstanding 100 shares
           
Additional paid-in capital
    623,241       621,099  
Accumulated other comprehensive income, net of tax
    14,721       1,416  
Accumulated deficit
    (678,770 )     (649,030 )
 
           
 
    (40,808 )     (26,515 )
 
           
 
               
Total liabilities and stockholder’s deficit
  $ 2,838,517     $ 2,866,449  
 
           
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 INCOME (LOSS)

(in thousands)
                                 
    Three Months     Three Months     Six Months     Six Months  
    Ended     Ended     Ended     Ended  
    July 30, 2011     July 31, 2010     July 30, 2011     July 31, 2010  
Net sales
  $ 358,547     $ 334,233     $ 704,993     $ 656,310  
Cost of sales, occupancy and buying expenses
    175,382       159,220       346,741       317,971  
 
                       
Gross profit
    183,165       175,013       358,252       338,339  
 
                       
Other expenses:
                               
Selling, general and administrative
    130,209       121,747       256,931       239,766  
Depreciation and amortization
    16,352       15,856       33,406       32,222  
Severance and transaction-related costs
    426       212       769       314  
Other (income) expense, net
    (1,181 )     3,582       4,130       4,812  
 
                       
 
    145,806       141,397       295,236       277,114  
 
                       
Operating income
    37,359       33,616       63,016       61,225  
Gain on early debt extinguishment
    233       6,249       482       10,736  
Impairment of equity investment
          6,030             6,030  
Interest expense, net
    44,335       40,573       90,570       83,336  
 
                       
Loss before income tax expense
    (6,743 )     (6,738 )     (27,072 )     (17,405 )
Income tax expense
    3,400       1,607       2,668       3,240  
 
                       
Net loss
  $ (10,143 )   $ (8,345 )   $ (29,740 )   $ (20,645 )
 
                       
 
                               
Net loss
  $ (10,143 )   $ (8,345 )   $ (29,740 )   $ (20,645 )
Foreign currency translation and interest rate swap adjustments, net of tax
    (5,125 )     2,513       13,305       (9 )
Reclassification of foreign currency translation adjustments into net loss
          (9,572 )           (9,572 )
 
                       
Comprehensive loss
  $ (15,268 )   $ (15,404 )   $ (16,435 )   $ (30,226 )
 
                       
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 30, 2011     July 31, 2010  
Cash flows from operating activities:
               
Net loss
  $ (29,740 )   $ (20,645 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    33,406       32,222  
Impairment
          6,030  
Amortization of lease rights and other assets
    1,600       1,610  
Amortization of debt issuance costs
    8,535       5,038  
Payment of in kind interest expense
    11,831       19,003  
Foreign currency exchange net loss on Euro Loan
    2,158        
Net unfavorable accretion of lease obligations
    (382 )     (786 )
Loss on sale/retirement of property and equipment, net
    58       366  
Gain on early debt extinguishment
    (482 )     (10,736 )
Stock compensation expense
    2,142       2,541  
(Increase) decrease in:
               
Inventories
    (8,694 )     (18,501 )
Prepaid expenses
    (10,930 )     917  
Other assets
    (1,912 )     3,945  
Increase (decrease) in:
               
Trade accounts payable
    6,899       10,074  
Income taxes payable
    (5,814 )     (2,590 )
Accrued interest payable
    15,462       (5,612 )
Accrued expenses and other liabilities
    (19,246 )     8,974  
Deferred income taxes
    (1,349 )     (352 )
Deferred rent expense
    647       1,878  
 
           
Net cash provided by operating activities
    4,189       33,376  
 
           
Cash flows from investing activities:
               
Acquisition of property and equipment, net
    (32,202 )     (19,556 )
Acquisition of intangible assets/lease rights
    (1,873 )     (524 )
Proceeds from sale of property
          16,765  
Changes in restricted cash
    (1,680 )      
 
           
Net cash used in investing activities
    (35,755 )     (3,315 )
 
           
Cash flows from financing activities:
               
Payments of Credit facility
    (438,940 )     (7,250 )
Proceeds from Note
    450,000        
Repurchases of Notes
    (45,497 )     (59,112 )
Payment of debt issuance costs
    (10,544 )      
Principal payments of capital leases
          (765 )
 
           
Net cash used in financing activities
    (44,981 )     (67,127 )
 
           
Effect of foreign currency exchange rate changes on cash and cash equivalents
    5,047       (1,510 )
 
           
Net decrease in cash and cash equivalents
    (71,500 )     (38,576 )
Cash and cash equivalents, at beginning of period
    255,902       198,708  
 
           
Cash and cash equivalents, at end of period
    184,402       160,132  
Restricted cash, at end of period
    26,725        
 
           
Cash and cash equivalents and restricted cash, at end of period
  $ 211,127     $ 160,132  
 
           
 
               
Supplemental disclosure of cash flow information:
               
Income taxes paid
  $ 10,123     $ 5,829  
Interest paid
    54,766       65,232  
 
               
Non-cash investing and financing activities:
               
Property acquired under capital lease
          18,055  
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 have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results for the interim periods presented have been included. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended January 29, 2011 filed with the Securities and Exchange Commission, including Note 2 to the Consolidated Financial Statements included therein which discusses principles of consolidation and summary of significant accounting policies.
The Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make certain estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures regarding contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include, but are not limited to, the value of inventories, goodwill, intangible assets and other long-lived assets, legal contingencies and assumptions used in the calculation of income taxes, retirement and other post-retirement benefits, stock-based compensation, derivative and hedging activities, residual values and other items. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, energy markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates will be reflected in the financial statements in those future periods when the changes occur.
Due to the seasonal nature of the retail industry and the Company’s business, the results of operations for interim periods of the year are not necessarily indicative of the results of operations on an annualized basis.
The Unaudited Condensed Consolidated Financial Statements include certain reclassifications of prior period amounts in order to conform to current period presentation.
2. Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”) to provide a consistent definition of fair value and ensure that fair value measurements and disclosure requirements are similar between U.S. GAAP and IFRSs. This guidance changes certain fair value measurement principles and enhances the disclosure requirements for fair value measurements. The amendments in this ASU are effective for interim and annual fiscal periods beginning after December 15, 2011 and are applied prospectively. Early adoption by public entities is not permitted. The Company does not expect adoption of ASU 2011-04 will have a material impact on the Company’s financial position, results of operations or cash flows.

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3. Fair Value Measurements
ASC 820, Fair Value Measurement Disclosures defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Disclosures of the fair value of certain financial instruments are required, whether or not recognized in the Unaudited Condensed Consolidated Balance Sheets. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. There is a three-level valuation hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables summarize the Company’s assets (liabilities) measured at fair value on a recurring basis segregated among the appropriate levels within the fair value hierarchy (in thousands):
                                 
            Fair Value Measurements at July 30, 2011 Using  
            Quoted Prices in              
            Active Markets for     Significant     Significant  
            Identical Assets     Other Observable     Unobservable  
            (Liabilities)     Inputs     Inputs  
    Carrying Value     (Level 1)     (Level 2)     (Level 3)  
Interest rate swap
  $ (2,541 )   $     $ (2,541 )   $  
                                 
            Fair Value Measurements at January 29, 2011 Using  
            Quoted Prices in              
            Active Markets for     Significant     Significant  
            Identical Assets     Other Observable     Unobservable  
            (Liabilities)     Inputs     Inputs  
    Carrying Value     (Level 1)     (Level 2)     (Level 3)  
Interest rate swaps
  $ (1,165 )   $     $ (1,165 )   $  
The fair value of the Company’s interest rate swaps represent the estimated amounts the Company would receive or pay to terminate those contracts at the reporting date based upon pricing or valuation models applied to current market information. The interest rate swaps are valued using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate curves. The Swap entered into on July 28, 2010 is collateralized by cash and thus the Company does not make any credit-related valuation adjustments. The Company mitigates derivative credit risk by transacting with highly rated counterparties. The Company does not enter into derivative financial instruments for trading or speculative purposes.
Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
The Company’s non-financial assets, which include goodwill, intangible assets, and long-lived tangible assets, are not adjusted to fair value on a recurring basis. Fair value measures of non-financial assets are primarily used in the impairment analysis of these assets. Any resulting asset impairment would require that the non-financial asset be recorded at its fair value. The Company reviews goodwill and indefinite-lived intangible assets for impairment annually, during the fourth quarter of each fiscal year, or as circumstances indicate the possibility of impairment. The Company monitors the carrying value of definite-lived intangible assets and long-lived tangible assets for impairment whenever events or changes in circumstances indicate its carrying amount may not be recoverable.

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Financial Instruments Not Measured at Fair Value
The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts receivable, current liabilities, short-term debt, long-term debt, and the revolving credit facility. Cash and cash equivalents, restricted cash, accounts receivable, short-term debt and current liabilities approximate fair market value due to the relatively short maturity of these financial instruments.
The Company considers all investments with a maturity of three months or less when acquired to be cash equivalents. The Company’s cash equivalent instruments are valued using quoted market prices and are primarily U.S. Treasury securities. The estimated fair value of the Company’s long-term debt was approximately $2.29 billion at July 30, 2011, compared to a carrying value of $2.43 billion at that date. The estimated fair value of the Company’s long-term debt, including the current portion, and the revolving credit facility was approximately $2.36 billion at January 29, 2011, compared to a carrying value of $2.45 billion at that date. For publicly-traded debt, the fair value (estimated market value) is based on market prices. For non-publicly-traded debt, fair value is estimated based on quoted prices for similar instruments.
4. Debt
Debt as of July 30, 2011 and January 29, 2011 included the following components (in thousands):
                 
    July 30, 2011     January 29, 2011  
Short-term debt and current portion of long-term debt:
               
Note payable to bank due 2012
  $ 61,042     $ 57,703  
Current portion of long-term debt
          18,451  
 
           
Total short-term debt and current portion of long-term debt
  $ 61,042     $ 76,154  
 
           
 
               
Long-term debt:
               
Senior secured term loan facility due 2014
  $ 1,154,310     $ 1,399,250  
Senior notes due 2015
    223,000       236,000  
Senior toggle notes due 2015
    338,667       360,431  
Senior subordinated notes due 2017
    259,612       259,612  
Senior secured second lien notes due 2019
    450,000        
 
           
 
    2,425,589       2,255,293  
Less: current portion of long-term debt
          (18,451 )
 
           
Long-term debt
  $ 2,425,589     $ 2,236,842  
 
           
 
               
Senior secured revolving credit facility due 2013
  $     $ 194,000  
 
           
 
               
Obligations under capital leases
  $ 17,290     $ 17,290  
 
           
See Note 3 for related fair value disclosure on debt.
Short-term Debt
In January 2011, we entered into a Euro (“€”) denominated loan (the “Euro Loan”) in the amount of €42.4 million that is due on January 24, 2012. The Euro Loan bears interest at the three month Euro Interbank Offered Rate (“EURIBOR”) rate plus 8.00% per year and is payable quarterly. As of July 30, 2011, there was €42.4 million, or the equivalent of $61.0 million, outstanding under the Euro Loan. The net proceeds of the borrowing were used for general corporate purposes.
The obligations under the Euro Loan are secured by a cash deposit in the amount of €15.1 million, or the equivalent of $21.7 million at July 30, 2011, and a perfected first lien security interest in all of the issued and outstanding equity interest of one of our international subsidiaries, Claire’s Holdings S.a.r.l. The cash deposit is classified as “Cash and cash equivalents and restricted cash” in our Unaudited Condensed Consolidated Balance Sheets.

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Senior Secured Second Lien Notes
On March 4, 2011, the Company issued $450.0 million aggregate principal amount of 8.875% senior secured second lien notes that mature on March 15, 2019 (the “Senior Secured Second Lien Notes”). Interest on the Senior Secured Second Lien Notes is payable semi-annually to holders of record at the close of business on March 1 or September 1 immediately preceding the interest payment date on March 15 and September 15 of each year, commencing on September 15, 2011. The Senior Secured Second Lien Notes are guaranteed on a second-priority senior secured basis by all of the Company’s existing and future direct or indirect wholly-owned domestic subsidiaries that guarantee the Company’s senior secured credit facility. The Senior Secured Second Lien Notes and related guarantees are secured by a second-priority lien on substantially all of the assets that secure the Company’s and its subsidiary guarantors’ obligations under the Company’s senior secured credit facility. The Company used the proceeds of the offering of the Senior Secured Second Lien Notes to reduce the entire $194.0 million outstanding under the Company’s revolving credit facility (without terminating the commitment), to repay $244.9 million of indebtedness under the Company’s senior secured term loan, and to pay $10.4 million in financing costs which have been recorded as Deferred Financing Costs, Net in the accompanying Unaudited Condensed Consolidated Balance Sheets. As a result of our prepayment under the senior secured term loan facility, we are no longer required to make any quarterly payments and have a final payment due May 29, 2014.
Note Repurchases
The following is a summary of the Company’s debt repurchase activity for the three and six months ended July 30, 2011 and July 31, 2010 (in thousands):
                                                 
    Three Months Ended July 30, 2011     Six Months Ended July 30, 2011  
    Principal     Repurchases     Recognized     Principal     Repurchase     Recognized  
Notes Repurchased   Amount     Price     Gain (1)     Amount     Price     Gain (Loss) (2)  
Senior Notes
  $ 3,000     $ 2,940     $ 12     $ 13,000     $ 12,870     $ (86 )
Senior Toggle Notes
    18,986       18,543       221       33,140       32,627       568  
 
                                   
 
  $ 21,986     $ 21,483     $ 233     $ 46,140     $ 45,497     $ 482  
 
                                   
 
(1)   Net of deferred issuance cost write-offs of $48 for the Senior Notes and $222 for the Senior Toggle Notes.
 
(2)   Net of deferred issuance cost write-offs of $216 for the Senior Notes and $400 for the Senior Toggle Notes, and accrued interest write-off of $455 for the Senior Toggle Notes.
                                                 
    Three Months Ended July 31, 2010     Six Months Ended July 31, 2010  
    Principal     Repurchases     Recognized     Principal     Repurchase     Recognized  
Notes Repurchased   Amount     Price     Gain (1)     Amount     Price     Gain (2)  
Senior Toggle Notes
  $ 41,623     $ 36,328     $ 5,340     $ 47,623     $ 41,313     $ 6,427  
Senior Subordinated Notes
    7,000       5,935       909       22,625       17,799       4,309  
 
                                   
 
  $ 48,623     $ 42,263     $ 6,249     $ 70,248     $ 59,112     $ 10,736  
 
                                   
 
(1)   Net of deferred issuance cost write-offs of $673 for the Senior Toggle Notes and $156 for the Senior Subordinated Notes, and accrued interest write-off of $718 for the Senior Toggle Notes.
 
(2)   Net of deferred issuance cost write-offs of $777 for the Senior Toggle Notes and $517 for the Senior Subordinated Notes, and accrued interest write-off of $894 for the Senior Toggle Notes.
The Company elected to pay interest in kind on its Senior Toggle Notes for the interest periods beginning June 2, 2008 through June 1, 2011. This election, net of reductions for note repurchases, increased the principal amount on the Senior Toggle Notes by $109.5 million and $98.1 million as of July 30, 2011 and January 29, 2011, respectively. The accrued payment in kind interest is included in “Long-term debt” in the Unaudited Condensed Consolidated Balance Sheets. Effective June 2, 2011, the Company began paying interest in cash.

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Covenants
Our Senior Notes, Senior Toggle Notes, Senior Subordinated Notes and Senior Secured Second Lien Notes (collectively, the “Notes”), Credit Facility and Euro Loan contain certain covenants that, among other things, and subject to certain exceptions and other basket amounts, restrict our ability and the ability of our subsidiaries to:
    incur additional indebtedness;
 
    pay dividends or distributions on our capital stock, repurchase or retire our capital stock and redeem, repurchase or defease any subordinated indebtedness;
 
    make certain investments;
 
    create or incur certain liens;
 
    create restrictions on the payment of dividends or other distributions to us from our subsidiaries;
 
    transfer or sell assets;
 
    engage in certain transactions with our affiliates; and
 
    merge or consolidate with other companies or transfer all or substantially all of our assets.
None of these covenants, however, require the Company to maintain any particular financial ratio or other measure of financial performance. As of July 30, 2011, we were in compliance with the covenants under our Credit Facility, Notes and Euro Loan.
5. Derivatives and Hedging Activities
The Company formally designates and documents the financial instrument as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transaction. The Company formally assesses both at inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in cash flows of the related underlying exposure. The Company measures the effectiveness of its cash flow hedges by evaluating the following criteria: (i) the re-pricing dates of the derivative instrument match those of the debt obligation; (ii) the interest rates of the derivative instrument and the debt obligation are based on the same interest rate index and tenor; (iii) the variable interest rate of the derivative instrument does not contain a floor or cap, or other provisions that cause a basis difference with the debt obligation; and (iv) the likelihood of the counterparty not defaulting is assessed as being probable.
The Company primarily employs derivative financial instruments to manage its exposure to interest rate changes and to limit the volatility and impact of interest rate changes on earnings and cash flows. The Company does not enter into derivative financial instruments for trading or speculative purposes. The Company faces credit risk if the counterparties to the financial instruments are unable to perform their obligations. However, the Company seeks to mitigate derivative credit risk by entering into transactions with counterparties that are significant and creditworthy financial institutions. The Company monitors the credit ratings of the counterparties.
For derivatives that qualify as cash flow hedges, the Company reports the effective portion of the change in fair value as a component of “Accumulated other comprehensive income (loss), net of tax” in the Unaudited Condensed Consolidated Balance Sheets and reclassifies it into earnings in the same periods in which the hedged item affects earnings, and within the same income statement line item as the impact of the hedged item. The ineffective portion of the change in fair value of a cash flow hedge is recognized in income immediately. No ineffective portion was recorded to earnings during the three and six months ended July 30, 2011 and July 31, 2010, respectively, and all components of the derivative gain or loss were included in the assessment of hedge effectiveness. For derivative financial instruments which do not qualify as cash flow hedges, any changes in fair value would be recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss).

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The Company may at its discretion change the designation of any such hedging instrument agreements prior to maturity. At that time, any gains or losses previously reported in accumulated other comprehensive income (loss) on termination would amortize into interest expense or interest income to correspond to the recognition of interest expense or interest income on the hedged debt. If such debt instrument was also terminated, the gain or loss associated with the terminated derivative included in accumulated other comprehensive income (loss) at the time of termination of the debt would be recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) at that time.
On July 28, 2010, the Company entered into an interest rate swap agreement (the “Swap”) to manage exposure to fluctuations in interest rate changes related to the senior secured term loan facility. The Swap has been designated and accounted for as a cash flow hedge and expires on July 30, 2013. The Swap represents a contract to exchange floating rate for fixed interest payments periodically over the life of the Swap without exchange of the underlying notional amount. The Swap covers an aggregate notional amount of $200.0 million of the outstanding principal balance of the senior secured term loan facility and has a fixed rate of 1.2235%. The interest rate Swap results in the Company paying a fixed rate plus the applicable margin then in effect for LIBOR borrowings resulting in an interest rate of 3.97% at July 30, 2011, on a notional amount of $200.0 million of the senior secured term loan.
The Company entered into three interest rate swap agreements in July 2007 (the “2007 Swaps”) to manage exposure to interest rate changes related to the senior secured term loan facility. The 2007 Swaps were designated and accounted for as cash flow hedges. Those 2007 Swaps expired on June 30, 2010. The 2007 Swaps covered an aggregate notional amount of $435.0 million of the outstanding principal balance of the senior secured term loan facility. The fixed rates of the 2007 Swaps ranged from 4.96% to 5.25%.
The Company does not make any credit-related valuation adjustments to the Swap entered into on July 28, 2010 because it is collateralized by cash, the balance of which is $5.0 million at July 30, 2011. The collateral requirement increases for declines in the three year LIBOR rate below 1.2235%. As of July 30, 2011, the three year LIBOR rate was 0.58% and each further 10 basis point decline in rate would result in an additional collateral requirement of $0.6 million. Any subsequent increases in the three year LIBOR rate will result in a release of the collateral. The Company included credit-related valuation adjustments in the calculation of fair value for the 2007 Swaps.
At July 30, 2011 and January 29, 2011, the estimated fair values of the Company’s derivative financial instruments designated as interest rate cash flow hedges were liabilities of approximately $2.5 million and $1.2 million, respectively, which were recorded in “Accrued expenses and other current liabilities” in the Unaudited Condensed Consolidated Balance Sheets. These amounts were also recorded, net of tax of approximately $5.7 million and $5.7 million, respectively, as a component in “Accumulated other comprehensive income (loss), net of tax” in the Unaudited Condensed Consolidated Balance Sheets. See Note 3 — Fair Value Measurements for fair value measurement of interest rate swaps.

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The following tables provide a summary of the financial statement effect of the Company’s derivative financial instruments designated as interest rate cash flow hedges during the three and six months ended July 30, 2011 and July 31, 2010 (in thousands):
                                         
                    Location of Gain or        
                    (Loss) Reclassified     Amount of Gain or (Loss)  
Derivatives in   Amount of Gain or (Loss)     from Accumulated     Reclassified from Accumulated  
Cash Flow Hedging   Recognized in OCI on Derivative     OCI into Income     OCI into Income  
Relationships   (Effective Portion)     (Effective Portion)     (Effective Portion) (1)  
    Three months ended             Three months ended  
    July 30, 2011     July 31, 2010             July 30, 2011     July 31, 2010  
Interest rate swaps
  $ (1,079 )   $ 2,590     Interest expense, net   $ (481 )   $ (3,447 )
 
(1)   Represents reclassification of amounts from accumulated other comprehensive income (loss) to earnings as interest expense is recognized on the senior secured term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges.
                                         
                    Location of Gain or        
                    (Loss) Reclassified     Amount of Gain or (Loss)  
Derivatives in Cash   Amount of Gain or (Loss)     from Accumulated     Reclassified from Accumulated  
Flow Hedging   Recognized in OCI on Derivative     OCI into Income     OCI into Income  
Relationships   (Effective Portion)     (Effective Portion)     (Effective Portion) (1)  
    Six months ended             Six months ended  
    July 30, 2011     July 31, 2010             July 30, 2011     July 31, 2010  
Interest rate swaps
  $ (1,376 )   $ 7,749     Interest expense, net   $ (946 )   $ (8,779 )
 
(1)   Represents reclassification of amounts from accumulated other comprehensive income (loss) to earnings as interest expense is recognized on the senior secured term loan facility. No ineffectiveness is associated with these interest rate cash flow hedges.
Over the next twelve months, the Company expects to reclassify net losses on the Company’s interest rate swaps recognized within “Accumulated other comprehensive income (loss), net of tax” of $1.9 million to interest expense.
6. Commitments and Contingencies
The Company is, from time to time, involved in litigation incidental to the conduct of its business, including personal injury litigation, litigation regarding merchandise sold, including product and safety concerns regarding heavy metal and chemical content in merchandise, litigation with respect to various employment matters, including litigation with present and former employees, wage and hour litigation, and litigation to protect trademark rights.
The Company believes that current pending litigation will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.

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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 30, 2011:
                         
                    Weighted-  
            Weighted-     Average  
            Average     Remaining  
    Number of     Exercise     Contractual  
    Shares     Price     Term (Years)  
Outstanding at January 29, 2011
    6,860,014     $ 10.00          
Options granted
    375,000     $ 10.00          
Options exercised
                     
Options forfeited or expired
    (67,406 )   $ 10.00          
 
                     
Outstanding at July 30, 2011
    7,167,608     $ 10.00       4.0  
 
                     
 
                       
Options vested and expected to vest at July 30, 2011
    6,867,260     $ 10.00       4.0  
 
                     
 
                       
Exercisable at July 30, 2011
    2,692,445     $ 10.00       3.3  
 
                     
The weighted average grant date fair value of options granted during the six months ended July 30, 2011 and July 31, 2010 was $2.86 and $3.00, respectively.
During the three and six months ended July 30, 2011 and July 31, 2010, the Company recorded stock-based compensation expense and additional paid-in capital relating to stock-based compensation of approximately $1.2 million, $2.1 million, $1.3 million and $2.5 million, respectively. Stock-based compensation expense is recorded in “Selling, general and administrative” expenses in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Incentive Plan Modifications
On May 20, 2011, the Compensation Committee of the Company approved amendments to the Company’s Stock Incentive Plan (the “Incentive Plan”), the form of option grant letter and certain outstanding options (the “Outstanding Options”) held by various employees (collectively, the “Plan Amendments”).
The Plan Amendments (which will apply to Outstanding Options and, unless otherwise specified at the time of grant, any future option grants under the Amended Incentive Plan, and, where applicable, any shares held by employees) generally provide for the following:
    Eliminated the holding period after vesting for Performance and Stretch Performance options;
 
    Changed the definition of “Qualified IPO”;
 
    Eliminated certain restrictions on transfer of shares in the event of a Qualified IPO;
 
    Provided each optionee the right to satisfy the exercise price and any withholding tax obligation triggered by such exercise by any combination of cash and/or shares (including both previously owned shares and shares otherwise to be delivered upon exercise of the option); and
 
    Added two additional vesting events applicable to Performance Options and to certain Stretch Performance Options if they occur prior to or concurrent with the end of the Company’s fiscal 2012 year.
The modifications to the Company’s Incentive Plan resulted in $2.2 million in total incremental compensation cost, of which $0.2 million was recognized in the second fiscal quarter 2011. The

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remaining unrecognized compensation cost will be amortized over the remaining vesting period. The plan modification affected approximately 155 employees.
Buy-One-Get-One (“BOGO”) Option Offer
On May 20, 2011, the Compensation Committee of the Company also approved an offer pursuant to the amended Incentive Plan to certain employees to purchase a specified number of shares of the common stock of the parent of the Company at a price per share of $10.00 (the “Offer”). For each share purchased, the employee received an option to purchase an additional share at $10.00 (a “BOGO Option”). The Offer was made available to employees who had not previously accepted similar offers from the parent of the Company. The Company granted 179,000 BOGO Options and recognized stock-based compensation expense of approximately $0.1 million in the second fiscal quarter 2011 related to these options.
8. Income Taxes
The effective income tax rate was (50.4)% and (9.9)% for the three and six months ended July 30, 2011. This effective income tax rate differed from the statutory federal tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated in the three and six months ended July 30, 2011 by the Company’s U.S. operations.
The effective income tax rate was (23.8)% and (18.6)% for the three and six months ended July 31, 2010. This effective income tax rate differed from the statutory federal tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated in the three and six months ended July 31, 2010 by the Company’s U.S. operations.
In April 2011, the Company received from the Canada Revenue Agency withholding tax assessments for 2003 through 2007 of approximately $5.0 million, including penalties and interest. In conjunction with these assessments, a security deposit will be required in the amount of approximately $5.0 million until such time a final decision is made by the tax authority. The Company is objecting to these assessments and believes it will prevail at the appeals level; therefore, an accrual has not been recorded for this item. In February 2011, the Internal Revenue Service concluded its tax examination of our U.S. Federal income tax return for Fiscal 2007 and did not assess any additional tax liability. The Company’s U.S. Federal income tax returns for Fiscal 2008 and 2009 are currently under review by the Internal Revenue Service.
9. Related Party Transactions
The Company paid store planning and retail design fees to a Company owned by a family member of one of the Company’s executive officers. These fees are included in “Furniture, fixtures and equipment” in the Company’s Unaudited Condensed Consolidated Balance Sheets and “Selling, general and administrative” expenses in the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). For the three months ended July 30, 2011 and July 31, 2010, the Company paid fees of approximately $0.4 million and $0.4 million, respectively. For the six months ended July 30, 2011 and July 31, 2010, the Company paid fees of approximately $0.9 million and $0.6 million, respectively. This arrangement was approved by the Audit Committee of the Board of Directors.
The initial purchasers of the Senior Secured Second Lien Notes were Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, Goldman Sachs & Co., and Morgan Joseph TriArtisan LLC. Apollo Management, LLC, an affiliate of Apollo Management VI, L.P., the Company’s controlling shareholder, has a non-controlling interest in Morgan Joseph TriArtisan LLC and its affiliates. Additionally, a member of the Company’s Board of Directors is an executive of Morgan Joseph TriArtisan Inc., an affiliate of Morgan Joseph TriArtisan LLC. In connection with the issuance of the Senior Secured Second Lien Notes, the Company paid a fee of approximately $0.3 million to Morgan Joseph TriArtisan LLC.

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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 Income (Loss) within its North American division. The franchise fees the Company charges under the franchising agreements are reported in “Other expense (income), net” in the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) within its European division. Until September 2, 2010, the Company accounted for the results of operations of Claire’s Nippon under the equity method and included the results within “Other expense (income), net” in the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) within the Company’s North American division. After September 2, 2010, these former joint venture stores began to operate as licensed stores. Substantially all of the interest expense on the Company’s outstanding debt is recorded in the Company’s North American division.
Net sales and operating income for the three and six months ended July 30, 2011 and July 31, 2010 are as follows (in thousands):
                                 
    Three Months     Three Months     Six Months     Six Months  
    Ended     Ended     Ended     Ended  
    July 30, 2011     July 31, 2010     July 30, 2011     July 31, 2010  
Net sales:
                               
North America
  $ 217,057     $ 210,087     $ 441,245     $ 422,686  
Europe
    141,490       124,146       263,748       233,624  
 
                       
Total net sales
    358,547       334,233       704,993       656,310  
 
                       
 
                               
Depreciation and amortization:
                               
North America
    10,121       10,402       20,526       20,909  
Europe
    6,231       5,454       12,880       11,313  
 
                       
Total depreciation and amortization
    16,352       15,856       33,406       32,222  
 
                       
 
                               
Operating income for reportable segments:
                               
North America
    23,944       19,368       54,568       43,771  
Europe
    13,841       14,460       9,217       17,768  
 
                       
Total operating income for reportable segments
    37,785       33,828       63,785       61,539  
Severance and transaction-related costs
    426       212       769       314  
 
                       
Net consolidated operating income
    37,359       33,616       63,016       61,225  
Gain on early debt extinguishment
    233       6,249       482       10,736  
Impairment of equity investment
          6,030             6,030  
Interest expense, net
    44,335       40,573       90,570       83,336  
 
                       
 
                               
Net consolidated loss before income tax expense
  $ (6,743 )   $ (6,738 )   $ (27,072 )   $ (17,405 )
 
                       
Excluded from operating income for the North American segment are severance and transaction-related costs of approximately $0.2 million and $0.2 million for the three months ended July 30, 2011 and July 31, 2010, respectively, and $0.3 million and $0.3 million for the six months ended July 30, 2011 and July 31, 2010, respectively.
Excluded from operating income for the European segment are severance and transaction-related costs of approximately $0.2 million and $0 for the three months ended July 30, 2011 and July 31, 2010, respectively, and $0.5 million and $0 for the six months ended July 30, 2011 and July 31, 2010, respectively.

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11. Supplemental Financial Information
On May 29, 2007, Claire’s Stores, Inc. (the “Issuer”), issued $935.0 million in Senior Notes, Senior Toggle Notes and Senior Subordinated Notes, and on March 4, 2011, issued $450.0 million aggregate principal amount of Senior Secured Second Lien Notes. These Notes are irrevocably and unconditionally guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of Claire’s Stores, Inc. that guarantee the Company’s Credit Facility (the “Guarantors”). The Company’s other subsidiaries, principally its international subsidiaries including its European, Canadian and Asian subsidiaries (the “Non-Guarantors”), are not guarantors of these Notes.
The tables in the following pages present the condensed consolidating financial information for the Issuer, the Guarantors and the Non-Guarantors, together with eliminations, as of and for the periods indicated. The consolidating financial information may not necessarily be indicative of the financial position, results of operations or cash flows had the Issuer, Guarantors and Non-Guarantors operated as independent entities.

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Condensed Consolidating Balance Sheet
July 30, 2011
(in thousands)
                                         
                    Non-              
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
ASSETS
                                       
Current assets:
                                       
Cash and cash equivalents and restricted cash (1)
  $ 109,920     $ 12,491     $ 88,716     $     $ 211,127  
Inventories
          89,075       58,590             147,665  
Prepaid expenses
    1,069       15,189       17,570             33,828  
Other current assets
    52       16,290       10,847             27,189  
 
                             
Total current assets
    111,041       133,045       175,723             419,809  
 
                             
Property and equipment:
                                       
Furniture, fixtures and equipment
    3,533       125,044       74,939             203,516  
Leasehold improvements
    1,071       146,890       124,025             271,986  
 
                             
 
    4,604       271,934       198,964             475,502  
Less accumulated depreciation and amortization
    (2,551 )     (164,170 )     (98,593 )           (265,314 )
 
                             
 
    2,053       107,764       100,371             210,188  
 
                             
Leased property under capital lease:
                                       
Land and building
          18,055                   18,055  
Less accumulated depreciation and amortization
          (1,354 )                 (1,354 )
 
                             
 
          16,701                   16,701  
 
                             
Intercompany receivables
          410,510             (410,510 )      
Investment in subsidiaries
    2,331,088       (65,396 )           (2,265,692 )      
Goodwill
          1,235,651       314,405             1,550,056  
Intangible assets, net
    286,000       7,658       264,372             558,030  
Deferred financing costs, net
    37,579             247             37,826  
Other assets
    129       3,918       41,860             45,907  
 
                             
 
    2,654,796       1,592,341       620,884       (2,676,202 )     2,191,819  
 
                             
Total assets
  $ 2,767,890     $ 1,849,851     $ 896,978     $ (2,676,202 )   $ 2,838,517  
 
                             
 
                                       
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
                                       
Current liabilities:
                                       
Short-term debt
  $     $     $ 61,042     $     $ 61,042  
Trade accounts payable
    653       24,334       39,883             64,870  
Income taxes payable
          (321 )     10,807             10,486  
Accrued interest payable
    32,217             65             32,282  
Accrued expenses and other current liabilities
    14,091       36,220       41,302             91,613  
 
                             
Total current liabilities
    46,961       60,233       153,099             260,293  
 
                             
Intercompany payables
    336,148             74,362       (410,510 )      
Long-term debt
    2,425,589                         2,425,589  
Revolving credit facility
                             
Obligation under capital lease
          17,290                   17,290  
Deferred tax liability
          106,267       14,845             121,112  
Deferred rent expense
          17,496       10,309             27,805  
Unfavorable lease obligations and other long-term liabilities
          26,126       1,110             27,236  
 
                             
 
    2,761,737       167,179       100,626       (410,510 )     2,619,032  
 
                             
Stockholder’s equity (deficit):
                                       
Common stock
          367       2       (369 )      
Additional paid in capital
    623,241       1,435,909       815,866       (2,251,775 )     623,241  
Accumulated other comprehensive income (loss), net of tax
    14,721       4,930       4,696       (9,626 )     14,721  
Retained earnings (accumulated deficit)
    (678,770 )     181,233       (177,311 )     (3,922 )     (678,770 )
 
                             
 
    (40,808 )     1,622,439       643,253       (2,265,692 )     (40,808 )
 
                             
Total liabilities and stockholder’s equity (deficit)
  $ 2,767,890     $ 1,849,851     $ 896,978     $ (2,676,202 )   $ 2,838,517  
 
                             
 
(1)   Cash and cash equivalents includes restricted cash of $5,000 for “Issuer” and $21,725 for “Non-Guarantors”

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Condensed Consolidating Balance Sheet
January 29, 2011
(in thousands)
                                         
                    Non-              
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
ASSETS
                                       
Current assets:
                                       
Cash and cash equivalents and restricted cash (1)
  $ 179,529     $ 3,587     $ 96,650     $     $ 279,766  
Inventories
          84,868       51,280             136,148  
Prepaid expenses
    851       1,680       18,918             21,449  
Other current assets
          16,547       8,111             24,658  
 
                             
Total current assets
    180,380       106,682       174,959             462,021  
 
                             
Property and equipment:
                                       
Furniture, fixtures and equipment
    3,276       119,228       64,010             186,514  
Leasehold improvements
    1,052       143,072       103,906             248,030  
 
                             
 
    4,328       262,300       167,916             434,544  
Less accumulated depreciation and amortization
    (2,205 )     (147,857 )     (83,449 )           (233,511 )
 
                             
 
    2,123       114,443       84,467             201,033  
 
                             
Leased property under capital lease:
                                       
Land and building
          18,055                   18,055  
Less accumulated depreciation and amortization
          (903 )                 (903 )
 
                             
 
          17,152                   17,152  
 
                             
Intercompany receivables
          366,929             (366,929 )      
Investment in subsidiaries
    2,303,333       (63,535 )           (2,239,798 )      
Goodwill
          1,235,651       314,405             1,550,056  
Intangible assets, net
    286,000       9,294       262,172             557,466  
Deferred financing costs, net
    35,973             461             36,434  
Other assets
    130       3,842       38,315             42,287  
 
                             
 
    2,625,436       1,552,181       615,353       (2,606,727 )     2,186,243  
 
                             
Total assets
  $ 2,807,939     $ 1,790,458     $ 874,779     $ (2,606,727 )   $ 2,866,449  
 
                             
 
                                       
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
                                       
Current liabilities:
                                       
Short-term debt and current portion of long-term debt
  $ 18,451     $     $ 57,703     $     $ 76,154  
Trade accounts payable
    1,199       24,545       28,611             54,355  
Income taxes payable
          644       11,100             11,744  
Accrued interest payable
    16,696             87             16,783  
Accrued expenses and other current liabilities
    20,630       37,910       48,575             107,115  
 
                             
Total current liabilities
    56,976       63,099       146,076             266,151  
 
                             
Intercompany payables
    346,636             20,293       (366,929 )      
Long-term debt
    2,236,842                         2,236,842  
Revolving credit facility
    194,000                         194,000  
Obligation under capital lease
          17,290                   17,290  
Deferred tax liability
          106,797       14,979             121,776  
Deferred rent expense
          17,230       9,407             26,637  
Unfavorable lease obligations and other long-term liabilities
          28,889       1,379             30,268  
 
                             
 
    2,777,478       170,206       46,058       (366,929 )     2,626,813  
 
                             
Stockholder’s equity (deficit):
                                       
Common stock
          367       2       (369 )      
Additional paid in capital
    621,099       1,435,909       815,866       (2,251,775 )     621,099  
Accumulated other comprehensive income (loss), net of tax
    1,416       3,663       (7,080 )     3,417       1,416  
Retained earnings (accumulated deficit)
    (649,030 )     117,214       (126,143 )     8,929       (649,030 )
 
                             
 
    (26,515 )     1,557,153       682,645       (2,239,798 )     (26,515 )
 
                             
Total liabilities and stockholder’s equity (deficit)
  $ 2,807,939     $ 1,790,458     $ 874,779     $ (2,606,727 )   $ 2,866,449  
 
                             
 
(1)   Cash and cash equivalents includes restricted cash of $3,450 for “Issuer” and $20,414 for “Non-Guarantors”

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Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended July 30, 2011
(in thousands)
                                         
                    Non-              
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
Net sales
  $     $ 200,545     $ 158,002     $     $ 358,547  
Cost of sales, occupancy and buying expenses
    1,346       97,490       76,546             175,382  
 
                             
Gross profit (deficit)
    (1,346 )     103,055       81,456             183,165  
 
                             
Other expenses:
                                       
Selling, general and administrative
    7,722       65,662       56,825             130,209  
Depreciation and amortization
    184       9,277       6,891             16,352  
Severance and transaction-related costs
    164             262             426  
Other (income) expense
    (3,337 )     1,423       733             (1,181 )
 
                             
 
    4,733       76,362       64,711             145,806  
 
                             
Operating income (loss)
    (6,079 )     26,693       16,745             37,359  
Gain on early debt extinguishment
    233                         233  
Interest expense, net
    42,283       541       1,511             44,335  
 
                             
Income (loss) before income taxes
    (48,129 )     26,152       15,234             (6,743 )
Income tax expense
          758       2,642             3,400  
 
                             
Income (loss) from continuing operations
    (48,129 )     25,394       12,592             (10,143 )
Equity in earnings of subsidiaries
    37,986       692             (38,678 )      
 
                             
Net income (loss)
    (10,143 )     26,086       12,592       (38,678 )     (10,143 )
Foreign currency translation and interest rate swap adjustments, net of tax
    (5,125 )     (480 )     (3,186 )     3,666       (5,125 )
 
                             
Comprehensive income (loss)
  $ (15,268 )   $ 25,606     $ 9,406     $ (35,012 )   $ (15,268 )
 
                             
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended July 31, 2010
(in thousands)
                                         
                    Non-              
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
Net sales
  $     $ 194,832     $ 139,401     $     $ 334,233  
Cost of sales, occupancy and buying expenses
    1,382       93,947       63,891             159,220  
 
                             
Gross profit (deficit)
    (1,382 )     100,885       75,510             175,013  
 
                             
Other expenses (income):
                                       
Selling, general and administrative
    8,472       64,447       48,828             121,747  
Depreciation and amortization
    155       9,576       6,125             15,856  
Severance and transaction-related costs
    212                         212  
Other (income) expense
    (6,740 )     6,029       4,293             3,582  
 
                             
 
    2,099       80,052       59,246             141,397  
 
                             
Operating income (loss)
    (3,481 )     20,833       16,264             33,616  
Gain on early debt extinguishment
    6,249                         6,249  
Impairment of equity investment
          6,030                     6,030  
Interest expense, net
    40,418       175       (20 )           40,573  
 
                             
Income (loss) before income taxes
    (37,650 )     14,628       16,284             (6,738 )
Income tax expense (benefit)
          (932 )     2,539             1,607  
 
                             
Income (loss) from continuing operations
    (37,650 )     15,560       13,745             (8,345 )
Equity in earnings of subsidiaries
    29,305       282             (29,587 )      
 
                             
Net income (loss)
    (8,345 )     15,842       13,745       (29,587 )     (8,345 )
Foreign currency translation and interest rate swap adjustments, net of tax
    2,513       (8,521 )     (644 )     9,165       2,513  
Reclassification of foreign currency translation adjustment into net income (loss)
    (9,572 )     (9,572 )           9,572       (9,572 )
 
                             
Comprehensive income (loss)
  $ (15,404 )   $ (2,251 )   $ 13,101     $ (10,850 )   $ (15,404 )
 
                             

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Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Six Months Ended July 30, 2011
(in thousands)
                                         
                    Non-              
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
Net sales
  $     $ 409,569     $ 295,424     $     $ 704,993  
Cost of sales, occupancy and buying expenses
    2,941       195,939       147,861             346,741  
 
                             
Gross profit (deficit)
    (2,941 )     213,630       147,563             358,252  
 
                             
Other expenses:
                                       
Selling, general and administrative
    15,910       128,054       112,967             256,931  
Depreciation and amortization
    365       18,755       14,286             33,406  
Severance and transaction-related costs
    297             472             769  
Other (income) expense
    (6,985 )     1,859       9,256             4,130  
 
                             
 
    9,587       148,668       136,981             295,236  
 
                             
Operating income (loss)
    (12,528 )     64,962       10,582             63,016  
Gain on early debt extinguishment
    482                         482  
Interest expense, net
    86,513       1,072       2,985             90,570  
 
                             
Income (loss) before income taxes
    (98,559 )     63,890       7,597             (27,072 )
Income tax expense (benefit)
          (354 )     3,022             2,668  
 
                             
Income (loss) from continuing operations
    (98,559 )     64,244       4,575             (29,740 )
Equity in earnings of subsidiaries
    68,819       (225 )           (68,594 )      
 
                             
Net income (loss)
    (29,740 )     64,019       4,575       (68,594 )     (29,740 )
Foreign currency translation and interest rate swap adjustments, net of tax
    13,305       1,268       11,776       (13,044 )     13,305  
 
                             
Comprehensive income (loss)
  $ (16,435 )   $ 65,287     $ 16,351     $ (81,638 )   $ (16,435 )
 
                             
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Six Months Ended July 31, 2010
(in thousands)
                                         
                    Non-              
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
Net sales
  $     $ 393,424     $ 262,886     $     $ 656,310  
Cost of sales, occupancy and buying expenses
    2,657       189,934       125,380             317,971  
 
                             
Gross profit (deficit)
    (2,657 )     203,490       137,506             338,339  
 
                             
Other expenses:
                                       
Selling, general and administrative
    16,904       125,870       96,992             239,766  
Depreciation and amortization
    287       19,214       12,721             32,222  
Severance and transaction-related costs
    314                         314  
Other (income) expense
    (12,615 )     8,283       9,144             4,812  
 
                             
 
    4,890       153,367       118,857             277,114  
 
                             
Operating income (loss)
    (7,547 )     50,123       18,649             61,225  
Gain on early debt extinguishment
    10,736                         10,736  
Impairment of equity investment
          6,030                   6,030  
Interest expense, net
    83,163       182       (9 )           83,336  
 
                             
Income (loss) before income taxes
    (79,974 )     43,911       18,658             (17,405 )
Income tax expense (benefit)
    23       (316 )     3,533             3,240  
 
                             
Income (loss) from continuing operations
    (79,997 )     44,227       15,125             (20,645 )
Equity in earnings of subsidiaries
    59,352       235             (59,587 )      
 
                             
Net income (loss)
    (20,645 )     44,462       15,125       (59,587 )     (20,645 )
Foreign currency translation and interest rate swap adjustments, net of tax
    (9 )     911       (9,895 )     8,984       (9 )
Reclassification of foreign currency translation adjustment into net income (loss)
    (9,572 )     (9,572 )           9,572       (9,572 )
 
                             
Comprehensive income (loss)
  $ (30,226 )   $ 35,801     $ 5,230     $ (41,031 )   $ (30,226 )
 
                             

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Condensed Consolidating Statement of Cash Flows
Six Months Ended July 30, 2011
(in thousands)
                                         
                    Non-              
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
Cash flows from operating activities:
                                       
Net income (loss)
  $ (29,740 )   $ 64,019     $ 4,575     $ (68,594 )   $ (29,740 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                                       
Equity in (earnings) loss of subsidiaries
    (68,819 )     225             68,594        
Depreciation and amortization
    365       18,755       14,286             33,406  
Amortization of lease rights and other assets
                1,600             1,600  
Amortization of debt issuance costs
    8,231             304             8,535  
Payment of in kind interest expense
    11,831                         11,831  
Foreign currency exchange net loss on Euro Loan
                2,158             2,158  
Net accretion of favorable (unfavorable) lease obligations
          (663 )     281             (382 )
Loss on sale/retirement of property and equipment, net
          41       17             58  
Gain on early debt extinguishment
    (482 )                       (482 )
Stock compensation expense
    1,713             429             2,142  
(Increase) decrease in:
                                       
Inventories
          (4,207 )     (4,487 )           (8,694 )
Prepaid expenses
    (218 )     (13,508 )     2,796             (10,930 )
Other assets
    (52 )     (350 )     (1,510 )           (1,912 )
Increase (decrease) in:
                                       
Trade accounts payable
    (547 )     (33 )     7,479             6,899  
Income taxes payable
          (965 )     (4,849 )           (5,814 )
Accrued interest payable
    15,520             (58 )           15,462  
Accrued expenses and other liabilities
    (7,915 )     (1,689 )     (9,642 )           (19,246 )
Deferred income taxes
          (902 )     (447 )           (1,349 )
Deferred rent expense
          266       381             647  
 
                             
Net cash provided by (used in) operating activities
    (70,113 )     60,989       13,313             4,189  
 
                             
Cash flows from investing activities:
                                       
Acquisition of property and equipment, net
    (295 )     (11,793 )     (20,114 )           (32,202 )
Acquisition of intangible assets/lease rights
          (20 )     (1,853 )           (1,873 )
Changes in restricted cash
    (1,550 )           (130 )           (1,680 )
 
                             
Net cash used in investing activities
    (1,845 )     (11,813 )     (22,097 )           (35,755 )
 
                             
Cash flows from financing activities:
                                       
Payments of Credit facility
    (438,940 )                       (438,940 )
Proceeds from Note
    450,000                         450,000  
Repurchases of Notes
    (45,497 )                       (45,497 )
Payment of debt issuance costs
    (10,453 )           (91 )           (10,544 )
Intercompany activity, net
    45,689       (43,581 )     (2,108 )            
 
                             
Net cash provided by (used in) financing activities
    799       (43,581 )     (2,199 )           (44,981 )
 
                             
Effect of foreign currency exchange rate changes on cash and cash equivalents
          3,309       1,738             5,047  
 
                             
Net increase (decrease) in cash and cash equivalents
    (71,159 )     8,904       (9,245 )           (71,500 )
Cash and cash equivalents, at beginning of period
    176,079       3,587       76,236             255,902  
 
                             
Cash and cash equivalents, at end of period
    104,920       12,491       66,991             184,402  
Restricted cash, at end of period
    5,000             21,725             26,725  
 
                             
Cash and cash equivalents and restricted cash, at end of period
  $ 109,920     $ 12,491     $ 88,716     $     $ 211,127  
 
                             

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Condensed Consolidating Statement of Cash Flows
Six Months Ended July 31, 2010
(in thousands)
                                         
                    Non-              
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
Cash flows from operating activities:
                                       
Net income (loss)
  $ (20,645 )   $ 44,462     $ 15,125     $ (59,587 )   $ (20,645 )
Adjustments to reconcile net income (loss) to net
                                       
cash provided by (used in) operating activities:
                                       
Equity in earnings of subsidiaries
    (59,352 )     (235 )           59,587        
Depreciation and amortization
    287       19,214       12,721             32,222  
Impairment
          6,030                   6,030  
Amortization of lease rights and other assets
          25       1,585             1,610  
Amortization of debt issuance costs
    5,038                         5,038  
Payment of in kind interest expense
    19,003                         19,003  
Net accretion of favorable (unfavorable) lease obligations
          (1,023 )     237             (786 )
Loss on sale/retirement of property and equipment, net
          366                   366  
Gain on early debt extinguishment
    (10,736 )                       (10,736 )
Stock compensation expense
    1,924             617             2,541  
(Increase) decrease in:
                                       
Inventories
          (11,003 )     (7,498 )           (18,501 )
Prepaid expenses
    (561 )     133       1,345             917  
Other assets
    1,220       5,110       (2,385 )           3,945  
Increase (decrease) in:
                                       
Trade accounts payable
    374       5,867       3,833             10,074  
Income taxes payable
          (255 )     (2,335 )           (2,590 )
Accrued interest payable
    (5,612 )                       (5,612 )
Accrued expenses and other liabilities
    1,556       2,298       5,120             8,974  
Deferred income taxes
          (407 )     55             (352 )
Deferred rent expense
    (107 )     1,254       731             1,878  
 
                             
Net cash provided by (used in) operating activities
    (67,611 )     71,836       29,151             33,376  
 
                             
Cash flows from investing activities:
                                       
Acquisition of property and equipment, net
    (740 )     (7,394 )     (11,422 )           (19,556 )
Acquisition of intangible assets/lease rights
          (63 )     (461 )           (524 )
Proceeds from sale of property
          16,765                   16,765  
 
                             
Net cash provided by (used in) investing activities
    (740 )     9,308       (11,883 )           (3,315 )
 
                             
Cash flows from financing activities:
                                       
Payments of Credit facility
    (7,250 )                       (7,250 )
Repurchases of Notes
    (59,112 )                       (59,112 )
Principal payments of capital leases
          (765 )                 (765 )
Intercompany activity, net
    135,200       (77,080 )     (58,120 )            
 
                             
Net cash provided by (used in) financing activities
    68,838       (77,845 )     (58,120 )           (67,127 )
 
                             
Effect of foreign currency exchange rate changes on cash and cash equivalents
          1,428       (2,938 )           (1,510 )
 
                             
Net increase (decrease) in cash and cash equivalents
    487       4,727       (43,790 )           (38,576 )
Cash and cash equivalents, at beginning of period
    109,138       (10,604 )     100,174             198,708  
 
                             
Cash and cash equivalents, at end of period
    109,625       (5,877 )     56,384             160,132  
Restricted cash, at end of period
                             
 
                             
Cash and cash equivalents and restricted cash, at end of period
  $ 109,625     $ (5,877 )   $ 56,384     $     $ 160,132  
 
                             
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. A store which is temporarily closed, such as for remodeling, is removed from the same store sales computation if it is closed for nine consecutive weeks. The removal is effective prospectively upon the completion of the ninth consecutive 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.

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Business Overview
We are one of the world’s leading specialty retailers of fashionable accessories and jewelry at affordable prices for young women, teens, tweens, and girls ages 3 to 27. We are organized based on our geographic markets, which include our North American division and our European division. As of July 30, 2011, we operated a total of 3,020 stores, of which 1,959 were located in all 50 states of the United States, Puerto Rico, Canada, and the U.S. Virgin Islands (our North American division) and 1,061 stores were located in the United Kingdom, France, Switzerland, Spain, Ireland, Austria, Germany, Netherlands, Portugal, Belgium, Poland, Czech Republic and Hungary (our European division). We operate our stores under two brand names: Claire’s®, on a global basis, and Icing®, in North America.
As of July 30, 2011, we also franchised or licensed 387 stores in Japan, the Middle East, Turkey, Russia, Greece, Guatemala, Malta, Ukraine and South Africa. We account for the goods we sell to third parties under franchising agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” in our Consolidated Statements of Operations and Comprehensive Income (Loss). The franchise fees we charge under the franchising agreements are reported in “Other expense (income), net” in our Consolidated Statements of Operations and Comprehensive Income (Loss).
Until September 2, 2010, we operated the stores in Japan through our former Claire’s Nippon 50:50 joint venture with Aeon Co., Ltd. We accounted for the results of operations of Claire’s Nippon under the equity method and included the results within “Other expense (income), net” in our Consolidated Statements of Operations and Comprehensive Income (Loss). Beginning September 2, 2010, these stores began to operate as licensed stores.
Our primary brand in North America and exclusively in Europe is Claire’s. Our Claire’s customers are predominantly teens (ages 13 to 18), tweens (ages 7 to 12) and kids (ages 3 to 6), or referred to as our Young, Younger and Youngest target customer groups.
Our second brand in North America is Icing, which targets a single edit point customer represented by a 23 year old young woman just graduating from college and entering the work force who dresses consistent with the current fashion influences. We believe this niche strategy enables us to create a well defined merchandise point of view and attract a broad group of customers from 19 to 27 years of age.
We believe that we are the leading accessories and jewelry destination for our target customers, which is embodied in our mission statement — to be a fashion authority and fun destination offering a compelling, focused assortment of value-priced accessories, jewelry and other emerging fashion categories targeted to the lifestyles of kids, tweens, teens and young women. In addition to age segmentation, we use multiple lifestyle aesthetics to further differentiate our merchandise assortments for our Young and Younger target customer groups.
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:
    Accessories — includes fashion accessories for year-round use, including legwear, headwear, attitude glasses, scarves, armwear and belts, and seasonal use, including sunglasses, hats, fall footwear, sandals, scarves, gloves, boots, slippers and earmuffs; and other accessories, including hairgoods, handbags, and small leather goods, as well as cosmetics
 
    Jewelry — includes earrings, necklaces, bracelets, body jewelry and rings, as well as ear piercing
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 store locations within a single mall. In Europe our stores are located primarily on high streets, in shopping malls and in high traffic urban areas.

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Current Market Conditions
Continued distress in the financial markets has resulted in declines in consumer confidence and spending, extreme volatility in securities prices, and has had a negative impact on credit availability and declining valuations of certain investments. We have assessed the implications of these factors on our current business and have responded with pursuit of cost reduction opportunities and are proceeding cautiously to support increased sales. If the national, or global, economies or credit market conditions in general were to deteriorate further in the future, it is possible that such deterioration could put additional negative pressure on consumer spending and negatively affect our cash flows or cause a tightening of trade credit that may negatively affect our liquidity.
Consolidated Results of Operations
A summary of our consolidated results of operations for the three and six months ended July 30, 2011 and July 31, 2010 are as follows (dollars in thousands):
                 
    Three Months     Three Months  
    Ended     Ended  
    July 30, 2011     July 31, 2010  
Net sales
  $ 358,547     $ 334,233  
(Decrease) increase in same store sales
    (1.4 )%     8.9 %
Gross profit percentage
    51.1 %     52.4 %
Selling, general and administrative expenses as a percentage of net sales
    36.3 %     36.4 %
Depreciation and amortization as a percentage of net sales
    4.6 %     4.7 %
Operating income
  $ 37,359     $ 33,616  
Gain on early debt extinguishment
  $ 233     $ 6,249  
Impairment of equity investment
  $     $ 6,030  
Net loss
  $ (10,143 )   $ (8,345 )
Number of stores at the end of the period (1)
    3,020       2,954  
 
(1)   Number of stores excludes stores operated under franchise and licensing agreements.
                 
    Six Months     Six Months  
    Ended     Ended  
    July 30, 2011     July 31, 2010  
Net sales
  $ 704,993     $ 656,310  
Increase in same store sales
    0.8 %     8.2 %
Gross profit percentage
    50.8 %     51.6 %
Selling, general and administrative expenses as a percentage of net sales
    36.4 %     36.5 %
Depreciation and amortization as a percentage of net sales
    4.7 %     4.9 %
Operating income
  $ 63,016     $ 61,225  
Gain on early debt extinguishment
  $ 482     $ 10,736  
Impairment of equity investment
  $     $ 6,030  
Net loss
  $ (29,740 )   $ (20,645 )
Number of stores at the end of the period (1)
    3,020       2,954  
 
(1)   Number of stores excludes stores operated under franchise and licensing agreements.
Net sales
Net sales for the three months ended July 30, 2011 increased $24.3 million, or 7.3%, from the three months ended July 31, 2010. This increase was attributable to favorable foreign currency translation effect of our foreign locations’ sales, new stores sales and an increase in shipments to franchisees, partially offset by a decrease in same store sales and the effect of store closures. Net sales would have increased 1.7% excluding the impact from foreign currency rate changes.

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Net sales for the six months ended July 30, 2011 increased $48.7 million, or 7.4%, from the six months ended July 31, 2010. This increase was attributable to favorable foreign currency translation effect of our foreign locations’ sales, new stores sales, increase in same store sales and an increase in shipments to franchisees, partially offset by the effect of store closures. Net sales would have increased 3.4% excluding the impact from foreign currency rate changes.
For the three months ended July 30, 2011, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 5.1%, partially offset by an increase in average transaction value of 4.0%.
For the six months ended July 30, 2011, the increase in same store sales was primarily attributable to an increase in average transaction value of 4.7%, partially offset by a decrease in average number of transactions per store of 3.6%.
The following table compares our sales of each product category 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 30, 2011     July 31, 2010     July 30, 2011     July 31, 2010  
Accessories
    50.8       51.8       52.1       51.9  
Jewelry
    49.2       48.2       47.9       48.1  
 
                       
 
    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. These costs are included instead in “Selling, general and administrative” expenses in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (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 30, 2011, gross profit percentage decreased 130 basis points to 51.1% compared to 52.4% during the three months ended July 31, 2010. The decrease in gross profit percentage consisted of a 90 basis point decrease in merchandise margin and a 60 basis point increase in occupancy costs, partially offset by a 20 basis point decrease in buying and buying-related costs. The decrease in merchandise margin resulted primarily from an increase in markdowns and a reduction in inventory shrink benefit partially offset by lower freight expense.
During the six months ended July 30, 2011, gross profit percentage decreased 80 basis points to 50.8% compared to 51.6% during the six months ended July 31, 2010. The decrease in gross profit percentage consisted of a 90 basis point decrease in merchandise margin, partially offset by a 10 basis point decrease in buying and buying-related costs. The decrease in merchandise margin resulted primarily from an increase in markdowns and a reduction in inventory shrink benefit.
Selling, general and administrative expenses
During the three months ended July 30, 2011, selling, general and administrative expenses increased $8.5 million, or 7.0%, compared to the three months ended July 31, 2010. As a percentage of net sales, selling, general and administrative expenses decreased 0.1% compared to the three months ended July 31, 2010. Excluding an unfavorable $6.4 million foreign currency translation effect, the net increase in selling, general and administrative expenses would have been $2.1 million, primarily for new store-related expenses.
During the six months ended July 30, 2011, selling, general and administrative expenses increased $17.2 million, or 7.2%, compared to the six months ended July 31, 2010. As a percentage of net sales, selling, general and administrative expenses decreased 0.1% compared to the six months ended July 31, 2010.

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Excluding an unfavorable $9.1 million foreign currency translation effect, the net increase in selling, general and administrative expenses would have been $8.1 million, primarily for new store-related expenses.
Depreciation and amortization expense
During the three months ended July 30, 2011, depreciation and amortization expense increased $0.5 million to $16.4 million compared to $15.9 million for the three months ended July 31, 2010. The majority of this increase is due to the effect of asset additions during fiscal 2010 and the first half of fiscal 2011.
During the six months ended July 30, 2011, depreciation and amortization expense increased $1.2 million to $33.4 million compared to $32.2 million for the six months ended July 31, 2010. The majority of this increase is due to the effect of asset additions during fiscal 2010 and the first half of fiscal 2011.
Other expense (income), net
The following is a summary of other expense (income) activity for the three and six months ended July 30, 2011 and July 31, 2010 (in thousands):
                                 
    Three Months     Three Months     Six Months     Six Months  
    Ended     Ended     Ended     Ended  
    July 30, 2011     July 31, 2010     July 30, 2011     July 31, 2010  
Foreign currency exchange (gain) loss, net
  $ (584 )   $ 2,510     $ 5,365     $ 3,295  
Equity loss
          1,413             2,529  
Royalty income
    (597 )     (341 )     (986 )     (532 )
Other income
                (249 )     (480 )
 
                       
 
  $ (1,181 )   $ 3,582     $ 4,130     $ 4,812  
 
                       
During the three months ended July 30, 2011, foreign currency exchange loss, net decreased primarily from a $(1.1) million net gain to remeasure the Euro Loan at the period end foreign exchange rate. Equity loss decreased due to the Company converting its equity ownership interest in a former joint venture into a licensing agreement.
During the six months ended July 30, 2011, foreign currency exchange loss, net increased primarily from a $2.2 million net charge to remeasure the Euro Loan at the period end foreign exchange rate. Equity loss decreased due to the Company converting its equity ownership interest in a former joint venture into a licensing agreement.
Gain on early debt extinguishment
The following is a summary of the Company’s debt repurchase activity for the three and six months ended July 30, 2011 and July 31, 2010 (in thousands):
                                                 
    Three Months Ended July 30, 2011     Six Months Ended July 30, 2011  
    Principal     Repurchases     Recognized     Principal     Repurchase     Recognized  
Notes Repurchased   Amount     Price     Gain (1)     Amount     Price     Gain (Loss) (2)  
Senior Notes
  $ 3,000     $ 2,940     $ 12     $ 13,000     $ 12,870     $ (86 )
Senior Toggle Notes
    18,986       18,543       221       33,140       32,627       568  
 
                                   
 
  $ 21,986     $ 21,483     $ 233     $ 46,140     $ 45,497     $ 482  
 
                                   
 
(1)   Net of deferred issuance cost write-offs of $48 for the Senior Notes and $222 for the Senior Toggle Notes.
 
(2)   Net of deferred issuance cost write-offs of $216 for the Senior Notes and $400 for the Senior Toggle Notes, and accrued interest write-off of $455 for the Senior Toggle Notes.

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    Three Months Ended July 31, 2010     Six Months Ended July 31, 2010  
    Principal     Repurchases     Recognized     Principal     Repurchase     Recognized  
Notes Repurchased   Amount     Price     Gain (1)     Amount     Price     Gain (2)  
Senior Toggle Notes
  $ 41,623     $ 36,328     $ 5,340     $ 47,623     $ 41,313     $ 6,427  
Senior Subordinated Notes
    7,000       5,935       909       22,625       17,799       4,309  
 
                                   
 
  $ 48,623     $ 42,263     $ 6,249     $ 70,248     $ 59,112     $ 10,736  
 
                                   
 
(1)   Net of deferred issuance cost write-offs of $673 for the Senior Toggle Notes and $156 for the Senior Subordinated Notes, and accrued interest write-off of $718 for the Senior Toggle Notes.
 
(2)   Net of deferred issuance cost write-offs of $777 for the Senior Toggle Notes and $517 for the Senior Subordinated Notes, and accrued interest write-off of $894 for the Senior Toggle Notes.
Impairment Charge
During the six months ended July 30, 2010, we recorded a non-cash impairment charge of $6.0 million for our former investment in Claire’s Nippon. There were no other impairment charges recorded during the six months ended July 31, 2010. The joint venture’s continuing operating losses prompted us to perform a valuation of our investment in Claire’s Nippon.
Interest expense, net
During the three months ended July 30, 2011, net interest expense aggregated $44.3 million compared to $40.6 million for the three months ended July 31, 2010. The increase of $3.7 million is primarily due to interest on the $450.0 million Senior Secured Second Lien Notes and Euro Loan and an accelerated reduction of deferred financing costs, partially offset by lower outstanding balances under our Revolving Credit Facility and Senior Notes.
During the six months ended July 30, 2011, net interest expense aggregated $90.6 million compared to $83.3 million for the six months ended July 31, 2010. The increase of $7.3 million is primarily due to interest on the $450.0 million Senior Secured Second Lien Notes and Euro Loan and an accelerated reduction of deferred financing costs, partially offset by lower outstanding balances under our Revolving Credit Facility and Senior Notes.
Income taxes
The effective income tax rate for the three and six months ended July 30, 2011 was (50.4)% and (9.9)%, respectively, compared to (23.8)% and (18.6)% for the three and six months ended July 31, 2010. These effective income tax rates differed from the statutory federal tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated in the three and six months ended July 30, 2011 and July 31, 2010, respectively, by our U.S. operations.
Segment Operations
We are organized into two business segments — North America and Europe. The following is a discussion of results of operations by business segment.

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North America
Key statistics and results of operations for our North American division are as follows (dollars in thousands):
                                 
    Three Months     Three Months     Six Months     Six Months  
    Ended     Ended     Ended     Ended  
    July 30, 2011     July 31, 2010     July 30, 2011     July 31, 2010  
Net sales
  $ 217,057     $ 210,087     $ 441,245     $ 422,686  
Increase in same store sales
    2.0 %     9.0 %     3.4 %     8.9 %
Gross profit percentage
    51.7 %     52.0 %     52.1 %     51.8 %
Number of stores at the end of the period (1)
    1,959       1,984       1,959       1,984  
 
(1)   Number of stores excludes stores operated under franchise and licensing agreements.
During the three months ended July 30, 2011, net sales in North America increased $7.0 million, or 3.3%, from the three months ended July 31, 2010. This increase was attributable to an increase in same store sales, an increase in shipments to franchisees, new store sales and a favorable foreign currency translation effect of our Canadian operations’ sales, partially offset by the effect of store closures. Sales would have increased 2.7% excluding the impact from foreign currency rate changes.
During the six months ended July 30, 2011, net sales in North America increased $18.6 million, or 4.4%, from the six months ended July 31, 2010. This increase was attributable to an increase in same store sales, an increase in shipments to franchisees, new store sales and a favorable foreign currency translation effect of our Canadian operations’ sales, partially offset by the effect of store closures. Sales would have increased 3.9% excluding the impact from foreign currency rate changes.
For the three months ended July 30, 2011, the increase in same store sales was primarily attributable to an increase in average transaction value of 4.2%, partially offset by a decrease in average number of transactions per store of 1.6%.
For the six months ended July 30, 2011, the increase in same store sales was primarily attributable to an increase in average transaction value of 5.1%, partially offset by a decrease in average number of transactions per store of 1.2%.
During the three months ended July 30, 2011, gross profit percentage decreased 30 basis points to 51.7% compared to 52.0% during the three months ended July 31, 2010. The decrease in gross profit percentage consisted of an 80 basis point decrease in merchandise margin, partially offset by a 30 basis point decrease in occupancy costs and a 20 basis point decrease in buying and buying-related costs. The decrease in merchandise margin resulted primarily from a reduction in inventory shrink benefit and an increase in markdowns partially offset by lower freight expense. The improvement in occupancy rate is due to the leveraging effect of higher sales.
During the six months ended July 30, 2011, gross profit percentage increased 30 basis points to 52.1% compared to 51.8% during the six months ended July 31, 2010. The increase in gross profit percentage consisted of an 80 basis point decrease in occupancy costs, partially offset by a 50 basis point decrease in merchandise margin. The improvement in occupancy rate is due to the leveraging effect of higher sales. The decrease in merchandise margin resulted primarily from an increase in markdowns and a reduction in inventory shrink benefit partially offset by lower freight expense.

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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 30, 2011     July 31, 2010     July 30, 2011     July 31, 2010  
Accessories
    45.6       46.4       46.2       46.9  
Jewelry
    54.4       53.6       53.8       53.1  
 
                       
 
    100.0       100.0       100.0       100.0  
 
                       
Europe
Key statistics and results of operations for our European division are as follows (dollars in thousands):
                                 
    Three Months     Three Months     Six Months     Six Months  
    Ended     Ended     Ended     Ended  
    July 30, 2011     July 31, 2010     July 30, 2011     July 31, 2010  
Net sales
  $ 141,490     $ 124,146     $ 263,748     $ 233,624  
(Decrease) increase in same store sales
    (6.5 )%     8.7 %     (3.5 )%     7.0 %
Gross profit percentage
    50.2 %     53.0 %     48.7 %     51.1 %
Number of stores at the end of the period (1)
    1,061       970       1,061       970  
 
(1)   Number of stores excludes stores operated under franchise and licensing agreements.
During the three months ended July 30, 2011, net sales in Europe increased $17.3 million, or 14.0%, from the three months ended July 31, 2010. This increase was attributable to favorable foreign currency translation of our European operations’ sales and new store sales, partially offset by a decrease in same store sales and the effect of store closures. Sales would have increased 0.2% excluding the impact from foreign currency rate changes.
During the six months ended July 30, 2011, net sales in Europe increased $30.1 million, or 12.9%, from the six months ended July 31, 2010. This increase was attributable to favorable foreign currency translation of our European operations’ sales and new store sales, partially offset by a decrease in same store sales and the effect of store closures. Sales would have increased 2.7% excluding the impact from foreign currency rate changes.
For the three months ended July 30, 2011, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 11.0%, partially offset by an increase in average transaction value of 3.5%.
For the six months ended July 30, 2011, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 8.2%, partially offset by an increase in average transaction value of 4.0%.
During the three months ended July 30, 2011, gross profit percentage decreased 280 basis points to 50.2% compared to 53.0% during the three months ended July 31, 2010. The decrease in gross profit percentage consisted of a 210 basis point increase in occupancy costs and a 100 basis point decrease in merchandise margin, partially offset by a 30 basis point decrease in buying and buying-related costs. The decrease in merchandise margin resulted primarily from a higher mix of clearance merchandise, markdowns and freight expense.
During the six months ended July 30, 2011, gross profit percentage decreased 240 basis points to 48.7% compared to 51.1% during the six months ended July 31, 2010. The decrease in gross profit percentage consisted of a 140 basis point decrease in merchandise margin and a 120 basis point increase in occupancy costs, partially offset by a 20 basis point decrease in buying and buying-related costs. The

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decrease in merchandise margin resulted primarily from a higher mix of clearance merchandise, markdowns and freight expense.
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 30, 2011     July 31, 2010     July 30, 2011     July 31, 2010  
Accessories
    58.6       60.7       61.7       61.0  
Jewelry
    41.4       39.3       38.3       39.0  
 
                       
 
    100.0       100.0       100.0       100.0  
 
                       
Liquidity and Capital Resources
A summary of cash flows provided by (used in) operating, investing and financing activities for the six months ended July 30, 2011 and July 31, 2010 is outlined in the table below (in thousands):
                 
    Six Months     Six Months  
    Ended     Ended  
    July 30, 2011     July 31, 2010  
Operating activities
  $ 4,189     $ 33,376  
Investing activities
    (35,755 )     (3,315 )
Financing activities
    (44,981 )     (67,127 )
Cash flows from operating activities
Cash provided by operating activities decreased $29.2 million for the six months ended July 30, 2011 compared to the prior year period. The decrease was due to an unfavorable net change in working capital items primarily resulting from a decrease of $28.2 million in accrued expenses and other liabilities.
Cash flows from investing activities
Cash used in investing activities was $35.8 million for the six months ended July 30, 2011 and primarily consisted of capital expenditures for new store openings, the remodeling of existing stores, improvements to technology systems, acquisition of lease rights and, to a lesser extent, an increase in restricted cash. Cash used in investing activities was $3.3 million for the six months ended July 31, 2010 and primarily consisted of proceeds received from our sale-leaseback transaction partially offset by capital expenditures for the remodeling of existing stores, new store openings, improvements to technology systems and acquisition of lease rights. During the remainder of Fiscal 2011, we expect to fund between $43.0 million and $48.0 million of capital expenditures.
Cash flows from financing activities
Cash used in financing activities was $45.0 million for the six months ended July 30, 2011 which consisted of note repurchases of $45.5 million to retire $13.0 million of Senior Notes and $33.1 million of Senior Toggle Notes. Cash used in financing activities was $67.1 million for the six months ended July 31, 2010 which consisted primarily of note repurchases of $59.1 million to retire $47.6 million of Senior Toggle Notes and $22.6 million of Senior Subordinated Notes and scheduled principal payments of $7.3 million on our Credit Facility.
As discussed in our Annual Report on Form 10-K for the year ended January 29, 2011, we elected to pay interest in kind on our Senior Toggle Notes for the interest periods beginning June 2, 2008 through June 1, 2011. This election, net of reductions for note repurchases, increased the principal amount on the Senior Toggle Notes by $109.5 million and $98.1 million as of July 30, 2011 and January 29, 2011, respectively. The accrued payment in kind interest is included in “Long-term debt” in the Unaudited

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Condensed Consolidated Balance Sheets. Effective June 2, 2011, the Company began paying interest in cash.
We or our affiliates have purchased and may, from time to time, purchase portions of our indebtedness. All of our purchases have been privately-negotiated, open market transactions.
Cash Position
As of July 30, 2011, we had cash and cash equivalents and restricted cash of $211.1 million and substantially all of the cash equivalents consisted of money market funds invested in U.S. Treasury Securities.
We anticipate that cash generated from operations will be sufficient to meet our future working capital requirements, capital expenditures, and debt service requirements for at least the next twelve months. However, our ability to fund future operating expenses and capital expenditures and our ability to make scheduled payments of interest on, to pay principal on, or refinance indebtedness and to satisfy any other present or future debt obligations will depend on future operating performance. Our future operating performance and liquidity may also be adversely affected by general economic, financial, and other factors beyond the Company’s control, including those disclosed in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.
Short-term Debt
On January 24, 2011, we entered into a Euro (“€”) denominated loan (the “Euro Loan”) in the amount of €42.4 million that is due on January 24, 2012. The Euro Loan bears interest at the three month Euro Interbank Offered Rate (“EURIBOR”) rate plus 8.00% per year and is payable quarterly. As of July 30, 2011, there was €42.4 million, or the equivalent of $61.0 million, outstanding under the Euro Loan. The net proceeds of the borrowing were used for general corporate purposes.
The obligations under the Euro Loan are secured by a cash deposit in the amount of €15.1 million, or the equivalent of $21.7 million at July 30, 2011, and a perfected first lien security interest in all of the issued and outstanding equity interest of one of our international subsidiaries, Claire’s Holdings S.a.r.l. The cash deposit is classified as “Cash and cash equivalents and restricted cash” in our Unaudited Condensed Consolidated Balance Sheets.
Senior Secured Second Lien Notes
On March 4, 2011, we issued $450.0 million aggregate principal amount of 8.875% senior secured second lien notes that mature on March 15, 2019 (the “Senior Secured Second Lien Notes”). Interest on the Senior Secured Second Lien Notes is payable semi-annually to holders of record at the close of business on March 1 or September 1 immediately preceding the interest payment date on March 15 and September 15 of each year, commencing on September 15, 2011. The Senior Secured Second Lien Notes are guaranteed on a second-priority senior secured basis by all of our existing and future direct or indirect wholly-owned domestic subsidiaries that guarantee the Credit Facility. The Senior Secured Second Lien Notes and related guarantees are secured by a second-priority lien on substantially all of the assets that secure our and our subsidiary guarantors’ obligations under the Credit Facility. As noted above, we used the proceeds of the offering of the Senior Secured Second Lien Notes to reduce the entire $194.0 million outstanding under the Company’s revolving credit facility (without terminating the commitment), to repay $244.9 million of indebtedness under the Company’s senior secured term loan, and to pay $10.4 million in financing costs which have been recorded as Deferred Financing Costs, Net in the accompanying Unaudited Condensed Consolidated Balance Sheets.
Credit Facility
As mentioned above, we reduced the entire amount outstanding under our Revolver (without terminating the commitment) and indebtedness under our senior secured term loan. We can borrow up to $200.0 million under our Revolver that matures on May 29, 2013. At July 30, 2011, we had $4.8 million of

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letters of credit outstanding against the Revolver and had available $195.2 million to fund operations under our Revolver, if needed. As a result of our prepayment under the senior secured term loan facility, we are no longer required to make any quarterly payments and have a final payment due May 29, 2014.
European Credit Facilities
Our non-U.S. subsidiaries have bank credit facilities totaling $3.0 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. At July 30, 2011, the entire amount of $3.0 million was available for borrowing by us, subject to a reduction of $2.9 million for outstanding bank guarantees.
Covenants
Our Senior Notes, Senior Toggle Notes, Senior Subordinated Notes and Senior Secured Second Lien Notes (collectively, the “Notes”), Credit Facility and Euro Loan contain certain covenants that, among other things, and subject to certain exceptions and other basket amounts, restrict our ability and the ability of our subsidiaries to:
    incur additional indebtedness;
 
    pay dividends or distributions on our capital stock, repurchase or retire our capital stock and redeem, repurchase or defease any subordinated indebtedness;
 
    make certain investments;
 
    create or incur certain liens;
 
    create restrictions on the payment of dividends or other distributions to us from our subsidiaries;
 
    transfer or sell assets;
 
    engage in certain transactions with our affiliates; and
 
    merge or consolidate with other companies or transfer all or substantially all of our assets.
None of these covenants, however, require the Company to maintain any particular financial ratio or other measure of financial performance. As of July 30, 2011, we were in compliance with the covenants under our Credit Facility, Notes and Euro Loan.
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 2010 Annual Report on Form 10-K, filed on April 21, 2011, in the Notes to Consolidated Financial Statements, Note 2, and the Critical Accounting Policies and Estimates section contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations therein.
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

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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: changes in consumer preferences and consumer spending; competition; our level of indebtedness; general economic conditions; general political and social conditions such as war, political unrest and terrorism; natural disasters or severe weather events; currency fluctuations and exchange rate adjustments; uncertainties generally associated with the specialty retailing business, such as decreases in mall traffic due to high gasoline prices or other general economic conditions; 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; increases in the cost of our merchandise; significant increases in our merchandise markdowns; inability to grow our store base in Europe or expand our international franchising operations; inability to design and implement new information systems or disruptions in adapting our information systems to allow for e-commerce sales; delays in anticipated store openings or renovations; results from any future asset impairment analysis; changes in applicable laws, rules and regulations, including changes in federal, state or local regulations governing the sale of our products, particularly regulations relating to the content in our products, general employment laws, including laws relating to overtime pay and employee benefits, health care laws, tax laws and import laws; product recalls; loss of key members of management; increases in the cost of labor; labor disputes; unwillingness of vendors and service providers to supply goods or services pursuant to historical customary credit arrangements; 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 2010 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, excluding restricted cash, at financial institutions that are in excess of federally insured limits. With the current financial environment and the instability of financial institutions, 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, maintaining bank accounts with a group of credit worthy financial institutions and limiting the cash balance in any one bank account. As of July 30, 2011, all cash equivalents, excluding restricted cash, were maintained in one money market fund that was invested exclusively in U.S. Treasury securities and our restricted cash was deposited with significant and credit worthy financial institutions.
Interest Rates
On July 28, 2010, we entered into an interest rate swap agreement (the “Swap”) to manage exposure to fluctuations in interest rates. The Swap expires on July 30, 2013. The Swap represents a contract to exchange floating rate for fixed interest payments periodically over the life of the Swap without exchange of the underlying notional amount. The Swap covers an aggregate notional amount of $200.0 million of the outstanding principal balance of the senior secured term loan facility. The fixed rate of the Swap is 1.2235% and has been designated and accounted for as a cash flow hedge. At July 30, 2011, the estimated fair value of the Swap was a liability of approximately $2.5 million and was recorded, net of tax, as a component of “Accumulated other comprehensive income (loss), net of tax” in our Unaudited Condensed Consolidated Balance Sheets.
We entered into three interest rate swap agreements in July 2007 (the “2007 Swaps”) to manage exposure to fluctuations in interest rates. Those 2007 Swaps expired on June 30, 2010. The 2007 Swaps represented contracts to exchange floating rate for fixed interest payments periodically over the lives of the 2007 Swaps without exchange of the underlying notional amount. The 2007 Swaps covered an aggregate notional amount of $435.0 million of the outstanding principal balance of the senior secured term loan facility. The fixed rates of the 2007 Swaps ranged from 4.96% to 5.25%. The 2007 Swaps were designated and accounted for as cash flow hedges.
At July 30, 2011, we had fixed rate debt of $1,288.6 million and variable rate debt of $1,215.4 million. Based on our variable rate debt balance (less $200.0 million for the interest rate swap) as of July 30, 2011, a 1% change in interest rates would increase or decrease our annual interest expense by approximately $10.2 million, net.
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. At July 30, 2011, 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 income (loss)” are $14.7 million and $(7.8) million, net of tax, reflecting the unrealized gain (loss) on foreign currency translations during the six months ended July 30, 2011 and July 31, 2010, 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,

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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.
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 the Company has 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, sustained recession in the U.S. and Europe, rising unemployment and continued declines in discretionary income, our revenue and margins could be significantly affected in the future. We can not predict whether, when or the manner in which the economic conditions described above will change.
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 our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report to ensure that information required to be disclosed 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.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting have been made during the quarter ended July 30, 2011, 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 29, 2011.
Item 6. Exhibits
     
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 U.S.C. 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 U.S.C. 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.LAB
  XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE
  XBRL Taxonomy Extension Presentation Linkbase Document
Items 2, 3, 4 and 5 of Part II are not applicable and have been omitted.

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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 2, 2011  By:   /s/ Eugene S. Kahn    
    Eugene S. Kahn, Chief Executive Officer   
    (principal executive officer)   
 
     
September 2, 2011  By:   /s/ J. Per Brodin    
    J. Per Brodin, Executive Vice President and  
    Chief Financial Officer (principal financial and accounting officer)   

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INDEX TO EXHIBITS
     
EXHIBIT NO.   DESCRIPTION
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.LAB
  XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE
  XBRL Taxonomy Extension Presentation Linkbase Document