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EXCEL - IDEA: XBRL DOCUMENT - CLAIRES STORES INC | Financial_Report.xls |
EX-32.1 - EX-32.1 - CLAIRES STORES INC | g27469exv32w1.htm |
EX-31.1 - EX-31.1 - CLAIRES STORES INC | g27469exv31w1.htm |
EX-32.2 - EX-32.2 - CLAIRES STORES INC | g27469exv32w2.htm |
EX-31.2 - EX-31.2 - CLAIRES STORES INC | g27469exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
Claires 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) |
Registrants 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 Registrants common stock, $0.001 par value, were
outstanding.
CLAIRES STORES, INC. AND SUBSIDIARIES
INDEX
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 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
CLAIRES STORES, INC. AND SUBSIDIARIES
CLAIRES 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 STOCKHOLDERS 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 |
||||||||
Stockholders 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 stockholders deficit |
$ | 2,838,517 | $ | 2,866,449 | ||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
Table of Contents
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(in thousands)
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.
4
Table of Contents
CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(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.
5
Table of Contents
CLAIRES 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 managements 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 Companys business, the results of
operations for interim periods of the year are not necessarily indicative of the results of
operations on an annualized basis.
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 Companys financial position, results of operations or cash flows.
6
Table of Contents
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 Companys 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 Companys 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 Companys 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 Companys 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.
7
Table of Contents
Financial Instruments Not Measured at Fair Value
The Companys 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 Companys cash equivalent instruments are valued using quoted market prices
and are primarily U.S. Treasury securities. The estimated fair value of the Companys 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 Companys 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,
Claires 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.
8
Table of Contents
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 Companys
existing and future direct or indirect wholly-owned domestic subsidiaries that guarantee the
Companys 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
Companys and its subsidiary guarantors obligations under the Companys 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 Companys revolving credit facility (without
terminating the commitment), to repay $244.9 million of indebtedness under the Companys 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 Companys 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 Companys 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 Companys
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 Companys
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 Companys 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 Companys
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 Companys fiscal 2012 year. |
The modifications to the Companys 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 Companys 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 Companys 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 Companys 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
Companys executive officers. These fees are included in Furniture, fixtures and equipment in the
Companys Unaudited Condensed Consolidated Balance Sheets and Selling, general and administrative
expenses in the Companys 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 Companys controlling shareholder,
has a non-controlling interest in Morgan Joseph TriArtisan LLC and its affiliates. Additionally, a
member of the Companys 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 Companys 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 Companys 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 Claires Nippon under the equity method and
included the results within Other expense (income), net in the Companys Unaudited Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss) within the Companys 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 Companys outstanding debt is
recorded in the Companys 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, Claires 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 Claires Stores, Inc. that guarantee the Companys Credit Facility (the
Guarantors). The Companys 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)
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 STOCKHOLDERS 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 | |||||||||||||||
Stockholders 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 stockholders 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 |
17
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Condensed Consolidating Balance Sheet
January 29, 2011
(in thousands)
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 STOCKHOLDERS 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 | |||||||||||||||
Stockholders 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 stockholders 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 |
18
Table of Contents
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended July 30, 2011
(in thousands)
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)
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 | ) | ||||||
19
Table of Contents
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Six Months Ended July 30, 2011
(in thousands)
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)
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 | ) | |||||||
20
Table of Contents
Condensed Consolidating Statement of Cash Flows
Six Months Ended July 30, 2011
(in thousands)
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 | ||||||||||
21
Table of Contents
Condensed Consolidating Statement of Cash Flows
Six Months Ended July 31, 2010
(in thousands)
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. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Managements Discussion and Analysis of Financial Condition and Results of Operations is designed
to provide the reader of the financial statements with a narrative on our results of operations,
financial position and liquidity, risk management activities, and significant accounting policies
and critical estimates. Managements Discussion and Analysis 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.
22
Table of Contents
Business Overview
We are one of the worlds 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: Claires®, 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 Claires Nippon 50:50
joint venture with Aeon Co., Ltd. We accounted for the results of operations of Claires 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 Claires. Our Claires 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
Claires 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 Companys 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 Claires Nippon. There were no other impairment charges recorded
during the six months ended July 31, 2010. The joint ventures continuing operating losses
prompted us to perform a valuation of our investment in Claires 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 Companys 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,
Claires 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 Companys revolving
credit facility (without terminating the commitment), to repay $244.9 million of indebtedness under
the Companys 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
Managements 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 managements
then current views and assumptions regarding future events and operating performance, and we assume
no obligation to update any forward-looking statement. Forward-looking statements involve known or
unknown risks, uncertainties and other factors, including changes in estimates and judgments
discussed under Critical Accounting Policies and Estimates which may cause our actual results,
performance or achievements, or industry results to be materially different from any future
results, performance or achievements expressed or implied by such forward-looking statements. 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 governments 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 Commissions rules and forms,
and that such information is accumulated and communicated to our management, including each of such
officers as appropriate to allow timely decisions regarding required disclosure.
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 managements evaluation of possible liability or
outcome of litigation. Accordingly, the consequences of these matters cannot be finally determined
by management. However, in the opinion of management, we believe that current pending litigation
will not have a material adverse effect on our financial 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.
CLAIRES 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 |