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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended October 28, 2017

OR

 

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

For the transition period from                      to                     

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

 

 

Claire’s Stores, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   59-0940416

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2400 West Central Road,

Hoffman Estates, Illinois

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

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

 

 

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

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

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

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

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

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

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

 

 

 


Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

INDEX

 

     PAGE NO.  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

     3  

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

     3  

Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Nine Months Ended October 28, 2017 and October 29, 2016

     4  

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 28, 2017 and October 29, 2016

     5  

Notes to Unaudited Condensed Consolidated Financial Statements

     6  

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

     25  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     39  

Item 4. Controls and Procedures

     40  

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     41  

Item 1A. Risk Factors

     41  

Item 6. Exhibits

     41  

SIGNATURES

     42  

Ex-31.1 Section  302 Certification of CEO

  

Ex-31.2 Section  302 Certification of CFO

  

Ex-32.1 Section  906 Certification of CEO

  

Ex-32.2 Section  906 Certification of CFO

  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

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

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 25,819     $ 55,792  

Inventories

     157,827       130,239  

Prepaid expenses

     16,755       14,642  

Other current assets

     27,237       25,270  
  

 

 

   

 

 

 

Total current assets

     227,638       225,943  
  

 

 

   

 

 

 

Property and equipment:

    

Furniture, fixtures and equipment

     225,356       218,804  

Leasehold improvements

     302,042       297,636  
  

 

 

   

 

 

 
     527,398       516,440  

Accumulated depreciation and amortization

     (406,557     (381,975
  

 

 

   

 

 

 
     120,841       134,465  
  

 

 

   

 

 

 

Leased property under capital lease:

    

Land and building

     18,055       18,055  

Accumulated depreciation and amortization

     (6,990     (6,313
  

 

 

   

 

 

 
     11,065       11,742  
  

 

 

   

 

 

 

Goodwill

     1,132,575       1,132,575  

Intangible assets, net of accumulated amortization of $84,740 and $80,502, respectively

     454,215       454,956  

Other assets

     42,345       40,525  
  

 

 

   

 

 

 
     1,629,135       1,628,056  
  

 

 

   

 

 

 

Total assets

   $ 1,988,679     $ 2,000,206  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities:

    

Current portion of long-term debt, net

   $ —       $ 18,405  

Trade accounts payable

     80,887       69,731  

Income taxes payable

     5,761       6,083  

Accrued interest payable

     24,079       53,266  

Accrued expenses and other current liabilities

     85,494       87,146  
  

 

 

   

 

 

 

Total current liabilities

     196,221       234,631  
  

 

 

   

 

 

 

Long-term debt, net

     2,112,961       2,118,653  

Revolving credit facility, net

     69,607       3,925  

Obligation under capital lease

     16,082       16,388  

Deferred tax liability

     99,134       99,255  

Deferred rent expense

     33,977       34,300  

Unfavorable lease obligations and other long-term liabilities

     9,306       10,376  
  

 

 

   

 

 

 
     2,341,067       2,282,897  
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholder’s deficit:

    

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

     —         —    

Additional paid-in capital

     630,686       630,496  

Accumulated other comprehensive loss, net of tax

     (40,567     (51,881

Accumulated deficit

     (1,138,728     (1,095,937
  

 

 

   

 

 

 
     (548,609     (517,322
  

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

   $ 1,988,679     $ 2,000,206  
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE (LOSS) INCOME

(in thousands)

 

     Three Months     Three Months     Nine Months     Nine Months  
     Ended     Ended     Ended     Ended  
     October 28,
2017
    October 29,
2016
    October 28,
2017
    October 29,
2016
 

Net sales

   $ 314,584     $ 312,041     $ 930,842     $ 928,860  

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

     162,092       166,833       475,463       495,869  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     152,492       145,208       455,379       432,991  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

        

Selling, general and administrative

     115,336       112,964       338,622       333,058  

Depreciation and amortization

     10,755       14,061       32,848       41,917  

Impairment of assets

     —         142,271       —         142,271  

Severance and transaction-related costs

     335       205       867       1,903  

Other income, net

     (3,376     (3,900     (8,248     (5,493
  

 

 

   

 

 

   

 

 

   

 

 

 
     123,050       265,601       364,089       513,656  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     29,442       (120,393     91,290       (80,665

Gain on early debt extinguishment

     —         317,323       —         317,323  

Interest expense, net

     43,229       47,101       130,203       157,803  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense (benefit)

     (13,787     149,829       (38,913     78,855  

Income tax expense (benefit)

     1,758       (749     3,878       (888
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (15,545   $ 150,578     $ (42,791   $ 79,743  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (15,545   $ 150,578     $ (42,791   $ 79,743  

Other comprehensive (loss) income:

        

Foreign currency translation adjustments

     (552     (1,600     4,015       (1,080

Net gain (loss) on intra-entity foreign currency transactions, net of tax expense (benefit) $663, $(650), $1,607 and $84

     (2,175     (4,238     7,299       (428
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (2,727     (5,838     11,314       (1,508
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (18,272   $ 144,740     $ (31,477   $ 78,235  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Nine Months     Nine Months  
     Ended     Ended  
     October 28, 2017     October 29, 2016  

Cash flows from operating activities:

    

Net (loss) income

   $ (42,791   $ 79,743  

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

    

Depreciation and amortization

     32,848       41,917  

Impairment of assets

     —         142,271  

Amortization of lease rights and other assets

     3,177       2,054  

Amortization of debt issuance costs

     6,462       6,176  

Accretion of debt premium

     (2,209     (2,029

Non-cash pay-in-kind interest expense

     1,200       9,156  

Net unfavorable accretion of lease obligations

     (47     (190

Loss on sale/retirement of property and equipment, net

     161       228  

Gain on early debt extinguishment

     —         (317,323

Gain on sale of intangible assets/lease rights

     —         (303

Stock-based compensation expense (benefit)

     190       (11

(Increase) decrease in:

    

Inventories

     (23,105     (1,249

Prepaid expenses

     (114     (4,960

Other assets

     (1,444     (1,658

Increase (decrease) in:

    

Trade accounts payable

     9,500       (1,353

Income taxes payable

     153       355  

Accrued interest payable

     (29,186     (23,416

Accrued expenses and other liabilities

     (4,781     (9,374

Deferred income taxes

     (1,108     (2,377

Deferred rent expense

     (1,074     (1,274
  

 

 

   

 

 

 

Net cash used in operating activities

     (52,168     (83,617
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisition of property and equipment

     (13,014     (12,351

Acquisition of intangible assets/lease rights

     (48     (110

Proceeds from sale of intangible assets/lease rights

     —         303  
  

 

 

   

 

 

 

Net cash used in investing activities

     (13,062     (12,158
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from revolving credit facilities

     118,000       165,427  

Payments on revolving credit facilities

     (53,200     (40,935

Payment on current portion of long-term debt

     (18,420     —    

Payments of unamortized interest related to long-term debt

     (9,506     —    

Payment of debt issuance costs

     (742     (11,272

Principal payments on capital lease

     (236     (176

Capital contribution from Parent

     —         11,550  
  

 

 

   

 

 

 

Net cash provided by financing activities

     35,896       124,594  
  

 

 

   

 

 

 

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

     (639     (7,174
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (29,973     21,645  

Cash and cash equivalents, at beginning of period

     55,792       18,871  
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 25,819     $ 40,516  
  

 

 

   

 

 

 
Supplemental disclosure of cash flow information:     

Interest paid

   $ 162,889     $ 167,819  

Income taxes paid

     5,261       1,425  
Non-cash supplemental financing activities:     

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

   $ 5,009     $ —    

Decrease in adjustment to carrying value

     5,009       —    

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Presentation

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

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

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

 

2. Recent Accounting Pronouncements

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

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

 

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

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

In March 2016, the FASB issued ASU 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20), Recognition of Breakage for Certain Prepaid Stored-Value Products. The new guidance addresses diversity in practice related to the derecognition of a prepaid stored-value product liability. ASU 2016-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The amended standard may be adopted on either a modified retrospective or a retrospective basis. The Company is evaluating the impact of adopting the new guidance on the consolidated financial statements in conjunction with its evaluation of ASU 2014-09 discussed below.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for substantially all leases. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of income. The new standard is effective for years beginning after December 15, 2018, including interim periods within those years. The Company expects the adoption of ASU 2016-02 to have a material impact on its consolidated financial position.

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

 

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

 

3. Fair Value Measurements

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

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

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

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

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

 

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The following table summarizes the Company’s assets measured at fair value on a nonrecurring basis segregated among the appropriate levels within the fair value hierarchy. The levels within the fair value hierarchy remain unchanged as of October 28, 2017.

 

(in thousands):          Fair Value Measurements as of October 29, 2016 Using        
           Quoted Prices in      Significant      Significant        
           Active Markets for      Other Observable      Unobservable     Impairment  
           Identical Assets      Inputs      Inputs     Charges (Estimated)  
     Carrying Value     (Level 1)      (Level 2)      (Level 3) (1)     Three Months Ended
October 29, 2016
 

Goodwill

   $ 314,405     $ —        $ —        $ 184,405     $ 130,000  

Intangible assets

   $ 406,000 (2)    $ —        $ —        $ 397,000 (3)    $ 9,000  

Long-lived assets

   $ 52,737     $ —        $ —        $ 49,466     $ 3,271  

 

(1) See Note 4 – Impairment Charges for discussion of the valuation techniques used to measure fair value, the description of the inputs and information used to develop those inputs.
(2) Carrying value comprised of tradenames relating to North America and Europe, $257,000 and $149,000, respectively.
(3) Fair Value comprised of tradenames relating to North America and Europe, $253,000 and $144,000, respectively.

During the three months ended October 29, 2016, goodwill with a carrying value of $314.4 million was written down to its fair value of $184.4 million, resulting in an impairment charge of $130.0 million, which was included in “Impairment of assets” on the Consolidated Statement of Operations and Comprehensive (Loss) Income.

During the three months ended October 29, 2016, tradenames with a carrying value of $406.0 million were written down to their fair value of $397.0 million, resulting in an impairment charge of $9.0 million, which was included in “Impairment of assets” on the Consolidated Statement of Operations and Comprehensive (Loss) Income.

During the three months ended October 29, 2016, long-lived assets held and used with a carrying value of $52.7 million were written down to their fair value of $49.5 million, resulting in an impairment charge of $3.3 million, which was included in “Impairment of assets” on the Consolidated Statement of Operations and Comprehensive (Loss) Income.

For goodwill, intangible assets and long-lived assets, see Note 4 – Impairment Charges.

Financial Instruments Not Measured at Fair Value

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

The Company considers all investments with a maturity of three months or less when acquired to be cash equivalents. The Company’s cash equivalent instruments are valued using quoted market prices and are primarily U.S. Treasury securities. The revolving credit facilities approximate fair value due to the variable component of the interest rate. Excluding unamortized debt issuance costs, the estimated fair value of the Company’s long-term debt was approximately $1.26 billion as of October 28, 2017, compared to a carrying value of $2.12 billion at that date. Excluding unamortized debt issuance costs, the estimated fair value of the Company’s long-term debt (including current portion) was approximately $1.09 billion as of January 28, 2017, compared to a carrying value of $2.15 billion at that date. For publicly-traded debt, the fair value (estimated market value) is based on quoted market prices in less active markets. For non-publicly traded debt, fair value is estimated based on quoted prices for similar instruments. If measured at fair value in the financial statements, long-term debt excluding term loans would be classified as Level 2 in the fair value hierarchy, while term loans would be classified as Level 3 in the fair value hierarchy.

 

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4. Impairment Charges

The Company recorded estimated non-cash impairment charges for the three months ended October 29, 2016. No impairment charges were recorded for the three and nine months ended October 28, 2017. (in thousands):

 

     Three Months  
     Ended  
     October 29, 2016  

Goodwill (estimated)

   $ 130,000  

Tradenames (estimated)

     9,000  

Long-lived assets (estimated)

     3,271  
  

 

 

 

Total impairment charges (estimated)

   $ 142,271  
  

 

 

 

The Company’s principal indefinite-lived intangible assets, other than goodwill, include tradenames and lease rights which are not subject to amortization. Goodwill and other indefinite-lived intangible assets are tested for impairment annually or more frequently when events or circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. The Company performs annual impairment tests during the fourth quarter of its fiscal year.

The Company’s principal definite-lived intangible assets include franchise agreements and lease rights which are subject to amortization and leases that existed at date of acquisition with terms that were favorable to market at that date. Definite-lived intangible assets are tested for impairment when events or circumstances indicate that the carrying value of the asset may not be recoverable.

During the third quarter of Fiscal 2016, declines in customer traffic at shopping malls, where many of our stores are located, and inventory imbalances had adversely affected our results of operations. Generally, the Company tests assets for impairment annually as of the first day of the fourth quarter of its fiscal year. However, during the third quarter of Fiscal 2016, the Company considered the impact the economic conditions had on its business as an indicator under ASC Topic 350, Intangibles – Goodwill and Other, that a reduction in its goodwill fair value may have occurred.

Accordingly, the Company performed its test for goodwill impairment following the two-step process defined in ASC Topic 350. During testing under Step 1 of ASC Topic 350, management determined the fair value of the Europe reporting unit was less than its carrying value. Given the timing of the Step 1 analysis and complexities inherent in the Step 2 calculation, management recorded a preliminary estimate of the goodwill impairment charge. Accordingly, management utilized Step 1 of the test to determine the extent of the goodwill impairment and concluded the carrying value of the goodwill of the Europe reporting unit was impaired by $130.0 million. As a result, the Company recorded a preliminary estimated non-cash impairment charge of $130.0 million in the third quarter of 2016, which was included in “Impairment of assets” on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). During the fourth quarter of Fiscal 2016, the Company completed its Step 2 testing and, accordingly, adjusted the preliminary estimated goodwill impairment charges recorded in the third quarter of Fiscal 2016, by recording an additional goodwill impairment charge of $39.3 million.

In the third quarter of Fiscal 2016, the Company determined that the tradenames intangible assets in its Europe reporting unit and its North America reporting unit were impaired by $5.0 million and $4.0 million, respectively. As a result, the Company recorded a preliminary estimated non-cash impairment charge of $9.0 million in the third quarter of Fiscal 2016, which was included in “Impairment of assets” on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

In the third quarter of Fiscal 2016, the Company determined that the leasehold improvements in its Europe reporting unit were impaired by $3.3 million. As a result, the Company recorded a preliminary estimated non-cash impairment charge of $3.3 million in the third quarter of Fiscal 2016, which was included in “Impairment of assets” on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

 

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5. Debt

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

 

     October 28, 2017      January 28, 2017  

Current portion of long-term debt:

     

10.5% Senior subordinated notes due 2017

   $ —        $ 18,420  

Unamortized debt issuance cost

     —          (15
  

 

 

    

 

 

 

Total current portion of long-term debt, net

   $ —        $ 18,405  
  

 

 

    

 

 

 

Long-term debt:

     

Claire’s Gibraltar unsecured term loan due 2019

   $ 40,000      $ 40,000  

Claire’s Gibraltar Intermediate secured term loan due 2019

     51,200        50,000  

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

     1,129,410        1,131,619  

8.875% Senior secured second lien notes due 2019

     222,300        222,300  

6.125% Senior secured first lien notes due 2020

     210,000        210,000  

7.75% Senior notes due 2020

     216,742        216,742  

9.0% Claire’s Stores term loan due 2021

     31,804        30,933  

9.0% CLSIP term loan due 2021

     103,356        100,525  

9.0% Claire’s Gibraltar term loan due 2021

     47,701        46,394  

Adjustment to carrying value

     71,781        86,296  

Unamortized debt issuance costs

     (11,333      (16,156
  

 

 

    

 

 

 

Total long-term debt, net

   $ 2,112,961      $ 2,118,653  
  

 

 

    

 

 

 

Revolving credit facility:

     

U.S. asset based lending credit facility due 2019

   $ 71,000      $ 6,200  

Unamortized debt issuance costs

     (1,393      (2,275
  

 

 

    

 

 

 

Total revolving credit facility, net

   $ 69,607      $ 3,925  
  

 

 

    

 

 

 

Obligation under capital lease (including current portion)

   $ 16,475      $ 16,712  
  

 

 

    

 

 

 

 

(1) Amount includes unamortized premium of $4,410 and $6,619 as of October 28, 2017 and January 28, 2017, respectively.

Exchange Offer

On September 20, 2016, the Company, CLSIP LLC, a newly formed subsidiary designated as unrestricted under the Company’s debt agreements (“CLSIP ”) and Claire’s (Gibraltar) Holdings Limited, the holding company of the Company’s European operations (“Claire’s Gibraltar” and together with the Company and CLSIP, the “Offerors”) completed an offer to exchange (the “Exchange Offer”) the Company’s issued and outstanding (i) 8.875% Senior Secured Second Lien Notes due 2019 (the “Second Lien Notes”), (ii) 7.750% Senior Notes due 2020 (the “Unsecured Notes” ) and (iii) 10.500% Senior Subordinated Notes due 2017 (the “Subordinated Notes”), for (i) Senior Secured Term Loans maturing 2021 of the Company (“Claire’s Stores Term Loans”), (ii) Senior Secured Term Loans maturing 2021 of CLSIP (“CLSIP Term Loans”) and (iii) Senior Term Loans maturing 2021 of Claire’s Gibraltar (“Claire’s Gibraltar Term Loans” and together with the Claire’s Stores Term Loans and the CLSIP Term Loans, the “Term Loans”).

 

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On September 20, 2016, the Offerors accepted from non-affiliate holders approximately $227.7 million aggregate principal amount of Second Lien Notes, approximately $103.3 million aggregate principal amount of Unsecured Notes and approximately $0.7 million aggregate principal amount of Subordinated Notes in exchange for approximately $20.4 million aggregate principal amount of Claire’s Stores Term Loans, approximately $66.3 million aggregate principal amount of CLSIP Term Loans and approximately $30.6 million aggregate principal amount of Claire’s Gibraltar Term Loans and entered into the respective term loan agreements providing for each of the Term Loans.

Claire’s Inc., the parent of the Company (“Parent”) owned approximately $58.7 million aggregate principal amount of the Subordinated Notes and certain funds managed by affiliates of Apollo Global Management, LLC (the “Apollo Funds” and, together with Parent, the “Affiliated Holders”) owned approximately $183.6 million aggregate principal amount of the Company’s 10.500% PIK Senior Subordinated Notes due 2017 (the “PIK Subordinated Notes”), in each case immediately prior to the completion of the Exchange Offer. No Affiliated Holder participated in the Exchange Offer. However, because the Exchange Offer was not fully subscribed, following the allocation of the maximum consideration offered in the Exchange Offer, on September 20, 2016, the Affiliated Holders effected a similar exchange of Subordinated Notes, in the case of Parent, and PIK Subordinated Notes, in the case of the Apollo Funds, for Term Loans on the same economic terms offered in the Exchange Offer for the Unsecured Notes that were tendered prior to the Exchange Offer’s “Early Tender Time”, including additional consideration paid to holders of Unsecured Notes as a result of the undersubscription (the “Affiliated Holder Exchange”). On September 20, 2016, the Offerors accepted from the Affiliated Holders approximately $58.7 million aggregate principal amount of Subordinated Notes and $183.6 million aggregate principal amount of PIK Subordinated Notes pursuant to the Affiliated Holder Exchange in exchange for approximately $10.5 million aggregate principal amount of Claire’s Stores Term Loans, approximately $34.2 million aggregate principal amount of CLSIP Term Loans and approximately $15.8 million aggregate principal amount of Claire’s Gibraltar Term Loans. The interest payable on the Term Loans held by the Affiliated Holders or their affiliates will be pay-in-kind.

The following is a summary of our Exchange Offer (in thousands):

 

     Three Months  
     Ended  
     October 29,
2016
 

Reduction in carrying value of debt exchange

   $ 396,090  

Reduction of accrued interest associated with debt exchanged

     20,066  

Write-off of unamortized debt issuance costs, plus professional fees incurred

     (11,843

Adjustment to carrying value of debt

     (86,296
  

 

 

 
   $ 318,017  
  

 

 

 

As part of the transaction, we recorded an adjustment to carrying value for the debt issued in the Exchange Offer. The adjustment to carrying value of debt represents the interest to be paid in cash on the Term Loans issued in the Exchange Offer through the maturity date of those Term Loans. This amount increased the Company’s carrying value of debt by $86.3 million. Such amount will be reduced in the future years as scheduled interest is paid on those Term Loans.

10.50% Senior Subordinated Notes

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

ABL Credit Facility

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

 

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

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

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

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

As of October 28, 2017, we had $71.0 million of borrowings, which together with the $4.0 million of letters of credit outstanding, reduces the borrowing availability to $0.0 million.

U.S. Revolving Credit Facility

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

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

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

 

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

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

As of October 28, 2017, no borrowings were outstanding under the U.S. Credit Facility.

Debt Covenants

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

 

    incur additional indebtedness;

 

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

 

    make certain investments;

 

    create or incur certain liens;

 

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

 

    transfer or sell assets;

 

    engage in certain transactions with its affiliates; and

 

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

Certain of these covenants in the indentures governing the Company’s note indebtedness, such as limitations on the Company’s ability to make certain payments such as dividends, or incur debt, will no longer apply if the notes have investment grade ratings from both of the rating agencies of Moody’s Investor Services, Inc. (“Moody’s”) and Standard & Poor’s Ratings Group (“S&P”) and no event of default has occurred. Since the date of issuance of the notes, the notes have not received investment grade ratings from Moody’s or S&P. Accordingly, all of the covenants under the notes currently apply to the Company. None of the covenants under the notes, however, require the Company to maintain any particular financial ratio or other measure of financial performance.

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

Europe Bank Credit Facilities

The Company’s non-U.S. subsidiaries have bank credit facilities totaling approximately $1.9 million. The facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in the respective country of operation. As of October 28, 2017, there was a reduction of $1.8 million for outstanding bank guarantees, which reduces the borrowing availability to $0.1 million as of that date.

 

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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 regarding intellectual property rights.

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

 

7. Accumulated Other Comprehensive Loss

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

 

     Total (1)  

Balance as of January 28, 2017

   $ (51,881

Other comprehensive income

     11,314  
  

 

 

 

Balance as of October 28, 2017

   $ (40,567
  

 

 

 

 

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

 

8. Stock Options and Stock-Based Compensation

The following is a summary of activity in the Company’s stock option plan for the nine months ended October 28, 2017:

 

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

Outstanding as of January 28, 2017

     3,125,062      $ 5.67     

Options granted

     239,200      $ 0.56     

Options exercised

     —          

Options forfeited

     (33,913    $ 7.46     

Options expired

     (57,987    $ 9.51     
  

 

 

       

Outstanding as of October 28, 2017

     3,272,362      $ 5.21        4.2  
  

 

 

       

Options vested and expected to vest as of October 28, 2017

     3,071,907      $ 5.41        4.1  
  

 

 

       

Exercisable as of October 28, 2017

     1,734,786      $ 6.89        3.5  
  

 

 

       

The weighted average grant date fair value of options granted during the nine months ended October 28, 2017 and October 29, 2016 was $0.19 and $0.33, respectively.

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

 

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9. Income Taxes

The effective income tax rate was (12.8)% and (10.0)% for the three and nine months ended October 28, 2017. This effective income tax rate differed from the statutory federal income tax rate of 35% primarily from foreign tax rate differentials as compared to the U.S. statutory rate and the exclusion of losses for certain countries for which no tax benefit is recognized.

The effective income tax rate was (0.5)% and (1.1)% for the three and nine months ended October 29, 2016. This effective income tax rate differed from the statutory federal income tax rate of 35% primarily from the exclusion from taxable income of the gain on extinguishment of debt and the increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses included in income in the three and nine months ended October 29, 2016 by the Company’s U.S. operations.

 

10. Related Party Transactions

Indebtedness

As discussed, above in Note 5, the Apollo Funds and Parent completed the Affiliated Holder Exchange on September 20, 2016. As of October 28, 2017 and January 28, 2017, Parent and affiliates held $65.6 million and $60.6 million, respectively, of the Company’s indebtedness. For the three and nine months ended October 28, 2017 and October 29, 2016, the Company recognized interest expense related to the indebtedness held by Parent and affiliates of $0.0 million, $0.0 million, $3.6 million and $16.0 million, respectively. Interest on the debt held as of October 28, 2017 is payable in kind.

Management Services Agreement

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

In addition, on June 6, 2017, the Company and Cowen entered into a letter agreement (the “Cowen Management Agreement”) pursuant to which Cowen agreed to provide the Company with certain financial advisory and investment banking services on a month-to-month basis. In return for such services, the Company agreed to pay Cowen a monthly cash fee of $32,000, payable at the beginning of each month, and in addition, to reimburse Cowen for all reasonable out-of-pocket expenses. The Company also agreed to provide Cowen (and its affiliates) with a customary indemnification. Both Cowen and the Company had the right to terminate the Cowen Management Agreement at any time during its term on 30 days prior written notice. While in effect, the terms of the Cowen Management Agreement were to govern in the event of any conflict between the Cowen Management Agreement and the terms of the Management Services Agreement referred to above. On September 1, 2017, the Company elected to terminate the Cowen Management Agreement effective as of September 30, 2017.

 

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11. Segment Information

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

Net sales, depreciation and amortization and operating income for the three and nine months ended October 28, 2017 and October 29, 2016 are as follows (in thousands):

 

     Three Months      Three Months      Nine Months      Nine Months  
     Ended      Ended      Ended      Ended  
     October 28,
2017
     October 29,
2016
     October 28,
2017
     October 29,
2016
 

Net sales:

           

North America

   $ 194,705      $ 192,885      $ 586,698      $ 586,965  

Europe

     119,879        119,156        344,144        341,895  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

     314,584        312,041        930,842        928,860  
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization:

           

North America

     6,673        8,641        20,803        26,073  

Europe

     4,082        5,420        12,045        15,844  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization

     10,755        14,061        32,848        41,917  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income for reportable segments:

           

North America

     22,777        15,501        64,793        56,256  

Europe

     7,000        6,582        27,364        7,253  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income for reportable segments

     29,777        22,083        92,157        63,509  

Impairment of assets

     —          142,271        —          142,271  

Severance and transaction-related costs

     335        205        867        1,903  
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated operating income (loss)

     29,442        (120,393      91,290        (80,665

Gain on early debt extinguishment

     —          317,323        —          317,323  

Interest expense, net

     43,229        47,101        130,203        157,803  
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated (loss) income before income tax expense (benefit)

   $ (13,787    $ 149,829      $ (38,913    $ 78,855  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Excluded from operating income for the North America segment are severance and transaction-related costs of approximately $0.0 million and $0.0 million for the three months ended October 28, 2017 and October 29, 2016, respectively, and $0.3 million and $1.3 million for the nine months ended October 28, 2017 and October 29, 2016, respectively. For the three and nine months ended October 29, 2016, North America operating income also excludes impairment charges of $4.0 million, respectively.

Excluded from operating income for the Europe segment are severance and transaction-related costs of approximately $0.3 million and $0.2 million for the three months ended October 28, 2017 and October 29, 2016, respectively, and $0.6 million and $0.6 million for the nine months ended October 28, 2017 and October 29, 2016, respectively. For the three and nine months ended October 29, 2016, Europe operating income also excludes impairment charges of $138.3 million, respectively.

 

12. Supplemental Financial Information

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

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

 

18


Table of Contents

Condensed Consolidating Balance Sheet

October 28, 2017

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 4,592     $ 3,891     $ 17,336     $ —       $ 25,819  

Inventories

     —         87,783       70,044       —         157,827  

Prepaid expenses

     1,095       1,127       14,533       —         16,755  

Other current assets

     117       15,466       11,654       —         27,237  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     5,804       108,267       113,567       —         227,638  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     5,817       138,551       80,988       —         225,356  

Leasehold improvements

     1,315       183,618       117,109       —         302,042  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     7,132       322,169       198,097       —         527,398  

Accumulated depreciation and amortization

     (5,669     (255,363     (145,525     —         (406,557
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,463       66,806       52,572       —         120,841  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —         18,055       —         —         18,055  

Accumulated depreciation and amortization

     —         (6,990     —         —         (6,990
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —         11,065       —         —         11,065  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —         366,175       112,336       (478,511     —    

Investment in subsidiaries

     1,651,509       (44,059     —         (1,607,450     —    

Goodwill

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

Intangible assets, net

     188,100       149,694       201,055       (84,634     454,215  

Other assets

     1,144       4,102       37,099       —         42,345  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,840,753       1,463,429       495,548       (2,170,595     1,629,135  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,848,020     $ 1,649,567     $ 661,687     $ (2,170,595   $ 1,988,679  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Trade accounts payable

   $ 892     $ 26,003     $ 53,992     $ —       $ 80,887  

Income taxes payable

     —         103       5,658       —         5,761  

Accrued interest payable

     23,843       —         236       —         24,079  

Accrued expenses and other current liabilities

     11,052       33,540       40,902       —         85,494  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     35,787       59,646       100,788       —         196,221  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     478,511       —         —         (478,511     —    

Long-term debt, net

     1,812,724       143,929       156,308       —         2,112,961  

Revolving credit facility, net

     69,607       —         —         —         69,607  

Obligation under capital lease

     —         16,082       —         —         16,082  

Deferred tax liability

     —         93,554       5,580       —         99,134  

Deferred rent expense

     —         22,662       11,315       —         33,977  

Unfavorable lease obligations and other long-term liabilities

     —         9,306       —         —         9,306  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,360,842       285,533       173,203       (478,511     2,341,067  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —         367       2       (369     —    

Additional paid in capital

     630,686       1,520,543       766,993       (2,287,536     630,686  

Accumulated other comprehensive income (loss), net of tax

     (40,567     (4,282     (36,524     40,806       (40,567

Accumulated deficit

     (1,138,728     (212,240     (342,775     555,015       (1,138,728
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (548,609     1,304,388       387,696       (1,692,084     (548,609
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 1,848,020     $ 1,649,567     $ 661,687     $ (2,170,595   $ 1,988,679  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

Condensed Consolidating Balance Sheet

January 28, 2017

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

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

Inventories

     —         74,307       55,932       —         130,239  

Prepaid expenses

     463       1,397       12,782       —         14,642  

Other current assets

     —         14,281       10,989       —         25,270  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

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

Leasehold improvements

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Accumulated depreciation and amortization

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —         18,055       —         —         18,055  

Accumulated depreciation and amortization

     —         (6,313     —         —         (6,313
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —         11,742       —         —         11,742  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

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

Investment in subsidiaries

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

Goodwill

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

Intangible assets, net

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

Other assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Current portion of long-term debt, net

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

Trade accounts payable

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

Income taxes payable

     —         1,160       4,923       —         6,083  

Accrued interest payable

     52,667       —         599       —         53,266  

Accrued expenses and other current liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     349,923       —         —         (349,923     —    

Long-term debt, net

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

Revolving credit facility, net

     3,925       —         —         —         3,925  

Obligation under capital lease

     —         16,388       —         —         16,388  

Deferred tax liability

     —         93,554       5,701       —         99,255  

Deferred rent expense

     —         23,424       10,876       —         34,300  

Unfavorable lease obligations and other long-term liabilities

     —         10,373       3       —         10,376  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —         367       2       (369     —    

Additional paid in capital

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

Accumulated other comprehensive income (loss), net of tax

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

Accumulated deficit

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended October 28, 2017

(in thousands)

 

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —       $ 177,592     $ 136,992     $ —       $ 314,584  

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

     3,283       87,140       71,669       —         162,092  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (3,283     90,452       65,323       —         152,492  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     5,519       58,360       51,457       —         115,336  

Depreciation and amortization

     176       6,028       4,551       —         10,755  

Severance and transaction-related costs

     (25     2       358       —         335  

Other income, net

     (3,257     (9     (110     —         (3,376
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,413       64,381       56,256       —         123,050  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (5,696     26,071       9,067       —         29,442  

Interest expense, net

     39,983       533       2,713       —         43,229  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (45,679     25,538       6,354       —         (13,787

Income tax expense (benefit)

     —         308       1,450       —         1,758  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (45,679     25,230       4,904       —         (15,545

Equity in earnings (loss) of subsidiaries

     30,134       1,783       —         (31,917     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (15,545     27,013       4,904       (31,917     (15,545

Foreign currency translation adjustments

     (552     (404     994       (590     (552

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

     (2,175     (702     (1,568     2,270       (2,175
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (2,727     (1,106     (574     1,680       (2,727
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (18,272   $ 25,907     $ 4,330     $ (30,237   $ (18,272
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended October 29, 2016

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations      Consolidated  

Net sales

   $ —       $ 176,923     $ 135,118     $ —        $ 312,041  

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

     3,163       92,929       70,741       —          166,833  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit (deficit)

     (3,163     83,994       64,377       —          145,208  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other expenses:

           

Selling, general and administrative

     5,680       57,200       50,084       —          112,964  

Depreciation and amortization

     250       7,852       5,959       —          14,061  

Impairment of assets

     4,000       —         138,271       —          142,271  

Severance and transaction-related costs

     (7     7       205       —          205  

Other (income) expense

     (2,305     (1,380     (215     —          (3,900
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     7,618       63,679       194,304       —          265,601  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating income (loss)

     (10,781     20,315       (129,927     —          (120,393

Gain on early debt extinguishment

     317,323       —         —            317,323  

Interest expense, net

     45,796       548       757       —          47,101  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income (loss) before income taxes

     260,746       19,767       (130,684     —          149,829  

Income tax expense (benefit)

     —         (915     166       —          (749
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income (loss) from continuing operations

     260,746       20,682       (130,850     —          150,578  

Equity in earnings (loss) of subsidiaries

     (110,168     595       —         109,573        —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss)

     150,578       21,277       (130,850     109,573        150,578  

Foreign currency translation adjustments

     (1,600     (161     (378     539        (1,600

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

     (4,238     (595     (4,273     4,868        (4,238
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss)

     (5,838     (756     (4,651     5,407        (5,838
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income (loss)

   $ 144,740     $ 20,521     $ (135,501   $ 114,980      $ 144,740  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

21


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Nine Months Ended October 28, 2017

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ 540,530     $ 390,312     $ —       $ 930,842  

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

     9,462       263,203       202,798       —         475,463  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (9,462     277,327       187,514       —         455,379  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     17,239       174,362       147,021       —         338,622  

Depreciation and amortization

     548       18,733       13,567       —         32,848  

Severance and transaction-related costs

     209       75       583       —         867  

Other income, net

     (6,112     (313     (1,823     —         (8,248
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     11,884       192,857       159,348       —         364,089  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (21,346     84,470       28,166       —         91,290  

Interest expense, net

     120,324       1,594       8,285       —         130,203  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (141,670     82,876       19,881       —         (38,913

Income tax expense (benefit)

     —         (635     4,513       —         3,878  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (141,670     83,511       15,368       —         (42,791

Equity in earnings (loss) of subsidiaries

     98,879       (374     —         (98,505     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (42,791     83,137       15,368       (98,505     (42,791

Foreign currency translation adjustments

     4,015       264       2,635       (2,899     4,015  

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

     7,299       641       7,903       (8,544     7,299  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     11,314       905       10,538       (11,443     11,314  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (31,477   $ 84,042     $ 25,906     $ (109,948   $ (31,477
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Nine Months Ended October 29, 2016

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ 542,722     $ 386,138     $ —       $ 928,860  

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

     8,749       278,426       208,694       —         495,869  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (8,749     264,296       177,444       —         432,991  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     15,245       170,824       146,989       —         333,058  

Depreciation and amortization

     730       23,709       17,478       —         41,917  

Impairment of assets

     4,000       —         138,271       —         142,271  

Severance and transaction-related costs

     1,342       4       557       —         1,903  

Other (income) expense

     (5,818     (966     1,291       —         (5,493
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     15,499       193,571       304,586       —         513,656  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (24,248     70,725       (127,142     —         (80,665

Gain on early debt extinguishment

     317,323       —         —           317,323  

Interest expense, net

     154,782       1,641       1,380       —         157,803  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     138,293       69,084       (128,522     —         78,855  

Income tax expense (benefit)

     —         (1,691     803       —         (888
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     138,293       70,775       (129,325     —         79,743  

Equity in earnings (loss) of subsidiaries

     (58,550     (999     —         59,549       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     79,743       69,776       (129,325     59,549       79,743  

Foreign currency translation adjustments

     (1,080     777       (3,337     2,560       (1,080

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

     (428     1,026       (509     (517     (428
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (1,508     1,803       (3,846     2,043       (1,508
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 78,235     $ 71,579     $ (133,171   $ 61,592     $ 78,235  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows

Nine Months Ended October 28, 2017

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (42,791   $ 83,137     $ 15,368     $ (98,505   $ (42,791

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

          

Loss (equity) in earnings of subsidiaries

     (98,879     374       —         98,505       —    

Depreciation and amortization

     548       18,733       13,567       —         32,848  

Amortization of lease rights and other assets

     —         —         3,177       —         3,177  

Amortization of debt issuance costs

     5,661       —         801       —         6,462  

Accretion of debt premium

     (2,209     —         —         —         (2,209

Non-cash pay-in-kind interest expense

     —         —         1,200       —         1,200  

Net accretion of unfavorable lease obligations

     —         (49     2       —         (47

Loss on sale/retirement of property and equipment, net

     —         153       8       —         161  

Stock-based compensation expense (benefit)

     172       —         18       —         190  

(Increase) decrease in:

          

Inventories

     —         (13,476     (9,629     —         (23,105

Prepaid expenses

     (632     270       248       —         (114

Other assets

     (191     (955     (298     —         (1,444

Increase (decrease) in:

          

Trade accounts payable

     (828     5,249       5,079       —         9,500  

Income taxes payable

     —         (1,046     1,199       —         153  

Accrued interest payable

     (28,824     —         (362     —         (29,186

Accrued expenses and other liabilities

     (3,422     (983     (376     —         (4,781

Deferred income taxes

     —         —         (1,108     —         (1,108

Deferred rent expense

     —         (763     (311     —         (1,074
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (171,395     90,644       28,583       —         (52,168
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     —         (8,097     (4,917     —         (13,014

Acquisition of intangible assets/lease rights

     —         (48     —         —         (48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —         (8,145     (4,917     —         (13,062
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from revolving credit facilities

     118,000       —         —         —         118,000  

Payments on revolving credit facilities

     (53,200     —         —         —         (53,200

Payment on current portion of long-term debt

     (18,420     —         —         —         (18,420

Payments of unamortized interest related to long-term debt

     (1,653     (5,373     (2,480     —         (9,506

Payment of debt issuance costs

     (384     —         (358     —         (742

Principal payments on capital lease

     —         (236     —         —         (236

Intercompany activity, net

     128,606       (77,380     (51,226     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     172,949       (82,989     (54,064     —         35,896  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —         1,376       (2,015     —         (639
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     1,554       886       (32,413     —         (29,973

Cash and cash equivalents, at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 4,592     $ 3,891     $ 17,336     $ —       $ 25,819  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Cash Flows

Nine Months Ended October 29, 2016

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ 79,743     $ 69,776     $ (129,325   $ 59,549     $ 79,743  

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

          

Loss (equity) in earnings of subsidiaries

     58,550       999       —         (59,549     —    

Depreciation and amortization

     730       23,709       17,478       —         41,917  

Impairment of assets

     4,000       —         138,271       —         142,271  

Amortization of lease rights and other assets

     —         —         2,054       —         2,054  

Amortization of debt issuance costs

     5,874       —         302       —         6,176  

Accretion of debt premium

     (2,029     —         —         —         (2,029

Non-cash in kind interest expense

     9,156       —         —         —         9,156  

Net accretion of unfavorable lease obligations

     —         (188     (2     —         (190

Loss on sale/retirement of property and equipment, net

     —         219       9       —         228  

Gain on early debt extinguishment

     (317,323     —         —         —         (317,323

Gain on sale of intangible assets/lease rights

     —         —         (303     —         (303

Stock-based compensation expense (benefit)

     (25     —         14       —         (11

(Increase) decrease in:

          

Inventories

     —         5,654       (6,903     —         (1,249

Prepaid expenses

     (618     (172     (4,170     —         (4,960

Other assets

     (1,389     32       (301     —         (1,658

Increase (decrease) in:

          

Trade accounts payable

     1,070       (4,497     2,074       —         (1,353

Income taxes payable

     —         1,136       (781     —         355  

Accrued interest payable

     (23,679     —         263       —         (23,416

Accrued expenses and other liabilities

     5,016       (10,817     (3,573     —         (9,374

Deferred income taxes

     —         (1,493     (884     —         (2,377

Deferred rent expense

     —         (912     (362     —         (1,274
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (180,924     83,446       13,861       —         (83,617
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     (580     (7,040     (4,731     —         (12,351

Acquisition of intangible assets/lease rights

     —         (30     (80     —         (110

Proceeds from sale of intangible assets/lease rights

     —         —         303       —         303  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (580     (7,070     (4,508     —         (12,158
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from revolving credit facilities

     68,000       —         97,427       —         165,427  

Payments on revolving credit facilities

     —         —         (40,935     —         (40,935

Payment of debt issuance costs

     (10,541     —         (731     —         (11,272

Principal payments on capital lease

     —         (176     —         —         (176

Capital contribution received from parent

     11,550       —         —         —         11,550  

Intercompany activity, net

     125,371       (78,237     (47,134     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     194,380       (78,413     8,627       —         124,594  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —         2,449       (9,623     —         (7,174
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     12,876       412       8,357       —         21,645  

Cash and cash equivalents, at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 15,540     $ 3,806     $ 21,170     $ —       $ 40,516  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

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

We are highly leveraged, with significant debt service obligations. As of October 28, 2017, we reported net debt (total debt less cash and cash equivalents) of approximately $2.2 billion, with maturities ranging from 2019 to 2021. See Note 5 – Debt, in the Notes to the accompanying Unaudited Condensed Consolidated Financial Statements for a summary of our outstanding indebtedness as of October 28, 2017, and Note 6 – Debt, in the Notes to Audited Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended January 28, 2017 filed with the Securities and Exchange Commission, for a description of our existing debt, debt agreements, and Exchange Offer.

Results of Consolidated Operations

Management Overview

We are one of the world’s leading specialty retailers of fashionable jewelry and accessories for young women, teens, tweens, and kids. Our vision is to be the emporium of choice for all girls (in age or attitude) across the world. We deliver this by offering a range of innovative, fun and affordable products and services that cater to all of her activities, as she grows up, whenever and wherever. Our broad and dynamic selection of merchandise is unique. We are organized into two operating segments: North America and Europe. We identify our operating segments by how we manage and evaluate our business activities. As of October 28, 2017, we operated a total of 2,638 company-operated stores of which 1,602 were located in all 50 states of the United States, Puerto Rico, Canada and the U.S. Virgin Islands (North America segment) and 1,036 stores were located in the United Kingdom, Switzerland, Austria, Germany, France, Ireland, Spain, Portugal, Netherlands, Belgium, Poland, Czech Republic, Hungary, Italy and Luxembourg (Europe segment). We operate our stores under two brand names: Claire’s® and Icing®. As of October 28, 2017, we also had a total of 929 concession stores, of which 402 were located in the United States and Canada (North America segment) and 527 stores were located in the United Kingdom, France, Spain, Austria, Germany, Italy, Portugal, Switzerland, Hungary and Poland (Europe segment).

As of October 28, 2017, we also franchised 653 stores in Japan, the Middle East, Greece, Guatemala, Malta, India, Dominican Republic, El Salvador, Panama, Indonesia, Costa Rica, Romania, Martinique, Pakistan, Thailand, Southern Africa, Russia, Ecuador, Curacao and Chile. We account for the goods we sell to third parties under franchising agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” (North America segment) in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The franchise fees we charge under the franchising agreements are reported in “Other income, net” (North America segment) in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

Claire’s® is our primary global brand that we operate through company-operated, concession stores, or franchise stores. Claire’s® offers a differentiated and fun store experience with a “treasure hunt” setting that encourages our customer to visit often to explore and find merchandise that appeals to her. We

 

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Table of Contents

believe by maintaining a highly relevant merchandise assortment and offering a compelling value proposition, Claire’s® has universal appeal to teens, pre-teens and kids. Claire’s® target customer is a girl between 3-18 years old for whom we create three distinct ranges: 3 to 6, 6 to 12 and 12 to 18.

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

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

 

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

 

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

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

Financial activity for the three and nine months ended October 28, 2017 includes the following:

 

    Net sales increase of 0.8% and increase of 0.2%; respectively;

 

    Same store sales percentages;

 

     Three Months
Ended
October 28, 2017
    Nine Months
Ended
October 28, 2017
 

         Consolidated

     1.1     2.7

         North America

     2.4     1.8

         Europe

     (1.0 )%      4.3

•    Gross profit percentage increase

     200 basis points       230 basis points  

•    Operating income margin

     9.4     9.8

Operational activity for the three and nine months ended October 28, 2017 includes the following:

 

Store Activity Openings (Closings):

   Three Months
Ended
October 28, 2017
     Nine Months
Ended
October 28, 2017
 
     Opened      Closed(1)      Opened      Closed(1)  

Company-operated

     —          (22      1        (73

Concession

     75        (6      83        (87

Franchise

     14        (11      90        (40
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     89        (39      174        (200
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Due to underperformance or lease renewal terms that did not meet our criteria.

 

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Table of Contents

A summary of our consolidated results of operations for the three and nine months ended October 28, 2017 and October 29, 2016 are as follows (dollars in thousands):

 

     Three Months     Three Months  
     Ended     Ended  
     October 28, 2017     October 29, 2016  

Net sales

   $ 314,584     $ 312,041  

Increase (decrease) in same store sales

     1.1     (1.6 )% 

Gross profit percentage

     48.5     46.5

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

     36.7     36.2

Depreciation and amortization as a percentage of net sales

     3.4     4.5

Impairment of assets

   $ —       $ 142,271  

Operating income (loss)

   $ 29,442     $ (120,393

Gain on early extinguishment of debt

   $ —       $ 317,323  

Net (loss) income

   $ (15,545   $ 150,578  

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

     2,638       2,769  

Number of concession stores at the end of the period

     929       935  
     Nine Months     Nine Months  
     Ended     Ended  
     October 28, 2017     October 29, 2016  

Net sales

   $ 930,842     $ 928,860  

Increase (decrease) in same store sales

     2.7     (4.2 )% 

Gross profit percentage

     48.9     46.6

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

     36.4     35.9

Depreciation and amortization as a percentage of net sales

     3.5     4.5

Impairment of assets

   $ —       $ 142,271  

Operating income (loss)

   $ 91,290     $ (80,665

Gain on early extinguishment of debt

   $ —       $ 317,323  

Net (loss) income

   $ (42,791   $ 79,743  

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

     2,638       2,769  

Number of concession stores at the end of the period

     929       935  

Net sales

Net sales for the three months ended October 28, 2017 increased $2.5 million, or 0.8%, from the three months ended October 29, 2016. The increase was attributable to a favorable foreign currency translation effect of our non-U.S. net sales of $6.3 million, an increase in same store sales of $3.1 million and an increase in new concession and company-operated store sales of $2.9 million, partially offset by the effect of store closures of $9.5 million and decreased sales to franchisees of $0.3 million. Sales would have decreased 1.1% excluding the impact from foreign currency exchange rate changes.

Net sales for the nine months ended October 28, 2017 increased $2.0 million, or 0.2%, from the nine months ended October 29, 2016. The increase was attributable to an increase in same store sales of $23.9 million and an increase in new concession store sales and company-operated store sales of $11.8 million, partially offset by the effect of store closures of $28.9 million, an unfavorable foreign currency translation effect of our non-U.S. net sales of $3.1 million and decreased shipments to franchisees of $1.7 million. Sales would have increased 0.6% excluding the impact of foreign currency exchange rate changes.

For the three months ended October 28, 2017, the increase in same store sales was primarily attributable to an increase in average transaction value of 5.9%, partially offset by a decrease in average number of transactions per store of 3.8%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

For the nine months ended October 28, 2017, the increase in same store sales was primarily attributable to an increase in average transaction value of 7.4%, partially offset by a decrease in average number of transactions per store of 3.8%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

 

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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      Nine Months      Nine Months  
     Ended      Ended      Ended      Ended  

Product Category

   October 28, 2017      October 29, 2016      October 28, 2017      October 29, 2016  

Jewelry

     45.5        46.5        47.6        47.5  

Accessories

     54.5        53.5        52.4        52.5  
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0        100.0        100.0        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

In calculating gross profit and gross profit percentages, we exclude the costs related to our distribution center and depreciation and amortization expense. These costs are included instead in “Selling, general and administrative” expenses in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. 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 October 28, 2017, gross profit percentage increased 200 basis points to 48.5% compared to 46.5% during the three months ended October 29, 2016. The increase in gross profit percentage consisted of a 120 basis point increase in merchandise margin and a 90 basis point decrease in occupancy, partially offset by a 10 basis point increase in buying and buying-related costs. The increase in merchandise margin percentage resulted primarily from higher initial markup and lower markdowns. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in same store sales.

During the nine months ended October 28, 2017, gross profit percentage increased 230 basis points to 48.9% compared to 46.6% during the nine months ended October 29, 2016. The increase in gross profit percentage consisted of a 120 basis point increase in merchandise margin and by a 120 basis point decrease in occupancy costs, partially offset by a 10 basis point increase in buying and buying-related costs. The increase in merchandise margin percentage resulted primarily from higher initial markup and lower markdowns. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in same store sales.

Selling, general and administrative expenses

During the three months ended October 28, 2017, selling, general and administrative expenses increased $2.4 million, or 2.1%, compared to the three months ended October 29, 2016. As a percentage of net sales, selling, general and administrative expenses increased 50 basis points compared to the three months ended October 29, 2016. Excluding an unfavorable $2.3 million foreign currency translation effect, selling, general, and administrative expenses would have increased $0.1 million.

During the nine months ended October 28, 2017, selling, general and administrative expenses increased $5.6 million, or 1.7%, compared to the nine months ended October 29, 2016. As a percentage of net sales, selling, general and administrative expenses increased 50 basis points compared to the nine months ended October 29, 2016. Excluding a favorable $1.7 million foreign currency translation effect, selling, general, and administrative expenses would have increased $7.3 million. Excluding the foreign currency translation effect, the increase was primarily due to increased compensation-related expense, including concession store commission expense and store incentive compensation.

 

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Depreciation and amortization expense

During the three months ended October 28, 2017, depreciation and amortization expense decreased $3.3 million to $10.8 million compared to $14.1 million for the three months ended October 29, 2016. Excluding an unfavorable $0.2 million foreign currency translation effect, the decrease in depreciation and amortization expense would have been $3.5 million. The decrease is primarily due to store closings.

During the nine months ended October 28, 2017, depreciation and amortization expense decreased $9.1 million to $32.8 million compared to $41.9 million for the nine months ended October 29, 2016. Excluding a favorable $0.2 million foreign currency translation effect, the decrease in depreciation and amortization expense would have been $8.9 million. The decrease is primarily due to store closings.

Impairment charges

During the third quarter of Fiscal 2016, declines in customer traffic at shopping malls, where many of our stores are located, and inventory imbalances had adversely affected our results of operations. We performed our tests for goodwill, intangible assets, property and equipment and other asset impairment following relevant accounting standards pertaining to the particular assets being tested. The impairment test conducted in the third quarter of Fiscal 2016 resulted in the recognition of preliminary estimated non-cash impairment charges of $130.0 million, $9.0 million and $3.3 million, relating to goodwill, intangible assets and long-lived assets, respectively. During the fourth quarter of Fiscal 2016, the Company completed its Step 2 testing and, accordingly, adjusted the preliminary estimated goodwill impairment charges recorded in the third quarter of Fiscal 2016, by recording an additional goodwill impairment charge of $39.3 million. See Note 4 – Impairment Charges in the Notes to Consolidated Financial Statements for further discussion of the impairment charges.

Gain on early debt extinguishment

The Company recorded a gain on early extinguishment of debt related to the Exchange Offer in the three months ended October 29, 2016 as follows (in thousands): There were no early debt extinguishment activities during the three and nine months ended October 28, 2017.

 

     Three Months  
     Ended  
     October 29,
2016
 

Reduction in carrying value of debt exchange

   $ 396,090  

Reduction of accrued interest associated with debt exchanged

     20,066  

Write-off of unamortized debt issuance costs, plus professional fees incurred

     (11,843

Adjustment to carrying value of debt

     (86,296
  

 

 

 
   $ 318,017  
  

 

 

 

During the three months ended October 29, 2016, the Company recognized a $694 loss on early debt extinguishment attributed to the write-off of unamortized debt financing costs associated with the replacement of the former U.S. Credit Facility with the ABL Credit Facility.

Other income, net

The following is a summary of other income activity for the three and nine months ended October 28, 2017 and October 29, 2016 (in thousands):

 

     Three Months      Three Months      Nine Months      Nine Months  
     Ended      Ended      Ended      Ended  
     October 28, 2017      October 29, 2016      October 28, 2017      October 29, 2016  

Royalty income

   $ (2,477    $ (2,576    $ (7,754    $ (5,208

Foreign currency exchange loss (gain), net

     (899      (1,021      (489      23  

Gain on sale of assets

     —          (303      —          (303

Other income

     —          —          (5      (5
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ (3,376    $ (3,900    $ (8,248    $ (5,493
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Interest expense, net

During the three months ended October 28, 2017, net interest expense aggregated $43.2 million compared to $47.1 million for the three months ended October 29, 2016. The decrease is primarily due to decreased indebtedness as a result of the Exchange Offer consummated in September 2016 and the extinguishment of the 10.5% Senior Subordinated Notes in the quarter ended April 29, 2017.

During the nine months ended October 28, 2017, net interest expense aggregated $130.2 million compared to $157.8 million for the nine months ended October 29, 2016. The decrease is primarily due to decreased indebtedness as a result of the Exchange Offer consummated in September 2016 and the extinguishment of the 10.5% Senior Subordinated Notes in the quarter ended April 29, 2017.

Income taxes

The effective income tax rate for the three and nine months ended October 28, 2017 was (12.8)% and (10.0)% compared to (0.5)% and (1.1)% for the three and nine months ended October 29, 2016. These effective income tax rates differed from the statutory federal income tax rate of 35% primarily from foreign tax rate differentials as compared to the U.S. statutory rate, the exclusion of losses for certain countries for which no tax benefit is recognized and the exclusion of the gain on extinguishment of debt from taxable income.

Segment Operations

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

North America

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

 

     Three Months     Three Months     Nine Months     Nine Months  
     Ended     Ended     Ended     Ended  
     October 28,
2017
    October 29,
2016
    October 28,
2017
    October 29,
2016
 

Net sales

   $ 194,705     $ 192,885     $ 586,698     $ 586,965  

Increase (decrease) in same store sales

     2.4     (1.0 )%      1.8     (2.0 )% 

Gross profit percentage

     49.6     46.3     49.8     47.5

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

     1,602       1,688       1,602       1,688  

Number of concession stores at the end of the period

     402       333       402       333  

During the three months ended October 28, 2017, net sales in North America increased $1.8 million, or 0.9%, from the three months ended October 29, 2016. The increase was attributable to an increase in same stores sales of $4.4 million, an increase in new concession store sales and company-operated store sales of $3.1 million and a favorable foreign currency translation effect of our non-U.S. net sales of $0.9 million, partially offset by the effect of store closures of $6.3 million and decreased sales to franchisees of $0.3 million. Sales would have increased 0.5% excluding the impact from foreign currency exchange rate changes.

During the nine months ended October 28, 2017, net sales in North America decreased $0.3 million, or 0.0%, from the nine months ended October 29, 2016. The decrease was attributable to the effect of store closures of $19.2 million and decreased sales to franchisees of $1.7 million, partially offset by an increase in new concession store sales and company-operated store sales of $10.4 million, an increase in same store sales of $9.7 million and a favorable foreign currency translation effect of our non-U.S. net sales of $0.5 million. Sales would have decreased 0.1% excluding the impact from foreign currency exchange rate changes.

 

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For the three months ended October 28, 2017, the increase in same store sales was primarily attributable to an increase in average transaction value of 8.4%, partially offset by a decrease in average number of transactions per store of 4.8%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

For the nine months ended October 28, 2017, the increase in same store sales was primarily attributable to an increase in average transaction value of 8.3%, partially offset by a decrease in average number of transactions per store of 6.0%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

During the three months ended October 28, 2017, gross profit percentage increased 330 basis points to 49.6% compared to 46.3% during the three months ended October 29, 2016. The increase in gross profit percentage consisted of an increase in merchandise margin of 180 basis points and by a 160 basis point decrease in occupancy costs, partially offset by a 10 basis point increase in buying and buying-related costs. The increase in merchandise margin percentage resulted primarily from initial markup and lower freight costs. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in same store sales.

During the nine months ended October 28, 2017, gross profit percentage increased 230 basis points to 49.8% compared to 47.5% during the nine months ended October 29, 2016. The increase in gross profit percentage consisted of an increase in merchandise margin of 140 basis points and by a 100 basis point decrease in occupancy costs, partially offset by a 10 basis point increase in buying and buying-related costs. The increase in merchandise margin percentage resulted primarily from lower markdowns and higher trade discounts. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in same store sales.

The 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      Nine Months      Nine Months  
     Ended      Ended      Ended      Ended  

Product Category

   October 28, 2017      October 29, 2016      October 28, 2017      October 29, 2016  

Jewelry

     51.8        52.7        54.0        53.3  

Accessories

     48.2        47.3        46.0        46.7  
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0        100.0        100.0        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Europe

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

 

     Three Months     Three Months     Nine Months     Nine Months  
     Ended     Ended     Ended     Ended  
     October 28,
2017
    October 29,
2016
    October 28,
2017
    October 29,
2016
 

Net sales

   $ 119,879     $ 119,156     $ 344,144     $ 341,895  

Increase (decrease) in same store sales

     (1.0 )%      (2.5 )%      4.3     (7.6 )% 

Gross profit percentage

     46.7     47.0     47.4     45.2

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

     1,036       1,081       1,036       1,081  

Number of concession stores at the end of the period

     527       602       527       602  

During the three months ended October 28, 2017, net sales in Europe increased $0.7 million, or 0.6%, from the three months ended October 29, 2016. The increase was attributable to a favorable foreign currency translation effect of our non-U.S. net sales of $5.4 million and an increase in company-operated store sales of $0.1 million, partially offset by the effect of store closures of $3.5 million and a decrease in same store sales of $1.3 million. Sales would have decreased 3.7% excluding the impact from foreign currency exchange rate changes.

During the nine months ended October 28, 2017, net sales in Europe increased $2.2 million, or 0.7%, from the nine months ended October 29, 2016. The increase was attributable to an increase in same store sales of $14.2 million and an increase in new concession store sales and company-operated store sales of $1.4 million, partially offset by the effect of store closures of $9.7 million and an unfavorable foreign currency translation effect of our non-U.S. net sales of $3.7 million. Sales would have increased 1.7% excluding the impact from foreign currency exchange rate changes.

For the three months ended October 28, 2017, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 2.6%, partially offset by an increase in average transaction value of 2.4%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

For the nine months ended October 28, 2017, the increase in same store sales was primarily attributable to an increase in average transaction value of 7.1%, partially offset by a decrease in average number of transactions per store of 1.0%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

During the three months ended October 28, 2017, gross profit percentage decreased 30 basis points to 46.7% compared to 47.0% during the three months ended October 29, 2016. The decrease in gross profit percentage consisted of a 50 basis point increase in occupancy costs, partially offset by a 20 basis point increase in merchandise margin. The increase in occupancy costs, as a percentage of net sales, resulted primarily from the deleveraging effect of a decrease in same store sales. The increase in merchandise margin percentage resulted primarily from lower markdowns, partially offset by higher freight costs and unfavorable foreign currency exchange rates. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin.

During the nine months ended October 28, 2017, gross profit percentage increased 220 basis points to 47.4% compared to 45.2% during the nine months ended October 29, 2016. The increase in gross profit percentage consisted of a 130 basis point decrease in occupancy costs, an 80 basis point increase in merchandise margin and a 10 basis point decrease in buying and buying-related costs. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in same store sales. The increase in merchandise margin percentage resulted primarily from higher initial markup, partially offset by unfavorable foreign currency exchange rates.

 

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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      Nine Months      Nine Months  
     Ended      Ended      Ended      Ended  

Product Category

   October 28, 2017      October 29, 2016      October 28, 2017      October 29, 2016  

Jewelry

     35.5        36.6        36.9        37.7  

Accessories

     64.5        63.4        63.1        62.3  
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0        100.0        100.0        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liquidity and Capital Resources

We are highly leveraged, with significant debt service obligations. As of October 28, 2017, we reported net debt (total debt less cash and cash equivalents) of approximately $2.2 billion with maturities ranging from 2019 through 2021. Repayment of our debt as it matures beginning in 2019 will require refinancing, and we cannot make assurances that we will have the financial resources required to obtain, or that the conditions of the capital markets will support, any future refinancing, replacement or restructuring of our indebtedness.

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

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

A summary of cash flows provided by (used in) operating, investing and financing activities for the nine months ended October 28, 2017 and October 29, 2016 is outlined in the table below (in thousands):

 

     Nine Months      Nine Months  
     Ended      Ended  
     October 28, 2017      October 29, 2016  

Operating activities

   $ (52,168    $ (83,617

Investing activities

     (13,062      (12,158

Financing activities

     35,896        124,594  

Cash flows from operating activities

For the nine months ended October 28, 2017, cash used in operations decreased $31.4 million compared to the prior year period. The primary reason for the decrease in cash used in operations was an increase in operating income and net other items of $23.7 million and a decrease in working capital of $7.7 million, excluding cash equivalents. For the nine months ended October 29, 2016, cash used in operations decreased $19.8 million compared to the prior year period. The primary reason for the decrease was a decrease in working capital of $27.8 million, partially offset by a decrease in operating income and net other items of $8.0 million, excluding cash equivalents.

Cash flows from investing activities

For the nine months ended October 28, 2017, cash used in investing activities was $13.1 million and consisted of $13.1 million for capital expenditures. For the nine months ended October 29, 2016, cash used in investing activities was $12.2 million and consisted of $12.5 million for capital expenditures, partially offset by proceeds of $0.3 million from the sale of intangible assets. During the remainder of Fiscal 2017, we expect to spend approximately $7.0 million of capital expenditures.

 

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Cash flows from financing activities

For the nine months ended October 28, 2017, cash provided by financing activities was $35.9 million, which consisted primarily of net borrowings of $64.8 million under our ABL Credit Facility, partially offset by payment of $18.4 million for the extinguishment of the Senior Subordinated Notes, payment of $9.5 million for unamortized interest related to long-term debt, payment of $0.7 million in financing costs and payment of $0.1 million for a capital lease. For the nine months ended October 29, 2016, cash provided by financing activities was $124.6 million, which consisted primarily of net borrowings of $124.5 million under the revolving credit facilities, capital contribution received from parent of $11.6 million, partially offset by payment of $11.3 million in financing costs and payment of $0.2 million for a capital lease.

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

Cash Position

As of October 28, 2017, we had cash of $25.8 million.    

In addition, as of October 28, 2017, our foreign subsidiaries held cash and cash equivalents of $17.3 million. During the nine months ended October 28, 2017, we transferred certain cash held by foreign subsidiaries to the U.S. to meet certain liquidity needs. During the remainder of Fiscal 2017, we expect a portion of our foreign subsidiaries’ future cash flow generation to be repatriated to the U.S. to meet certain liquidity needs. We are currently accruing U.S. income taxes, net of any foreign tax credit benefit, on all foreign earnings deemed repatriated.

Exchange Offer

On September 20, 2016, the Company, CLSIP LLC, a newly formed subsidiary designated as unrestricted under the Company’s debt agreements (“CLSIP”) and Claire’s (Gibraltar) Holdings Limited, the holding company of the Company’s European operations (“Claire’s Gibraltar ” and together with the Company and CLSIP, the “Offerors”) completed an offer to exchange (the “Exchange Offer”) the Company’s issued and outstanding (i) 8.875% Senior Secured Second Lien Notes due 2019 (the “Second Lien Notes”), (ii) 7.750% Senior Notes due 2020 (the “Unsecured Notes” ) and (iii) 10.500% Senior Subordinated Notes due 2017 (the “Subordinated Notes”), for (i) Senior Secured Term Loans maturing 2021 of the Company (“Claire’s Stores Term Loans”), (ii) Senior Secured Term Loans maturing 2021 of CLSIP (“CLSIP Term Loans”) and (iii) Senior Term Loans maturing 2021 of Claire’s Gibraltar (“Claire’s Gibraltar Term Loans” and together with the Claire’s Stores Term Loans and the CLSIP Term Loans, the “Term Loans”).

On September 20, 2016, the Offerors accepted from non-affiliate holders approximately $227.7 million aggregate principal amount of Second Lien Notes, approximately $103.3 million aggregate principal amount of Unsecured Notes and approximately $0.7 million aggregate principal amount of Subordinated Notes validly tendered and not withdrawn in the Exchange Offer in exchange for approximately $20.4 million aggregate principal amount of Claire’s Stores Term Loans, approximately $66.3 million aggregate principal amount of CLSIP Term Loans and approximately $30.6 million aggregate principal amount of Claire’s Gibraltar Term Loans and entered into the respective term loan agreements providing for each of the Term Loans.

Parent owned approximately $58.7 million aggregate principal amount of the Subordinated Notes and certain funds managed by affiliates of Apollo Global Management, LLC (the “Apollo Funds” and, together with Parent, the “Affiliated Holders”) owned approximately $183.6 million aggregate principal amount of the Company’s 10.500% PIK Senior Subordinated Notes due 2017 (the “PIK Subordinated Notes”), in each case immediately prior to the completion of the Exchange Offer. No Affiliated Holder

 

34


Table of Contents

participated in the Exchange Offer. However, because the Exchange Offer was not fully subscribed, following the allocation of the maximum consideration offered in the Exchange Offer, on September 20, 2016, the Affiliated Holders effected a similar exchange of Subordinated Notes, in the case of Parent, and PIK Subordinated Notes, in the case of the Apollo Funds, for Term Loans on the same economic terms offered in the Exchange Offer for the Unsecured Notes that were tendered prior to the Exchange Offer’s “Early Tender Time”, including additional consideration paid to holders of Unsecured Notes as a result of the undersubscription (the “Affiliated Holder Exchange”). On September 20, 2016, the Offerors accepted from the Affiliated Holders approximately $58.7 million aggregate principal amount of Subordinated Notes and $183.6 million aggregate principal amount of PIK Subordinated Notes pursuant to the Affiliated Holder Exchange in exchange for approximately $10.5 million aggregate principal amount of Claire’s Stores Term Loans, approximately $34.2 million aggregate principal amount of CLSIP Term Loans and approximately $15.8 million aggregate principal amount of Claire’s Gibraltar Term Loans. The interest payable on the Term Loans held by the Affiliated Holders or their affiliates will be pay-in-kind.

As part of the transaction, we recorded an adjustment to carrying value for the debt issued in the Exchange Offer. The adjustment to carrying value of debt represents the interest to be paid in cash on the Term Loans issued in the exchange through the maturity date of those Term Loans. This amount increased the Company’s carrying value of debt by $86.3 million. Such amount will be reduced in the future years as scheduled interest is paid on those Term Loans.

10.50% Senior Subordinated Notes

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

ABL Credit Facility

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

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

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

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

 

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

As of October 28, 2017, we had $71.0 million of borrowings, together with the $4.0 million of letters of credit outstanding, which reduced the borrowing availability to $0.0 million.

U.S. Revolving Credit Facility

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

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

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

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

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

As of October 28, 2017, no borrowings were outstanding under the U.S. Credit Facility.

 

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Debt Covenants

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

 

    incur additional indebtedness;

 

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

 

    make certain investments;

 

    create or incur certain liens;

 

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

 

    transfer or sell assets;

 

    engage in certain transactions with our affiliates; and

 

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

For a description of our existing debt and debt agreements, see Note 5 – Debt, in the Unaudited Condensed Consolidated Financial Statements. As of October 28, 2017, we were in compliance with the covenants under all existing debt agreements.

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

Europe Bank Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $1.9 million. These facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in their respective countries of operation. As of October 28, 2017, we had a reduction of $1.8 million for outstanding bank guarantees, which reduces the borrowing availability to $0.1 million as of that date.

Management Services Agreement    

See Note 10 – Related Party Transactions, in the Notes to the Unaudited Condensed Consolidated Financial Statements.

Critical Accounting Policies and Estimates

Our Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Fiscal 2016 Annual Report on Form 10-K, filed on April 14, 2017, in the Notes to Consolidated Financial Statements, Note 2 – Summary of Significant Accounting Policies, and the Critical Accounting Policies and Estimates section contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations therein.

Goodwill and indefinite-lived intangible assets are subject to impairment assessments at least annually (or more frequently when events or circumstances indicate that an impairment may have occurred) by applying a fair-value test. These fair value estimates require significant management judgment and are based on the best information available at the time of the analysis. Our principal intangible assets, other than goodwill, are tradenames, franchise agreements, and leases that existed as of the date that the Company was acquired in May 2007, which had terms that were favorable to market at that date. Our impairment testing for Fiscal 2016 resulted in the recognition of a non-cash impairment charge to goodwill of $169.3 million, of which $130.0 million was recorded during the three months ended October 29, 2016, as well as impairment charges of $9.0 million and $3.3 million, relating to intangible assets and long-lived assets, respectively. We expect to next perform our annual impairment analysis during the fourth fiscal quarter of Fiscal 2017, and we may be required to recognize additional impairment charges at that time or in the future.

 

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Recent Accounting Pronouncements

See Note 2 – Recent Accounting Pronouncements, in the Notes to the Unaudited Condensed Consolidated Financial Statements.

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

We and our representatives may from time to time make written or oral forward-looking statements, including statements contained in this and other filings with the Securities and Exchange Commission and in our press releases and reports we issue publicly. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to our future financial performance, business strategy, planned capital expenditures, ability to service our debt, and new store openings for future periods, are forward-looking statements. The forward-looking statements are and will be based on management’s then current views and assumptions regarding future events and operating performance, and we assume no obligation to update any forward-looking statement. Forward-looking statements involve known or unknown risks, uncertainties and other factors, including changes in estimates and judgments discussed under “Critical Accounting Policies and Estimates” which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements may use the words “expect,” “anticipate,” “plan,” “intend,” “project,” “may,” “believe,” “forecasts” and similar expressions. Some of these risks, uncertainties and other factors are as follows: our level of indebtedness; general economic conditions; changes in consumer preferences and consumer spending; unwillingness of vendors and service providers to supply goods or services pursuant to historical customary credit arrangements; competition; general political and social conditions such as war, political unrest and terrorism; natural disasters or severe weather events; currency fluctuations and exchange rate adjustments; failure to maintain our favorable brand recognition; failure to successfully market our products through other channels, such as e-commerce; uncertainties generally associated with the specialty retailing business, such as decreases in mall traffic; disruptions in our supply of inventory; inability to increase same store sales; inability to renew, replace or enter into new store leases on favorable terms; increase in our cost of merchandise; significant increases in our merchandise markdowns or promotional sales; inability to grow our Company operated store base in North America and Europe, or expand our international store base through franchise or similar licensing arrangements, or expand our store base through concessions; inability to design and implement new information systems; data security breaches of confidential information or other cyber attacks; delays in anticipated store openings or renovations; results from any future asset impairment analysis; changes in applicable laws, rules and regulations, including changes in North America and Europe, or other international laws and regulations governing the sale of our products, particularly regulations relating to heavy metal and chemical content in our products; changes in anti-bribery laws; changes in employment laws, including laws relating to overtime pay, tax laws and import laws; product recalls; loss of key members of management; increase in the costs of healthcare for our employees; increases in the cost of labor; labor disputes; increases in the cost of borrowings; unavailability of additional debt or equity capital; and the impact of our substantial indebtedness on our operating income and our ability to grow. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. In addition, we typically earn a disproportionate share of our operating income in the fourth quarter due to seasonal buying patterns, which are difficult to forecast with certainty. Additional discussion of these and other risks and uncertainties is contained elsewhere in this Item 2, in Item 3, “Quantitative and Qualitative Disclosures About Market Risk” and in our Form 10-K for Fiscal 2016 under “Statement Regarding Forward-Looking Disclosures” and “Risk Factors.”

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Cash

We have significant amounts of cash at financial institutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on our deposits. We mitigate this risk by maintaining bank accounts with a group of credit worthy financial institutions.

Interest Rates

As of October 28, 2017, we had fixed rate debt of $2,079.9 million and variable rate debt of $111.0 million. Based on our variable rate balance as of October 28, 2017, a 1% change in interest rates would increase or decrease our annual interest expense by approximately $1.1 million.

Foreign Currency

We are exposed to market risk from foreign currency exchange rate fluctuations on the United States dollar (“USD” or “dollar”) value of foreign currency denominated transactions and our investments in foreign subsidiaries. We manage this exposure to market risk through our regular operating and financing activities, and may from time to time, use foreign currency options. Exposure to market risk for changes in foreign currency exchange rates relates primarily to our foreign operations’ buying, selling, and financing activities in currencies other than local currencies and to the carrying value of our net investments in foreign subsidiaries. As of October 28, 2017, we maintained no foreign currency options. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries. Included in “Comprehensive (loss) income” are $11.3 million and ($1.5) million, net of tax, reflecting the unrealized gain (loss) on foreign currency translations and intra-entity foreign currency transactions during the nine months ended October 28, 2017 and October 29, 2016, respectively.

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

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

 

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General Market Risk

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

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Quarterly Report, because, of a material weakness in the company’s internal control over financial reporting as described below, our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including each of such officers as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

Based on our evaluation under the framework in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that our internal control over financial reporting was not effective as of October 28, 2017 because of the existence of the material weakness described below.

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

Management continues to remediate the material weakness referred to above through the design and implementation of additional review procedures which include a more detailed review of the accuracy of inputs included in the calculations used in the Company’s quarterly assessment of its income tax provision.

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

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are, from time to time, involved in routine litigation incidental to the conduct of our business, including litigation instituted by persons injured upon premises under our control; litigation regarding the merchandise that we sell, including product and safety concerns regarding content in our merchandise; litigation with respect to various employment matters, including wage and hour litigation; litigation with present and former employees; and litigation regarding intellectual property rights. Although litigation is routine and incidental to the conduct of our business, like any business of our size which employs a significant number of employees and sells a significant amount of merchandise, such litigation can result in large monetary awards when judges, juries or other finders of facts do not agree with management’s evaluation of possible liability or outcome of litigation. Accordingly, the consequences of these matters cannot be finally determined by management. However, in the opinion of management, we believe that current pending litigation will not have a material adverse effect on our financial results.

 

Item 1A. Risk Factors

There have been no material changes in our risk factors disclosed in our Annual Report on Form 10-K for the year ended January 28, 2017.

 

Item 6. Exhibits

 

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

 

(1) Filed herewith.

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

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    CLAIRE’S STORES, INC.
December 8, 2017     By:  

/s/ Ron Marshall

     

Ron Marshall, Chief Executive Officer (principal

executive officer)

December 8, 2017     By:  

/s/ Scott Huckins

     

Scott Huckins, Executive Vice President and Chief

Financial Officer (principal financial 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.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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