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Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CLAIRE’S INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5600   36-4609619

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification No.)

 

 

2400 West Central Road

Hoffman Estates, IL 60192

(847) 765-1100

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Rebecca Orand, Esq.

3 S.W. 129th Avenue

Pembroke Pines, Florida 33027

(954) 433-3900

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copy to:

Howard A. Kenny

Morgan, Lewis & Bockius LLP

101 Park Avenue

New York, New York 10178

(212) 309-6000

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

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

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price (a)

 

Amount of

Registration Fee (b)

Common stock, $0.01 par value per share

  $100,000,000   $13,640

 

 

(a) Estimated pursuant to Rule 457(o) promulgated under the Securities Act of 1933.
(b) The amount of the filing fee is calculated in accordance with Rule 0-11 of the Securities Exchange Act of 1934, as amended, and Fee Advisory #1 for fiscal year 2013, issued August 31, 2012, by multiplying the transaction valuation by 0.00013640.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated May 3, 2013

PROSPECTUS

             Shares

Claire’s Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Claire’s Inc.

We are selling all of the shares being offered hereby.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $          and $        . We intend to apply to list our common stock on the New York Stock Exchange under the symbol “CLRS”.

 

 

Investing in our common stock involves risks. Please see “ Risk Factors ” beginning on page 9 for a discussion of factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per
Share
     Total  

Initial public offering price

   $                    $                

Underwriting discount (1)

   $         $     

Proceeds, before expenses, to Claire’s Inc.

   $         $     

 

(1) We have agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting.”

To the extent that the underwriters sell more than              shares of common stock, the underwriters have the option to purchase up to an additional              shares at the initial public offering price less the underwriting discount. They may exercise that option for 30 days.

 

 

The underwriters expect to deliver the shares of common stock against payment in New York, New York on or about                     , 2013.

The date of this prospectus is                     , 2013.


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TABLE OF CONTENTS

 

     Page  

INDUSTRY AND MARKET DATA

     ii   

TRADEMARKS, SERVICE MARKS AND TRADENAMES

     ii   

NON-GAAP FINANCIAL MEASURES

     ii   

SUMMARY

     1   

RISK FACTORS

     9   

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

     24   

USE OF PROCEEDS

     25   

DIVIDEND POLICY

     26   

CAPITALIZATION

     27   

DILUTION

     28   

SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA

     30   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     33   

BUSINESS

     56   

MANAGEMENT

     64   

EXECUTIVE COMPENSATION

     70   

PRINCIPAL STOCKHOLDERS

     86   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     88   

DESCRIPTION OF CAPITAL STOCK

     89   

SHARES ELIGIBLE FOR FUTURE SALE

     93   

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK

     95   

UNDERWRITING

     99   

LEGAL MATTERS

     104   

EXPERTS

     104   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     104   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares of common stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Through and including                     , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Persons who come into possession of this prospectus and any free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

 

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FISCAL YEAR

We operate on a retail accounting calendar. Our fiscal year ends on the Saturday closest to January 31. We refer to our fiscal year end based on the year in which the fiscal year begins. Accordingly, our fiscal years ended February 2, 2013, January 28, 2012, and January 29, 2011, are referred as “Fiscal 2012”, Fiscal 2011”, and “Fiscal 2010”, respectively. Fiscal 2012 consisted of 53 weeks, while Fiscal 2011 and Fiscal 2010 each consisted of 52 weeks.

INDUSTRY AND MARKET DATA

We have obtained certain industry and market share data from third-party sources, and other industry publications that we believe are reliable. In many cases, however, we have made statements in this prospectus regarding our industry and our position in the industry based on estimates made from our experience in the industry and our own investigation of market conditions. We believe the industry and market data and our estimates to be true and accurate, and we use such data and estimates in the operation of our business.

TRADEMARKS, SERVICE MARKS AND TRADENAMES

We own or have rights to trademarks, service marks or tradenames that we use in connection with the operation of our business, including our corporate names, brands, logos and product names. Other trademarks, service marks and tradenames appearing in this prospectus are the property of their respective owners. The trademarks we own include Claire’s ® and Icing ® . Solely for convenience, some of the trademarks, service marks and tradenames referred to in this prospectus are sometimes included without the  ®  and  TM  symbols, but we assert, to the fullest extent under applicable law, our rights to our trademarks, service marks and tradenames.

NON-GAAP FINANCIAL MEASURES

To supplement our financial information presented in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), we present EBITDA, Adjusted EBITDA and Adjusted EBITDA margin. A reconciliation of EBITDA and Adjusted EBITDA to our net income under U.S. GAAP appears in “Summary—Summary Historical Consolidated Financial Information” and “Selected Financial Data.”

EBITDA represents net income (loss) before provision for income taxes, gain on early debt extinguishment, interest income and expense, impairment and depreciation and amortization. Adjusted EBITDA represents EBITDA further adjusted to exclude non-cash and unusual items. Adjusted EBITDA margin represents Adjusted EBITDA divided by net sales for the applicable period, expressed as a percentage. Management uses Adjusted EBITDA and Adjusted EBITDA margin as important tools to assess our operating performance. Management considers Adjusted EBITDA to be a useful measure in highlighting trends in our business and in analyzing the profitability of similar enterprises. Management believes that Adjusted EBITDA is effective, when used in conjunction with net income (loss), in evaluating asset performance, and differentiating efficient operators in the industry. Furthermore, management believes that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to potential investors and analysts because it provides insight into management’s evaluation of our results of operations. Our calculation of Adjusted EBITDA may not be consistent with “EBITDA” for the purpose of the covenants in the agreements governing our indebtedness.

EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP, are not intended to represent cash flow from operations under GAAP and should not be used as an alternative to net income (loss) as an indicator of operating performance or to cash flow from operating, investing or financing activities as a measure of liquidity. Management compensates for the limitations of using EBITDA and Adjusted EBITDA by using it only to supplement our GAAP results to provide a more complete understanding of the factors and trends

 

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affecting our business. Each of EBITDA and Adjusted EBITDA has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

Some of the limitations of EBITDA and Adjusted EBITDA are:

 

   

EBITDA and Adjusted EBITDA do not reflect our cash used for capital expenditures;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will have to be replaced and EBITDA and Adjusted EBITDA do not reflect the cash requirements for such replacements;

 

   

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital requirements;

 

   

EBITDA and Adjusted EBITDA do not reflect the cash necessary to make payments of interest or principal on our indebtedness; and

 

   

EBITDA and Adjusted EBITDA do not reflect extraordinary items and non-recurring expenses such as one-time write-offs to inventory and reserve accruals.

While EBITDA and Adjusted EBITDA are frequently used as a measure of operations and the ability to meet indebtedness service requirements, they are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation.

 

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SUMMARY

The following summary highlights information contained elsewhere in this prospectus. It should be read together with the more detailed information and consolidated financial statements included elsewhere in this prospectus. You should read the entire prospectus, including the “Risk Factors” section and our consolidated financial statements and notes to those statements, before making an investment decision.

Unless otherwise noted, “we,” “us,” “our” and the “Company” mean Claire’s Inc. and its consolidated subsidiaries, including Claire’s Stores, Inc. (“Claire’s Stores”).

Who We Are

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 inspire girls and women around the world to become their best selves by providing products and experiences that empower them to express their own unique individual styles. Our broad and dynamic selection of merchandise is unique, and over 90% of our products are proprietary. Claire’s ® is our primary global brand that we operate in 41 countries through company-operated or franchise stores. Claire’s ® offers a differentiated and fun store experience with a “treasure hunt” setting that encourages our customer to visit often to explore and find merchandise that appeals to her. We believe by maintaining a highly relevant merchandise assortment and offering a compelling value proposition, Claire’s ® has universal appeal to teens, pre-teens and kids. Icing ® is our other brand which we currently operate in North America through company-operated stores. Icing ® offers an inspiring merchandise assortment of fashionable products that helps a young woman say something about herself, whatever the occasion. We believe Icing ® provides us with significant potential to reach young women in age groups beyond our Claire’s ® core demographic.

We believe Claire’s ® represents a “Girl’s Best Friend” and a favorite shopping destination for teens, tweens, and kids. Claire’s ® target customer is a girl between 3-18 years old with a particular focus on a core demographic of girls between 10-14 years old. According to our estimates, we have over 95% brand awareness within this target demographic in our largest markets. As of February 2, 2013, Claire’s ® had a presence in 41 countries through 2,705 company-operated Claire’s ® stores in North America, Europe and China, and 392 franchised stores in numerous other geographies.

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 believe that expansion of our Icing ® store base both in existing and new markets over time presents a significant opportunity to leverage our core merchandising, sourcing and marketing expertise to cater to a wider demographic. As of February 2, 2013, the last day of fiscal 2012, we operated 380 Icing ® stores across the United States, Canada, and Puerto Rico.

We are organized by geography through our North America division, our Europe division and our China division, recently formed to operate our existing and future stores in China. In North America, our stores are located primarily in shopping malls and average approximately 985 square feet of selling space. 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 and average approximately 655 square feet of selling space. Despite smaller average selling square feet, our European stores average similar sales per store to our North American stores.

We believe that the strength of our business model and our disciplined operating philosophy has enabled us to deliver strong financial performance:

 

   

Our same store sales growth was 1.8% in Fiscal 2012; and we have reported positive same store sales growth for ten out of the last thirteen quarters through the end of Fiscal 2012.

 

 

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From the end of Fiscal 2009 through the end of Fiscal 2012, we have opened a total of 443 new company-operated and franchised stores. Our global store base (including franchise stores) was 3,477 stores at the end of Fiscal 2012.

 

   

Our net sales increased to $1,557.0 million in Fiscal 2012 from $1,342.4 million in Fiscal 2009, increasing at a compound annual growth rate of 5.1%.

 

   

Our Adjusted EBITDA increased to $308.0 million in Fiscal 2012 from $233.9 million in Fiscal 2009 increasing at a compound annual growth rate of 9.6%.

Our Competitive Strengths

Category Defining Claire’s ® Brand

According to our estimates, over 95% of our target demographic in our largest markets recognizes the Claire’s ® brand. A Claire’s ® store is located in approximately 88% of all major United States shopping malls across all 50 states and in 40 countries outside of the United States, including markets where we franchise. We are a “Girl’s Best Friend” and believe we serve as an authority in jewelry and accessories for 3–18 year-olds. We believe that our reputation for providing age-appropriate merchandise and shopping experience allows parents to trust the Claire’s ® brand for their daughters. Our Claire’s ® brand is regularly featured in editorial coverage and relevant fashion periodicals. Additionally, we leverage our e-commerce platform and social media to enhance our brand awareness and strengthen our customer relationships.

Preferred Shopping Destination

We are recognized as a favorite shopping destination for young women, teens, tweens, and kids. We believe our customer finds our store an engaging and stimulating experience that allows her to explore and share discoveries, thereby encouraging frequency of visits. Besides jewelry and accessories, we also offer an exciting assortment of beauty products, lifestyle accessories and seasonal items to keep our customer engaged. As part of our jewelry offering, our stores have pierced the ears of over 83 million customers, including 3.7 million in Fiscal 2012. We believe this seminal point of contact helps our stores establish an important long-term relationship with our core customer. We believe our store environment, product assortment and low average dollar ticket differentiate us from other retail concepts as well as pure play online platforms.

Attractive Unit Economics with Strong Cash Flow

Our stores have relatively low build out costs and moderate inventory requirements. For a new store investment, we target a payback period of three years or less. We achieved a better than three-year payback for aggregate new stores opened during Fiscal 2010, Fiscal 2011, and Fiscal 2012. We manage our store portfolio on a store-by-store basis to optimize overall returns and minimize risk. When we choose to close a store it is generally because the store has negative or marginally positive four-wall cash flow or the store’s anticipated future performance or lease renewal terms do not meet the Company’s criteria. As a result, for Fiscal 2012, approximately 95% of our stores are cash flow positive.

Our cash flow is driven by our strong gross margins, efficient operating structure, low annual maintenance capital expenditures and flexible growth capital expenditure initiatives. Our moderate working capital requirements result from high merchandise margins, low unit cost of merchandise, relatively lower seasonality of our business and relatively strong inventory turnover.

 

 

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Globally Diversified with Proven Ability to Enter New Countries

The Claire’s ® concept has a global scale and proven geographic portability. As of February 2, 2013, we operated or franchised a total of 3,097 Claire’s ® stores across all 50 states of the United States and in 40 additional countries across the world. We also operated 380 Icing ® Stores as of Fiscal 2012 year end. During Fiscal 2012, we entered large and high potential markets of China and Italy through company-operated stores and also entered the Latin American and Southeast Asian markets through our franchising program. During Fiscal 2011, we entered the strategically significant countries of Mexico and India through franchising relationships. Over the past 8 years, we have doubled the number of countries in which we operate or franchise.

Cost-Efficient Global Sourcing Capabilities

Our merchandising strategy is supported by efficient, low-cost global sourcing capabilities diversified across approximately 660 suppliers located primarily outside the United States. Our vertically integrated Hong Kong buying office was established over 20 years ago and now sources a majority of our purchases. Our strategy of offering proprietary merchandise coupled with vertically-integrated local buying capabilities is designed to enable us to source rapidly and cost effectively, thus allowing us to maintain inventory efficiency and achieve high merchandise margins.

Strong and Passionate Senior Management Team with Significant Experience

Our senior management team has extensive global, retail experience and complementary expertise across a broad range of disciplines in specialty retail, including merchandising, supply chain, real estate and finance. Our Chief Executive Officer Jim Fielding, who joined the Company in June 2012, was formerly President of Disney Stores, and has prior management experience at The Gap, Lands’ End and Dayton Hudson. Linda Hefner Filler, President of our North America Division, who joined the Company in March 2013, brings to the Company 25 years of retail and consumer products experience, including executive positions with Wal-Mart Corporation, Kraft Foods and Sara Lee Corporation. Beatrice Lafon, President of our Europe Division, who joined the Company in October 2011, brings to the Company 25 years of Pan-European retail experience, including executive positions with TJ Hughes and Animal Ltd. in the United Kingdom, Etam Group in the Netherlands, and Woolworths Group. Per Brodin, our Executive Vice President and Chief Financial Officer, has over 20 years of financial, accounting and management experience, including senior leadership positions with Centene Corporation and May Department Stores as well as working for twelve years at an international public accounting firm.

Business Strategy

Our business strategy is designed to maximize our sales opportunities, earnings growth and cash flow:

Generate Organic Growth

Continue To Enhance Merchandise and In-Store Experience

We are focused on enhancing the fashion-orientation and quality of our product offerings to deliver a unique, proprietary assortment that is highly relevant to our target customers. We believe we can drive growth through intensifying key merchandise categories, especially in higher margin and higher productivity products such as jewelry.

We believe we can drive increased frequency of visits through our unique and compelling in-store environment. We aim to provide a consistent, engaging and brand-right customer experience across all of our

 

 

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owned and franchised stores worldwide. Additionally, we focus on improving ease of shopping and increasing sales productivity by enhancing store layout and merchandise displays. We will continue to develop our store management teams and sales associates emphasizing in-store operational excellence.

Deepen Customer Relationship & Loyalty

We will continue to drive brand awareness and deepen customer relationships with our branding efforts conducted through in-store marketing collateral and ongoing social media, email, and text campaigns. Maintaining and improving our leadership in ear piercing also allows us to solidify the customer’s experience with Claire’s ® and establish brand loyalty early. We believe we can leverage our online community and proprietary customer database to drive increased customer engagement for Claire’s ® and Icing ® .

Expand and Upgrade Company-Operated Store Base

We have demonstrated a consistent track record of expanding our company-operated store base, opening 82, 157 and 110 new company-operated stores in Fiscal 2010, Fiscal 2011 and Fiscal 2012, respectively. Of our 110 new stores opened in Fiscal 2012, 79 were in Europe, 28 were in North America and 3 were in China. We plan to open approximately 150 new stores in Fiscal 2013 across all of our markets in Europe, North America and China. We recently entered the countries of China and Italy and believe these countries present significant growth opportunities. In North America, the Claire’s ® brand has significant penetration but we continue to opportunistically pursue additional locations. We also believe there is a compelling opportunity to remodel key locations in both North America and Europe in order to create a more contemporary ambience and a visually appealing display of our innovative product offerings, and to further enhance our customer’s in-store experience. Historically, our remodel capital expenditures have produced returns similar to our new store expenditures.

We believe the Icing ® brand has significant long-term growth potential in North America and plan up to 35 new store openings in Fiscal 2013. Over time, we plan to launch Icing ® internationally to countries where we can leverage the existing Claire’s expertise and infrastructure.

Franchise in New International Countries

Developing a robust franchising model has allowed us to gain a foothold in multiple international geographies and we believe that significant high potential “white space” opportunities remain. In 2012, we entered Latin America and Southeast Asia. Within Latin America, we have partnered with a single franchisee to develop stores in sixteen new countries and, in 2012, opened franchise stores in four of these countries. Within Southeast Asia, we have partnered with another single franchisee to develop stores in five new countries and, in 2012, opened a franchise store in one of these countries. We are currently studying our brand introduction strategy for Brazil, Russia, and Australia via our franchise model. In 2011, under our franchise model, we entered into the countries of Mexico and India which we believe offer high growth opportunities. We will continue to evaluate new countries for franchised stores. In addition, we believe the Icing ® brand represents an additional opportunity for franchise growth.

Grow Our E-Commerce Sales

We believe that the increasing penetration of internet enabled devices within our customer base offers an opportunity to better connect with our customer and complement our in-store experience. We launched our e-commerce and mobile platforms in the United States during Fiscal 2011 and Fiscal 2012, respectively, to allow our target customer to shop with Claire’s ® at her convenience. In addition, our on-line channel allows us to expand product offerings to include complementary products not available in our stores. In early Fiscal 2013 we launched Claire’s ® e-commerce internationally starting in the United Kingdom, Republic of Ireland, and Canada and also launched our e-commerce platform for Icing ® .

 

 

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We believe that, over time, our digital platform represents a valuable tool for engaging with our customer, gathering feedback on her preferences and enhancing our product testing capabilities, all of which should drive higher sales productivity both in-store and online.

Equity Sponsor

We are controlled by Apollo Management VI, L.P., which together with certain affiliated co-investment partnerships (the “Sponsors”), acquired us in May 2007.

Founded in 1990, Apollo is a leading global alternative asset manager with offices in New York, Los Angeles, Houston, London, Frankfurt, Luxembourg, Singapore, Mumbai and Hong Kong. As of December 31, 2012, Apollo had assets under management of approximately $113 billion in its private equity, credit and real estate businesses.

Apollo and its affiliates have extensive experience investing in retail-oriented companies. Apollo’s current retail portfolio includes investments in CKE Restaurants and Sprouts Farmers Markets. Apollo’s past successful retail investments include General Nutrition Centers, Zale Corporation, AMC Entertainment, Rent-A-Center, Dominick’s Supermarkets, Ralphs Grocery Company, Smart & Final and Proffitt’s Department Stores.

Indebtedness

Our May 2007 acquisition by the Sponsor was financed by the issuance by Claire’s Stores of senior notes (“Senior Notes”) and senior subordinated notes (“Senior Subordinated Notes” and together with the Senior Notes, the “Merger Notes”) and borrowings under a bank term loan and revolving credit facility (the “Former Credit Facility”). In 2011, Claire’s Stores issued 8.875% Senior Secured Second Lien notes due 2019 (the “Senior Secured Second Lien Notes”), and used the net proceeds to reduce indebtedness under our Former Credit Facility. During 2012, Claire’s Stores issued 9.00% Senior Secured First Lien Notes due 2019 (the “9.0% Senior Secured First Lien Notes”), and used the net proceeds to reduce indebtedness under our Former Credit Facility. On September 20, 2012, we paid in full the remaining Former Term Loan and entered into an amended and restated credit agreement that replaced the Former Credit Facility with a $115.0 million 5-year senior secured revolving credit facility (the “Credit Facility”). On March 15, 2013, after the end of our Fiscal 2012, Claire’s Stores issued 6.125% Senior Secured First Lien Notes due 2020 (the “6.125% Senior Secured First Lien Notes” and together with the Merger Notes, the Senior Secured Second Lien Notes and the 9.0% Senior Secured First Lien Notes, the “Notes”). The net cash proceeds have been used to refinance approximately $60 million of Senior Notes, and, together with cash on hand, will be used to refinance an additional approximately $150 million of Senior Notes on June 3, 2013, pursuant to a notice of redemption provided to holders on May 3, 2013. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for further information regarding our Credit Facility and Notes.

Risk Factors

Investing in our common stock involves substantial risk. Our ability to execute our strategy is also subject to certain risks. The risks described under the heading “Risk Factors” immediately following this summary may cause us not to realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. If any of the risks or the risks described under the heading “Risk Factors” were to occur, you may lose part or all of your investment. You should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk Factors” before making an investment decision.

Additional Information

Our principal executive offices are located at 2400 West Central Road, Hoffman Estates, IL 60192, and our telephone number is (847) 765-1100.

Claire’s Inc. was incorporated in Delaware on March 19, 2007.

 

 

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The Offering

 

Issuer

Claire’s Inc.

 

Common stock offered by us

            shares.

 

Common stock to be outstanding immediately after the offering

            shares.

 

Option to purchase additional shares

To the extent that the underwriters sell more than             shares of common stock, the underwriters have the option to purchase up to an additional             shares from us at the initial public offering price less the underwriting discount. They may exercise this option for 30 days.

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $         million ($         million if the underwriters’ option to purchase             additional shares is exercised in full) after deducting the estimated underwriting discounts and commissions and other expenses of $         million payable by us ($         million if the underwriters’ option to purchase                 additional shares is exercised in full), assuming the shares are offered at $         per share, which represents the midpoint of the range set forth on the front cover of this prospectus. We intend to use these net proceeds to refinance existing indebtedness. For sensitivity analyses as to the offering price and other information, see “Use of Proceeds.” In addition, upon the completion of this offering, we will pay from cash on hand the Sponsors a fee of approximately $         million (plus any unreimbursed expenses) in connection with the termination of our management services agreement, as described under “Certain Relationships and Related Party Transactions—Management Fee.”

 

Dividend policy

We currently intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth. The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition and requirements, business conditions and covenants under any applicable contractual arrangements, including our indebtedness. See “Dividend Policy.”

 

Risk factors

You should carefully read and consider the information set forth under “Risk Factors” beginning on page     of this prospectus and all other information set forth in this prospectus before deciding to invest in our common stock.

 

NYSE symbol

“CLRS”

Except as otherwise indicated, all of the information in this prospectus assumes:

 

   

no exercise of the underwriters’ option to purchase up to             additional shares of common stock; and

 

   

an initial offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus.

 

 

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Summary Historical Consolidated Financial Information

The following table sets forth our summary historical consolidated financial and operating data.

The summary historical consolidated financial data for Fiscal 2012, Fiscal 2011 and Fiscal 2010 and summary historical balance sheet data as of the end of Fiscal 2011 and Fiscal 2012 have been derived from our audited Consolidated Financial Statements contained elsewhere in this prospectus.

Our historical results included below are not necessarily indicative of our future performance. This information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the related notes incorporated by reference into this prospectus.

 

     Fiscal Year  
     February 2,
2013 (1)
    January 28,
2012 (1)
    January 29,
2011 (1)
 
     (in thousands, except for per share data and store data)  

Statement of Operations Data:

      

Net sales

   $ 1,557,020      $ 1,495,900      $ 1,426,397   

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

     755,996        724,775        685,111   
  

 

 

   

 

 

   

 

 

 

Gross profit

     801,024        771,125        741,286   

Other expenses:

      

Selling, general and administrative

     503,254        504,360        493,081   

Depreciation and amortization

     64,879        68,753        65,198   

Impairment of assets

     —          —          12,262   

Severance and transaction-related costs

     2,828        6,928        741   

Other (income) expense, net

     (6,105     (1,254     5,542   
  

 

 

   

 

 

   

 

 

 
     564,856        578,787        576,824   
  

 

 

   

 

 

   

 

 

 

Operating income

     236,168        192,338        164,462   

Gain (loss) on early debt extinguishment

     (8,952     7,058        13,583   

Impairment of equity investment

     —          —          6,030   

Interest expense, net

     206,287        172,569        154,382   

Income (loss) from continuing operations before income taxes

     20,929        26,827        17,633   

Income tax expense

     14,685        11,022        10,476   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 6,244      $ 15,805      $ 7,157   
  

 

 

   

 

 

   

 

 

 

Earnings per share—basic and diluted

   $ 0.10      $ 0.26      $ 0.12   

Weighted average shares outstanding—basic

     60,805        60,685        60,557   

Weighted average shares outstanding—diluted

     60,805        60,695        60,591   

Pro forma earnings per share—basic and diluted (2)

      

Pro forma weighted average shares outstanding—basic and diluted (2)

      

Other Financial Data:

      

Adjusted EBITDA (3)

   $ 308,034      $ 274,732      $ 263,890   

Adjusted EBITDA margin (3)

     19.8     18.4     18.5

Capital expenditures:

      

New stores and remodels (4)

     64,398        63,705        40,126   

Other

     9,455        12,912        9,689   

Total capital expenditures (4)

     73,853        76,617        49,815   

Cash interest expense (5)

     161,264        133,036        107,361   

Same store sales growth

     1.8     0.1     6.5

Store Data (at period end):

      

Number of stores:

      

North America

     1,921        1,953        1,972   

Europe

     1,161        1,118        1,009   

China

     3        —          —     
  

 

 

   

 

 

   

 

 

 

Total company-operated

     3,085        3,071        2,981   

Franchise

     392        381        395   
  

 

 

   

 

 

   

 

 

 

Total global stores

     3,477        3,452        3,376   

Total gross square footage of company-operated stores (000’s)

     3,117        3,092        3,012   

Net sales per company-operated store (000’s) (6)

   $ 506      $ 494      $ 481   

Net sales per square foot of company-operated stores (7)

   $ 502      $ 490      $ 476   

 

 

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     Fiscal Year  
     February 2,
2013 (1)
     January 28,
2012 (1)
     January 29,
2011 (1)
 
     (in thousands, except for per share data and store data)  

Balance Sheet Data (at period end):

        

Cash and cash equivalents (8)

   $ 169,256       $ 177,612       $ 281,384   

Total assets

     2,800,641         2,765,551         2,867,918   

Total debt (including capital lease) (9)

     2,346,866         2,366,815         2,491,691   

Total net debt (Total debt less Cash and cash equivalents)

     2,177,610         2,189,203         2,210,307   

Total stockholders’ equity

     28,866         15,498         5,336   

 

(1) Fiscal 2012 consisted of 53 weeks; Fiscal 2011 and Fiscal 2010 were 52 week periods.
(2) Pro forma earnings per share give effect to the following events, as if each occurred on January 29, 2012, the first day of our fiscal 2012: (i) our sale of                shares of common stock in this offering at an assumed price of $        per share (the midpoint of the range listed on the cover page of this Prospectus), the net proceeds of which we have estimated to be $        and (ii) the application of the net proceeds to refinance debt as set forth in “Use of Proceeds.” Pro forma earnings per share consists of pro forma net income divided by the pro forma weighted average shares outstanding. The pro forma adjustments do not reflect the termination of our management services agreement with Apollo Management.
(3) See “Non-GAAP financial measures” for an explanation of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin as presented in this table.

A reconciliation of historical net income to EBITDA and Adjusted EBITDA is set forth in the following table:

 

     Fiscal Year
Ended
 
     February 2,
2013 (1)
    January 28,
2012 (1)
    January 29,
2011 (1)
 
     (unaudited)  
     (in thousands)  

Net income (a)

   $ 6,244      $ 15,805      $ 7,157   

Income tax expense

     14,685        11,022        10,476   

Loss (gain) on early debt extinguishment

     8,952        (7,058     (13,583

Interest expense

     206,486        173,036        154,463   

Interest income

     (199     (467     (81

Impairment (b)

     —          —          18,292   

Depreciation and amortization

     64,879        68,753        65,198   
  

 

 

   

 

 

   

 

 

 

EBITDA

     301,047        261,091        241,922   

Adjustments:

      

Stock compensation, book to cash, rent, intangible amortization (c)

     857        1,875        9,865   

Management fee, consulting expense, joint venture investment (d)

     3,518        3,000        6,442   

Other (e)

     2,612        8,766        5,661   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 308,034      $ 274,732      $ 263,890   
  

 

 

   

 

 

   

 

 

 

 

  (a) Fiscal 2011 includes a $2.0 million gain to remeasure a Euro-denominated loan at the period end foreign exchange rate.
  (b) Represents non-cash impairment charges.
  (c) Includes: non-cash stock compensation expense, net non-cash rent expense, amortization of rent free periods, the inclusion of cash landlord allowances, and the net accretion of favorable (unfavorable) lease obligations and non-cash amortization of lease rights.
  (d) Includes: the management fee paid to the Sponsors, non-recurring consulting expenses and non-cash equity loss from our 50:50 joint venture (effective September 2, 2010, we had no ownership in this joint venture).
  (e) Includes: non-cash losses on property and equipment primarily associated with the sale of our North American distribution center/office building, remodels, relocations and closures; costs, including third party charges and compensation, incurred in conjunction with the relocation of new employees; non-cash foreign exchange gains/losses resulting from intercompany transactions and remeasurements of U.S. dollar denominated cash accounts and foreign currency denominated debt of our foreign entities into their functional currency; and severance and transaction related costs.

Adjusted EBITDA margin represents Adjusted EBITDA divided by net sales for the applicable period, expressed as a percentage.

 

(4) For Fiscal 2012, Fiscal 2011 and Fiscal 2010 includes expenditures for store-related intangible assets in the amounts of $5,049, $5,709 and $1,104, respectively.
(5) Cash interest expense does not include amortization of debt issuance costs, or interest expense paid in kind, or accretion of debt premium.
(6) Net sales per company-operated store are calculated based on the average number of stores during the period.
(7) Net sales per square foot of company-operated stores are calculated based on the average gross square feet during the period.
(8) Cash and cash equivalents include restricted cash of $0, $4,350 and $23,864 as of February 2, 2013, January 28, 2012 and January 29, 2011 respectively.
(9) At February 2, 2013, total debt included unamortized premium of $16.3 million.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before investing in our common stock. We describe below risks known to us that we believe are material to our business. Any of the following risks could materially and adversely affect our business, financial condition, results of operations or cash flows. In such a case, you may lose part or all of your original investment.

Risks Relating to Our Business

Economic conditions may adversely impact demand for our merchandise, which could adversely impact our business, results of operations, financial condition and cash flows.

Consumer purchases of discretionary items, including our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. Some of the factors impacting discretionary consumer spending include general economic conditions, wages and employment, consumer debt, the availability of customer credit, currency exchange rates, taxation, fuel and energy prices, interest rates, consumer confidence and other macroeconomic factors. Downturns in the economy typically affect consumer purchases of merchandise and could adversely impact our results of operations and continued growth.

Fluctuations in consumer preferences may adversely affect the demand for our products and result in a decline in our sales.

Our retail fashion jewelry and accessories business fluctuates according to changes in consumer preferences. If we are unable to anticipate, identify or react to changing styles or trends, our sales may decline, and we may be faced with excess inventories. If this occurs, we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow moving inventory, which could have a material adverse effect on our results of operations and adversely affect our margins. In addition, if we miscalculate customer tastes and our customers come to believe that we are no longer able to offer merchandise that appeals to them, our brand image may suffer.

Advance purchases of our merchandise make us vulnerable to changes in consumer preferences and pricing shifts and may negatively affect our results of operations.

Fluctuations in the demand for retail jewelry and accessories especially affect the inventory we sell because we enter into contracts for the purchase and manufacture of merchandise with our suppliers in advance of the applicable season and sometimes before trends are identified or evidenced by customer purchases. In addition, the cyclical nature of the retail business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we and other retailers generally build up inventory levels. As a result, we are vulnerable to demand and pricing shifts and it is more difficult for us to respond to new or changing customer needs. Our financial condition could be materially adversely affected if we are unable to manage inventory levels and respond to short-term shifts in client demand patterns. Inventory levels in excess of client demand may result in excessive markdowns and, therefore, lower than planned margins. If we underestimate demand for our merchandise, on the other hand, we may experience inventory shortages resulting in missed sales and lost revenues. Either of these events could negatively affect our operating results and brand image.

A disruption of imports from our foreign suppliers may increase our costs and reduce our supply of merchandise.

We do not own or operate any manufacturing facilities. We purchased merchandise from approximately 660 suppliers in Fiscal 2012. Approximately 86% of our Fiscal 2012 merchandise was purchased from suppliers outside the United States, including approximately 70% purchased from China. Any event causing a sudden disruption of imports from China or other foreign countries, including political and financial instability, would

 

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likely have a material adverse effect on our operations. We cannot predict whether any of the countries in which our products currently are manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the United States. and other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, embargoes and customs restrictions, on merchandise that we purchase could increase the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition and results of operations. The United States has previously imposed trade quotas on specific categories of goods and apparel imported from China, and may impose additional quotas in the future. International pressure on China regarding revaluation of the Chinese yuan, continues, which has included proposed United States Federal legislation to impose tariffs on imports from China unless the Chinese government revalues the Chinese yuan.

Fluctuations in foreign currency exchange rates could negatively impact our results of operations.

Substantially all of our foreign purchases of merchandise are negotiated and paid for in United States dollars. As a result, our sourcing operations may be adversely affected by significant fluctuation in the value of the United States dollar against foreign currencies. We are also exposed to the gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our Consolidated Financial Statements due to the translation of operating results and financial position of our foreign subsidiaries. We purchased approximately 70% of our merchandise from China in Fiscal 2012. During Fiscal 2012, the Chinese yuan strengthened against the United States dollar, and this trend may continue in Fiscal 2013. An increase in the Chinese yuan against the dollar means that we will have to pay more in United States dollars for our purchases from China. 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 operating results.

Our business depends on the willingness of vendors and service providers to supply us with goods and services pursuant to customary credit arrangements which may not be available to us in the future.

Like most companies in the retail sector, we purchase goods and services from trade creditors pursuant to customary credit arrangements. If we are unable to maintain or obtain trade credit from vendors and service providers on terms favorable to us, or at all, or if vendors and service providers are unable to obtain trade credit or factor their receivables, then we may not be able to execute our business plan, develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business. In addition, the tightening of trade credit could limit our available liquidity.

The failure to grow our store base outside of North America, expand our international franchising business or grow our e-commerce business may adversely affect our business.

Our growth plans include expanding our store base outside of North America, with plans to expand our store base in Europe, Asia, and South America. We opened our first Claire’s store in China in the last quarter of Fiscal 2012, and have plans for accelerated growth in China in the near future. We have limited experience in operating in some of these locations outside of North America, including China. Our ability to grow successfully outside of North America depends in part on determining a sustainable formula to build customer loyalty and gain market share in certain especially challenging international retail environments. Customers in our new markets may not be as familiar with our brands, and we may need to build brand awareness in these markets through greater investments in promotional activities. As a result, our sales may not be at volumes we plan or not result in the margins we anticipate. In addition, in many of these markets, the real estate, employment and labor, transportation and logistics, regulatory, and other operating requirements differ dramatically from those in the places where we have experience. Also, the integration of our operations in foreign countries presents certain challenges not necessarily presented in the integration of our North America operations. If our expansion plans outside of North America are unsuccessful or do not deliver an appropriate return on our investments, our consolidated operations and financial results could be materially and adversely affected.

 

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We also plan to expand into new countries by entering into franchising and licensing agreements with unaffiliated third parties who are familiar with the local retail environment and have sufficient retail experience to operate stores in accordance with our business model, which requires strict adherence to the guidelines established by us in our franchising agreements. Failure to identify appropriate franchisees or negotiate acceptable terms in our franchising and licensing agreements that meet our financial targets would adversely affect our international expansion goals, and could have a material adverse effect on our operating results and impede our strategy of increasing our net sales through expansion.

We launched our United States e-commerce business in 2011, and have plans to launch our e-commerce business for Claire’s in Canada, Icing in North America, and Claire’s in Europe in Fiscal 2013. Failure to grow our current e-commerce business in the United States, or successfully launch and grow our e-commerce business in these new markets, could have a material adverse effect on our operating results and impede our growth strategy.

Our cost of doing business could increase as a result of changes in federal, state, local and international regulations regarding the content of our merchandise.

The Consumer Product Safety Improvement Act of 2008 (“CPSIA”), in general, bans the sale of children’s products containing lead in excess of certain maximum standards, and imposes other restrictions and requirements on the sale of children’s products, including importing, testing and labeling requirements. In addition, various states, from time to time, propose or enact legislation regarding heavy metals or chemicals in products that differ from federal laws. We are also subject to various other health and safety rules and regulations, such as the Federal Food Drug and Cosmetic Act and the Federal Hazardous Substance Act. Our inability to comply with these regulatory requirements, including the new initiatives labeled as “green chemistry,” or other existing or newly adopted regulatory requirements, could increase our cost of doing business or result in significant fines or penalties that could have a material adverse effect on our business, results of operations, financial condition and cash flows.

In addition to regulations governing the sale of our merchandise in the United States and Canada, we are also subject to regulations governing the sale of our merchandise in our Europe and China stores. The European Union “REACH” legislation requires identification and disclosure of chemicals in consumer products, including chemicals that might be in the merchandise that we sell. Over time, this regulation, among other items, may require us to substitute certain chemicals contained in our products with substances the European Union considers safer. In China, we are subject to similar product and safety laws. Our failure to comply with this foreign legislation could result in significant fines or penalties and increase our cost of doing business.

Recalls, product liability claims, and government, customer or consumer concerns about product safety could harm our reputation, increase costs or reduce sales.

We are subject to regulation by the Consumer Product Safety Commission and similar state and international regulatory authorities, and our products could be subject to involuntary recalls and other actions by these authorities. Concerns about product safety, including but not limited to concerns about the safety of products manufactured in China (where most of our products are manufactured), could lead us to recall selected products. Recalls and government, customer or consumer concerns about product safety could harm our reputation, increase costs or reduce sales, any of which could have a material adverse effect on our financial results.

If we are unable to renew or replace our store leases or enter into leases for new stores on favorable terms, or if any of our current leases are terminated prior to the expiration of their stated term and we cannot find suitable alternate locations, our growth and profitability could be adversely affected.

All of our stores are leased. Our ability to renew any expired lease or, if such lease cannot be renewed, our ability to lease a suitable alternate location, and our ability to enter into leases for new stores on favorable terms

 

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will depend on many factors which are not within our control, such as conditions in the local real estate market, competition for desirable properties, our relationships with current and prospective landlords, and negotiating acceptable lease terms that meet our financial targets. Our ability to operate stores on a profitable basis depends on various factors, including whether we can reduce the number of under-performing stores which have a higher level of fixed costs in comparison to net sales, and our ability to maintain a proportion of new stores to mature stores that does not harm existing sales. If we are unable to renew existing leases or lease suitable alternate locations, enter into leases for new stores on favorable terms, or increase our same store sales, our growth and our profitability could be adversely affected.

Additionally, the economic environment may at times make it difficult to determine the fair market rent of retail real estate properties within the countries that we operate. This could impact the quality of our decisions to exercise lease options at previously negotiated rents, renew expiring leases or enter into new leases, in each case at negotiated rents. These decisions could also impact our ability to retain real estate locations adequate to meet our financial targets or efficiently manage the profitability of our existing store portfolio and could have a material adverse effect on our results of operations.

Natural disasters or unusually adverse weather conditions or potential emergence of disease or pandemic could adversely affect our net sales or supply of inventory.

Unusually adverse weather conditions, natural disasters, potential emergence of disease or pandemic or similar disruptions, especially during peak holiday selling seasons, but also at other times, could significantly reduce our net sales. In addition, these disruptions could also adversely affect our supply chain efficiency and make it more difficult for us to obtain sufficient quantities of merchandise from suppliers, which could have a material adverse effect on our financial position, earnings, and cash flow.

Information technology systems changes may disrupt our supply of merchandise.

Our success depends, in large part, on our ability to source and distribute merchandise efficiently. We continue to evaluate and leverage the best of both our North America and Europe information systems to support our product supply chain, including merchandise planning and allocation, inventory and price management in those markets and also in China. We also continue to evaluate and implement modifications and upgrades to our information technology systems. Modifications involve replacing legacy systems with successor systems or making changes to the legacy systems and our ability to maintain effective internal controls. We are aware of inherent risks associated with replacing and changing these core systems, including accurately capturing data, and possibly encountering supply chain disruptions. There can be no assurances that we will successfully launch these new systems as planned or that they will occur without disruptions to our operations. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.

If we experience a data security breach and confidential customer information is disclosed, we may be subject to penalties and experience negative publicity, which could affect our customer relationships and have a material adverse effect on our business, and we may incur increasing costs in an effort to minimize these cybersecurity risks.

We are continuing to expand our digital reach through various channels, including e-commerce. As we continue to expand these channels, our risks regarding data privacy and possible cyber attacks increase. We and our customers could suffer harm if customer information were accessed by third parties due to a security failure in our systems. The collection of data and processing of transactions require us to receive and store a large amount of personally identifiable data. This type of data is subject to legislation and regulation in various jurisdictions. Data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting state and federal legislative proposals addressing data privacy and security. We may become exposed to potential liabilities with respect to the data that we collect, manage and process, and may incur legal costs if our information security policies and procedures are not effective or if we

 

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are required to defend our methods of collection, processing and storage of personal data. Future investigations, lawsuits or adverse publicity relating to our methods of handling personal data could adversely affect our business, results of operations, financial condition and cash flows due to the costs and negative market reaction relating to such developments.

We may not have the resources or technical expertise to anticipate or prevent rapidly-evolving types of cyber attacks. Attacks may be targeted at us, our customers, or others who have entrusted us with information. Actual or anticipated attacks may cause us to incur increasing costs, including costs to hire additional personnel, purchase additional protection technologies, train employees, and engage third-party experts and consultants. Advances in computer capabilities, new technological discoveries, or other developments may result in the technology used by us to protect data being breached or compromised. In addition, data and security breaches can also occur as a result of non-technical issues, including breach by us or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our security could result in violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have a material adverse effect on our results of operations and our reputation.

Changes in the anticipated seasonal business pattern could adversely affect our sales and profits and our quarterly results may fluctuate due to a variety of factors.

Our business typically follows a seasonal pattern, peaking during the Christmas, Easter and back-to-school periods. Seasonal fluctuations also affect inventory levels, because we usually order merchandise in advance of peak selling periods. Our quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the time of store openings, the amount of revenue contributed by new stores, the timing and level of markdowns, the timing of store closings, expansions and relocations, competitive factors and general economic conditions.

A decline in number of people who go to shopping malls could reduce the number of our customers and reduce our net sales.

Substantially all of our North America stores are located in shopping malls. Our North America sales are derived, in part, from the high volume of traffic in those shopping malls. We benefit from the ability of the shopping mall’s “anchor” tenants, generally large department stores and other area attractions, to generate consumer traffic around our stores. We also benefit from the continuing popularity of shopping malls as shopping destinations for girls and young women. Sales volume and shopping mall traffic may be adversely affected by economic downturns in a particular area, competition from non-shopping mall retailers and other shopping malls where we do not have stores and the closing of anchor tenants in a particular shopping mall. In addition, a decline in the popularity of shopping malls among our target customers that may curtail customer visits to shopping malls, could result in decreased sales that would have a material adverse effect on our business, financial condition and results of operations.

Our industry is highly competitive.

The specialty retail business is highly competitive. We compete with international, national and local department stores, specialty and discount store chains, independent retail stores, e-commerce services, digital content and digital media devices, web services, direct marketing to consumers and catalog businesses that market similar lines of merchandise. Many of our competitors are companies with substantially greater financial, marketing and other resources. Given the large number of companies in the retail industry, we cannot estimate the number of our competitors. Although we launched our Claire’s United States e-commerce site in 2011, and plan to launch our e-commerce sites for Claire’s in Canada, Icing in North America, and Claire’s in Europe in Fiscal 2013, significant shifts in customer buying patterns to purchasing fashionable jewelry and accessories at affordable prices through channels other than traditional shopping malls, such as e-commerce, could have a material adverse effect on our financial results.

 

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Adoption of new or revised employment and labor laws and regulations could make it easier for our employees to obtain union representation and our business could be adversely impacted.

Currently, none of our employees in North America are represented by unions. However, our employees have the right at any time under the National Labor Relations Act to form or affiliate with a union. If some or all of our workforce were to become unionized and the terms of the collective bargaining agreement were significantly different from our current compensation arrangements, it could increase our costs and adversely impact our profitability. Any changes in regulations, the imposition of new regulations, or the enactment of new legislation could have an adverse impact on our business, to the extent it becomes easier for workers to obtain union representation.

Higher health care costs and labor costs could adversely affect our business.

With the passage in 2010 of the U.S. Patient Protection and Affordable Care Act , we are required to provide affordable coverage, as defined in the Act, to all employees, or otherwise be subject to a payment per employee based on the affordability criteria in the Act. Many of these requirements will be phased in over a period of time. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care and insurance costs could have a material adverse effect on our business, financial condition and results of operations. In addition, changes in the federal or state minimum wage or living wage requirements or changes in other workplace regulations could adversely affect our ability to meet our financial targets.

Our profitability could be adversely affected by high petroleum prices.

The profitability of our business depends to a certain degree upon the price of petroleum products, both as a component of the transportation costs for delivery of inventory from our vendors to our stores and as a raw material used in the production of our merchandise. We are unable to predict what the price of crude oil and the resulting petroleum products will be in the future. We may be unable to pass along to our customers the increased costs that would result from higher petroleum prices. Therefore, any such increase could have a material adverse impact on our business and profitability.

The possibility of war and acts of terrorism could disrupt our information or distribution systems and increase our costs of doing business.

A significant act of terrorism could have a material adverse impact on us by, among other things, disrupting our information or distributions systems, causing dramatic increases in fuel prices, thereby increasing the costs of doing business and affecting consumer spending, or impeding the flow of imports or domestic products to us.

We depend on our key personnel.

Our ability to anticipate and effectively respond to changing trends and consumer preferences depends in part on our ability to attract and retain key personnel in our design, merchandising, marketing and other functions. We cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. The loss of services of key members of our senior management team or of certain other key employees could also negatively affect our business.

Litigation matters incidental to our business could be adversely determined against us.

We are involved from time to time in litigation incidental to our business. Management believes that the outcome of current litigation will not have a material adverse effect on our results of operations or financial condition. Depending on the actual outcome of pending litigation, charges would be recorded in the future that may have an adverse effect on our operating results.

 

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Goodwill and indefinite-lived intangible assets comprise a significant portion of our total assets. We must test goodwill and indefinite-lived intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable; which could result in a material, non-cash write-down of goodwill or indefinite-lived intangible assets and could have a material adverse impact on our results of operations.

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. Our principal intangible assets, other than goodwill, are tradenames, franchise agreements, and leases that existed at date of acquisition with terms that were favorable to market at that date. We may be required to recognize additional impairment charges in the future. Additional impairment losses could have a material adverse impact on our results of operations and stockholder’s deficit.

There are factors that can affect our provision for income taxes.

We are subject to income taxes in numerous jurisdictions, including the United States, individual states and localities, and internationally. Our provision for income taxes in the future could be adversely affected by numerous factors including, but not limited to, the mix of income and losses from our foreign and domestic operations that may be taxed at different rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting principles or interpretations thereof, which could adversely impact earnings in future periods. In addition, the estimates we make regarding domestic and foreign taxes are based on tax positions that we believe are supportable, but could potentially be subject to successful challenge by the Internal Revenue Service or other authoritative agencies. If we are required to settle matters in excess of our established accruals for uncertain tax positions, it could result in a charge to our earnings.

If we or our independent manufacturers, franchisees or licensees do not use ethical business practices or comply with applicable laws and regulations, our brand name could be harmed due to negative publicity and our results of operations could be adversely affected.

While our internal and vendor operating guidelines promote ethical business practices, we do not control our independent manufacturers, franchisees or licensees, or their business practices. Accordingly, we cannot guarantee their compliance with our guidelines. Violation of labor or other laws, such as the Foreign Corrupt Practices Act, the U.K. Bribery Act, and sanction laws administered by Office of Foreign Assets Control (OFAC) by our independent manufacturers, franchisees or licensees, or the divergence from labor practices generally accepted as ethical in the United States, could diminish the value of our brand and reduce demand for our merchandise if, as a result of such violation, we were to attract negative publicity. In addition, we also conduct business directly in many countries and increased our international activities with the opening of company-operated stores in China in the latter part of Fiscal 2012. Accordingly, we are also subject to the Foreign Corrupt Practices Act, the U.K. Bribery Act, and OFAC sanction laws. Acts by our employees that violate these laws could subject us to criminal or civil sanctions and penalties. As a result, our results of operations could be adversely affected.

We rely on third parties to deliver our merchandise and if these third parties do not adequately perform this function, our business would be disrupted.

The efficient operation of our business depends on the ability of our third party carriers to ship merchandise directly to our distribution facilities and individual stores. These carriers typically employ personnel represented by labor unions and have experienced labor difficulties in the past. Due to our reliance on these parties for our shipments, interruptions in the ability of our vendors to ship our merchandise to our distribution facilities or the ability of carriers to fulfill the distribution of merchandise to our stores could adversely affect our business, financial condition and results of operations.

 

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We depend on single North America, Europe and International distribution facilities.

We handle merchandise distribution for all of our North America and China stores from a single facility in Hoffman Estates, Illinois, a suburb of Chicago, Illinois. We handle merchandise distribution for all of our Europe operations from a single facility in Birmingham, United Kingdom. We handle merchandise distribution for all of our international franchise operations from a single facility in Hong Kong. Independent third party transportation companies deliver our merchandise to our stores and our clients. Any significant interruption in the operation of our distribution facilities or the domestic transportation infrastructure due to natural disasters, accidents, inclement weather, system failures, work stoppages, slowdowns or strikes by employees of the transportation companies, or other unforeseen causes could delay or impair our ability to distribute merchandise to our stores, which could result in lower sales, a loss of loyalty to our brands and excess inventory and would have a material adverse effect on our business, financial condition and results of operations.

We may be unable to protect our tradenames and other intellectual property rights.

We believe that our tradenames and service marks are important to our success and our competitive position due to their name recognition with our customers. There can be no assurance that the actions we have taken to establish and protect our tradenames and service marks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the tradenames, service marks and proprietary rights of others. The laws of some foreign countries may not protect proprietary rights to the same extent as do the laws of the United States, and it may be more difficult for us to successfully challenge the use of our proprietary rights by other parties in these countries. Also, others may assert rights in, or ownership of, our tradenames and other proprietary rights, and we may be unable to successfully resolve those types of conflicts to our satisfaction.

Our success depends on our ability to maintain the value of our brands.

Our success depends on the value of our Claire’s ® and Icing ® brands. The Claire’s ® and Icing ® names are integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brands will depend largely on the success of our design, merchandising, and marketing efforts and our ability to provide a consistent, enjoyable quality client experience. Our brands could be adversely affected if we fail to achieve these objectives for one or both of these brands and our public image and reputation could be tarnished by negative publicity. Any of these events could negatively impact sales.

We may be unable to rely on liability indemnities given by foreign vendors which could adversely affect our financial results.

The quality of our globally sourced products may vary from our expectations and sources of our supply may prove to be unreliable. In the event we seek indemnification from our suppliers for claims relating to the merchandise shipped to us, our ability to obtain indemnification may be hindered by the supplier’s lack of understanding of North America, Europe and China product liability laws. Our ability to successfully pursue indemnification claims may also be adversely affected by the financial condition of the supplier. Any of these circumstances could have a material adverse effect on our business and financial results.

Risks Relating to Our Indebtedness

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under the Credit Facility and Notes.

We are significantly leveraged. As of February 2, 2013, our total debt was approximately $2.39 billion, consisting of borrowings under our Notes and a capital lease obligation. We cannot assure you that we will have the financial resources required, or that the conditions of the capital markets will support, any future refinancing or restructuring of those facilities or other indebtedness.

 

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Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the Credit Facility and Notes. Our high degree of leverage could have important consequences, including:

 

   

increasing our vulnerability to adverse economic, industry or competitive developments;

 

   

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

   

exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our Credit Facility, will be at variable rates of interest;

 

   

making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the Notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indentures governing the Notes and the agreements governing such other indebtedness;

 

   

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

   

imposing restrictions on the operating of our business that may hinder our ability to take advantage of strategic opportunities to grow our business;

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes, which could be exacerbated by further volatility in the credit markets; and

 

   

limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.

Despite our substantial high indebtedness, we and our subsidiaries are still able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The indentures governing the Notes and our Credit Facility each contain restrictions on the incurrence of additional indebtedness. However, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. Accordingly, we and our subsidiaries may be able to incur substantial additional indebtedness in the future. As of February 2, 2013, we had undrawn availability under our Credit Facility of $110.5 million. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we now face would increase. In addition, the indentures governing the Notes and our Credit Facility will not prevent us from incurring obligations that do not constitute indebtedness under those agreements.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our Credit Facility and the indentures governing the Notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’ ability to, among other things:

 

   

incur additional indebtedness or issue certain preferred shares;

 

   

pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

   

make certain investments;

 

   

transfer or sell certain assets;

 

   

create liens;

 

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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

   

enter into certain transactions with our affiliates.

A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions, and, in the case of the Credit Facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under our indebtedness, the lenders and/or note holders could elect to declare all amounts outstanding to be immediately due and payable and, in the case of the Credit Facility, terminate all commitments to extend further credit. Such actions could cause cross defaults under our other indebtedness. If we were unable to repay such amounts, the lenders under our Credit Facility and the holders of our secured Notes could proceed against the collateral granted to them to secure that indebtedness.

We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the Notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of our Credit Facility and the indentures governing the Notes or any future debt instruments that we may enter into may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

To service our debt obligations, we may need to increase the portion of the income of our foreign subsidiaries that is expected to be remitted to the United States, which could increase our income tax expense.

The amount of the income of our foreign subsidiaries that we expect to remit to the United States may significantly impact our United States federal income tax expense. We record United States federal income taxes on that portion of the income of our foreign subsidiaries that is expected to be remitted to the United States. In order to service our debt obligations, we may need to increase the portion of the income of our foreign subsidiaries that we expect to remit to the United States, which may significantly increase our income tax expense. Consequently, our income tax expense has been, and will continue to be, impacted by our strategic initiative to make substantial capital investments outside the United States.

If we default on our obligations to pay our other indebtedness, the holders of our debt could exercise rights that could have a material effect on us.

If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default,

 

   

the holders of such indebtedness may be able to cause all of our available cash flow to be used to pay such indebtedness and, in any event, could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest;

 

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the lenders under our Credit Facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets; and

 

   

we could be forced into bankruptcy or liquidation.

If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our Credit Facility to avoid being in default. If we breach our covenants under our Credit Facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our Credit Facility, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

Risks Related to This Offering

There is no existing market for our common stock and we do not know if one will develop, which could impede your ability to sell your shares and may depress the market price of our common stock.

There has not been a public market for our common stock prior to this offering. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for the common stock will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. See “Underwriting.” Consequently, you may be unable to sell our common stock at prices equal to or greater than the price you pay in this offering.

Apollo controls us, and its interests may conflict with or differ from your interests as a stockholder.

After the consummation of this offering, Apollo will beneficially own approximately    % of our common stock, assuming the underwriters do not exercise their option to purchase additional shares, or    % if the underwriters exercise their option in full. As a result, Apollo will continue to have the ability to prevent any transaction that requires the approval of our stockholders, including the approval of significant corporate transactions such as mergers and the sale of substantially all of our assets.

The interests of Apollo could conflict with or differ from your interests as a holder of our common stock. For example, the concentration of ownership held by Apollo could delay, defer or prevent a change of control of us or impede a merger, takeover or other business combination that you as a stockholder may otherwise view favorably. Apollo is in the business of making or advising on investments in companies and holds, and may from time to time in the future acquire, interests in or provide advice to businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. They may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Our certificate of incorporation provides that we expressly renounce any interest or expectancy in any business opportunity, transaction or other matter in which Apollo Management or any of its members, directors, employees or other affiliates (the “Apollo Group”) participates or desires or seeks to participate in, even if the opportunity is one that we would reasonably be deemed to have pursued if given the opportunity to do so. The renouncement does not apply to any business opportunities that are presented to an Apollo Group member solely in such person’s capacity as a member of our board of directors and with respect to which no other member of the Apollo Group independently receives notice or otherwise identifies such business opportunity prior to us becoming aware of it, or if the business opportunity is initially identified by the Apollo Group solely through the disclosure of information by or on behalf of us. See “Management—Apollo Approval of Certain Matters and Rights to Nominate Certain Directors,” “Certain Relationships and Related Party Transactions—Stockholders Agreement” and “Description of Capital Stock—Certain Anti-Takeover, Limited Liability and Indemnification Provisions—Apollo Approval Rights.”

 

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Apollo will continue to strongly influence or effectively control our decisions for so long as it beneficially owns a significant amount of our outstanding common stock.

So long as Apollo continues to beneficially own a significant amount of our equity, even if such amount is less than 50%, it may continue to be able to strongly influence or effectively control our decisions. For example, our bylaws require the approval of a majority of the directors nominated by Apollo Management voting on the matter for certain important matters, including mergers and acquisitions, issuances of equity and the incurrence of debt, so long as Apollo beneficially owns at least 33  1 / 3 % of our outstanding common stock. Upon completion of this offering, Apollo will continue to beneficially own more than 50% of our common stock. See “Management—Apollo Approval of Certain Matters and Rights to Nominate Certain Directors,” “Certain Relationships and Related Party Transactions—Stockholders Agreement” and “Description of Capital Stock—Certain Anti-Takeover, Limited Liability and Indemnification Provisions—Apollo Approval Rights.”

We will be a “controlled company” within the meaning of the New York Stock Exchange rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

Upon the closing of this offering, Apollo will continue to control a majority of our voting common stock. As a result, we will be a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. Under the rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain New York Stock Exchange corporate governance requirements, including:

 

   

the requirement that we have a majority of independent directors on our board of directors;

 

   

the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Following this offering, we intend to utilize the foregoing exemptions from the New York Stock Exchange corporate governance requirements. As a result, we will not have a majority of independent directors nor will our nominating and corporate governance and compensation committees consist entirely of independent directors and we will not be required to have an annual performance evaluation of the nominating and corporate governance and compensation committees. See “Management.” Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.

The price of our common stock may fluctuate significantly and you could lose all or part of your investment.

Volatility in the market price of our common stock may prevent you from being able to sell your common stock at or above the price you paid for your common stock. The market price for our common stock could fluctuate significantly for various reasons, including:

 

   

our operating and financial performance and prospects;

 

   

changes in earnings estimates or recommendations by securities analysts who track our common stock or industry;

 

   

market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

   

the number of shares to be publicly traded after this offering; and

 

   

sales of common stock by us, our stockholder, Apollo or its affiliated funds or members of our management team.

 

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In addition, the stock market has experienced significant price and volume fluctuations in recent years. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industries. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce our share price.

We currently have no plans to pay regular dividends on our common stock, so you may not receive funds without selling your common stock.

We currently have no plans to pay regular dividends on our common stock. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions applying to the payment of dividends, and other considerations that our board of directors deems relevant. The terms of our Credit Facility and the indentures governing the Notes include limitations on our ability to pay dividends and/or the ability of our subsidiaries to pay dividends to us. Accordingly, you may have to sell some or all of your common stock in order to generate cash flow from your investment.

Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.

We may sell additional shares of common stock in subsequent public offerings or otherwise, including to finance acquisitions. We have 90,000,000 authorized shares of common stock, of which                shares will be outstanding upon consummation of this offering. The outstanding share number includes shares that we are selling in this offering, which may be resold immediately in the public market. The remaining outstanding shares are restricted from immediate resale under the lock-up agreements with the underwriters described in the “Underwriting” section of this prospectus, but may be sold into the market in the near future. These shares will become available for sale following the expiration of the lock-up agreements, which, without the prior consent of             , is 180 days after the date of this prospectus, subject to certain exceptions and extensions. Immediately after the expiration of the lock-up period, the shares will be eligible for resale under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), subject to volume limitations.

As soon as practicable after the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering 8,200,000 shares of our common stock reserved for issuance under our Incentive Plan. Accordingly, shares of our common stock registered under such registration statement may become available for sale in the open market upon grants under the plan, subject to vesting restrictions, Rule 144 limitations applicable to our affiliates and the contractual lock-up provisions described below.

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including any shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

Our organizational documents may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.

Provisions of our certificate of incorporation and bylaws may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our board of directors. These provisions include:

 

   

having a classified board of directors;

 

   

establishing limitations on the removal of directors;

 

   

prohibiting cumulative voting in the election of directors;

 

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empowering only the board to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise, and requiring that, as long as Apollo continues to beneficially own at least 33 1/3% of our common stock, any vacancy resulting from the death, removal or resignation of an Apollo Management designee be filled by a majority of the remaining directors nominated by Apollo Management;

 

   

as long as Apollo continues to beneficially own more than 50.1% of our common stock, granting Apollo Management the right to increase the size of our board of directors and to fill the resulting vacancies at any time;

 

   

authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;

 

   

prohibiting stockholders from acting by written consent or calling a special meeting if less than 50.1% of our outstanding common stock is beneficially owned by Apollo;

 

   

requiring the approval of a majority of the directors nominated by Apollo Management voting on the matter to approve certain business combinations and certain other significant matters so long as Apollo beneficially owns at least 33 1/3% of our common stock; and

 

   

establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

Our issuance of shares of preferred stock could delay or prevent a change in control of us. Our board of directors has the authority to cause us to issue, without any further vote or action by the stockholders, shares of preferred stock in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. The issuance of shares of our preferred stock may have the effect of delaying, deferring or preventing a change in control without further action by the stockholders, even where stockholders are offered a premium for their shares.

Our bylaws also require the approval of a majority of directors nominated by Apollo Management voting on the matter for certain important matters, including mergers and acquisitions, issuances of equity and the incurrence of debt, as long as Apollo beneficially owns at least 33  1 / 3 % of our outstanding common stock. In addition, as long as Apollo beneficially owns a majority of our outstanding common stock, Apollo Management will be able to control all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and certain corporate transactions. See “Management—Apollo Approval of Certain Matters and Rights to Nominate Certain Directors.” Together, these charter, bylaw and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock. Furthermore, the existence of the foregoing provisions, as well as the significant common stock beneficially owned by Apollo and its rights to nominate a specified number of directors in certain circumstances, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of us, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

You will experience an immediate and substantial dilution in the net tangible book deficit of the common stock you purchase.

After giving effect to this offering and the other adjustments described elsewhere in this prospectus under “Dilution,” we expect that our pro forma as adjusted net tangible book deficit as of February 2, 2013 would be $         per share. Based on an assumed initial public offering price of $        per share, the midpoint of the estimated offering range set forth on the cover page of this prospectus, you will experience immediate and substantial dilution of approximately $        per share in net tangible book deficit of the common stock you purchase in this offering. See “Dilution,” including the discussion of the effects on dilution from a change in the price of this offering.

 

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The additional requirements of having a class of publicly traded equity securities may strain our resources and distract management.

Even though Claire’s Stores currently files reports with the SEC, after the consummation of this offering, we will be subject to additional reporting requirements of the Securities Exchange Act of 1934 (“the Exchange Act”), the Sarbanes-Oxley Act of 2002, (the “Sarbanes-Oxley Act”), and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”). The Dodd-Frank Act effects comprehensive changes to public company governance and disclosures in the United States and will subject us to additional federal regulation. We cannot predict with any certainty the requirements of the regulations ultimately adopted or how the Dodd-Frank Act and such regulations will impact the cost of compliance for a company with publicly traded common stock. We are currently evaluating and monitoring developments with respect to the Dodd-Frank Act and other new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We also expect that being a company with publicly traded common stock and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control for financial reporting. These requirements may place a strain on our systems and resources. Under Section 404 of the Sarbanes-Oxley Act, we will be required to include a report of management on our internal control over financial reporting in our Annual Reports on Form 10-K. After consummation of this offering, our independent registered public accounting firm auditing our financial statements must attest to the effectiveness of our internal control over financial reporting. This requirement will first apply to our Annual Report on Form 10-K for fiscal 2014. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. If we are unable to conclude that our disclosure controls and procedures and internal control over financial reporting are effective, or if our independent public accounting firm is unable to provide us with an unqualified report on our internal control over financial reporting in future years, investors may lose confidence in our financial reports and our stock price may decline.

We have broad discretion to apply the proceeds to us from this offering, and we may use them in ways that may not enhance our operating results or the price of our common stock.

Our management will have broad discretion over the use of proceeds from this offering, and we could spend the proceeds from this offering in ways our stockholders may not agree with or that do not yield a favorable return, if at all. If we do not invest or apply the proceeds of this offering in ways that improve our operating results, we may fail to achieve expected financial results, which could cause our stock price to decline.

 

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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. 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 fiscal years, 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. The forward-looking statements may use the words “expect,” “anticipate,” “plan,” “intend,” “project,” “may,” “believe,” “forecast,” and similar expressions. Forward-looking statements involve known or unknown risks, uncertainties and other factors, including changes in estimates and judgments discussed under “Critical Accounting Policies and Estimates” which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Some of these risks, uncertainties and other factors are as follows: our level of indebtedness; general economic conditions; changes in consumer preferences and consumer spending; 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 new channels, such as e-commerce; uncertainties generally associated with the specialty retailing business; 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; significant increases in our merchandise markdowns; inability to grow our store base in Europe, China, or expand to grow our international store base through franchise or similar licensing arrangements; 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; changes in applicable laws, rules and regulations, including changes in North America, Europe, or China 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 employment 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; unwillingness of vendors and service providers to supply goods or services pursuant to historical customary credit arrangements; increases in the cost of borrowings; unavailability of additional debt or equity capital; and the impact of our substantial indebtedness on our operating income and our ability to grow. 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. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

 

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USE OF PROCEEDS

Assuming an initial public offering price of $          per share, the midpoint of the range set forth on the cover page of this prospectus, we estimate that we will receive net proceeds from this offering of approximately $ million ($          million if the underwriters’ option to purchase additional shares is exercised in full), after deducting underwriting discounts and commissions and other estimated expenses of $          million ($          million if the underwriters’ option to purchase              additional shares is exercised in full) payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $          per share would increase (decrease) the net proceeds to us from this offering by approximately $          million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us, by approximately $          million, assuming the initial public offering price per share remains the same.

We intend to use the net proceeds that we receive to refinance existing indebtedness under the Notes and for general corporate purpose . In addition, upon the completion of this offering, we will pay from cash on hand the Sponsors a fee of approximately $          million (plus any unreimbursed expenses) in connection with the termination of our management services agreement, as described under “Certain Relationships and Related Party Transactions—Management Fee.”

 

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DIVIDEND POLICY

We currently intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth. In addition, our Credit Facility and the indentures governing the Notes limit our ability to pay dividends or other distributions on our common stock. The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition and requirements, business conditions and covenants under any applicable contractual arrangements.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of February 2, 2013, on an actual basis and on an as adjusted basis to give effect to this offering and the anticipated use of proceeds to refinance existing indebtedness. You should read the following table in conjunction with the sections titled “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related notes included elsewhere in this prospectus.

No adjustments have been made to reflect normal course operations by us, or other developments with our business, after February 2, 2013, and thus the as adjusted information provided below is not indicative of our actual capitalization at any date.

 

     As of February 2, 2013  
     Actual     As Adjusted  
     (unaudited)  
     (in thousands)  

Cash and cash equivalents

   $ 169,256      $                
  

 

 

   

 

 

 

Debt:

    

Senior Secured Revolving Credit Facility

   $ —        $     

9.00% Senior Secured First Lien Notes due 2019 (a)

     1,141,294     

8.875% Senior Secured Second Lien Notes due 2019

     450,000     

9.25% Senior Fixed Rate Notes due 2015

     220,270     

9.625% / 10.375% Senior Toggle Notes due 2015

     302,190     

10.5% Senior Subordinated Notes due 2017

     215,880     

Capital lease obligation

     17,232     
  

 

 

   

 

 

 

Total debt

   $ 2,346,866      $     
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock par value $0.01 per share; authorized 90,000,000 shares; issued and outstanding 60,824,500 shares, actual;              shares, as adjusted

     608     

Preferred stock par value $             per share; authorized 0 shares, actual;              shares, as adjusted

     —       

Additional paid-in capital

     628,115     

Accumulated other comprehensive income, net of tax

     3,273     

Accumulated deficit

     (603,130  
  

 

 

   

 

 

 

Total stockholders’ equity

     28,866     
  

 

 

   

 

 

 

Total capitalization

   $ 2,375,732      $     
  

 

 

   

 

 

 

 

(a) Includes unamortized premium of $16,294

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of the common stock to be sold in this offering exceeds the net tangible book value (deficit) per share of common stock after the offering. Net tangible book value (deficit) per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date. The Company defines total tangible assets as total assets less intangible assets, including deferred financing costs. There are              shares of our common stock reserved for future awards under our Incentive Plan, which have not been included within the dilution amounts presented below.

Our net tangible book deficit as of February 2, 2013 was approximately $2,108.7 million, or $34.67 per share. Our pro forma net tangible book deficit as of February 2, 2013 was approximately $          million, or $          per share of common stock.

After giving effect to the sale of the              shares of common stock we are offering at an assumed initial public offering price of $          per share (the midpoint of the range listed on the cover page of this prospectus) and after deducting underwriting discounts and commissions, our estimated offering expenses, our expected use of the net proceeds of this offering as described under “Use of Proceeds,” our pro forma as adjusted net tangible book deficit would have been approximately $          million, or $          per share of common stock, as of February 2, 2013. This represents an immediate decrease in pro forma net tangible book deficit of approximately $          per share to existing stockholders and an immediate dilution of approximately $          per share to new investors. The following table illustrates this calculation on a per share basis:

 

Assumed initial public offering price per share

      $                

Net tangible book deficit per share as of February 2, 2013

   $ 34.67      

Decrease per share attributable to the pro forma adjustments described above

     
  

 

 

    

Pro forma net tangible book deficit as of February 2, 2013

     

Increase per share attributable to the offering and the use of proceeds and use of cash on hand described above

     
  

 

 

    

Pro forma as adjusted net tangible book deficit per share after this offering

     
     

 

 

 

Dilution per share to new investors

      $     
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $          per share would decrease (increase) our pro forma as adjusted net tangible book deficit by approximately $          million, or $          per share, and increase (decrease) the dilution to new investors in this offering by $          per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. An increase of 1,000,000 in the number of shares we are offering would decrease our pro forma as adjusted net tangible book deficit by approximately $          million, or $          per share, and would decrease dilution to new investors in this offering by $          per share, assuming the initial public offering price per share remains the same. A decrease of 1,000,000 in the number of shares we are offering would increase our pro forma as adjusted net tangible book deficit by approximately $         million, or $         per share, and would increase dilution to new investors in this offering by $          per share, assuming the initial public offering price per share remains the same.

The following table summarizes on an as adjusted basis as of February 2, 2013, giving effect to:

 

   

the total number of shares of common stock purchased from us;

 

   

the total consideration paid to us, assuming an initial public offering price of $          per share (before deducting the estimated underwriting discount and commissions and offering expenses payable by us in connection with this offering); and

 

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the average price per share paid by our existing stockholder and by new investors purchasing shares in this offering:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     60,824,500              %   $                           %   $                

Investors in the offering purchasing newly-issued shares

             %             %   $     
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

             %   $                %   $     
  

 

 

    

 

 

   

 

 

    

 

 

   

A $1.00 increase (decrease) in the assumed initial public offering price of $          per share (the midpoint of the range set forth on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors purchasing newly-issued shares, total consideration paid by all stockholders and the average price per share by $          million, $          million and $        , respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) total consideration paid by new investors and total consideration paid by all stockholders by $          million and $        million, respectively, and would increase and (decrease) the average price per share paid by all stockholders by $          and $        , respectively, assuming the initial public offering price stays the same.

 

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SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA

The balance sheet data as of February 2, 2013 and January 28, 2012 and statement of operations data for the fiscal years ended February 2, 2013, January 28, 2012 and January 29, 2011 are derived from our Consolidated Financial Statements included herein and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the related notes thereto appearing elsewhere in this prospectus. The Consolidated Balance Sheet data as of January 29, 2011, January 30, 2010, and January 31, 2009 and the Consolidated Statement of Operations and Comprehensive Income data for the fiscal years ended January 30, 2010 and January 31, 2009 are derived from our Consolidated Financial Statements which are not included herein.

 

     Fiscal Year
Ended
February 2,
2013 (1)
    Fiscal Year
Ended
January 28,
2012 (1)
    Fiscal Year
Ended
January 29,
2011 (1)
    Fiscal Year
Ended
January 30,
2010 (1)
    Fiscal Year
Ended
January 31,
2009 (1)
 
     (in thousands, except for per share and store data)  

Statement of Operations Data:

          

Net sales

   $ 1,557,020      $ 1,495,900      $ 1,426,397      $ 1,342,389      $ 1,412,960   

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

     755,996        724,775        685,111        663,269        724,832   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     801,024        771,125        741,286        679,120        688,128   

Other expenses:

          

Selling, general and administrative

     503,254        504,360        493,081        466,996        513,746   

Depreciation and amortization

     64,879        68,753        65,198        71,471        85,093   

Impairment of assets

     —          —          12,262        3,142        498,490   

Severance and transaction-related costs

     2,828        6,928        741        921        15,928   

Other (income) expense, net

     (6,105     (1,254     5,542        (5,493     (4,499
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     564,856        578,787        576,824        537,037        1,108,758   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     236,168        192,338        164,462        142,083        (420,630

Gain (loss) on early debt extinguishment

     (8,952     7,058        13,583        36,412        17,083   

Impairment of equity investment

     —          —          6,030        —          25,500   

Interest expense, net

     206,287        172,569        154,382        174,456        193,914   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     20,929        26,827        17,633        4,039        (622,961

Income tax expense

     14,685        11,022        10,476        11,803        2,447   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 6,244      $ 15,805      $ 7,157      $ (7,764   $ (625,408
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

          

Basic and diluted

   $ 0.10      $ 0.26      $ 0.12      $ (0.13   $ (10.34

Weighted average shares outstanding—basic

     60,805        60,685        60,557        60,520        60,462   

Weighted average shares outstanding—diluted

     60,805        60,695        60,591        60,520        60,462   

Other Financial Data:

          

Adjusted EBITDA (2)

     308,034        274,732        263,890        233,839        213,347   

Adjusted EBITDA margin (2)

     19.8     18.4     18.5     17.4     15.1

Capital expenditures:

          

New stores and remodels (3)

   $ 64,398      $ 63,705      $ 40,126      $ 17,103      $ 38,241   

Other

     9,455        12,912        9,689        8,395        23,135   

Total capital expenditures

     73,853        76,617        49,815        25,498        61,376   

Cash interest expense (4)

     161,264        133,036        107,361        126,733        168,567   

Same store sales growth

     1.8     0.1     6.5     (1.7 )%      (6.9 )% 

 

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     Fiscal Year
Ended
February 2,
2013 (1)
     Fiscal Year
Ended
January 28,
2012 (1)
     Fiscal Year
Ended
January 29,
2011 (1)
     Fiscal Year
Ended
January 30,
2010 (1)
    Fiscal Year
Ended
January 31,
2009 (1)
 
     (in thousands, except for per share data and store data)  

Store Data (at period end):

             

Number of stores

             

North America

     1,921         1,953         1,972         1,993        2,026   

Europe

     1,161         1,118         1,009         955        943   

China

     3         —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total company-operated

     3,085         3,071         2,981         2,948        2,969   

Joint venture

     —           —           —           211        214   

Franchise

     392         381         395         195        196   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total global stores

     3,477         3,452         3,376         3,354        3,379   

Total gross square footage of company-operated stores (000’s)

     3,117         3,092         3,012         2,982        3,011   

Net sales per company-operated store (000’s) (5)

   $ 506       $ 494       $ 481       $ 454      $ 461   

Net sales per square foot of company-operated stores (6)

   $ 502       $ 490       $ 476       $ 448      $ 453   

Balance Sheet Data (at period end)

             

Cash and cash equivalents (7)

   $ 169,256       $ 177,612       $ 281,384       $ 199,474      $ 205,252   

Total assets

     2,800,641         2,765,551         2,867,918         2,834,772        2,881,573   

Total debt (including capital lease) (8)

     2,346,866         2,366,815         2,491,691         2,492,260        2,555,003   

Total net debt (Total debt less Cash and cash equivalents)

     2,177,610         2,189,203         2,210,307         2,292,786        2.349,751   

Total stockholders’ equity (deficit)

     28,866         15,498         5,336         (5,685     (29,524

 

(1) Fiscal 2012 consisted of 53 weeks; Fiscal 2011, Fiscal 2010, Fiscal 2009 and Fiscal 2008 were 52 week periods.
(2) See “Non-GAAP financial measures” for an explanation of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin as presented in this table.

A reconciliation of historical net income (loss) to EBITDA and Adjusted EBITDA is set forth in the following table:

 

    Fiscal Year Ended  
    February 2,
2013(1)
    January 28,
2012(1)
    January 29,
2011(1)
    January 30,
2010
    January 31,
2009
 
    (unaudited)        
    (in thousands)        

Net income (loss)(a)

  $ 6,244      $ 15,805      $ 7,157      $ (7,764   $ (625,408

Income tax expense

    14,685        11,022        10,476        11,803        2,447   

Loss (gain) on early debt extinguishment

    8,952        (7,058     (13,583     (36,412     (17,083

Interest expense

    206,486        173,036        154,463        174,676        195,634   

Interest income

    (199     (467     (81     (220     (1,720

Impairment(b)

                  18,292        3,142        523,990   

Depreciation and amortization

    64,879        68,753        65,198        71,471        85,093   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    301,047        261,091        241,922        216,696        162,953   

Adjustments:

         

Stock compensation, book to cash, rent, intangible amortization(c)

    857        1,875        9,865        10,439        16,742   

Management fee, consulting expense, joint venture investment(d)

    3,518        3,000        6,442        5,214        3,812   

Other(e)

    2,612        8,766        5,661        1,490        29,840   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 308,034      $ 274,732      $ 263,890      $ 233,839      $ 213,347   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Fiscal 2011 includes a $2.0 million gain to remeasure a Euro-denominated loan at the period end foreign exchange rate.

 

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  (b) Represents non-cash impairment charges.
  (c) Includes: non-cash stock compensation expense, net non-cash rent expense, amortization of rent free periods, the inclusion of cash landlord allowances, and the net accretion of favorable (unfavorable) lease obligations and non-cash amortization of lease rights.
  (d) Includes: the management fee paid to the Sponsors, non-recurring consulting expenses and non-cash equity loss from our 50:50 joint venture (effective September 2, 2010, we had no ownership in this joint venture).
  (e) Includes: non-cash losses on property and equipment primarily associated with the sale of our North American distribution center/office building, remodels, relocations and closures; the gain on sale of lease rights upon exiting certain European locations; costs, including third party charges and compensation, incurred in conjunction with the relocation of new employees; non-cash foreign exchange gains/losses resulting from intercompany transactions and remeasurements of U.S. dollar denominated cash accounts and foreign currency denominated debt of our foreign entities into their functional currency; and severance and transaction related costs, Pan European Transformation costs and Cost Savings Initiative costs.

Adjusted EBITDA margin represents Adjusted EBITDA divided by net sales for the applicable period, expressed as a percentage.

 

(3) For Fiscal 2012, Fiscal 2011, Fiscal 2010, Fiscal 2009, and Fiscal 2008 include expenditures for store related intangible assets in the amounts of $5,049, $5,709, $1,104, $546 and $1,971, respectively.
(4) Cash interest expense does not include amortization of debt issuance costs, interest expense paid in kind or accretion of debt premium.
(5) Net sales per company-operated store are calculated based on the average number of stores during the period.
(6) Net sales per square foot of company-operated stores are calculated based on the average gross square feet during the period.
(7) At February 2, 2013, January 28, 2012, and January 29, 2011, cash and cash equivalents included restricted cash of $0 million, $4.4 million, and $23.9 million, respectively.
(8) At February 2, 2013, total debt included unamortized premium of $16.3 million.

 

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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 Consolidated Financial Statements and related notes thereto contained elsewhere in this prospectus.

Our fiscal year ends on the Saturday closest to January 31, and we refer to the fiscal year by the calendar year in which it began. As a result, our fiscal year ended February 2, 2013 consisted of 53 weeks, while both of our fiscal years ended January 28, 2012 and January 29, 2011 consisted of 52 weeks.

We include a store in the calculation of same store sales once it has been in operation sixty weeks after its initial opening and, effective in the third quarter of fiscal 2012, 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 nine consecutive weeks. The removal is effective prospectively upon the completion of the ninth consecutive week of closure. A store which is closed permanently, such as upon termination of the lease, is immediately removed from the same store sales computation. We compute same store sales on a local currency basis, which eliminates any impact for changes in foreign currency exchange rates.

Acquisition by Equity Sponsors

We were acquired in May 2007 by the Sponsors. The purchase price and the related fees and expenses were financed through the issuance of the Merger Notes, borrowing under the Former Credit Facility, equity investment by the Sponsors, and cash on hand at the Company.

The acquisition was accounted for as a business combination using the purchase method of accounting, whereby the purchase price was allocated to the assets and liabilities based on the estimated fair market values at the date of acquisition.

See Note 1—Nature of Operations and Acquisition of Claire’s Stores, Inc. and Note 5—Debt, respectively, in the Notes to Consolidated Financial Statements for details of the acquisition and current indebtedness.

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. 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. We operate owned stores throughout the United States, Puerto Rico, Canada, the U.S. Virgin Islands and China (North America segment) and 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 ® .

We also franchise stores in Japan, the Middle East, Turkey, Greece, Guatemala, Malta, Ukraine, Mexico, India, Dominican Republic, El Salvador, Venezuela, Panama, Honduras, and Indonesia. Until September 2, 2010, we operated stores in Japan through a 50:50 joint venture. Beginning September 2, 2010, these stores began to operate as franchise stores. We account for the goods we sell to third parties under franchising agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” in our Consolidated Statements of Operations and Comprehensive Income. The franchise fees we charge under the franchising agreements are reported in “Other (income) expense, net” in our Consolidated Statements of Operations and Comprehensive Income.

 

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Financial activity for Fiscal 2012 includes the following:

 

   

Sales growth of 4.1%; excluding the additional week of net sales, sales growth would have been 2.5%.

 

   

Same store sales growth (1):

 

     Fiscal 2012  

Consolidated

     1.8

North America

     1.9

Europe

     1.7

 

(1) Computed on comparable 52 week basis: 52 weeks ended January 26, 2013 compared to the 52 weeks ended January 28, 2012.

 

   

Operating income growth of 22.8%; excluding the additional week of operations, operating income growth would have been 19.6%.

 

   

Operating income margin of 15.2%; excluding the additional week of operations, income margin would have been 15.0%.

During Fiscal 2012, we issued $1,125.0 million aggregate principal amount of the 9.0% Senior Secured First Lien Notes that mature on March 15, 2019 and received proceeds of $1,142.1 million. We used the net proceeds from the note offerings, together with cash on hand, to repay $1,154.3 million of indebtedness under the Former Credit Facility. In September 2012, we replaced our existing $200.0 million senior secured Former Revolver maturing May 29, 2013 with our current $115.0 million five-year senior secured revolving Credit Facility. In March 2013, after our fiscal year end, we commenced a tender offer to repurchase a total of $210.0 million aggregate principal amount of Senior Fixed Rate Notes and Senior Toggle Notes. On March 15, 2013, we issued $210.0 million aggregate principal amount of 6.125% Senior Secured First Lien Notes that mature March 15, 2020. On March 15, 2013, we used approximately $63.3 million of the net proceeds of the 6.125% Senior Secured First Lien Note offering to purchase early tendered Senior Notes. On March 28, 2013, the tender offer expired, and, as of that date, $20,000 of additional Senior Fixed Rate Notes were validly tendered. On April 1, 2013, we used approximately $20,000 of the net proceeds of the offering of the 6.125% Senior Secured First Lien Notes to purchase the additional tendered Senior Notes in accordance with the tender offer. We intend to use the remaining net proceeds, together with cash on hand, to repurchase an additional $149.5 million aggregate principal amount of Senior Fixed Rate Notes on June 3, 2013 pursuant to a redemption notice delivered to noteholders on May 3, 2013.

Operational activity for Fiscal 2012 includes the following:

 

   

Opened 110 new company-owned stores; entered 3 new countries on an owned basis, including China and Italy.

 

   

Partnered with franchisees with the potential to develop stores in 21 new countries; opened franchised stores in 6 new countries.

 

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A summary of our consolidated results of operations is as follows (dollars in thousands):

 

     Fiscal 2012     Fiscal 2011     Fiscal 2010  

Net sales

   $ 1,557,020      $ 1,495,900      $ 1,426,397   

Increase in same store sales

     1.8     0.1     6.5

Gross profit percentage

     51.4     51.5     52.0

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

     32.3     33.7     34.6

Depreciation and amortization as a percentage of net sales

     4.2     4.6     4.6

Severance and transaction-related costs as percentage of net sales

     0.2     0.5     0.1

Impairment of assets

   $ —        $ —        $ 12,262   

Operating income

   $ 236,168      $ 192,338      $ 164,462   

Gain (loss) on early debt extinguishment

   $ (8,952   $ 7,058      $ 13,583   

Impairment of equity investment

   $ —        $ —        $ 6,030   

Net income

   $ 6,244      $ 15,805      $ 7,157   

Number of stores at the end of the period (1)

     3,085        3,071        2,981   

 

(1) Number of stores excludes stores operated under franchise agreements.

Net sales

Net sales in Fiscal 2012 increased $61.1 million, or 4.1%, from Fiscal 2011. Fiscal 2012 included 53 weeks of operations compared to Fiscal 2011. The increase was attributable to new store sales of $66.8 million, an increase in same store sales of $25.9 million, the additional week of net sales of $23.6 million, increased shipments to franchisees of $2.7 million, partially offset by a decrease of $32.1 million due to the effect of store closures and an unfavorable foreign currency translation effect of our non-U.S. net sales of $25.8 million. Excluding the extra week of net sales in Fiscal 2012, net sales would have increased 2.5%, or 4.3%, excluding the impact from foreign currency exchange rate changes.

Net sales in Fiscal 2011 increased $69.5 million, or 4.9%, from Fiscal 2010. This increase was attributable to new store sales of $59.7 million, a favorable foreign currency translation effect of our non-U.S. store sales of $30.7 million, increased shipments to franchisees of $2.4 million and an increase in same stores sales of $1.4 million, or 0.1%, partially offset by a decrease of $24.7 million due to the effect of store closures. Net sales would have increased 2.7% excluding the impact from foreign currency exchange rate changes.

The increase in same store sales was primarily attributable to an increase in average transaction value of 4.2%, partially offset by a decrease in average number of transactions per store of 2.2%.

The following table compares our sales of each product category for the last three fiscal years:

 

     Percentage of Total  

Product Category

   Fiscal 2012      Fiscal 2011      Fiscal 2010  

Jewelry

     47.9         46.1         45.5   

Accessories

     52.1         53.9         54.5   
  

 

 

    

 

 

    

 

 

 
     100.0         100.0         100.0   
  

 

 

    

 

 

    

 

 

 

Gross profit

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

 

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In Fiscal 2012, gross profit percentage decreased 10 basis points to 51.4% compared to the prior fiscal year of 51.5%. The decrease in gross profit percentage consisted of an 80 basis point decrease in merchandise margin, partially offset by a 60 basis point decrease in occupancy costs and a 10 basis point decrease in buying and buying-related costs. The decrease in merchandise margin resulted primarily from an increase in markdowns and higher inventory shrink. The decrease in occupancy rate resulted primarily from the leveraging effect of an increase in same store sales.

In Fiscal 2011, gross profit percentage decreased 50 basis points to 51.5% compared to the prior fiscal year of 52.0%. The decrease in gross profit percentage consisted of a 40 basis point increase in occupancy costs and a 20 basis point decrease in merchandise margin, partially offset by a 10 basis point decrease in buying and buying-related costs. The increase in the occupancy rate resulted primarily from the deleveraging effect of a reduction in same store sales in Europe. The decrease in merchandise margin resulted primarily from an increase in markdowns.

Selling, general and administrative expenses

In Fiscal 2012, selling, general and administrative expenses decreased $1.1 million, or 0.2%, over the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses decreased 140 basis points compared to the prior year. Excluding the extra week of operations in Fiscal 2012 and a favorable $9.9 million foreign currency translation effect, selling, general and administrative expenses would have increased $0.4 million.

In Fiscal 2011, selling, general and administrative expenses increased $11.3 million, or 2.3%, over the prior fiscal year. As a percentage of net sales, selling, general and administrative expenses decreased 90 basis points compared to the prior year. Excluding an unfavorable $10.1 million foreign currency translation effect, selling, general and administrative expenses would have increased $0.3 million.

Depreciation and amortization expense

Depreciation and amortization expense decreased $3.9 million to $64.9 million during Fiscal 2012 compared to Fiscal 2011. Excluding a favorable $1.0 million foreign currency translation effect, the decrease in depreciation and amortization expense would have been $2.9 million.

Depreciation and amortization expense increased $3.6 million to $68.8 million during Fiscal 2011 compared to Fiscal 2010. Excluding an unfavorable $1.1 million foreign currency translation effect, the increase in depreciation and amortization expense would have been $2.5 million. The majority of this increase is due to the effect of asset additions during Fiscal 2011.

Impairment charges

During Fiscal 2012 and Fiscal 2011, we did not recognize any impairment charges.

During the fourth quarter of Fiscal 2010, management performed a strategic review of its franchising business. The inability of certain franchisees’ to achieve store development expectations in select markets prompted us to reevaluate our franchise development strategy and to perform a valuation of the franchise agreements, which are definite-lived intangible assets. We utilized a discounted cash flow model and determined the franchise agreements intangible assets were impaired. This resulted in us recording a non-cash impairment charge of $12.3 million in Fiscal 2010, which was included in “Impairment of assets” on our Consolidated Statements of Operations and Comprehensive Income.

During the second quarter of Fiscal 2010, we recorded a non-cash impairment charge related to the investment in a 50:50 joint venture called Claire’s Nippon of $6.0 million. The joint venture’s continuing operating losses prompted us to perform a valuation of our investment in Claire’s Nippon. Effective September 2, 2010, the Claire’s Nippon stores are no longer operated through this joint venture.

 

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See Note 3—Impairment Charges in the Notes to Consolidated Financial Statements for further discussion of the impairment charges.

Severance and transaction-related costs

Since 2007, we have incurred severance and various transaction-related costs. These costs consisted primarily of severance costs resulting from reductions in workforce occurring from time-to-time and financial advisory and legal fees. During Fiscal 2012, we incurred $2.8 million of such costs, including costs for the remaining payments due under the employment contract of certain former officers. During Fiscal 2011 and Fiscal 2010, we incurred $6.9 million and $0.7 million of such costs, respectively.

Other (income) expense, net

The following is a summary of other (income) expense activity for Fiscal 2012, Fiscal 2011 and Fiscal 2010 (in thousands):

 

     Fiscal 2012     Fiscal 2011     Fiscal 2010  

Foreign currency exchange loss (gain), net

   $ (1,437   $ 899      $ 5,131   

Franchise fees

     (4,668     (1,904     (1,638

Equity loss

     —          —          2,529   

Other income

     —          (249     (480
  

 

 

   

 

 

   

 

 

 
   $ (6,105   $ (1,254   $ 5,542   
  

 

 

   

 

 

   

 

 

 

Gain (loss) on early debt extinguishment

During Fiscal 2012, we recognized a $9.7 million loss on early debt extinguishment attributed to the write-off of unamortized debt issuance costs associated with the early repayment of $1,154.3 million of indebtedness under our Former Credit Facility and replacement of our Former Revolver. In addition, we recognized $0.8 million gain on a repurchase of notes.

The following is a summary of our note repurchase activity during Fiscal 2012, Fiscal 2011 and Fiscal 2010 (in thousands):

 

     Fiscal 2012  

Notes Repurchased

   Principal
Amount
     Repurchase
Price
     Recognized
Gain (1)
 

Senior Subordinated Notes

   $ 6,875       $ 5,990       $ 755   
  

 

 

    

 

 

    

 

 

 

 

(1) Net of deferred issuance cost write-offs of $130 for the Senior Subordinated Notes.

 

     Fiscal 2011  

Notes Repurchased

   Principal
Amount
     Repurchase
Price
     Recognized
Gain (1)
 

Senior Fixed Rate Notes

   $ 15,730       $ 15,213       $ 260   

Senior Toggle Notes

     66,675         60,481         5,767   

Senior Subordinated Notes

     7,107         5,904         1,031   
  

 

 

    

 

 

    

 

 

 
   $ 89,512       $ 81,598       $ 7,058   
  

 

 

    

 

 

    

 

 

 

 

(1) Net of deferred issuance cost write-offs of $257 for the Senior Fixed Rate Notes, $796 for the Senior Toggle Notes, and $172 for the Senior Subordinated Notes, and accrued interest write-off of $369 for the Senior Toggle Notes.

 

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     Fiscal 2010  

Notes Repurchased

   Principal
Amount
     Repurchase
Price
     Recognized
Gain (1)
 

Senior Fixed Rate Notes

   $ 14,000       $ 12,268       $ 1,467   

Senior Toggle Notes

     29,226         25,228         4,260   

Senior Subordinated Notes

     52,375         43,139         7,856   
  

 

 

    

 

 

    

 

 

 
   $ 95,601       $ 80,635       $ 13,583   
  

 

 

    

 

 

    

 

 

 

 

(1) Net of deferred issuance cost write-offs of $265 for the Senior Fixed Rate Notes, $518 for the Senior Toggle Notes and $1,380 for the Senior Subordinated Notes, and accrued interest write-off of $780 for the Senior Toggle Notes.

During Fiscal 2012, Fiscal 2011 and Fiscal 2010, we purchased, in open market transactions, $6.9 million, $7.1 million and $29.8 million aggregate principal amount of Senior Subordinated Notes issued by Claire’s Stores, Inc. For accounting purposes, these purchased Senior Subordinated Notes were constructively retired at the time of purchase and we recognized gains of $0.8 million, $1.0 million and $3.5 million, respectively.

Interest expense, net

Interest expense for Fiscal 2012 aggregated $206.3 million, an increase of $33.7 million compared to the prior year. The increase is primarily due to indebtedness incurred under the 9.0% Senior Secured First Lien Notes that bears a higher rate of interest than the Former Credit Facility, partially offset by lower outstanding balance under our Former Credit Facility, a Euro denominated loan, and Senior Toggle Notes. For Fiscal 2012, interest expense includes approximately $9.8 million of amortization of deferred debt issuance costs and approximately $0.8 million of accretion of debt premium.

Interest expense for Fiscal 2011 aggregated $172.6 million, an increase of $18.2 million compared to the prior year. This increase is primarily due to indebtedness incurred under the $450.0 million Senior Secured Second Lien Notes that bears a higher rate of interest than the Former Credit Facility and additional indebtedness incurred under a Euro denominated loan, partially offset by lower outstanding balances under our Former Credit Facility and Senior Notes. For Fiscal 2011, interest expense includes approximately $13.0 million of amortization of deferred debt issuance costs and $11.7 million of paid in kind interest.

Interest expense for Fiscal 2010 aggregated $154.4 million, a decrease of $20.1 million compared to the prior year. This decrease is primarily the result of Merger Notes repurchases. For Fiscal 2010, interest expense includes approximately $9.9 million of amortization of deferred debt issuance costs and $35.7 million of paid in kind interest.

See Note 5—Debt in the Notes to Consolidated Financial Statements for components of interest expense (income), net.

Income taxes

In Fiscal 2012, our income tax expense was $14.7 million and our effective income tax rate was 70.2%. Our effective income tax rate for Fiscal 2012 reflects income tax expense of $13.5 million on earnings of foreign subsidiaries and income tax expense of $13.1 million related to the effect of changes to our valuation allowance on deferred tax assets, partially offset by income tax benefits of $17.9 million on income in our foreign jurisdictions that are taxed at lower income tax rates. In Fiscal 2012, we made net cash income tax payments of $14.9 million primarily for Europe.

In Fiscal 2011, our income tax expense was $11.0 million and our effective income tax rate was 41.1%. Our effective income tax rate for Fiscal 2011 reflects income tax expense of $6.1 million on earnings of foreign

 

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subsidiaries and income tax expense of $2.4 million related to the effect of changes to our valuation allowance on deferred tax assets, partially offset by income tax benefits of $9.2 million on income in our foreign jurisdictions that are taxed at lower income tax rates. In Fiscal 2011, we made net cash income tax payments of $14.7 million primarily for Europe.

In Fiscal 2010, our income tax expense was $10.5 million and our effective income tax rate was 59.47%. Our effective income tax rate for Fiscal 2010 reflects income tax expense of $0.4 million on earnings of foreign subsidiaries, income tax expense of $11.8 million related to the effect of changes to our valuation allowance on deferred tax assets, and income tax expense of $2.8 million relating to other permanent items, partially offset by income tax benefits of $11.6 million on income in our foreign jurisdictions that are taxed at lower income tax rates. In Fiscal 2010, we made net cash income tax payments of $6.3 million.

In Fiscal 2008, we recorded a charge of $89.7 million to establish a valuation allowance against its deferred tax assets in the U.S. We concluded that a valuation allowance was appropriate in light of the significant negative evidence, which was objective and verifiable, such as cumulative losses in recent fiscal years in our U.S. operations. While our long-term financial outlook in the U.S. remains positive, we concluded that its ability to rely on its long-term outlook as to future taxable income was limited due to the relative weight of the negative evidence from its recent U.S. cumulative losses. Our conclusion regarding the need for a valuation allowance against U.S. deferred tax assets could change in the future based on improvements in operating performance, which may result in the full or partial reversal of the valuation allowance. The foreign valuation allowances relate to net operating loss carryforwards that, in the opinion of management, are more likely than not to expire unutilized.

See Note 11—Income Taxes in the Notes to Consolidated Financial Statements for further details.

Segment Operations

We are organized into two business segments—North America, which includes our new stores in China, and Europe. The following is a discussion of results of operations by business segment.

North America

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

 

     Fiscal 2012     Fiscal 2011     Fiscal 2010  

Net sales

   $ 977,310      $ 942,278      $ 914,149   

Increase in same store sales

     1.9     2.8     7.8

Gross profit percentage

     52.9     52.6     52.1

Number of stores at the end of the period (1)

     1,924        1,953        1,972   

 

(1) Number of stores excludes stores operated under franchise agreements and includes 3 China stores.

Net sales

Net sales in North America during Fiscal 2012 increased $35.0 million, or 3.7% from Fiscal 2011. Fiscal 2012 included 53 weeks of operations compared to Fiscal 2011. The increase was attributable to new store sales of $18.7 million, an increase in same store sales of $17.1 million, the additional week of net sales of $13.4 million, increased shipments to franchisees of $2.7 million, partially offset by a decrease of $16.7 million due to the effect of store closures and an unfavorable foreign currency translation effect of our non-U.S. net sales of $0.2 million. Excluding the extra week of net sales in Fiscal 2012, net sales would have increased 2.3%, or unchanged, excluding the impact from foreign currency exchange rate changes.

 

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The increase in same store sales was primarily attributable to an increase in average transaction value of 5.1%, partially offset by a decrease in average number of transactions per store of 2.5%.

Net sales in North America during Fiscal 2011 increased $28.1 million, or 3.1%, from Fiscal 2010. The increase was attributable to an increase in same store sales of $24.7 million, or 2.8%, new store sales of $9.8 million, an increase in shipments to franchisees of $2.3 million and a favorable foreign currency translation effect of our non-U.S. net sales of $2.1 million, partially offset by a decrease of $10.8 million due to the effect of store closures.

The increase in same store sales was primarily attributable to an increase in average transaction value of 5.4%, partially offset by a decrease in average number of transactions per store of 2.3%.

Gross profit

In Fiscal 2012, gross profit percentage increased 30 basis points to 52.9% compared to the gross profit percentage for Fiscal 2011 of 52.6%. The increase in gross profit percentage consisted of a 50 basis point decrease in occupancy costs and a 20 basis point decrease in buying and buying-related costs, partially offset by a 40 basis point decrease in merchandise margin. The improvement in occupancy rate resulted primarily from the leveraging effect of an increase in same store sales. The decrease in merchandise margin resulted primarily from an increase in markdowns, partially offset by improvement in initial markups.

In Fiscal 2011, gross profit percentage increased 50 basis points to 52.6% compared to the gross profit percentage for Fiscal 2010 of 52.1%. The increase in gross profit percentage consisted of a 40 basis point decrease in occupancy costs and a 10 basis point increase in merchandise margin. The improvement in occupancy rate is due to the leveraging effect of higher sales.

The following table compares our sales of each product category for the last three fiscal years:

 

       Percentage of Total  

Product Category

   Fiscal 2012      Fiscal 2011      Fiscal 2010  

Jewelry

     52.6         50.8         50.2   

Accessories

     47.4         49.2         49.8   
  

 

 

    

 

 

    

 

 

 
     100.0         100.0         100.0   
  

 

 

    

 

 

    

 

 

 

Europe

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

 

     Fiscal 2012     Fiscal 2011     Fiscal 2010  

Net sales

   $ 579,710      $ 553,622      $ 512,248   

Increase (decrease) in same store sales

     1.7     (4.4 )%      4.3

Gross profit percentage

     49.0     49.8     51.7

Number of stores at the end of the period (1)

     1,161        1,118        1,009   

 

(1) Number of stores excludes stores operated under franchise agreements.

Net sales

Net sales in Europe during Fiscal 2012 increased $26.1 million, or 4.7%, from Fiscal 2011. Fiscal 2012 included 53 weeks of operations compared to Fiscal 2011. The increase was attributable to new store sales of

 

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$48.1 million, the additional week of net sales of $10.2 million, an increase in same store sales of $8.8 million, partially offset by an unfavorable foreign currency translation effect of our non-U.S. net sales of $25.6 million and a decrease of $15.4 million due to the effect of store closures. Excluding the extra week of sales in Fiscal 2012, net sales would have increased 2.9%, or 7.8%, excluding the impact from foreign currency exchange rate changes.

The increase in same store sales was primarily attributable to an increase in average transaction value of 4.2%, partially offset by a decrease in average number of transactions per store of 3.3%.

Net sales in Europe during Fiscal 2011 increased $41.4 million, or 8.1%, from Fiscal 2010. This increase was attributable to new store sales of $49.9 million and favorable foreign currency translation of our non-U.S net sales of $28.7 million, partially offset by a decrease in same stores sales of $23.3 million, (4.4)%, and a decrease of $13.9 million due to the effect of store closures.

The decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 7.6%, partially offset by an increase in average transaction value of 2.0%.

Gross profit

In Fiscal 2012, gross profit percentage decreased 80 basis points to 49.0% compared to the gross profit percentage for Fiscal 2011 of 49.8%. The decrease in gross profit percentage consisted of a 160 basis point decrease in merchandise margin and a 10 basis point increase in buying and buying-related costs, partially offset by a 90 basis point decrease in occupancy costs. The decrease in merchandise margin resulted from a reduction in initial markups and an increase in inventory shrink. The improvement in occupancy rate resulted primarily from the leveraging effect of an increase in same store sales.

In Fiscal 2011, gross profit percentage decreased 190 basis points to 49.8% compared to the gross profit percentage for Fiscal 2010 of 51.7%. The decrease in gross profit percentage consisted of a 130 basis point increase in occupancy costs and a 70 basis point decrease in merchandise margin, partially offset by a 10 basis point decrease in buying and buying-related costs. The increase in occupancy rate resulted primarily from the deleveraging effect of a reduction in same store sales. The decrease in merchandise margin resulted primarily from an increase in markdowns.

The following table compares our sales of each product category for the last three fiscal years:

 

     Percentage of Total  

Product Category

   Fiscal 2012      Fiscal 2011      Fiscal 2010  

Jewelry

     40.3         38.2         37.3   

Accessories

     59.7         61.8         62.7   
  

 

 

    

 

 

    

 

 

 
     100.0         100.0         100.0   
  

 

 

    

 

 

    

 

 

 

Liquidity and Capital Resources

Our operating liquidity requirements are funded through internally generated cash flow from net sales and cash on hand. Our primary uses of cash are debt service requirements, new store expenditures, and working capital requirements. Cash outlays for the payment of interest are significantly higher in Fiscal 2012 than in prior years as a result of cash interest payments on the 9.0% Senior Secured First Lien Notes and Senior Secured Toggle Notes. Our current capital structure generates tax losses in our U.S. operations because of debt service requirements. Accordingly, we expect to pay minimal cash taxes in the U.S. in the near term, while our foreign cash taxes are less affected by our capital structure and debt service requirements. We anticipate that the existing

 

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cash and cash equivalents and cash generated from operations will be sufficient to meet our debt service requirements as they become due, new store expenditures, and future working capital requirements for at least the next twelve months. However, our ability to make scheduled payments of interest on, to pay principal on, or refinance indebtedness, to satisfy any other present or future debt obligations and our ability to fund future capital expenditures and operating expenses will depend on future operating performance. Our future operating performance and liquidity may also be adversely affected by general economic, financial, and other factors beyond our control, including those disclosed in “Risk Factors.”

Credit Facility

Our Former Credit Facility provided senior secured financing of up to $1.65 billion that consisted of the $1.45 billion Former Term Loan and the $200.0 million Former Revolver. On May 29, 2007, upon our acquisition by the Sponsors, we borrowed $1.45 billion under our Former Term Loan facility and were issued a $4.5 million letter of credit. The letter of credit was subsequently increased to $6.0 million and later reduced to $4.8 million.

During Fiscal 2012, we issued $1,125.0 million aggregate principal amount of the 9.0% Senior Secured First Lien Notes that mature on March 15, 2019 and received proceeds of $1,142.1 million. We used the net proceeds from the note offerings, together with cash on hand, to repay $1,154.3 million of indebtedness under the Former Term Loan and to terminate the Former Credit Facility.

On September 20, 2012, we entered into an Amended and Restated Credit Agreement with Credit Suisse AG, as Administrative Agent, and the other Lenders named therein (the “Credit Facility”), pursuant to which we replaced our existing $200.0 million senior secured Former Revolver maturing May 29, 2013 with a $115.0 million five-year senior secured revolving credit facility.

Borrowings under the Credit Facility bear interest at a rate equal to, at our 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. We also pay a facility fee of 0.50% per annum of the committed amount of the Credit Facility whether or not utilized.

Claire’s Stores is the borrower under the Credit Facility, and all obligations under the Credit Facility are unconditionally guaranteed by us and Claire’s Stores’ existing and future direct or indirect wholly-owned domestic subsidiaries, subject to certain exceptions.

All obligations under the Credit Facility, and the guarantees of those obligations, are secured, subject to certain exceptions and permitted liens, by a first priority lien on substantially all of our material owned assets and those of Claire’s Stores and all subsidiary guarantors, limited in the case of equity interests held by us, Claire’s Stores or any subsidiary guarantor in a foreign subsidiary, to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by us, Claire’s Stores or a subsidiary guarantor. The liens securing the Credit Facility rank equally to the liens securing the 9.0% Senior Secured First Lien Notes.

The Credit Facility contains customary provisions relating to mandatory prepayments, voluntary payments, affirmative and negative covenants, and events of default; however, it does not contain any covenants that require us 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 exceed $15 million, we will be required to comply with a maximum Total Net Secured Leverage Ratio of 5.5 to 1.0 based upon the ratio of its 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.

 

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The Credit Facility does not contain any covenants that require us to maintain any particular financial ratio or other measure of financial performance; however, it does contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our restricted subsidiaries’ ability to, among other things:

 

   

incur additional indebtedness or issue certain preferred shares;

 

   

pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

   

make certain investments;

 

   

sell certain assets;

 

   

create liens;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

   

enter into certain transactions with our affiliates.

A breach of any of these covenants could result in an event of default. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding under the Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under the Credit Facility could proceed against the collateral granted to them to secure that indebtedness. As of February 2, 2013, we were in compliance with the covenants.

Merger Notes

In connection with our acquisition by the Sponsors, Claire’s Stores issued three series of notes.

Our Senior Notes were issued in two series: (1) $250.0 million of Senior Fixed Rate Notes, and (2) $350.0 million of Senior Toggle Rate Notes. The Senior Fixed Rate Notes are unsecured obligations, mature on June 1, 2015 and bear interest at a rate of 9.25% per annum. The Senior Toggle Rate Notes are senior obligations and will mature on June 1, 2015. For any interest period through June 1, 2011, we may, at our option, elect to pay interest on the Senior Toggle Rate Notes (i) entirely in cash, (ii) entirely by increasing the principal amount of the outstanding Senior Toggle Rate Notes or by issuing payment in kind (PIK) Notes, or (iii) 50% as cash interest and 50% as PIK interest. Cash interest on the Senior Toggle Rate Notes will accrue at the rate of 9.625% per annum and be payable in cash. PIK interest on the Senior Toggle Rate Notes will accrue at the cash interest rate per annum plus 0.75% and be payable by issuing PIK notes. When we made a PIK interest election, our debt increased by the amount of such interest and we issued PIK notes on the scheduled semi-annual payment dates. We elected to pay interest in kind on our 9.625%/10.375% Senior Toggle Rate Notes for the interest periods beginning June 2, 2008 through June 1, 2011. This election, net of reductions for note repurchases, increased the principal amount on the Senior Toggle Rate Notes by $109.5 million as of February 2, 2013 and January 28, 2012, respectively. The accrued payment in kind interest is included in “Long-term debt” in the Consolidated Balance Sheets. Effective June 2, 2011, we began accruing cash interest.

Claire’s Stores also issued the Senior Subordinated Notes in an initial aggregate principal amount of $335.0 million. The Senior Subordinated Notes are senior subordinated obligations, will mature on June 1, 2017 and bear interest at a rate of 10.50% per annum.

The Merger Notes are guaranteed on an unsecured basis by all of Claire’s Stores existing and future direct or indirect, wholly-owned domestic subsidiaries that guarantee the Credit Facility.

Interest on the Merger Notes is payable semi-annually to holders of record at the close of business on May 15 or November 15 immediately preceding the interest payment date on June 1 and December 1 of each year, commencing December 1, 2007. The Merger Notes are also subject to certain redemption and repurchase rights as described in Note 5—Debt in the Notes to Consolidated Financial Statements.

 

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Senior Secured Second Lien Notes

On March 4, 2011, Claire’s Stores issued $450.0 million aggregate principal amount of 8.875% Senior Secured Second Lien Notes that mature on March 15, 2019. The Senior Secured Second Lien Notes are guaranteed on a second-priority senior secured basis by all of Claire’s Stores existing and future direct or indirect wholly-owned domestic subsidiaries that guarantee the Credit Facility. The Senior Secured Second Lien Notes and related guarantees are secured by a second-priority lien on substantially all of the assets that secure Claire’s Stores and its subsidiary’s guarantors’ obligations under the Credit Facility. We used the net proceeds of the offering of the Senior Secured Second Lien Notes to reduce the entire amount outstanding under our Former Revolver (without terminating the commitment) and indebtedness under the Former Term Loan.

Interest on the Senior Secured Second Lien Notes is payable semi-annually to holders of record at the close of business on March 1 or September 1 immediately preceding the interest payment date on March 15 and September 15 of each year, commencing on September 15, 2011. The notes are also subject to certain redemption and repurchase rights as discussed in Note 5—Debt in the Notes to Consolidated Financial Statements.

9.0% Senior Secured First Lien Notes

On February 28, 2012, Claire’s Stores issued $400.0 million aggregate principal amount of 9.00% Senior Secured First Lien Notes that mature on March 15, 2019. The notes were issued at a price equal to 100.00% of the principal amount. On March 12, 2012, Claire’s Stores issued an additional $100.0 million aggregate principal amount of the same series of 9.0% Senior Secured First Lien Notes at a price equal to 101.50% of the principal amount. On September 20, 2012, Claire’s Stores issued an additional $625.0 million aggregate principal amount of the same series of 9.0% Senior Secured First Lien Notes at a price equal to 102.5% of the principal amount. Interest on the 9.0% Senior Secured First Lien Notes is payable semi-annually to holders of record at the close of business on March 1 or September 1 immediately preceding the interest payment date on March 15 and September 15 of each year, commencing on September 15, 2012. The 9.0% Senior Secured First Lien Notes are guaranteed on a first-priority senior secured basis by all of our existing and future direct or indirect wholly-owned domestic subsidiaries that guarantee the our Credit Facility. The 9.0% Senior Secured First Lien Notes and related guarantees are secured by a first-priority lien on substantially all of the assets that secure our and our subsidiary guarantors’ obligations under our Credit Facility. We used the net proceeds of the offerings of the 9.0% Senior Secured First Lien Notes, together with cash on hand, to repay $1,154.3 million of indebtedness under the Former Term Loan.

6.125% Senior Secured First Lien Notes

On March 15, 2013, after the end of our Fiscal 2012, Claire’s Stores issued $210.0 million aggregate principal amount of 6.125% Senior Secured First Lien Notes that mature on March 15, 2020. See Note 16 – Subsequent Events in the Notes to Consolidated Financial Statements for further description of the 6.125% Senior Secured First Lien Notes.

Note Covenants

Our 9.0% Senior Secured First Lien Notes, 6.125% Senior Secured First Lien Notes, Senior Secured Second Lien Notes, Senior Fixed Rate Notes, Senior Toggle Notes and Senior Subordinated Notes (collectively, the “Notes”) contain certain covenants that, among other things, and subject to certain exceptions and other basket amounts, restrict our ability and the ability of our subsidiaries to:

 

   

incur additional indebtedness;

 

   

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

 

   

make certain investments;

 

   

create or incur certain liens;

 

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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.

Certain of these covenants, such as limitations on our 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 us. None of these covenants, however, require us to maintain any particular financial ratio or other measure of financial performance. As of February 2, 2013, we were in compliance with the covenants.

Europe Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $2.5 million. These facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in their respective countries of operation. At February 2, 2013, the entire amount of $2.5 million was available for borrowing by us, subject to a reduction of $2.2 million for outstanding bank guarantees.

Analysis of Consolidated Financial Condition

A summary of cash flows provided by (used in) operating, investing and financing activities is outlined in the table below (in thousands):

 

     Fiscal 2012     Fiscal 2011     Fiscal 2010  

Operating activities

   $ 111,197      $ 105,665      $ 152,821   

Investing activities

     (68,494     (57,384     (56,952

Financing activities

     (45,619     (134,172     (38,849

Our working capital at the end of Fiscal 2012 was $125.5 million compared to $159.1 million at the end of Fiscal 2011, a decrease of $33.6 million. The decrease in working capital mainly reflects an increase in accrued liabilities of $31.3 million, an increase in trade accounts and income taxes payables of $13.0 million, a decrease in cash and cash equivalents and restricted cash of $8.4 million, partially offset by an increase in inventories of $15.4 million and an increase in prepaid expense and other items of $3.7 million.

Cash flows from operating activities

In Fiscal 2012, cash provided by operations increased $5.5 million compared to Fiscal 2011. The primary reason for the increase was an increase in operating income before depreciation and amortization expense, stock compensation benefit and foreign exchange loss on the Euro Loan of $42.1 million; partially offset by an increase in interest payments of $28.2 million and, an increase in net change in working capital and other items, excluding cash and cash equivalents and restricted cash, of $8.4 million.

In Fiscal 2011, cash provided by operations activities decreased $47.2 million compared to Fiscal 2010. The primary reasons for the decrease were an increase in interest payments of $25.7 million; an increase in net change in working capital items, excluding cash and cash equivalents and restricted cash, of $25.7 million; an increase in income tax payments of $8.3 million; partially offset by an increase in operating income before impairment of assets, depreciation and amortization expense and stock compensation expense of $12.5 million.

 

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Cash flows from investing activities

In Fiscal 2012, cash used in investing was $68.5 million and primarily consisted of $72.8 million for net capital expenditures, partially offset by a $4.4 million decrease in restricted cash associated with the termination of the interest rate swap agreement.

In Fiscal 2011, cash used in investing activities was $57.4 million and primarily consisted of $76.6 million for capital expenditures, partially offset by a decrease in restricted cash primarily resulting from a return of our deposit securing a Euro denominated loan. Cash used in investing activities was $57.0 million in Fiscal 2010 and primarily consists of capital expenditures for new store openings, the remodeling of existing stores, improvements to technology systems, acquisitions of lease rights and an increase in restricted cash, partially offset by proceeds received from our sale-leaseback transaction.

In Fiscal 2013, we currently expect to incur approximately $85.0 million to $90.0 million of capital expenditures to open new stores, and remodel existing stores.

Cash flows from financing activities

In Fiscal 2012, cash used in financing activities was $45.6 million and primarily consisted of the issuance of $1,142.1 million of 9.0% Senior Secured First Lien Notes used, together with cash on hand, to repay $1,154.3 million of indebtedness under the Former Term Loan, to pay $28.0 million in financing costs, and to retire $6.9 million of Senior Subordinated Notes.

In Fiscal 2011, cash used in financing activities was $134.2 million which consisted primarily of note repurchases of $81.6 million to retire $15.7 million of Senior Fixed Rate Notes, $66.7 million of Senior Toggle Notes and $7.1 million of Senior Subordinated Notes, payment of $54.7 to retire a Euro denominated loan and net proceeds from the issuance of $450.0 million of Senior Secured Second Lien Notes used to reduce the entire $194.0 million outstanding under the Former Revolver and repay $244.9 million of indebtedness under the Former Term Loan.

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

Cash position

As of February 2, 2013, we had cash and cash equivalents of $169.3 million and all cash equivalents were maintained in one money market fund invested exclusively in U.S. Treasury Securities.

As of February 2, 2013, our foreign subsidiaries held cash and cash equivalents of $106.3 million. In Fiscal 2012 and Fiscal 2011, we did not repatriate any cash held by foreign subsidiaries, but we expect a portion of our foreign subsidiaries’ future cash flow generation to be repatriated to the U.S. to meet certain liquidity needs. Based upon the amount of our remaining U.S. net operating loss carryforwards at February 2, 2013, we do not expect to pay U.S. income tax on Fiscal 2013 repatriations. When our U.S. net operating loss carryforwards are no longer available, we would be required to accrue and pay U.S. income taxes on any such repatriation.

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us 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-

 

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lived assets, legal contingencies and assumptions used in the calculation of income taxes, stock-based compensation, derivative and hedging activities, residual values and other items. These estimates and assumptions are based on our best estimates and judgment. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquidity in credit markets, volatility in each of the 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.

Inventory

Our inventories in North America and China are valued at the lower of cost or market, with cost determined using the retail method. Inherent in the retail inventory calculation are certain significant management judgments and estimates including, among others, merchandise markups, markdowns and shrinkage, which impact the ending inventory valuation at cost as well as resulting gross margins. The methodologies used to value merchandise inventories include the development of the cost-to-retail ratios, the groupings of homogeneous classes of merchandise, development of shrinkage reserves and the accounting for retail price changes. Our inventories in Europe are accounted for under the lower of cost or market method, with cost determined using the average cost method at an individual item level. Market is determined based on the estimated net realizable value, which is generally the merchandise selling price. Inventory valuation is impacted by the estimation of slow moving goods, shrinkage and markdowns. Management monitors merchandise inventory levels to identify slow-moving items and uses markdowns to clear such inventories. Changes in consumer demand of our products could affect our retail prices, and therefore impact the retail method and lower of cost or market valuations.

Long-Lived Assets

We evaluate the carrying value of long-lived assets whenever events or changes in circumstances indicate that a potential impairment has occurred. A potential impairment has occurred if the projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of the asset in operations. When a potential impairment has occurred, an impairment charge is recorded if the carrying value of the long-lived asset exceeds its fair value. Fair value is measured based on a projected discounted cash flow model using a discount rate we feel is commensurate with the risk inherent in our business. A prolonged decrease in consumer spending would require us to modify our models and cash flow estimates, and could create a risk of an impairment triggering event in the future. Our impairment analyses contain estimates due to the inherently judgmental nature of forecasting long-term estimated cash flows and determining the ultimate useful lives of assets. Actual results may differ from those estimates, which could materially impact our impairment assessment.

During Fiscal 2010, we recorded a non-cash impairment charge of $6.0 million related to our former investment in our joint venture, Claire’s Nippon.

Goodwill

We continually evaluate whether events and changes in circumstances warrant recognition of an impairment of goodwill. The conditions that would trigger an impairment assessment of goodwill include a significant, sustained negative trend in our operating results or cash flows, a decrease in demand for our products, a change in the competitive environment, and other industry and economic factors. We conduct our annual impairment test to determine whether an impairment of the value of goodwill has occurred in accordance with the guidance set forth in Accounting Standards Codification (“ASC”) Topic 350, Intangibles—Goodwill and Other . ASC Topic 350 has a two-step process for determining goodwill impairment. In accordance with ASU 2011-08, Intangibles— Goodwill and Other (Topic 350) , we have the option of performing a qualitative assessment before

 

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calculating the fair value of our reporting units or bypassing the qualitative assessment for any reporting unit for any period and proceeding directly to the first step of the two-step goodwill impairment test. If we determine, on the basis of qualitative factors, it is not more likely than not that the fair value of the reporting unit is less than the carrying amount, then performing the two-step impairment test would be unnecessary. We opted to bypass the qualitative assessment and proceeded directly to the first step of the two-step goodwill impairment test. The first step in this process compares the fair value of the reporting unit to its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess. We have two reporting units as defined under ASC Topic 350. These reporting units are our North America segment and our Europe segment.

Fair value is determined using appropriate valuation techniques. All valuation methodologies applied in a valuation of any form of property can be broadly classified into one of three approaches: the asset approach, the market approach and the income approach. We rely on the income approach using discounted cash flows and market approach using comparable public company entities in deriving the fair values of our reporting units. The asset approach is not used as our reporting units have significant intangible assets, the value of which is dependent on cash flow.

The fair value of each reporting unit determined under Step 1 of the goodwill impairment test was based on a three-fourths weighting of a discounted cash flow analysis under the income approach using forward-looking projections of estimated future operating results and a one-fourth weighting of a guideline company methodology under the market approach using earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. Our determination of the fair value of each reporting unit incorporates multiple assumptions and contains inherent uncertainties, including significant estimates relating to future business growth, earnings projections, and the weighted average cost of capital used for purposes of discounting. Decreases in revenue growth, decreases in earnings projections and increases in the weighted average cost of capital will all cause the fair value of the reporting unit to decrease, which could require us to modify future models and cash flow estimates, and could result in an impairment triggering event in the future.

We have weighted the valuation of our reporting units at three-fourths using the income approach and one-fourth using the market based approach. We believe that this weighting is appropriate since it is difficult to find other comparable publicly traded companies that are similar to our reporting units’ heavy penetration of jewelry and accessories sales and margin structure. It is our view that the future discounted cash flows are more reflective of the value of the reporting units.

The projected cash flows used in the income approach cover the periods consisting of the fourth quarter Fiscal 2012 and the fiscal years 2013 through 2017. Beyond fiscal year 2017, a terminal value was calculated using the Gordon Growth Model. We developed the projected cash flows based on estimates of forecasted same store sales, new store openings, operating margins and capital expenditures. Due to the inherent judgment involved in making these estimates and assumptions, actual results could differ from those estimates. The projected cash flows reflect projected same store sales increases representative of our past performance post-recession.

A weighted average cost of capital reflecting the risk associated with the projected cash flows was calculated for each reporting unit and used to discount each reporting unit’s projected cash flows and terminal value. Key assumptions made in calculating a weighted average cost of capital include the risk-free rate, market risk premium, volatility relative to the market, cost of debt, specific company premium, small company premium, tax rate and debt-to-equity ratio.

The calculation of fair value is significantly impacted by each reporting unit’s projected cash flows and the discount interest rates used. Accordingly, any sustained volatility in the economic environment could impact

 

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these assumptions and make it reasonably possible that another impairment charge could be recorded some time in the future. However, since the terminal value is a significant portion of each reporting unit’s fair value, the impact of any such near-term volatility on our fair value would be lessened.

Our annual impairment analysis did not result in any impairment of goodwill during Fiscal 2012, Fiscal 2011 and Fiscal 2010. The excess of fair value over carrying value for each of our reporting units as of October 27, 2012, the annual testing date for Fiscal 2012, ranged from approximately $282.0 million to approximately $436.0 million. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of each reporting unit. This hypothetical 10% decrease would result in excess fair value over carrying value ranging from approximately $182.0 million to approximately $231.0 million for each of our reporting units.

Intangible Assets

Intangible assets include tradenames, franchise agreements, lease rights, territory rights and leases that existed at the date of acquisition with terms that were favorable to market at that date. We continually evaluate whether events and changes in circumstances warrant revised estimates of the useful lives, residual values or recognition of an impairment loss for intangible assets. Future adverse changes in market and legal conditions or poor operating results of underlying assets could result in losses or an inability to recover the carrying value of the intangible asset, thereby possibly requiring an impairment charge in the future.

We evaluate the market value of the intangible assets periodically and record an impairment charge when we believe the carrying amount of the asset is not recoverable. Indefinite-lived intangible assets are tested for impairment annually or more frequently when events or circumstances indicate that impairment may have occurred. Definite-lived intangible assets are tested for impairment when events or circumstances indicate that the carrying amount may not be recoverable. We estimate the fair value of these intangible assets primarily utilizing a discounted cash flow model. The forecasted cash flows used in the model contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins and cost of capital. Changes in any of the assumptions utilized could affect the fair value of the intangible assets and result in an impairment triggering event. A prolonged decrease in consumer spending would require us to modify our models and cash flow estimates, with the risk of an impairment triggering event in the future. We did not recognize any impairment charges during Fiscal 2012 and Fiscal 2011. During Fiscal 2010, we recorded a non-cash impairment charge of $12.3 million related to certain franchise agreements which are definite-lived intangible assets.

Income Taxes

We are subject to income taxes in many jurisdictions, including the United States, individual states and localities and internationally. Our annual consolidated provision for income taxes is determined based on our income, statutory tax rates and the tax implications of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items to be included in the tax return at different times than the items are reflected on the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. We establish deferred tax assets and liabilities as a result of these temporary differences.

Our judgment is required in determining any valuation allowance recorded against deferred tax assets, specifically net operating loss carryforwards, tax credit carryforwards and deductible temporary differences that may reduce taxable income in future periods. In assessing the need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income and tax planning opportunities. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.

 

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During Fiscal 2012, we reported an increase of $6.8 million in valuation allowance against our U.S. deferred tax assets and an increase of $4.3 million in valuation allowance against our foreign deferred tax assets. Our conclusion regarding the need for a valuation allowance against U.S. and foreign deferred tax assets could change in the future based on improvements in operating performance, which may result in the full or partial reversal of the valuation allowance.

During Fiscal 2011, we reported an increase of $4.6 million in valuation allowance against our U.S. deferred tax assets and no change in valuation allowance against our foreign deferred tax assets.

During Fiscal 2010, we reported a decrease of $15.2 million in valuation allowance against our U.S. deferred tax assets and an increase of $1.5 million in valuation allowance against our foreign deferred tax assets. The foreign increase primarily relates to foreign jurisdictions that have a history of losses.

In Fiscal 2008, we recorded a charge of $89.7 million to establish a valuation allowance against our deferred tax assets in the U.S. We concluded that such a valuation allowance was appropriate in light of the significant negative evidence, which was objective and verifiable, such as the cumulative losses in recent fiscal years in our U.S. operations. While our long-term financial outlook in the U.S. remains positive, we concluded that our ability to rely on our long-term outlook as to future taxable income was limited due to the relative weight of the negative evidence from our recent U.S. cumulative losses.

We establish accruals for uncertain tax positions in our Consolidated Financial Statements based on tax positions that we believe are supportable, but are potentially subject to successful challenge by the taxing authorities. We believe these accruals are adequate for all open audit years based on our assessment of many factors including past experience, progress of ongoing tax audits and interpretations of tax law. If changing facts and circumstances cause us to adjust our accruals, or if we prevail in tax matters for which accruals have been established, or we are required to settle matters in excess of established accruals, our income tax expense for a particular period will be affected.

Income tax expense also reflects our best estimates and assumptions regarding, among other things, the geographic mix of income and losses from our foreign and domestic operations, interpretation of tax laws and regulations of multiple jurisdictions, plans for repatriation of foreign earnings, and resolution of tax audits. Our effective income tax rates in future periods could be impacted by changes in the geographic mix of income and losses from our foreign and domestic operations that may be taxed at different rates, changes in tax laws, repatriation of foreign earnings, and the resolution of unrecognized tax benefits for amounts different from our current estimates. Given our capital structure, we will continue to experience volatility in our effective tax rate over the near term.

Stock-Based Compensation

We issue stock options and other stock-based awards to executive management, key employees and directors under our stock-based compensation plans.

On January 29, 2006, we adopted ASC Topic 718, Compensation—Stock Compensation (“ASC Topic 718”), using the modified prospective method. The calculation of stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility and pre-vesting forfeitures. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we were to use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate forfeitures based on our historical experience of stock-based awards granted, exercised and cancelled, as well as considering future expected behavior. If the actual forfeiture rate is materially different from our estimate, stock-based compensation expense could be different from what we have recorded in the current period.

 

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Under ASC Topic 718, time-vested stock awards are accounted for at fair value at date of grant. The compensation expense is recorded over the requisite service period. Stock-based compensation expense for time-vested stock awards granted in Fiscal 2012, Fiscal 2011 and Fiscal 2010 was recorded over the requisite service period using the graded-vesting method for the entire award.

Performance-vested awards, which qualified as equity plans under ASC Topic 718, were accounted for based on fair value at date of grant. The stock-based compensation expense was based on the number of shares expected to be issued when it became probable that performance targets required to receive the award would be achieved. The expense was recorded over the requisite service period.

Buy one, get one (“BOGO”) options issued prior to May 2011 were immediately vested, exercisable upon issuance, and accounted for at fair value at date of grant. The compensation expense for these BOGOs was recognized over a four year period due to the terms of the option requiring forfeiture in certain cases including the grantee’s voluntary resignation from our employ prior to May 2011. BOGOs issued subsequent to May 2011 are accounted for at the fair value at date of grant and the compensation expense is recognized over the requisite service period.

The fair values of time-vested stock options and BOGO options granted during Fiscal 2012, Fiscal 2011 and Fiscal 2010 were determined using the Black-Scholes option-pricing model. The fair values of performance based stock options issued during Fiscal 2012, Fiscal 2011 and Fiscal 2010 were based on the Monte Carlo model. Both models incorporate various assumptions such as expected dividend yield, risk-free interest rate, expected life of the options and expected stock price volatility.

Performance Based Stock Option Exchange Offer

On June 15, 2012, we commenced an offer (the “Exchange Offer”) to exchange certain performance based stock options held by our employees for new performance based stock options (the “New Options”) granted on a 1 for 2 basis. The Exchange Offer was completed on July 16, 2012. The New Options expire on July 16, 2019.

The New Options issued under the Exchange Offer provide for the following performance conditions:

 

   

Vest in equal installments on the first two anniversaries after the first to occur of:

(i) the date of an initial public offering (“IPO”) at a price of at least $25 per share,

(ii) any date following an IPO when the average stock price over the preceding 30 consecutive trading days exceeds $25, or

(iii) any date before an IPO where more than 25% of our outstanding shares are sold for cash or marketable consideration having a value of at least $25 per share;

 

   

Vest immediately if, on or after the occurrence of a performance condition described in (i), (ii) or (iii), but prior to the second anniversary thereof, there occurs a change of control of us.

The Exchange Offer resulted in $1.2 million in total incremental compensation cost that will be recognized when a performance condition occurs. The Exchange Offer affected approximately 125 employees.

Incentive Plan Modifications

On May 20, 2011, the Compensation Committee approved amendments to the Stock Incentive Plan, the form of option grant letter and certain outstanding options (the “Outstanding Options”) held by various employees (collectively, the “Plan Amendments”).

The Plan Amendments (which apply to Outstanding Options and, unless otherwise specified at the time of grant, any future option grants under the amended Incentive Plan, and, where applicable, any shares held by employees) generally provide for the following:

 

   

Eliminated the holding period after vesting for Performance and Stretch Performance options;

 

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Changed the definition of “Qualified IPO”;

 

   

Eliminated certain restrictions on transfer of shares in the event of a Qualified IPO;

 

   

Provided each optionee the right to satisfy the exercise price and any withholding tax obligation triggered by such exercise by any combination of cash and/or shares (including both previously owned shares and shares otherwise to be delivered upon exercise of the option); and

 

   

Added two additional vesting events applicable to Performance Options and to certain Stretch Performance Options if they occur prior to or concurrent with the end of fiscal 2012.

The incremental compensation cost associated with the modifications to our Incentive Plan totaled $2.2 million, of which $0.2 million was initially recognized in the second fiscal quarter 2011 and $0.3 million in the third fiscal quarter 2011. The plan modification affected approximately 155 employees. During the fourth quarter of Fiscal 2011, we determined that the achievement of vesting events for the Performance Stock Options was not probable and therefore, reversed the stock compensation expense that was previously recognized for these options. Additionally, we recorded a reversal of stock compensation expense of $5.1 million associated with forfeitures of stock options, including $3.8 million for our former Chief Executive Officer.

BOGO Option Offer

On May 20, 2011, the Compensation Committee also approved an offer pursuant to the amended Incentive Plan to certain employees to purchase a specified number of shares of our common stock at a price per share of $10.00 (the “Offer”). For each share purchased, the employee received an option to purchase an additional share at $10.00 (a “BOGO Option”). The Offer was made available to employees who had not previously accepted similar offers from us. We granted 179,000 BOGO Options and recognized stock-based compensation expense of approximately $0.3 million in Fiscal 2011 related to these options.

Our estimates of stock price volatility, interest rate, grant date fair value and expected term of options and restricted stock are affected by illiquidity in credit markets, consumer spending and current and future economic conditions. As future events and their effects can not be determined with precision, actual results could differ significantly from our estimates. See Note 9—Stock Options and Stock-Based Compensation in the Notes to Consolidated Financial Statements.

Derivatives and Hedging

We account for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging (“ASC Topic 815”). In accordance with ASC Topic 815, we report all derivative financial instruments on our Consolidated Balance Sheet at fair value. We formally designate and document the financial instrument as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transaction. We formally assess both at inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure. We measure the effectiveness of our cash flow hedges by evaluating the following criteria: (i) the re-pricing dates of the derivative instrument match those of the debt obligation; (ii) the interest rates of the derivative instrument and the debt obligation are based on the same interest rate index and tenor; (iii) the variable interest rate of the derivative instrument does not contain a floor or cap, or other provisions that cause a basis difference with the debt obligation; and (iv) the likelihood of the counterparty not defaulting is assessed as being probable.

We primarily employ derivative financial instruments to manage our exposure to market risk from interest rate changes and to limit the volatility and impact of interest rate changes on earnings and cash flows. We do not enter into derivative financial instruments for trading or speculative purposes. We face credit risk if the counterparties to the financial instruments are unable to perform their obligations. However, we seek to mitigate derivative credit risk by entering into transactions with counterparties that are significant and creditworthy financial institutions. We monitor the credit ratings of the counterparties.

 

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For derivatives that qualify as cash flow hedges, we report the effective portion of the change in fair value as a component of “Accumulated other comprehensive income (loss), net of tax” in the Consolidated Balance Sheets and reclassify it into earnings in the same periods in which the hedged item affects earnings, and within the same income statement line item as the impact of the hedged item. The ineffective portion of the change in fair value of a cash flow hedge is recognized into income immediately. No ineffective portion was recorded into earnings during Fiscal 2012, Fiscal 2011, and Fiscal 2010, respectively, and all components of the derivative gain or loss were included in the assessment of hedge effectiveness. For derivative financial instruments which do not qualify as cash flow hedges, any changes in fair value would be recorded in the Consolidated Statements of Operations and Comprehensive Income. We adopted ASC Topic 820, Fair Value Measurements and Disclosures, on February 3, 2008, which required us to include credit valuation adjustment risk in the calculation of fair value.

We may at our discretion terminate or change the designation of any such hedging instrument agreements prior to maturity. At that time, any gains or losses previously reported in accumulated other comprehensive income (loss) on termination would amortize into interest expense or interest income to correspond to the recognition of interest expense or interest income on the hedged debt. If such debt instrument was also terminated, the gain or loss associated with the terminated derivative included in accumulated other comprehensive income (loss) at the time of termination of the debt would be recognized in the Consolidated Statements of Operations and Comprehensive Income at that time.

On September 20, 2012, we terminated the interest rate swap agreement entered into on July 28, 2010 (the “Swap”), settled the contract at fair value of the liability and also extinguished the associated hedged debt instrument. Accordingly, we reclassified $1.8 million of unrealized loss associated with the Swap from “Accumulated other comprehensive income (loss), net of tax” in the Consolidated Balance Sheets into “Interest expense, net” in the Consolidated Statements of Operations and Comprehensive Income.

Contractual Obligations and Off Balance Sheet Arrangements

We finance certain equipment through transactions accounted for as non-cancelable operating leases. As a result, the rental expense for this equipment is recorded during the term of the lease contract in our Consolidated Financial Statements, generally over four to seven years. In the event that we, or our landlord, terminate a real property lease prior to its scheduled expiration, we will be required to accrue all future rent payments under any non-cancelable operating lease with respect to leasehold improvements or equipment located thereon. The following table sets forth our contractual obligations requiring the use of cash as of February 2, 2013:

 

       Payments Due by Period  

Contractual Obligations

(in millions)

   Total      1 year      2-3
years
    4-5
years
     More
than 5
years
 

Recorded Contractual Obligations:

             

Debt (1)

   $ 2,313.3       $ —         $ 522.5 (2)    $ 215.8       $ 1,575.0 (3) 

Capital lease obligation

     44.6         2.3         4.7        4.9         32.7   

Unrecorded Contractual Obligations:

             

Operating lease obligations (4)

     1,078.7         214.6         354.1        235.2         274.8   

Interest (5)

     1,160.7         214.2         403.5        317.6         225.4   

Letters of credit

     4.5         4.5         —          —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,601.8       $ 435.6       $ 1,284.8      $ 773.5       $ 2,107.9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Represents debt expected to be paid and does not assume any note repurchases or prepayments.
(2) Includes $302.2 million under our Senior Toggle Rate Notes and $220.3 million under our Senior Fixed Rate Notes.
(3) Includes $1,125.0 million (excluding unamortized premium of $16.3 million) under our 9.0% Senior Secured First Lien Notes and $450.0 million under our Senior Secured Second Lien Notes.

 

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(4) Operating lease obligations consists of future minimum lease commitments related to store operating leases, distribution center leases, office leases and equipment leases. Operating lease obligations do not include common area maintenance (“CAM”), contingent rent, insurance, marketing or tax payments for which we are also obligated.
(5) Represents interest expected to be paid on our debt and does not assume any note repurchases or prepayments.

We have no material off-balance sheet arrangements (as such term is defined in Item 303(a) (4) (ii) under Regulation S-K of the Securities Exchange Act) other than disclosed herein.

Seasonality and Quarterly Results

Sales of each category of merchandise vary from period to period depending on current trends. We experience traditional retail patterns of peak sales during the Christmas, Easter and back-to-school periods. Sales as a percentage of total sales in each of the four quarters of Fiscal 2012 were 22%, 23%, 23% and 32%, respectively. See Note 13—Selected Quarterly Financial Data in the Notes to Consolidated Financial Statements for our quarterly results of operations.

Impact of Inflation

Inflation impacts our operating costs including, but not limited to, cost of goods and supplies, occupancy costs and labor expenses. We seek to mitigate these effects by passing along inflationary increases in costs through increased sales prices of our products where competitively practical or by increasing sales volumes.

Recent Accounting Pronouncements

See Note 2—Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.

There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.

Quantitative and Qualitative Disclosures About Market Risk

Cash and Cash Equivalents

We have significant amounts of cash and cash equivalents, at financial institutions that are in excess of federally insured limits. With the current financial environment and the instability of financial institutions, we cannot be assured that we will not experience losses on our deposits. We mitigate this risk by investing in money market funds that are invested exclusively in U.S. Treasury securities and maintaining bank accounts with a group of credit worthy financial institutions. As of February 2, 2013, all cash equivalents were maintained in one money market fund that was invested exclusively in U.S. Treasury securities.

Interest Rates

We no longer have exposure to interest rate risk associated with derivative instruments. On September 20, 2012, we terminated the interest rate swap agreement entered into on July 28, 2010 (the “Swap”), settled the contract at fair value of the liability and also extinguished the associated hedged debt instrument. We previously entered into the Swap to manage exposure to fluctuations in interest rates. The Swap had an expiration date of July 30, 2013. The Swap represented a contract to exchange floating rate for fixed interest rates periodically over the life of the Swap without exchange of the underlying notional amount. The Swap covered an aggregate notional amount of $200.0 million of the outstanding principal balance of the Former Term Loan. The fixed rate of the Swap was 1.2235% and was designated and accounted for as a cash flow hedge.

 

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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 in currencies other than local currencies and to the carrying value of net investments in foreign subsidiaries. At February 2, 2013, we maintained no foreign currency options. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries. Included in “Comprehensive income” are $5.5 million, $(4.8) million and $0.8 million, net of tax, reflecting the unrealized (loss) gain on foreign currency translations and intra-entity foreign currency transactions during Fiscal 2012, Fiscal 2011 and Fiscal 2010, respectively.

Certain of our subsidiaries make significant USD purchases from Asian suppliers, particularly in China. Until July 2005, the Chinese government pegged its currency, the yuan renminbi (“RMB”), to the USD, adjusting the relative value only slightly and on infrequent occasion. Many people viewed this practice as leading to a substantial undervaluation of the RMB relative to the USD and other major currencies, 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 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 exchange rates fluctuate significantly from one period to the next, results in local currency can vary significantly upon translation into U.S. dollars. Accordingly, fluctuations in foreign currency exchange rates, most notably the strengthening of the dollar against the euro, could have a material impact on our revenue growth in future periods.

General Market Risk

Our competitors include department stores, specialty stores, mass merchandisers, discount stores and other retail and internet channels. Our operations are impacted by consumer spending levels, which are affected by general economic conditions, consumer confidence, employment levels, availability of consumer credit and interest rates on credit, consumer debt levels, consumption of consumer staples including food and energy, consumption of other goods, adverse weather conditions and other factors over which 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, sustained 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 can not predict whether, when or the manner in which the economic conditions described above will change.

 

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BUSINESS

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 inspire girls and women around the world to become their best selves by providing products and experiences that empower them to express their own unique individual styles. Our broad and dynamic selection of merchandise is unique, and over 90% of our products are proprietary. Claire’s ® is our primary global brand that we operate in 41 countries through company-operated or franchise stores. Claire’s ® offers a differentiated and fun store experience with a “treasure hunt” setting that encourages our customer to visit often to explore and find merchandise that appeals to her. We believe by maintaining a highly relevant merchandise assortment and offering a compelling value proposition, Claire’s ® has universal appeal to teens, pre-teens and kids. Icing ® is our other brand which we currently operate in North America through company-operated stores. Icing ® offers an inspiring merchandise assortment of fashionable products that helps a young woman to say something about herself, whatever the occasion. We believe Icing ® provides us with significant potential to reach young women in age groups beyond our Claire’s ® core demographic.

We believe Claire’s ® represents a “Girl’s Best Friend” and a favorite shopping destination for teens, tweens, and kids. Claire’s ® target customer is a girl between 3-18 years old with a particular focus on a core demographic of girls between 10-14 years old. According to our estimates, we have over 95% brand awareness within this target demographic in our largest markets. As of February 2, 2013, Claire’s ® had a presence in 41 countries through 2,705 company-operated Claire’s ® stores in North America, Europe and China, and 392 franchised stores in numerous other geographies.

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 believe that expansion of our Icing ® store base both in existing and new markets over time presents a significant opportunity to leverage our core merchandising, sourcing and marketing expertise to cater to a wider demographic. As of February 2, 2013, the last day of fiscal 2012, we operated 380 Icing ® stores across the United States, Canada, and Puerto Rico.

We are organized by geography through our North America division, our Europe division and our China division, recently formed to operate our existing and future stores in China. In North America, our stores are located primarily in shopping malls and average approximately 985 square feet of selling space. 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 and average approximately 655 square feet of selling space. Despite smaller average selling square feet, our European stores average similar sales per store to our North American stores.

We believe that the strength of our business model and our disciplined operating philosophy has enabled us to deliver strong financial performance:

 

   

Our same store sales growth was 1.8% in Fiscal 2012; and we have reported positive same store sales growth for ten out of the last thirteen quarters through the end of Fiscal 2012.

 

   

From the end of Fiscal 2009 through the end of Fiscal 2012, we have opened a total of 443 new company-operated and franchised stores. Our global store base (including franchise stores) was 3,477 stores at the end of Fiscal 2012.

 

   

Our net sales increased to $1,557.0 million in Fiscal 2012 from $1,342.4 million in Fiscal 2009, increasing at a compound annual growth rate of 5.1%.

 

   

Our Adjusted EBITDA increased to $308.0 million in Fiscal 2012 from $233.9 million in Fiscal 2009, increasing at a compound annual growth rate of 9.6%.

 

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Our Competitive Strengths

Category Defining Claire’s ® Brand

According to our estimates, over 95% of our target demographic in our largest markets recognizes the Claire’s ® brand. A Claire’s ® store is located in approximately 88% of all major United States shopping malls across all 50 states and in 40 countries outside of the United States, including markets where we franchise. We are a “Girl’s Best Friend” and believe we serve as an authority in jewelry and accessories for 3 – 18 year-olds. We believe that our reputation for providing age-appropriate merchandise and shopping experience allows parents to trust the Claire’s ® brand for their daughters. Our Claire’s ® brand is regularly featured in editorial coverage and relevant fashion periodicals. Additionally, we leverage our e-commerce platform and social media to enhance our brand awareness and strengthen our customer relationships.

Preferred Shopping Destination

We are recognized as a favorite shopping destination for young women, teens, tweens, and kids. We believe our customer finds our store an engaging and stimulating experience that allows her to explore and share discoveries, thereby encouraging frequency of visits. Besides jewelry and accessories, we also offer an exciting assortment of beauty products, lifestyle accessories and seasonal items to keep our customer engaged. As part of our jewelry offering, our stores have pierced the ears of over 83 million customers, including 3.7 million in Fiscal 2012. We believe this seminal point of contact helps our stores establish an important long-term relationship with our core customer. We believe our store environment, product assortment and low average dollar ticket differentiate us from other retail concepts as well as pure play online platforms.

Attractive Unit Economics with Strong Cash Flow

Our stores have relatively low build out costs and moderate inventory requirements. For a new store investment, we target a payback period of three years or less. We achieved a better than three-year payback for aggregate new stores opened during Fiscal 2010, Fiscal 2011, and Fiscal 2012. We manage our store portfolio on a store-by-store basis to optimize overall returns and minimize risk. When we choose to close a store it is generally because the store has negative or marginally positive four-wall cash flow or the store’s anticipated future performance or lease renewal terms do not meet the Company’s criteria. As a result, for Fiscal 2012, approximately 95% of our stores are cash flow positive.

Our cash flow is driven by our strong gross margins, efficient operating structure, low annual maintenance capital expenditures and flexible growth capital expenditure initiatives. Our moderate working capital requirements result from high merchandise margins, low unit cost of merchandise, relatively lower seasonality of our business and relatively strong inventory turnover.

Globally Diversified with Proven Ability to Enter New Countries

The Claire’s ® concept has a global scale and proven geographic portability. As of February 2, 2013, we operated or franchised a total of 3,097 Claire’s ® stores across all 50 states of the United States and in 40 additional countries across the world. We also operated 380 Icing ® Stores as of Fiscal 2012 year end. During Fiscal 2012, we entered large and high potential markets of China and Italy through company-operated stores and also entered the Latin American and Southeast Asian markets through our franchising program. During Fiscal 2011, we entered the strategically significant countries of Mexico and India through franchising relationships. Over the past 8 years, we have doubled the number of countries in which we operate or franchise.

Cost-Efficient Global Sourcing Capabilities

Our merchandising strategy is supported by efficient, low-cost global sourcing capabilities diversified across approximately 660 suppliers located primarily outside the United States. Our vertically integrated Hong Kong buying office was established over 20 years ago and now sources a majority of our purchases. Our strategy

 

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of offering proprietary merchandise coupled with vertically-integrated local buying capabilities is designed to enable us to source rapidly and cost effectively, thus allowing us to maintain inventory efficiency and achieve high merchandise margins.

Strong and Passionate Senior Management Team with Significant Experience

Our senior management team has extensive global, retail experience and complementary expertise across a broad range of disciplines in specialty retail, including merchandising, supply chain, real estate and finance. Our Chief Executive Officer Jim Fielding, who joined the Company in June 2012, was formerly President of Disney Stores, and has prior management experience at The Gap, Lands’ End and Dayton Hudson. Linda Hefner Filler, President of our North America Division, who joined the Company in March 2013, brings to the Company 25 years of retail and consumer products experience, including executive positions with Wal-Mart Corporation, Kraft Foods and Sara Lee Corporation. Beatrice Lafon, President of our Europe Division, who joined the Company in October 2011, brings to the Company 25 years of Pan-European retail experience, including executive positions with TJ Hughes and Animal Ltd. in the United Kingdom, Etam Group in the Netherlands, and Woolworths Group. Per Brodin, our Executive Vice President and Chief Financial Officer, has over 20 years of financial, accounting and management experience, including senior leadership positions with Centene Corporation and May Department Stores as well as working for twelve years at an international public accounting firm.

Business Strategy

Our business strategy is designed to maximize our sales opportunities, earnings growth and cash flow:

Generate Organic Growth

Continue To Enhance Merchandise and In-Store Experience

We are focused on enhancing the fashion-orientation and quality of our product offerings to deliver a unique, proprietary assortment that is highly relevant to our target customers. We believe we can drive growth through intensifying key merchandise categories, especially in higher margin and higher productivity products such as jewelry.

We believe we can drive increased frequency of visits through our unique and compelling in-store environment. We aim to provide a consistent, engaging and brand-right customer experience across all of our owned and franchised stores worldwide. Additionally, we focus on improving ease of shopping and increasing sales productivity by enhancing store layout and merchandise displays. We will continue to develop in our store management teams and sales associates emphasizing in-store operational excellence.

Deepen Customer Relationship & Loyalty

We will continue to drive brand awareness and deepen customer relationships with our branding efforts conducted through in-store marketing collateral and ongoing social media, email, and text campaigns. Maintaining and improving our leadership in ear piercing also allows us to solidify the customer’s experience with Claire’s ® and establish brand loyalty early. We believe we can leverage our online community and proprietary customer database to drive increased customer engagement for Claire’s ® and Icing ® .

Expand and Upgrade Company-Operated Store Base

We have demonstrated a consistent track record of expanding our company-operated store base, opening 82, 157 and 110 new company-operated stores in Fiscal 2010, Fiscal 2011 and Fiscal 2012, respectively. Of our 110 new stores opened in Fiscal 2012, 79 were in Europe, 28 were in North America and 3 were in China. We plan to open approximately 150 new stores in Fiscal 2013 across all of our markets in Europe, North America and China. We recently entered the countries of China and Italy and believe these countries present significant growth opportunities. In North America, the Claire’s ® brand has significant penetration but we continue to opportunistically pursue additional locations. We also believe there is a compelling opportunity to remodel key

 

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locations in both North America and Europe in order to create a more contemporary ambience and a visually appealing display of our innovative product offerings, and to further enhance our customer’s in-store experience. Historically, our remodel capital expenditures have produced returns similar to our new store expenditures.

We believe the Icing ® brand has significant long-term growth potential in North America and plan up to 35 new store openings in Fiscal 2013. Over time, we plan to launch Icing ® internationally to countries where we can leverage the existing Claire’s expertise and infrastructure.

Franchise in New International Countries

Developing a robust franchising model has allowed us to gain a foothold in multiple international geographies and we believe that significant high potential “white space” opportunities remain. In 2012, we entered Latin America and Southeast Asia. Within Latin America, we have partnered with a single franchisee to develop stores in sixteen new countries and, in 2012, opened franchise stores in four of these countries. Within Southeast Asia, we have partnered with another single franchisee to develop stores in five new countries and, in 2012, opened a franchise store in one of these countries. We are currently studying our brand introduction strategy for Brazil, Russia, and Australia via our franchise model. In 2011, under our franchise model, we entered into the countries of Mexico and India which we believe offer high growth opportunities. We will continue to evaluate new countries for franchised stores. In addition, we believe the Icing ® brand represents an additional opportunity for franchise growth.

Grow Our E-Commerce Sales

We believe that the increasing penetration of internet enabled devices within our customer base offers an opportunity to better connect with our customer and complement our in-store experience. We launched our e-commerce and mobile platforms in the United States during Fiscal 2011 and Fiscal 2012, respectively, to allow our target customer to shop with Claire’s ® at her convenience. In addition, our on-line channel allows us to expand product offerings to include complementary products not available in our stores. In early Fiscal 2013 we launched Claire’s ® e-commerce internationally starting in the United Kingdom, Republic of Ireland, and Canada and also launched our e-commerce platform for Icing ® .

We believe that, over time, our digital platform represents a valuable tool for engaging with our customer, gathering feedback on her preferences and enhancing our product testing capabilities, all of which should drive higher sales productivity both in-store and online.

Merchandising

The Claire’s ® mission is to be the “Girl’s Best Friend” brand for fun, fashionable, and value priced jewelry and accessories targeted at our core demographic of girls 3-18. Our merchandising team is keenly aware of the psychographics of our core customer and her ever-changing tastes and attitudes. We strive to connect with her as our “friend” with whom we share her most personal milestones – be it a first ear piercing, a first day at school, a first date, or a first job. We work to present a broad yet curated product assortment in an environment where girls and young women feel encouraged to express their personalities, creativity, and individuality. Our merchandising strategy leverages our authority as a jewelry destination and ear piercing specialist. Besides our core jewelry and accessories products, other important categories include hair accessories, our licensed product assortment, and our beauty businesses. Our other accessories categories allow us to reflect seasonal changes in the business and the customer mindset, and we develop strong event assortments to capitalize on key traffic periods, like Prom, Back-To-School, Halloween, and Holiday.

 

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For Fiscal 2012, the company-wide average in-store unit selling price for our products was $6.17 and the average transaction value was $15.61. Each Claire’s ® store offers approximately 7,000 SKUs in the following major product categories:

 

   

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

 

   

Accessories: Includes fashion and seasonal accessories, including headwear, legwear, hairgoods, handbags and small leather goods, attitude glasses, scarves, armwear and belts, sunglasses, hats, gloves, slippers and earmuffs; and our beauty product offerings.

The company-wide average in-store unit selling price for our products was $7.11 for jewelry and $5.44 for accessories. The following table shows a comparison of sales by product category:

 

     Percentage of Total  

Product Category

   Fiscal 2012      Fiscal 2011      Fiscal 2010  

Jewelry

     47.9         46.1         45.5   

Accessories

     52.1         53.9         54.5   
  

 

 

    

 

 

    

 

 

 
     100.0         100.0         100.0   
  

 

 

    

 

 

    

 

 

 

Icing’s ® mission is to be the “Say Something” brand focused on smart, trend right products that are appropriate for young women 18-35, with a particular focus on women in their mid 20’s. Jewelry is the dominant category for Icing ® , but the Accessories business is highly penetrated as well. Key accessory categories include handbags, small leather goods, and tech accessories. Hair accessories are also important, and the beauty business is developing an excellent range of nail, eye, lip, and beauty tools products. The Icing ® customer expresses her unique style and individuality through our products, and we enable the many dimensions of her personality and viewpoints to shine.

Over 90% of our merchandise consists of proprietary designs that carry the Claire’s ® or Icing ® label. The remainder consists of licensed products featuring brands such as Disney, Hello Kitty or selected entertainment properties. Our wide range of products allows us to capitalize on a spectrum of trends, ideas and merchandise concepts, while not being dependent on any one of them.

Purchasing and Distribution

Our global sourcing group purchases merchandise from a diversified base of approximately 660 suppliers. Our vertically integrated buying office in Hong Kong has been in operation for over two decades and sources a majority of our products. We purchased 86% of our merchandise from vendors based outside the United States, including 70% purchased from China. We are not dependent on any single supplier for our products. In Fiscal 2012, we sourced at least 90% of the merchandise sourced through our Hong Kong buying office from approximately 100 suppliers, none of which represented more than five percent of total purchases.

Our distribution facility in Hoffman Estates, Illinois, a suburb of Chicago, ships merchandise to our North America and China stores. Our distribution facility in Birmingham, United Kingdom services all of our stores in Europe. We distribute merchandise to our franchisees from a third party operated distribution center in Hong Kong. Our distribution centers ship merchandise by common carrier to our individual store locations. To keep our assortment fresh and exciting, we typically ship merchandise to our stores three to five times per week.

Stores

As of February 2, 2013, we operated a total of 3,085 stores, including 380 Icing ® stores, and also franchised 392 stores globally. Our stores, company-wide, average net sales of approximately $506,000 and net sales per square foot of $502 for fiscal year 2012.

 

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Store Design and Environment

The in-store shopping experience is integral to the Claire’s ® and Icing ® brands. Our Claire’s ® stores are designed and merchandised to allow our customer to discover appealing merchandise in a “treasure hunt” setting. We strive to maintain a consistent look and experience across all of our owned and franchised stores through a disciplined plan-o-gram process that coordinates floor plan changes 8-10 times per year.

Our stores in North America are located primarily in shopping malls and average approximately 985 square feet of selling space. Our stores in Europe are located on high streets, in shopping malls and in high traffic urban locations and average approximately 655 square feet of selling space. Our store hours are dictated by shopping mall operations which are typically from 10:00 a.m. to 9:00 p.m. Monday through Saturday and where permitted by law, from noon to 5:00 p.m. on Sunday. In Fiscal 2012, approximately 48% of our sales were made in cash, with the balance made by checks, debit cards, and credit cards.

Each of our stores is typically led by a manager and a full-time assistant manager. In addition, each store has one or more part-time employees, depending on store volume. We utilize a labor scheduling model that optimizes the number of hours allocated to appropriately staff for varying sales volumes expected during each week.

New Stores and Store Economics

We have a standardized procedure for efficient opening of new stores and their integration into our information and distribution systems. The floor plan, merchandise layout and marketing efforts are developed specific to each new location. In addition, we maintain qualified store opening teams to provide training to new store employees. On average, we open a new store within two-to-three months after signing a lease.

Our stores generate attractive returns. Our new stores immediately deleverage due to low target average build-out costs of $225,000 per store and moderate inventory requirements. For a new store investment, we generally target a payback period of three years or less. The vast majority of our new stores have met or exceeded this target. In addition, over 95% of our worldwide stores today are cash flow positive.

 

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Store Openings, Closings and Future Growth

In Fiscal 2012, we opened 110 stores and closed 96 underperforming stores, for a net increase of 14 stores. When we choose to close a store it is generally because the store has negative or marginally positive four-wall cash flow or the store’s anticipated future performance or lease renewal terms do not meet the Company’s criteria. In Europe, we increased our store count by 43 stores, net resulting in a total of 1,161 stores. In North America, we decreased our store count by 32 stores, net, to 1,921 stores. “Stores, net” refers to stores opened, net of closings. In China, we opened 3 stores, net resulting in a total of 3.

 

Store Openings (Closings):

   Fiscal
2012
    Fiscal
2011
    Fiscal
2010
 

North America

      

Openings

     28        28        13   

Closings

     (60     (47     (34
  

 

 

   

 

 

   

 

 

 

Net

     (32     (19     (21
  

 

 

   

 

 

   

 

 

 

Europe

      

Openings

     79        129        69   

Closings

     (36     (20     (15
  

 

 

   

 

 

   

 

 

 

Net

     43        109        54   
  

 

 

   

 

 

   

 

 

 

China

      

Openings

     3        —          —     

Closings

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net

     3        —          —     
  

 

 

   

 

 

   

 

 

 

Consolidated

      

Openings

     110        157        82   

Closings

     (96     (67     (49
  

 

 

   

 

 

   

 

 

 

Total

     14        90        33   
  

 

 

   

 

 

   

 

 

 

We plan to open approximately 150 company-operated stores globally in Fiscal 2013. We also plan to continue opening stores when suitable locations are found and satisfactory lease negotiations are concluded. In addition to the investment in leasehold improvements and fixtures, we may also purchase intangible assets or incur initial direct costs for leases relating to certain store locations in our Europe operations.

 

Store Count as of:

   February 2,
2013
     January 28,
2012
     January 29,
2011
 

North America

     1,921         1,953         1,972   

Europe

     1,161         1,118         1,009   

China

     3         —           —     
  

 

 

    

 

 

    

 

 

 

Subtotal Company-Operated

     3,085         3,071         2,981   
  

 

 

    

 

 

    

 

 

 

Franchise

     392         381         395   
  

 

 

    

 

 

    

 

 

 

Total

     3,477         3,452         3,376   
  

 

 

    

 

 

    

 

 

 

Marketing and Advertising

We rely on a multi-channel approach to marketing and advertising with a very limited reliance on traditional television, radio and print mediums. Given Claire’s focus as a shopping destination, we invest in locating our stores in prominent, high-traffic locations. Our stores feature colorful displays showcasing our merchandise and latest trends, thus adding to the fun and playful atmosphere of the store. Our brands are also featured on the tags attached to most of our products. We believe that our target customer develops an affinity for our stores through frequent visits and through word-of-mouth publicity from her peers.

 

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Our digital marketing effort includes our United States e-commerce site launched in Fiscal 2011, which has a look and feel consistent with the in-store experience. We also drive brand awareness and relevance with social media, email and text campaigns which are complementary to in-store marketing. We leverage our Facebook presence by posting content such as celebrity looks and Claire’s promotions that are relevant to our target customer and have received over 1.4 million Likes on Facebook. We use our email database to send weekly emails to over 900,000 customers who have provided their email addresses through our website or in-store registration process, including when customers get their ears pierced.

Trademarks and Service Marks

We are the owner in the United States of various marks, including “ Claire’s ® ,” “ Claire’s Accessories ® ,” and “ Icing ® .” We have also registered these marks outside of the United States. We currently license certain of our marks under franchising arrangements in Japan, the Middle East, Turkey, Greece, Guatemala, Malta, Ukraine, Mexico, India, Dominican Republic, El Salvador, Venezuela, Panama, Honduras, and Indonesia. We believe our rights in our marks are important to our business and intend to maintain our marks and the related registrations.

Information Technology

Information technology is important to our business success. Our information and operational systems use a broad range of both purchased and internally developed applications to support our retail operations, financial, real estate, merchandising, inventory management and marketing processes. Sales information is generally collected from point of sale terminals in our stores on a daily basis. We have developed proprietary software to support key decisions in various areas of our business including merchandising, allocation and operations. We periodically review our critical systems to evaluate disaster recovery plans and the security of our systems.

Competition

The specialty retail business is highly competitive. We compete on a global, national, regional, and local level with other specialty and discount store chains and independent retail stores. Our competition also includes Internet, direct marketing to consumer, and catalog businesses. We also compete with department stores, mass merchants, and other chain store concepts. We cannot estimate the number of our competitors because of the large number of companies in the retail industry that fall into one of these categories. We believe the main competitive factors in our business are brand recognition, merchandise assortments for each target customer, compelling value, store location and the shopping experience.

Seasonality

Sales of each category of merchandise vary from period to period depending on current trends. We experience traditional retail patterns of peak sales during the Christmas, Easter, and back-to-school periods. Sales as a percentage of total sales in each of the four quarters of Fiscal 2012 were 22%, 23%, 23% and 32%, respectively.

Employees

On February 2, 2013, we employed approximately 18,800 employees, 63% of whom were part-time. Part-time employees typically work up to 20 hours per week. We consider employee relations to be good.

 

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MANAGEMENT

Board of Directors and Executive Officers

Our current executive officers and directors, and their ages and positions, are as follows:

 

Name    Age    Position

James D. Fielding

   48    Chief Executive Officer

Linda Filler

   52    President of Claire’s North America

Beatrice Lafon

   53    President of Claire’s Europe

J. Per Brodin

   51    Executive Vice President and Chief Financial Officer

Peter P. Copses

   54    Non-Executive Chairman of our Board of Directors

Robert J. DiNicola

   65    Director

George G. Golleher

   65    Director

Rohit Manocha

   53    Director

Ron Marshall

   59    Director

Lance A. Milken

   37    Director

James D. Fielding was appointed Chief Executive Officer and a director of the Company in June 2012. From 2005 until joining the Company, Mr. Fielding was with The Walt Disney Company, where he served most recently as President of Disney Stores Worldwide. In that capacity, from 2008 to 2012, Mr. Fielding was responsible for all global operations of the 360 Disney Stores in twelve countries as well as the DisneyStore.com business in five countries. He served as the architect of Disney Stores brand and merchandising strategy, new store expansion, including successful launch of a new concept in June 2010, the acquisition of the Disney Stores Japan business, and the development and expansion of Disney Stores global e-commerce business, among other initiatives. Prior to that role, from 2004 to 2008 he served as the Executive Vice President, Global Retail Sales and Marketing for the Disney Consumer Products division, where he was responsible for account management, retail operations, franchise development and brand imaging for all consumer products categories. Prior to joining The Walt Disney Company, Mr. Fielding held the position of General Merchandise Manager for the coed division of Lands’ End, Inc., a direct merchant offering casual apparel for men, women and children. At Lands’ End, he managed all channels of distribution, including Internet, catalog and stores. Earlier in his career, Mr. Fielding held several merchandising positions with The J. Peterman Company, The Gap, and Dayton Hudson Department Store. Mr. Fielding’s prior executive leadership and business experience, which includes over 25 years of experience in the retail industry, led the board to believe that Mr. Fielding should serve as a director of the Company.

Linda Filler was appointed President of Claire’s North America in March 2013. From 2007 to 2012, Ms. Filler served as an Executive Vice President at Wal-Mart Corporation; from 2009 to 2012 as Executive Vice President and Chief Merchandising Officer for Sam’s Club, and from 2007 to 2009 as Executive Vice President and General Manager of the Wal-Mart Stores Home Division. From 1989 to 2006, Ms. Filler served in key executive and leadership roles at Kraft Foods and Sara Lee Corporation. At Kraft, Ms. Filler was the Executive Vice President for Global Strategy. At Sara Lee, Ms. Filler rose through marketing and general manager roles to ultimately serve as Group CEO for the Hanes Underwear and Sock group. Ms. Filler has served as a director of Danaher Corporation, a global life science and technology company, since 2005.

Beatrice Lafon became our President of Europe in October 2011. Prior to joining the Company, Ms. Lafon had over 30 years of Pan-European retail experience. From 2000 to 2011, Ms. Lafon served in a variety of executive roles, including Founder, Owner and Managing Director, Business Intelligence Network (2001-2011); Chief Executive Officer, TJ Hughes (2011), Group Chief Executive, Netherlands, Etam Group (2008-2010); Chief Executive Officer, Animal Ltd. (2006-2008); Strategy Consultant, Tchibo UK Ltd. (2006-2008); Commercial Director, SkyBuy, BSkyBuy Plc (2003-2005); Managing Director, Eyestorm (2001-2002); and Director, E-Commerce/Managing Director, Homebse.co.UK (2000-2001). From 1993 to 2000 and 2005-2006, Ms. Lafon served in various retail positions at Woolworths Group, including Head of Buying and Business Development from 1993 to 1996. In June 2011, TJ Hughes voluntarily entered administration under the insolvency laws in the United Kingdom.

 

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J. Per Brodin became our Senior Vice President and Chief Financial Officer in February 2008 and was promoted to Executive Vice President and Chief Financial Officer in May 2010. From November 2005 until joining the Company, Mr. Brodin served in various capacities with Centene Corporation, including Senior Vice President and Chief Financial Officer and Vice President and Chief Accounting Officer. From March 2002 to November 2005, Mr. Brodin served as Vice President, Accounting and Reporting for The May Department Stores Company. From 1989 to February 2002, Mr. Brodin was with the Audit and Business Advisory Practice of Arthur Andersen, LLP, serving as Senior Manager with their Professional Standards Group from February 2000 until February 2002.

Peter P. Copses became Chairman of the Company’s Board of Directors in May 2007. Mr. Copses co-founded Apollo Management in 1990. Prior to joining Apollo Management, Mr. Copses was an investment banker at Drexel Burnham Lambert Incorporated, and subsequently at Donaldson, Lufkin, & Jenrette Securities, concentrating on the structuring, financing and negotiation of mergers and acquisitions. Mr. Copses has served as a director of Rexnord Corporation, a diversified, multi-platform industrial company, since July 2006. In addition, since July 2010, Mr. Copses has served as the chairman of the Board of Directors of CKE Inc. (“CKE”), an owner, operator, franchisor and licensor of quick service restaurants. Over the course of the past 20 years, Mr. Copses has served on the Board of Directors of several other retail businesses, including General Nutrition Centers, Inc. and Zale Corporation. In light of our ownership structure and Mr. Copses’ position with Apollo Management, his knowledge of the retail industry and his extensive financial and business experience, including his background as an investment banker, the board believes it is appropriate for Mr. Copses to serve as a director of the Company.

Robert J. DiNicola became a member of the Company’s Board of Directors in May 2007. Mr. DiNicola has also served as a director of CKE since July 2010 and serves as the Senior Retail Advisor for Apollo Management. Mr. DiNicola served as Chief Executive Officer and Chairman of the Board of LNT from February 2006 until May 2008, when LNT and its parent company filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code, which was converted to a Chapter 7 liquidation in February 2010. Mr. DiNicola served as Executive Chairman of General Nutrition Centers, Inc. (“GNC”) from December 2004 to March 2007, and as the interim CEO and Chairman of GNC from December 2004 to June 2005. Mr. DiNicola also held numerous positions with Zale Corporation, including Chief Executive Officer from April 1994 to 2002, and Chairman of the Board from April 1994 to 2004. Prior to joining Zale Corporation, Mr. DiNicola served as the Chairman and Chief Executive Officer of the Bon Marché, a division of Federated Department Stores. Beginning his retail career in 1972, Mr. DiNicola has also worked for Macy’s and The May Department Stores Company. In light of our ownership structure and Mr. DiNicola’s knowledge of the retail industry and the competitive challenges and opportunities facing the Company gained through his executive leadership and management experience in the retail industry, the board believes it is appropriate for Mr. DiNicola to serve as a director of the Company.

George G. Golleher became a member of the Company’s Board of Directors in May 2007. Mr. Golleher has served as a director of Sprouts Farmers Markets from April 2011 to the present. Mr. Golleher was Executive Chairman of Smart & Final Inc., an operator of warehouse grocery stores, from January 2012 to November 2012 and was also its chief executive officer from May 2007 to December 2011. In addition, Mr. Golleher has served as a director of CKE since July 2010. Mr. Golleher was a director of Simon Worldwide, Inc., a promotional marketing company, from September 1999 to April 2006, and was also its Chief Executive Officer from March 2003 to April 2006. From March 1998 to May 1999, Mr. Golleher served as President, Chief Operating Officer and director of Fred Meyer, Inc., a food and drug retailer. Prior to joining Fred Meyer, Inc., Mr. Golleher served for 15 years with Ralphs Grocery Company until March 1998, ultimately as the Chief Executive Officer and Vice Chairman of the Board. From 2002 until April 2009, Mr. Golleher served as a director of Rite Aid Corporation, one of the largest retail drugstore chains in the United States. Mr. Golleher has also been a business consultant and private equity investor since June 1999. In light of our ownership structure and Mr. Golleher’s knowledge of the retail industry and the competitive challenges and opportunities facing the Company gained through his executive leadership and management experience in the retail industry, the board believes it is appropriate for Mr. Golleher to serve as a director of the Company.

 

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Rohit Manocha became a member of the Company’s Board of Directors in May 2007. Mr. Manocha is a co-founding Partner of Tri-Artisan Capital Partners, LLC (“Tri-Artisan”). Mr. Manocha is also co-President of Morgan Joseph TriArtisan Group Inc., the parent of Tri-Artisan and Morgan Joseph Tri-Artisan LLC, a registered broker-dealer. Tri-Artisan is a New York based merchant banking firm, founded in 2002, that invests, on behalf of its investors, in private equity transactions. Prior to joining Tri-Artisan, Mr. Manocha was a senior banker at Thomas Weisel Partners, ING Barings and Lehman Brothers. In light of our ownership structure and Mr. Manocha’s position with Tri-Artisan and his extensive financial and business experience, the board believes it is appropriate for Mr. Manocha to serve as a director of the Company.

Ron Marshall has served as a member of the Company’s Board of Directors since December 2007. Mr. Marshall has served as President and Chief Executive Officer of The Great Atlantic & Pacific Tea Company from February 2010 through July 2010. From January 2009 until January 2010, Mr. Marshall was President and Chief Executive Officer, and director of Borders Group Inc., a national bookseller. In February 2011, Border’s Group filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code, which was converted to a liquidation in December 2011. From 1998 to 2006, Mr. Marshall served as Chief Executive Officer of Nash Finch Company and was a member of its Board of Directors. Prior to joining Nash Finch, Mr. Marshall served as Chief Financial Officer of Pathmark Stores, Inc., Dart Group Corporation, Barnes & Noble Bookstores, Inc., NBI’s The Office Place and Jack Eckerd Corporation. Mr. Marshall has also been a principal of Wildridge Capital Management since 2006. Mr. Marshall is a certified public accountant. In light of our ownership structure and Mr. Marshall’s knowledge of the retail industry and the competitive challenges and opportunities facing the Company gained through his executive leadership and management experience in the retail industry, the board believes it is appropriate for Mr. Marshall to serve as a director of the Company.

Lance A. Milken became a member of the Company’s Board of Directors in May 2007. Mr. Milken is a Partner at Apollo Management, where he has worked since 1998. In addition, Mr. Milken has served as a director of CKE since July 2010. Mr. Milken also serves as a member of the Milken Institute board of trustees. In light of our ownership structure and Mr. Milken’s position with Apollo Management and his extensive financial and business experience, including his experience in leveraged finance, the board believes it is appropriate for Mr. Milken to serve as a director of the Company.

Composition of Board of Directors

We intend to avail ourselves of the “controlled company” exception under the New York Stock Exchange rules, which eliminates the requirements that we have a majority of independent directors on our board of directors and that we have compensation and nominating/corporate governance committees composed entirely of independent directors. We will be required, however, to have an audit committee with one independent director during the 90-day period beginning on the date of effectiveness of the registration statement filed with the SEC in connection with this offering and of which this prospectus is part. After such 90-day period and until one year from the date of effectiveness of the registration statement, we will be required to have a majority of independent directors on our audit committee. Thereafter, we will be required to have an audit committee comprised entirely of independent directors.

If at any time we cease to be a “controlled company” under the New York Stock Exchange rules, the board of directors will take all action necessary to comply with the applicable New York Stock Exchange rules, including appointing a majority of independent directors to the board of directors and establishing certain committees composed entirely of independent directors, subject to a permitted “phase-in” period.

Following the consummation of this offering, our board of directors will be divided into three classes. The members of each class will serve staggered, three-year terms (other than with respect to the initial terms of the Class I and Class II directors, which will be one and two years, respectively). Upon the expiration of the term of a class of directors, directors in that class will be elected for three-year terms at the annual meeting of stockholders in the year in which their term expires.

 

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Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of our directors. This classification of our board of directors may have the effect of delaying or preventing changes in control.

At each annual meeting, our stockholders will elect the successors to our directors. Apollo will beneficially own approximately     % of our common stock after this offering, assuming the underwriters do not exercise their option to purchase up to                 additional shares (     % if the underwriters exercise their option in full). Accordingly, immediately after this offering, Apollo will have the power to control the election of directors at our annual meetings. Our executive officers and key employees serve at the discretion of our board of directors. Directors may be removed for cause by the affirmative vote of the holders of a majority of our common stock.

Apollo Approval of Certain Matters and Rights to Nominate Certain Directors

The approval of a majority of a quorum of the members of our board of directors, which must include the approval of a majority of the directors nominated by Apollo Management voting on the matter, is required by our bylaws under certain circumstances. These consist of, as to us and, to the extent applicable, each of our subsidiaries:

 

   

amendment, modification or repeal of any provision of our certificate of incorporation, bylaws or similar organizational documents in a manner that adversely affects Apollo;

 

   

the issuance of additional shares of any class of our capital stock (other than any award under any stockholder approved equity compensation plan);

 

   

a consolidation or merger of us with or into any other entity, or transfer (by lease, assignment, sale or otherwise) of all or substantially all of our and our subsidiaries’ assets, taken as a whole, to another entity, or a “Change of Control” as defined in our or our subsidiaries’ principal senior secured credit facilities or senior note indentures, including the Credit Facility and the indentures governing the Notes;

 

   

a disposition, in a single transaction or a series of related transactions, of any of our or our subsidiaries’ assets with a value in excess of $50 million in the aggregate, other than the sale of inventory or products in the ordinary course of business;

 

   

consummation of any acquisition of the stock or assets of any other entity (other than any of our subsidiaries), in a single transaction or a series of related transactions, involving consideration in excess of $50 million in the aggregate;

 

   

the incurrence of indebtedness, in a single transaction or a series of related transactions, by us or any of our subsidiaries aggregating more than $10 million, except for borrowings under a revolving credit facility that has previously been approved or is in existence (with no increase in maximum availability) on the date of closing this offering or that is otherwise approved by Apollo Management;

 

   

a termination of the chief executive officer or designation of a new chief executive officer; and

 

   

a change in size of the board of directors.

These approval rights will terminate at such time as Apollo no longer beneficially owns at least 33  1 / 3 % of our outstanding common stock. Upon completion of this offering, Apollo will continue to beneficially own at least 33   1 / 3 % of our own common stock.

See “Certain Relationships and Related Party Transactions—Stockholders Agreement” for a description of the rights of Apollo Management to nominate a certain number of directors.

 

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Committees of our Board of Directors

Following the consummation of this offering, our board of directors will have two standing committees: an Audit Committee and a Compensation and Corporate Governance Committee. Our board of directors will adopt written charters for each of these committees, which will be available on our corporate website following completion of this offering.

Audit Committee

Following the consummation of this offering, our Audit Committee will consist of Peter P. Copses, Chairman, Rohit Manocha, Ron Marshall and Lance A. Milken . Our board of directors has determined that Mr. Copses qualifies as an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K and that Mr. Marshall is independent as independence is defined in Rule 10A-3 of the Exchange Act and under the New York Stock Exchange listing standards. Under New York Stock Exchange listing standards, the Audit Committee must consist of a majority of independent directors with 90 days of listing, and consist of all independent directors by the first anniversary of listing. The principal duties and responsibilities of our Audit Committee will be as follows:

 

   

to prepare the annual Audit Committee report to be included in our annual proxy or information statement;

 

   

to oversee and monitor our financial reporting process;

 

   

to oversee and monitor the integrity of our financial statements and internal control system;

 

   

to oversee and monitor the independence, retention, performance and compensation of our independent auditor;

 

   

to oversee and monitor the performance, appointment and retention of our senior internal audit staff person;

 

   

to discuss, oversee and monitor policies with respect to risk assessment and risk management;

 

   

to establish procedures for the receipt and treatment of accounting complaints;

 

   

to oversee and monitor our compliance with legal and regulatory matters; and

 

   

to provide regular reports to the board.

The Audit Committee will also have the authority to retain counsel and advisors to fulfill its responsibilities and duties and to form and delegate authority to subcommittees.

Compensation and Corporate Governance Committee

Following the consummation of this offering, our Compensation and Corporate Governance Committee will consist of Peter P. Copses, Chairman, Rohit Manocha and Lance A. Milken. The principal duties and responsibilities of the Compensation and Corporate Governance Committee will be as follows:

 

   

to review, evaluate and make recommendations to the full board of directors regarding our compensation policies and programs;

 

   

to review and approve the compensation of our chief executive officer, other officers and key employees, including all material benefits, option or stock award grants and perquisites and all material employment agreements, confidentiality and non-competition agreements;

 

   

to review and recommend to the board of directors a succession plan for the chief executive officer and development plans for other key corporate positions as shall be deemed necessary from time to time;

 

   

to review and make recommendations to the board of directors with respect to our incentive compensation plans and equity-based compensation plans;

 

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to administer incentive compensation and equity-related plans;

 

   

to review and make recommendations to the board of directors with respect to the financial and other performance targets that must be met;

 

   

to set and review the compensation of members of the board of directors;

 

   

to prepare an annual compensation committee report and take such other actions as are necessary and consistent with the governing law and our organizational documents;

 

   

to identify best practices and recommend corporate governance principles, including giving proper attention and making effective responses to stockholder concerns regarding corporate governance;

 

   

to develop and recommend to our board of directors guidelines setting forth corporate governance principles applicable to the Company; and

 

   

to oversee the evaluation of our board of directors and senior management.

Our Compensation and Corporate Governance Committee will also perform the duties and responsibilities traditionally performed by a nominating committee, including:

 

   

identifying candidates qualified to become directors of the Company, consistent with criteria approved by our board of directors;

 

   

recommending to our board of directors nominees for election as directors at the next annual meeting of stockholders or a special meeting of stockholders at which directors are to be elected, as well as to recommend directors to serve on the other committees of the board; and

 

   

recommending to our board of directors candidates to fill vacancies and newly created directorships on the board of directors.

Compensation Committee Interlocks and Insider Participation

During Fiscal 2012 and until the completion of this offering, the Compensation Committee of our subsidiary, Claire’s Stores, which consists of the same three individuals, was and will be responsible for determining executive compensation. During Fiscal 2012, none of our executive officers (i) served as a member of the compensation committee of another entity, one of whose executive officers served on Claire’s Stores’ Compensation Committee, (ii) served as a director of another entity, one of whose executive officers served on Claires’s Stores’ Compensation Committee, or (iii) served as a member of the compensation committee of another entity, one of whose executive officers served as one of our directors.

Code of Business Conduct and Ethics

Following the consummation of this offering, we will have a Code of Business Conduct and Ethics that applies to all of our officers, directors and employees, including our principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. In addition, upon the consummation of this offering, we will have a Code of Ethics for our chief executive officer and senior financial officers. These standards are designed to deter wrongdoing and to promote honest and ethical conduct. Excerpts from the Code of Business Conduct and Ethics and the Code of Ethics for our chief executive officer and senior financial officers, which address the subject areas covered by the SEC’s rules, will be posted on our website. Any substantive amendment to, or waiver from, any provision of these Codes with respect to any senior executive or financial officer will also be posted on our website.

 

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

This Compensation Disclosure and Analysis describes, among other things, Fiscal 2012 executive compensation for each of the individuals whose compensation is set out below in the Summary Compensation Table (referred to as our “named executive officers”). The compensation committee of the board of directors of Claire’s Stores, Inc. has been responsible for determining our executive compensation programs, including market compensation decisions during Fiscal 2012. Going forward, after the offering is completed, compensation decisions as to our executive officers will be made by our Compensation and Corporate Governance Committee. The Compensation committee of Claire’s Stores, Inc. is, and our Compensation and Corporate Governance Committee will be, comprised of Peter P. Copses, Chairman, Rohit Manocha and Lance A. Milken. As used in this discussion, the “Compensation Committee” refers to the Compensation Committee of Claire’s Stores, Inc. or the Compensation and Corporate Governance Committee of Claire’s Inc., whichever is appropriate from the context.

For Fiscal 2012, our named executive officers include Mr. Fielding, Mr. Brodin and Ms. Lafon. As of the end of Fiscal 2012, we had no other executive officers. Ms. Filler joined our Company after the end of Fiscal 2012. In addition, for Fiscal 2012, our named executive officers also include James G. Conroy, former Chief Operating Officer, who resigned June 8, 2012, and Jay Friedman, former President, North America, who resigned August 2, 2012, each of whom served as an executive officer during part of Fiscal 2012.

Our Board of Directors, upon consultation with independent compensation consultants and review of comparable peer group companies, negotiated employment agreements and other arrangements with our current named executive officers. In June 2012, James Fielding became our Chief Executive Officer, and our Board of Directors approved an employment agreement with Mr. Fielding. In February 2008, our Board of Directors approved compensation arrangements for J. Per Brodin, our then Senior Vice President and Chief Financial Officer. In May 2010, Mr. Brodin was promoted to Executive Vice President and Chief Financial Officer, and the Compensation Committee of the Board of Directors approved an amendment to Mr. Brodin’s compensation arrangements. In October 2011, Beatrice Lafon became our President of Europe, and our Board of Directors approved an employment agreement with Ms. Lafon. In February 2013, Linda Filler became our President of North America and our Board of Directors approved an employment agreement with Ms. Filler.

This Compensation Disclosure and Analysis describes, among other things, Fiscal 2012 executive compensation for each of the individuals whose compensation is set out below in the Summary Compensation Table (referred to as our “named executive officers”). For Fiscal 2012, our named executive officers include Mr. Fielding, Mr. Brodin and Ms. Lafon. As of the end of Fiscal 2012, we had no other executive officers. Ms. Filler joined our Company after the end of Fiscal 2012. In addition, for Fiscal 2012, our named executive officers also include James G. Conroy, former Chief Operating Officer, who resigned June 8, 2012, and Jay Friedman, former President, North America, who resigned August 2, 2012, each of whom served as an executive officer during part of Fiscal 2012.

During Fiscal 2012, the basic elements of compensation for our named executive officers remained essentially unchanged from Fiscal 2011 and prior years.

Compensation Philosophy and Objectives

Our Compensation Committee developed an executive compensation program designed to reward the achievement of specific annual and long-term goals by the Company, and which is designed to align the executives’ interests with those of our stockholders by rewarding performance above established goals, with the ultimate objective of improving stockholder value. Our Compensation Committee evaluates both performance

 

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and compensation to ensure that the Company maintains its ability to attract, retain and motivate qualified employees in key positions and that compensation to key employees remains competitive relative to the compensation paid by similar sized companies. Our Compensation Committee believes that the executive compensation packages provided by the Company to the named executive officers should include both cash and stock-based compensation that reward performance as measured against established goals.

In negotiating the initial employment agreements and arrangements with our named executive officers, our Board of Directors and Compensation Committee, as the case may be, placed significant emphasis on aligning the management interests with those of Apollo Management. Our named executive officers received equity awards that included performance vesting options and have also made equity investments in our common stock.

Components of Executive Compensation

The principal components of compensation in Fiscal 2012 for our named executive officers were base salary, annual performance bonus, stock option awards, management equity investments in our common stock, and other benefits and perquisites.

Base Salary. The Company provides our named executive officers with base salary to compensate them for services rendered during the fiscal year. Base salaries for the named executive officers are determined by the Compensation Committee for each executive based on his or her position and scope of responsibility. The initial base salaries for our named executive officers were established in their initial employment agreements or other written arrangements.

For Fiscal 2012, base salaries for our named executive officers were as follows:

 

James D. Fielding

   $ 900,000   

Beatrice Lafon

   $ 603,654   

J. Per Brodin

   $ 531,258   

James G. Conroy

   $ 700,000   

Jay Friedman

   $ 700,000   

Mr. Fielding’s base salary was the amount specified in his employment agreement. For Ms. Lafon and Mr. Brodin, Fiscal 2012 base salaries reflected merit increases from their base salaries for Fiscal 2011. The annual base salaries for Messrs. Conroy and Friedman were increased to the amounts set forth in the above table on an interim basis in connection with their appointments as Interim Co-Chief Executive Officers in January 2012 until the appointment of Mr. Fielding in June 2012. Mr Friedman’s base salary was subsequently reduced to $600,000 upon the appointment of Mr. Fielding. Mr. Conroy resigned from the Company in June 2012; Mr. Friedman resigned from the Company in August 2012.

Annual Performance Bonus. Our named executive officers are eligible to receive annual cash performance bonuses in addition to their base salary. These bonuses are intended to motivate and reward achievement of annual financial objectives and to provide a competitive total compensation package to our executives.

Our Compensation Committee sets threshold, target and maximum numeric performance goals for each performance metric at or near the beginning of each annual performance period, with input from senior management. These performance goals are based on projected internal plan targets available to the Compensation Committee at that time. Performance metrics are further weighted based on the executive’s responsibility from a global, North American and European perspective. For Fiscal 2012, the Compensation Committee set the threshold to maximum range at 25% to 175% of base salary for the Chief Executive Officer and Division Presidents, a change from the range of 50% to 150% of base salary used in Fiscal 2011. Mr. Brodin’s Fiscal 2012 percentage range was set at 15% to 105% of base salary, a change from the range of 30% to 90% of base salary used in Fiscal 2011. The Compensation Committee believed that these performance targets goals would be

 

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difficult to achieve, but could be achieved with significant effort on the part of its executives and that payment of the maximum amounts would occur only upon the achievement of results in excess of internal and general market expectations and our long-term strategic objectives.

In addition, for Fiscal 2012, our Compensation Committee added a new performance metric based on new store performance for those executive officers that are members of the Company’s Real Estate Committee.

In Fiscal 2012, the cash bonus for Ms. Lafon was based on the following combined global, division, and targeted weighted performance metrics: earnings before interest, taxes, depreciation and amortization (EBITDA), as adjusted (69%), same store sales (15%), free cash flow (10%), and new store sales (6%). In Fiscal 2012, the cash bonus for Mr. Brodin was based on the following combined global and targeted weighted performance metrics: earnings before interest, taxes, depreciation and amortization (EBITDA), as adjusted (70%), new store sales (10%), free cash flow (10%) and expense control (10%). Pursuant to his employment agreement, Mr. Fielding received a guaranteed bonus for Fiscal 2012, based on target performance.

The performance bonuses earned for Fiscal 2012 were based on the named executive officer meeting or exceeding the following numeric performance goals established by our Compensation Committee at or near the beginning of Fiscal 2012.

Fiscal 2012 Global and Targeted Performance Goals

 

Bonus Level

   New Store Sales ($
in millions) (2)
     Adjusted
EBITDA ($ in
millions (3)
     Free Cash Flow
($ in millions)
     Expense Control
(% of Sales)
 

Threshold

     59         290         188         55.6

Target

     70         322         220         55.1

Maximum

     81         354         252         54.5

Fiscal 2012 North America Division and Targeted Performance Goals

 

Bonus Level

   Same Store Sales
(%) (1)
     New Store Sales ($
in millions) (2)
     Adjusted
EBITDA ($ in
millions (3)
     Free Cash Flow
($ in millions)
 

Threshold

     1.00         17         223         179   

Target

     4.68         19         244         200   

Maximum

     8.36         22         265         221   

Fiscal 2012 Europe Division and Targeted Performance Goals

 

Bonus Level

   Same Store Sales
(%) (1)
     New Store Sales ($
in millions) (2)
     Adjusted
EBITDA ($ in
millions (3)
     Free Cash Flow
($ in millions)
 

Threshold

     0.00         42         79         30   

Target

     2.92         50         91         41   

Maximum

     5.85         57         102         53   

 

(1) We include a store in the calculation of same store sales once it has been in operation 60 weeks after its initial opening.
(2) New store sales include sales from stores open less than 60 weeks.
(3) EBITDA represents income from continuing operations before provision (benefit) for income tax, interest income and expense and depreciation and amortization, as adjusted for certain non-recurring and non-cash expenses.

 

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The following table indicates the threshold (minimum), target and maximum annual potential bonuses that our named executive officers were eligible to receive for Fiscal 2012, expressed as a dollar amount and as a percentage of the named executive officer’s Fiscal 2012 annual base salary, assuming that the numeric performance goals established by our Compensation Committee for each of the performance metrics applicable to the named executive officer at the threshold, target or maximum levels were achieved. The last column of the table reflects the actual performance bonus earned by the named executive officer for Fiscal 2012.

Fiscal Year 2012 Bonus Table

 

Name

   Potential
Threshold
     Potential
Target
     Potential
Maximum
     Actual  

James D. Fielding

    Chief Executive Officer

   $ 225,000 (25%)       $ 900,000 (100%)       $ 1,575,000 (175%)         $560,377 (1) 

Beatrice Lafon

    President of Claire’s Europe

   $ 150,913 (25%)       $ 603,654 (100%)       $ 1,056,394 (175%)       $ 340,659   

J. Per Brodin

    Executive Vice President and Chief
Financial Officer

   $ 79,689 (15%)       $ 318,755 (60%)       $ 557,821 (105%)       $ 161,308   

James G. Conroy

    Former Chief Operating Officer (2)

   $ 175,000 (25%)       $ 700,000 (100%)       $ 1,225,000 (175%)       $ 109,162   

Jay Friedman

    Former President North America (2)

   $ 150,000 (25%)       $ 600,000 (100%)       $ 1,050,000 (175%)       $ 0   

 

(1) Amount reflects guaranteed bonus paid to Mr. Fielding for Fiscal 2012 pursuant to his employment agreement. The guaranteed bonus was prorated for the time of Fiscal 2012 in which he was employed.
(2) Mr. Conroy resigned on June 8, 2012, and received a prorated bonus based on the time of his employment during Fiscal 2012. Mr. Friedman resigned on August 2, 2012, and did not receive a bonus.

In March 2013, our Compensation Committee set threshold, target and maximum numeric performance goals for Fiscal 2013 for named executive officers. The annual cash performance bonus structure for Fiscal 2013 is comparable to that of Fiscal 2012 except the Compensation Committee revised the threshold to maximum percentage range for Mr. Brodin at 25% to 175% of base salary, as opposed to the 15% to 105% of base salary applicable in Fiscal 2012.

Stock Option Awards. Our named executive officers are eligible to receive stock options pursuant to our amended and restated incentive plan, adopted in 2007 and amended in 2011 (the “Incentive Plan”). The Incentive Plan provides employees or directors of, or consultants who were previously employed by, the Company or its affiliates who are in a position to contribute to the long-term success of these entities with shares of our common stock or stock options to aid in attracting, retaining and motivating individuals of outstanding ability. The Incentive Plan provides for the grant of shares of common stock, incentive stock options, and non-qualified stock options. The Incentive Plan is administered by our Compensation Committee, which has the authority to determine who should be awarded options or shares, the number of shares to be granted or to be subject to an option, the exercise price or purchase price of such awards, and other applicable terms and conditions. The Compensation Committee consists of people who are “non-employee directors” as defined under Rule 16b-3 under the Exchange Act, “outside directors,” within the meaning of Internal Revenue Code Section 162(m) and “independent directors” under New York Stock Exchange’s rules). The aggregate number of shares currently reserved for issuance under the Incentive Plan is 8,200,000.

Stock option grants under the Incentive Plan have previously been divided among “Time Options,” “Performance Options” and “Stretch Performance Options.” The stock options generally expire seven years after the date of grant. The Time Options become vested and exercisable in four equal installments based on the anniversary of the date of grant or the anniversary of a designated date, subject to acceleration in the event of a

 

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change in control (as defined in the option grant letter). The Performance Options provide that if on any “Measurement Date,” the “Value Per Share” equals or exceeds the “Target Stock Price,” then the performance options will vest and become exercisable. The Stretch Performance Options provide that if on any “Measurement Date,” the “Value Per Share” equals or exceeds the “Stretch Stock Price,” then the stretch performance options will vest and become exercisable. Prior to an initial public offering, a Measurement Date is the end of each fiscal quarter (beginning with the last day of the second quarter of our 2009). Prior to an initial public offering, Value Per Share is the Company’s “Net Equity Value” divided by the number of fully diluted shares. Net Equity Value is calculated as (1) 8.5 times the Company’s EBITDA for the four fiscal quarters ending on the Measurement Date, plus (2) the sum of all cash and cash equivalents and the aggregate exercise price of all outstanding options or warrants to purchase shares of the Company’s common stock as of the Measurement Date, less (3) the sum of the Company’s debt and capital leases as of the Measurement Date. Upon a defined liquidity event, Value Per Share is the price per share realized by the Company’s principal stockholders. The Target Stock Price means $10.00 compounded at an annual rate of 22.5% from May 29, 2007 to the Measurement Date, and the Stretch Stock Price means $10.00, compounded at an annual rate of 32% from May 29, 2007 to the Measurement Date.

On June 15, 2012, the Company commenced an offer (the “Exchange Offer”) to exchange certain Performance Options held by employees of the Company for new Performance Options (the “New Options”) granted on a 1 for 2 basis. The Exchange Offer was completed on July 16, 2012. The New Options expire on July 16, 2019. The New Options issued under the Exchange Offer provide for the following performance condition: (a) vest in equal installments on the first two anniversaries after the first to occur of: (i) the date of an initial public offering (“IPO”) at a price of at least $25 per share, (ii) any date following an IPO when the average stock price over the preceding 30 consecutive trading days exceeds $25, or (iii) any date before an IPO where more than 25% of the outstanding shares of the Company are sold for cash or marketable consideration having a value of at least $25 per share; or (b) vest immediately if, on or after the occurrence of an event described in (i), (ii) or (iii), but prior to the second anniversary thereof, there occurs a change of control of the Company. In the Exchange Offer, Mr. Brodin received 42,500 New Options, Ms. Lafon received 70,000 and Mr. Friedman received 80,000 (all which have expired subsequent to his resignation).

In addition, for Fiscal 2012, stock option grants to our named executive officers were as set out in the table below. Performance Options granted subsequent to the Exchange Offer have the same terms as the “New Options” described above. See “—Management Equity Investments” below for an explanation of Management Investment Options.

 

Name

   Grant Date      Options (#)      Exercise Price
($/Sh)
 

James D. Fielding

        

Time Options

     6/18/12         500,000         10.00   

Performance Options

     6/18/12         500,000         10.00   

Management Investment Options

     6/18/12         50,000         10.00   

J. Per Brodin

        

Time Options

     1/15/13         75,000         10.00   

Performance Options

     1/15/13         37,500         10.00   

Beatrice Lafon

        

Time Options

     5/22/12         25,000         10.00   

Performance Options

     8/28/12         25,000         10.00   

Management Investment Options

     5/22/12         5,000         10.00   

Unless the term of a vested option would otherwise terminate earlier, all vested options generally terminate on the 91st day following an individual’s termination for any reason (other than death or disability, in which case such option will terminate on the 181st day following termination).

 

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Common stock issued under the Incentive Plan is subject to various restrictions. During the one-year period following the grantee’s termination of employment (or the date of exercise, if later), the Company or its principal stockholders may repurchase any or all of the shares purchased pursuant to an option. Such shares may be purchased for fair market value; however, the purchase price may be less depending upon the circumstances surrounding the grantee’s termination of employment. In addition, if the Company’s principal stockholders sell a majority of the Company, they may require a grantee to participate in the sale, or a grantee may require such principal stockholders to allow it to participate in the sale, in either case under the same terms and conditions as applicable to the principal stockholders. Shares acquired pursuant to an award generally may not otherwise be transferred until an initial public offering, and certain investors have voting proxy on all shares of common stock issued pursuant to the Incentive Plan.

In the event any recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, repurchase, exchange or issuance of shares or other securities, any stock dividend or other special and nonrecurring dividend or distribution (whether in the form of cash, securities or other property), liquidation, dissolution, or other similar transactions or events, affects the shares, our Board of Directors or Compensation Committee of our Board of Directors will make appropriate equitable adjustments in order to prevent dilution or enlargement of a grantee’s rights under the Incentive Plan. Such adjustments may be applicable to the number and kind of shares available for grant of awards; the number and kind of shares which may be delivered with respect to outstanding awards; and the exercise price. In addition, in recognition of any unusual or nonrecurring events, our Board of Directors or Compensation Committee of our Board of Directors may adjust any terms and conditions applicable to outstanding awards, which may include cancellation of outstanding options in exchange for the in-the-money value, if any, of the vested portion.

The Board of Directors or Compensation Committee of our Board of Directors may amend or terminate the Incentive Plan or any award issued thereunder; however, in general, no such amendment or termination may adversely affect the rights of a grantee.

Management Equity Investments. Our Board of Directors awards certain management employees the opportunity to purchase or acquire the Company’s common stock at a price of $10.00 per share, the estimated fair market value of the Company’s common stock after the closing of our acquisition by the Sponsors in 2007. For investments made by management employees, the management employee was granted an option (a “Management Investment Option”) to purchase an additional share of the Company’s common stock at an exercise price of $10.00 per share. The Management Investment Options expire in seven years. The shares of the Company’s common stock acquired by the current named executive officers are subject to restrictions on transfer, repurchase rights and other limitations.

Benefits Programs . The current named executive officers participate in a variety of retirement, health and welfare, and paid time-off benefits designed to enable us to attract and retain our workforce in a competitive marketplace. Health and welfare and paid time-off benefits helped ensure that we have a productive and focused workforce through reliable and competitive health and other benefits.

Retirement Plans . The Company maintains the Claire’s Stores, Inc. 401(k) Savings and Retirement Plan (the “401(k) Plan”) to enable eligible employees to save for retirement through a tax-advantaged combination of elective employee contributions and our matching contributions, and provide employees the opportunity to directly manage their retirement plan assets through a variety of investment options. The 401(k) Plan allowed eligible employees to elect to contribute from 1% to 50% of their eligible compensation to an investment trust on a pre-tax basis, up to the maxim