AMENDMENT NO. 1 TO
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended November 3, 2001
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OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission file number 1-8899
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CLAIRE'S STORES, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-0940416
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 S.W. 129th Avenue Pembroke Pines, Florida 33027
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(Address of principal executive offices) (Zip Code)
(954) 433-3900
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Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
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The number of shares of the registrant's Common Stock and Class A Common Stock
outstanding as of November 30, 2001 was 45,946,797 and 2,833,669, respectively,
excluding treasury shares.
CLAIRE'S STORES, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets at November 3, 2001 and
February 3, 2001. 3
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Three and Nine
Months Ended November 3, 2001 and October 28, 2000. 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended November 3, 2001 and October 28, 2000. 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 8
PART II. OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
2
PART I. FINANCIAL INFORMATION
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
NOV. 3, FEB. 3,
2001 2001
---------- ----------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 124,418 $ 111,663
Inventories 122,877 112,104
Prepaid expenses and other current assets 42,673 36,012
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Total current assets 289,968 259,779
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Property and equipment:
Land and building 17,979 17,765
Furniture, fixtures and equipment 198,972 180,147
Leasehold improvements 133,359 133,522
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350,310 331,434
Less accumulated depreciation and amortization (181,305) (160,317)
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169,005 171,117
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Goodwill, net 196,649 204,269
Other assets 36,484 33,369
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$ 692,106 $ 668,534
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 33,789 $ 31,263
Trade accounts payable 67,167 30,848
Income taxes payable - 2,313
Dividends payable - 1,916
Accrued expenses 29,504 33,757
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Total current liabilities 130,460 100,097
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Long term liabilities:
Long term debt 151,278 151,374
Deferred credits 17,157 17,363
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168,435 168,737
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Stockholders' equity:
Preferred stock par value $1.00 per share; authorized
1,000,000 shares, issued and outstanding 0 shares - -
Class A common stock par value $.05 per share;
authorized 20,000,000 shares, issued 2,833,921
shares and 2,846,354 shares 142 142
Common stock par value $.05 per share; authorized
150,000,000 shares, issued 45,946,545 shares and
45,930,363 shares 2,297 2,297
Additional paid-in capital 29,870 29,825
Accumulated other comprehensive income (14,195) (7,221)
Retained earnings 375,549 375,109
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393,663 400,152
Treasury stock, at cost (109,882 shares) (452) (452)
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393,211 399,700
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Commitments and contingencies
$ 692,106 $ 668,534
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- ---------------------
NOV. 3, OCT. 28, NOV. 3, OCT. 28,
2001 2000 2001 2000
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(In thousands)
Net sales $233,950 $247,536 $713,213 $731,518
Cost of sales, occupancy and buying expenses 129,647 127,505 404,070 380,951
--------- --------- --------- ---------
Gross profit 104,303 120,031 309,143 350,567
--------- --------- --------- ---------
Other expenses:
Selling, general and administrative 87,946 84,974 263,691 256,685
Depreciation and amortization 11,410 11,079 33,571 32,785
Interest expense, net 1,295 2,674 5,414 7,016
--------- --------- --------- ---------
100,651 98,727 302,676 296,486
--------- --------- --------- ---------
Income before income taxes 3,652 21,304 6,467 54,081
Income taxes 1,272 7,460 2,267 19,131
--------- --------- --------- ---------
Net income 2,380 13,844 4,200 34,950
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Other comprehensive income (loss):
Foreign currency translation adjustments 501 (3,831) (6,974) (9,056)
--------- --------- --------- ---------
Comprehensive income (loss) $ 2,881 $ 10,013 $ (2,774) $ 25,894
========= ========= ========= =========
Net income per share:
Basic $ 0.05 $ 0.28 $ 0.09 $ 0.69
========= ========= ========= =========
Diluted $ 0.05 $ 0.28 $ 0.09 $ 0.69
========= ========= ========= =========
Average common shares outstanding - Basic 48,671 49,594 48,670 50,342
========= ========= ========= =========
Average common shares outstanding - Diluted 48,740 49,728 48,750 50,524
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
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NOV. 3, OCT. 28,
2001 2000
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(In thousands)
Cash flows from operating activities:
Net income $ 4,200 $ 34,950
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 33,571 32,785
Loss on retirement of property and equipment 1,361 1,210
Decrease (increase) in -
Inventories (10,754) (33,933)
Prepaid expenses and other assets (10,890) 11,270
Increase (decrease) in -
Trade accounts payable 36,296 6,978
Income taxes payable (2,313) (14,183)
Accrued expenses (4,159) (2,434)
Deferred credits (206) 1,930
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Net cash provided by operating activities 47,106 38,573
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Cash flows from investing activities:
Acquisition of property and equipment (26,638) (29,081)
Acquisition of business, net of cash acquired - (9,548)
Sale of short-term investments - 2,998
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Net cash used in investing activities (26,638) (35,631)
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Cash flows from financing activities:
Purchase of treasury stock - (41,831)
Principal draws on debt 2,930 260
Proceeds from stock options exercised 45 348
Dividends paid (5,676) (5,922)
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Net cash used in financing activities (2,701) (47,145)
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Effect of foreign currency exchange rate changes on cash
and cash equivalents (5,012) (9,056)
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Net increase (decrease) in cash and cash equivalents 12,755 (53,259)
Cash and cash equivalents at beginning of period 111,663 137,414
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Cash and cash equivalents at end of period $124,418 $ 84,155
========= =========
See accompanying notes to condensed consolidated financial statements.
5
CLAIRE'S STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods. These financial statements have been prepared in
accordance with the instructions to Form 10-Q and therefore do not include all
of the information or footnotes necessary for a complete presentation. They
should be read in conjunction with the Company's audited financial statements
included as part of its Annual Report on Form 10-K for the year ended February
3, 2001 filed with the Securities and Exchange Commission. Due to the seasonal
nature of the Company's business, the results of operations for the first nine
months of the year are not indicative of the results of operations on an
annualized basis.
2. Basic net income per share is based on the weighted average number of
shares of Class A Common Stock and Common Stock outstanding during the period
presented while diluted net income per share includes the dilutive effect of
stock options. Options to purchase 1,147,337 and 560,500 shares of common
stock, at prices ranging from $17.75 to $30.25 per share and from $19.73 to
$30.25 per share, respectively, were outstanding for the quarters ended November
3, 2001 and October 28, 2000, respectively, but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares for the
respective fiscal quarters.
Options to purchase 1,166,826 and 560,500 shares of common stock, at
Prices ranging from $17.31 to $30.25 per share and from $19.73 to $30.25 were
outstanding for the nine months ended November 3, 2001 and October 28, 2000,
respectively, but were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of the common shares for the respective nine month periods.
3. In July 2001, the FASB issued Statement No. 141, "Business Combinations",
and Statement No. 142, "Goodwill and Other Intangible Assets". Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values
and reviewed for impairment in accordance with FAS Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of".
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective February 3, 2002. Furthermore, goodwill
and intangible assets determined to have an indefinite useful life acquired in a
purchase business combination completed after June 30, 2001, but before
Statement 142 is adopted in full will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized and
tested for impairment in accordance with the appropriate pre-Statement 142
accounting requirements prior to the adoption of Statement 142.
6
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired,
and make any necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
Statement 142 within the first interim period. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect of a
change in accounting principle in the first interim period.
In connection with Statement 142's transitional goodwill impairment
evaluation, the Statement will require the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Company will then have up to
six months from the date of adoption to determine the fair value of each
reporting unit and compare it to the reporting unit's carrying amount. To the
extent a reporting unit's carrying amount exceeds its fair value, an indication
exists that the reporting unit's goodwill may be impaired and the Company must
perform the second step of the transitional impairment test. In the second
step, the Company must compare the implied fair value of the reporting unit's
goodwill, determined by allocating the reporting unit's fair value to all of it
assets (recognized and unrecognized) and liabilities in a manner similar to a
purchase price allocation in accordance with Statement 141, to its carrying
amount, both of which would be measured as of the date of adoption. This
second step is required to be completed as soon as possible, but no later than
the end of the year of adoption. Any transitional impairment loss will be
recognized as the cumulative effect of a change in accounting principle in the
Company's statement of operations
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $194 million. Amortization expense related to
goodwill was $8.8 million and $6.6 million for the year ended February 3, 2001
and the nine months ended November 3, 2001, respectively. Because of the
extensive effort needed to comply with adopting Statements 141 and 142, it is
not practicable to reasonably estimate the impact of adopting these Statements
on the Company's financial statements at the date of this report, including
whether it will be required to recognize any transitional impairment losses as
the cumulative effect of a change in accounting principle.
4. In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Statement No. 144 supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
and retains many of the fundamental provisions of that Statement. This
pronouncement extends the reporting requirements for discontinued operations to
components of an entirety that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for sale.
It also provides guidance on methods to be used in determining estimates of
impaired values. The standard is effective for fiscal years beginning after
December 15, 2001, with earlier application permitted.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
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The Company and its representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995, including any statements that may be contained in the following
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in this report and in other filings with the Securities and
Exchange Commission and in its reports to stockholders, which represent the
Company's expectations or beliefs with respect to future events and future
financial performance. These forward-looking statements are subject to certain
risks and uncertainties. Important factors currently known to management that
could cause actual results to differ materially from those in forward-looking
statements are set forth in the risk factors contained in the Company's Annual
Report on Form 10-K for the year ended February 3, 2001, and those risk factors
are hereby incorporated by reference in this Form 10-Q. The Company does not
undertake to update or revise any forward-looking statement to reflect changed
assumptions, the occurrence of unanticipated events or changes to operating
results over time.
The following table sets forth, for the periods indicated, percentages which
certain items reflected in the financial statements bear to net sales of the
Company:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -------------------
NOV. 3, OCT. 28, NOV. 3, OCT. 28,
2001 2000 2001 2000
-------- --------- -------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, occupancy and buying expenses 55.4% 51.5% 56.7% 52.1%
-------- --------- -------- ---------
Gross Profit 44.6% 48.5% 43.3% 47.9%
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Other expenses:
Selling, general and administrative 37.6% 34.3% 37.0% 35.1%
Depreciation and amortization 4.9% 4.5% 4.7% 4.5%
Interest expense, net 0.6% 1.1% 0.8% 1.0%
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43.1% 39.9% 42.5% 40.6%
-------- --------- -------- ---------
Income before income taxes 1.5% 8.6% 0.8% 7.3%
Income taxes 0.5% 3.0% 0.3% 2.6%
-------- --------- -------- ---------
Net income 1.0% 5.6% 0.5% 4.7%
======== ========= ======== =========
RESULTS OF OPERATIONS
Net sales for the three months ended November 3, 2001 decreased approximately 6%
compared to the three month period ended October 28, 2000. The decrease for the
period resulted primarily from a 5% comparable sales per store decrease and
operating approximately 1% fewer stores than last year. The decrease in total
stores is primarily due to the Company closing non-performing Afterthoughts
stores. Net sales for the nine months ended November 3, 2001 decreased 3%
compared to the nine month period ended October 28, 2000. The decrease for the
period resulted primarily from a 3% comparable sales per store decrease. We
believe the primary cause of the comparable sales per store decreases are the
effects of lower traffic patterns in the malls and a lack of consumer spending
resulting from an already difficult economic environment.
8
Cost of sales, occupancy and buying expenses as a percentage of net sales, were
55.4% and 51.5% for the three months ended November 3, 2001 and October 28,
2000, respectively. Lack of leverage on occupancy expenses caused by negative
comparable store sales accounted for most of the increase. In addition, planned
new merchandise receipts, which are typically sold at full price were reduced
during the period due to sales trends. Therefore, more aged merchandise already
on hand was sold at lower margins. Cost of sales, occupancy and buying expenses
as a percentage of net sales were 56.7% and 52.1% for the nine months ended
November 3, 2001 and October 28, 2000, respectively. The more than $20 million
of additional inventory markdowns taken in the second quarter as a result of the
Company's inventory management initiatives in response to slow moving inventory
and lower than expected sales were the primary reason for the increase during
the period as well as a lack of leverage due to the negative comparable same
store sales.
Selling, general and administrative expenses (S,G&A) for the three and nine
months ended November 3, 2001 was 37.6% and 37.0% of sales as compared to 34.3%
and 35.1% for the comparable periods ended October 28, 2000. This increase as a
percentage of sales is primarily the result of the lack of leverage caused by
decreased comparable store sales. While the Company was not able to realize
leverage on its fixed corporate expenses due to the negative comparable store
sales reported in the quarter ended November 3, 2001, management took steps to
control those expenses which could be managed to correspond with customer
traffic within stores.
Depreciation and amortization as a percentage of sales were approximately 4.9%
and 4.7% for the three and nine months ended November 3, 2001 as compared to
4.5% for the three and nine months ended October 28, 2000, respectively. The
increase as a percentage of sales was primarily a result of negative comparable
store sales reported in the quarter and nine months ended November 3, 2001 and
opening new stores during the past twelve months. Store closings this fiscal
year did not significantly affect depreciation as many of these stores were
closed at the end of the term of their leases when most store assets have
already been fully depreciated in prior periods.
Interest expense, net was $1.3 million and $5.4 million for the three and nine
months ended November 3, 2001 as compared to $2.7 million and $7.0 million for
the comparable period ended October 28, 2000. This decrease was primarily due to
lower interest rates charged on the Company's debt offset by lower invested cash
balances and lower interest rates earned which produced lower interest income
than the comparable periods.
Inflation has not affected the Company as it has generally been able to pass
along inflationary increases in its costs through increased sales prices.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the acquisition of Afterthoughts, the Company entered into
the Credit Facility pursuant to which it financed $200 million of the purchase
price. The Credit Facility includes a $40 million revolving line of credit
which matures on December 1, 2004 and a $175 million five year term loan payable
on a quarterly basis through December 1, 2004. The Credit Facility is
prepayable without penalty and bears interest at 125 basis points margin over
the London Interbank Borrowing Rate. The margin is adjusted periodically based
on the Company's performance as it relates to certain financial measurements.
The Company had $183.5 million outstanding on this facility at November 3, 2001.
The Credit Facility contains covenants including, but not limited to,
limitations on investments, dividends and other restricted payments, incurrence
of additional debt and acquisitions, as well as various financial covenants
customary for transactions of this type. These financial covenants include
current ratio, fixed charge coverage ratio and current leverage ratio. The
Company is currently in compliance with these covenants.
9
Company operations have historically provided a strong, positive cash flow
which, together with the Company's cash balances, provides adequate liquidity to
meet the Company's operational needs and debt obligations. Cash and cash
equivalents totaled $124.4 million at November 3, 2001.
Net cash provided by operating activities amounted to $47.1 million in the first
nine months of Fiscal 2002 compared to $38.6 million in the first nine months of
Fiscal 2001. The primary source of net cash provided by operating activities in
Fiscal 2002 was net income of $4.2 million, adjusted for non-cash items and
changes in trade payables.
Net cash used in investing activities of $26.6 million in the first nine months
of Fiscal 2002 was used for capital expenditures, primarily opening and
remodeling stores.
Net cash used in financing activities of $2.7 million in the first nine months
of Fiscal 2002 was primarily borrowings on the Company's credit facilities
offset by amounts used to pay the Company's dividends.
Inventory at November 3, 2001 decreased 15% compared to the inventory balance at
the end of the prior fiscal year's third quarter. This reduction is a direct
result of the Company's inventory management initiatives taken during the third
quarter in response to lower than expected sales.
For the nine months ended November 3, 2001, the Company opened 152 stores and
closed 121 stores ending the quarter with 3,056 stores. In addition, the
Company remodeled 107 stores.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
10
SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLAIRE'S STORES, INC.
----------------------
(Registrant)
Date: December 14, 2001 /s/ Ira D. Kaplan
-----------------
Ira D. Kaplan
Senior Vice President
and Chief Financial
Officer
(Mr. Kaplan is the
Senior Vice President
and Chief Financial
Officer and has been
duly authorized to
sign on behalf of
the registrant)
11