Claire's Stores, Inc. Reports Fiscal 2009 Second Quarter Results

PEMBROKE PINES, Fla., Sept. 9 /PRNewswire/ -- Claire's Stores, Inc., a leading specialty retailer offering value-priced fashion accessories and jewelry for kids, tweens, teens, and young women ages 3 to 27, today reported its financial results for the 2009 second quarter, which ended August 1, 2009.

Second Quarter Results

The Company reported net sales of $314.2 million for the 2009 second quarter, a 12.7% decrease from the 2008 second quarter. The decrease was primarily attributable to the effect of foreign currency exchange rate changes, a decline in same store sales and the effect of store closures, partially offset by new store sales. Sales would have declined 7.4% excluding the impact from changes in foreign currency exchange rates.

Consolidated same store sales declined 6.9% in the fiscal 2009 second quarter caused primarily by a decline in average transactions per store of 6.7%. The decline in the number of transactions reflects weaker traffic. In North America, same store sales decreased 9.9%, with sales at our Icing brand outperforming Claire's. European same store sales declined 1.6%. We compute same store sales on a local currency basis, which eliminates any impact from changes in foreign currency exchange rates.

Chief Executive Officer Gene Kahn commented, "While we continue to feel the effect of a challenging retail environment as well as the impact of negative consumer confidence, our second quarter sales performance had monthly sequential same store sales improvement. During the second quarter, a decline in traffic coupled with a highly promotional teen apparel specialty business caused a more competitive environment for every customer dollar. Since we are very confident in our value proposition, we did not overreact to the promotional activity, allowing us to improve our merchandise margin.

While it is difficult to compare our third quarter performance at this point, because of various changes in the calendar, our quarter to date same store sales are in the negative low single digits. Looking forward, we see no reason to believe the retail environment will see significant near-term improvement and, therefore, will continue to focus on controlling expenses and maximizing available sales while generating positive free cash flow."

Gross profit percentage decreased 20 basis points during the fiscal 2009 second quarter to 49.7% compared to the fiscal 2008 second quarter of 49.9%. The decrease consisted of an 80 basis point improvement in merchandise margin and a 30 basis point decrease in buying cost, offset by a 130 basis point increase in occupancy cost. The improvement in merchandise margin was due to increased initial mark-up on purchases, reduced markdowns and decreased freight costs. Occupancy costs decreased approximately $6.1 million, $0.6 million net of foreign exchange effect, but increased as a percentage of sales due to the deleveraging effect of lower sales. Excluding $1.6 million of non-recurring expenses relating to our Pan European Transformation project that were included in buying costs in the fiscal 2008 second quarter, the decrease in gross profit percentage was approximately 70 basis points.

Selling, general and administrative expenses decreased $21.6 million, or 16.3%, compared to the fiscal 2008 second quarter. However, excluding a $6.6 million foreign currency translation effect and a decrease of $3.3 million of non-recurring costs related to our Cost Savings Initiative and Pan European Transformation projects, the net decrease in selling, general and administrative expenses would have been $11.7 million or 9.1%.

Adjusted EBITDA in the fiscal 2009 second quarter was $50.5 million compared to $58.1 million in the fiscal 2008 second quarter. The Company defines Adjusted EBITDA as earnings before interest, income taxes, gain from early debt extinguishment, depreciation and amortization, excluding the impact of transaction related costs incurred in connection with its May 2007 acquisition and other non-recurring or non-cash expenses, and normalizing occupancy costs for certain rent-related adjustments.

At August 1, 2009, cash and cash equivalents were $182.4 million and $194.0 million continued to be drawn on the Company's Revolving Credit Facility. As previously disclosed, the Company drew the full available amount under the facility during the 2008 third quarter in order to preserve the availability of the commitment because a member of the facility syndicate, Lehman Brothers, filed for bankruptcy. The agent bank has not yet found a replacement for Lehman Brothers in the facility syndicate, or arranged for the assumption of Lehman Brothers' commitment by a creditworthy entity. The Company will continue to assess whether to pay down all or a portion of this outstanding balance based on various factors, including the creditworthiness of other syndicate members and general economic conditions.

We used cash in operating activities of $11.1 million in the fiscal 2009 second quarter. This was net of $47.7 million of interest payments. Capital expenditures during the 2009 second quarter were $5.9 million, of which $4.3 million related to new store openings and remodeling projects, compared with $16.0 million of capital expenditures during the second quarter 2008. During the fiscal 2009 second quarter, we also paid $10.0 million to retire $27.8 million of our Senior Subordinated Notes, which generated a gain on early debt extinguishment of $17.1 million.

    Store Count as of:     August 1, 2009   January 31, 2009   August 2, 2008
                           --------------   ----------------   --------------

    North America               2,001             2,026            2,142
    Europe                        947               943              911
                           --------------   ----------------   --------------
       Subtotal Company-Owned   2,948             2,969            3,053
                           --------------   ----------------   --------------
    Joint Venture                 212               214              205
    Franchise                     194               196              175
                           --------------   ----------------   --------------
       Subtotal Non-Owned         406               410              380
                           --------------   ----------------   --------------
    Total                       3,354             3,379            3,433
                           ==============   ================   ==============

Conference Call Information

The Company will host its second quarter conference call on September 10th, at 10:00 a.m. (EDT). The call-in number is 210-839-8081 and the password is "Claires." A replay will be available through September 17, 2009. The replay number is 402-530-7636 and the password is 25247. The conference call is also being webcast and archived on the Company's corporate website at http://www.clairestores.com, where it can be accessed by clicking on the "Events" link located under "Financial Information" for a replay or download as an MP3 file.

Company Overview

Claire's Stores, Inc. is a leading specialty retailer of value-priced fashion accessories and jewelry for girls and young women through its two store concepts: Claire's(R) and Icing(R). While the latter operates only in North America, Claire's operates worldwide. As of August 1, 2009, Claire's Stores, Inc. operated 2,948 stores in North America and Europe. Claire's Stores, Inc. also operates through its subsidiary, Claire's Nippon, Co., Ltd., 212 stores in Japan as a 50:50 joint venture with AEON, Co., Ltd. The Company also franchises 194 stores in the Middle East, Turkey, Russia, South Africa, Poland and Guatemala.

Forward-looking Statements:

This press release contains "forward-looking statements" which represent the Company's expectations or beliefs with respect to future events. Statements that are not historical are considered forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. Those factors include, without limitation: changes in consumer preferences and consumer spending; competition; our level of indebtedness, general economic conditions; general political and social conditions such as war, political unrest and terrorism; natural disasters or severe weather events; currency fluctuations and exchange rate adjustments; uncertainties generally associated with the specialty retailing business; 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; inability to design and implement new information systems; delays in anticipated store openings or renovations; uncertainty that definitive financial results may differ from preliminary financial results due to, among other things, final U.S. GAAP adjustments; changes in applicable laws, rules and regulations, including changes in federal, state or local regulations governing the sale of our merchandise, particularly regulations relating to the content in our merchandise, and employment laws relating to overtime pay, tax laws and import laws; product recalls; loss of key members of management; increases in the cost of labor; labor disputes; unwillingness of vendors and service providers to supply goods or services pursuant to historical customary credit arrangements; increases in the cost of borrowings; unavailability of additional debt or equity capital; and the impact of our substantial indebtedness on our operating income, and our ability to grow. These and other applicable risks, cautionary statements and factors that could cause actual results to differ from the Company's forward-looking statements are included in the Company's filings with the SEC, specifically as described in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2009 filed with the SEC on April 28, 2009. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. The historical results contained in this press release are not necessarily indicative of the future performance of the Company.

Additional Information:

Note: Other Claire's Stores, Inc. press releases, a corporate profile and the most recent Form 10-K and Form 10-Q reports are available on Claire's corporate website at: http://www.clairestores.com.

Contact Information:

J. Per Brodin, Senior Vice President and Chief Financial Officer

Phone: (954) 433-3900, Fax: (954) 442-3999 or E-mail, investor.relations@claires.com

                     CLAIRE'S STORES, INC. AND SUBSIDIARIES
                   UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
                                 OF OPERATIONS
                                 (In thousands)

    SECOND FISCAL QUARTER
                                               Three Months    Three Months
                                                  Ended           Ended
                                              August 1, 2009  August 2, 2008
                                              --------------  --------------
    Net sales                                    $314,196        $359,973
    Cost of sales, occupancy and
     buying expenses                              158,088         180,267
                                              --------------  --------------
    Gross profit                                  156,108         179,706
                                              --------------  --------------
    Other expenses (income):
      Selling, general and administrative,
       excluding severance costs                  110,813         132,421
      Depreciation and amortization                18,703          22,561
      Severance and transaction-related costs          25             296
      Other (income) expense, net                    (722)           (549)
                                              --------------  --------------
                                                  128,819         154,729
                                              --------------  --------------
    Operating income                               27,289          24,977
    Gain on early debt extinguishment              17,104               -
    Interest expense (income), net                 45,329          48,739
                                              --------------  --------------
    Loss before income taxes                         (936)        (23,762)
    Income tax expense (benefit)                    2,797          (6,831)
                                              --------------  --------------
    Net loss                                      $(3,733)       $(16,931)
                                              ==============  ==============

    YEAR TO DATE

                                                Six Months     Six Months
                                                   Ended          Ended
                                              August 1, 2009  August 2, 2008
                                              --------------  --------------
    Net sales                                    $607,294        $686,976
    Cost of sales, occupancy and
     buying expenses                              309,267         352,249
                                              --------------  --------------
    Gross profit                                  298,027         334,727
                                              --------------  --------------
    Other expenses (income):
      Selling, general and administrative,
       excluding severance costs                  219,282         263,756
      Depreciation and amortization                36,858          44,662
      Severance and transaction-related costs         374           6,264
      Other (income) expense, net                    (308)         (1,109)
                                              --------------  --------------
                                                  256,206         313,573
                                              --------------  --------------
    Operating income                               41,821          21,154
    Gain on early debt extinguishment              17,104               -
    Interest expense (income), net                 90,563          97,396
                                              --------------  --------------
    Loss before income taxes                      (31,638)        (76,242)
    Income tax expense (benefit)                    1,118         (23,741)
                                              --------------  --------------
    Net loss                                     $(32,756)       $(52,501)
                                              ==============  ==============



                     CLAIRE'S STORES, INC. AND SUBSIDIARIES
                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

                                          August 1, 2009    January 31, 2009
                                          --------------    ----------------
                                             (In thousands, except share
                                                and per share amounts)
    ASSETS
    Current assets:
     Cash and cash equivalents               $182,350           $204,574
     Inventories                              108,193            103,691
     Prepaid expenses                          44,256             31,837
     Other current assets                      26,761             27,079
                                          --------------    ----------------
      Total current assets                    361,560            367,181
                                          --------------    ----------------
    Property and equipment:
     Land and building                         22,288             22,288
     Furniture, fixtures and
      equipment                               157,624            143,702
     Leasehold improvements                   226,644            214,007
                                          --------------    ----------------
                                              406,556            379,997
     Less accumulated depreciation
      and amortization                       (153,914)          (113,926)
                                          --------------    ----------------
                                              252,642            266,071
                                          --------------    ----------------

    Intangible assets, net of
     accumulated amortization of
     $26,566 and $19,731, respectively        588,325            587,125
    Deferred financing costs, net of
     accumulated amortization of $23,600
     and $17,646, respectively                 53,990             59,944
    Other assets                               56,585             56,428
    Goodwill                                1,544,346          1,544,346
                                          --------------    ----------------
                                            2,243,246          2,247,843
                                          --------------    ----------------

    Total assets                           $2,857,448         $2,881,095
                                          ==============    ================

    LIABILITIES AND STOCKHOLDER'S DEFICIT

    Current liabilities:
     Trade accounts payable                   $55,071            $53,237
     Current portion of long-term debt         14,500             14,500
     Income taxes payable                       5,338              6,477
     Accrued interest payable                  13,050             13,316
     Accrued expenses and other
      current liabilities                     102,772            107,974
                                          --------------    ----------------
      Total current liabilities               190,731            195,504
                                          --------------    ----------------

    Long-term debt                          2,357,760          2,373,272
    Revolving Credit Facility                 194,000            194,000
    Deferred tax liability                    114,023            112,829
    Deferred rent expense                      21,116             18,462
    Unfavorable lease obligations
     and other long-term liabilities           39,926             42,871
                                          --------------    ----------------
                                            2,726,825          2,741,434
                                          --------------    ----------------

    Commitments and contingencies                   -                  -

    Stockholder's deficit:
     Common stock par value $0.001
      per share; authorized 1,000 shares;
      issued and outstanding 100 shares             -                  -
     Additional paid-in capital               612,319            609,427
     Accumulated other comprehensive
      income (loss), net of tax                 3,280            (22,319)
     Retained deficit                        (675,707)          (642,951)
                                          --------------    ----------------
                                              (60,108)           (55,843)
                                          --------------    ----------------
    Total liabilities and
     Stockholder's deficit                 $2,857,448          2,881,095
                                          ==============    ================

Net income (loss) reconciliation to EBITDA and Adjusted EBITDA

EBITDA represents net income (loss) before provision for income taxes, gain on early debt extinguishment, interest income and expense, impairment of assets and depreciation and amortization. Adjusted EBITDA represents EBITDA further adjusted to exclude non-cash and unusual items. Management uses Adjusted EBITDA as an important tool 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 provides 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 U.S. GAAP, are not intended to represent cash flow from operations under U.S. 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 U.S. GAAP results to provide a more complete understanding of the factors and trends 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 U.S. 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 non-recurring expenses which qualify as extraordinary items 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.

While management believes that these measures provide useful information to investors, the SEC may require that EBITDA and Adjusted EBITDA be presented differently or not at all in future filings we will make with the SEC.

                    CLAIRE'S STORES, INC. AND SUBSIDIARIES
                                ADJUSTED EBITDA
                                  (UNAUDITED)
                                (IN THOUSANDS)

                                    Three      Three       Six        Six
                                    Months     Months     Months     Months
                                    Ended      Ended      Ended      Ended
                                   August 1,  August 2,  August 1,  August 2,
                                     2009       2008       2009       2008
                                   ---------  ---------  ---------  ---------

    Net loss                       $(3,733)   $(16,931)  $(32,756) $(52,501)
    Income tax expense (benefit)     2,797      (6,831)     1,118   (23,741)
    Gain on early debt
     extinguishment                (17,104)          -    (17,104)        -
    Interest expense                45,368      49,096     90,675    98,283
    Interest income                    (39)       (357)      (112)     (887)
    Depreciation and amortization   18,703      22,561     36,858    44,662
                                   ---------  ---------  ---------  ---------
    Reported EBITDA                 45,992      47,538     78,679    65,816
    Book to cash rent adjustment (a)   594       1,556      1,075     3,623
                                   ---------  ---------  ---------  ---------
    EBITDA after rent related
     adjustment                     46,586      49,094     79,754    69,439
    Amortization of intangible
     assets (b)                        514         574      1,008     1,102
    Loss (income) in equity of
     joint venture (c)                 323         (32)     1,188       101
    Loss (gain) on retirement of
     property and equipment, net (d)     3         (81)         8       (54)
    Gain on sale of intangible
     assets (e)                       (598)          -       (598)        -
    Stock compensation expense (f)   2,371       1,148      2,892     3,915
    Legal settlement & related
     costs (g)                           -         161          -       373
    Relocation costs (h)               289         744        576       744
    Consulting expenses (i)              -         297          -     1,132
    Fixture leases (j)                   -          96          -       255
    Management fee (k)                 750         750      1,500     1,500
    Severance and transaction
     related costs (l)                  25         296        374     6,264
    Pan European Transformation
     costs (m)                          52       3,428         30     5,983
    Cost Savings Initiative costs (n)  181       1,671         14     1,671
                                   ---------  ---------  ---------  ---------
    Adjusted EBITDA                $50,496     $58,146    $86,746   $92,425
                                   =========  =========  =========  =========


    The following footnotes relate to the table above:

    (a) Represents 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.

    (b) Represents non-cash amortization of lease rights.

    (c) Represents non-cash equity loss (income) from our 50:50 joint
        venture with AEON Co. Ltd.

    (d) Represents non-cash gains and losses on store related property and
        equipment primarily associated with remodels, relocations and
        closures.

    (e) Represents the gain on sale of lease rights upon exiting certain
        European locations.

    (f) Represents non-cash stock compensation expense.

    (g) Represents a legal settlement and fees in connection with wage and
        hour class action litigation in California.

    (h) Consists of costs, including third party charges and compensation,
        incurred in conjunction with the relocation of new employees.

    (i) Represents non-recurring consulting expenses.

    (j) Represents non-cash amortization expenses associated with synthetic
        leases of store fixtures. The Company has not entered into any new
        synthetic leases after 2001.

    (k) Represents the management fee paid to Apollo Management and
        Tri-Artisan Capital Partners.

    (l) Consists of severance, legal, financial advisory, compensation,
        and other acquisition related expenses.

    (m) Represents costs of our strategic Pan-European Transformation
        project.  These costs consist primarily of severance, consulting
        fees, compensation and legal expense which are included in buying
        and SG&A expenses.

    (n) Represents the costs relating to our Cost Savings Initiative
        project.  These costs consist primarily of consulting fees.

SOURCE Claire's Stores, Inc.

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