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 October 31, 1998
OR
( )Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-8899
CLAIRE'S STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-0940416
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 S.W. 129th Avenue Pembroke Pines, Florida 33027
(Address of principal executive offices) (Zip Code)
(954) 433-3900
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
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 .
The number of shares of the registrant's Common Stock and Class A Common
Stock outstanding as of November 26, 1998 was 48,008,314 and 2,893,688
respectively, excluding treasury shares.
<PAGE>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at October 31, 1998 and
January 31, 1998. 3
Consolidated Statements of Income for the Three and Nine
Months Ended October 31, 1998 and November 1, 1997. 4
Consolidated Statements of Cash Flows for the Nine Months
Ended October 31, 1998 and November 1, 1997. 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations 8-9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
Oct. 31, Jan.31,
ASSETS 1998 1998(1)
Current assets: (In thousands)
<S> <C> <C>
Cash and cash equivalents $ 89,825 $122,491
Short-term investments 13,852 10,215
Inventories 89,891 52,437
Prepaid expenses and other current
assets 24,265 19,055
Total current assets 217,833 204,198
Property and equipment:
Land and buildings 13,579 8,827
Furniture, fixtures and equipment 116,276 100,976
Leasehold improvements 88,265 80,575
218,120 190,378
Less accumulated depreciation and
amortization (109,239) (97,810)
108,881 92,568
Other assets 23,369 20,301
$350,083 $317,067
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 31,432 $ 20,065
Income taxes payable 5,383 10,691
Accrued expenses 18,346 17,442
Dividends payable 55 1,466
Total current liabilities 55,216 49,664
Long-term debt - 1,600
Deferred credits 10,461 8,545
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 2,893,720 and 2,904,745 shares 145 145
Common stock par value $.05 per share;
authorized 150,000,000 shares, issued
47,897,032 and 47,645,701 shares 2,394 2,296
Additional paid-in capital 22,771 22,139
Accumulated other comprehensive income (3,111) (558)
Retained earnings 262,659 233,688
284,858 257,710
Treasury stock, at cost, 109,882 shares (452) (452)
284,406 257,258
Commitments and contingencies
$350,083 $317,067
(1) Restated to reflect the merger with Lux Corporation.
</TABLE>
<PAGE>
<TABLE>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED
OCTOBER 31, 1998 AND NOVEMBER 1, 1997
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands, except per share amounts)
Oct. 31, Nov. 1, Oct. 31, Nov. 1,
1998 1997(1) 1998 1997(1)
<S> <C> <C> <C> <C>
Net sales $162,346 $124,622 $446,737 $363,245
Cost of sales, occupancy
and buying expenses 82,554 62,107 224,104 181,475
Gross profit 79,792 62,515 222,633 181,770
Other expenses:
Selling, general and
administrative 58,949 42,526 158,637 124,503
Depreciation and
amortization 5,501 4,606 15,820 13,182
Interest income, net and
other income (1,623) (2,833) (4,780) ( 5,180)
62,827 44,299 169,677 132,505
Income before income
taxes 16,965 18,216 52,956 49,265
Income taxes 6,272 6,829 19,591 18,472
Net income 10,693 11,387 33,365 30,793
Other comprehensive income,
net of tax:
Foreign currency
translation adjustments 86 7 (257) (102)
Unrealized losses on
securities (1,601) - (1,351) -
Comprehensive income $ 9,178 $ 11,394 $ 31,757 $ 30,691
Basic net income per
share $ .21 $ .23 $ .66 $ .61
Diluted net income per
share $ .21 $ .22 $ .65 $ .60
Dividends per common
share $ .04 $ .03 $ .12 $ .09
Dividends per Class A
common share $ .02 $ .015 $ .06 $ .045
Average common shares
outstanding - Basic 50,677 50,271 50,604 50,178
Average common shares
outstanding - Diluted 51,047 51,216 51,086 51,108
(1) Restated to reflect the merger with Lux Corporation.
</TABLE>
<PAGE>
<TABLE>
CLAIRE'S STORES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
OCTOBER 31, 1998 AND NOVEMBER 1, 1997
(Unaudited)
<CAPTION>
Nine Months Ended
(In thousands)
Oct 31, Nov 1,
1998 1997(1)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 33,365 $ 30,793
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 15,820 13,182
Tax benefit from options 450 -
Loss on retirement of property
and equipment 960 1,101
Changes in assets and
liabilities:
(Increase) in -
Inventories (37,454) (15,897)
Prepaid expenses and other assets (8,278) (2,591)
Increase (decrease) in -
Trade accounts payable 11,367 5,894
Income taxes payable (5,308) (9,755)
Accrued expenses 904 544
Deferred credits 1,916 1,242
Net cash provided by
operating activities 13,742 24,513
Cash flows from investing activities:
Acquisition of property and
equipment which represents net cash
used in investing activities (33,093) (25,662)
Cash flows from financing activities:
Principal (payments) borrowings on debt (1,600) 1,300
Purchases of short-term investments, net (5,781) -
Proceeds from stock options exercised 280 996
Dividends paid (5,806) (4,334)
Net cash used in financing
activities (12,907) (2,038)
Effect of foreign currency exchange
rate changes on cash and cash
equivalents (408) (162)
Net decrease in cash and
cash equivalents (32,666) (3,349)
Cash and cash equivalents at beginning
of period 122,491 94,335
Cash and cash equivalents at end of period $ 89,825 $ 90,986
(1) Restated to reflect the merger with Lux Corporation.
</TABLE>
<PAGE>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) which are,
in the opinion of management, necessary to 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 the Annual
Report on Form 10-K for the year ended January 31, 1998 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. The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per share", in the fiscal year ended January 31, 1998.
In accordance with SFAS 128, both basic net income per share and diluted
net income per share have been presented in the financial statements.
Earnings per share for all periods have been restated to reflect the
provisions of this statement. 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 (50,677,000 and
50,604,000 shares for the three and nine months ended October 31, 1998,
respectively and 50,271,000 and 50,178,000 shares for the three and nine
months ended November 1, 1997, respectively). Diluted net income per
share includes the dilutive effect of stock options (51,047,000 and
51,086,000 shares for the three and nine months ended October 31, 1998,
respectively and 51,216,000 and 51,108,000 shares for the three and nine
months ended November 1, 1997, respectively). Options to purchase
592,500 shares and 145,834 shares of common stock at prices ranging from
$17.92 to $22.88 and $19.73 to $22.88 for the three and nine months
ended October 31, 1998, respectively, and options to purchase 50,000
shares and 123,333 shares of common stock at $22.38 per share and prices
ranging from $19.73 to $22.38 per share, respectively, were outstanding
for the three and nine months ended November 1, 1997, 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 period.
3. Effective February 1, 1998, the Company adopted the SFAS No. 130,
"Reporting Comprehensive Income". This statement requires that all items
recognized under accounting standards as components of comprehensive
income be reported with the same prominence as other financial statement
items.
4. In April 1998, the Company completed its acquisition of Lux Corporation
("Lux"), a closely held specialty apparel chain operating under the name
of "Mr. Rags," in a stock-for-stock merger. The stores specialize in
selling teen unisex clothing and accessories. In connection with the
merger, the Company issued 2,070,286 shares of common stock in exchange
for all the outstanding common stock of Lux. The merger has been
accounted for as a pooling of interests business combination.
Accordingly, the accompanying unaudited consolidated financial statements
have been restated to include the accounts of Lux as if the companies had
combined at the beginning of the first period presented. Prior to the
merger, Lux's fiscal year ended on November 30. In recording the business
combination, Lux's prior year financial statements have been restated to
conform with the Company's fiscal year end.
<PAGE>
In November 1998, the Company completed its acquisition of Bijoux One, a
privately held 53-store fashion accessory chain. Bijoux One,
headquartered in Zurich, Switzerland, became a wholly-owned subsidiary of
the Company. The transaction will be accounted for as a purchase. The
purchase price was comprised of cash and the issuance of 100,000 shares
of the Company's stock. Excess purchase price over fair market value of
the underlying assets was allocated to goodwill, which will be amortized
over twenty five years.
5. In prior years, certain computer programs were written using two digits
rather than four to define the applicable year. These programs were
written without considering the impact of the upcoming change in the
century and may experience problems handling dates beyond the year 1999.
This could cause certain computer applications to fail or to create
erroneous results unless corrective measures are taken.
The Company has, however, been assessing the impact that the Year 2000
issue will have on its computer systems, and in response to these
assessments, which are ongoing, the Company has developed a plan to
inventory critical systems and develop solutions to those systems that
are found to have date-related deficiencies. Project plans call for the
completion of the solution implementation phase and testing of those
solutions by the end of 1999, prior to any anticipated impact on the
Company's systems.
In addition to the Company's internal systems and hardware, the Company
is in the process of assessing the Year 2000 readiness of its vendors.
As a part of this assessment, the Company has asked each major vendor to
inform the Company of its (the vendors') Year 2000 readiness and
initiatives. To the extent that the Company's vendors do not provide the
Company with satisfactory evidence of their readiness for the Year 2000
issue, contingency plans will be developed.
The Company expects that the maximum cost which could be incurred in
conjunction with the testing and remediation of all hardware and software
systems and applications would be approximately $250,000 through
completion in 1999, of which, approximately $125,000 has been incurred
to date. Such costs have been and will be funded by the Company's
operating cash flows.
The cost of the Company's plan to address the Year 2000 issue and the
anticipated date on which the Company plans to complete the necessary
Year 2000 conversion efforts are based on management's best estimates,
which were derived from numerous assumptions of future events, including
the availability of resources, vendor remediation plans, and other
factors. As a result, there can be no assurance that the Company, or
other companies with whom the Company conducts business, will
successfully address the Year 2000 problem in a timely manner, or at all,
or that the Year 2000 problem will not have a material adverse effect on
the Company's business or operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The analysis below takes into account that prior year's balances have been
restated to reflect the pooling of interests with Lux Corporation as if the
companies had combined at the beginning of the first period presented. For a
further discussion of this transaction, see Note 4 to the Company's unaudited
consolidated financial statements herein.
Net sales for the three and nine months ended October 31, 1998 increased
approximately 30% and 23%, respectively, compared to the comparable periods
ended November 1, 1997. The increases for the periods resulted primarily
from the addition of a net 180 stores, same-store sales increases of 10% and
5% in the three and nine month periods ended October 31, 1998 and sales from
the Company's Just Nikki, Inc.'s catalog operations which did not exist
during the same periods last year. The same-store sales increases were
primarily due to increases in the number of transactions per store and the
average retail price per transaction.
Cost of sales, occupancy and buying expenses increased 33% and 23%,
respectively, for the three and nine months ended October 31, 1998 over the
comparable periods ended November 1, 1997. The principal reasons for these
increases were the rise in the number of stores and the volume of merchandise
sold. As a percentage of net sales, these expenses increased to 50.8% and
50.2% for the three and nine months ended October 31, 1998 compared to 49.8%
and 50.0% for the comparable periods ended November 1, 1997. These increases
as a percentage of sales were due to a more aggressive promotional strategy
and continuing changes in the merchandise product mix offered for sale.
Selling, general and administrative expenses (S,G&A), as a percentage of
sales for the three and nine months ended October 31, 1998 were 36.3% and
35.5%, respectively, compared to 34.1% and 34.3%, respectively, for the
comparable periods ended November 1, 1997. This increase was primarily
attributable to the costs associated with the launch of the Company's Just
Nikki, Inc.'s catalog operations.
Depreciation and amortization as a percentage of sales was approximately 3.5%
for the three and nine months ended October 31, 1998, which was comparable to
the three and nine months ended November 1, 1997.
Interest income, net and other income, totaled $1,623,000 and $4,780,000 for
the three and nine month periods ended October 31, 1998, respectively,
compared to interest income, net and other income of $2,833,000 and
$5,180,000 for the three and nine month periods ended November 1, 1997,
respectively. Included in the balances at November 1, 1997 is a gain
realized from the sale of investments of approximately $1,560,000. Excluding
this amount from the November 1, 1997 balances, the balances at October 31,
1998 actually increased $350,000 and $1,160,000 for the three and nine month
periods. These increases were due to an increase in invested cash during the
three and nine months ended October 31, 1998, which averaged approximately
$119,100,000 and $123,100,000, respectively. During the three and nine
months ended November 1, 1997, invested cash averaged approximately
$99,000,000 and $96,900,000, respectively.
<PAGE>
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
Net cash decreased $32,666,000 for the nine months ended October 31, 1998 due
to net cash used in the acquisition of property and equipment totaling
$33,093,000, the payment of dividends of $5,806,000, the purchase of
short-term investments of $5,781,000 and the payment of long-term debt of
$1,600,000. These were offset by net cash provided by operating activities
of $13,742,000 and the proceeds from stock options exercised totaling
$280,000.
Inventory at October 31, 1998 increased 71% compared to the inventory balance
at the end of the Company's January 31, 1998 fiscal year. The increase is
mainly attributable to the increase in the number of stores, the same-store
sales currently being achieved and the inventory buildup for the Christmas
selling season. The Company believes overall inventory levels are
appropriate given the current economic environment and the level of sales
currently being achieved.
The Company opened 192 stores in the nine months ended October 31, 1998 and
remodeled 69 stores.
At October 31, 1998, the Company had available a $10 million credit line with
a bank to finance the Company's letters of credit and working capital
requirements. This credit facility matures January 31, 1999. The Company
believes that internally generated funds and borrowings available under its
credit agreements will be sufficient to meet its current operating needs and
its presently anticipated required capital expenditures.
Special Note Regarding Forward-Looking Statements
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 (the "Reform Act"), including any statements
that may be contained in the foregoing "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 safe harbor compliance statement for forward-looking
statements in the Company's Annual Report on Form 10-K for the year ended
January 31, 1998, and that statement is 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.
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
On November 11, 1998, the Company issued 100,000 shares of its
common stock in connection with its acquisition of Bijoux One. The
issuance was made in reliance upon the exemption from the registration
provisions of the Securities Act of 1933, as amended (the "Act"),
provided by Rule 506 of Regulation D promulgated under Section 4(2) of
the Act.
Item 5. Other Information
Stockholder Proposals for Annual Meeting
Stockholder proposals intended to be presented at the 1999
annual stockholders' meeting must be received by the Company at its
principal executive offices (3 Southwest 129th Avenue, Pembroke Pines,
Florida 33027) by April 7, 1999.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule (for SEC use only)
99.1 Press Release of Claire's Stores, Inc. dated November 11, 1998
b) Reports on Form 8-K
Not Applicable
<PAGE>
SIGNATURE
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, 1998 /s/ Ira D. Kaplan
Ira D. Kaplan
Senior Vice President, Chief Financial
Officer and Treasurer
(Mr. Kaplan is the Senior Vice
President, Chief Financial Officer and
Treasurer and has been duly authorized
to sign on behalf of the registrant)
<PAGE>
SIGNATURE
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, 1998
Ira D. Kaplan
Senior Vice President, Chief Financial
Officer and Treasurer
(Mr. Kaplan is the Senior Vice President,
Chief Financial Officer and Treasurer and
has been duly authorized to sign on
behalf of the registrant)
<PAGE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-30-1999 JAN-30-1999
<PERIOD-START> AUG-02-1998 FEB-01-1998
<PERIOD-END> OCT-31-1998 OCT-31-1998
<CASH> 89,825 89,825
<SECURITIES> 13,852 13,852
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 89,891 89,891
<CURRENT-ASSETS> 217,833 217,833
<PP&E> 218,120 218,120
<DEPRECIATION> 108,881 108,881
<TOTAL-ASSETS> 350,083 350,083
<CURRENT-LIABILITIES> 55,216 55,216
<BONDS> 0 0
0 0
0 0
<COMMON> 2,539 2,539
<OTHER-SE> 281,867 281,867
<TOTAL-LIABILITY-AND-EQUITY> 350,083 350,083
<SALES> 162,346 446,737
<TOTAL-REVENUES> 162,346 446,737
<CGS> 0 0
<TOTAL-COSTS> 82,554 224,104
<OTHER-EXPENSES> 62,827 169,677
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 16,965 52,956
<INCOME-TAX> 6,272 19,591
<INCOME-CONTINUING> 10,693 33,365
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,693 33,365
<EPS-PRIMARY> .21 .66
<EPS-DILUTED> .21 .65
</TABLE>
