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 April 29, 2000
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 33027
Pembroke Pines, Florida (Zip Code)
(Address of principal executive offices)
(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 May 27, 2000 was 48,389,994 and 2,861,361, respectively,
excluding treasury shares.
<PAGE>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
---------
PART I. FINANCIAL INFORMATION
----------------------------------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at April 29, 2000 and
January 29, 2000. 3
Condensed Consolidated Statements of Income and Comprehensive
Income for the Three Months Ended April 29, 2000 and
May 1, 1999. 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended April 29, 2000 and May 1, 1999. 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 7-9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
2
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
APR. 29, JAN. 29,
2000 2000
---------- ----------
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 110,188 $ 137,414
Short-term investments 5,972 3,456
Inventories 113,130 109,464
Prepaid expenses and other current assets 50,474 39,684
--------- ---------
Total current assets 279,764 290,018
--------- ---------
Property and equipment:
Land and building 17,642 17,568
Furniture, fixtures and equipment 162,364 156,688
Leasehold improvements 130,910 129,767
--------- ---------
310,916 304,023
Less accumulated depreciation and amortization (143,145) (137,244)
--------- ---------
167,771 166,779
--------- ---------
Goodwill, net 216,337 211,982
Other assets 35,434 33,320
--------- ---------
251,771 245,302
-------- ---------
$ 699,306 $ 702,099
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable to bank $ 11,792 $ 8,759
Trade accounts payable 44,865 35,911
Income taxes payable 5,038 17,149
Dividends payable 2,046 2,045
Accrued expenses 33,883 32,991
--------- ---------
Total current liabilities 97,624 96,855
--------- ---------
Long term liabilities:
Long term debt 189,500 192,000
Deferred credits 14,770 14,458
--------- ---------
204,270 206,458
--------- ---------
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 2,861,852
shares and 2,868,380 shares 143 143
Common stock par value $.05 per share; authorized
150,000,000 shares, issued 48,389,503 shares and
48,374,326 shares 2,419 2,419
Additional paid-in capital 29,343 29,291
Accumulated other comprehensive income (3,657) (228)
Retained earnings 369,616 367,613
--------- ---------
397,864 399,238
Treasury stock, at cost, (109,882 shares) (452) (452)
--------- ---------
397,412 398,786
--------- ---------
Commitments and contingencies
$ 699,306 $ 702,099
========= =========
See accompanying notes to condensed consolidated financial statements.
-----------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED
APR. 29, MAY 1,
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
Net sales $232,000 $170,663
Cost of sales, occupancy and buying expenses 128,396 84,993
--------- --------
Gross profit 103,604 85,670
--------- --------
Other expenses:
Selling, general and administrative 84,791 59,111
Depreciation and amortization 10,543 6,289
Interest expense (income), net 1,940 (1,634)
--------- --------
97,274 63,766
--------- --------
Income from continuing operations before
income taxes 6,330 21,904
Income taxes 2,337 8,104
--------- --------
Net income 3,993 13,800
--------- --------
Other comprehensive income:
Foreign currency translation adjustments (3,429) 232
Unrealized gain on securities - 2,540
--------- --------
Comprehensive income $ 564 $ 16,572
======== ========
Net income per share:
Basic $ 0.08 $ 0.27
======== ========
Diluted $ 0.08 $ 0.27
======== ========
Average common shares outstanding - Basic 51,139 50,854
======== ========
Average common shares outstanding - Diluted 51,325 51,332
======== ========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
APR. 29, MAY 1,
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,993 $ 13,800
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,543 6,289
Loss on retirement of property and equipment 372 220
Changes in assets and liabilities:
Increase in -
Inventories (3,109) (4,620)
Prepaid expenses and other assets (6,883) (5,399)
Increase (decrease) in -
Trade accounts payable 7,262 11,165
Income taxes payable (11,875) (4,473)
Accrued expenses (457) (5,655)
Deferred credits 312 680
-------- --------
Net cash provided by operating activities 158 12,007
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (9,022) (9,906)
Sale (purchase) of short-term investments, net (2,517) 10,053
Acquisition of business, net of cash acquired (9,548) (18,000)
-------- --------
Net cash used in investing activities (21,087) (17,853)
-------- --------
Cash flows from financing activities:
Principal payments on debt (927) -
Proceeds from stock options exercised 49 965
Dividends paid (1,990) (1,976)
-------- --------
Net cash used in financing activities (2,868) (1,011)
-------- --------
Effect of foreign currency exchange rate changes (3,429) 180
-------- --------
Net decrease in cash and cash equivalents (27,226) (6,677)
Cash and cash equivalents at beginning of period 137,414 117,546
-------- --------
Cash and cash equivalents at end of period $110,188 $110,869
======== ========
See accompanying notes to condensed consolidated financial statements.
-----------------------------------------------------------------------
</TABLE>
5
<PAGE>
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 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
29, 2000 filed with the Securities and Exchange Commission. Due to the seasonal
nature of the Company's business, the results of operations for the first three
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 570,500 and 11,806 shares of common stock,
at prices ranging from $18.63 to $30.25 per share and at a price of $28.81 per
share, respectively, were outstanding for the quarters ended April 29, 2000 and
May 1, 1999, 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 quarter.
3. In February 2000, the Company completed its acquisition of Cleopatre, a
privately held 42 store fashion accessory chain with its headquarters in Paris,
France. The transaction was accounted for as a purchase. The purchase price
was approximately $11 million. The excess purchase price over fair market value
of the underlying assets was allocated to goodwill, which will be amortized over
twenty-five years.
4. The following unaudited pro forma financial information gives effect to
the acquisition of Afterthoughts as if it had occurred on February 1, 1998.
This unaudited pro forma financial information includes the effects of (a)
amortization of goodwill; (b) the interest expense, net impact of the funds used
and borrowed to consummate the acquisition and (c) the federal and state income
taxes relating to the other adjustments at a combined statutory rate of 38%.
Prior to the acquisition, Afterthoughts operated as a division of subsidiaries
of the Venator Group, Inc. ("Venator") and certain overhead costs and other
expenses were allocated to Afterthoughts by Venator. Accordingly, the unaudited
pro forma financial information includes such overhead costs and other expenses.
The unaudited pro forma financial information may not be comparable to and may
not be indicative of the Company=s results of operations subsequent to the
acquisition because Afterthoughts was not under common control or management and
had different capital structures during the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 1,
1999
--------
(In thousands, except for share data)
<S> <C>
Net Sales $221,379
Income before taxes 19,119
Net income 12,006
Earnings per common share, basic 0.24
Earnings per common share, diluted 0.23
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Net sales for the three months ended April 29, 2000 increased approximately 36%
over the comparable period ended May 1, 1999. The increase for the period
resulted primarily from the addition of a net 969 stores (or a 46% increase)
offset by a 4% same-store sales decrease for the quarter. Included in the net
increase in stores for the period are 695 Afterthoughts stores (net of closings
to date) acquired in December 1999 and 42 Cleopatre stores acquired in February
2000.
Cost of sales, occupancy and buying expenses increased 51% for the three months
ended April 29, 2000 over the comparable period ended May 1, 1999. The
principal reason for this increase was the rise in the number of stores and the
volume of merchandise sold. As a percentage of net sales, these expenses were
55.3% for the three months ended April 29, 2000 and 49.8% for the three months
ended May 1, 1999. Due to the same-store sales decrease of 4% in the three
months ended April 29, 2000, rent, rent support and the cost of the
merchandising department, which are relatively fixed in nature, increased 200
basis points as a percentage of sales compared to the three months ended May 1,
1999. The cost of merchandise as a percentage of sales increased 350 basis
points in the three months ended April 29, 2000 compared to the same period
ended May 1, 1999. This increase was due to approximately $8 million of
markdown reserves recorded due to the lack of sales momentum and high inventory
position. The required merchandise reserves were a result of higher than
planned inventory levels and lower than expected sales. This combination caused
inventory at retail to increase 23.5% on a per store basis, thus affecting the
realizable value of inventory on hand.
Selling, general and administrative expenses (S,G&A), as a percentage of sales
for the three months ended April 29, 2000 was 36.5% compared to 34.6% for the
comparable period ended May 1, 1999. This increase was primarily attributable
to the lack of leverage caused by the same-store sales decrease discussed above
and the redundant costs related to the integration of the Afterthoughts
division's operations, which are not expected to be incurred by the Company
after June 2000.
Depreciation and amortization as a percentage of sales was approximately 4.5%
for the three months ended April 29, 2000 as compared to 3.7% for the three
months ended May 1, 1999. The increase as a percentage of sales was primarily a
result of the amortization of goodwill related to the acquisition of the
Afterthoughts division.
Interest expense (income), net was $1,940,000 for the three month period ended
April 29, 2000 compared to ($1,634,000) for the comparable period ended May 1,
1999. This change was primarily due to the interest expense on the Company's
credit facility used to acquire the Afterthoughts stores.
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 approximately $27 million for the three months ended April
29, 2000 due to net cash used for the acquisition of property and equipment
totaling $9,022,000, the payment of dividends of $1,990,000, the payment of
$9,548,000 for the acquisition of Cleopatre in France and the payment
of $14,500,000 of income taxes offset by leveraging trade accounts
payable of $7,262,000.
7
<PAGE>
Inventory at April 29, 2000 increased 3% compared to the inventory balance at
the end of the Company's January 29, 2000 fiscal year. The increase was
attributable to a net increase of 29 stores in the three months ended April 29,
2000 and the additional merchandise needed for the Company's Spring
selling season.
For the three months ended April 29, 2000, the Company opened 51 stores, closed
70 stores and acquired 42 stores ending the quarter with 3,053 stores. In
addition, the Company remodeled 36 stores.
At April 29, 2000, 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, the first installment of which is due and payable beginning
December 31, 2000 with future installments, thereafter, payable on a quarterly
basis through December 1, 2004. The Credit Facility is prepayable without
penalty and bears interest for an initial six months at 125 basis points margin
over the London Interbank Borrowing Rate. The margin is then adjusted
periodically based on the Company's performance as it relates to certain
financial measurements. At April 29, 2000, $200 million was outstanding on this
facility.
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 was in compliance with these covenants at April 29, 2000.
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 capital expenditures.
YEAR 2000
----------
As previously reported, over the past several years the Company developed and
implemented a plan to address the anticipated impacts of the so-called Year 2000
problem on our information technology ("IT") systems and on non-IT systems. We
also surveyed selected third parties to determine the status of their Year 2000
compliance programs. In addition, we developed contingency plans specifying
what the Company would do if we or important third parties experienced
disruptions to critical business activities as a result of the Year 2000
problems.
The Company's Year 2000 plan was completed in all material respects prior to the
anticipated Year 2000 failure dates. As of May 27, 2000, the Company has not
experienced any materially important business disruptions or system failures as
a result of Year 2000 issues, nor is it aware of any Year 2000 issues that have
impacted its suppliers or other significant third parties to an extent
significant to the Company. However, Year 2000 compliance has many elements and
potential consequences, some of which may not be foreseeable or may be realized
in future periods. Consequently, there can be no assurance that unforeseen
circumstances may not arise, or that the Company will not in the future identify
equipment or systems which are not Year 2000 compliant.
As of April 29, 2000, the Company's total incremental costs (historical plus
estimated future costs) of addressing Year 2000 issues are estimated to be
approximately $350,000, of which nearly all has been incurred to date. These
costs were funded through operating cash flow.
For further information regarding Year 2000 matters, refer to disclosures under
Forward-Looking Statements below.
8
<PAGE>
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 29, 2000, 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.
PART II. OTHER INFORMATION
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 May 11, 2000
(b) Reports on Form 8-K
None
9
<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: June 9, 2000 /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)
10
<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: June 9, 2000 -----------------------
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
<PAGE>
