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 28, 2000
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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
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 of 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, 2000 was 46,022,667 and 2,848,300, respectively,
excluding treasury shares.
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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
Condensed Consolidated Balance Sheets at October 28, 2000
and January 29, 2000. 3
Condensed Consolidated Statements of Income and Comprehensive
Income for the Three and Nine Months Ended
October 28, 2000 and October 30, 1999. 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended October 28, 2000 and October 30, 1999. 5
Notes to Condensed Consolidated Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 7-9
PART II. OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
OCT. 28, JAN 29,
2000 2000
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(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 84,155 $ 137,414
Short-term investments 457 3,456
Inventories 143,955 109,464
Prepaid expenses and other current assets 31,906 39,684
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Total current assets 260,473 290,018
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Property and equipment:
Land and building 17,765 17,568
Furniture, fixtures and equipment 174,881 156,688
Leasehold improvements 129,897 129,767
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322,543 304,023
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Less accumulated depreciation and amortization (154,670) (137,244)
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167,873 166,779
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Goodwill, net 211,782 211,982
Other assets 37,286 33,320
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249,068 245,302
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$ 677,414 $ 702,099
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 14,190 $ 8,759
Trade accounts payable 44,582 35,911
Income taxes payable 2,729 17,149
Dividends payable 1,950 2,045
Accrued expenses 31,911 32,991
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Total current liabilities 95,362 96,855
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Long term liabilities:
Long term debt 188,289 192,000
Deferred credits 16,388 14,458
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204,677 206,458
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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 2,849,467
shares and 2,868,380 shares 142 143
Common stock par value $.05 per share; authorized
150,000,000 shares issued 48,453,388 shares and
48,374,226 shares 2,423 2,419
Additional paid-in capital 29,641 29,291
Accumulated other comprehensive income (9,284) (228)
Retained earnings 396,737 367,613
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419,659 399,238
Treasury stock, at cost, (2,276,082 shares) (42,284) (452)
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377,375 398,786
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Commitments and contingencies
$ 677,414 $ 702,099
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</TABLE>
See accompanying notes to condensed financial statements.
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<TABLE>
<CAPTION>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 28, 2000 AND OCTOBER 30, 1999
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
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OCT. 28, OCT. 30, OCT. 28, OCT. 30,
2000 1999 2000 1999
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(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 247,536 $ 182,750 $ 731,518 $ 539,503
Cost of sales, occupancy and buying expenses 127,505 92,658 380,951 269,254
--------- --------- --------- ---------
Gross profit 120,031 90,092 350,567 270,249
--------- --------- --------- ----------
Other expenses:
Selling, general and administrative 84,974 64,819 256,685 185,215
Depreciation and amortization 11,079 6,872 32,785 19,595
Interest expense (income), net 2,674 (1,574) 7,016 (4,566)
Gain on investments - - - (3,929)
--------- --------- --------- ---------
98,727 70,117 296,486 196,315
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Income from continuing operations before
income taxes 21,304 19,975 54,081 73,934
Income taxes 7,460 7,249 19,131 27,088
--------- --------- --------- ---------
Net income 13,844 12,726 34,950 46,846
Other comprehensive income:
Foreign currency translation adjustments (3,831) 1,276 (9,056) (236)
--------- --------- --------- ---------
Comprehensive income $ 10,013 $ 14,002 $ 25,894 $ 46,610
========= ========= ========= =========
Net income per share:
Basic $ 0.28 $ 0.25 $ 0.69 $ 0.92
========= ========= ========= =========
Diluted $ 0.28 $ 0.25 $ 0.69 $ 0.91
========= ========= ========= =========
Average common shares outstanding - Basic 49,594 51,043 50,342 50,943
========= ========= ========= =========
Average common shares outstanding - Diluted 49,728 51,271 50,524 51,341
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
OCTOBER 28, 2000 AND OCTOBER 30, 1999
(Unaudited)
NINE MONTHS ENDED
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OCT. 28, OCT. 30,
2000 1999
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(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 34,950 $ 46,846
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 32,785 19,595
Gain on investments - (3,929)
Loss on retirement of property and equipment 1,210 944
Changes in assets and liabilities:
(Increase) decrease in -
Inventories (33,933) (36,675)
Prepaid expenses and other assets 11,270 (7,433)
Increase (decrease) in -
Trade accounts payable 6,978 13,303
Income taxes payable (14,183) (14,705)
Accrued expenses (2,434) (2,096)
Deferred credits 1,930 2,064
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Net cash provided by operating activities 38,573 17,914
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Cash flows from investing activities:
Acquisition of property and equipment (29,081) (34,879)
Sale of short-term investments, net 2,998 23,140
Acquisition of business, net of cash acquired (9,548) (18,000)
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Net cash used in investing activities (35,631) (29,739)
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Cash flows from financing activities:
Purchase of treasury stock (41,831) -
Principal borrowings (payments) on debt 260 (485)
Proceeds from stock options exercised 348 2,554
Dividends paid (5,922) (5,939)
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Net cash used in financing activities (47,145) (3,870)
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Effect of foreign currency exchange rate changes (9,056) (304)
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Net decrease in cash and cash equivalents (53,259) (15,999)
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Cash and cash equivalents at beginning of period 137,414 117,546
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Cash and cash equivalents at end of period $ 84,155 $101,547
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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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 interim
periods' results. 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 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.
Diluted net income per share includes the dilutive effect of stock options.
Options to purchase 560,500 and 885,000 shares of common stock for the three
months ended October 28, 2000 and October 30, 1999, respectively, at prices
ranging from $19.73 to $30.25 per share for both periods, were outstanding 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 periods. Options to purchase 560,500 and
270,000 shares of Common Stock, at prices ranging from $19.73 to $30.25 per
share and from $25.00 to $30.25, respectively, were outstanding for the nine
months ended October 28, 2000 and October 30, 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 nine months.
3. In June 2000, the Company completed its reincorporation from the State of
Delaware to the State of Florida through a merger transaction. In accordance
with generally accepted accounting principles, the merger and resulting
reincorporation have been accounted for as a reorganization of entities under
common control at historical cost in a manner similar to a pooling of interests.
Under this accounting method the assets and liabilities of the combined entities
have been carried forward at their recorded historical book values.
4. 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.
5. 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.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 30, 1999 OCTOBER 30, 1999
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(In thousands, except for share data)
<S> <C> <C>
Net Sales $226,783 $685,662
Income before taxes 13,558 64,813
Net income 8,750 41,000
Earnings per common share, basic 0.17 0.81
Earnings per common share, diluted 0.17 0.79
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Net sales for the three months and nine months ended October 28, 2000,
respectively, increased approximately 35% and 36% over the comparable periods
ended October 30, 1999. The increase for the three month and nine month periods
resulted primarily from the addition of a net 848 stores (including 635
Afterthoughts stores, net of closings to date, acquired in December 1999 and 42
Cleopatre stores acquired in February 2000) and by the same-store sales increase
of 6% for the quarter. Same-store sales for the nine months were even with the
prior year's comparable period. Same-store sales results for the Afterthoughts
stores will be included in the Company's Accessory Division for periods
beginning December 1, 2000. These same-store sales results are expected to be
below those of the Claire's Accessories stores due to a number of factors
relating primarily to the difficult process of integrating Afterthoughts'
operation into Claire's.
Cost of sales, occupancy and buying expenses increased 38% and 41% for the three
months and nine months ended October 28, 2000, respectively, over the comparable
periods ended October 30, 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 51.5% and 52.1% for the three
months and nine months ended October 28, 2000, respectively, and 50.7% and 49.9%
for the comparable periods ended October 30, 1999. Rent, rent support and the
cost of the merchandising department, which are relatively fixed in nature,
increased approximately 60 basis points as a percentage of sales. Due to the
same-store sales being even with the comparable period in the prior year in the
nine months ended October 28, 2000, rent, rent support and the cost of the
merchandising department increased approximately 145 basis points as a
percentage of sales. Additionally, cost of merchandise increased 75 basis
points as a percentage of sales, primarily due to the additional costs incurred
related to the transitional services provided to the Afterthoughts stores.
Selling, general and administrative expenses, as a percentage of sales for the
three months and nine months ended October 28, 2000 were 34.3% and 35.1%,
respectively, compared to 35.5% and 34.3% for the comparable periods ended
October 30, 1999. The decrease as a percentage of sales for the three month
period was caused primarily by leverage in fixed corporate expenses. The
increase for the nine month period as a percentage of sales was primarily
attributable to the redundant costs related to the integration of the
Afterthoughts division's operations. The Company has substantially completed
its integration of Afterthoughts as it relates to store operations, payroll and
human resources, merchandising, planning and distribution, accounting and
finance, real estate and construction and MIS. Throughout the remainder of this
year, the Company will continue its efforts on the integration of marketing,
field operations and the communication of best practices among divisions. Sales
and SG&A were adversely affected as a result of these integration efforts during
the first nine months of this fiscal year. It has been the Company's objective
to close a number of underperforming or duplicative Afterthoughts stores. To
date, 133 stores have been closed or leases not renewed, resulting in 635 stores
remaining at October 28, 2000. Approximately 80 additional stores are scheduled
to close by February 3, 2001.
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Depreciation and amortization as a percentage of sales was approximately 4.5%
for the three and nine months ended October 28, 2000, as compared to 3.8% and
3.6% for the three months and nine months ended October 30, 1999, respectively.
The increase as a percentage of sales for the three month period is a result of
an increase in amortization of goodwill on the acquisition of the Afterthoughts
and Cleopatre stores.
Interest expense, net of interest income, totaled $2,674,000 and $7,016,000 for
the three and nine months ended October 28, 2000, respectively, compared to
interest income, net of interest expense of $1,574,000 and $4,566,000 for the
comparable periods ended October 30, 1999, respectively. This change was
primarily due to the interest expense on borrowings under the Company's credit
facility, which were to substantially fund the acquisition of the Afterthoughts
stores.
Gain on investments totaled $3,929,000 and represents the net realized gain on
investments for the period during the nine months ended October 30, 1999.
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 $53.3 million for the nine months ended October 28, 2000.
This decrease was caused primarily by the acquisition of property and equipment
totaling $29.1 million, the acquisition of Cleopatre of $9.5 million, dividends
paid of $5.9 million and the Company's repurchase of 2,166,200 shares of its
common stock in the open market for $41.8 million. These cash outflows were
offset by cash flow from operations and changes in other asset and liability
accounts.
Inventory at October 28, 2000 increased 32% compared to the inventory balance at
the end of the Company's January 29, 2000 fiscal year. The increase is
attributable to a net increase of 50 stores in the nine months ended October 28,
2000 and the additional merchandise needed to maintain the current sales
momentum as the Company prepares for the holiday selling season.
The Company opened 177 stores in the nine months ended October 28, 2000 and
remodeled 128 stores.
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.
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 October 28, 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.
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RECENT DEVELOPMENTS
Sales for the four weeks ended November 25, 2000 increased 21% to $77,095,000
compared with $63,811,000 reported for the comparable prior year period.
Same-store sales decreased 3% for the month.
If the sales trends as of December 9, 2000 continue, the Company believes that
consolidated net income and earnings per share for the fourth quarter will be
below those of the prior year's fourth quarter.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only)
99.1 Press Release of the Company dated November 16, 2000
(b) Reports on Form 8-K
None
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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.
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(Registrant)
Date: December 12, 2000 /s/ Ira D. Kaplan
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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)
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