##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended April 30, 2005 OR o
    
    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 001-08899
 Claires Stores, Inc.  Florida
    
    59-0940416(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)3 S.W. 129th Avenue, Pembroke Pines, Florida
    
    33027(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (954) 433-3900 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   
o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).  Yes   x   No   
o The number of shares of the registrants Common Stock and Class A Common Stock outstanding as
of May 27, 2005 was 94,068,740 and 5,122,245, respectively.




---



##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES
INDEX PAGE NO.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets at April 30, 2005 and January 29, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended April 30, 2005 and May 1, 2004
    
    
    4Unaudited
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended April 30, 2005and May 1, 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    8Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4. Controls and Procedures
    
    
    15PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    16Item 6. Exhibits
    
    
    16SIGNATURE PAGE
    
    
    17Amended & Restated 1996 Incentive PlanAmended & Restated 2005 Incentive Plan2005 Management Deferred Compensation PlanSection 302 Certification of Co-CEOSection 302 Certification of Co-CEOSection 302 Certification of CFOSection 906 Certification of Co-CEOSection 906 Certification of Co-CEOSection 906 Certification of CFO
 2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements
 CLAIRES STORES, INC. AND SUBSIDIARIES 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 Apr. 30, 2005
    
    
    Jan. 29, 2005(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    316,077
    
    
    $
    191,006Short-term investments
    
    
    
    
    
    
    134,613Inventories
    
    
    117,077
    
    
    
    110,072Prepaid expenses and other current assets
    
    
    69,840
    
    
    
    57,635Total current assets
    
    
    502,994
    
    
    
    493,326Property and equipment:Land and building
    
    
    18,151
    
    
    
    18,151Furniture, fixtures and equipment
    
    
    242,367
    
    
    
    238,022Leasehold improvements
    
    
    219,416
    
    
    
    211,721479,934
    
    
    
    467,894Less accumulated depreciation and amortization
    
    
    (271,649
    )
    
    
    (263,368
    )208,285
    
    
    
    204,526Intangible assets, net
    
    
    53,846
    
    
    
    52,474Other assets
    
    
    13,716
    
    
    
    14,736Goodwill
    
    
    200,989
    
    
    
    201,067268,551
    
    
    
    268,277Total assets
    
    $
    979,830
    
    
    $
    966,129LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    59,307
    
    
    $
    41,994Income taxes payable
    
    
    27,486
    
    
    
    30,600Accrued expenses
    
    
    74,174
    
    
    
    94,344Total current liabilities
    
    
    160,967
    
    
    
    166,938Long-term liabilities:Deferred tax liability
    
    
    23,740
    
    
    
    24,293Deferred rent expense
    
    
    20,094
    
    
    
    19,21143,834
    
    
    
    43,504Commitments and contingencies
    
    
    
    
    
    
    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 40,000,000 shares, issued and outstanding 5,122,751
shares and 5,125,432 shares, respectively
    
    
    256
    
    
    
    256Common stock par value $.05 per share; authorized
300,000,000 shares, issued and outstanding 94,048,634
shares and 93,858,231 shares, respectively
    
    
    4,703
    
    
    
    4,693Additional paid-in capital
    
    
    51,418
    
    
    
    50,477Accumulated other comprehensive income, net of tax
    
    
    26,387
    
    
    
    28,041Retained earnings
    
    
    692,265
    
    
    
    672,220775,029
    
    
    
    755,687Total liabilities and stockholders equity
    
    $
    979,830
    
    
    $
    966,129
 See accompanying notes to unaudited condensed consolidated financial statements. 3




---



##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME
 Three Months EndedApr. 30, 2005
    
    
    May 1, 2004(In thousands, except per share amounts)Net sales
    
    $
    302,708
    
    
    $
    281,591Cost of sales, occupancy and buying expenses
    
    
    138,695
    
    
    
    125,524Gross profit
    
    
    164,013
    
    
    
    156,067Other expenses (income):Selling, general and administrative
    
    
    110,462
    
    
    
    104,245Depreciation and amortization
    
    
    12,348
    
    
    
    10,659Interest expense
    
    
    55
    
    
    
    30Interest and other income
    
    
    (1,961
    )
    
    
    (1,210
    )120,904
    
    
    
    113,724Income before income taxes
    
    
    43,109
    
    
    
    42,343Income taxes
    
    
    13,407
    
    
    
    14,651Net income
    
    
    29,702
    
    
    
    27,692Foreign currency translation adjustments
    
    
    (1,654
    )
    
    
    (5,063
    )Comprehensive income
    
    $
    28,048
    
    
    $
    22,629Net income per share:Basic
    
    $
    0.30
    
    
    $
    0.28Diluted
    
    $
    0.30
    
    
    $
    0.28
 See accompanying notes to unaudited condensed consolidated financial statements. 4




---



##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedApr. 30, 2005
    
    
    May 1, 2004(In thousands)Cash flows from operating activities:Net income
    
    $
    29,702
    
    
    $
    27,692Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    12,348
    
    
    
    10,659Amortization of intangible assets
    
    
    261
    
    
    
    287Stock compensation expense
    
    
    640
    
    
    
    Loss on retirement of property and equipment
    
    
    630
    
    
    
    694Gain on sale of intangible assets
    
    
    
    
    
    
    (169
    )(Increase) decrease in -Inventories
    
    
    (6,962
    )
    
    
    (16,144
    )Prepaid expenses and other assets
    
    
    (12,153
    )
    
    
    (10,045
    )Increase (decrease) in -Trade accounts payable
    
    
    17,355
    
    
    
    14,139Income taxes payable
    
    
    (3,157
    )
    
    
    (4,212
    )Accrued expenses
    
    
    (20,224
    )
    
    
    (7,156
    )Deferred income taxes
    
    
    246
    
    
    
    2,139Deferred rent expense
    
    
    892
    
    
    
    (207
    )Net cash provided by operating activities
    
    
    19,578
    
    
    
    17,677Cash flows from investing activities:Acquisition of property and equipment
    
    
    (17,031
    )
    
    
    (17,220
    )Acquisition of intangible assets
    
    
    (2,407
    )
    
    
    (1,523
    )Purchases of short-term investments
    
    
    (82,334
    )
    
    
    Sales of short-term investments
    
    
    216,947
    
    
    
    Net cash provided by (used in) investing activities
    
    
    115,175
    
    
    
    (18,743
    )Cash flows from financing activities:Proceeds from stock options exercised
    
    
    311
    
    
    
    23Dividends paid
    
    
    (9,657
    )
    
    
    (5,778
    )Net cash used in financing activities
    
    
    (9,346
    )
    
    
    (5,755
    )Effect of foreign currency exchange rate changes on cash
and cash equivalents
    
    
    (336
    )
    
    
    (270
    )Net increase (decrease) in cash and cash equivalents
    
    
    125,071
    
    
    
    (7,091
    )Cash and cash equivalents at beginning of period
    
    
    191,006
    
    
    
    224,630Cash and cash equivalents at end of period
    
    $
    316,077
    
    
    $
    217,539
 See accompanying notes to unaudited condensed consolidated financial statements. 5




---



##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation and Significant Accounting Policies  The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q, and do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. These statements
should be read in conjunction with the consolidated financial statements and notes thereto
included in the Annual Report on Form 10-K for the year ended January 29, 2005 filed with the
Securities and Exchange Commission, including Note 1 to the consolidated financial statements
included therein which discusses principles of consolidation and a summary of our significant
accounting policies. These statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, which require management to make
certain estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. The most significant
estimates include valuation of inventories, valuation of goodwill and intangible assets,
provisions for income taxes, contingencies and litigation. Actual results could differ from
these estimates. Due to the seasonal nature of the Companys business, the results of
operations for interim periods of the year are not necessarily indicative of the results of
operations on an annualized basis. Certain prior period amounts have been reclassified to
conform to the current period presentation. 2. Earnings Per Share  The information required to compute basic and diluted earnings per share is as follows (in
thousands, except per share data): Three Months EndedApr. 30, 2005
    
    
    May 1, 2004Numerator:Net income
    
    $
    29,702
    
    
    $
    27,692Denominator:Weighted average number of shares outstandingBasic
    
    
    98,994
    
    
    
    98,916Effect of dilutive stock options
    
    
    359
    
    
    
    325Effect of dilutive restricted stock awards
    
    
    5
    
    
    
    Diluted
    
    
    99,358
    
    
    
    99,241Net income per share:Basic
    
    $
    0.30
    
    
    $
    0.28Diluted
    
    $
    0.30
    
    
    $
    0.28
  All outstanding options for the three months ended April 30, 2005 and May 1, 2004 were
included in the computation of diluted earnings per share. 6




---



##### Table of Contents



3. Stock-Based Compensation  Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock Based
Compensation, as amended by SFAS 148, Accounting for Stock Based Compensation-Transition and
Disclosure, allows entities to choose between a fair value based method of accounting for
employee stock options or similar equity instruments and the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB) Opinion 25, Accounting for Stock
Issued to Employees. Entities electing to account for employee stock options or similar equity
instruments under APB 25 must make pro forma disclosures of net income and earnings per share as
if the fair value method of accounting had been applied. The Company has elected to apply the
provisions of APB 25 in the preparation of its unaudited condensed consolidated financial
statements and provide pro forma disclosure of net income and earnings per share as required
under SFAS 123 and SFAS 148 (dollars in thousands, except per share data). Three Months EndedApr. 30, 2005
    
    
    May 1, 2004Net income  as reported
    
    
    29,702
    
    
    $
    27,692Stock-based employee compensationexpense determined under the fairvalue based methods, net of income tax
    
    
    (890
    )
    
    
    (521
    )Stock-based employee compensationexpense included in reported netincome, net of income tax
    
    
    416
    
    
    
    Net income  pro forma
    
    $
    29,228
    
    
    $
    27,171Basic net income per share  as reported
    
    $
    0.30
    
    
    $
    0.28Basic net income per share  pro forma
    
    $
    0.30
    
    
    $
    0.27Diluted net income per share  as reported
    
    $
    0.30
    
    
    $
    0.28Diluted net income per share  pro forma
    
    $
    0.29
    
    
    $
    0.27
 4. New Accounting Pronouncements  In December 2004, the FASB issued SFAS 123R, Share-Based Payment, a revision of SFAS 123. The
standard requires companies to expense the grant-date fair value of stock options and other
equity-based compensation issued to employees. On April 15, 2005, the Securities and Exchange
Commission announced an amendment to the compliance dates for SFAS 123R that delays the
effective date for annual periods beginning after June 15, 2005. The Company will be required
to recognize the expense attributable to stock options granted or vested subsequent to January
28, 2006. The Company is evaluating the requirements of SFAS 123R and has not yet determined
the method of adoption or the effect of adopting SFAS 123R.In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional
Asset Retirement Obligations, which is an interpretation of SFAS 143, Accounting for Asset
Retirement Obligations. This interpretation clarifies terminology within SFAS 143 and requires
an entity to recognize a liability for the fair value of a conditional asset retirement
obligation when incurred if the liabilitys fair value can be reasonably estimated. This
interpretation is effective for fiscal years ending after December 15, 2005. The Company does
not expect the adoption of this interpretation to have a material impact on our financial
condition or results of operations. 5. Segment Information  The Company is organized based on the geographic markets in which it operates. Under this
structure, the Company currently has two reportable segments: North America and International.
The Company accounts for the results of operations of Claires Nippon under the equity method
and includes these results within Interest and other income in the Companys Statement of
Operations within the Companys North American division. Net sales and Income before income
taxes for the periods presented were as follows (dollars in thousands): 7




---



##### Table of Contents



Net Sales
    
    
    Income Before Income TaxesThree Months Ended
    
    
    Three Months EndedApr. 30,
    
    
    May 1,
    
    
    Apr. 30,
    
    
    May 1,2005
    
    
    2004
    
    
    2005
    
    
    2004North America
    
    $
    216,340
    
    
    $
    208,200
    
    
    $
    41,297
    
    
    $
    41,993International
    
    
    86,368
    
    
    
    73,391
    
    
    
    1,812
    
    
    
    350Total
    
    $
    302,708
    
    
    $
    281,591
    
    
    $
    43,109
    
    
    $
    42,343
 6. Income Taxes  The Companys effective income tax rate during the first three months of Fiscal 2006 was 31.1%,
as compared to 34.6% during the comparable period of Fiscal 2005. The Companys lower effective
income tax rate for the three month period ended April 30, 2005 was the result of a change in
the mix of earnings between U.S. and foreign operations and tax planning. 7. Statements of Cash Flows  Payments of income taxes were $16.9 million and $16.2 million for the three months ended April
30, 2005 and May 1, 2004, respectively. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Managements Discussion and Analysis is designed to provide the reader of the financial statements
with a narrative on our results of operations, financial position and liquidity, risk management
activities, significant accounting policies and critical estimates, and the future impact of
accounting standards that have been issued but are not yet effective. Managements Discussion and
Analysis is presented in the following sections: Overview, Critical Accounting Policies and
Estimates, Results of Operations and Analysis of Consolidated Financial Condition. It is useful to
read Managements Discussion and Analysis in conjunction with the unaudited condensed consolidated
financial statements and related notes thereto contained elsewhere in this document. Annually, our fiscal years end on the Saturday closest to January 31. As a result, both our
current and prior fiscal years consist of four 13-week quarters. We refer to the prior fiscal year
ended January 29, 2005 as Fiscal 2005, and the current fiscal year ending January 28, 2006 as
Fiscal 2006. All references to earnings per share relate to diluted earnings per share from net
income. We include a store in the calculation of comparable store sales once it has been in operation sixty
weeks after its initial opening. If a store is closed during a fiscal period, the stores sales
will be included in the computation of comparable store sales for that fiscal month, quarter and
year to date period only for the days in which it was operating as compared to those same days in
the comparable period. Relocated, remodeled and expanded square footage stores are classified the
same as the original store and are not considered new stores upon relocation, remodeling or
completion of their expansion. Overview We are a leading specialty retailer of value-priced fashion accessories and jewelry for pre-teens
and teenagers as well as young adults. We are organized based on our geographic markets, which
include our North American operations and our International operations. As of April 30, 2005, we
operated a total of 2,852 stores in all 50 states of the United States, Puerto Rico, Canada, the
Virgin Islands, the United Kingdom, Switzerland, Austria, Germany (the latter three collectively
referred to as S.A.G.), France and Ireland. The stores are operated mainly under the trade names
Claires Boutiques, Claires Accessories, Icing by Claires, Afterthoughts and The Icing.
We are in the process of transitioning our Afterthoughts stores to Icing by Claires stores to
capitalize on the Claires brand name. We also operate 161 stores in Japan 8




---



##### Table of Contents



through a 50:50 joint venture with AEON Co. Ltd. (Claires Nippon). We account for the results
of operations of Claires Nippon under the equity method and include these results within Interest
and other income in our Statement of Operations within our North American division. In addition,
we license 65 stores in the Middle East under a licensing and merchandising agreement with Al Shaya
Co. Ltd. and 5 stores in South Africa under similar agreements with the House of Busby Limited. We
account for the goods we sell under the merchandising agreements within Gross profit in our North
American division and the license fees we charge within Interest and other income within our
International division in our Statement of Operations. We have two store concepts: Claires Accessories, which caters to fashion-conscious girls and teens
in the 7 to 17 age range, and Icing by Claires, which caters to fashion-conscious teens and young
women in the 17 to 27 age range. Our merchandise typically ranges in price between $2 and $20,
with the average product sold at approximately $4. Our stores share a similar format and our
different store concepts and trade-names allow us to have multiple store locations in a single
mall. Although we face competition from a number of small specialty store chains and others
selling fashion accessories, we believe that our stores comprise one of the largest chains of
specialty retail stores in the world devoted to the sale of value-priced fashion accessories for
pre-teen, teenage and young adult females. Fundamentally, our business model is to offer the customer a compelling price/value relationship
and a wide array of products to choose from. We seek to deliver a high level of profitability and
cash flow by:  
    maximizing the effectiveness of our retail product pricing through promotional activity
    minimizing our product costs through economies of scale as the worlds leading
mall-based retailer of value-priced accessories and jewelry
    reinvesting operating cash flows into opening new stores, remodeling existing stores and
infrastructure in order to create future revenues and build brand name loyalty While our financial results have grown steadily and record sales performance was achieved during
the first quarter of Fiscal 2006, the retail environment remains very competitive. Managements
plan for future growth is dependent on:  
    our ability to successfully identify merchandise appealing to our customers
    displaying our merchandise at convenient, accessible locations staffed with personnel
that provide courteous and professional customer service
    sourcing our merchandise to achieve a positive price/value relationship
    increasing sales at existing store locations
    expanding our sales, with our focus on our International segment, through additional
store locations Our ability to achieve these objectives will be dependent on various factors, including those
outlined in Cautionary Note Regarding Forward-Looking Statements and Risk Factors. Critical Accounting Policies and Estimates Our condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. Preparation of these statements
requires management to make judgments and estimates. Some accounting policies have a significant
impact on amounts reported in these financial statements. A summary of significant accounting
policies and a description of accounting policies that are considered critical may be found in our
Fiscal 2005 Annual Report on Form 10-K, filed on April 13, 2005, in the Notes to the Consolidated
Financial Statements, Note 1, and the Critical Accounting Policies and Estimates section therein. 9




---



##### Table of Contents



Results of Operations Consolidated Operations A summary of our consolidated results of operations is as follows (dollars in thousands, except per
share data): Three Months EndedApr. 30, 2005
    
    
    May 1, 2004Net sales
    
    $
    302,708
    
    
    $
    281,591Comparable store sales
    
    
    5
    %
    
    
    11
    %Gross profit percentage
    
    
    54.2
    %
    
    
    55.4
    %Selling, general and administrative expenses as a percentage of Net sales
    
    
    36.5
    %
    
    
    37.0
    %Net income
    
    $
    29,702
    
    
    $
    27,692Net income per diluted share
    
    $
    0.30
    
    
    $
    0.28Number of stores at the end of the period(1)
    
    
    2,852
    
    
    
    2,828
 (1)Number of stores excludes Claires Nippon and stores operated under license
agreements Net sales for the three months ended April 30, 2005 increased by $21.1 million, or 7.5% from the
three months ended May 1, 2004. The increase in Net sales was primarily attributable to comparable
store sales increases of 5%, or approximately $13.3 million, during the three months ended April
30, 2005, and approximately $3.9 million resulting from the weak US Dollar when translating our
foreign operations at higher exchange rates. During the first quarter of Fiscal 2006, the positive comparable sales were primarily driven by an
increase in the average retail price per transaction, which was the result of both an increase in
the average unit retail price and the average number of units sold per transaction. The following table compares our percentage of sales of each product category for each of the
periods presented: Three Months EndedApr. 30,
    
    
    May 1,2005
    
    
    2004Jewelry
    
    
    58.7
    %
    
    
    58.8
    %Accessories
    
    
    41.3
    %
    
    
    41.2
    %100.0
    %
    
    
    100.0
    %
 In calculating Gross profit and Gross profit percentages, we exclude the costs related to our
distribution center. These costs are included instead in Selling, general and administrative
expenses. Other retail companies may include these costs in cost of sales, so our gross profit
percentages may not be comparable to those retailers. Gross profit percentages decreased by 120 basis points during the three months ended April 30, 2005
as compared to the three months ended May 1, 2004. The decrease was caused primarily by a drop in
our merchandise margins due to an increase in inventory markdowns taken during the period in North
America. Selling, general and administrative expenses increased $6.2 million or 6.0% for the three months
ended April 30, 2005 as compared to the three months ended May 1, 2004. The increase was primarily
attributable to increases in store payroll including benefits and increases in professional fees
associated with litigation matters and Sarbanes-Oxley compliance. As a percentage of Net sales,
Selling, general and administrative expenses declined by 50 basis points for the three months ended
April 30, 2005 as compared to the three months ended May 1, 2004. 10




---



##### Table of Contents



Our effective income tax rate during the first three months of Fiscal 2006 was 31.1%, as compared
to 34.6% during the comparable period of Fiscal 2005. Our lower effective income tax rate for the
three month period ended April 30, 2005 was the result of a change in the mix of earnings between
U.S. and foreign operations and tax planning. We currently expect our effective income tax rate
for Fiscal 2006 to be approximately 33.1%. Our effective income tax rate in future periods will
depend on several variables, including the mix of earnings between U.S. and foreign operations and
our overall level of earnings. This is primarily due to the fact that our combined effective
income tax rate for our foreign operations is generally lower than our effective income tax rate
for U.S. operations.Our effective income tax rate could also be affected by the resolution of tax
contingencies for amounts different from our current estimates. Net income increased by approximately $2.0 million during the three months ended April 30, 2005, as
compared to the three months ended May 1, 2004. These increases were made possible primarily by
the incremental gross profit from additional sales generated during the period and from a lower
effective tax rate. Segment Operations We are organized into two business segments  North America and International. Following is a
discussion of results of operations by business segment. North America Key statistics and results of operations for our North American division are as follows (dollars in
thousands): Three Months EndedApr. 30, 2005
    
    
    May 1, 2004Net sales
    
    $
    216,340
    
    
    $
    208,200Comparable store sales
    
    
    3
    %
    
    
    18
    %Gross profit percentage
    
    
    55.8
    %
    
    
    58.3
    %Number of stores at the end of the period(1)
    
    
    2,123
    
    
    
    2,123
  (1)Number of stores excludes Claires Nippon and stores operated under license agreements Net sales in North America during the three months ended April 30, 2005 increased by $8.1
million, or 3.9%, from the three months ended May 1, 2004. The increase in Net sales was primarily
attributable to comparable store sales increases of 3% during the three months ended April 30,
2005. The positive comparable sales experienced in North America were primarily attributed to an increase
in the average retail price per transaction, which was the result of both an increase in the
average unit retail and the average number of units sold per transaction. Gross profit percentages decreased by 250 basis points during the three months ended April 30, 2005
as compared to the three months ended May 1, 2004. The decrease was caused primarily by a drop in
our merchandise margins due to an increase in inventory markdowns taken during the period. The following table compares our percentage of Net sales of each product category for each of the
periods presented: Three Months EndedApr. 30, 2005
    
    
    May 1, 2004Jewelry
    
    
    65.2
    %
    
    
    65.8
    %Accessories
    
    
    34.8
    %
    
    
    34.2
    %100.0
    %
    
    
    100.0
    %
 11




---



##### Table of Contents



International Key statistics and results of operations for our International division are as follows (dollars in
thousands): Three Months EndedApr. 30, 2005
    
    
    May 1, 2004Net sales
    
    $
    86,368
    
    
    $
    73,391Comparable store sales
    
    
    9
    %
    
    
    (5
    %)Gross profit percentage
    
    
    50.1
    %
    
    
    47.4
    %Number of stores at the end of the period(1)
    
    
    729
    
    
    
    705
  (1)Number of stores excludes Claires Nippon and stores operated under license agreements Our objective is to increase sales in the International division primarily through store
growth and comparable store sales increases. We also continue to explore adding operations in
countries in which we do not currently operate. Net sales in our International division during the three months ended April 30, 2005 increased by
approximately $13.0 million, or 17.7%, from the three months ended May 1, 2004. The increase in
Net sales for the three months ended April 30, 2005 was primarily attributable to comparable store
sales increases of 9% or approximately $6.5 million, the effects of the weak US dollar when
translating our foreign operations at higher exchange rates of approximately $3.9 million, and by
new store revenue, net of store closures, of approximately $2.5 million during the period. The
comparable store increases for the three month period were primarily attributed to an increase in
the average retail price per transaction, which was the result of both an increase in the average
unit retail price and the average number of units sold per transaction. We actively employed strategic initiatives within our International division over the past year in
an attempt to reverse the negative comparable store sales trend in our International division.
These initiatives included sharing best practices for merchandise selection, store operations and
attentive customer service. In addition, we are investing in operational systems infrastructure in
order to facilitate the greater level of complexity and precision now required of the business. Gross profit percentages improved by 270 basis points for the first quarter of Fiscal 2006 as
compared to the first quarter of Fiscal 2005. The improvement is due to a number of reasons.
First, we took fewer markdowns than in the prior years quarter. In addition, the ability of our
International division to source a significant portion of goods at a lower cost due to those goods
being purchased from our vendors in US Dollars. The lower cost was achieved due to the relative
weakness in the US Dollar. Also, comparable store sales increased at a faster rate than occupancy
costs, which are primarily fixed by nature, and created positive leverage on those costs. Finally,
the shift of sales from accessories to jewelry during the three months ended April 30, 2005 as
compared to the three months ended May 1, 2004 has had the result of improved gross profit
percentages due to the higher initial markup realized on jewelry. The following table compares our
percentage of Net sales of each product category for each of the periods presented: Three Months EndedApr. 30, 2005
    
    
    May 1, 2004Jewelry
    
    
    42.5
    %
    
    
    38.7
    %Accessories
    
    
    57.5
    %
    
    
    61.3
    %100.0
    %
    
    
    100.0
    %
 12




---



##### Table of Contents



Analysis of Consolidated Financial Condition A summary of cash flows from operating, investing and financing activities is outlined in the table
below (dollars in thousands): Three Months EndedApr. 30, 2005
    
    
    May 1, 2004Operating activities
    
    $
    19,578
    
    
    $
    17,677Investing activities
    
    
    115,175
    
    
    
    (18,743
    )Financing activities
    
    
    (9,346
    )
    
    
    (5,755
    )
 We have consistently satisfied operating liquidity needs and planned capital expenditure
programs through our normal conversion of sales to cash. At April 30, 2005, we had approximately
$316.1 million in cash and cash equivalents and short-term investments, a decrease of $9.5 million
from January 29, 2005. We ended the first quarter of Fiscal 2006 with no borrowed debt
outstanding. The net increase in cash and cash equivalents during the period was due to cash
generated from operations and the sale of short-term investments, offset by capital expenditures
and the payment of dividends. Our major source of cash from operations is store sales, nearly all of which are generated on a
cash or credit card basis. Our primary outflows of cash from operations are the purchase of
inventory, net of accounts payable, operational costs, the payment of current taxes, capital
expenditures and the payment of dividends. Cash flows provided by operating activities in the
first three months of Fiscal 2006 reflect higher net income as compared to the first three months
of Fiscal 2005, reduced investment in inventories offset by the decrease in accrued expenses and
increased dividend payments. Our working capital at April 30, 2005 was $342.0 million compared to $326.4 million at January 29,
2005. Changes in working capital primarily reflect higher inventory levels and prepaid expenses. Our $17.0 million of capital expenditures were made primarily to remodel existing stores and to
open new stores. We generally experience a noticeable increase in sales in locations where a store
has been recently remodeled. We also invested approximately $2.4 million in intangible assets
primarily within our International division representing acquired lease rights on new store
locations in certain countries. We expect to fund approximately $81.0 million of capital
expenditures and $10.0 million to $15.0 million of purchased lease rights in Fiscal 2006 in an
effort to continue to remodel and expand our store base. We also paid dividends of $9.7 million during the three months ended April 30, 2005, an increase of
approximately $3.9 million from the three months ended May 1, 2004. We expect to pay at least
$38.6 million in dividends in Fiscal 2006. Liquidity and Capital Resources Our credit facility is a revolving line of credit of up to $60.0 million, is secured by inventory
in the United States and is due to expire March 31, 2009. The borrowings under this facility are
limited based on certain calculations of availability, based primarily on the amount of inventory
on hand in the United States. At April 30, 2005, the entire amount of $60.0 million would have
been available for borrowing by us, subject to reduction for $3.4 million of outstanding letters of
credit. The credit facility is cancelable by us without penalty and bears interest at an initial
margin of 75 basis points over the London Interbank Borrowing Rate (LIBOR). The margin is then
adjusted periodically based on certain liquidity measurements. The credit facility also contains a
covenant which restricts, among other things, our ability to make dividend distributions if we are
in default or if our excess liquidity is less than $20 million during certain periods. Excess
liquidity is specifically defined in our debt agreement as the sum of our available credit lines
and certain cash and cash equivalent amounts. 13




---



##### Table of Contents



Our non-US subsidiaries have available credit facilities totaling approximately $837,000 with
banks. The facilities are used for working capital requirements and letters of credit. These
credit facilities have been arranged in accordance with customary lending practices in their
respective countries of operation. At April 30, 2005, there were no borrowings under these credit
facilities. Management believes that our present ability to borrow is greater than our established credit
lines. However, if market conditions change and sales were to dramatically decline or we could not
control operating costs or other expenses, our cash flows and liquidity could be reduced, and we
could experience an increase in borrowing costs, or even a reduction in or elimination of our
access to debt and/or equity markets. Cautionary Note Regarding Forward-Looking Statements and Risk Factors We and our representatives may from time to time make written or verbal forward-looking statements,
including statements contained in this and other filings with the Securities and Exchange
Commission and in our press releases and reports to shareholders. All statements which address
operating performance, events or developments that we expect or anticipate will occur in the
future, including statements relating to our future financial performance, business strategy,
planned capital expenditures and new store openings for Fiscal 2006, are forward-looking
statements. The forward-looking statements are and will be based on managements then current
views and assumptions regarding future events and operating performance and we assume no obligation
to update any forward-looking statement. Forward-looking statements involve known or unknown
risks, uncertainties and other factors, including changes in estimates and judgments discussed
under Critical Accounting Policies and Estimates which may cause our actual results, performance
or achievements, or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking statements. Some of these
risks, uncertainties and other factors are as follows: changes in consumer preferences and consumer
spending; competition; general economic, political and social conditions, such as war, political
unrest and terrorism or natural disasters; currency fluctuations and exchange rate adjustments;
changes in laws, including employment laws relating to overtime pay, tax laws and import laws;
uncertainties generally associated with the specialty retailing business; disruptions in our supply
of inventory; inability to increase comparable store sales at recent historical rates; inability to
design and implement new information systems; and delays in anticipated store openings or
renovations. In addition, we typically earn a disproportionate share of our operating income in
the fourth quarter due to seasonal buying patterns, which are difficult to forecast with certainty.
Additional discussion of these and other risks and uncertainties is contained elsewhere in this
Item 2, in Item 3, Quantitative and Qualitative Disclosures About Market Risk and in our Form
10-K for Fiscal 2005 under Cautionary Note Regarding Forward-Looking Statements and Risk Factors. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Foreign Currency We are exposed to market risk from foreign currency exchange rate fluctuations on the US Dollar
value of foreign currency denominated transactions and our investment in foreign subsidiaries. We
manage this exposure to market risk through our regular operating and financing activities, and
from time to time, the use of foreign currency options. Exposure to market risk for changes in
foreign exchange rates relates primarily to foreign operations buying, selling and financing in
currencies other than local currencies and to the carrying value of net investments in foreign
subsidiaries. We may manage our exposure to foreign exchange rate risk related to our foreign
operations buying, selling and financing in currencies other than local currencies by using
foreign currency options from time to time to hedge foreign currency transactional exposure. At
April 30, 2005, we had not entered into foreign currency options. We do not generally hedge the
translation exposure related to our net investment in foreign subsidiaries, since we generally have
no near term intent to repatriate funds from such subsidiaries. During the three months ended
April 30, 2005, included in comprehensive income and stockholders equity is $1.7 million
reflecting a foreign currency translation loss. Based on our average net currency positions in
Fiscal 2006, the potential gain or loss due to a 10% adverse change on foreign currency exchange
rates could be significant to our operations. 14




---



##### Table of Contents



Certain of our subsidiaries make significant US Dollar purchases from Asian suppliers, particularly
in China. There continues to be speculation that China may elect to adjust the exchange rate of
the Chinese Yuan against the US Dollar. Currently, the Chinese Yuan has a fixed exchange rate
against the US Dollar. If China adjusts the exchange rate or allows the value to float, we could
experience increases in our cost of merchandise imported from China. The results of operations of foreign subsidiaries, when translated into US Dollars, reflect the
average rates of exchange for the periods presented. As a result, similar results in local
currency can vary significantly upon translation into US Dollars if exchange rates fluctuate
significantly from one period to the next. Interest Rates Our exposure to market risk for changes in interest rates is limited to our cash, cash equivalents
and debt. Based on our average invested cash balances and outstanding debt during the first three
months of Fiscal 2006, a 10% increase in the average effective interest rate in the remainder of
Fiscal 2006 would not have materially impacted our annual interest income or expense. 
 Item 4. Controls and Procedures We carried out an evaluation, under the supervision and with the participation of our management,
including our Co-Chief Executive Officers and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this Quarterly Report.
Based upon that evaluation, our Co-Chief Executive Officers and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of the end of the period covered by
this Quarterly Report to ensure that information required to be disclosed in this Quarterly Report
is recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commissions rules and forms. There was no change in our internal control over financial reporting during our last fiscal quarter
identified in connection with the evaluation referred to above that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting. 15




---



##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings We are, from time to time, involved in routine litigation incidental to the conduct of our
business, including litigation instituted by persons injured upon premises under our control,
litigation regarding the merchandise that we sell, including product and safety concerns regarding
metal content in our merchandise, litigation with respect to various employment matters, including
litigation with present and former employees, and litigation to protect our trademark rights.
Although litigation is routine and incidental to the conduct of our business, like any business of
our size and employing a significant number of employees, such litigation can result in large
monetary awards when judges, juries or other finders of facts do not agree with managements
evaluation of possible liability or outcome of litigation. Accordingly, the consequences of these
matters cannot be finally determined by management. However, in the opinion of management, we
believe that current pending litigation will not have a material adverse effect on our financial
position, earnings or cash flows. In April 2005, we closed under the settlement agreement previously approved by the United States
Bankruptcy Court for the Central District of California in connection with the litigation filed
against us in January 2003 by the Official Committee of Unsecured Creditors of Lux Corporation.
Under the terms of the settlement agreement, we paid $5 million ($3.1 million net of income taxes)
to settle the case, and exchanged mutual general releases. The settlement was previously recorded,
net of tax, in our Fiscal 2005 financial statements as Net loss from discontinued operations. 
 Item 6. Exhibits 10.1
    
    Amended and Restated 1996 Incentive Compensation Plan (1)10.2
    
    Amended and Restated 2005 Incentive Compensation Plan (2)10.3
    
    2005 Management Deferred Compensation Plan (3)31.1
    
    Certification of Co-Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a).31.2
    
    Certification of Co-Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a).31.3
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and 15d-14(a).32.1
    
    Certification of Co-Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.32.2
    
    Certification of Co-Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.32.3
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
  (1)This Planamends and restates the 1996 Incentive
Compensation Plan previously approved by the Companys shareholders and filed
with the Commission. None of the amendments to the Plan were material.(2)This Plan amends and restates the 2005 Incentive Compensation Plan
previously filed with the Commission. None of the amendments to the Plan were
material.(3)This Plan amends and restates the Management Deferred Compensation
Plan previously filed with the Commission. None of the amendments to the Plan
were material. Items 2, 3, 4 and 5 are not applicable and have been omitted. 16




---



##### Table of Contents



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)June 8, 2005
    /s/ Marla L. SchaeferMarla L. SchaeferCo-Chairman of the Board of Directors
(principal co-executive officer and
director) June 8, 2005
    /s/ E. Bonnie SchaeferE. Bonnie SchaeferCo-Chairman of the Board of Directors
(principal co-executive officer and
director) June  8, 2005
    /s/ Ira D. KaplanIra D. Kaplan, Senior Vice President,
Chief Financial Officer and Director
(principal financial and accounting
officer and director) 17




---



##### Table of Contents



INDEX TO EXHIBITS EXHIBIT NO.
    
    DESCRIPTION10.1
    
    Amended and Restated 1996 Incentive Compensation Plan.10.2
    
    Amended and Restated 2005 Incentive Compensation Plan.10.3
    
    2005 Management Deferred Compensation Plan.31.1
    
    Certification of Co-Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a).31.2
    
    Certification of Co-Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a).31.3
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a).32.1
    
    Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.3
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 18