##### 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 October 29, 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
 þ o
 þ o
 o þ




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CLAIRES STORES, INC. AND SUBSIDIARIES
INDEX
 PAGE NO.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets at October 29, 2005 and January 29, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended October 29, 2005 and October 30, 2004
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 29, 2005 and October 30, 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    18Item 6. Exhibits
    
    
    18SIGNATURE PAGE
    
    
    19Section 302 Co-CEO CertificationSection 302 Co-CEO CertificationSection 302 CFO CertificationSection 906 Co-CEO CertificationSection 906 Co-CEO CertificationSection 906 CFO Certification
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 CLAIRES STORES, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 Oct. 29, 2005
    
    
    Jan. 29, 2005(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    359,757
    
    
    $
    191,006Short-term investments
    
    
    
    
    
    
    134,613Inventories
    
    
    147,354
    
    
    
    110,072Prepaid expenses and other current assets
    
    
    56,224
    
    
    
    57,635Total current assets
    
    
    563,335
    
    
    
    493,326Property and equipment:Land and building
    
    
    18,151
    
    
    
    18,151Furniture, fixtures and equipment
    
    
    247,375
    
    
    
    238,022Leasehold improvements
    
    
    231,800
    
    
    
    211,721497,326
    
    
    
    467,894Less accumulated depreciation and amortization
    
    
    (279,775
    )
    
    
    (263,368
    )217,551
    
    
    
    204,526Intangible assets, net
    
    
    54,392
    
    
    
    52,474Other assets
    
    
    14,363
    
    
    
    14,736Goodwill
    
    
    198,977
    
    
    
    201,067267,732
    
    
    
    268,277Total assets
    
    $
    1,048,618
    
    
    $
    966,129LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    74,849
    
    
    $
    42,325Income taxes payable
    
    
    15,887
    
    
    
    30,600Accrued expenses
    
    
    87,827
    
    
    
    94,013Total current liabilities
    
    
    178,563
    
    
    
    166,938Long-term liabilities:Deferred tax liability
    
    
    22,094
    
    
    
    24,293Deferred rent expense
    
    
    20,966
    
    
    
    19,21143,060
    
    
    
    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 $0.05 per share;
authorized 40,000,000 shares, issued and outstanding
5,115,846
shares and 5,125,432 shares, respectively
    
    
    256
    
    
    
    256Common stock par value $0.05 per share; authorized
300,000,000 shares, issued and outstanding 94,252,155
shares and 93,858,213 shares, respectively
    
    
    4,713
    
    
    
    4,693Additional paid-in capital
    
    
    59,129
    
    
    
    50,477Unearned
compensation  stock grants
    
    
    (3,027
    )
    
    
    Accumulated other comprehensive income, net of taxes
    
    
    19,409
    
    
    
    28,041Retained earnings
    
    
    746,515
    
    
    
    672,220826,995
    
    
    
    755,687Total liabilities and stockholders equity
    
    $
    1,048,618
    
    
    $
    966,129
  3




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##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 Three Months Ended
    
    
    Nine Months EndedOct. 29,
    
    
    Oct. 30,
    
    
    Oct. 29,
    
    
    Oct. 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share amounts)Net sales
    
    $
    327,259
    
    
    $
    296,702
    
    
    $
    955,009
    
    
    $
    883,516Cost of sales, occupancy and buying expenses
    
    
    151,541
    
    
    
    139,232
    
    
    
    442,084
    
    
    
    406,675Gross profit
    
    
    175,718
    
    
    
    157,470
    
    
    
    512,925
    
    
    
    476,841Other expenses (income)Selling, general and administrative
    
    
    112,631
    
    
    
    105,823
    
    
    
    334,722
    
    
    
    313,511Depreciation and amortization
    
    
    12,318
    
    
    
    11,439
    
    
    
    36,442
    
    
    
    33,042Interest and other income
    
    
    (3,761
    )
    
    
    (1,301
    )
    
    
    (8,805
    )
    
    
    (3,779
    )121,188
    
    
    
    115,961
    
    
    
    362,359
    
    
    
    342,774Income before income taxes
    
    
    54,530
    
    
    
    41,509
    
    
    
    150,566
    
    
    
    134,067Income taxes
    
    
    16,403
    
    
    
    14,351
    
    
    
    47,279
    
    
    
    46,468Net income
    
    
    38,127
    
    
    
    27,158
    
    
    
    103,287
    
    
    
    87,599Foreign currency translation adjustments
    
    
    638
    
    
    
    8,946
    
    
    
    (8,631
    )
    
    
    5,997Comprehensive income
    
    $
    38,765
    
    
    $
    36,104
    
    
    $
    94,656
    
    
    $
    93,596Net income per share:Basic
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    1.04
    
    
    $
    0.89Diluted
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    1.04
    
    
    $
    0.88Basic weighted average number of common
shares outstanding
    
    
    99,140
    
    
    
    98,935
    
    
    
    99,063
    
    
    
    98,923Diluted weighted average number of common and
common equivalent shares outstanding
    
    
    99,534
    
    
    
    99,384
    
    
    
    99,448
    
    
    
    99,306Dividends declared per share:Common stock
    
    $
    0.10
    
    
    $
    0.08
    
    
    $
    0.30
    
    
    $
    0.21Class A common stock
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.15
    
    
    $
    0.105
  4




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##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedOct.
29, 2005
    
    

Oct.
30, 2004(In thousands)Cash flows from operating activities:Net income
    
    $
    103,287
    
    
    $
    87,599Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    36,442
    
    
    
    33,042Amortization of intangible assets
    
    
    829
    
    
    
    837Loss on retirement of property and equipment
    
    
    2,523
    
    
    
    2,579Gain on sale of intangible assets
    
    
    
    
    
    
    (170
    )Stock compensation expense
    
    
    2,504
    
    
    
    Increase in -Inventories
    
    
    (38,843
    )
    
    
    (50,834
    )Prepaid expenses and other assets
    
    
    (381
    )
    
    
    (8,882
    )Increase (decrease) in -Trade accounts payable
    
    
    34,348
    
    
    
    22,232Income taxes payable
    
    
    (14,961
    )
    
    
    (19,069
    )Accrued expenses
    
    
    (4,789
    )
    
    
    5,672Deferred income taxes
    
    
    (2,264
    )
    
    
    6,402Deferred rent expense
    
    
    1,914
    
    
    
    (365
    )Net cash provided by operating activities
    
    
    120,609
    
    
    
    79,043Cash flows from investing activities:Acquisition of property and equipment
    
    
    (55,314
    )
    
    
    (50,367
    )Acquisition of intangible assets
    
    
    (6,968
    )
    
    
    (6,338
    )Purchase of short-term investments
    
    
    (82,334
    )
    
    
    Sale of short-term investments
    
    
    216,947
    
    
    
    Net cash provided by (used in) investing activities
    
    
    72,331
    
    
    
    (56,705
    )Cash flows from financing activities:Proceeds from stock options exercised
    
    
    3,141
    
    
    
    655Dividends paid
    
    
    (28,992
    )
    
    
    (20,229
    )Net cash used in financing activities
    
    
    (25,851
    )
    
    
    (19,574
    )Effect of foreign currency exchange rate changes on cash
and cash equivalents
    
    
    1,662
    
    
    
    1,866Net increase in cash and cash equivalents
    
    
    168,751
    
    
    
    4,630Cash and cash equivalents at beginning of period
    
    
    191,006
    
    
    
    224,630Cash and cash equivalents at end of period
    
    $
    359,757
    
    
    $
    229,260
  5




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CLAIRES STORES, INC. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation and Significant Accounting Policies
  2. Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedOct.
29, 2005
    
    
    Oct. 30, 2004
    
    
    Oct. 29, 2005
    
    
    Oct. 30, 2004Numerator:Net income
    
    $
    38,127
    
    
    $
    27,158
    
    
    $
    103,287
    
    
    $
    87,599Denominator:Weighted average number of shares
outstandingBasic
    
    
    99,140
    
    
    
    98,935
    
    
    
    99,063
    
    
    
    98,923Effect of dilutive stock options
    
    
    359
    
    
    
    449
    
    
    
    364
    
    
    
    383Effect of dilutive non-vested stock awards
    
    
    35
    
    
    
    
    
    
    
    21
    
    
    
    Diluted
    
    
    99,534
    
    
    
    99,384
    
    
    
    99,448
    
    
    
    99,306Net income per share:Basic
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    1.04
    
    
    $
    0.89Diluted
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    1.04
    
    
    $
    0.88
   6




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3. Stock-Based Compensation
   Three Months Ended
    
    
    Nine Months EndedOct. 29,
    
    
    Oct. 30,
    
    
    Oct 29,
    
    
    Oct. 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    38,127
    
    
    $
    27,158
    
    
    $
    103,287
    
    
    $
    87,599Stock-based
employee
compensation
expense
determined
under the fair
value based
methods, net
of income tax
    
    
    (948
    )
    
    
    (527
    )
    
    
    (2,691
    )
    
    
    (1,554
    )Stock-based
employee
compensation
expense
included in
reported net
income, net of
income tax
    
    
    584
    
    
    
    
    
    
    
    1,628
    
    
    
    Net income  pro forma
    
    $
    37,763
    
    
    $
    26,631
    
    
    $
    102,224
    
    
    $
    86,045Basic net
income per
share  as
reported
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    1.04
    
    
    $
    0.89Basic net
income per
share  pro
forma
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    1.03
    
    
    $
    0.87Diluted net
income per
share  as
reported
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    1.04
    
    
    $
    0.88Diluted net
income per
share  pro
forma
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    1.03
    
    
    $
    0.87
 4. New Accounting Pronouncements
    7




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5. Segment Information
  Net Sales
    
    
    Income Before Income TaxesThree Months Ended
    
    
    Nine Months Ended
    
    
    Three Months Ended
    
    
    Nine Months EndedOct. 29,
    
    
    Oct. 30,
    
    
    Oct. 29,
    
    
    Oct. 30,
    
    
    Oct. 29,
    
    
    Oct. 30,
    
    
    Oct. 29,
    
    
    Oct. 30,2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004North America
    
    $
    228,668
    
    
    $
    207,753
    
    
    $
    667,936
    
    
    $
    630,212
    
    
    $
    41,732
    
    
    $
    28,981
    
    
    $
    119,615
    
    
    $
    106,476International
    
    
    98,591
    
    
    
    88,949
    
    
    
    287,073
    
    
    
    253,304
    
    
    
    12,798
    
    
    
    12,528
    
    
    
    30,951
    
    
    
    27,591Total
    
    $
    327,259
    
    
    $
    296,702
    
    
    $
    955,009
    
    
    $
    883,516
    
    
    $
    54,530
    
    
    $
    41,509
    
    
    $
    150,566
    
    
    $
    134,067
 6. Income Taxes
   7. Statements of Cash Flows
  8




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##### Table of Contents



8. Stockholders Equity
   9. Commitments and Contingencies
  10. Subsequent Events
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    9




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Overview
    
    
    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
  
    
    successfully identifying merchandise appealing to our customers and managing our
inventory levels
    
    displaying our merchandise at convenient, accessible locations staffed with personnel
that provide courteous and professional customer service
    
    sourcing our merchandise to achieve a positive value/price relationship
    
    increasing sales at existing store locations
    
    expanding our sales, especially in our International division, through additional store locations
  10




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Critical Accounting Policies and Estimates
  Results of Operations
 Consolidated Operations
  Three Months Ended
    
    Nine Months EndedOct. 29, 2005
    
    Oct. 30, 2004
    
    Oct. 29, 2005
    
    Oct. 30, 2004Net sales
    
    $
    327,259
    
    
    $
    296,702
    
    
    $
    955,009
    
    
    $
    883,516Increase in comparable store sales
    
    
    9.0
    %
    
    
    9.0
    %
    
    
    6.0
    %
    
    
    10.0
    %Gross profit percentage
    
    
    53.7
    %
    
    
    53.1
    %
    
    
    53.7
    %
    
    
    54.0
    %Selling, general and administrative expenses
as a percentage of Net sales
    
    
    34.4
    %
    
    
    35.7
    %
    
    
    35.0
    %
    
    
    35.5
    %Net income
    
    $
    38,127
    
    
    $
    27,158
    
    
    $
    103,287
    
    
    $
    87,599Net income per diluted share
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    1.04
    
    
    $
    0.88Number of stores at the end of the period (1)
    
    
    2,881
    
    
    
    2,844
    
    
    
    2,881
    
    
    
    2,844
 
 (1)
    
    Number of stores excludes Claires Nippon and stores operated under licensing agreements    11




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedOct. 29, 2005
    
    Oct. 30, 2004
    
    Oct. 29, 2005
    
    Oct. 30, 2004Jewelry
    
    
    59.0
    %
    
    
    56.0
    %
    
    
    59.0
    %
    
    
    58.0
    %Accessories
    
    
    41.0
    %
    
    
    44.0
    %
    
    
    41.0
    %
    
    
    42.0
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
      12




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Segment Operations
  North America
  Three Months Ended
    
    Nine Months EndedOct. 29, 2005
    
    Oct. 30, 2004
    
    Oct. 29, 2005
    
    Oct. 30, 2004Net sales
    
    $
    228,668
    
    
    $
    207,753
    
    
    $
    667,936
    
    
    $
    630,212Increase in comparable store sales
    
    
    9.0
    %
    
    
    10.0
    %
    
    
    5.0
    %
    
    
    13.0
    %Gross profit percentage
    
    
    53.5
    %
    
    
    52.1
    %
    
    
    53.9
    %
    
    
    54.3
    %Number of stores at the end of
the period (1)
    
    
    2,131
    
    
    
    2,128
    
    
    
    2,131
    
    
    
    2,128
 
 (1)
    
    Number of stores excludes Claires Nippon and stores operated under licensing agreements    13




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Three Months Ended
    
    Nine Months EndedOct. 29, 2005
    
    Oct. 30, 2004
    
    Oct. 29, 2005
    
    Oct. 30, 2004Jewelry
    
    
    65.0
    %
    
    
    64.0
    %
    
    
    66.0
    %
    
    
    65.0
    %Accessories
    
    
    35.0
    %
    
    
    36.0
    %
    
    
    34.0
    %
    
    
    35.0
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 International
  Three Months Ended
    
    Nine Months EndedOct. 29, 2005
    
    Oct. 30, 2004
    
    Oct. 29, 2005
    
    Oct. 30, 2004Net sales
    
    $
    98,591
    
    
    $
    88,949
    
    
    $
    287,073
    
    
    $
    253,304Increase in comparable store sales
    
    
    8.0
    %
    
    
    6.0
    %
    
    
    9.0
    %
    
    
    2.0
    %Gross profit percentage
    
    
    54.1
    %
    
    
    55.4
    %
    
    
    53.3
    %
    
    
    53.2
    %Number of stores at the end of
the period (1)
    
    
    750
    
    
    
    716
    
    
    
    750
    
    
    
    716
 
 (1)
    
    Number of stores excludes Claires Nippon and stores operated under licensing agreements    14




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedOct. 29, 2005
    
    Oct. 30, 2004
    
    Oct. 29, 2005
    
    Oct. 30, 2004Jewelry
    
    
    46.0
    %
    
    
    40.0
    %
    
    
    45.0
    %
    
    
    40.0
    %Accessories
    
    
    54.0
    %
    
    
    60.0
    %
    
    
    55.0
    %
    
    
    60.0
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Analysis of Consolidated Financial Condition
  Nine Months EndedOct. 29, 2005
    
    Oct. 30, 2004Operating activities
    
    $
    120,609
    
    
    $
    79,043Investing activities
    
    $
    72,331
    
    
    $
    (56,705
    )Financing activities
    
    $
    (25,851
    )
    
    $
    (19,574
    )
       15




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Credit Arrangements
    Cautionary Note Regarding Forward-Looking Statements and Risk Factors
  16




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency
    Interest Rates
  
 Item 4. Controls and Procedures
  17




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 6. Exhibits
 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.
 Items 2, 3, 4 and 5 are not applicable and have been omitted.
 18




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##### Table of Contents



SIGNATURE
  CLAIRES STORES, INC.
(Registrant)December 7, 2005
    /s/ Marla L. SchaeferMarla L. SchaeferCo-Chairman of the Board of Directors
(principal co-executive officer and
director)December 7, 2005
    /s/ E. Bonnie SchaeferE. Bonnie SchaeferCo-Chairman of the Board of Directors
(principal co-executive officer and
director)December 7, 2005
    /s/ Ira D. KaplanIra D. Kaplan, Senior Vice President,Chief Financial Officer and Director
(principal financial and accounting
officer and director) 19




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##### Table of Contents



INDEX TO EXHIBITS
 EXHIBIT NO.
    
    DESCRIPTION31.1
    
    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.
 20