##### 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 July 31, 2010
 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 Nos. 1-8899 and 333-148108
 Claires Stores, Inc.
  Florida
    
    59-0940416(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)2400 West Central Road, 
Hoffman Estates, Illinois
    
    60195(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (847) 765-1100
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



CLAIRES STORES, INC. AND SUBSIDIARIES
INDEX
 PAGE NO.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    3Unaudited Condensed Consolidated Balance Sheets as of July 31,
2010 and January 30, 2010
    
    3Unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Three and Six Months Ended
July 31, 2010 and August 1, 2009
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for
the Six Months Ended July 31, 2010 and August 1, 2009
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    19Item 3. Quantitative and Qualitative Disclosures About Market
Risk
    
    29Item 4. Controls and Procedures
    
    30PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    32Item 1A. Risk Factors
    
    32Item 6. Exhibits
    
    32SIGNATURE PAGE
    
    33Ex-31.1 Section 302 Certification of CEO
    
    35Ex-31.2 Section 302 Certification of CFO
    
    36Ex-32.1 Section 906 Certification of CEO
    
    37Ex-32.2 Section 906 Certification of CFO
    
    38EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 CLAIRES STORES, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 July 31, 2010
    
    
    January 30, 2010(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    160,132
    
    
    $
    198,708Inventories
    
    
    127,768
    
    
    
    110,338Prepaid expenses
    
    
    32,383
    
    
    
    32,873Other current assets
    
    
    23,298
    
    
    
    28,236Total current assets
    
    
    343,581
    
    
    
    370,155Property and equipment:Land and building
    
    
    
    
    
    
    19,318Furniture, fixtures and equipment
    
    
    171,796
    
    
    
    162,602Leasehold improvements
    
    
    231,676
    
    
    
    228,503403,472
    
    
    
    410,423Less accumulated depreciation and amortization
    
    
    (204,350
    )
    
    
    (182,439
    )199,122
    
    
    
    227,984Leased property under capital leases:Building
    
    
    18,055
    
    
    
    Less accumulated depreciation and amortization
    
    
    (451
    )
    
    
    17,604
    
    
    
    Intangible assets, net of accumulated amortization of $38,063 and
$32,532, respectively
    
    
    570,357
    
    
    
    580,027Deferred financing costs, net of accumulated amortization of $36,282
and $29,949, respectively
    
    
    41,308
    
    
    
    47,641Other assets
    
    
    40,601
    
    
    
    58,242Goodwill
    
    
    1,550,056
    
    
    
    1,550,0562,202,322
    
    
    
    2,235,966Total assets
    
    $
    2,762,629
    
    
    $
    2,834,105LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Trade accounts payable
    
    $
    56,336
    
    
    $
    45,660Current portion of long-term debt
    
    
    14,500
    
    
    
    14,500Income taxes payable
    
    
    7,258
    
    
    
    10,272Accrued interest payable
    
    
    9,032
    
    
    
    14,644Accrued expenses and other current liabilities
    
    
    96,246
    
    
    
    96,436Total current liabilities
    
    
    183,372
    
    
    
    181,512Long-term debt
    
    
    2,253,989
    
    
    
    2,313,378Revolving credit facility
    
    
    194,000
    
    
    
    194,000Obligations under capital leases
    
    
    17,290
    
    
    
    Deferred tax liability
    
    
    120,815
    
    
    
    122,145Deferred rent expense
    
    
    23,842
    
    
    
    22,082Unfavorable lease obligations and other long-term liabilities
    
    
    31,648
    
    
    
    35,6302,641,584
    
    
    
    2,687,235Commitments and contingenciesStockholders deficit:Common stock par value $0.001 per share; authorized 1,000 shares;
issued and outstanding 100 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    618,627
    
    
    
    616,086Accumulated other comprehensive income (loss), net of tax
    
    
    (6,956
    )
    
    
    2,625Retained deficit
    
    
    (673,998
    )
    
    
    (653,353
    )(62,327
    )
    
    
    (34,642
    )Total liabilities and stockholders deficit
    
    $
    2,762,629
    
    
    $
    2,834,105
  3




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CLAIRES STORES, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJuly 31, 2010
    
    
    August 1, 2009
    
    
    July 31, 2010
    
    
    August 1, 2009Net sales
    
    $
    334,233
    
    
    $
    314,196
    
    
    $
    656,310
    
    
    $
    607,294Cost of sales, occupancy and buying
expenses
    
    
    159,220
    
    
    
    159,140
    
    
    
    317,971
    
    
    
    311,495Gross profit
    
    
    175,013
    
    
    
    155,056
    
    
    
    338,339
    
    
    
    295,799Other expenses (income):Selling, general and administrative
    
    
    124,257
    
    
    
    109,761
    
    
    
    243,061
    
    
    
    217,054Depreciation and amortization
    
    
    15,856
    
    
    
    18,703
    
    
    
    32,222
    
    
    
    36,858Severance and transaction-related costs
    
    
    212
    
    
    
    25
    
    
    
    314
    
    
    
    374Other expense (income), net
    
    
    1,072
    
    
    
    (722
    )
    
    
    1,517
    
    
    
    (308
    )141,397
    
    
    
    127,767
    
    
    
    277,114
    
    
    
    253,978Operating income
    
    
    33,616
    
    
    
    27,289
    
    
    
    61,225
    
    
    
    41,821Gain on early debt extinguishment
    
    
    6,249
    
    
    
    17,104
    
    
    
    10,736
    
    
    
    17,104Impairment of equity investment
    
    
    6,030
    
    
    
    
    
    
    
    6,030
    
    
    
    Interest expense, net
    
    
    40,573
    
    
    
    45,329
    
    
    
    83,336
    
    
    
    90,563Loss before income tax expense
    
    
    (6,738
    )
    
    
    (936
    )
    
    
    (17,405
    )
    
    
    (31,638
    )Income tax expense
    
    
    1,607
    
    
    
    2,797
    
    
    
    3,240
    
    
    
    1,118Net loss
    
    $
    (8,345
    )
    
    $
    (3,733
    )
    
    $
    (20,645
    )
    
    $
    (32,756
    )Net loss
    
    $
    (8,345
    )
    
    $
    (3,733
    )
    
    $
    (20,645
    )
    
    $
    (32,756
    )Foreign currency translation and interest
rate
swap adjustments, net of tax
    
    
    2,513
    
    
    
    20,414
    
    
    
    (9
    )
    
    
    25,599Reclassification of foreign currency
translation adjustments in net loss
    
    
    (9,572
    )
    
    
    
    
    
    
    (9,572
    )
    
    
    Comprehensive income (loss)
    
    $
    (15,404
    )
    
    $
    16,681
    
    
    $
    (30,226
    )
    
    $
    (7,157
    )
  4




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CLAIRES STORES, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months
    
    
    Six MonthsEnded
    
    
    EndedJuly 31, 2010
    
    
    August 1, 2009Cash flows from operating activities:Net loss
    
    $
    (20,645
    )
    
    $
    (32,756
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    32,222
    
    
    
    36,858Impairment
    
    
    6,030
    
    
    
    Amortization of lease rights and other assets
    
    
    1,610
    
    
    
    1,008Amortization of debt issuance costs
    
    
    5,038
    
    
    
    5,256Payment in kind interest expense
    
    
    19,003
    
    
    
    19,576Net accretion of favorable (unfavorable) lease obligations
    
    
    (786
    )
    
    
    (1,103
    )Loss on sale/retirement of property and equipment, net
    
    
    366
    
    
    
    8Gain on early debt extinguishment
    
    
    (10,736
    )
    
    
    (17,104
    )Gain on sale of intangible assets/lease rights
    
    
    
    
    
    
    (598
    )Stock compensation expense
    
    
    2,541
    
    
    
    2,892(Increase) decrease in:Inventories
    
    
    (18,501
    )
    
    
    (763
    )Prepaid expenses
    
    
    917
    
    
    
    (8,958
    )Other assets
    
    
    3,945
    
    
    
    996Increase (decrease) in:Trade accounts payable
    
    
    10,074
    
    
    
    (1,280
    )Income taxes payable
    
    
    (2,590
    )
    
    
    (1,347
    )Accrued interest payable
    
    
    (5,612
    )
    
    
    (266
    )Accrued expenses and other liabilities
    
    
    8,974
    
    
    
    (7,021
    )Deferred income taxes
    
    
    (352
    )
    
    
    2,087Deferred rent expense
    
    
    1,878
    
    
    
    2,029Net cash provided by (used in) operating activities
    
    
    33,376
    
    
    
    (486
    )Cash flows from investing activities:Acquisition of property and equipment, net
    
    
    (19,556
    )
    
    
    (11,101
    )Acquisition of intangible assets/lease rights
    
    
    (524
    )
    
    
    (419
    )Proceeds from sale of intangible assets/lease rights
    
    
    
    
    
    
    1,638Proceeds from sale of property
    
    
    16,765
    
    
    
    Net cash used in investing activities
    
    
    (3,315
    )
    
    
    (9,882
    )Cash flows from financing activities:Credit facility payments
    
    
    (7,250
    )
    
    
    (7,250
    )Note purchases
    
    
    (59,112
    )
    
    
    (10,036
    )Principal payments on capital leases
    
    
    (765
    )
    
    
    Net cash used in financing activities
    
    
    (67,127
    )
    
    
    (17,286
    )Effect of foreign currency exchange rate changes on cash and
cash equivalents
    
    
    (1,510
    )
    
    
    5,430Net decrease in cash and cash equivalents
    
    
    (38,576
    )
    
    
    (22,224
    )Cash and cash equivalents at beginning of period
    
    
    198,708
    
    
    
    204,574Cash and cash equivalents at end of period
    
    $
    160,132
    
    
    $
    182,350Supplemental disclosure of cash flow information:Income taxes paid
    
    $
    5,829
    
    
    $
    1,981Interest paid
    
    
    65,232
    
    
    
    66,033Property acquired under capital lease
    
    
    18,055
    
    
    
    
  5




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CLAIRES STORES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
     2. Significant Accounting Policies
 Update to Significant Accounting Policies
  6




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Capital Leases
   3. Segment Information
   Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJuly 31, 2010
    
    
    August 1, 2009
    
    
    July 31, 2010
    
    
    August 1, 2009Net sales:North America
    
    $
    210,087
    
    
    $
    193,165
    
    
    $
    422,686
    
    
    $
    389,609Europe
    
    
    124,146
    
    
    
    121,031
    
    
    
    233,624
    
    
    
    217,685Total net sales
    
    
    334,233
    
    
    
    314,196
    
    
    
    656,310
    
    
    
    607,294Depreciation and amortization:North America
    
    
    10,402
    
    
    
    12,682
    
    
    
    20,909
    
    
    
    25,249Europe
    
    
    5,454
    
    
    
    6,021
    
    
    
    11,313
    
    
    
    11,609Total depreciation and amortization
    
    
    15,856
    
    
    
    18,703
    
    
    
    32,222
    
    
    
    36,858Operating income for reportable segments:North America
    
    
    19,368
    
    
    
    12,663
    
    
    
    43,771
    
    
    
    28,792Europe
    
    
    14,460
    
    
    
    14,651
    
    
    
    17,768
    
    
    
    13,403Total operating income for reportable segments
    
    
    33,828
    
    
    
    27,314
    
    
    
    61,539
    
    
    
    42,195Severance and transaction-related costs
    
    
    212
    
    
    
    25
    
    
    
    314
    
    
    
    374Net consolidated operating income
    
    
    33,616
    
    
    
    27,289
    
    
    
    61,225
    
    
    
    41,821Gain on early debt extinguishment
    
    
    6,249
    
    
    
    17,104
    
    
    
    10,736
    
    
    
    17,104Impairment of equity investment
    
    
    6,030
    
    
    
    
    
    
    
    6,030
    
    
    
    Interest expense, net
    
    
    40,573
    
    
    
    45,329
    
    
    
    83,336
    
    
    
    90,563Net consolidated loss before income tax expense
    
    $
    (6,738
    )
    
    $
    (936
    )
    
    $
    (17,405
    )
    
    $
    (31,638
    )
 7




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##### Table of Contents



4. Debt
 Capital Leases
  Note Purchases
  Three Months Ended
    
    
    Six Months EndedJuly 31, 2010
    
    
    July 31, 2010Principal
    
    
    Purchase
    
    
    Principal
    
    
    PurchaseNote Purchased
    
    Amount
    
    
    Price
    
    
    Amount
    
    
    PriceSenior Subordinated Notes
    
    $
    7,000
    
    
    $
    5,935
    
    
    $
    22,625
    
    
    $
    17,799Senior Toggle Notes
    
    
    41,623
    
    
    
    36,328
    
    
    
    47,623
    
    
    
    41,313$
    48,623
    
    
    $
    42,263
    
    
    $
    70,248
    
    
    $
    59,112
 Three Months Ended
    
    
    Six Months EndedAugust 1, 2009
    
    
    August 1, 2009Principal
    
    
    Purchase
    
    
    Principal
    
    
    PurchaseNote Purchased
    
    Amount
    
    
    Price
    
    
    Amount
    
    
    PriceSenior Subordinated Notes
    
    $
    27,838
    
    
    $
    10,036
    
    
    $
    27,838
    
    
    $
    10,036
  8




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##### Table of Contents



5. Stock Options and Stock-Based Compensation
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Life (Years)
    
    
    ValueOutstanding at January 30,
2010
    
    
    6,272,110
    
    
    $
    10.00
    
    
    
    3.8
    
    
    
    Options granted
    
    
    564,000
    
    
    $
    10.00
    
    
    
    6.8
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options forfeited or expired
    
    
    (270,097
    )
    
    $
    10.00
    
    
    
    4.0
    
    
    
    Outstanding at July 31, 2010
    
    
    6,566,013
    
    
    $
    10.00
    
    
    
    4.1
    
    
    
    Exercisable at July 31, 2010
    
    
    2,211,069
    
    
    $
    10.00
    
    
    
    4.1
    
    
    
    
   6. Income Taxes
   7. Fair Value Measurements and Derivative Instruments
   9




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##### Table of Contents



Fair Value Measurements at July 31, 2010 UsingQuoted Prices inActive Markets for
    
    
    Significant
    
    
    SignificantIdentical Assets
    
    
    Other Observable
    
    
    Unobservable(Liabilities)
    
    
    Inputs
    
    
    InputsCarrying Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Debt and Credit Facility
    
    $
    (2,462,489
    )
    
    $
    (2,077,959
    )
    
    $
    
    
    
    $
    Interest rate swap
    
    $
    (1,002
    )
    
    $
    
    
    
    $
    (1,002
    )
    
    $
    
 10




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##### Table of Contents



Fair Value Measurements at January 30, 2010 UsingQuoted Prices inActive Markets for
    
    
    Significant
    
    
    SignificantIdentical Assets
    
    
    Other Observable
    
    
    Unobservable(Liabilities)
    
    
    Inputs
    
    
    InputsCarrying Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Debt and Credit Facility
    
    $
    (2,521,878
    )
    
    $
    (1,952,832
    )
    
    $
    
    
    
    $
    Interest rate swaps
    
    $
    (8,752
    )
    
    $
    
    
    
    $
    (8,752
    )
    
    $
    
  Location of Gain or(Loss) Reclassified
    
    
    Amount of Gain or (Loss)Derivatives in
    
    Amount of Gain or (Loss)
    
    
    from Accumulated
    
    
    Reclassified from AccumulatedCash Flow Hedging
    
    Recognized in OCI on Derivative
    
    
    OCI into Income
    
    
    OCI into IncomeRelationships
    
    (Effective Portion)
    
    
    (Effective Portion)
    
    
    (Effective Portion) (1)Three months ended
    
    
    
    
    
    
    Three months endedJuly 31, 2010
    
    
    August 1, 2009
    
    
    
    
    
    
    July 31, 2010
    
    
    August 1, 2009Interest rate swaps
    
    $
    2,590
    
    
    $
    1,163
    
    
    Interest expense, net
    
    $
    (3,447
    )
    
    $
    (4,595
    )
 
 (1)
    
    Represents reclassification of amounts from accumulated other comprehensive income (loss) to earnings as interest
expense is recognized on the senior secured term loan facility. No ineffectiveness is associated with these interest rate
cash flow hedges. Location of Gain or(Loss) Reclassified
    
    
    Amount of Gain or (Loss)Derivatives in Cash
    
    Amount of Gain or (Loss)
    
    
    from Accumulated
    
    
    Reclassified from AccumulatedFlow Hedging
    
    Recognized in OCI on Derivative
    
    
    OCI into Income
    
    
    OCI into IncomeRelationships
    
    (Effective Portion)
    
    
    (Effective Portion)
    
    
    (Effective Portion) (1)Six months ended
    
    
    
    
    
    
    Six months endedJuly 31, 2010
    
    
    August 1, 2009
    
    
    
    
    
    
    July 31, 2010
    
    
    August 1, 2009Interest rate swaps
    
    $
    7,749
    
    
    $
    1,596
    
    
    Interest expense, net
    
    $
    (8,779
    )
    
    $
    (8,645
    )
 
 (1)
    
    Represents reclassification of amounts from accumulated other comprehensive income (loss) to earnings as interest
expense is recognized on the senior secured term loan facility. No ineffectiveness is associated with these interest rate
cash flow hedges.  11




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Fair Value Measurements at July 31, 2010 UsingQuoted Prices inActive Markets for
    
    
    Significant
    
    
    SignificantIdentical Assets
    
    
    Other Observable
    
    
    Unobservable(Liabilities)
    
    
    Inputs
    
    
    Inputs
    
    
    ImpairmentCarrying Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Charges (1)Investment in Claires Nippon
    
    $
    600
    
    
    $
    
    
    
    $
    
    
    
    $
    600
    
    
    $
    6,030
 
 (1)
    
    Includes legal, tax and valuation costs and reclassification of cumulative translation
adjustments from accumulated other comprehensive income (loss) to earnings as impairment charges. Investments 
Equity Method and Joint Ventures
 Nonmonetary Transactions
 8. Commitments and Contingencies
  12




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##### Table of Contents



9. Related Party Transactions
  10. Supplemental Financial Information
   13




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##### Table of Contents



Condensed Consolidating Balance Sheet  July 31, 2010  (in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    109,625
    
    
    $
    (5,877
    )
    
    $
    56,384
    
    
    $
    
    
    
    $
    160,132Inventories
    
    
    
    
    
    
    84,905
    
    
    
    42,863
    
    
    
    
    
    
    
    127,768Prepaid expenses
    
    
    1,071
    
    
    
    14,082
    
    
    
    17,230
    
    
    
    
    
    
    
    32,383Other current assets
    
    
    27
    
    
    
    15,791
    
    
    
    7,480
    
    
    
    
    
    
    
    23,298Total current assets
    
    
    110,723
    
    
    
    108,901
    
    
    
    123,957
    
    
    
    
    
    
    
    343,581Property and equipment:Land and building
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Furniture, fixtures and equipment
    
    
    2,780
    
    
    
    113,292
    
    
    
    55,724
    
    
    
    
    
    
    
    171,796Leasehold improvements
    
    
    1,048
    
    
    
    139,897
    
    
    
    90,731
    
    
    
    
    
    
    
    231,6763,828
    
    
    
    253,189
    
    
    
    146,455
    
    
    
    
    
    
    
    403,472Less accumulated depreciation and amortization
    
    
    (1,870
    )
    
    
    (130,998
    )
    
    
    (71,482
    )
    
    
    
    
    
    
    (204,350
    )1,958
    
    
    
    122,191
    
    
    
    74,973
    
    
    
    
    
    
    
    199,122Leased property under capital leases:Building
    
    
    
    
    
    
    18,055
    
    
    
    
    
    
    
    
    
    
    
    18,055Less accumulated depreciation and amortization
    
    
    
    
    
    
    (451
    )
    
    
    
    
    
    
    
    
    
    
    (451
    )
    
    
    
    17,604
    
    
    
    
    
    
    
    
    
    
    
    17,604Intercompany receivables
    
    
    
    
    
    
    276,120
    
    
    
    
    
    
    
    (276,120
    )
    
    
    Investment in subsidiaries
    
    
    2,251,576
    
    
    
    (67,213
    )
    
    
    
    
    
    
    (2,184,363
    )
    
    
    Intangible assets, net
    
    
    286,000
    
    
    
    11,020
    
    
    
    273,337
    
    
    
    
    
    
    
    570,357Deferred financing costs, net
    
    
    41,308
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,308Other assets
    
    
    125
    
    
    
    4,584
    
    
    
    35,892
    
    
    
    
    
    
    
    40,601Goodwill
    
    
    
    
    
    
    1,235,650
    
    
    
    314,406
    
    
    
    
    
    
    
    1,550,0562,579,009
    
    
    
    1,460,161
    
    
    
    623,635
    
    
    
    (2,460,483
    )
    
    
    2,202,322Total assets
    
    $
    2,691,690
    
    
    $
    1,708,857
    
    
    $
    822,565
    
    
    $
    (2,460,483
    )
    
    $
    2,762,629LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Trade accounts payable
    
    $
    2,710
    
    
    $
    25,653
    
    
    $
    27,973
    
    
    $
    
    
    
    $
    56,336Current portion of long-term debt
    
    
    14,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,500Income taxes payable
    
    
    
    
    
    
    (237
    )
    
    
    7,495
    
    
    
    
    
    
    
    7,258Accrued interest payable
    
    
    9,032
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,032Accrued expenses and other current liabilities
    
    
    16,187
    
    
    
    35,856
    
    
    
    44,203
    
    
    
    
    
    
    
    96,246Total current liabilities
    
    
    42,429
    
    
    
    61,272
    
    
    
    79,671
    
    
    
    
    
    
    
    183,372Intercompany payables
    
    
    263,599
    
    
    
    
    
    
    
    12,521
    
    
    
    (276,120
    )
    
    
    Long-term debt
    
    
    2,253,989
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,253,989Revolving credit facility
    
    
    194,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194,000Obligations under capital leases
    
    
    
    
    
    
    17,290
    
    
    
    
    
    
    
    
    
    
    
    17,290Deferred tax liability
    
    
    
    
    
    
    106,069
    
    
    
    14,746
    
    
    
    
    
    
    
    120,815Deferred rent expense
    
    
    
    
    
    
    16,211
    
    
    
    7,631
    
    
    
    
    
    
    
    23,842Unfavorable lease obligations and other long-term
liabilities
    
    
    
    
    
    
    29,924
    
    
    
    1,724
    
    
    
    
    
    
    
    31,6482,711,588
    
    
    
    169,494
    
    
    
    36,622
    
    
    
    (276,120
    )
    
    
    2,641,584Stockholders equity (deficit):Common stock
    
    
    
    
    
    
    367
    
    
    
    2
    
    
    
    (369
    )
    
    
    Additional paid in capital
    
    
    618,627
    
    
    
    1,445,795
    
    
    
    876,798
    
    
    
    (2,322,593
    )
    
    
    618,627Accumulated other comprehensive income (loss),
net of tax
    
    
    (6,956
    )
    
    
    3,011
    
    
    
    (14,029
    )
    
    
    11,018
    
    
    
    (6,956
    )Retained earnings (deficit)
    
    
    (673,998
    )
    
    
    28,918
    
    
    
    (156,499
    )
    
    
    127,581
    
    
    
    (673,998
    )(62,327
    )
    
    
    1,478,091
    
    
    
    706,272
    
    
    
    (2,184,363
    )
    
    
    (62,327
    )Total liabilities and stockholders equity (deficit)
    
    $
    2,691,690
    
    
    $
    1,708,857
    
    
    $
    822,565
    
    
    $
    (2,460,483
    )
    
    $
    2,762,629
 14




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##### Table of Contents



Condensed Consolidating Balance Sheet
January 30, 2010  (in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    109,138
    
    
    $
    (10,604
    )
    
    $
    100,174
    
    
    $
    
    
    
    $
    198,708Inventories
    
    
    
    
    
    
    73,902
    
    
    
    36,436
    
    
    
    
    
    
    
    110,338Prepaid expenses
    
    
    509
    
    
    
    14,217
    
    
    
    18,147
    
    
    
    
    
    
    
    32,873Other current assets
    
    
    1,030
    
    
    
    19,527
    
    
    
    7,679
    
    
    
    
    
    
    
    28,236Total current assets
    
    
    110,677
    
    
    
    97,042
    
    
    
    162,436
    
    
    
    
    
    
    
    370,155Property and equipment:Land and building
    
    
    
    
    
    
    19,318
    
    
    
    
    
    
    
    
    
    
    
    19,318Furniture, fixtures and equipment
    
    
    2,137
    
    
    
    109,405
    
    
    
    51,060
    
    
    
    
    
    
    
    162,602Leasehold improvements
    
    
    1,113
    
    
    
    138,706
    
    
    
    88,684
    
    
    
    
    
    
    
    228,5033,250
    
    
    
    267,429
    
    
    
    139,744
    
    
    
    
    
    
    
    410,423Less accumulated depreciation and amortization
    
    
    (1,746
    )
    
    
    (117,101
    )
    
    
    (63,592
    )
    
    
    
    
    
    
    (182,439
    )1,504
    
    
    
    150,328
    
    
    
    76,152
    
    
    
    
    
    
    
    227,984Intercompany receivables
    
    
    
    
    
    
    148,072
    
    
    
    
    
    
    
    (148,072
    )
    
    
    Investment in subsidiaries
    
    
    2,200,694
    
    
    
    (7,069
    )
    
    
    
    
    
    
    (2,193,625
    )
    
    
    Intangible assets, net
    
    
    286,000
    
    
    
    13,017
    
    
    
    281,010
    
    
    
    
    
    
    
    580,027Deferred financing costs, net
    
    
    47,641
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,641Other assets
    
    
    18,099
    
    
    
    3,230
    
    
    
    36,913
    
    
    
    
    
    
    
    58,242Goodwill
    
    
    
    
    
    
    1,235,651
    
    
    
    314,405
    
    
    
    
    
    
    
    1,550,0562,552,434
    
    
    
    1,392,901
    
    
    
    632,328
    
    
    
    (2,341,697
    )
    
    
    2,235,966Total assets
    
    $
    2,664,615
    
    
    $
    1,640,271
    
    
    $
    870,916
    
    
    $
    (2,341,697
    )
    
    $
    2,834,105LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Trade accounts payable
    
    $
    2,335
    
    
    $
    19,202
    
    
    $
    24,123
    
    
    $
    
    
    
    $
    45,660Current portion of long-term debt
    
    
    14,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,500Income taxes payable
    
    
    
    
    
    
    101
    
    
    
    10,171
    
    
    
    
    
    
    
    10,272Accrued interest payable
    
    
    14,644
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,644Accrued expenses and other current liabilities
    
    
    22,380
    
    
    
    33,559
    
    
    
    40,497
    
    
    
    
    
    
    
    96,436Total current liabilities
    
    
    53,859
    
    
    
    52,862
    
    
    
    74,791
    
    
    
    
    
    
    
    181,512Intercompany payables
    
    
    137,913
    
    
    
    
    
    
    
    10,159
    
    
    
    (148,072
    )
    
    
    Long-term debt
    
    
    2,313,378
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,313,378Revolving credit facility
    
    
    194,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194,000Deferred tax liability
    
    
    
    
    
    
    106,386
    
    
    
    15,759
    
    
    
    
    
    
    
    122,145Deferred rent expense
    
    
    107
    
    
    
    14,957
    
    
    
    7,018
    
    
    
    
    
    
    
    22,082Unfavorable lease obligations and other long-term
liabilities
    
    
    
    
    
    
    33,347
    
    
    
    2,283
    
    
    
    
    
    
    
    35,6302,645,398
    
    
    
    154,690
    
    
    
    35,219
    
    
    
    (148,072
    )
    
    
    2,687,235Stockholders equity (deficit):Common stock
    
    
    
    
    
    
    367
    
    
    
    2
    
    
    
    (369
    )
    
    
    Additional paid in capital
    
    
    616,086
    
    
    
    1,445,795
    
    
    
    876,798
    
    
    
    (2,322,593
    )
    
    
    616,086Accumulated other comprehensive income (loss),
net of tax
    
    
    2,625
    
    
    
    2,101
    
    
    
    (4,134
    )
    
    
    2,033
    
    
    
    2,625Retained deficit
    
    
    (653,353
    )
    
    
    (15,544
    )
    
    
    (111,760
    )
    
    
    127,304
    
    
    
    (653,353
    )(34,642
    )
    
    
    1,432,719
    
    
    
    760,906
    
    
    
    (2,193,625
    )
    
    
    (34,642
    )Total liabilities and stockholders equity (deficit)
    
    $
    2,664,615
    
    
    $
    1,640,271
    
    
    $
    870,916
    
    
    $
    (2,341,697
    )
    
    $
    2,834,105
 15




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##### Table of Contents



Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended July 31, 2010  (in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    370,817
    
    
    $
    139,401
    
    
    $
    (175,985
    )
    
    $
    334,233Cost of sales, occupancy and buying expenses
    
    
    1,382
    
    
    
    269,932
    
    
    
    63,891
    
    
    
    (175,985
    )
    
    
    159,220Gross profit
    
    
    (1,382
    )
    
    
    100,885
    
    
    
    75,510
    
    
    
    
    
    
    
    175,013Other expenses (income):Selling, general and administrative
    
    
    9,054
    
    
    
    64,422
    
    
    
    50,781
    
    
    
    
    
    
    
    124,257Depreciation and amortization
    
    
    155
    
    
    
    9,576
    
    
    
    6,125
    
    
    
    
    
    
    
    15,856Severance and transaction-related costs
    
    
    212
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212Other (income) expense
    
    
    (7,322
    )
    
    
    6,054
    
    
    
    2,340
    
    
    
    
    
    
    
    1,0722,099
    
    
    
    80,052
    
    
    
    59,246
    
    
    
    
    
    
    
    141,397Operating income (loss)
    
    
    (3,481
    )
    
    
    20,833
    
    
    
    16,264
    
    
    
    
    
    
    
    33,616Gain on early debt extinguishment
    
    
    6,249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,249Impairment of equity investment
    
    
    
    
    
    
    6,030
    
    
    
    
    
    
    
    
    
    
    
    6,030Interest expense, net
    
    
    40,418
    
    
    
    175
    
    
    
    (20
    )
    
    
    
    
    
    
    40,573Income (loss) before income taxes
    
    
    (37,650
    )
    
    
    14,628
    
    
    
    16,284
    
    
    
    
    
    
    
    (6,738
    )Income tax expense (benefit)
    
    
    
    
    
    
    (932
    )
    
    
    2,539
    
    
    
    
    
    
    
    1,607Income (loss) from continuing operations
    
    
    (37,650
    )
    
    
    15,560
    
    
    
    13,745
    
    
    
    
    
    
    
    (8,345
    )Equity in earnings of subsidiaries
    
    
    29,305
    
    
    
    282
    
    
    
    
    
    
    
    (29,587
    )
    
    
    Net income (loss)
    
    
    (8,345
    )
    
    
    15,842
    
    
    
    13,745
    
    
    
    (29,587
    )
    
    
    (8,345
    )Foreign currency translation and interest rate swap
adjustments, net of tax
    
    
    2,513
    
    
    
    (8,521
    )
    
    
    (644
    )
    
    
    9,165
    
    
    
    2,513Reclassification of foreign currency translation
adjustments in net income (loss)
    
    
    (9,572
    )
    
    
    (9,572
    )
    
    
    
    
    
    
    9,572
    
    
    
    (9,572
    )Comprehensive income (loss)
    
    $
    (15,404
    )
    
    $
    (2,251
    )
    
    $
    13,101
    
    
    $
    (10,850
    )
    
    $
    (15,404
    )
 Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Three Months Ended August 1, 2009  (in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    335,542
    
    
    $
    133,730
    
    
    $
    (155,076
    )
    
    $
    314,196Cost of sales, occupancy and buying expenses
    
    
    
    
    
    
    249,900
    
    
    
    64,316
    
    
    
    (155,076
    )
    
    
    159,140Gross profit
    
    
    
    
    
    
    85,642
    
    
    
    69,414
    
    
    
    
    
    
    
    155,056Other expenses (income):Selling, general and administrative
    
    
    7,717
    
    
    
    55,417
    
    
    
    46,627
    
    
    
    
    
    
    
    109,761Depreciation and amortization
    
    
    369
    
    
    
    11,548
    
    
    
    6,786
    
    
    
    
    
    
    
    18,703Severance and transaction-related costs
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Other (income) expense
    
    
    (3,571
    )
    
    
    4,881
    
    
    
    (2,032
    )
    
    
    
    
    
    
    (722
    )4,540
    
    
    
    71,846
    
    
    
    51,381
    
    
    
    
    
    
    
    127,767Operating income (loss)
    
    
    (4,540
    )
    
    
    13,796
    
    
    
    18,033
    
    
    
    
    
    
    
    27,289Gain on early debt extinguishment
    
    
    17,104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,104Interest expense (income), net
    
    
    45,338
    
    
    
    (13
    )
    
    
    4
    
    
    
    
    
    
    
    45,329Income (loss) before income taxes
    
    
    (32,774
    )
    
    
    13,809
    
    
    
    18,029
    
    
    
    
    
    
    
    (936
    )Income tax expense (benefit)
    
    
    (174
    )
    
    
    1,470
    
    
    
    1,501
    
    
    
    
    
    
    
    2,797Income (loss) from continuing operations
    
    
    (32,600
    )
    
    
    12,339
    
    
    
    16,528
    
    
    
    
    
    
    
    (3,733
    )Equity in earnings of subsidiaries
    
    
    28,867
    
    
    
    706
    
    
    
    
    
    
    
    (29,573
    )
    
    
    Net income (loss)
    
    
    (3,733
    )
    
    
    13,045
    
    
    
    16,528
    
    
    
    (29,573
    )
    
    
    (3,733
    )Foreign currency translation and interest rate swap
adjustments, net of tax
    
    
    20,414
    
    
    
    2,315
    
    
    
    18,339
    
    
    
    (20,654
    )
    
    
    20,414Comprehensive income
    
    $
    16,681
    
    
    $
    15,360
    
    
    $
    34,867
    
    
    $
    (50,227
    )
    
    $
    16,681
 16




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##### Table of Contents



Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Six Months Ended July 31, 2010  (in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    726,606
    
    
    $
    262,886
    
    
    $
    (333,182
    )
    
    $
    656,310Cost of sales, occupancy and buying expenses
    
    
    2,657
    
    
    
    523,116
    
    
    
    125,380
    
    
    
    (333,182
    )
    
    
    317,971Gross profit
    
    
    (2,657
    )
    
    
    203,490
    
    
    
    137,506
    
    
    
    
    
    
    
    338,339Other expenses (income):Selling, general and administrative
    
    
    17,486
    
    
    
    125,787
    
    
    
    99,788
    
    
    
    
    
    
    
    243,061Depreciation and amortization
    
    
    287
    
    
    
    19,214
    
    
    
    12,721
    
    
    
    
    
    
    
    32,222Severance and transaction-related costs
    
    
    314
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314Other (income) expense
    
    
    (13,197
    )
    
    
    8,366
    
    
    
    6,348
    
    
    
    
    
    
    
    1,5174,890
    
    
    
    153,367
    
    
    
    118,857
    
    
    
    
    
    
    
    277,114Operating income (loss)
    
    
    (7,547
    )
    
    
    50,123
    
    
    
    18,649
    
    
    
    
    
    
    
    61,225Gain on early debt extinguishment
    
    
    10,736
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,736Impairment of equity investment
    
    
    
    
    
    
    6,030
    
    
    
    
    
    
    
    
    
    
    
    6,030Interest expense, net
    
    
    83,163
    
    
    
    182
    
    
    
    (9
    )
    
    
    
    
    
    
    83,336Income (loss) before income taxes
    
    
    (79,974
    )
    
    
    43,911
    
    
    
    18,658
    
    
    
    
    
    
    
    (17,405
    )Income tax expense (benefit)
    
    
    23
    
    
    
    (316
    )
    
    
    3,533
    
    
    
    
    
    
    
    3,240Income (loss) from continuing operations
    
    
    (79,997
    )
    
    
    44,227
    
    
    
    15,125
    
    
    
    
    
    
    
    (20,645
    )Equity in earnings of subsidiaries
    
    
    59,352
    
    
    
    235
    
    
    
    
    
    
    
    (59,587
    )
    
    
    Net income (loss)
    
    
    (20,645
    )
    
    
    44,462
    
    
    
    15,125
    
    
    
    (59,587
    )
    
    
    (20,645
    )Foreign currency translation and interest rate swap
adjustments, net of tax
    
    
    (9
    )
    
    
    911
    
    
    
    (9,895
    )
    
    
    8,984
    
    
    
    (9
    )Reclassification of foreign currency translation
adjustments in net income (loss)
    
    
    (9,572
    )
    
    
    (9,572
    )
    
    
    
    
    
    
    9,572
    
    
    
    (9,572
    )Comprehensive income (loss)
    
    $
    (30,226
    )
    
    $
    35,801
    
    
    $
    5,230
    
    
    $
    (41,031
    )
    
    $
    (30,226
    )
 Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For The Six Months Ended August 1, 2009  (in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    661,525
    
    
    $
    241,197
    
    
    $
    (295,428
    )
    
    $
    607,294Cost of sales, occupancy and buying expenses
    
    
    
    
    
    
    485,080
    
    
    
    121,843
    
    
    
    (295,428
    )
    
    
    311,495Gross profit
    
    
    
    
    
    
    176,445
    
    
    
    119,354
    
    
    
    
    
    
    
    295,799Other expenses (income):Selling, general and administrative
    
    
    13,987
    
    
    
    112,749
    
    
    
    90,318
    
    
    
    
    
    
    
    217,054Depreciation and amortization
    
    
    1,113
    
    
    
    22,621
    
    
    
    13,124
    
    
    
    
    
    
    
    36,858Severance and transaction-related costs
    
    
    374
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    374Other (income) expense
    
    
    (6,238
    )
    
    
    9,483
    
    
    
    (3,553
    )
    
    
    
    
    
    
    (308
    )9,236
    
    
    
    144,853
    
    
    
    99,889
    
    
    
    
    
    
    
    253,978Operating income (loss)
    
    
    (9,236
    )
    
    
    31,592
    
    
    
    19,465
    
    
    
    
    
    
    
    41,821Gain on early debt extinguishment
    
    
    17,104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,104Interest expense (income), net
    
    
    90,618
    
    
    
    (13
    )
    
    
    (42
    )
    
    
    
    
    
    
    90,563Income (loss) before income taxes
    
    
    (82,750
    )
    
    
    31,605
    
    
    
    19,507
    
    
    
    
    
    
    
    (31,638
    )Income tax expense (benefit)
    
    
    (174
    )
    
    
    1,848
    
    
    
    (556
    )
    
    
    
    
    
    
    1,118Income (loss) from continuing operations
    
    
    (82,576
    )
    
    
    29,757
    
    
    
    20,063
    
    
    
    
    
    
    
    (32,756
    )Equity in earnings of subsidiaries
    
    
    49,820
    
    
    
    1,272
    
    
    
    
    
    
    
    (51,092
    )
    
    
    Net income (loss)
    
    
    (32,756
    )
    
    
    31,029
    
    
    
    20,063
    
    
    
    (51,092
    )
    
    
    (32,756
    )Foreign currency translation and interest rate swap
adjustments, net of tax
    
    
    25,599
    
    
    
    4,049
    
    
    
    25,849
    
    
    
    (29,898
    )
    
    
    25,599Comprehensive income (loss)
    
    $
    (7,157
    )
    
    $
    35,078
    
    
    $
    45,912
    
    
    $
    (80,990
    )
    
    $
    (7,157
    )
 17




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows
Six Months Ended July 31, 2010  (in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (20,645
    )
    
    $
    44,462
    
    
    $
    15,125
    
    
    $
    (59,587
    )
    
    $
    (20,645
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Equity in earnings of subsidiaries
    
    
    (59,352
    )
    
    
    (235
    )
    
    
    
    
    
    
    59,587
    
    
    
    Depreciation and amortization
    
    
    287
    
    
    
    19,214
    
    
    
    12,721
    
    
    
    
    
    
    
    32,222Impairment
    
    
    
    
    
    
    6,030
    
    
    
    
    
    
    
    
    
    
    
    6,030Amortization of lease rights and other assets
    
    
    
    
    
    
    25
    
    
    
    1,585
    
    
    
    
    
    
    
    1,610Amortization of debt issuance costs
    
    
    5,038
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,038Payment in kind interest expense
    
    
    19,003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,003Net accretion of favorable (unfavorable) lease
obligations
    
    
    
    
    
    
    (1,023
    )
    
    
    237
    
    
    
    
    
    
    
    (786
    )Loss on sale/retirement of property and equipment, net
    
    
    
    
    
    
    366
    
    
    
    
    
    
    
    
    
    
    
    366Gain on early debt extinguishment
    
    
    (10,736
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,736
    )Stock compensation expense
    
    
    1,924
    
    
    
    
    
    
    
    617
    
    
    
    
    
    
    
    2,541(Increase) decrease in:Inventories
    
    
    
    
    
    
    (11,003
    )
    
    
    (7,498
    )
    
    
    
    
    
    
    (18,501
    )Prepaid expenses
    
    
    (561
    )
    
    
    133
    
    
    
    1,345
    
    
    
    
    
    
    
    917Other assets
    
    
    1,220
    
    
    
    5,110
    
    
    
    (2,385
    )
    
    
    
    
    
    
    3,945Increase (decrease) in:Trade accounts payable
    
    
    374
    
    
    
    5,867
    
    
    
    3,833
    
    
    
    
    
    
    
    10,074Income taxes payable
    
    
    
    
    
    
    (255
    )
    
    
    (2,335
    )
    
    
    
    
    
    
    (2,590
    )Accrued interest payable
    
    
    (5,612
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,612
    )Accrued expenses and other liabilities
    
    
    1,556
    
    
    
    2,298
    
    
    
    5,120
    
    
    
    
    
    
    
    8,974Deferred income taxes
    
    
    
    
    
    
    (407
    )
    
    
    55
    
    
    
    
    
    
    
    (352
    )Deferred rent expense
    
    
    (107
    )
    
    
    1,254
    
    
    
    731
    
    
    
    
    
    
    
    1,878Net cash provided by (used in) operating activities
    
    
    (67,611
    )
    
    
    71,836
    
    
    
    29,151
    
    
    
    
    
    
    
    33,376Cash flows from investing activities:Acquisition of property and equipment, net
    
    
    (740
    )
    
    
    (7,394
    )
    
    
    (11,422
    )
    
    
    
    
    
    
    (19,556
    )Acquisition of intangible assets/lease rights
    
    
    
    
    
    
    (63
    )
    
    
    (461
    )
    
    
    
    
    
    
    (524
    )Proceeds from sale of property
    
    
    
    
    
    
    16,765
    
    
    
    
    
    
    
    
    
    
    
    16,765Net cash provided by (used in) investing activities
    
    
    (740
    )
    
    
    9,308
    
    
    
    (11,883
    )
    
    
    
    
    
    
    (3,315
    )Cash flows from financing activities:Credit facility payments
    
    
    (7,250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,250
    )Note purchases
    
    
    (59,112
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,112
    )Principal payments on capital leases
    
    
    
    
    
    
    (765
    )
    
    
    
    
    
    
    
    
    
    
    (765
    )Intercompany activity, net
    
    
    135,200
    
    
    
    (77,080
    )
    
    
    (58,120
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    68,838
    
    
    
    (77,845
    )
    
    
    (58,120
    )
    
    
    
    
    
    
    (67,127
    )Effect of foreign currency exchange rate changes on cash and
cash equivalents
    
    
    
    
    
    
    1,428
    
    
    
    (2,938
    )
    
    
    
    
    
    
    (1,510
    )Net increase (decrease) in cash and cash equivalents
    
    
    487
    
    
    
    4,727
    
    
    
    (43,790
    )
    
    
    
    
    
    
    (38,576
    )Cash and cash equivalents at beginning of period
    
    
    109,138
    
    
    
    (10,604
    )
    
    
    100,174
    
    
    
    
    
    
    
    198,708Cash and cash equivalents at end of period
    
    $
    109,625
    
    
    $
    (5,877
    )
    
    $
    56,384
    
    
    $
    
    
    
    $
    160,132
 18




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows
Six Months Ended August 1, 2009  (in thousands)
 Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (32,756
    )
    
    $
    31,029
    
    
    $
    20,063
    
    
    $
    (51,092
    )
    
    $
    (32,756
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Equity in earnings of subsidiaries
    
    
    (49,820
    )
    
    
    (1,272
    )
    
    
    
    
    
    
    51,092
    
    
    
    Depreciation and amortization
    
    
    1,113
    
    
    
    22,621
    
    
    
    13,124
    
    
    
    
    
    
    
    36,858Amortization of lease rights and other assets
    
    
    
    
    
    
    24
    
    
    
    984
    
    
    
    
    
    
    
    1,008Amortization of debt issuance costs
    
    
    5,256
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,256Payment in kind interest expense
    
    
    19,576
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,576Net accretion of favorable (unfavorable) lease
obligations
    
    
    
    
    
    
    (1,322
    )
    
    
    219
    
    
    
    
    
    
    
    (1,103
    )(Gain) loss on sale / retirement of property and
equipment, net
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Gain on early debt extinguishment
    
    
    (17,104
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,104
    )Gain on sale of intangible assets/lease rights
    
    
    
    
    
    
    
    
    
    
    (598
    )
    
    
    
    
    
    
    (598
    )Stock compensation expense
    
    
    1,882
    
    
    
    
    
    
    
    1,010
    
    
    
    
    
    
    
    2,892(Increase) decrease in:Inventories
    
    
    
    
    
    
    (2,766
    )
    
    
    2,003
    
    
    
    
    
    
    
    (763
    )Prepaid expenses
    
    
    (305
    )
    
    
    (1,101
    )
    
    
    (7,552
    )
    
    
    
    
    
    
    (8,958
    )Other assets
    
    
    1,132
    
    
    
    (529
    )
    
    
    393
    
    
    
    
    
    
    
    996Increase (decrease) in:Trade accounts payable
    
    
    (1,096
    )
    
    
    (1,392
    )
    
    
    1,208
    
    
    
    
    
    
    
    (1,280
    )Income taxes payable
    
    
    
    
    
    
    (164
    )
    
    
    (1,183
    )
    
    
    
    
    
    
    (1,347
    )Accrued interest payable
    
    
    (263
    )
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (266
    )Accrued expenses and other liabilities
    
    
    (7,870
    )
    
    
    (143
    )
    
    
    992
    
    
    
    
    
    
    
    (7,021
    )Deferred income taxes
    
    
    
    
    
    
    1,307
    
    
    
    780
    
    
    
    
    
    
    
    2,087Deferred rent expense
    
    
    (279
    )
    
    
    1,620
    
    
    
    688
    
    
    
    
    
    
    
    2,029Net cash provided by (used in) operating activities
    
    
    (80,534
    )
    
    
    47,920
    
    
    
    32,128
    
    
    
    
    
    
    
    (486
    )Cash flows from investing activities:Acquisition of property and equipment, net
    
    
    (143
    )
    
    
    (6,666
    )
    
    
    (4,292
    )
    
    
    
    
    
    
    (11,101
    )Acquisition of intangible assets/lease rights
    
    
    (13
    )
    
    
    (58
    )
    
    
    (348
    )
    
    
    
    
    
    
    (419
    )Proceeds from sale of intangible assets/lease rights
    
    
    
    
    
    
    
    
    
    
    1,638
    
    
    
    
    
    
    
    1,638Net cash used in investing activities
    
    
    (156
    )
    
    
    (6,724
    )
    
    
    (3,002
    )
    
    
    
    
    
    
    (9,882
    )Cash flows from financing activities:Credit facility payments
    
    
    (7,250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,250
    )Note purchases
    
    
    (10,036
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,036
    )Intercompany activity, net
    
    
    41,774
    
    
    
    (22,145
    )
    
    
    (19,629
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    24,488
    
    
    
    (22,145
    )
    
    
    (19,629
    )
    
    
    
    
    
    
    (17,286
    )Effect of foreign currency exchange rate changes on cash and
cash equivalents
    
    
    
    
    
    
    (150
    )
    
    
    5,580
    
    
    
    
    
    
    
    5,430Net increase (decrease) in cash and cash equivalents
    
    
    (56,202
    )
    
    
    18,901
    
    
    
    15,077
    
    
    
    
    
    
    
    (22,224
    )Cash and cash equivalents at beginning of period
    
    
    154,414
    
    
    
    211
    
    
    
    49,949
    
    
    
    
    
    
    
    204,574Cash and cash equivalents at end of period
    
    $
    98,212
    
    
    $
    19,112
    
    
    $
    65,026
    
    
    $
    
    
    
    $
    182,350
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   19




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##### Table of Contents



Business Overview
        
    
    Accessories  includes fashion accessories for year-round use, including headwear,
legwear, attitude glasses, scarves, armwear, and belts, and seasonal use, including
sunglasses, sandals, boots, scarves and slippers; and other accessories, including
hairgoods, handbags, and small leather goods, as well as cosmetics
    
    Jewelry  includes earrings, necklaces, bracelets, body jewelry and rings, as well as
ear piercing
  20




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##### Table of Contents



Current Market Conditions
  Consolidated Results of Operations
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedJuly 31, 2010
    
    
    August 1, 2009Net sales
    
    $
    334,233
    
    
    $
    314,196Increase (decrease) in same store sales
    
    
    8.9
    %
    
    
    (6.9
    )%Gross profit percentage
    
    
    52.4
    %
    
    
    49.4
    %Selling, general and administrative expenses as a percentage of net sales
    
    
    37.2
    %
    
    
    34.9
    %Depreciation and amortization as a percentage of net sales
    
    
    4.7
    %
    
    
    6.0
    %Operating income
    
    $
    33,616
    
    
    $
    27,289Gain on early debt extinguishment
    
    $
    6,249
    
    
    $
    17,104Impairment of equity investment
    
    $
    6,030
    
    
    $
    Net loss
    
    $
    (8,345
    )
    
    $
    (3,733
    )Number of stores at the end of the period (1)
    
    
    2,954
    
    
    
    2,948
 
 (1)
    
    Number of stores excludes stores operated under franchise agreements and joint venture stores. Six Months
    
    
    Six MonthsEnded
    
    
    EndedJuly 31, 2010
    
    
    August 1, 2009Net sales
    
    $
    656,310
    
    
    $
    607,294Increase (decrease) in same store sales
    
    
    8.2
    %
    
    
    (4.7
    )%Gross profit percentage
    
    
    51.6
    %
    
    
    48.7
    %Selling, general and administrative expenses as a percentage of net sales
    
    
    37.0
    %
    
    
    35.7
    %Depreciation and amortization as a percentage of net sales
    
    
    4.9
    %
    
    
    6.1
    %Operating income
    
    $
    61,225
    
    
    $
    41,821Gain on early debt extinguishment
    
    $
    10,736
    
    
    $
    17,104Impairment of equity investment
    
    $
    6,030
    
    
    $
    Net loss
    
    $
    (20,645
    )
    
    $
    (32,756
    )Number of stores at the end of the period (1)
    
    
    2,954
    
    
    
    2,948
 
 (1)
    
    Number of stores excludes stores operated under franchise agreements and joint venture stores. Net sales
  21




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##### Table of Contents



Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended% of Total
    
    July 31, 2010
    
    
    August 1, 2009
    
    
    July 31, 2010
    
    
    August 1, 2009Accessories
    
    
    51.8
    
    
    
    50.2
    
    
    
    51.9
    
    
    
    49.5Jewelry
    
    
    48.2
    
    
    
    49.8
    
    
    
    48.1
    
    
    
    50.5100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
 Gross profit
    Selling, general and administrative expenses
  22




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##### Table of Contents



Depreciation and amortization expense
   Other (income) expense, net
  Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJuly 31, 2010
    
    
    August 1, 2009
    
    
    July 31, 2010
    
    
    August 1, 2009Equity loss
    
    $
    1,413
    
    
    $
    323
    
    
    $
    2,529
    
    
    $
    1,188Royalty income
    
    
    (341
    )
    
    
    (360
    )
    
    
    (532
    )
    
    
    (806
    )Gain on sale of assets
    
    
    
    
    
    
    (598
    )
    
    
    
    
    
    
    (598
    )Other income
    
    
    
    
    
    
    (87
    )
    
    
    (480
    )
    
    
    (92
    )$
    1,072
    
    
    $
    (722
    )
    
    $
    1,517
    
    
    $
    (308
    )
 Impairment of equity investment
  Interest expense, net
   23




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##### Table of Contents



Income taxes
  Segment Operations
  North America
  Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJuly 31, 2010
    
    
    August 1, 2009
    
    
    July 31, 2010
    
    
    August 1, 2009Net sales
    
    $
    210,087
    
    
    $
    193,165
    
    
    $
    422,686
    
    
    $
    389,609Increase (decrease) in same store sales
    
    
    9.0
    %
    
    
    (9.9
    )%
    
    
    8.9
    %
    
    
    (6.5
    )%Gross profit percentage
    
    
    52.0
    %
    
    
    48.1
    %
    
    
    51.8
    %
    
    
    48.8
    %Number of stores at the end of the period (1)
    
    
    1,984
    
    
    
    2,001
    
    
    
    1,984
    
    
    
    2,001
 
 (1)
    
    Number of stores excludes stores operated under franchise agreements and joint venture stores.      24




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##### Table of Contents



Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended% of Total
    
    July 31, 2010
    
    
    August 1, 2009
    
    
    July 31, 2010
    
    
    August 1, 2009Accessories
    
    
    46.4
    
    
    
    44.6
    
    
    
    46.9
    
    
    
    43.9Jewelry
    
    
    53.6
    
    
    
    55.4
    
    
    
    53.1
    
    
    
    56.1100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
 Europe
  Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJuly 31, 2010
    
    
    August 1, 2009
    
    
    July 31, 2010
    
    
    August 1, 2009Net sales
    
    $
    124,146
    
    
    $
    121,031
    
    
    $
    233,624
    
    
    $
    217,685Increase (decrease) in same store sales
    
    
    8.7
    %
    
    
    (1.6
    )%
    
    
    7.0
    %
    
    
    (1.3
    )%Gross profit percentage
    
    
    53.0
    %
    
    
    51.3
    %
    
    
    51.1
    %
    
    
    48.6
    %Number of stores at the end of the
period (1)
    
    
    970
    
    
    
    947
    
    
    
    970
    
    
    
    947
 
 (1)
    
    Number of stores excludes stores operated under franchise agreements and joint venture stores.      25




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##### Table of Contents



Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended% of Total
    
    July 31, 2010
    
    
    August 1, 2009
    
    
    July 31, 2010
    
    
    August 1, 2009Accessories
    
    
    60.7
    
    
    
    59.0
    
    
    
    61.0
    
    
    
    59.3Jewelry
    
    
    39.3
    
    
    
    41.0
    
    
    
    39.0
    
    
    
    40.7100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
 Financial Resources and Liquidity
  Six Months
    
    
    Six MonthsEnded
    
    
    EndedJuly 31, 2010
    
    
    August 1, 2009Operating activities
    
    $
    33,376
    
    
    $
    (486
    )Investing activities
    
    
    (3,315
    )
    
    
    (9,882
    )Financing activities
    
    
    (67,127
    )
    
    
    (17,286
    )
 Cash flows from operating activities
  Cash flows from investing activities
  Cash flows from financing activities
   26




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##### Table of Contents



Cash position
   Credit Facility and Notes
   
    
    incur additional indebtedness;
    
    pay dividends or distributions on our capital stock, repurchase or retire our capital
stock and redeem, repurchase or defease any subordinated indebtedness;
    
    make certain investments;
    
    create or incur certain liens;
    
    create restrictions on the payment of dividends or other distributions to us from our
subsidiaries;
    
    transfer or sell assets;
    
    engage in certain transactions with our affiliates; and
    
    merge or consolidate with other companies or transfer all or substantially all of our
assets.
  27




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##### Table of Contents



Critical Accounting Policies and Estimates
  Cautionary Note Regarding Forward-Looking Statements and Risk Factors
  28




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Cash and Cash Equivalents
  Foreign Currency
    29




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##### Table of Contents



Interest Rates
    General Market Risk
  
 Item 4. Controls and Procedures
   30




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31




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 6. Exhibits
 31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a).31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a).32.1
    
    Certification of 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 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 of Part II are not applicable and have been omitted.
 32




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##### Table of Contents



SIGNATURES
  CLAIRES STORES, INC.September 3, 2010
    By:
    /s/Eugene S. KahnEugene S. Kahn, Chief Executive Officer(principal executive officer)September 3, 2010
    By:
    /s/J. Per BrodinJ. Per Brodin, Executive Vice President and ChiefFinancial Officer (principal financial and
accounting officer) 33




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##### Table of Contents



INDEX TO EXHIBITS
 EXHIBIT NO.
    
    DESCRIPTION31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).32.1
    
    Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 34