##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended April 29, 2006
 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
 x o
 o
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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 April 29, 2006 and January 28, 2006
    
    
    3Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended April 29, 2006 and April 30, 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 29, 2006 and April 30, 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 6. Exhibits
    
    
    21SIGNATURE PAGE
    
    
    22
 2




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##### 



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 Apr. 29, 2006
    
    
    Jan. 28, 2006(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    386,354
    
    
    $
    431,122Inventories
    
    
    128,341
    
    
    
    113,405Prepaid expenses
    
    
    42,883
    
    
    
    17,738Other current assets
    
    
    36,560
    
    
    
    35,742Total current assets
    
    
    594,138
    
    
    
    598,007Property and equipment:Land and building
    
    
    17,350
    
    
    
    18,151Furniture, fixtures and equipment
    
    
    261,565
    
    
    
    252,346Leasehold improvements
    
    
    252,374
    
    
    
    238,817531,289
    
    
    
    509,314Less accumulated depreciation and amortization
    
    
    (296,272
    )
    
    
    (286,595
    )235,017
    
    
    
    222,719Intangible assets, net of accumulated amortization of $11,304
and $10,550, respectively
    
    
    59,843
    
    
    
    56,175Other assets
    
    
    15,200
    
    
    
    15,162Goodwill
    
    
    199,660
    
    
    
    198,638274,703
    
    
    
    269,975Total assets
    
    $
    1,103,858
    
    
    $
    1,090,701LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    72,642
    
    
    $
    50,242Income taxes payable
    
    
    27,609
    
    
    
    36,708Accrued expenses and other liabilities
    
    
    86,578
    
    
    
    92,495Total current liabilities
    
    
    186,829
    
    
    
    179,445Long-term liabilities:Deferred tax liability
    
    
    21,513
    
    
    
    20,979Deferred rent expense
    
    
    22,302
    
    
    
    21,959Other liabilities
    
    
    992
    
    
    
    44,807
    
    
    
    42,938Commitments 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
4,884,557
shares and 4,895,746 shares, respectively
    
    
    244
    
    
    
    245Common stock par value $0.05 per share; authorized
300,000,000 shares, issued and outstanding 94,045,702
shares and 94,580,977 shares, respectively
    
    
    4,702
    
    
    
    4,729Additional paid-in capital
    
    
    71,982
    
    
    
    63,321Unearned compensation
    
    
    
    
    
    
    (2,690
    )Accumulated other comprehensive income, net of tax
    
    
    28,730
    
    
    
    21,036Retained earnings
    
    
    766,564
    
    
    
    781,677872,222
    
    
    
    868,318Total liabilities and stockholders equity
    
    $
    1,103,858
    
    
    $
    1,090,701
  3




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##### 



CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME
 Three Months EndedApr. 29, 2006
    
    
    Apr. 30, 2005(In thousands, except per share amounts)Net sales
    
    $
    311,927
    
    
    $
    302,708Cost of sales, occupancy and buying expenses
    
    
    147,174
    
    
    
    138,695Gross profit
    
    
    164,753
    
    
    
    164,013Other expenses (income):Selling, general and administrative
    
    
    111,676
    
    
    
    110,517Depreciation and amortization
    
    
    13,158
    
    
    
    12,348Interest and other income
    
    
    (4,567
    )
    
    
    (1,961
    )120,267
    
    
    
    120,904Income before income taxes
    
    
    44,486
    
    
    
    43,109Income taxes
    
    
    14,785
    
    
    
    13,407Net income
    
    
    29,701
    
    
    
    29,702Foreign currency translation adjustments
    
    
    7,694
    
    
    
    (1,654
    )Comprehensive income
    
    $
    37,395
    
    
    $
    28,048Net income per share:Basic
    
    $
    0.30
    
    
    $
    0.30Diluted
    
    $
    0.30
    
    
    $
    0.30Basic weighted average number of common shares outstanding
    
    
    99,160
    
    
    
    98,994Diluted weighted average number of common and common
equivalent
shares outstanding
    
    
    99,572
    
    
    
    99,358Dividends declared per share:Common stock
    
    $
    0.10
    
    
    $
    0.10Class A common stock
    
    $
    0.05
    
    
    $
    0.05
  4




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##### 



CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedApr. 29, 2006
    
    Apr. 30, 2005(In thousands)Cash flows from operating activities:Net income
    
    $
    29,701
    
    
    $
    29,702Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    13,158
    
    
    
    12,348Amortization of intangible assets
    
    
    348
    
    
    
    261(Gain) loss on sale/retirement of property and equipment, net
    
    
    (147
    )
    
    
    630Gain on sale of intangible assets
    
    
    (47
    )
    
    
    Excess tax benefit from share-based compensation
    
    
    (3,242
    )
    
    
    Stock compensation expense
    
    
    2,435
    
    
    
    640Increase (decrease) in -Inventories
    
    
    (13,928
    )
    
    
    (6,962
    )Prepaid expenses
    
    
    (24,124
    )
    
    
    (11,622
    )Other assets
    
    
    400
    
    
    
    (531
    )Increase (decrease) in -Trade accounts payable
    
    
    21,331
    
    
    
    17,386Income taxes payable
    
    
    (4,590
    )
    
    
    (3,157
    )Accrued expenses and other liabilities
    
    
    (7,725
    )
    
    
    (20,255
    )Deferred income taxes
    
    
    (350
    )
    
    
    246Deferred rent expense
    
    
    163
    
    
    
    892Net cash provided by operating activities
    
    
    13,383
    
    
    
    19,578Cash flows from investing activities:Acquisition of property and equipment
    
    
    (23,190
    )
    
    
    (17,031
    )Proceeds from sale of land and building
    
    
    881
    
    
    
    Acquisition of intangible assets
    
    
    (1,679
    )
    
    
    (2,407
    )Purchase of short-term investments
    
    
    
    
    
    
    (82,334
    )Sale of short-term investments
    
    
    
    
    
    
    216,947Net cash provided by (used in) investing activities
    
    
    (23,988
    )
    
    
    115,175Cash flows from financing activities:Proceeds from stock options exercised
    
    
    7,539
    
    
    
    311Purchase and retirement of common stock
    
    
    (35,177
    )
    
    
    Excess tax benefit from share-based compensation
    
    
    3,242
    
    
    
    Dividends paid
    
    
    (9,687
    )
    
    
    (9,657
    )Net cash used in financing activities
    
    
    (34,083
    )
    
    
    (9,346
    )Effect of foreign currency exchange rate changes on cash
and cash equivalents
    
    
    (80
    )
    
    
    (336
    )Net increase (decrease) in cash and cash equivalents
    
    
    (44,768
    )
    
    
    125,071Cash and cash equivalents at beginning of period
    
    
    431,122
    
    
    
    191,006Cash and cash equivalents at end of period
    
    $
    386,354
    
    
    $
    316,077
  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 PoliciesThe accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q, and do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair statement have been included. These statements should
be read in conjunction with the consolidated financial statements and notes thereto included in
the Annual Report on Form 10-K for the year ended January 28, 2006 filed with the Securities and
Exchange Commission, including Note 1 to the consolidated financial statements included therein
which discusses principles of consolidation and a summary of significant accounting policies.
These statements have been prepared in accordance with U.S. generally accepted accounting
principles, which require management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates include valuation of inventories,
valuation of goodwill and intangible assets, provisions for income taxes, stock-based
compensation, and contingencies and litigation. Actual results could differ from these
estimates. Due to the seasonal nature of the Companys business, the results of operations for
interim periods of the year are not necessarily indicative of the results of operations on an
annualized basis. Certain prior period amounts have been reclassified to conform to the current
period presentation.Stock-Based CompensationThe Company adopted Statement of Financial Accounting Standard No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R) on January 29, 2006.Time-vested stock awards are accounted for at fair value at date of grant. The compensation
expense is recorded over the requisite service period.Other stock awards, such as long-term incentive plan awards, which qualify as equity plans under
SFAS No. 123R, are accounted for based on fair value at date of grant. The compensation expense
is based on the number of shares expected to be issued when it becomes probable that performance
targets required to receive the award will be achieved. The expense is recorded over the
requisite service period.Other long-term incentive plans accounted for as liabilities under SFAS No. 123R are recorded at
fair value at each reporting date until settlement. The compensation expense is based on the
number of performance units expected to be issued when it becomes probable that performance
targets required to receive the award will be achieved. The expense is recorded over the
requisite service period.2.
    
    Earnings Per ShareThe information required to compute basic and diluted earnings per share is as follows (in
thousands, except per share data):
 Three Months EndedApr. 29, 2006
    
    Apr. 30, 2005Numerator:Net income
    
    $
    29,701
    
    
    $
    29,702Denominator:Weighted average number of shares outstandingBasic
    
    
    99,160
    
    
    
    98,994Effect of dilutive stock options
    
    
    343
    
    
    
    359Effect of dilutive time-vested and long term incentive stock awards
    
    
    69
    
    
    
    5Diluted
    
    
    99,572
    
    
    
    99,358Net income per share:Basic
    
    $
    0.30
    
    
    $
    0.30Diluted
    
    $
    0.30
    
    
    $
    0.30
 6




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All outstanding time-vested stock awards and options for the three months ended April 29,
2006 and April 30, 2005 were included in the computation of diluted earnings per share.3.
    
    Stock-Based CompensationThe Company issues stock options and other stock-based awards to executive management, key
employees and directors under stock-based compensation plans.Through January 28, 2006, the Company historically accounted for stock-based compensation using
the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) and, accordingly, recognized no compensation expense
related to stock options. For grants of restricted stock, other than those awarded under
long-term incentive agreements, the fair value of the shares at the date of grant was amortized
to compensation expense over the awards vesting period. For awards of stock granted under
long-term incentive agreements, the fair value at the end of each reporting period was amortized
to compensation expense over the awards vesting period. The Company has historically reported
pro forma results under the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as amended by
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure.
 Three Months EndedApr. 30, 2005Net income  as reported
    
    $
    29,702Stock-based employee compensation
expense determined under the fair
value based methods, net of income tax
    
    
    (890
    )Stock-based employee compensation
expense included in reported net
income, net of income tax
    
    
    416Net income  pro forma
    
    $
    29,228Basic net income per share  as reported
    
    $
    0.30Basic net income per share  pro forma
    
    $
    0.30Diluted net income per share  as reported
    
    $
    0.30Diluted net income per share  pro forma
    
    $
    0.29
 Effective January 29, 2006, the Company adopted SFAS No. 123R using the modified prospective
transition method. Under the modified prospective transition method, fair value accounting and
recognition provisions of SFAS No. 123R are applied to share-based awards granted or modified
subsequent to the date of adoption and prior periods presented are not restated. In addition,
for awards granted prior to the effective date, the unvested portion of the awards is recognized
in periods subsequent to the effective date based on the grant date fair value determined for
pro forma disclosure purposes under SFAS No. 123.Prior to adopting SFAS No. 123R, the Company presented tax benefits resulting from the exercise
of stock options as operating cash flows in the statements of cash flows. SFAS No. 123R
requires cash flows resulting from excess tax benefits to be classified as a part of cash flows
from financing activities. Excess tax benefits are realized tax benefits from tax deductions
for exercised options in excess of the deferred tax asset attributable to stock compensation
costs for such options.In the three months ended April 29, 2006 and April 30, 2005, the Company recognized total
stock-based compensation cost of $2.4 million and $0.6 million, respectively, and related tax
benefits of approximately $0.8 million and $0.2 million, respectively. As a result of the
adoption of SFAS No. 123R, the Companys income before income taxes, net income and basic and
diluted earnings per share for the three months ended April 29, 2006 are not materially
different than if the Company had continued to account for the share-based compensation programs
under APB 25. For the three months ended April 29, 2006, cash flow from operating activities
decreased $3.2 million and cash flow from financing activities increased $3.2 million as a
result of adoption of SFAS No. 123R and the requirement relating to classification of cash
 7




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##### 



flows of tax benefits from share-based compensation.The Company issues new shares to satisfy share-based awards and exercise of stock options.
During the three month periods ended April 29, 2006 and April 30, 2005, no cash was used to
settle equity instruments granted under share-based payment arrangements.Under the Claires Stores, Inc. Amended and Restated 1996 Incentive Plan (the 1996 Plan), the
Company may grant either incentive stock options or non-qualified stock options to purchase up
to 8,000,000 shares of Common stock, plus any shares unused or recaptured from previous plans.
Incentive stock options granted under the 1996 Plan are exercisable at prices equal to the fair
market value of shares at the date of grant, except that incentive stock options granted to any
person holding 10% or more of the total combined voting power or value of all classes of capital
stock of the Company, or any subsidiary of the Company, carry an exercise price equal to 110% of
the fair market value at the date of grant. The aggregate number of shares granted to any one
person may not exceed 1,000,000. Each incentive stock option or non-qualified stock option will
terminate ten years after the date of grant (or such shorter period as specified in the grant)
and may not be exercised thereafter.The Claires Stores, Inc. Amended and Restated 2005 Incentive Plan (the 2005 Plan) was
approved by the Companys Board of Directors in March 2005 and by stockholders in June 2005.
Under the 2005 Plan, the Company may grant incentive stock options, non-qualified stock options,
restricted and deferred stock awards, dividend equivalents, stock appreciation rights, bonus
stock awards, performance awards and other stock based awards to purchase up to 2,000,000 shares
of Common stock, plus any shares unused or recaptured from previous plans. Incentive stock
options available for grant under the 2005 Plan are exercisable at prices equal to the fair
market value of shares at the date of the grant, except that incentive stock options available
to any person holding 10% or more of the total combined voting power or value of all classes of
capital stock of the Company, or any subsidiary of the Company, carry an exercise price equal to
110% of the fair market value at the date of the grant. The aggregate number of shares granted
to any one person may not exceed 500,000 shares. Each incentive stock option or non-qualified
stock option will terminate ten years after the date of grant (or such shorter period as
specified in the grant) and may not be exercised thereafter. The terms and conditions related
to restricted and deferred stock awards, dividend equivalents, stock appreciation rights, bonus
stock awards, performance awards and other stock based awards will be determined by the
Compensation Committee of the Companys Board of Directors.Incentive stock options currently outstanding are exercisable at various prices and dates
beginning one year from the date of grant, and expire five to ten years after the date of grant.
Non-qualified stock options currently outstanding are exercisable at prices equal to the fair
market value of the shares at the date of grant and expire five to ten years after the date of
grant.There were 9,211,109 shares of Common stock available for future grants under the 2005 Plan at
April 29, 2006 (which includes shares recaptured from the previous plans). There will be no
future grants under the 1996 Plan.On January 23, 2006, the Company accelerated the vesting of approximately 659,000 incentive and
non-qualified stock options held by employees, representing substantially all unvested options
outstanding at the time of acceleration. These accelerated options had a weighted average
exercise price of $16.29, which was less than the market price of the Companys Common stock of
$29.34 at the time of acceleration. This action resulted in non-cash, stock-based compensation
expense of $314,000 in Fiscal 2006. The decision to accelerate vesting of these options was
made primarily to avoid recognizing the related aggregate compensation cost of approximately
$4.2 million in the Companys consolidated financial statements primarily during Fiscal 2007 and
2008 under SFAS No. 123R.
 8




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##### 



A summary of the activity in the Companys stock option plans is presented below:
 Three Months Ended April 29, 2006WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber of
    
    Exercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Life (Years)
    
    ValueOutstanding at beginning of
period
    
    
    1,113,436
    
    
    $
    15.33Options granted
    
    
    
    
    
    
    Options exercised
    
    
    (485,436
    )
    
    $
    15.53Options canceled
    
    
    (10,000
    )
    
    $
    16.93Outstanding at end of period
    
    
    618,000
    
    
    $
    15.14
    
    
    
    5.77
    
    
    $
    12,408,000Exercisable at end of period
    
    
    618,000
    
    
    $
    15.14
    
    
    
    5.77
    
    
    $
    12,408,000
 On January 29, 2006, substantially all of the Companys outstanding stock options were vested
and exercisable. During the three month periods ended April 29, 2006 and April 30, 2005, no
compensation expense relating to stock options was recorded. The aggregate intrinsic value of
stock options exercised during the three month periods ended April 29, 2006 and April 30, 2005
was approximately $9.3 million and $526,000, respectively.Time-Vested Stock Awards  During the fiscal year ended January 28, 2006, the Company
issued approximately 170,000 shares of restricted common stock to non-management directors and
executive management. The shares were issued under the 1996 Plan and 2005 Plan. The recipients
are entitled to vote and receive dividends on the shares, which are subject to certain transfer
restrictions and forfeiture if a recipient leaves the Company for various reasons, other than
disability, death, or certain other events. The weighted average grant date fair value was
$22.48 per share. The stock, which had an aggregate fair value at date of grant of
approximately $3.8 million, is subject to vesting provisions of one to three years based on
continued employment or service to the Company. Compensation expense relating to these shares
recorded during the three months ended April 29, 2006 and April 30, 2005 was approximately
$337,000 and $208,000, respectively. At April 29, 2006, unearned compensation related to these
shares was $2.4 million. That cost is expected to be recognized over a weighted-average period
of 1.75 years.A summary of the activity during the three months ended April 29, 2006 in the Companys
time-vested stock is presented below:
 Weighted-AverageTime-Vested Shares
    
    Shares
    

Grant Date Fair ValueNonvested at beginning of period
    
    
    169,933
    
    
    $
    22.48Granted
    
    
    
    
    
    
    Vested
    
    
    (37,500
    )
    
    $
    22.48Forfeited
    
    
    
    
    
    
    Nonvested at end of period
    
    
    132,433
    
    
    $
    22.48
 9




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##### 



Long-Term Incentive Stock Plan  In Fiscal 2006, the Compensation Committee of the Board
of Directors (the Compensation Committee) began granting performance stock awards, generally
referred to as the long-term incentive plan (the LTIP). Under the LTIP, common stock will be
awarded to certain officers and employees upon the Companys achievement of specific measurable
performance criteria determined by the Compensation Committee, as may be adjusted by the
Compensation Committee under the 1996 Plan and 2005 Plan. The performance grants for Fiscal
2006 were made under the 1996 Plan. During the three months ended April 29, 2006 and April 30,
2005, compensation expense and additional paid-in capital of approximately $255,000 and
$432,000, respectively, was recorded in conjunction with the LTIP. Compensation expense during
the three months ended April 29, 2006 was based on the fair value of the common stock at date of
grant in Fiscal 2006. Compensation expense for the three months ended April 30, 2005 was based
on the fair value of the common stock on April 30, 2005. Shares awarded under the LTIP vest
over a three year period subject to the Company achieving specified performance targets in each
of the three years. During Fiscal 2006, officers and employees earned approximately 54,000
shares of common stock representing shares earned through achievement of performance targets for
Fiscal 2006. A maximum of approximately 609,000 additional shares may be issued under the LTIP
for Fiscal 2006 grants.During April 2006, the Compensation Committee approved the Fiscal 2007 Long-Term Incentive
Program (Fiscal 2007 LTIP). Under the Fiscal 2007 LTIP, Performance Units will be issued to
certain officers and employees upon the Companys achievement during the fiscal year ended
February 3, 2007 of specific measurable performance criteria determined by the Compensation
Committee, as may be adjusted by the Compensation Committee. An aggregate maximum of 1,030,000
Performance Units may be earned under the Fiscal 2007 LTIP. The Performance Units will be paid
in cash, based on the closing price of the Companys common stock at the end of each of the
three fiscal years in the vesting period. Performance Units earned vest over a three year
period at the rate of 25%, 25% and 50% during the years ended February 3, 2007, February 2, 2008
and January 31, 2009, respectively. The Fiscal 2007 LTIP is accounted for as a liability under
SFAS 123R. During the three months ended April 29, 2006, the Company recorded compensation
expense of approximately $1.8 million in conjunction with the Fiscal 2007 LTIP. The
compensation expense was based on the common stock closing price on April 29, 2006 of $35.22.4.
    
    Segment InformationThe Company is organized based on the geographic markets in which it
operates. Under this structure, the Company currently has two
reportable segments: North America and International. The Company
accounts for the results of operations of Claires Nippon under the
equity method and includes the results within Interest and other
income in the Companys Unaudited Condensed Consolidated Statements
of Operations and Comprehensive Income within the Companys North
American division. Net sales and Income before income taxes for the
periods presented were as follows (dollars in thousands):
 Net Sales
    
    Income Before Income TaxesThree Months Ended
    
    Three Months EndedApr. 29,
    
    Apr. 30,
    
    Apr. 29,
    
    Apr. 30,2006
    
    2005
    
    2006
    
    2005North America
    
    $
    225,557
    
    
    $
    216,340
    
    
    $
    42,979
    
    
    $
    41,297International
    
    
    86,370
    
    
    
    86,368
    
    
    
    1,507
    
    
    
    1,812Total
    
    $
    311,927
    
    
    $
    302,708
    
    
    $
    44,486
    
    
    $
    43,109
 10




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##### 



5.
    
    Income TaxesThe Companys effective income tax rate during the three months
ended April 29, 2006 was 33.2%, as compared to 31.1% during the
comparable period ended April 30, 2005. The Companys higher
effective income tax rate for the three month period ended April
29, 2006 was due to a change in the overall geographic mix of
earnings, and other non-recurring items.6.
    
    Statements of Cash FlowsPayments of income taxes were $20.7 million and $16.9 million for the three months ended April
29, 2006 and April 30, 2005, respectively.During the three months ended April 29, 2006 and April 30, 2005, Property and equipment with an
original cost of $6.0 million and $4.5 million, respectively, was retired. The loss on
retirement approximated $620,000 and $630,000 for the three months ended April 29, 2006 and
April 30, 2005, respectively.7.
    
    Stockholders EquityDuring the three months ended April 29, 2006, the Company repurchased and
retired approximately 1,032,000 shares of common stock. Subsequent to April
29, 2006 and through May 26, 2006, the Company repurchased an additional
835,500 shares of common stock for approximately $25.0 million.8.
    
    Commitments and ContingenciesThe Company is, from time to time, involved in litigation incidental to the
conduct of its business, including personal injury litigation, litigation
regarding merchandise sold, including product and safety concerns regarding
metal content in merchandise, litigation with respect to various employment
matters, including wage and hour litigation, litigation with present and former
employees and litigation to protect trademark rights. The Company believes
that current pending litigation will not have a material adverse effect on its
financial position, earnings or cash flows.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    11




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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 price/value relationship
    
    increasing sales at existing store locations
    
    expanding our sales, especially in our International division, through additional store locations
 12




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Critical Accounting Policies and Estimates
  Stock-Based Compensation
       13




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##### 



Results of Operations
 Consolidated Operations
  Three Months EndedApril 29, 2006
    
    April 30, 2005Net sales
    
    $
    311,927
    
    
    $
    302,708Increase in comparable store sales
    
    
    3.0
    %
    
    
    5.0
    %Gross profit percentage
    
    
    52.8
    %
    
    
    54.2
    %Selling, general and administrative expenses
as a percentage of Net sales
    
    
    35.8
    %
    
    
    36.5
    %Net income
    
    $
    29,701
    
    
    $
    29,702Net income per diluted share
    
    $
    0.30
    
    
    $
    0.30Number of stores at the end of the period (1)
    
    
    2,906
    
    
    
    2,852
 
 (1)
    
    Number of stores excludes Claires Nippon and stores operated under license agreements
outside of North America     Three Months EndedApr. 29, 2006
    
    Apr. 30, 2005Jewelry
    
    
    62.0
    %
    
    
    59.0
    %Accessories
    
    
    38.0
    %
    
    
    41.0
    %100.0
    %
    
    
    100.0
    %
   14




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##### 



Segment Operations
  North America
  Three Months EndedApr. 29, 2006
    
    Apr. 30, 2005Net sales
    
    $
    225,557
    
    
    $
    216,340Increase in comparable store sales
    
    
    4.0
    %
    
    
    3.0
    %Gross profit percentage
    
    
    54.7
    %
    
    
    55.8
    %Number of stores at the end of the period(1)
    
    
    2,114
    
    
    
    2,123
 
 (1)
    
    Number of stores excludes Claires Nippon and stores operated under license
agreements outside of North America   15




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##### 



Three Months EndedApr. 29, 2006
    
    Apr. 30, 2005Jewelry
    
    
    66.0
    %
    
    
    65.0
    %Accessories
    
    
    34.0
    %
    
    
    35.0
    %100.0
    %
    
    
    100.0
    %
  International
  Three Months EndedApr. 29, 2006
    
    Apr. 30, 2005Net sales
    
    $
    86,370
    
    
    $
    86,368Increase in comparable store sales
    
    
    1.0
    %
    
    
    9.0
    %Gross profit percentage
    
    
    47.9
    %
    
    
    50.1
    %Number of stores at the end of the period(1)
    
    
    792
    
    
    
    729
 
 (1)
    
    Number of stores excludes Claires Nippon and stores operated under license
agreements    16




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##### 



Three Months EndedApr. 29, 2006
    
    Apr. 30, 2005Jewelry
    
    
    50.0
    %
    
    
    43.0
    %Accessories
    
    
    50.0
    %
    
    
    57.0
    %100.0
    %
    
    
    100.0
    %
 Analysis of Consolidated Financial Condition
  Three Months EndedApr. 29, 2006
    
    Apr. 30, 2005Operating activities
    
    $
    13,383
    
    
    $
    19,578Investing activities
    
    $
    (23,988
    )
    
    $
    115,175Financing activities
    
    $
    (34,083
    )
    
    $
    (9,346
    )
     17




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##### 



Credit Arrangements
    18




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##### 



Cautionary Note Regarding Forward-Looking Statements and Risk Factors
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency
    19




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##### 



Interest Rates
  
 Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  20




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##### 



Maximum DollarTotal Number of
    
    Value of SharesShares Purchased as
    
    that May Yet beTotal Number of
    
    Average Price Paid
    
    Part of Publicly
    
    Purchased Under thePeriod
    
    Shares Purchased
    
    per Share
    
    Announced Programs
    
    ProgramsJanuary 29 - February 25, 2006
    
    
    215
    
    
    $
    30.48
    
    
    
    215
    
    
    $
    193,459February 26 - April 1, 2006
    
    
    506
    
    
    
    35.08
    
    
    
    506
    
    
    
    175,697April 2 - April 29, 2006
    
    
    311
    
    
    
    34.97
    
    
    
    311
    
    
    
    164,823Total First Quarter
    
    
    1,032
    
    
    $
    34.09
    
    
    
    1,032
    
    
    $
    164,823
 
 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 3, 4 and 5 are not applicable and have been omitted.
 21




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##### 



SIGNATURE
  CLAIRES STORES, INC.(Registrant)June 7, 2006
    /s/ Marla L. SchaeferMarla L. SchaeferCo-Chairman of the Board of Directors
(principal co-executive officer and
director)June 7, 2006
    /s/ E. Bonnie SchaeferE. Bonnie SchaeferCo-Chairman of the Board of Directors
(principal co-executive officer and
director)June 7, 2006
    /s/ Ira D. KaplanIra D. Kaplan, Senior Vice President,Chief Financial Officer and Director
(principal financial and accounting
officer and director) 22




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##### 



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.
 23